-----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, FfL+TQorG37lWns0Pma1BY6j86owU1SfHwAgG/eB2KxFFbk22oISecFrr28vcVEs rnRFtr0VPZWeP7PH2BSU4g== 0000891618-96-001107.txt : 19960705 0000891618-96-001107.hdr.sgml : 19960705 ACCESSION NUMBER: 0000891618-96-001107 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19960703 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-04461 FILM NUMBER: 96590583 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/A 1 AMENDMENT NO.2 TO FORM S-1 DATED JULY 2, 1996 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996 REGISTRATION NO. 333-4461 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO 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. / / ------------------------ 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 JULY 3, 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 6. ------------------------------ 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. 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 81,530 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 diagnosing and selecting 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 of instruments is approximately five times as large as the combined installed base of all of the Company's current competitors. Ventana has placed instruments with 35 of the 42 cancer centers identified as principal cancer research centers by the National Cancer Institute including the Mayo Clinic, the Dana Farber Cancer Institute, The Johns Hopkins University and the M.D. Anderson Cancer Center. Each Ventana proprietary system placed typically provides a recurring revenue stream as customers consume reagents and supplies sold by the Company with each test conducted. 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 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 in the United States 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 which the Company estimates creates the opportunity for the placement of as many as 2,500 automated IHC testing instruments. The Company believes that less than 25% 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 the majority 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 that the Company's 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, which compete on the basis of product and price, 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 programs ("RPs"). In an RP, the Company provides the customer with the use of an instrument with no capital investment which creates an opportunity for the Company to generate reagent revenue. The Company believes that it can accelerate the rate of expansion of its installed base of instruments by using RPs 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................................ 10,990,091 shares(1) Use of proceeds........................... For repayment of approximately $16.2 million of indebtedness, capital expenditures, working capital and general corporate purposes. Proposed Nasdaq National Market Symbol.... VMSI
- --------------- (1) Includes 8,708,561 outstanding shares of Common Stock, 81,530 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 887,740 shares of Common Stock issuable upon exercise of warrants that may remain outstanding after the completion of this Offering and 840,399 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 --------------------------- ------------------ DECEMBER 31, MARCH 31, 1993 1994 1995 1995 1996 1995 1996 ------- ------- ------- ------- -------- ------------ ------------ STATEMENT OF OPERATIONS DATA: Sales: Instruments................................. $ 1,162 $ 2,588 $ 4,644 $ 1,007 $ 1,594 $ 8,396 $ 1,733 Reagents and other.......................... 1,519 3,339 5,969 1,195 2,552 11,079 3,495 ------- ------- ------- ------- ------- ------- ------- Total net sales........................... 2,681 5,927 10,613 2,202 4,146 19,475 5,228 Cost of goods sold............................ 1,722 2,531 4,282 936 1,432 9,096 1,924 ------- ------- ------- ------- ------- ------- ------- Gross profit.................................. 959 3,396 6,331 1,266 2,714 10,379 3,304 Operating expenses: Research and development.................... 2,100 1,926 2,239 556 613 4,407 771 Selling, general and administrative......... 4,067 6,899 7,435 1,594 2,374 10,968 2,799 Nonrecurring expenses....................... -- -- -- -- 9,983 9,983 -- Amortization of intangibles................. -- -- -- -- 46 557 139 ------- ------- ------- ------- ------- ------- ------- Loss from operations.......................... (5,208) (5,429) (3,343) (884) (10,302) (15,536) (405) Interest income (expense)..................... 229 59 74 50 (5) 74 (5) ------- ------- ------- ------- ------- ------- ------- Net loss...................................... $(4,979) $(5,370) $(3,269) $ (834) $(10,307) $(15,462) $ (410) ======= ======= ======= ======= ======= ======= ======= Net loss per share, as adjusted(2)............ $ (0.36) $ (0.09) $ (1.12) $ (1.55) $ (0.04) ======= ======= ======= ======= ======= Shares used in computing net loss per share, as adjusted(2).............................. 8,973 8,838 9,204 9,975 10,206 ======= ======= ======= ======= =======
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........................................................................... 419 15,396 Total assets.............................................................................. 21,742 36,719 Accumulated deficit(4).................................................................... (32,436) (32,436) Total stockholders' equity (deficit)(4)................................................... (1,560) 28,452
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 == == === === === RPs in installed base.................................................. 6 25 44 66 72 == == === === ===
- --------------- (1) Adjusted to reflect the acquisition of BioTek as if it had occurred on January 1, 1995. BioTek was acquired on February 26, 1996. (2) See Note 1 to the 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 sale of the Shares of Common Stock offered by the Company hereby and the application of the net proceeds thereof (at an assumed initial public offering price of $15.00 per share). See "Use of Proceeds," "Capitalization" and "Dividend Policy." (4) Gives effect to the cancellation of accrued Preferred Stock dividends upon the assumed conversion of the Preferred Stock into Common Stock. 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 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. CONTINUING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company has incurred cumulative losses of $32.4 million from its inception in 1985 through March 31, 1996. In February 1996, the Company acquired BioTek, which had sustained cumulative losses of $18.2 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 sell reagents to its customers, the Company's ability to compete successfully, the Company's ability to develop, introduce, market and distribute existing and new diagnostic systems, the 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 profitability 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 typically 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 RPs. The Company anticipates that the percentage of instruments placed through RPs, in particular RP placements without formal reagent purchase commitments, will increase in the future which is likely to result in a decrease in instrument sales both in absolute dollars and as a percentage of total revenues. In addition, average daily reagent use by customers may fluctuate from period to period, which may contribute to future fluctuations in revenues. In particular, customers who have received instruments under RP arrangements that do not provide for specified reagent purchase commitments are not contractually obligated to purchase reagents from the Company, and there can be no assurance as to the timing or volume of reagent purchases by such customers. Furthermore, customers that have entered into contractual RP agreements may also attempt to cancel all or a portion of their reagent purchase commitments. Accordingly, there can be no assurance as to the level of revenues that will be generated by customers procuring instruments through RP arrangements, particularly from those customers who obtain instruments without reagent purchase commitments. In the event that RP customers do not purchase anticipated quantities of reagents, the Company will have incurred substantial costs in supplying instruments to RP customers without receipt of an adequate reagent revenue stream and the Company's business, financial condition and results of operations would be materially and adversely affected. Sales of instruments may fluctuate from period to period because sales to the Company's international distributors typically provide such distributors with several months of instrument inventory, which the distributors will subsequently seek to place with end users. The Company's instrument installed base includes instruments shipped to DAKO A/S ("DAKO") and recognized as sales, over 85% of which the Company believes DAKO has placed with end-users. 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 the timing of new product announcements and the introduction of new products and new technologies by the Company 6 9 and its competitors, market acceptance of the Company's current or new products, developments with respect to regulatory matters, availability and cost of raw materials from its suppliers, competitive pricing pressures, increased research and development expenses, and increased marketing and sales expenses associated with the implementation of the Company's market expansion strategies for its instrument and reagent products. Future instrument and reagent sales could also be adversely affected by the configuration of the Company's patient priority systems, which require the use of the Company's detection chemistries, particularly if and to the extent that competitors are successful in developing and introducing new IHC instruments or if competitors offer reagent supply arrangements having pricing or other terms more favorable than those offered by the Company. In connection with future introductions of new products, the Company may be required to incur reserves or charges for inventory obsolescence in connection with unsold inventory of older generations of products. To date, however, the Company has not incurred material charges or expenses associated with inventory obsolescence in connection with new product introductions. In addition, a significant portion of the Company's expense levels 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 fields of cellular or molecular diagnostics. Failure of the Company's products to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. 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 and treatment of cancer and additional disease states. In particular, the Company must successfully and timely introduce the NexES and TechMate 250. These instruments are smaller capacity, lower priced instruments than the Company's current instruments and are necessary to expand the market opportunity at smaller hospitals and reference laboratories in the United States and Europe. The Company depends in part on the success of medical research in developing new antibodies, nucleic acid probes and clinical diagnostic procedures that can be adapted for use in the Company's systems. In addition, the Company will need to obtain licenses on satisfactory terms 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 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. Competition in the diagnostic industry is based on, among other things, product quality, performance, price and the breadth of a company's product offerings. The Company's systems compete both with products manufactured by competitors and with traditional manual diagnostic procedures. The Company's competitors may succeed in developing products that are more reliable or effective or less costly than those developed by the Company and may be more successful than the Company in manufacturing and marketing their products. There are other 7 10 companies engaged in research and development of diagnostic devices or reagents, and, notwithstanding the Company's product development efforts, the introduction of such devices or alternative methods for diagnostic testing could hinder the Company's ability to compete effectively and could have a material adverse effect on the Company's business, financial condition and results of operations. In the instrument market, several companies offer instruments that perform IHC tests and can be used with any supplier's reagents, which may be attractive to certain customers. In addition, any future growth in the market for automated IHC instruments may result in additional market entrants and increased competition, including more aggressive price competition. Many of the companies selling or developing diagnostic devices and instruments and many potential entrants in the automated IHC market have financial, manufacturing, marketing and distribution resources significantly greater than those of Ventana. In addition, many of these current and potential competitors have long-term supplier relationships with Ventana's existing and potential customers. These competitors may be able to leverage existing customer relationships to enhance their ability to place new IHC instruments. Competition in the market for automated IHC instruments, including the advent of new market entrants and increasing price competition, could have a material adverse effect on the Company's business, financial condition and results of operations. In the market for reagents, the Company encounters competition from suppliers of primary antibodies and detection chemistries, which are the two principal types of reagents used in IHC tests. The Company's patient priority instruments require the use of the Company's detection chemistries but can be used with primary antibodies supplied by third parties, and the Company's batch processing instruments can be used with both detection chemistries and primary antibodies supplied by third parties. Accordingly, the Company encounters significant competition in the sale of reagents for use on those of its instruments that can be used with reagents supplied by third parties. Lower prices for reagents used in manual IHC tests could also limit the growth of automation. Certain of the Company's current and potential competitors in the reagent market have financial, manufacturing, marketing and distribution resources greater than those of the Company. Competition in the market for reagents could also increase as a result of new market entrants providing more favorable reagent supply arrangements than the Company, including lower reagent prices. In particular, new entrants in the instrument market may seek to enhance their competitive position through reduced reagent pricing or more favorable supply arrangements; the Company's current instrument customers may find it attractive to purchase primary antibodies for patient priority instruments and primary antibodies and detection chemistries for batch processing instruments from such competitors. Increased competition in the reagent market could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition." MANUFACTURING RISKS The Company has only manufactured patient priority instruments and reagents for commercial sale since late 1991, and manufacturing of the Company's batch processing instruments is performed by third parties. As the Company continues to increase production of such instruments and reagents and develops and introduces new products, it may from time to time experience difficulties in manufacturing. 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 8 11 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. See "Business -- Manufacturing." DEPENDENCE UPON KEY SUPPLIERS The Company's reagent products are formulated from both chemical and biological materials utilizing proprietary Ventana technology as well as standard processing techniques. Certain components and raw materials, primarily antibodies, used in the manufacturing of the Company's reagent products are currently provided by single-source vendors. There can be no assurance that the materials or reagents needed by the Company will be available in commercial quantities or at acceptable prices. Any supply interruption or yield problems encountered in the use of materials from these vendors could have a material adverse effect on the Company's ability to manufacture its products until a new source of supply is obtained. The use of alternative or additional suppliers could be time consuming and expensive. In addition, a number of the components used to manufacture the 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 any of these vendors were delayed or interrupted for any reason or in the event of quality or reliability problems with such components or suppliers, the Company's ability to supply such instruments could be impaired, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." DEPENDENCE UPON THIRD-PARTY MANUFACTURERS FOR BATCH PROCESSING INSTRUMENTS The Company relies on two outside parties to manufacture its batch processing instruments. Kollsman Manufacturing Company, Inc. ("Kollsman") currently manufactures the TechMate 500 instrument and the Company has entered into an agreement with Kollsman for the 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 or timely manner. The Company's reliance on third-party manufacturers involves a number of additional risks, including the absence of guaranteed capacity, and reduced control over delivery schedules, quality assurance and costs. The amount and timing of resources to be devoted to these activities by such manufacturers are not within the control of the Company, and there can be no assurance that manufacturing problems will not occur in the future. Any such manufacturing or supply problems could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." RISKS ASSOCIATED WITH UNITED STATES DISTRIBUTION RELATIONSHIP 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. 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 United States. These developments could have a material adverse effect on the Company's business, financial condition and results of operations. 9 12 RISKS ASSOCIATED WITH EUROPEAN DISTRIBUTION RELATIONSHIP In Europe, batch processing instruments are sold through DAKO which also pays BioTek a fixed dollar royalty for each instrument in service in exchange for the right to sell its own reagents for use with such systems. The agreement with DAKO provides DAKO with exclusive distribution rights for batch processing instruments in Europe and other territories, subject to certain performance requirements. The agreement expires in December 1999. Accordingly, the Company is likely to be dependent upon DAKO for international sales of batch processing instruments through this date. In connection with 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. 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. 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. 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 materially adversely affect the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH 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 10 13 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 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." RISKS RELATING TO PATENTS AND PROPRIETARY RIGHTS The Company's success depends, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing the proprietary rights of others. There can be no assurance that the Company's patent applications will result in patents being issued or that any issued patents will provide 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 RPs, progress of the Company's product development programs, competing technological and market developments, expansion of the Company's sales and marketing activities, the cost of manufacturing scale-up activities, possible acquisitions of complementary businesses, products or technologies, the extent and duration of operating losses and timing of regulatory approvals. The Company may require additional capital resources and there is no assurance such capital will be available to the extent required, on terms acceptable to the Company or at all. Any such future capital requirements 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." 11 14 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." 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 12 15 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 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 ensure the quality and reliability of medical testing. In addition to these regulations, the Company is subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions and environmental matters. There can be no assurance that such laws or regulations will not in the future have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Environmental Matters" and "Business -- Government Regulation." RISKS RELATING TO AVAILABILITY OF THIRD-PARTY REIMBURSEMENT AND POTENTIAL ADVERSE EFFECTS OF HEALTH CARE REFORM The Company's ability to achieve revenue growth and profitability may depend on the ability of the Company's customers to obtain adequate levels of third-party reimbursement for 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." 13 16 PRODUCT LIABILITY AND RECALLS; PRODUCT LIABILITY INSURANCE The marketing and sale of the Company's diagnostic instruments and reagents entails risk of product liability claims. The Company has product liability insurance coverage with a per occurrence maximum of $2.0 million and an aggregate annual maximum of $5.0 million. There can be no assurance that this level of insurance coverage will be adequate or that insurance coverage will continue to be available on acceptable terms or at all. A product liability claim or recall could have a material adverse effect on the Company's business, reputation, financial condition and results of operations. ENVIRONMENTAL MATTERS Certain of the Company's manufacturing processes, primarily processes involved in manufacturing certain of the Company's reagent products, require the use of potentially hazardous and carcinogenic chemicals. The Company is required to comply with applicable federal, state and local laws regarding the use, storage and disposal of such materials. The Company currently uses third-party disposal services to remove and dispose of the hazardous materials used in its processes. The Company could in the future encounter claims from individuals, governmental authorities or other persons or entities in connection with exposure to or disposal or handling of such hazardous materials or violations of environmental laws by the Company or its contractors and could also be required to incur additional expenditures for hazardous materials management or environmental compliance. Costs associated with environmental claims, violations of environmental laws or regulations, hazardous materials management and compliance with environmental laws could have a material adverse effect on the business, financial condition and results of operations of the Company. See "Business -- Government Regulation." BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS The Company intends to use $16.2 million of the estimated net proceeds from the Offering to repay certain indebtedness. The Company anticipates that the remaining estimated net proceeds of this Offering will be used for capital expenditures, working capital and general corporate purposes. The amounts identified for such uses under "Use of Proceeds" are estimates and the amounts actually expended for each such purpose and the timing of such expenditures may vary depending upon numerous factors. The Company's management will have broad discretion in determining the amount and timing of expenditures, particularly with respect to that portion of the net proceeds available for use for working capital and general corporate purposes. See "Use of Proceeds." 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, (ii) require advance notice of business proposed to be brought before an annual or special meeting of stockholders and (iii) provide for a classified board of directors. 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," "Management" 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 14 17 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 10,990,091 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 7,990,091 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 2,023 shares of Common Stock will be saleable at 90 days after the Offering. An additional 8,786 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 7,468,559 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 7,817,760 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 313,957 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. 7,286,334 of the shares outstanding immediately following the completion 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." 15 18 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), Liquid Coverslip(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 $16.2 million of the estimated net proceeds from the Offering to repay (i) $14.2 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 $12.0 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. 16 19 DILUTION The net tangible book value of the Company at March 31, 1996 was $(10.4) million or $(1.29) per share after giving effect to the conversion of the Preferred Stock into Common Stock and the issuance of 81,530 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 81,530 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 $19.6 million or $1.76 per share. This represents an immediate increase in net tangible book value of $3.05 per share to existing stockholders and an immediate dilution in net tangible book value of $13.24 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.................. $(1.29) Increase per share attributable to new investors....................... 3.05 ------ Net tangible book value per share after the Offering..................... 1.76 ------ Immediate dilution per share to new investors............................ $13.24 ======
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.............. 8,113,424 79% $31,016,000 48% $ 3.82 New investors...................... 2,200,000 21% 33,000,000 52% 15.00 ------- --- ------- --- Total.................... 10,313,424 100% $64,016,000 100% $ 6.21 ======= === ======= ===
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 81,530 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 646,664 shares issued upon the exercise of stock purchase rights and 30,003 shares issued upon the exercise of options and warrants through May 15, 1996. At May 15, 1996, there were options outstanding to purchase 840,399 shares of Common Stock at a weighted average exercise price of $2.48 per share. In addition, warrants to purchase 887,740 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. 17 20 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; 8,031,894 shares issued and outstanding and; 10,313,424 shares issued and outstanding, as adjusted-amount paid in(3)(4)(5)...... 31,016 61,028 Accumulated deficit(6)................................................ (32,436) (32,436) Cumulative foreign currency translation adjustment.................... (140) (140) -------- -------- Total stockholders' equity (deficit)(4)(5).......................... (1,560) 28,452 -------- -------- Total capitalization........................................ $ 13,475 $ 28,452 ======== ========
- --------------- (1) As adjusted shares outstanding includes the issuance of 81,530 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 840,399 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 887,740 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 646,664 shares issued upon exercise of stock purchase rights and 30,003 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. The Company also raised $0.5 million through the private placement of subordinated notes subsequent to March 31, 1996 in connection with the acquisition of BioTek. The Company intends to repay $16.2 million of such debt with the proceeds of this Offering. See "Use of Proceeds." (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. 18 21 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 are 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. The Company has not paid any cash dividends since its inception.
ACTUAL PRO FORMA(1) -------------------------------------------------------------------- -------------------------- THREE MONTHS ENDED THREE MONTHS YEAR ENDED DECEMBER 31, MARCH 31, YEAR ENDED ENDED ----------------------------------------------- ------------------ DECEMBER 31, MARCH 31, STATEMENT OF OPERATIONS: 1991 1992 1993 1994 1995 1995 1996 1995 1996 ------- ------- ------- ------- ------- ------- -------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales: Instruments.................. $ 50 $ 717 $ 1,162 $ 2,588 $ 4,644 $ 1,007 $ 1,594 $ 8,396 $1,733 Reagents and other........... 28 452 1,519 3,339 5,969 1,195 2,552 11,079 3,495 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total net sales............ 78 1,169 2,681 5,927 10,613 2,202 4,146 19,475 5,228 Cost of goods sold............. 49 832 1,722 2,531 4,282 936 1,432 9,096 1,924 -------- -------- -------- -------- -------- -------- ------- -------- -------- Gross profit................... 29 337 959 3,396 6,331 1,266 2,714 10,379 3,304 Operating expenses: Research and development..... 1,352 1,194 2,100 1,926 2,239 556 613 4,407 771 Selling, general and administrative............. 892 2,465 4,067 6,899 7,435 1,594 2,374 10,968 2,799 Nonrecurring expenses........ -- -- -- -- -- -- 9,983 9,983 -- Amortization of intangibles................ -- -- -- -- -- -- 46 557 139 -------- -------- -------- -------- -------- -------- ------- -------- ------- Loss from operations........... (2,215) (3,322) (5,208) (5,429) (3,343) (884) (10,302) (15,536) (405) Interest income (expense)...... 23 48 229 59 74 50 (5) 74 (5) -------- -------- -------- -------- -------- ------- --------- -------- ------- Net loss....................... $(2,192) $(3,274) $(4,979) $(5,370) $(3,269) $ (834) $(10,307) $(15,462) $ (410) ======== ========= ========= ========= ========= ========= ========= ======== ======= Per share data(2): Net loss per share, as adjusted................... $ (0.36) $ (0.09) $ (1.12) $ (1.55) $(0.04) ========= ========= ========= ======== ======= Shares used in computing net loss per share, as adjusted................... 8,973 8,838 9,204 9,975 10,206 ========= ========= ========= ======== =======
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..................................................................................... 419 15,396 Total assets........................................................................................ 21,742 36,719 Accumulated deficit(4).............................................................................. (32,436 ) (32,436) Total stockholders' equity(deficit)(4).............................................................. (1,560 ) 28,452
- --------------- (1) Adjusted to reflect the acquisition of BioTek as if it had occurred on January 1, 1995. 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" and "Dividend Policy." (4) Gives effect to the cancellation of accrued Preferred Stock dividends upon the assumed conversion of the Preferred Stock into Common Stock. 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. 19 22 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 occurred on January 1, 1992:
THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31, 31, ------------------------------- ------------- 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- ---- INSTRUMENT PLACEMENTS (UNITS)(1): 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 == === === === === === RPs in current placements......................... 6 19 19 22 8 6 == === === === === === INSTRUMENT INSTALLED BASE (UNITS)(1): 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 == === === === === === RPs in installed base............................. 6 25 44 66 52 72 == === === === === ===
- --------------- (1) Instrument placements refers to the number of instruments placed by the Company (either through a direct sale, rental, or RP) during a particular fiscal period (e.g., a fiscal quarter or year). Instrument installed base refers to the cumulative number of instruments shipped to customers as of the end of a particular fiscal period. Instrument installed base includes batch processing instruments shipped to DAKO and recognized as sales, over 85% of which the Company believes DAKO has placed with end-users. 20 23 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 typically provides a recurring revenue stream as customers consume reagents and supplies sold by the Company with each test conducted. Reagents consist of two components: a primary antibody and a detection chemistry which is used to visualize the primary antibody. Therefore, the principal economic drivers for the Company are the number, type and method of placement of instruments 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 RP 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 and operating 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 has entered into a manufacturing agreement with Kollsman for the TechMate 500 instrument and has entered into a manufac- 21 24 turing 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 $27.2 million including $10.0 million related to the expensing of in-process research and development and restructuring costs associated with the acquisition of BioTek, resulting in cumulative losses of $32.4 million as of March 31, 1996. Similarly, BioTek incurred over $18.2 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 primarily 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 places instruments through direct sales, including nonrecourse leases, instrument rentals and the Company's reagent programs ("RPs"). In an RP, the Company provides the customer with the use of an instrument with no capital investment which creates an opportunity for the Company to generate reagent revenue. The terms and conditions of RP instrument placements can vary from formal agreements specifying minimum volumes and unit pricing for reagent purchases to short-term, informal arrangements where customers purchase reagents on a month-to-month basis. For RP placements, the Company incurs the cost of manufacturing or procuring instruments and recognizes revenues only as customers purchase reagents rather than at the time of instrument placement. The manufacturing cost of instruments placed through RPs is charged to cost of goods sold by depreciating standard costs over a period of three or four years. As a result, gross profit for instruments placed through RPs is recognized over a three or four year period rather than at the time of placement, as is the case in direct sales. Revenue associated with instruments placed through RPs is based on a volume pricing matrix which is designed to enable the Company to recover the sales value of the instrument through an increased price on the reagents purchased by the user. The Company typically recovers the cash costs associated with the placement of instruments through RPs in less than two years, although the Company's ability to recover such costs may be affected by the volume and pricing of reagents purchased by customers. Due to the working capital requirements associated with RPs, the Company has historically sought to limit the amount of instruments placed through RPs to approximately 30% of instrument placements. However, the Company anticipates that the percentage of instruments placed through RPs, in particular RP placements without formal reagent purchase commitments, will increase with the introduction of the NexES and TechMate 250 and as the Company obtains the additional working capital required to support additional RP placements. This is likely in the future to result in a decrease in instrument sales both in absolute dollars and as a percentage of total revenues. Instruments provided to customers under RPs without formal reagent purchase commitments are only considered placements if and when certain reagent purchase criteria are met by the customer. The Company typically only provides an instrument under an RP without a formal reagent purchase commitment if the Company believes that the customer performs a minimum number of IHC tests annually. As of March 31, 1996, the Company had placed 72 instruments through RPs. The Company's future results of operations may fluctuate significantly from period to period due to a variety of factors. The initial placement of an instrument is subject to a longer, less consistent sales cycle than the sale of reagents which begin and typically are recurring once an instrument is placed. The Company's operating results in the future are likely to fluctuate substantially from period to period because instrument sales are likely to remain an important part of revenues in the near future. The degree of fluctuation will depend on the timing, level and mix of instruments placed through direct sales and instruments placed through RPs. In addition, average daily reagent use by customers may fluctuate from period to period, which may contribute to future fluctuations in revenues. Sales of instruments may also fluctuate from period to period because sales to the Company's international distributors typically provide such distributors with several months of instrument inventory, which the distributors will subsequently seek to place with end-users. The Company's instrument installed base includes instruments shipped to DAKO and recognized as sales, over 22 25 85% of which the Company believes DAKO has placed with end users. 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 the timing of new product announcements and the introduction of new products and new technologies by the Company and its competitors, market acceptance of the Company's current or new products, developments with respect to regulatory matters, availability and cost of raw materials purchased from suppliers, competitive pricing pressures, increased sales and marketing expenses associated with the implementation of the Company's market expansion strategies for its instruments and reagent products, and increased research and development expenditures. Future instrument and reagent sales could also be adversely affected by the configuration of the Company's patient priority systems, which require the use of the Company's detection chemistries, particularly if and to the extent that competitors are successful in developing and introducing new IHC instruments or if competitors offer reagent supply arrangements having pricing or other terms more favorable than those offered by the Company. In connection with future introductions of new products, the Company may be required to incur charges for inventory obsolescence in connection with unsold inventory of older generations of products. To date, however, the Company has not incurred material charges or expenses associated with inventory obsolescence in connection with new product introductions. In addition, a significant portion of the Company's expense levels is based on its expectation of a higher level of revenues in the future and is relatively fixed in nature. Therefore, if revenue levels are below expectations, operating results in a given period are likely to be adversely affected. Total 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 at December 31, 1993 to 261 at December 31, 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, 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. 23 26 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 ENDED MARCH 31, ---------------- INSTRUMENT PLACEMENTS (UNITS): 1995 ---- 1996 ---- Patient priority................................................... 28 33 Batch processing................................................... -- 7 -- - --- Total current placements................................. 28 40 === === RPs in current placements.......................................... 8 6
MARCH 31, ------------------ INSTRUMENT INSTALLED BASE (UNITS): 1995 1996 ---- ------- Patient priority................................................... 176 294 Batch processing................................................... -- 287 --- --- Total instrument installed base.......................... 176 581 === === RPs 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. Sales in the three months ended March 31, 1996 included $0.6 million in sales of batch processing instruments and related reagents following the BioTek acquisition on February 26, 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. 24 27 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% $1,796 43% Administration.............................. 382 17% 578 14% ------ ---------- ------ ---------- Total SG&A........................ $1,594 72% $2,374 57% ====== ======== ====== ========
SG&A expense in the three months ended March 31, 1996 increased to $2.4 million from $1.6 million in the three months ended March 31, 1995, but declined to 57% 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 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, $7.9 million relating to the portion of the purchase price allocated to those in-process research and development projects where technological feasibility had not yet been established and 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% ====== ==== ====== ==== ====
25 28
YEAR ENDED DECEMBER 31, ---------------------- INSTRUMENT PLACEMENTS (UNITS): 1993 1994 1995 ---- ---- ---- Current placements...................................................... 56 74 113 RPs in current placements............................................... 19 19 22
DECEMBER 31, ---------------------- INSTRUMENT INSTALLED BASE (UNITS): 1993 1994 1995 ---- ---- ---- Instrument installed base............................................... 74 148 261 RPs 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 placement of a significant number of instruments through RPs, 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. 26 29
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. 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, 1995 and are adjusted 27 30 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 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.................................... 7,900 Goodwill and other intangibles....................................... 1,675 Developed technology................................................. 2,800 Customer base........................................................ 4,100 ----- Total purchase price......................................... $ 18,763 =====
In accordance with FAS 2, the Company charged to expense at the date of the acquisition $7.9 million relating to the portion of the purchase price allocated to those in-process research and development projects where technological feasibility had not yet been established and where there are no alternative future uses. Upon the closing of the acquisition, BioTek's revenue recognition policy was changed to adopt the Company's policy of recording certain sales upon shipment of instruments and reagents 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, 1995. The combined effect of the change in accounting policy is an increase in pro forma net sales in 1995. This is primarily due to (i) shipments of instruments and reagents to CMS in 1994 which were subsequently placed with end-users in 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 $7.9 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, 1995. Comparisons of pro forma results for the first quarter of 1996 to actual results for the first quarter of 1996 are not meaningful because Ventana's actual results of operations for the first quarter of 1996 include approximately one month of BioTek operations. 28 31 PRO FORMA RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995 AND THREE MONTHS ENDED MARCH 31, 1996 Net Sales Presented below is a summary of pro forma consolidated revenue, instrument placements and instrument installed base for the year ended December 31, 1995 and the three months ended March 31, 1996.
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, ---------------- ----------------- 1995 1996 ---------------- ----------------- $ % $ % ------- ---- ------- ---- (DOLLARS IN THOUSANDS) REVENUE SUMMARY: Instruments............................................. $ 8,396 43% $ 1,733 33% Reagents and other...................................... 11,079 57% 3,495 67% ------- --- ------ --- Total revenue......................................... $19,475 100% $ 5,228 100% ======= === ====== ===
THREE MONTHS YEAR ENDED ENDED MARCH DECEMBER 31, 31, INSTRUMENT PLACEMENTS (UNITS): 1995 1996 ------------ ------------ Patient priority...................................................... 113 33 Batch processing...................................................... 128 12 --- --- Total current placements......................................... 241 45 === === RPs in current placements............................................. 22 6
DECEMBER 31, MARCH 31, 1995 1996 ------------ ------------ INSTRUMENT INSTALLED BASE (UNITS): Patient priority...................................................... 261 294 Batch processing...................................................... 275 287 --- --- Total instrument installed base.................................. 536 581 === === RPs in installed base................................................. 66 72
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. Gross Margin and Operating Expenses Pro forma gross margin was 63% in the quarter ended March 31, 1996 as compared to 53% in the year ended December 31, 1995. Pro forma gross margin is lower than Ventana's stand-alone gross margin because BioTek's margin is 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. Pro forma research and development expenditures for 1995 also reflect BioTek's development of the TechMate 250 instrument and an ISH oven. During the first quarter of 1996, BioTek reduced research and development and SG&A expenditures due to working capital constraints. 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 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 1,924 ------- ------- ------- ------- ------- Gross profit.................................... 2,284 2,396 2,954 2,745 3,304 Operating expenses: Research and development...................... 721 1,815 1,002 869 771 Selling, general and administrative........... 2,367 3,130 2,675 2,796 2,799 Nonrecurring expenses......................... 9,983 -- -- -- -- Amortization of intangibles................... 139 139 140 139 139 ------- ------- ------- ------- ------- Loss from operations............................ (10,926) (2,688) (863) (1,059) (405) Interest income (expense)....................... 50 37 25 (38) (5) ------- ------- ------- ------- ------- Net loss........................................ $(10,876) $(2,651) $ (838) $(1,097) $ (410) ------- ------- ------- ------- ------- Pro forma net loss per share.................... $ (1.11) $ (0.27) $ (0.08) $ (0.11) $ (0.04) ======= ======= ======= ======= ======= Pro forma shares used in computing net loss per share..................................... 9,840 9,962 10,034 10,060 10,206 ======= ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company's expenses have significantly exceeded its net sales, resulting in an accumulated deficit of $32.4 million at March 31, 1996. The Company has funded its operations primarily through the private placement of approximately $31.0 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. Net cash flow from operating activities during the three months ended March 31, 1996 and 1995 was approximately $(1.2) 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 30 33 upgrade management information systems. The Company anticipates using approximately $1.8 million of the net proceeds of this Offering for capital expenditures during the next 12 months. Of such amount, approximately $0.2 million is subject to outstanding commitments by the Company. Net cash flow from financing activities was $6.1 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. An additional $0.5 million was raised through the private placement of such notes subsequent to March 31, 1996. In connection with the issuance of such subordinated notes, the Company issued warrants to purchase an aggregate of 887,740 shares of Common Stock of the Company at an exercise price of $5.82 per share. The proceeds of 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 222,973 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 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." 31 34 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 RPs, progress of the Company's product development programs, competing technological and market developments, expansion of the Company's sales and marketing activities, the cost of manufacturing scale-up activities, possible acquisitions of complementary businesses, products or technologies, the extent and duration of operating losses and timing of regulatory approvals. The Company may 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 diagnosing and selecting 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 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 identified as principal cancer research centers by the National Cancer Institute, including the Mayo Clinic, the Dana Farber Cancer Institute, The Johns Hopkins University, the M.D. Anderson Cancer Center 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 which the Company estimates creates the opportunity for the placement of as many as 2,500 automated IHC testing instruments. The Company believes that less than 25% 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 the majority 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 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, 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 has entered into a 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 (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 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 identified as principal cancer research centers by the National Cancer Institute provides a powerful reference tool for potential new customers. To facilitate instrument placements, the Company offers customers a wide selection of instruments which address the patient priority needs of hospital clinical laboratories and the batch processing needs of large hospitals and reference and research laboratories. In order to satisfy the broad spectrum of customers' operational and financial criteria, the Company intends to continue to offer several instrument procurement options, including RPs, and to expand the range and price points of its instrument offerings. In an RP, the Company provides the customer with the use of an instrument with no capital investment which creates an opportunity for the Company to generate reagent revenue. The Company believes it can accelerate the rate of expansion of its installed base by increasing its emphasis on the placement of instruments through RPs because the required capital investment associated with a purchase, a significant sales hurdle, will be eliminated. Maximize Revenue Stream Per Placement. Each instrument placed typically provides the Company with a recurring revenue stream through the sale of reagents and supplies. The Company seeks to increase this revenue stream by converting all existing manual tests performed by the customer to full automation and by selling to the customer all reagents required for such tests. The Company then seeks to have the customer expand its test menu through the inclusion of all tests that are offered by Ventana as well as new tests as they are introduced. To meet these objectives, the Company's systems have been designed as broad enabling platforms which permit customers to easily expand their test menu. The Company also has a comprehensive customer education program which includes on-site technical training in instrument use, user group meetings and Company-sponsored national teleconferences with leading medical experts who regularly update customers on diagnostic and testing developments. Develop New and Enhanced Products. Since 1991, the Company has successfully introduced and commercialized the Ventana 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 RPs 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 performed. Up to 40 slides can be processed at one time in the reaction chamber of the instrument utilizing as 37 40 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 the majority of the international market potential, and Japan, the Pacific Rim and Latin American markets constitute the balance of the international market opportunity. As of 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 identified as principal cancer research centers by the National Cancer Institute, including the Mayo Clinic, the Dana Farber Cancer Institute, The Johns Hopkins University, the M.D. Anderson Cancer Center and the Fred Hutchinson Cancer Center. Presented below is a representative list of existing customers, all of which have purchased products from the Company within the past year: 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 RPs in order to provide greater financial flexibility for its customers in equipment procurement. The Company believes that lower priced systems and the RP placements 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 RP placements 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 materially adversely affect the Company's business, financial condition and 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 Company places instruments through direct sales including nonrecourse leases, instrument rentals and the Company's RPs. In an RP, the Company provides the customer with the use of an instrument with no capital investment which creates an opportunity for the Company to generate reagent revenue. The terms and conditions of RP instrument placements can vary from formal agreements specifying minimum volumes and unit pricing for reagent purchases to short-term, informal arrangements where customers purchase reagents on a month-to-month basis. Due to the working capital requirements associated with RPs, the Company has historically sought to limit the amount of instruments placed through RPs to approximately 30% of instrument placements. However, the Company anticipates that the percentage of instruments placed through RPs, in particular RP placements without formal reagent purchase commitments, will increase with the introduction of the NexES and TechMate 250 and as the Company obtains the additional working capital required to support additional RP placements, which is likely in the future to 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 RPs. 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 42 45 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. 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 contract manufacturing agreements with LJL and 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 May 31, 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 year ended December 31, 1995 was $4.4 million. PATENTS AND PROPRIETARY RIGHTS Ventana has pursued a strategy of patenting key technology as it relates to both the automation and the chemistry of analyzing cells and tissues on microscope slides. Ventana holds 11 United States patents and eight foreign patents, including two European patents, and has filed additional United States and foreign patent applications. Three of Ventana's United States patent applications have been allowed. Several of Ventana's issued United States patents relate to reagent formulations and methods, including a reagent formulation characterized by long-term stability and a method of inhibiting evaporation of reagents during processing. Other issued United States patents relate to a reagent dispenser, a tissue fixative and various 44 47 aspects of the capillary gap technology and methods and devices for batch processing of slides. Pending applications relate to mechanical aspects of automated instruments for performing reactions on slides and processing methods used in these instruments. In addition, a patent application filed by the Company covers an evaporation inhibitor liquid that is effective for high temperature applications. The expiration dates of the Company's issued United States patents range from September 2005 to November 2013. There can be no assurance that the Company's patent applications will result in patents being issued or that any issued patents will provide 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. COMPETITION Competition in the diagnostic industry is intense and is expected to increase. Competition in the diagnostic industry is based on, among other things, product quality, performance, price and the breadth of a company's product offerings. Ventana's instrument and reagent systems for IHC tests compete with products offered by various manufacturers as well as with manual diagnostic methods. In addition, flow cytometry can be used for cellular testing and may, in certain markets, be competitive with the Company's products. The 45 48 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. In the instrument market, several companies, including Leica (a division of Leitz Microscope GmbH), Shandon Scientific Limited (a division of Life Sciences International PLC), BioGenex and DAKO (U.S.), offer instruments that perform IHC tests and can be used with any supplier's reagents, which may be attractive to certain customers. As of 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 Company has included semi-automated instruments manufactured by its competitors in arriving at its estimates of its market share. In addition, any future growth in the market for automated IHC instruments may result in additional market entrants and increased competition, including more aggressive price competition. Many of the companies selling or developing diagnostic devices and instruments and many potential entrants in the automated IHC market have financial, manufacturing, marketing and distribution resources significantly greater than those of Ventana. In addition, many of these current and potential competitors have long-term supplier relationships with Ventana's existing and potential customers. These competitors may be able to leverage existing customer relationships to enhance their ability to place new IHC instruments. Competition in the market for automated IHC instruments, including the advent of new market entrants and increasing price competition, could have a material adverse effect on the Company's business, financial condition and results of operations. In the market for reagents, the Company encounters competition from suppliers of primary antibodies and detection chemistries. The major suppliers of primary antibodies in the anatomical pathology market in the United States are DAKO, BioGenex and Coulter Immunology. The principal suppliers of detection chemistries in the United States are Vector Laboratories, BioGenex and DAKO. The Company's patient priority instruments require the use of the Company's detection chemistries but can be used with primary antibodies supplied by third parties, and the Company's batch processing instruments can be used with both detection chemistries and primary antibodies supplied by third parties. Accordingly, the Company encounters significant competition in the sale of reagents for use on those of its instruments that can be used with reagents supplied by third parties. Lower prices for reagents used in manual IHC tests could also limit the growth of automation. Certain of the Company's current and potential competitors in the reagent market have financial, manufacturing, marketing and distribution resources greater than those of the Company. Competition in the market for reagents could also increase as a result of new market entrants providing more favorable reagent supply arrangements than the Company, including lower reagent prices. In particular, new entrants in the instrument market may seek to enhance their competitive position through reduced reagent pricing or more favorable supply arrangements; the Company's current instrument customers may find it attractive to purchase primary antibodies for patient priority instruments and primary antibodies and detection chemistries for batch processing instruments from such competitors. Increased competition in the reagent market could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION The manufacturing, marketing and sale of the Company's products are subject to regulation by governmental authorities in the United States and other countries. In the United States, clinical diagnostic devices are subject to rigorous 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. 46 49 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. 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, 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 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 47 50 surveillance programs to monitor the effect of products which have been commercialized, and has the power to prevent or limit further marketing of the product based on the results of these post-marketing programs. The FDA enforces regulations prohibiting the marketing of products for unapproved uses. Further, if the Company wanted to make changes on a product after FDA clearance or approval, including changes in indications or intended use or other significant modifications to labeling or manufacturing, additional clearances or approvals would be required. The FDA has broad regulatory and enforcement powers including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products, withdraw clearances or approvals, restrict or enjoin the marketing of products, and impose civil and criminal penalties, any one or more of which could have a material adverse effect upon the Company. The Company is subject to FDA GMP regulations. The Company is in the process of implementing policies and procedures which are intended to allow the Company to receive ISO 9000 certification. ISO 9000 standards are worldwide standards for manufacturing process control, documentation and quality assurance. There can be no assurance that the Company will be successful in meeting ISO 9000 certification requirements. Under GMP regulations and ISO 9000 standards, the Company is subject to ongoing FDA and international compliance inspections. Laboratories using the Company's diagnostic devices for clinical use in the United States are regulated under CLIA, which is intended to ensure the quality and reliability of medical testing. Regulations implementing CLIA establish requirements for laboratories and laboratory personnel in the areas of administration, participation and proficiency testing, patient test management, quality control, personnel, quality assurance and inspection. Under these regulations, the specific requirements that a laboratory must meet depend on the complexity of the test being performed by the laboratory. Under CLIA regulations, all laboratories performing moderately complex or highly complex tests will be required to obtain either a registration certificate or certificate of accreditation from the Health Care Financing Administration. CLIA requirements may prevent some clinical laboratories from using certain of the Company's diagnostic products. Therefore, there can be no assurance that CLIA regulations and future administrative interpretations of CLIA will not have a material adverse impact on the Company by limiting the potential market for the Company's products. The Company sells products in certain international markets and plans to enter additional international markets. International sales of medical devices are subject to foreign government regulation, the requirements of which vary substantially from country to country. These range from comprehensive device approval requirements for some or all of the Company's medical device products to requests for product data or certifications. FDA approval is required for the export of Class III devices. In addition to the foregoing, the Company is subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions, laboratory and manufacturing practices, fire hazard control, disposal of hazardous or potentially hazardous substances and other environmental matters. To date, compliance with these laws and regulations has not had a material effect on the Company's financial position, and the Company has no plans for material capital expenditures relating to such matters. The Company currently uses third party disposal services to remove and dispose of the hazardous materials used in its processes. The Company could in the future encounter claims from individuals, governmental authorities or other persons or entities in connection with exposure to or disposal or handling of such hazardous materials or violations of environmental laws by the Company or its contractors and could also be required to incur additional expenditures for hazardous materials management or environmental compliance. Costs associated with environmental claims, violations of environmental laws or regulations, hazardous materials management and compliance with environmental laws could have a material adverse effect on the business, financial condition or results of operations of the Company. Although the Company believes it will be able to comply with all applicable regulations regarding the manufacture and sale of diagnostic products, such regulations are always subject to change and depend heavily upon administrative interpretations. Delays in or failure to receive clearances or approvals of products the Company plans to introduce, or changes in the applicable regulatory climates could have a material adverse effect upon the business, financial condition or results of operations of the Company. 48 51 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. 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 May 31, 1996, Ventana employed 128 persons full time. Of these employees, 58 were engaged in sales and marketing, 24 in research and development, 31 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 patent rights held by BioGenex relating to an antigen retrieval method used in IHC tests. BioGenex's claims include claims of both direct, indirect and contributory infringement. BioTek 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 June 30, 1996:
NAME AGE POSITION -------------------------- --- --------------------------------- Jack W. Schuler(1)(III) 55 Chairman of the Board of Directors R. James Danehy(III) 51 President, Chief Executive Officer and Director Stephen A. Tillson, Ph.D. 55 Vice President, Scientific Affairs and Quality Assurance R. Michael Rodgers 51 Vice President, Finance, Chief Financial Officer and Secretary Carl W. Hull 38 Vice President, Marketing and Business Development Michael K. Cusack 39 Vice President, International 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(II) 72 Director Michael R. Danzi(II) 36 Director Edward M. Giles(1)(II) 60 Director Thomas M. Grogan, 50 Director M.D.(III) John Patience(2)(III) 48 Director C. Anthony Stellar, 66 Director M.D.(I) James M. Strickland(I) 53 Director James R. Weersing(1)(2)(I) 57 Director
- --------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. (I) Class I director (II) Class II director (III) Class III director Mr. Schuler has served as a director of Ventana since April 1991 and as Chairman of the Board of Directors since November 1995. Mr. Schuler has been Chairman of the Board of Directors of Stericycle, Inc., a specialized medical waste management company, since March 1990. Mr. Schuler is also a partner in Crabtree Partners, a Chicago based venture capital firm. Prior to joining Stericycle, Mr. Schuler held various executive positions at Abbott from December 1972 through August 1989, serving most recently as President and Chief Operating Officer. He is currently a director of Medtronic, Inc., Somatogen, Inc. and Chiron Corporation. Mr. Schuler received a B.S. in Mechanical Engineering from Tufts University and an M.B.A. from Stanford University. Mr. 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 50 53 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 Affairs and Quality Assurance. From January 1990 to May 1992, Dr. Tillson served as a principal of Ticon Company Consulting. He has 25 years experience in the diagnostic and pharmaceutical industry. Dr. Tillson holds a Ph.D. from Purdue University and received a B.S. from California State Polytechnic University and an M.B.A. from St. Mary's College of California. Mr. 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. Hull joined Ventana in June 1996 as Vice President, Marketing and Business Development. From 1989 until joining Ventana, Mr. Hull held various marketing and management positions with several divisions of Abbott. He served most recently as Vice President and General Manager of Abbott Puerto Rico from February 1995 to June 1996, and as Marketing Manager at Sequoia-Turner Corp., a subsidiary of Abbott, from October 1993 to February 1995. From March 1989 to September 1992, Mr. Hull held various marketing and management positions in Abbott's Diagnostic Division. Mr. Hull received a B.A. in Political Science and International Relations from The Johns Hopkins University and an M.B.A. from the University of Chicago. Mr. Cusack joined Ventana as Vice President of Marketing in September 1994 and was promoted to Vice President, International in June, 1996. Mr. Cusack has also served as President Directeur General of Ventana Medical Systems, S.A., a wholly-owned subsidiary of Ventana, since September 1995. From November 1992 until joining Ventana, Mr. Cusack acted as General Manager, Europe and Mideast for CYTYC S.A.R.L., a medical diagnostics company with operations in the United States and abroad. Prior to CYTYC, Mr. Cusack held various marketing and managerial positions with Abbott's Diagnostics Division. Mr. Cusack received a B.S. from the University of Delaware and an M.B.A. from Temple University. Mr. 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 51 54 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 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. 52 55 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. The Company's certificate of incorporation and Bylaws, however, provide that upon the effective date of this Offering, the Board of Directors will be divided into three classes. Each class will consist of three or four directors. The terms of office of class I, class II and class III directors will expire at the Company's 1997, 1998 and 1999 annual meetings of stockholders, respectively. At each annual meeting of stockholders at which the term of office of a particular class of directors first expires, the persons elected to the board positions represented by such class of directors will be elected to serve from the time of election until the third annual meeting following election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes of directors so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the Board of Directors may have the effect of delaying or preventing changes in control or management of the Company. Officers serve at the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of the Company. The Company does not pay cash compensation to directors for serving in that capacity, although the Company does reimburse directors for expenses incurred in attending Board of Directors meetings. The Board of Directors has, among other committees, a Compensation Committee that makes recommendations concerning salaries and incentive compensation for employees of and consultants to the Company and an Audit Committee that reviews the results and scope of the audit and other services provided by the Company's independent auditors. 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 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. 53 56 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, International 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 $8,800 annual automobile allowance. (4) Consists entirely of commissions earned through employment as the Company's Northern Regional Sales Manager prior to his promotion to National Sales Manager in June of 1995. 54 57 STOCK OPTION INFORMATION The following table contains information concerning the stock option grants made to each of the Named Executive Officers for the year ended December 31, 1995. OPTION GRANTS IN LAST YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ------------------------------------------------------ ANNUAL RATES OF NUMBER OF % OF TOTAL STOCK PRICE SECURITIES OPTIONS EXERCISE APPRECIATION FOR UNDERLYING GRANTED TO OR BASE OPTION TERM(4) OPTIONS EMPLOYEES PRICE EXPIRATION ------------------- NAME GRANTED(1) IN 1995(2) ($/SH)(3) DATE 5%($) 10%($) - -------------------------- ---------- ---------- --------- ---------- ------- ------- R. James Danehy........... -- -- -- -- -- -- Bernard O. C. Questier.... 36,957 11.39% $0.84 10/4/05 $19,523 $49,476 David P. Pauluzzi......... 23,098 7.12 0.84 4/4/05- 12,202 30,922 6/30/05 Michael K. Cusack......... -- -- -- -- -- -- R. Michael Rodgers........ 15,153 4.67 0.84 4/4/05 8,005 20,286
- --------------- (1) Options were granted under the Company's 1988 Stock Option Plan. These generally vest over four years from the date of grant. (2) Based on an aggregate of 324,505 options granted by the Company in the year ended December 31, 1995 under the Company's 1988 Stock Option Plan to all employees of and consultants to the Company, including the Named Executive Officers. (3) The exercise price per share of each option was equal to the fair market value of the Common Stock on the date of grant as determined by the Company's Board of Directors. (4) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission. There can be no assurance provided to any executive officer or any other holder of the Company's securities that the actual stock price appreciation over the 10-year option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the executive officers. AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES The following table sets forth, for each of the Named Executive Officers, the shares acquired and the value realized on exercises of stock options during the year ended December 31, 1995 and the year-end number and value of exercisable and unexercisable options.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS SHARES AT DECEMBER 31, 1995 AT DECEMBER 31, 1995 ACQUIRED ON VALUE ---------------------------- ---------------------------- NAME EXERCISE(#) REALIZED($) 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. 55 58 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, James R. Weersing 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. In the event of a change in control of the Company, including a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, then all shares subject to options granted under the 1996 Stock Plan will become fully vested and exercisable unless such options are assumed by the successor or acquiring company. The 1996 Stock Plan will terminate in April 2006, unless earlier terminated in accordance with the terms of the 1996 Stock Plan. 1996 Director Option Plan. In June 1996, the Company adopted a 1996 Director Option Plan (the "Director Plan") and reserved a total of 250,000 shares of Common Stock for issuance thereunder. Commencing with the Company's 1997 annual meeting of stockholders, each nonemployee director will be granted a nonstatutory option to purchase an amount of shares of Common Stock of the Company equal to 5,000 shares multiplied by a fraction, the numerator of which shall be $15.00 and the denominator of which shall be the fair market value of one share of the Company's Common Stock on the date of grant. The exercise price of options granted under the Director Plan will be equal to the fair market value of one share of the Company's Common Stock on the date of grant. Each option granted under the Director Plan will vest on a cumulative monthly basis over a one-year period and will have a 10-year term. In the event of a change in control of the Company, including a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, then all shares subject to options granted under the Director Plan will become fully vested and exercisable unless such options are assumed by the successor or acquiring company. The Director Plan will terminate in June 2001, unless earlier terminated in accordance with the terms of the Director 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 had been authorized for issuance under the 1991 Purchase Plan as of March 31, 1996 of which 82,403 shares have been 56 59 issued as of such date. In June 1996, shares of Preferred Stock convertible into an additional 12,627 shares of Common Stock were reserved for issuance under the 1991 Purchase Plan to enable the Company to complete the issuance of shares of Preferred Stock in the purchase period that ended on June 30, 1996. 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 terminated 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 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. 57 60 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 8,595 Entities affiliated with Marquette Venture Partners.................................. 475,123 6,568
- --------------- (1) Each share of Preferred Stock will convert into 0.37 shares of Common Stock upon the closing of this Offering. In April and May 1996, the Company sold an aggregate of 646,664 shares of Common Stock to Jack Schuler, the Company's Chairman, John Patience, a director of the Company, and venture capital funds affiliated with Marquette Venture Partners ("Marquette"), a principal stockholder of the Company, at a purchase price of $1.62 per share. Messrs. Schuler and Patience paid the purchase price for their shares 10% in cash and 90% through a full recourse promissory note secured by the underlying shares of Common Stock. The promissory notes bear interest of 6% per annum and are due and payable in full on February 26, 1998. Marquette paid the purchase price for their shares in cash. These stock purchases were approved by the Company's Board of Directors in principle in January 1996 and the specific terms of the stock purchases were approved by the Board of Directors on February 23, 1996. The purchase price of $1.62 per share was determined by the Board of Directors of the Company in January 1996 and equals the fair market value of Company's Common Stock as of such date, as determined by the board. Messrs. Schuler and Patience were provided with the opportunity to purchase these shares in connection with (i) their efforts and assistance in completing the 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 193,948 shares (including 97,011 shares purchased by Mr. Schuler, 66,754 shares purchased by Mr. Patience and 30,183 shares purchased by Marquette) will become vested upon the completion of this Offering, (ii) 172,463 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) 129,348 shares purchased by Mr. Patience and 150,905 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. 58 61 In 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 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 28,975 shares of Common Stock at $1.63 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 $352,496 and $1,196,511, 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 222,973 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 800,356 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, $0.5 million in principal amount of Notes and Warrants to acquire 87,384 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 59 62 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 R. Weersing.............................................. 24,884 4,298 James M. Strickland............................................ 5,000 860 Thomas M. Grogan, M.D.(1) ..................................... 2,667 459
- --------------- (1) Represents shares beneficially owned by C. Ovens, Inc. 60 63 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 21.8% 449,668 1,468,982 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 12.9 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 10.8 -- 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)...................... 1,452,858 16.2 -- 1,452,858 13.0 All directors and executive officers as a group (17 persons)........................ 3,944,545 41.7 -- 3,944,545 33.8
61 64
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)....... 438,320 4.9% 103,243 335,077 3.0% Interwest Partners IV, L.P. .................. 370,900 4.2 87,363 283,537 2.6 Victoria Bannister(21)........................ 286,863 3.3 10,881 275,982 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 * 943 46,050 * Jan Karel Smeets.............................. 31,271 * 15,635 15,636 * Douglas F. Sweet.............................. 30,465 * 725 29,740 * Thomas B. Healey.............................. 20,882 * 10,441 10,441 * Dorothy L. O'Neal Revocable Trust(24)......... 19,903 * 8,814 11,089 * Wm. Kent Wonders(25).......................... 12,839 * 1,895 10,944 * Charles J. Casebeer(26)....................... 9,765 * 263 9,502 * Jessica Youle(27)............................. 9,630 * 4,264 5,366 * Mary Cawley(28)............................... 6,653 * 3,326 3,327 * Entities affiliated with the Thomas H. and Rosemary S. Tisch Trust..................... 2,349 * 553 1,796 *
- --------------- * 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 8,790,091 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 81,530 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 10,990,091 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. 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, Charles J. Casebeer and entities affiliated with the Thomas H. and Rosemary S. Tisch Trust 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 162,059 shares issuable upon the exercise of warrants held by MBW Venture Partners, L.P. Mr. Weersing, a director of the Company, is Managing Director of MBW Venture Partners Limited. Mr. Weersing disclaims beneficial ownership of the shares beneficially owned by MBW Venture Partners, L.P. except to the extent of his proportional partnership interest therein. 62 65 (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.); 36,941 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. (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. Also includes 4,298 shares issuable upon the exercise of warrants held by Mr. Weersing. (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 2,274 shares issuable upon the exercise of warrants held by the Dorothy L. O'Neal Revocable Trust. (25) Includes 1,467 shares issuable upon the exercise of warrants held by Mr. Wonders. (26) Includes 1,116 shares issuable upon the exercise of warrants held by Mr. Casebeer. (27) Includes 1,101 shares issuable upon the exercise of warrants held by Ms. Youle. (28) 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. 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 10,990,091 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 81,530 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 887,740 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 person became an interested stockholder, unless (with certain exceptions) the "business combination" or the 64 67 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 10,990,091 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 81,530 shares of Common Stock that will terminate if not exercised upon the completion of this Offering. Of these 10,990,091 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 7,990,091 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 7,468,559 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 2,023 shares of Common Stock will be saleable at 90 days after the Offering. An additional 8,786 shares of Common Stock will be saleable between 90 and 180 days after this Offering. Upon expiration of the lock-up agreements, approximately 7,817,760 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 313,957 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. 7,286,334 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 7,286,334 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 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 67 70 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 69,767 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. collectively own an aggregate of 29,753 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 6,160 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. In addition, copies of the Registration Statement may be obtained from the Commission's Internet address at http://www.sec.gov. 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. 68 71 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, 1995.......................................................... F-4 Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1996...................................................... F-5 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements............ F-6 VENTANA MEDICAL SYSTEMS, INC. Report of Ernst & Young LLP, Independent Auditors..................................... F-8 Audited Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited)...................................................................... F-9 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-10 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-11 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-12 Notes to Consolidated Financial Statements.......................................... F-13 BIOTEK SOLUTIONS, INC. Report of Ernst & Young LLP, Independent Auditors..................................... F-23 Audited Financial Statements Balance Sheets as of June 30, 1995 and December 31, 1995............................ F-24 Statements of Operations for the year ended June 30, 1995 and six months ended December 31, 1995................................................................ F-25 Statements of Changes in Stockholders' Deficit for the year ended June 30, 1995 and six months ended December 31, 1995............................................... F-26 Statements of Cash Flows for the year ended June 30, 1995 and six months December 31, 1995......................................................................... F-27 Notes to Financial Statements....................................................... F-28 BIOTEK SOLUTIONS, INC. Report of Arthur Andersen LLP, Independent Public Accountants......................... F-34 Audited Financial Statements Balance Sheets as of June 30, 1993 and 1994......................................... F-35 Statements of Operations for the years ended June 30, 1993 and 1994................. F-36 Statements of Changes in Shareholders' Deficit for the years ended June 30, 1993 and 1994............................................................................. F-37 Statements of Cash Flows for the years ended June 30, 1993 and 1994................. F-38 Notes to Financial Statements....................................................... F-39
F-1 72 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 year ended December 31, 1995 and for the three months ended March 31, 1996 have been prepared as if the acquisition of BioTek had been consummated as of January 1, 1995. 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 73 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.......................................... 2,383 2,383 Other................................................ 33 33 -------- -------- Total current assets................................... 8,686 23,663 Property, plant and equipment, net..................... 2,949 2,949 Intangibles, net....................................... 10,107 10,107 -------- ------- -------- Total assets................................. $ 21,742 $ 14,977 $ 36,719 ======== ======= ======== LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable..................................... $ 1,216 $ 1,216 Other current liabilities............................ 7,051 7,051 -------- -------- Total current liabilities.............................. 8,267 8,267 -------- -------- 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.................................. (40,892) 8,456(b) (32,436) Cumulative foreign currency transactions adjustment........................................ (140) (140) -------- ------- -------- Total stockholders' equity (deficit)......... (37,695) 66,147 28,452 -------- ------- -------- Total liabilities, convertible redeemable preferred stock and stockholders' equity (deficit).................................. $ 21,742 $ 14,977 $ 36,719 ======== ======= ========
See accompanying notes. F-3 74 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 Nonrecurring expenses................ -- -- 9,983 9,983 Amortization of intangibles.......... -- -- 557(6) 557 ------- ------- ------ ------- Loss from operations................... (3,343) (3,069) (9,124) (15,536) Interest (expense) income.............. 74 (2,224) 2,224(7) 74 ------- ------- ------ ------- Net loss............................... $ (3,269) $(5,293) $(6,900) $ (15,462) ======= ======= ====== ======= Pro forma net loss per share, as adjusted............................. $ (0.36) $ (1.55) ======= ======= Pro forma weighted average shares outstanding, as adjusted............. 8,973 9,975(8) ======= =======
See accompanying notes. F-4 75 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.................... 1,432 593 (101)(2)(3) 1,924 -------- ------- ------- ------ Gross profit.......................... 2,714 504 86 3,304 Operating expenses: Research and development............ 613 163 (5)(3) 771 Selling, general and administrative................... 2,374 368 57(2)(3)(4) 2,799 Nonrecurring expenses............... 9,983 413 (10,396)(5) -- Amortization of intangibles......... 46 -- 93(6) 139 -------- ------- ------- ------ Loss from operations.................. (10,302) (440) 10,337 (405) Interest (expense) income............. (5) (944) 944(7) (5) -------- ------- ------- ------ Net loss.............................. $ (10,307) $(1,384) $11,281 $ (410) ======== ======= ======= ====== Pro forma net loss per share, as adjusted............................ $ (1.12) $ (0.04) ======== ====== Pro forma weighted average shares outstanding, as adjusted............ 9,204 10,206(8) ======== ======
See accompanying notes. F-5 76 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, 1995 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 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.......................... 7,900 Goodwill and other intangibles............................... 1,675 Developed technology......................................... 2,800 Customer base................................................ 4,100 -------------- $ 18,763 ===========
In accordance with FAS 2, the Company charged to expense at the date of the acquisition $7.9 million relating to the portion of the purchase price allocated to those in-process research and development projects where technological feasibility had not yet been established and where there are no alternative future uses. Intangible assets consist primarily of goodwill, customer base and developed technology. Such assets are amortized over estimated useful lives of 15 years for developed technology and goodwill, and 20 years for customer base. 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 certain 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 the ultimate sale of products to the end-users as if such policy had been in effect as of January 1, 1995. The combined effect of the change in accounting policy is an increase in pro forma net sales in 1995. This is primarily due to (i) shipments of instruments and reagents to CMS in 1994 which were subsequently placed with end-users in 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 F-6 77 VENTANA MEDICAL SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 $7.9 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, 1995. (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. (8) The calculation of pro forma weighted average number of shares outstanding is as follows:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1995 1996 ------------ ------------ Weighted average shares outstanding........................ 957 1,120 Assumed conversion of Series A, C, and D preferred shares................................................... 6,580 6,648 Assumed exercise of warrants to purchase Series D preferred shares................................................... 50 50 Stock, options and warrants issued within one year of initial filing........................................... 1,386 1,386 Shares of common stock issued in connection with the initial public offering to be used to retire acquisition debt..................................................... 1,002 1,002 ------ ------------ Weighted average shares outstanding, as adjusted........... 9,975 10,206 ========== ==========
F-7 78 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 11, 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 11 to the Consolidated Financial Statements. Tucson, Arizona July 1, 1996 F-8 79 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 2,383 Other...................................... 38 24 33 -------- -------- ----------- Total current assets......................... 4,893 4,819 8,686 Property and equipment, net (Note 3)......... 2,169 2,258 2,949 Intangibles, net (Note 11)................... 217 301 10,107 -------- -------- ----------- Total assets................................. $ 7,279 $ 7,378 $ 21,742 ======== ======== ========= 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 7,051 -------- -------- ----------- Total current liabilities.................... 1,173 2,054 8,267 Long-term debt............................... -- -- 15,035 Commitments (Notes 6, 9 and 11) Convertible redeemable preferred stock at aggregate mandatory redemption value (Notes 6 and 10):................................. 30,237 35,180 36,135 $ -- Stockholders' equity (deficit) (Notes 7, 10 and 11): 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 1,344,269 shares issued and outstanding at December 31, 1994 and 1995 and March 31, 1996, respectively (50,000,000 shares authorized, 8,031,894 shares issued and outstanding -- pro forma) -- amount paid in................ 190 244 3,337 31,016 Accumulated deficit........................ (24,275) (29,980) (40,892) (32,436) Cumulative foreign currency translation adjustment.............................. (46) (120) (140) (140) -------- -------- ----------- ---------------- Total stockholders' equity (deficit)......... (24,131) (29,856) (37,695) $ (1,560) ============ -------- -------- ----------- Total liabilities, convertible redeemable preferred stock, and stockholders' equity (deficit).................................. $ 7,279 $ 7,378 $ 21,742 ======== ======== =========
See accompanying notes. F-9 80 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 1,432 --------- --------- --------- --------- --------- 959 3,396 6,331 1,266 2,714 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 2,374 Nonrecurring expenses................... -- -- -- -- 9,983 Amortization of intangibles............. -- -- -- -- 46 --------- --------- --------- --------- --------- Loss from operations...................... (5,208) (5,429) (3,343) (884) (10,302) Interest income (expense)................. 229 59 74 50 (5) --------- --------- --------- --------- --------- Net loss.................................. $ (4,979) $ (5,370) $ (3,269) $ (834) $ (10,307) ======== ======== ======== ======== ======== Net loss per share, as adjusted........... $ (0.36) $ (0.09) $ (1.12) ======== ======== ======== Shares used in computing net loss per share, as adjusted...................... 8,973 8,838 9,204 ======== ======== ========
See accompanying notes. F-10 81 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)...... -- -- -- -- 222,973 3,007 -- -- 3,007 Sale of common stock (unaudited)...... -- -- -- -- 101,132 86 -- -- 86 Translation adjustment (unaudited)...... -- -- -- -- -- -- -- (20) (20) Net loss (unaudited)...... -- -- -- -- -- -- (10,307) -- (10,307) --------- --------- --------- ------- --------- -------- ------------ ----------- -------- Balance at March 31, 1996 (unaudited)... $ 536 $10,859 $24,740 $36,135 1,344,269 $ 3,337 $(40,892) $(140) $(37,695) ======== ======== ======== ======== ========= ========= ============ ========== =========
See accompanying notes. F-11 82 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) $(10,307) Adjustments to reconcile net loss to net cash used in operating activities: Purchased in-process research and development......................... -- -- -- -- 7,900 Depreciation and amortization.......... 334 477 911 211 298 Changes in operating assets and liabilities: Accounts receivable.................... (244) (941) (474) 165 (287) Inventories............................ (258) (24) (874) (64) (488) Other assets........................... (126) 37 (114) (39) (9) Accounts payable....................... 69 321 422 48 (341) Other current liabilities.............. 110 224 459 132 2,024 ------- ------- ------- ------ -------- Net cash used in operating activities.... (5,094) (5,276) (2,939) (381) (1,210) INVESTING ACTIVITIES: Purchase of property and equipment, net.................................... (1,700) (604) (956) (399) (69) 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) (2,569) 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 6,092 ------- ------- ------- ------ -------- Net cash provided by financing activities............................. 5,105 2,999 2,561 2,415 6,092 Effect of exchange rate changes on cash................................... -- (46) (74) -- 20 ------- ------- ------- ------ -------- 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-12 83 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 11 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 plans ("RPs"), 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. Intangibles: Intangible assets consist primarily of goodwill, customer base, and developed technology acquired in the BioTek acquisition (see Note 11). Such assets are amortized over estimated useful lives of 15 years for developed technology and goodwill, and 20 years for customer base. Impairment is recognized in operating results if a permanent decline in value occurs. The Company will measure possible impairment of its intangible assets periodically by comparing the cash flows generated by those assets to their carrying values. The Company will periodically evaluate the useful lives assigned to the various categories of intangible assets F-13 84 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) considering such factors as (i) demand, obsolescence, competition, market share, and other economic factors; (ii) legal and regulatory provisions; and (iii) the periods expected to be benefited. Revenue Recognition: Sales of instruments and reagents are generally recognized upon shipment. Sales through domestic distributors are recognized upon shipment of products by the distributors to end users. Revenues from reagents sold under RPs and similar leasing arrangements are recognized when reagents are shipped. 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 11). Foreign Currency Translation: Foreign currency financial statements of the Company's foreign subsidiaries are converted into United States dollars by translating balance sheet accounts at the current exchange rate at year end and statement of operations accounts at the average exchange rate for the year, with resulting translation adjustments reported as a separate component of stockholders' equity (deficit). 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 preferred shares, options, and warrants 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-14 85 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) $ (10,307) 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) $ (10,912) ========= ========= ========== ========== Net loss per common share................. $ (3.02) $ (3.19) $ (2.43) $ (0.62) $ (4.36) ========= ========= ========== ========== Weighted average shares outstanding....... 2,243 2,303 2,343 2,289 2,505 ========= ========= ========== ==========
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 1,053 ---- ------ ------ $893 $1,767 $ 2,383 ==== ====== ======
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 2,366 Computers and related equipment.................. 187 284 275 Furniture and fixtures........................... 116 272 273 Leasehold improvements........................... 39 133 133 ------ ------ ------ 3,242 4,198 5,227 Less accumulated depreciation and amortization........ 1,073 1,940 2,278 ------ ------ ------ $2,169 $2,258 $ 2,949 ====== ====== ======
F-15 86 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 1,033 ---- ---- ------ $534 $993 $ 7,051 ==== ==== ======
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 11). 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-16 87 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 9,261,531 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 18,096,074
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-17 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) 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 82,403 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. 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......................................... 324,505 0.84 Exercised....................................... (160,210) 0.24 -- 0.95 Canceled........................................ (126,618) 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-18 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) 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-19 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) 10. FOREIGN OPERATIONS, GEOGRAPHIC, AND SEGMENT DATA The Company operates predominantly in one segment, the medical diagnostic devices industry. Inventory transfers to foreign subsidiaries are made at standard cost. The following summary includes both net sales to unaffiliated customers and transfers between geographic areas. The North America operations include corporate activity that benefits the Company as a whole. The North America geographic area represents primarily the United States. The European geographic area represents primarily France and Germany.
YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Net Sales: North America unaffiliated customers........................ $ 2,681 $ 5,627 $ 9,657 Europe unaffiliated customers............................... -- 300 956 Consolidated subsidiaries................................... -- 903 521 ------- ------- ------- 2,681 6,830 11,134 Eliminations................................................ -- (903) (521) ------- ------- ------- $ 2,681 $ 5,927 $10,613 ======= ======= ======= Net Loss: North America............................................... $(4,979) $(3,974) $(2,654) Europe...................................................... -- (1,164) (363) ------- ------- ------- (4,979) (5,138) (3,017) Eliminations................................................ -- (232) (252) ------- ------- ------- $(4,979) $(5,370) $(3,269) ======= ======= ======= Identifiable Assets: North America............................................... $ 9,151 $ 8,506 $ 8,823 Europe...................................................... -- 952 1,099 ------- ------- ------- 9,151 9,458 9,922 Eliminations................................................ -- (2,179) (2,544) ------- ------- ------- $ 9,151 $ 7,279 $ 7,378 ======= ======= =======
11. 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. F-20 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) If the Offering is consummated under terms presently anticipated, all of the currently outstanding preferred stock will automatically convert into 6,687,625 shares of common stock, and 81,530 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............ 7,900 Goodwill and other intangibles................. 1,675 Developed technology........................... 2,800 Customer base.................................. 4,100 ------ Total purchase price........................... $ 18,763 ======
The Company charged to expense at the date of the acquisition $7.9 million relating to the portion of the purchase price allocated to those in-process research and development projects where technological feasibility had not yet been established and where there are no alternative future uses. 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. Between February 26, 1996 and May 14, 1996, the Company issued approximately $5.1 million of convertible subordinated notes together with warrants to purchase an 2,378,898 shares of Preferred Stock of the Company at an exercise price of $2.15 per share. The proceeds of these notes were used to fund the cash F-21 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) 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 646,664 shares of common stock to two directors of the Company and a related partnership at a price of $1.62 per share for their efforts and assistance in completing the BioTek acquisition and assisting management with its integration of the companies. 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 April 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. In April 1996, the Board of Directors authorized the 1996 Employee Stock Purchase Plan (the "1996 Purchase Plan"). A total of 200,000 shares of common stock 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. In June 1996, the Company adopted a 1996 Director Option Plan (the "Director Plan") and reserved a total of 250,000 shares of common stock for issuance thereunder. Commencing with the Company's 1997 annual meeting of stockholders, each nonemployee director will be granted a nonstatutory option to purchase an amount of shares of common stock of the Company equal to 5,000 shares multiplied by a fraction, the numerator of which shall be $15.00 and the denominator of which shall be the fair market value of one share of the Company's common stock on the date of grant. The exercise price of options granted under the Director Plan will be equal to the fair market value of one share of the Company's common stock on the date of grant. Each option granted under the Director Plan will vest on a cumulative monthly basis over a one-year period and will have a 10-year term. The Director Plan will terminate in June 2001, unless earlier terminated. F-22 93 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. ERNST & YOUNG LLP Tucson, Arizona February 2, 1996, except for Note 12, as to which the date is February 20, 1996 F-23 94 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-24 95 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-25 96 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-26 97 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-27 98 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. Export sales, which were made primarily to Denmark, totaled $1,478,000 and $2,492,000 for the 6 months ended December 31, 1995 and the year ended June 30, 1995. 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-28 99 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-29 100 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-30 101 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-31 102 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-32 103 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-33 104 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-34 105 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-35 106 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-36 107 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-37 108 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-38 109 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-39 110 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-40 111 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-41 112 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-42 113 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-43 114 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-44 115 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-45 116 - ------------------------------------------------------ - ------------------------------------------------------ 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............................. 16 Use of Proceeds......................... 16 Dividend Policy......................... 16 Dilution................................ 17 Capitalization.......................... 18 Selected Consolidated Actual and Pro Forma Financial and Operating Data.... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 21 Business................................ 33 Management.............................. 50 Certain Transactions.................... 58 Principal and Selling Stockholders...... 61 Description of Capital Stock............ 64 Shares Eligible for Future Sale......... 65 Underwriting............................ 67 Legal Matters........................... 68 Experts................................. 68 Additional Information.................. 68 Index to 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. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 3,000,000 SHARES LOGO VENTANA MEDICAL SYSTEMS, INC. COMMON STOCK ----------------------- PROSPECTUS ----------------------- BEAR, STEARNS & CO. INC. DILLON, READ & CO. INC. , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 117 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.] 118 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 ========
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-1 119 (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, 1995. 10.2(a) Kollsman Secured Promissory Note dated December 4, 1994.
II-2 120
EXHIBIT NUMBER DESCRIPTION ----------- ------------------------------------------------------------------------- 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. 10.8(c) 1996 Directors Option 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(a) Silicon Valley Bank Loan and Security Agreement dated February 20, 1995. 10.19(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-5). 27.1* Financial Data Schedule.
- --------------- * Previously Filed. + Confidential Treatment Requested. II-3 121 (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-4 122 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tucson, State of Arizona, on the 2nd day of July, 1996. VENTANA MEDICAL SYSTEMS, INC. By: /s/ R. JAMES DANEHY ------------------------------------ R. James Danehy, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment to 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 July 2, 1996 - ----------------------------------------------- Officer and Director (Principal (R. James Danehy) Executive Officer) /s/ R. MICHAEL RODGERS* Vice President and Chief July 2, 1996 - ----------------------------------------------- Financial Officer (Principal (R. Michael Rodgers) Financial and Accounting Officer) /s/ REX J. BATES* Director July 2, 1996 - ----------------------------------------------- (Rex J. Bates) /s/ MICHAEL R. DANZI* Director July 2, 1996 - ----------------------------------------------- (Michael R. Danzi) /s/ EDWARD M. GILES* Director July 2, 1996 - ----------------------------------------------- (Edward M. Giles) /s/ THOMAS M. GROGAN, M.D.* Director July 2, 1996 - ----------------------------------------------- (Thomas M. Grogan, M.D.) /s/ JOHN PATIENCE* Director July 2, 1996 - ----------------------------------------------- (John Patience)
II-5 123
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------------- -------------- /s/ JACK W. SCHULER* Director July 2, 1996 - ----------------------------------------------- (Jack W. Schuler) /s/ C. ANTHONY STELLAR, M.D.* Director July 2, 1996 - ----------------------------------------------- (C. Anthony Stellar, M.D.) /s/ JAMES M. STRICKLAND* Director July 2, 1996 - ----------------------------------------------- (James M. Strickland) /s/ JAMES R. WEERSING* Director July 2, 1996 - ----------------------------------------------- (James R. Weersing) *By: /s/ R. JAMES DANEHY - ----------------------------------------------- (R. James Danehy) (Attorney in-fact)
II-6 124 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 11, as to which the date is 1996, of Ventana Medical Systems, Inc. in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-4461) 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 11 to the consolidated financial statements. ERNST & YOUNG LLP Tucson, Arizona July 1, 1996 II-7 125 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 Amendment No. 2 to the Registration Statement (Form S-1 No. 333-4461) and related Prospectus of Ventana Medical Systems, Inc. for the registration of 3,450,000 shares of its common stock. ERNST & YOUNG LLP Tucson, Arizona July 1, 1996 II-8 126 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 July 1, 1996 II-9 127 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, 1995. 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. 10.8(c) 1996 Directors Option 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.
128
EXHIBIT NUMBER DESCRIPTION ------------- ------------------------------------------------------------------------ 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(a) Silicon Valley Bank Loan and Security Agreement dated February 20, 1995. 10.19(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-5). 27.1* Financial Data Schedule.
- --------------- * Previously Filed. + Confidential Treatment Requested. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 ST&B Draft 6/7/96 3,000,000 Shares of Common Stock VENTANA MEDICAL SYSTEMS, INC. UNDERWRITING AGREEMENT _________ __, 1996 BEAR, STEARNS & CO. INC. DILLON, READ & CO. INC. as Representatives of the several Underwriters named in Schedule I attached hereto c/o Bear, Stearns & Co. Inc. 245 Park Avenue New York, New York 10167 Dear Sirs: Ventana Medical Systems, Inc., a corporation organized and existing under the laws of Delaware (the "Company"), and certain stockholders of the Company named in Schedule II hereto (the "Selling Stockholders") propose, subject to the terms and conditions stated herein, to sell to the several underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 3,000,000 shares (the "Firm Shares") of the Company's common stock, par value $0.001 per share (the "Common Stock"). Of the 3,000,000 Firm Shares, 2,200,000 Firm Shares are being sold by the Company and 800,000 Firm Shares are being sold by the Selling Stockholders. In addition, certain of the Selling Stockholders propose to grant, for the sole purpose of covering over-allotments in connection with the sale of the Firm Shares, at the option of the Underwriters, up to an additional 450,000 shares (the "Additional Shares") of Common Stock. The Firm Shares and any Additional Shares purchased by the Underwriters are referred to herein as the "Shares". The Shares are more fully described in the Registration Statement referred to below. 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the Underwriters that: (a) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, and may have filed an amendment or amendments thereto, on Form S-1 (No. 333-_______), for the registration of the Shares under the Securities Act of 1933, as amended 2 2 (the "Act"). Such registration statement, including the prospectus, financial statements and schedules, exhibits and all other documents filed as a part thereof, as amended at the time of effectiveness of the registration statement, including any information deemed to be a part thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations of the Commission under the Act (the "Regulations"), is herein called the "Registration Statement" and the prospectus, in the form first filed with the Commission pursuant to Rule 424(b) of the Regulations or filed as part of the Registration Statement at the time of effectiveness if no Rule 424(b) or Rule 434 filing is required, is herein called the "Prospectus". The term "preliminary prospectus" as used herein means a preliminary prospectus as described in Rule 430 of the Regulations. (b) At the time of the effectiveness of the Registration Statement or the effectiveness of any post-effective amendment to the Registration Statement, when the Prospectus is first filed with the Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when any supplement to or amendment of the Prospectus is filed with the Commission and at the Closing Date and the Additional Closing Date, if any, (as hereinafter respectively defined), the Registration Statement and the Prospectus and any amendments thereof and supplements thereto complied or will comply in all material respects with the applicable provisions of the Act and the Regulations and do not or will not contain an untrue statement of a material fact and do not or will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein (i) in the case of the Registration Statement, not misleading and (ii) in the case of the Prospectus, in light of the circumstances under which they were made, not misleading. When any related preliminary prospectus was first filed with the Commission (whether filed as part of the registration statement for the registration of the Shares or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment thereof or supplement thereto was first filed with the Commission, such preliminary prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Act and the Regulations and did not contain an untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. No representation and warranty is made in this subsection (b), however, with respect to any information contained in or omitted from the Registration Statement or the Prospectus or any related preliminary prospectus or any amendment thereof or supplement thereto in reliance upon and in conformity 3 3 with information furnished in writing to the Company by or on behalf of any Underwriter through you as herein stated expressly for use in connection with the preparation thereof. If Rule 434 is used, the Company will comply with the requirements of Rule 434. (c) Ernst & Young LLP, who have certified certain financial statements and supporting schedules included in the Registration Statement, are independent public accountants as required by the Act and the Regulations; and Arthur Andersen LLP, who have certified certain financial statements and supporting schedules included in the Registration Statement, were independent public accountants as required by the Act and the Regulations during the periods covered by the financial statements on which they reported contained in the Registration Statement. (d) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as set forth in the Registration Statement and the Prospectus, there has been no material adverse change or any development involving a prospective material adverse change in the business, prospects, properties, operations, condition (financial or other) or results of operations of the Company and its subsidiaries taken as a whole, whether or not arising from transactions in the ordinary course of business, and since the date of the latest balance sheet presented in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has incurred or undertaken any liabilities or obligations, direct or contingent, which are material to the Company and its subsidiaries, taken as a whole, except for liabilities or obligations which are reflected in the Registration Statement and the Prospectus. (e) This Agreement and the transactions contemplated herein have been duly and validly authorized by the Company and this Agreement has been duly and validly executed and delivered by the Company. (f) The execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any agreement, instrument, franchise, license or permit to which the Company or any of its subsidiaries is a party or by which any of such corporations or their respective properties or assets may be bound or (ii) violate or conflict with any provision of the certificate of incorporation or by-laws of 4 4 the Company or any of its subsidiaries or any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets is required for the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, including the issuance, sale and delivery of the Shares to be issued, sold and delivered by the Company hereunder, except the registration under the Act of the Shares and such consents, approvals, authorizations, orders, registrations, filings, qualifications, licenses and permits as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters. (g) All of the outstanding shares of Common Stock are duly and validly authorized and issued, fully paid and nonassessable and were not issued and are not now in violation of or subject to any preemptive rights. The Shares, when issued, delivered and sold in accordance with this Agreement, will be duly and validly issued and outstanding, fully paid and nonassessable, and will not have been issued in violation of or be subject to any preemptive rights. The Company had, at March 31, 1996, an authorized and outstanding capitalization as set forth in the Registration Statement and the Prospectus. The Common Stock, the Firm Shares and the Additional Shares conform to the descriptions thereof contained in the Registration Statement and the Prospectus. (h) Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the Company and its subsidiaries is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except for those failures to be so qualified or in good standing which will not in the aggregate have a material adverse effect on the Company and its subsidiaries taken as a whole. Each of the Company and its subsidiaries has all requisite power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public, regulatory or governmental agencies and bodies, to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration 5 5 Statement and the Prospectus, and no such consent, approval, authorization, order, registration, qualification, license or permit contains a materially burdensome restriction not adequately disclosed in the Registration Statement and the Prospectus. (i) Except as described in the Prospectus, there is no litigation or governmental proceeding to which the Company or any of its subsidiaries is a party or to which any property of the Company or any of its subsidiaries is subject or which is pending or, to the knowledge of the Company, contemplated against the Company or any of its subsidiaries which might result in any material adverse change or development involving a prospective material adverse change in the business, prospects, properties, operations, condition (financial or other) or results of operations of the Company and its subsidiaries taken as a whole or which is required to be disclosed in the Registration Statement and the Prospectus. (j) The Company has not taken and will not take, directly or indirectly, any action designed to cause or result in, or which constitutes or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. (k) The financial statements, including the notes thereto, and supporting schedules included in the Registration Statement and the Prospectus, present fairly the financial position of the Company as of the dates indicated and the results of its operations for the periods specified; except as otherwise stated in the Registration Statement, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis; and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. (l) Except as described in the Prospectus, no holder of securities of the Company has any rights to the registration of securities of the Company because of the filing of the Registration Statement or otherwise in connection with the sale of the Shares contemplated hereby. (m) The Company is not, and upon consummation of the transactions contemplated hereby will not be, subject to registration as an "investment company" under the Investment Company Act of 1940, as amended. (n) Except as described in the Prospectus, the Company and each of its subsidiaries own or possess adequate rights to use all material patents, patent applications, patent rights, inventions, trade secrets, know-how, proprietary 6 6 techniques, including processes and substances, trademarks, service marks, trademark registrations, service mark registrations, trade names, copyrights and licenses described or referred to in the Prospectus or owned or used by it or which are necessary for the conduct of its business as described in the Prospectus. Except as described in the Prospectus, neither the Company nor any of its subsidiaries has received any notice of, or is aware of, any infringement of or conflict with asserted rights of others with respect to any patents, patent applications, patent rights, inventions, trade secrets, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trademark registrations, service mark registrations, trade names, copyrights or licenses which individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding might result in a material adverse change or development involving a prospective material adverse change in the business, prospects, properties, operations, condition (financial or other) or results of operations of the Company and its subsidiaries, taken as a whole. (o) The Company and each of its subsidiaries, and all of their respective business operations, are in compliance in all material respects with all applicable statutes, rules and regulations and orders administered or issued by any governmental or regulatory authority in the jurisdictions in which it is conducting business and by any governmental or regulatory authority having jurisdiction over the Company or any of its subsidiaries, including, without limitation, the United States Food and Drug Administration. All of the descriptions in the Registration Statement and the Prospectus of applicable statutes, rules and regulations and orders administered or issued by any governmental or regulatory authority under the captions "Risk Factors -- FDA and Other Government Regulation" and "Business -- Government Regulation" and other references therein to regulatory matters are true and accurate in all material respects. (p) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Act or by the Regulations which have not been described in the Prospectus or filed as exhibits to the Registration Statement. (q) There has been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes or hazardous substances by the Company or any of its subsidiaries (or, to the knowledge of the Company, any of their predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company or its subsidiaries in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any 7 7 applicable law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or remedial action which would not, singularly or in the aggregate with all such violations and remedial actions, result in any material adverse change or a development involving a prospective material adverse change in the business, prospects, properties, operations, condition (financial or other) or results of operations of the Company and its subsidiaries taken as a whole; there has been no spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or any of its subsidiaries or with respect to which the Company or any of its subsidiaries have knowledge, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which would not, singularly or in the aggregate with all such spills, discharges, leaks, emissions, injections, escapes, dumpings and releases, result in a material adverse change or development involving a prospective material adverse change in the business, prospects, properties, operations, condition (financial or otherwise), or results of operations of the Company and its subsidiaries taken as a whole; and the terms "hazardous wastes", "toxic wastes", "hazardous substances" and "medical wastes" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. (r) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (s) No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company on the other hand, which is required to be described in the Prospectus which is not so described. 8 8 (t) Since the date as of which information is given in the Prospectus through the date hereof, and except as may otherwise be disclosed in the Prospectus, the Company has not (i) issued or granted any securities, (ii) entered into any transaction not in the ordinary course of business or (iii) declared or paid any dividend on its capital stock. (u) Except as disclosed in Schedule III hereto, each stockholder of the Company has entered into or is subject to a lock-up agreement (the "Lock-Up Agreements") under which such stockholder has agreed not to offer, sell, agree to sell, grant any option for the sale of 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, exercisable for or convertible into Common Stock) owned by them for a period of 180 days after the date of the Prospectus, without the prior written consent of Bear, Stearns & Co. Inc.; each Lock-Up Agreement constitutes the legal, valid and binding obligations of the stockholder or stockholders party thereto enforceable against each such stockholder in accordance with its terms. 2. Representations and Warranties of the Selling Stockholders. Each Selling Stockholder severally represents and warrants to, and agrees that: (a) Such Selling Stockholder has, and immediately prior to the Closing Date and the Additional Closing Date, if any, will have good and valid title to the Shares to be sold by such Selling Stockholder hereunder on such date, free and clear of all liens, encumbrances, equities or claims; and upon delivery of such Shares and payment therefor pursuant hereto, good and valid title to such Shares, free and clear of all liens, encumbrances, equities or claims, will pass to the several Underwriters. (b) Such Selling Stockholder has placed in custody under a custody agreement (the "Custody Agreement" and, together with all other similar agreements executed by the other Selling Stockholders, the "Custody Agreements") with Norwest Bank Minnesota, N.A., as custodian (the "Custodian"), for delivery under this Agreement, certificates in negotiable form (with signature guaranteed by a commercial bank or trust company having an office or correspondent in the United States or a member firm of the New York or American Stock Exchanges) representing the Shares to be sold by such Selling Stockholder hereunder. (c) Such Selling Stockholder has duly and irrevocably executed and delivered a power of attorney (the "Power of Attorney" and, together with all other similar agreements executed by the other Selling Stockholders, the "Powers of Attorney") appointing the Custodian and one or more other 9 9 persons, as attorneys-in-fact, with full power of substitution, and with full authority (exercisable by any one or more of them) to execute and deliver this Agreement and to take such other action as may be necessary or desirable to carry out the provisions hereof on behalf of such Selling Stockholder. (d) Such Selling Stockholder has full right, power and authority to enter into this Agreement, the Power of Attorney and the Custody Agreement; the execution, delivery and performance of this Agreement, the Power of Attorney and the Custody Agreement by such Selling Stockholder and the consummation by such Selling Stockholder of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, nor will such actions result in any violation of the provisions of the constituent documents of such Selling Stockholder, if any, or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over such Selling Stockholder or the property or assets of such Selling Stockholder; and, except for the registration of the Shares under the Act and such consents, approvals, authorizations, registrations or qualifications as may be required under applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement, the Power of Attorney or the Custody Agreement by such Selling Stockholder and the consummation by such Selling Stockholder of the transactions contemplated hereby. (e) To the extent that any statements or omissions made in the Registration Statement, the Prospectus or any amendment or supplement thereto are made in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder specifically for use therein, the Registration Statement and the Prospectus and any amendments or supplements thereto will not, when they become effective or are filed with the Commission, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and no facts have come to the attention of such Selling Stockholder which lead such Selling Stockholder to believe that the Registration Statement or the Prospectus or any amendments or supplements thereto will, when they become effective or are filed with the Commission, as the case may 10 10 be, contain any untrue statement of any other material fact or omit to state any other material fact required to be stated therein or necessary to make the statements therein not misleading. (f) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. 3. Purchase, Sale and Delivery of the Shares. (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell 2,200,000 Firm Shares and each Selling Stockholder hereby agrees to sell the number of Firm Shares set opposite its name in Schedule II hereto, severally and not jointly, to the Underwriters and the Underwriters, severally and not jointly, agree to purchase from the Company and the Selling Stockholders, at a purchase price per share of $_____, the number of Firm Shares set forth opposite the respective names of the Underwriters in Schedule I hereto plus any additional number of Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 11 hereof. (b) Payment of the purchase price for, and delivery of certificates for, the Firm Shares shall be made at the office of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, or at such other place as shall be agreed upon by you and the Company, at 10:00 A.M. on the third or fourth business day (as permitted under Rule 15c6-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (unless postponed in accordance with the provisions of Section 11 hereof) following the date of the effectiveness of the Registration Statement (or, if the Company has elected to rely upon Rule 430A of the Regulations, the third or fourth business day (as permitted under Rule 15c6-1 under the Exchange Act) after the determination of the initial public offering price of the Firm Shares), or such other time not later than ten business days after such date as shall be agreed upon by you and the Company (such time and date of payment and delivery being herein called the "Closing Date"). Payment shall be made to the Company and the Selling Stockholders by certified or official bank check or checks drawn in New York Clearing House funds or similar next day funds payable to the order of the Company and the Selling Stockholders, against delivery to you for the respective accounts of the Underwriters of certificates for the Shares to be purchased by them. Certificates for the Shares shall be registered in such name or names and in such authorized denominations as you may request in 11 11 writing at least two full business days prior to the Closing Date. The Company and the Selling Stockholders will permit you to examine and package such certificates for delivery at least one full business day prior to the Closing Date. (c) In addition, the Selling Stockholders so designated in Schedule II hereto (the "Option Stockholders") hereby grant to the Underwriters the option to purchase up to 450,000 Additional Shares at the same purchase price per share to be paid by the Underwriters to the Company and the Selling Stockholders for the Firm Shares as set forth in this Section 3, for the sole purpose of covering over-allotments in the sale of Firm Shares by the Underwriters. This option may be exercised at any time, in whole or in part, on or before the thirtieth day following the date of the Prospectus, by written notice by you to the Option Stockholders. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised and the date and time, as reasonably determined by you, when the Additional Shares are to be delivered (such date and time being herein sometimes referred to as the "Additional Closing Date"); provided, however, that the Additional Closing Date shall not be earlier than the Closing Date or earlier than the second full business day after the date on which the option shall have been exercised nor later than the eighth full business day after the date on which the option shall have been exercised (unless such time and date are postponed in accordance with the provisions of Section 11 hereof). Certificates for the Additional Shares shall be registered in such name or names and in such authorized denominations as you may request in writing at least two full business days prior to the Additional Closing Date. The Option Stockholders shall permit you to examine and package such certificates for delivery at least one full business day prior to the Additional Closing Date. The number of Additional Shares to be sold to each Underwriter shall be the number which bears the same ratio to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number increased as set forth in Section 11 hereof) bears to 3,000,000 subject, however, to such adjustments to eliminate any fractional shares as you in your sole discretion shall make. The number of Additional Shares to be sold by each Option Stockholder shall be the number which bears the same ratio to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Option Stockholder bears to the total number of Firm Shares being purchased by all Option Stockholders subject, however, to such adjustments to eliminate any fractional shares as the Custodian in its sole discretion shall make. Payment for the Additional Shares shall be made by certified or official bank check or checks, in New York Clearing House or similar next day funds, each payable to the order of the Option Stockholders at the offices of Bear, Stearns & Co. Inc., 12 12 245 Park Avenue, New York, New York 10167, or such other location as may be mutually acceptable, upon delivery of the certificates for the Additional Shares to you for the respective accounts of the Underwriters. 4. Offering. Upon your authorization of the release of the Firm Shares, the Underwriters propose to offer the Shares for sale to the public upon the terms set forth in the Prospectus. 5. Covenants of the Company. The Company covenants and agrees with the Underwriters that: (a) If the Registration Statement has not yet been declared effective, the Company will use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as possible, and if Rule 430A is used or the filing of the Prospectus is otherwise required under Rule 424(b) or Rule 434, the Company will file the Prospectus (properly completed if Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within the prescribed time period and will provide evidence satisfactory to you of such timely filing. If the Company elects to rely on Rule 434, the Company will prepare and file a term sheet that complies with the requirements of Rule 434. The Company will notify you immediately (and, if requested by you, will confirm such notice in writing) (i) when the Registration Statement and any amendments thereto become effective, (ii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (iii) of the mailing or the delivery to the Commission for filing of any amendment of or supplement to the Registration Statement or the Prospectus, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of the initiation, or the threatening, of any proceedings therefor, (v) of the receipt of any comments from the Commission, and (vi) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for that purpose. If the Commission shall propose or enter a stop order at any time, the Company shall make every reasonable effort to prevent the issuance of any such stop order and, if issued, to obtain the lifting of such order as soon as possible. The Company will not file any amendment to the Registration Statement or any amendment of or supplement to the Prospectus (including the prospectus required to be filed pursuant to Rule 424(b) or Rule 434) that differs from the prospectus on file at the time of the effectiveness of the Registration Statement before or after the effective 13 13 date of the Registration Statement to which you shall reasonably object in writing after being timely furnished in advance a copy thereof. (b) If at any time when a prospectus relating to the Shares is required to be delivered under the Act any event shall have occurred as a result of which the Prospectus as then amended or supplemented would, in the judgment of the Underwriters or the Company include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it shall be necessary at any time to amend or supplement the Prospectus or Registration Statement to comply with the Act or the Regulations, the Company will notify you promptly and prepare and file with the Commission an appropriate amendment or supplement (in form and substance satisfactory to you) which will correct such statement or omission and will use its best efforts to have any amendment to the Registration Statement declared effective as soon as possible. (c) The Company will promptly deliver to you signed copies of the Registration Statement, including exhibits and all amendments thereto, and the Company will promptly deliver to each of the Underwriters such number of copies of any preliminary prospectus, the Prospectus, the Registration Statement, and all amendments of and supplements to such documents, if any, as you may reasonably request. (d) The Company will endeavor in good faith, in cooperation with you, at or prior to the time of effectiveness of the Registration Statement, to qualify the Shares for offering and sale under the securities laws relating to the offering or sale of the Shares of such jurisdictions as you may designate and to maintain such qualification in effect for so long as required for the distribution thereof; except that in no event shall the Company be obligated in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process. (e) The Company will make generally available (within the meaning of Section 11(a) of the Act) to its security holders and to you as soon as practicable, but not later than 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earning statement (in form complying with the provisions of Rule 158 of the Regulations) covering a period of at least twelve consecutive months beginning after the effective date of the Registration Statement. 14 14 (f) During the period of 180 days from the date of the Prospectus, the Company will not, without the prior written consent of Bear, Stearns & Co. Inc., issue, sell, offer or agree to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any Common Stock (or any securities convertible into, exercisable for or exchangeable for Common Stock), and the Company will obtain the undertaking of each of its officers and directors not to engage in any of the aforementioned transactions on their own behalf, other than the sale of Shares hereunder and the Company's issuance of Common Stock and options to purchase Common Stock under the Company's 1996 Employee Stock Purchase Plan and 1996 Stock Option Plan as described in the Prospectus. (g) During a period of three years from the effective date of the Registration Statement, the Company will furnish to you copies of (i) all reports to its shareholders, and (ii) all reports, financial statements and proxy or information statements filed by the Company with the Commission or the National Association of Securities Dealers, Inc. (h) The Company will apply the proceeds from the sale of the Shares as set forth under the caption "Use of Proceeds" in the Prospectus. (i) The Company will use its best efforts to cause the Shares to be authorized for inclusion in the National Association of Securities Dealers Automated Quotation (National Market) System. (j) The Company will file with the Commission such reports on Form SR as may be required pursuant to Rule 463 of the Regulations. (k) During the period of 180 days from the date of the Prospectus, the Company will strictly enforce each Lock-Up Agreement. 6. Covenants of the Selling Stockholders. Each Selling Stockholder covenants and agrees that: (a) For a period of 180 days from the date of the Prospectus, it will not, directly or indirectly, sell, offer or agree to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any Common Stock (or any securities convertible into, exercisable for or exchangeable for Common Stock), without the prior written consent of Bear, Stearns & Co. Inc. (b) The Shares to be sold by such Selling Stockholder hereunder, which are represented by the certificates held in custody for such Selling Stockholder, are subject to the 15 15 interest of the Underwriters and the other Selling Stockholders thereunder, the arrangements made by such Selling Stockholder for such custody are to that extent irrevocable, and the obligations of such Selling Stockholder hereunder will not be terminated by any act of such Selling Stockholder, by operation of law, by the death or incapacity of any individual Selling Stockholder or, in the case of a trust, by the death or incapacity of any executor or trustee or the termination of such trust, or the occurrence of any other event. (c) If at any time when a prospectus relating to the Shares is required to be delivered under the Act any information which such Selling Stockholder has provided to the Company or the Underwriters becomes incorrect, or if it shall be necessary at any time to amend or supplement any information provided by such Selling Stockholder to the Company for inclusion in the Prospectus or Registration Statement to comply with the Act or the Regulations, such Selling Stockholder will notify the Company and the Underwriters promptly so that the Company may prepare and file with the Commission an appropriate amendment or supplement (in form and substance satisfactory to the Underwriters) which will correct such statement or omission. (d) Such Selling Stockholder will deliver to the Representatives prior to the Closing Date a properly completed and executed United States Treasury Department Form W-8 (if such Selling Stockholder is a non-United States person) or Form W-9 (if such Selling Stockholder is a United States person.) 7. Payment of Expenses. Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company hereby agrees to pay all costs and expenses incident to the performance of the obligations of the Company and the Selling Stockholders hereunder, including those in connection with (i) preparing, printing, duplicating, filing and distributing the Registration Statement, as originally filed and all amendments thereto (including all exhibits thereto), any preliminary prospectus, the Prospectus and any amendments or supplements thereto (including, without limitation, fees and expenses of the Company's accountants and counsel), the underwriting documents (including, without limitation, this Agreement, the Agreement Among Underwriters and the Selling Agreement) and all other documents related to the public offering of the Shares (including those supplied to the Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the costs of delivering and distributing the Custody Agreements and the Powers of Attorney, (iv) the qualification of the Shares under state securities or Blue Sky laws, including the costs of printing and mailing a preliminary 16 16 and final "Blue Sky Survey" and the fees of counsel for the Underwriters and such counsel's disbursements in relation thereto, (v) quotation of the Shares on the National Association of Securities Dealers Automated Quotation (National Market) System, (vi) filing fees of the Commission and the National Association of Securities Dealers, Inc., (vii) the cost of printing certificates representing the Shares and (viii) the cost and charges of any transfer agent or registrar; provided that the Selling Stockholders shall pay the fees and expenses of their counsel, the Custodian (and any other attorney-in-fact) and any transfer taxes payable in connection with their respective sales of Shares to the Underwriters and reimburse the Company for their pro rata share of the fees and expenses paid by the Company in connection with the offering of the Shares. 8. Conditions of Underwriters' Obligations. The obligations of the Underwriters to purchase and pay for the Firm Shares and the Additional Shares, as provided herein, shall be subject to the accuracy of the representations and warranties of the Company and the Selling Stockholders herein contained, as of the date hereof and as of the Closing Date (for purposes of this Section 8, "Closing Date" shall refer to the Closing Date for the Firm Shares and any Additional Closing Date, if different, for the Additional Shares), to the absence from any certificates, opinions, written statements or letters furnished to you or to Simpson Thacher & Bartlett ("Underwriters' Counsel") pursuant to this Section 8 of any misstatement or omission, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:30 P.M., New York time, on the date of this Agreement, or at such later time and date as shall have been consented to in writing by you; if the Company shall have elected to rely upon Rule 430A or Rule 434 of the Regulations, the Prospectus shall have been filed with the Commission in a timely fashion in accordance with Section 5(a) hereof; and, at or prior to the Closing Date no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof shall have been issued and no proceedings therefor shall have been initiated or threatened by the Commission. (b) At the Closing Date you shall have received the opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Company, dated the Closing Date addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) Each of the Company and its U.S. subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the 17 17 Company and its subsidiaries is duly qualified and in good standing as a foreign corporation in each U.S. jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except for those failures to be so qualified or in good standing which will not in the aggregate have a material adverse effect on the Company and its subsidiaries taken as a whole. Each of the Company and its U.S. subsidiaries has all requisite corporate authority to own, lease and operate its respective properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus. All of the issued and outstanding capital stock of each subsidiary of the Company has been duly and validly issued and is fully paid and nonassessable and was not issued in violation of preemptive rights and, is owned directly or indirectly by the Company, free and clear of any lien, encumbrance, claim, security interest, restriction on transfer, shareholders' agreement, voting trust or other defect of title whatsoever. (ii) The Company has an authorized capital stock as set forth in the Registration Statement and the Prospectus. All of the outstanding shares of Common Stock are duly and validly authorized and issued, are fully paid and nonassessable and were not issued in violation of or subject to any preemptive rights. The Shares to be delivered by the Company on the Closing Date have been duly and validly authorized and, when delivered by the Company in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable and will not have been issued in violation of or subject to any preemptive rights. The Common Stock, the Firm Shares and the Additional Shares conform to the descriptions thereof contained in the Registration Statement and the Prospectus. (iii) The Shares to be sold under this Agreement to the Underwriters are duly authorized for quotation on the National Association of Securities Dealers Automated Quotation (National Market) System. (iv) This Agreement has been duly and validly authorized, executed and delivered by the Company. (v) There is no litigation or governmental or other action, suit, proceeding or investigation before any court or before or by any public, regulatory or governmental agency or body pending or to such counsel's knowledge, threatened against, or involving the properties or business of, the Company or any of its subsidiaries, which is of a character required to 18 18 be disclosed in the Registration Statement and the Prospectus which has not been properly disclosed therein. (vi) The execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereby by the Company do not and will not (A) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its U.S. subsidiaries pursuant to, any agreement, instrument, franchise, license or permit known to such counsel to which the Company or any of its U.S. subsidiaries is a party or by which any of such corporations or their respective properties or assets may be bound or (B) violate or conflict with any provision of the certificate of incorporation or by-laws of the Company or any of its U.S. subsidiaries, or, to the best knowledge of such counsel, any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its U.S. subsidiaries or any of their respective properties or assets. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental, or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets is required for the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, except for (1) such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters (as to which such counsel need express no opinion) and (2) such as have been made or obtained under the Act. (vii) The Registration Statement and the Prospectus and any amendments thereof or supplements thereto (other than the financial statements and schedules and other financial data included therein, as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Act and the Regulations. (viii) The Registration Statement is effective under the Act, and, to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof has been issued and no proceedings 19 19 therefor have been initiated or threatened by the Commission and all filings required by Rule 424(b) of the Regulations have been made. (ix) The statements contained in the Prospectus under the caption "Risk Factors - FDA and Other Government Regulation" and "Business - Government Regulation" and other references therein to food and drug regulatory matters are complete and accurate in all material respects. (x) Except as disclosed in Schedule III hereto, each stockholder of the Company has entered into or is subject to a Lock-Up Agreement under which such stockholder has agreed not to offer, sell, agree to sell, grant any option for the sale of 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 exercisable for or convertible into Common Stock) owned by them for a period of 180 days after the date of the Prospectus, without the prior written consent of Bear, Stearns & Co. Inc.; each Lock-Up Agreement constitutes the legal, valid and binding obligations of the stockholder or stockholders party thereto enforceable against each such stockholder in accordance with its terms. (xi) In addition, such opinion shall also contain a statement that such counsel has participated in conferences with officers and representatives of the Company, representatives of the independent public accountants for the Company and the Underwriters at which the contents of the Prospectus and related matters were discussed and, no facts have come to the attention of such counsel which would cause such counsel to believe that either the Registration Statement at the time it became effective (including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or any amendment thereof made prior to the Closing Date as of the date of such amendment, contained an untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus as of its date (or any amendment thereof or supplement thereto made prior to the Closing Date as of the date of such amendment or supplement) and as of the Closing Date contained or contains an untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not 20 20 misleading (it being understood that such counsel need express no belief or opinion with respect to the financial statements and schedules and other financial data included or incorporated by reference therein). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters' Counsel, familiar with the applicable laws; (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and its subsidiaries, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel. The opinion of such counsel for the Company shall state that the opinion of any such other counsel is in form satisfactory to such counsel and, in their opinion, you and they are justified in relying thereon. (c) At the Closing Date, you shall have received the opinion of _______, French counsel for the Company, dated the Closing Date addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel to the effect that: (i) Ventana Medical Systems, S.A. is a corporation duly organized and validly existing and in good standing under the laws of France, and has all requisite corporate authority to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus. (ii) There is no litigation or governmental or other action, suit, proceeding or investigation before any court or before or by any public, regulatory or governmental body pending or to such counsel's knowledge, threatened against, or involving the properties or business of, Ventana Medical Systems, S.A. (iii) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by the Company do not and will not conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would 21 21 constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of Ventana Medical Systems, S.A. pursuant to any agreement, instrument, franchise, license or permit known to such counsel to which Ventana Medical Systems, S.A. is a party or by which Ventana Medical Systems, S.A. or its properties or assets may be bound or violate or conflict with any provision of the certificate of incorporation or by-laws of Ventana Medical Systems, S.A., or, to such counsel's knowledge, any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over Ventana Medical Systems, S.A. or any of its properties or assets. (iv) No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental, or regulatory agency or body having jurisdiction over such corporation or any of its properties or assets is required for the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. (v) All of the issued and outstanding capital stock of Ventana Medical Systems, S.A. has been duly and validly issued and is fully paid and nonassessable and was not issued in violation of preemptive rights and is owned directly by the Company, free and clear of any lien, encumbrance, claim, security interest, restriction on transfer, shareholders' agreement, voting trust or other defect of title whatsoever. (d) At the Closing Date, you shall have received the opinion of __________, German counsel for the Company, dated the Closing Date addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel to the effect that: (i) Ventana Medical Systems GmbH is a corporation duly organized and validly existing and in good standing under the laws of Germany, and has all requisite corporate authority to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus. (ii) There is no litigation or governmental or other action, suit, proceeding or investigation before any court or before or by any public, regulatory or governmental body pending or to such counsel's knowledge, threatened against, or involving the 22 22 properties or business of, Ventana Medical Systems GmbH. (iii) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by the Company do not and will not conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of Ventana Medical Systems GmbH pursuant to any agreement, instrument, franchise, license or permit known to such counsel to which Ventana Medical Systems GmbH is a party or by which Ventana Medical Systems GmbH or its properties or assets may be bound or violate or conflict with any provision of the certificate of incorporation or by-laws of Ventana Medical Systems GmbH, or, to such counsel's knowledge, any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over Ventana Medical Systems GmbH or any of its properties or assets. (iv) No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental, or regulatory agency or body having jurisdiction over such corporation or any of its properties or assets is required for the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. (v) All of the issued and outstanding capital stock of Ventana Medical Systems GmbH has been duly and validly issued and is fully paid and non-assessable and was not issued in violation of any preemptive rights and is owned directly by the Company, free and clear of any lien, encumbrance, claim, security interest, restriction on transfer, shareholders' agreement, voting trust or other defect of title whatsoever. (e) At the Closing Date, you shall have received an opinion of Skjerven, Morrill, MacPherson, Franklin & Friel, patent counsel to the Company, dated the Closing Date addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel to the effect that the statements in the Registration Statement and the Prospectus under the captions "Risk Factors -- Patents and Proprietary Rights", "Business -- Patents and Proprietary Rights" and "Business -- Legal Proceedings" and other references therein to patent matters have been reviewed by such counsel and are complete and accurate in all material respects. 23 23 (f) Kirkland & Ellis, counsel for the entities affiliated with Marquette Venture Partners, (each a "Marquette Entity" and collectively the "Marquette Entities"), shall have furnished to the Underwriters their written opinion, as counsel to the Marquette Entities, addressed to the Underwriters and dated the Closing Date, in form and substance satisfactory to the Underwriters, to the effect that: (i) Each Marquette Entity has full right, power and authority to enter into this Agreement, the Power of Attorney and the Custody Agreement; the execution, delivery and performance of this Agreement, the Power of Attorney and the Custody Agreement by each Marquette Entity and the consummation by each Marquette Entity of the transactions contemplated hereby and thereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which each Marquette Entity is a party or by which each Marquette Entity is bound or to which any of the property or assets of each Marquette Entity is subject, nor will such actions result in any violation of the provisions of the constituent documents of each Marquette Entity, if any, or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over each Marquette Entity or the property or assets of each Marquette Entity; and, except for the registration of the Shares under the Act and such consents, approvals, authorizations, registrations or qualifications as may be required under applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement, the Power of Attorney or the Custody Agreement by each Marquette Entity and the consummation by each Marquette Entity of the transactions contemplated hereby and thereby; (ii) This Agreement has been duly authorized, executed and delivered by or on behalf of each Marquette Entity; (iii) A Power-of-Attorney and a Custody Agreement have been duly authorized, executed and delivered by each Marquette Entity and constitute valid and binding agreements of each Marquette Entity; and 24 24 (iv) Upon payment for, and delivery of, the Shares to be sold by each Marquette Entity under this Agreement in accordance with the terms hereof, the Underwriters will acquire all of the rights of each Marquette Entity in such Shares and will also acquire the interest of each Marquette Entity in such Shares free of any adverse claim (within the meaning of the Uniform Commercial Code). In rendering such opinions, such counsel may rely as to matters of fact, to the extent they deem proper, on certificates of each Marquette Entity, provided that such counsel shall provide copies of any such certificates to Underwriters' Counsel and shall state that you and they are justified in relying thereon. (g) Wilson Sonsini Goodrich and Rosati, Professional Corporation, counsel for the Selling Stockholders other than the Marquette Entities, shall have furnished to the Underwriters their written opinion, as counsel to each such Selling Stockholder, addressed to the Underwriters and dated the Closing Date, in form and substance satisfactory to the Underwriters, to the effect that: (i) Each such Selling Stockholder has full right, power and authority to enter into this Agreement, the Power of Attorney and the Custody Agreement; the execution, delivery and performance of this Agreement, the Power of Attorney and the Custody Agreement by each such Selling Stockholder and the consummation by each such Selling Stockholder of the transactions contemplated hereby and thereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, nor will such actions result in any violation of the provisions of the constituent documents of each such Selling Stockholder, if any, or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over such Selling Stockholder or the property or assets of such Selling Stockholder; and, except for the registration of the Shares under the Act and such consents, approvals, authorizations, registrations or qualifications as may be required under applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for 25 25 the execution, delivery and performance of this Agreement, the Power of Attorney or the Custody Agreement by each such Selling Stockholder and the consummation by each such Selling Stockholder of the transactions contemplated hereby and thereby; (ii) This Agreement has been duly executed and delivered by or on behalf of each such Selling Stockholder; (iii) A Power-of-Attorney and a Custody Agreement have been duly executed and delivered by each such Selling Stockholder and constitute valid and binding agreements of each such Selling Stockholder; and (iv) Upon payment for, and delivery of, the Shares to be sold by each such Selling Stockholder under this Agreement in accordance with the terms hereof, the Underwriters will acquire all of the rights of such Selling Stockholder in such Shares and will also acquire the interest of such Selling Stockholder in such Shares free of any adverse claim (within the meaning of the Uniform Commercial Code). In rendering such opinion, such counsel may rely as to matters of fact, to the extent they deem proper, on certificates of the Selling Stockholders, provided that such counsel shall provide copies of any such certificates to Underwriters' Counsel and shall state that you and they are justified in relying thereon. (h) All proceedings taken in connection with the sale of the Firm Shares and the Additional Shares as herein contemplated shall be satisfactory in form and substance to you and to Underwriters' Counsel, and the Underwriters shall have received from said Underwriters' Counsel a favorable opinion, dated as of the Closing Date with respect to the issuance and sale of the Shares, the Registration Statement and the Prospectus and such other related matters as you may reasonably require, and the Company and the Selling Stockholders shall have furnished to Underwriters' Counsel such documents as they request for the purpose of enabling them to pass upon such matters. (i) At the Closing Date, you shall have received a certificate of the Chief Executive Officer and Chief Financial Officer of the Company, dated the Closing Date to the effect that (i) the condition set forth in subsection (a) of this Section 8 has been satisfied, (ii) as of the date hereof and as of the Closing Date the representations and warranties of the Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date the obligations of the Company to be performed hereunder on or prior thereto have been duly performed and (iv) subsequent to the 26 26 respective dates as of which information is given in the Registration Statement and the Prospectus, the Company and its subsidiaries have not sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any material adverse change, or any development involving a prospective material adverse change, in the business, prospects, properties, operations, condition (financial or otherwise), or results of operations of the Company and its subsidiaries taken as a whole, except in each case as described in or contemplated by the Prospectus. (j) At the Closing Date, you shall have received a Certificate of each Selling Stockholder (or the Custodian or one or more attorneys-in-fact on behalf of the Selling Stockholders), dated the Closing Date, signed by, or on behalf of, the Selling Stockholder (or the Custodian or one or more attorneys-in-fact) stating that (i) as of the date hereof and as of the Closing Date, the representations and warranties of the Selling Stockholders set forth in Section 2 hereof are accurate and (ii) each Selling Stockholder has complied with all agreements contained herein to be performed by each Selling Stockholder at or prior to the Closing Date. (k) At the time this Agreement is executed and at the Closing Date, you shall have received a letter, from Ernst & Young LLP, independent public accountants for the Company, dated, respectively, as of the date of this Agreement and as of the Closing Date addressed to the Underwriters and in form and substance satisfactory to you, to the effect that: (i) they are independent certified public accountants with respect to the Company within the meaning of the Act and the Regulations and stating that the answer to Item 10 of the Registration Statement is correct insofar as it relates to them; (ii) stating that, in their opinion, the financial statements and schedules of the Company included in the Registration Statement and the Prospectus and covered by their opinion therein comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable published rules and regulations of the Commission thereunder; (iii) on the basis of procedures consisting of a reading of the latest available unaudited interim consolidated financial statements of the Company, and its subsidiaries, a reading of the minutes of meetings and consents of the stockholders and boards of directors of the Company and its subsidiaries and the committees of such boards subsequent to December 31, 1995, inquiries of officers and other employees of the Company and its subsidiaries who have responsibility for financial and accounting matters of the Company and its subsidiaries with respect to transactions and events subsequent to 27 27 December 31, 1995 and other specified procedures and inquiries to a date not more than five days prior to the date of such letter, nothing has come to their attention that would cause them to believe that: (A) the Unaudited Consolidated Financial Statements and the Unaudited Pro Forma Condensed Consolidated Financial Statements and related schedules of the Company presented in the Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and, if applicable, the Exchange Act and the applicable published rules and regulations of the Commission thereunder or that such financial statements are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements included in the Registration Statement and the Prospectus; (B) the pro forma adjustments in the Unaudited Pro Forma Condensed Consolidated Financial Statements have not been properly applied to the historical amounts in the compilation of those statements; (C) with respect to the period subsequent to December 31, 1995 there were, as of the date of the most recent available monthly consolidated financial statements of the Company and its subsidiaries, if any, and as of a specified date not more than five days prior to the date of such letter, any changes in the capital stock or long-term indebtedness of the Company or any decrease in the net current assets or stockholders' equity of the Company, in each case as compared with the amounts shown in the most recent audited balance sheet presented in the Registration Statement and the Prospectus, except for changes or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter or (D) that during the period from December 31, 1995 to the date of the most recent available monthly consolidated financial statements of the Company and its subsidiaries, if any, and to a specified date not more than five days prior to the date of such letter, there was any decrease, as compared with the corresponding period in the prior fiscal year, in total revenues, or increase in total or per share net loss, except for changes which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter; and (iv) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and gross margins, and other financial information pertaining to the Company and its subsidiaries set forth in the Registration Statement and the Prospectus, which have been specified by you prior to the date of this Agreement, to the extent that such amounts, numbers, percentages, and information may be derived from the general accounting and financial records of the Company and its subsidiaries or from schedules furnished by the Company, and excluding any questions requiring an interpretation by legal counsel, with 28 28 the results obtained from the application of specified readings, inquiries, and other appropriate procedures specified by you set forth in such letter, and found them to be in agreement. (l) At the time this Agreement is executed and at the Closing Date, you shall have received a letter, from Arthur Andersen LLP, independent public accountants, dated, respectively, as of the date of this Agreement and as of the Closing Date addressed to the Underwriters and in form and substance satisfactory to you, to the effect that: (i) they are independent certified public accountants within the meaning of the Act and the Regulations and stating that the answer to Item 10 of the Registration Statement is correct insofar as it relates to them; and (ii) stating that, in their opinion, the financial statements and schedules of BioTek Solutions, Inc. included in the Registration Statement and the Prospectus and covered by their opinion therein comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable published rules and regulations of the Commission thereunder. (m) Prior to the Closing Date the Company and the Selling Stockholders shall have furnished to you such further information, certificates and documents as you may reasonably request. (n) You shall have received from each person who is a director or officer of the Company and each stockholder (except those named in Schedule III hereto) an agreement to the effect that such person will not, directly or indirectly, without your prior written consent, offer, sell, offer or agree to sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of an option to purchase or other disposition) of any shares of Common Stock (or any securities convertible into, exercisable for or exchangeable or exercisable for shares of Common Stock) for a period of 180 days after the date of the Prospectus. (o) At the Closing Date, the Shares shall have been approved for quotation on the National Association of Securities Dealers Automated Quotation (National Market) System. If any of the conditions specified in this Section 8 shall not have been fulfilled when and as required by this Agreement, or if any of the certificates, opinions, written statements or letters furnished to you or to Underwriters' Counsel pursuant to this Section 8 shall not be in all material respects reasonably satisfactory in form and substance to you and to Underwriters' Counsel, all obligations of the Underwriters hereunder may be cancelled by you at, or at any time prior to, 29 29 the Closing Date and the obligations of the Underwriters to purchase the Additional Shares may be cancelled by you at, or at any time prior to, the Additional Closing Date. Notice of such cancellation shall be given to the Company and the Selling Stockholders in writing, or by telephone, telex or telegraph, confirmed in writing. 9. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent but only to the extent that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through you expressly for use therein. This indemnity agreement will be in addition to any liability which the Company may otherwise have, including under this Agreement. (b) Each Selling Stockholder agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are 30 30 based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Stockholder specifically for inclusion therein. Notwithstanding the provisions of this Section 9(b), the aggregate liability of any Selling Stockholder under this Section 9(b) shall not exceed the proceeds received by such Selling Stockholder from the sale of Shares under this Agreement. This indemnity agreement will be in addition to any liability which the Selling Stockholders may otherwise have, including under this Agreement. (c) Each Underwriter severally, and not jointly, agrees to indemnify and hold harmless the Company, the Selling Stockholders, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement, each other person, if any, who controls the Company or the Selling Stockholders within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation, jointly or severally, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Underwriter through you expressly for use therein; provided, however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder. This indemnity will be in addition to any 31 31 liability which any Underwriter may otherwise have, including under this Agreement. The Company acknowledges that the statements set forth in the last paragraph of the cover page and in the first through sixth and the ninth and tenth paragraphs under the caption "Underwriting" in the Prospectus constitute the only information furnished in writing by or on behalf of any Underwriter expressly for use in the registration statement relating to the Shares as originally filed or in any amendment thereof, any related preliminary prospectus or the Prospectus or in any amendment thereof or supplement thereto, as the case may be. (d) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section 9). In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by one of the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have employed counsel to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the indemnifying parties. Anything in this subsection to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent was not unreasonably withheld. 10. Contribution. In order to provide for contribution in circumstances in which the indemnification provided for in Section 9 hereof is for any reason held to be unavailable from any indemnifying party or is insufficient to hold harmless a party indemnified thereunder, the Company, the 32 32 Selling Stockholders and the Underwriters shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnification provision (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Company or the Selling Stockholders any contribution received by the Company or the Selling Stockholders, as the case may be, from persons, other than the Underwriters, who may also be liable for contribution, including persons who control the Company or the Selling Stockholders within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the Company who signed the Registration Statement and directors of the Company) as incurred to which the Company, the Selling Stockholders, and one or more of the Underwriters may be subject, in such proportions as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 9 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the Selling Stockholders and (y) the underwriting discounts and commissions received by the Underwriters, respectively, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company, the Selling Stockholders and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 10 and the preceding sentence, (i) in no case shall any Underwriter be liable or responsible for any amount in excess of 33 33 the underwriting discount applicable to the Shares purchased by such Underwriter hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the provisions of this Section 10, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. For purposes of this Section 10, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, each person, if any, who controls a Selling Stockholder within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Selling Stockholder and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) of this Section 10. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties, notify each party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 10 or otherwise. No party shall be liable for contribution with respect to any action or claim settled without its consent; provided, however, that such consent was not unreasonably withheld. 11. Default by an Underwriter. (a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Shares or Additional Shares hereunder, and if the Firm Shares or Additional Shares with respect to which such default relates do not (after giving effect to arrangements, if any, made by you pursuant to subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares or Additional Shares, the Firm Shares or Additional Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to the respective proportions which the numbers of Firm Shares set forth opposite their respective names in Schedule I hereto bear to the aggregate number of Firm Shares set forth opposite the names of the non-defaulting Underwriters. 34 34 (b) In the event that such default relates to more than 10% of the Firm Shares or Additional Shares, as the case may be, you may in your discretion arrange for yourself or for another party or parties (including any non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm Shares or Additional Shares, as the case may be, to which such default relates on the terms contained herein. In the event that within five calendar days after such a default you do not arrange for the purchase of the Firm Shares or Additional Shares, as the case may be, to which such default relates as provided in this Section 11, this Agreement or, in the case of a default with respect to the Additional Shares, the obligations of the Underwriters to purchase and of the Option Stockholders to sell the Additional Shares shall thereupon terminate, without liability on the part of the Company or such Option Stockholders with respect thereto (except in each case as provided in Section 7, 9(a) and 10 hereof) or the Underwriters, but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other Underwriters, the Company and the Selling Stockholders for damages occasioned by its or their default hereunder. (c) In the event that the Firm Shares or Additional Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, you, the Company or the Selling Stockholders shall have the right to postpone the Closing Date or Additional Closing Date, as the case may be for a period, not exceeding five business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may thereby be made necessary or advisable. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 11 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares and Additional Shares. 12. Survival of Representations and Agreements. All representations and warranties, covenants and agreements of the Underwriters, the Company and the Selling Stockholders contained in this Agreement, including the agreements contained in Section 7, the indemnity agreements contained in Section 9 and the contribution agreements contained in Section 10, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person thereof or by or on behalf of the Company, any of its officers and directors or any controlling person thereof, or by or on behalf of any Selling Stockholder or controlling person thereof and shall survive delivery of and payment for the Shares to and by the Underwriters. The representations contained in Sections 1 and 2 and the agreements contained in Sections 7, 9, 10 and 13(d) hereof shall survive the termination of this 35 35 Agreement, including termination pursuant to Section 11 or 13 hereof. 13. Effective Date of Agreement; Termination. (a) This Agreement shall become effective, upon the later of (i) when you, the Company and the Selling Stockholders shall have received notification of the effectiveness of the Registration Statement or (ii) the execution of this Agreement. If either the initial public offering price or the purchase price per Share has not been agreed upon prior to 5:00 P.M., New York time, on the fifth full business day after the Registration Statement shall have become effective, this Agreement shall thereupon terminate without liability to the Company, the Selling Stockholders or the Underwriters except as herein expressly provided. Until this Agreement becomes effective as aforesaid, it may be terminated by the Company by notifying you and the Selling Stockholders or by you notifying the Company and the Selling Stockholders. Notwithstanding the foregoing, the provisions of this Section 13 and of Sections 1, 2, 7, 9 and 10 hereof shall at all times be in full force and effect. (b) You shall have the right to terminate this Agreement at any time prior to the Closing Date or the obligations of the Underwriters to purchase the Additional Shares at any time prior to the Additional Closing Date, as the case may be, if (i) any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, the market for the Company's securities or securities in general, (ii) if trading on the National Association of Securities Dealers Automated Quotation (National Market) System, New York or American Stock Exchanges shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, on the National Association of Securities Dealers Automated Quotation (National Market) System, the New York or American Stock Exchanges or by order of the Commission or any other governmental authority having jurisdiction, (iii) if a banking moratorium has been declared by a state or federal authority or if any new restriction materially adversely affecting the distribution of the Firm Shares or the Additional Shares, as the case may be, shall have become effective, or (iv) (A) if the United States becomes engaged in hostilities or there is an escalation of hostilities involving the United States or there is a declaration of a national emergency or war by the United States or (B) if there shall have been such change in political, financial or economic conditions if the effect of any such event in (A) or (B) as in your judgment makes it impracticable or inadvisable to proceed with the offering, sale and delivery of the Firm Shares or the Additional Shares, as the case may be, on the terms contemplated by the Prospectus. 36 36 (c) Any notice of termination pursuant to this Section 13 shall be by telephone, telex, or telegraph, confirmed in writing by letter. (d) If this Agreement shall be terminated pursuant to any of the provisions hereof (otherwise than pursuant to (i) notification by you as provided in Section 13(a) hereof or (ii) Section 11(b) or 13(b) hereof), or if the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Company or the Selling Stockholders to perform any agreement herein or comply with any provision hereof, the Company will, subject to demand by you, reimburse the Underwriters for all out-of-pocket expenses (including the fees and expenses of their counsel), incurred by the Underwriters in connection herewith. 14. Notice. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing and, if sent to any Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, Attention: Mark R. Goldstein, Vice President; if sent to the Company, shall be mailed, delivered, or telegraphed and confirmed in writing to the Company, 3865 North Business Center Drive, Tucson, Arizona 85705, Attention: [R. James Danehy, President and Chief Executive Officer]; and if sent to any Selling Stockholder, shall be mailed, delivered or telegraphed and confirmed in writing to such Selling Stockholder at the address set forth in Schedule II hereto. 15. Parties. This Agreement shall insure solely to the benefit of, and shall be binding upon, the Underwriters, the Selling Stockholders, the Company and the controlling persons, directors, officers, employees and agents referred to in Section 9 and 10, and their respective successors and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. The term "successors and assigns" shall not include a purchaser, in its capacity as such, of Shares from any of the Underwriters. 16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, BUT WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 37 37 If the foregoing correctly sets forth the understanding among you, the Company and the Selling Stockholders, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, VENTANA MEDICAL SYSTEMS, INC. By: ------------------------------- Title: The Selling Stockholders named in Schedule II to this Agreement By: ------------------------------- Attorney-in-fact Accepted as of the date first above written BEAR, STEARNS & CO. INC. DILLON, READ & CO. INC. By:BEAR, STEARNS & CO. INC. By: ---------------------------- Title: On behalf of themselves and the other Underwriters named in Schedule I hereto. 38 SCHEDULE I
Number of Firm Name of Underwriter Shares to be Purchased - ------------------- ---------------------- Bear, Stearns & Co. Inc. . . . . . . . Dillon, Read & Co. Inc. . . . . . . . Total. . . . . . . ---------------------- 3,000,000
39 SCHEDULE II
Number of Firm Shares Name and Address of Selling Stockholder to be Sold - --------------------------------------- ----------- Entities affiliated with Marquette Venture Partners* 520 Lake Cook Rd., Suite 450 Deerfield, IL 60015 ................................................................. 444,017 The CIT Group/Venture Capital, Inc.* ................................................ 101,945 Interwest Partners IV, L.P.* ........................................................ 86,265 Victoria Bannister* ................................................................. 10,744 W. Ross Humphreys ................................................................... 73,558 J. David Lowell ..................................................................... 28,428 David Nunnery* ...................................................................... 931 Jan Karel Smeets .................................................................... 15,635 Douglas F. Sweet* ................................................................... 716 Richard B. Peterson* ................................................................ 5,157 Thomas B. Healey .................................................................... 10,441 Dorothy L. O'Neal Revocable Trust ................................................... 8,814 Wm. Kent Wonders .................................................................... 1,895 Entities affiliated with the Myron S. and Joan D Eichen Family Trust* .............................................................. 2,043 Charles J. Casebeer* ................................................................ 260 Jessica Youle ....................................................................... 4,264 Mary Cawley ......................................................................... 3,326 Lawrance A. Brown, Jr.* ............................................................. 613 Philip E. McCarthy* ................................................................. 96 Entities affiliated with the Thomas H. and Rosemary S. Tisch Trust* ................................................................... 546 Ned M. Weinshenker Money Purchase Pension Plan* ..................................... 210 Wayne L. Clevenger Pension Plan* .................................................... 96 ------- Total ............................................................................... 800,000
* Denotes Selling Stockholders who have granted an option to the Underwriters pursuant to Section 3(c) of this Agreement. 40 SCHEDULE III Stockholders not subject to 180 day lock-up provisions Number of Shares Immediately Number of Shares Name of Stockholder Saleable Saleable after 90 days - ------------------- ---------- ---------------------- EX-3.1(I)(B) 3 FORM OF RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1(i)(b) AMENDED AND 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: The original Certificate of Incorporation of Ventana Medical Systems, Inc. was filed with the Secretary of State of the State of Delaware on February 26, 1993. Pursuant to Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware, this Amended and Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of this corporation. The text of the Certificate of Incorporation as heretofore amended or supplemented is hereby amended and restated in its entirety to read as follows: ARTICLE I The name of this corporation is Ventana Medical Systems, Inc. ARTICLE II 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. ARTICLE III 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. 2 ARTICLE IV 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 autho rized to issue is 50,000,000, and the total number of shares of Preferred Stock which this corporation is authorized to issue is 5,000,000. Each share of Common Stock and each share of Preferred Stock has a par value of $0.001. The Preferred Stock may be issued from time to time in one or more series pursuant to a resolution or resolutions providing for such issue duly adopted by the Board of Directors (authority to do so being expressly vested in the Board). The Board of Directors is hereby further authorized to fix or alter the voting powers, designations, preferences and qualifications, limitations or restrictions granted to or imposed upon additional series of Preferred Stock, and the number of shares constituting any such series and the designation thereof. Subject to compliance with applicable protective rights which have been or may be granted to Preferred Stock or series thereof in Certificates of Designation or the Corporation's Certificate of Incorporation, the rights, privileges, preferences and restrictions of any such additional series may be subordinate to or pari passu with (including, without limitation, inclusion of provisions with respect to liquidation and acquisition and dividend preferences, or approval of matters by vote or written consent), the rights of any present or future class or series of Preferred Stock or Common Stock. ARTICLE V The corporation is to have perpetual existence. ARTICLE VI 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. ARTICLE VII The number of directors which constitute the whole Board of Directors of the corporation shall be as specified in the Bylaws of the corporation. ARTICLE VIII 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. -2- 3 ARTICLE IX Holders of stock of any class or series of the corporation shall not be entitled to cumulate their votes for the election of directors or any other matter submitted to a vote of the stockholders. ARTICLE X No action shall be taken by the stockholders of the corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws and no action shall be taken by the stockholders by written consent. The affirmative vote of sixty-six and two thirds percent (662/3%) of the then outstanding voting securities of the corporation, voting together as a single class, shall be required for the amendment, repeal or modification of the provisions of Article IX or X of this Amended and Restated Certificate of Incorporation or Sections 2.3 and 2.5 of the corporation's Bylaws. ARTICLE XI 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 X nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article X, shall eliminate or reduce the effect of this Article X in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article X, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE XII 1. 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. 2. 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 -3- 4 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 XI, "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. ARTICLE XIII 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. ARTICLE XIV 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. -4- 5 IN WITNESS WHEREOF, the corporation has caused this Certificate to be signed by R. James Danehy, its President, and attested by R. Michael Rodgers, the Secretary of the corporation. The signatures below shall constitute the affirmation or acknowledgment, under penalties of perjury, that the facts herein stated are true, this ____ day of July, 1996. VENTANA MEDICAL SYSTEMS, INC. By: ----------------------------------- R. James Danehy, President and Chief Executive Officer ATTEST: - ----------------------------------------- R. Michael Rodgers, Secretary -5- EX-3.1(II)(B) 4 FORM OF BYLAWS 1 EXHIBIT 3.1(ii)(b) BYLAWS OF VENTANA MEDICAL SYSTEMS, INC. (A DELAWARE CORPORATION) ADOPTED EFFECTIVE AS OF JUNE 28, 1996 2 BYLAWS OF VENTANA MEDICAL SYSTEMS, INC. (A DELAWARE CORPORATION) 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............................................... 2 2.4 NOTICE OF STOCKHOLDERS' MEETINGS.............................. 2 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS...................................................... 2 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................. 4 2.7 QUORUM........................................................ 4 2.8 ADJOURNED MEETING; NOTICE..................................... 4 2.9 VOTING........................................................ 5 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING............................................. 5 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING.................... 5 2.12 PROXIES....................................................... 6 2.13 ORGANIZATION.................................................. 6 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE......................... 7 2.15 WAIVER OF NOTICE.............................................. 7 ARTICLE III DIRECTORS........................................................... 7 3.1 POWERS........................................................ 7 3.2 NUMBER OF DIRECTORS........................................... 7 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS...................... 8
-i- 3 TABLE OF CONTENTS (CONTINUED)
Page 3.4 RESIGNATION AND VACANCIES.......................... 8 3.5 REMOVAL OF DIRECTORS............................... 9 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE........... 9 3.7 FIRST MEETINGS..................................... 9 3.8 REGULAR MEETINGS................................... 10 3.9 SPECIAL MEETINGS; NOTICE........................... 10 3.10 QUORUM............................................. 10 3.11 WAIVER OF NOTICE................................... 10 3.12 ADJOURNMENT........................................ 11 3.13 NOTICE OF ADJOURNMENT.............................. 11 3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.. 11 3.15 FEES AND COMPENSATION OF DIRECTORS................. 11 3.16 APPROVAL OF LOANS TO OFFICERS...................... 11 3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION...................................... 12 ARTICLE IV COMMITTEES............................................... 12 4.1 COMMITTEES OF DIRECTORS........................... 12 4.2 MEETINGS AND ACTION OF COMMITTEES................. 12 4.3 COMMITTEE MINUTES................................. 13 ARTICLE V OFFICERS................................................. 13 5.1 OFFICERS.......................................... 13 5.2 ELECTION OF OFFICERS.............................. 13 5.3 SUBORDINATE OFFICERS.............................. 13 5.4 REMOVAL AND RESIGNATION OF OFFICERS............... 14 5.5 VACANCIES IN OFFICES.............................. 14 5.6 CHAIRMAN OF THE BOARD............................. 14 5.7 PRESIDENT......................................... 14 5.8 VICE PRESIDENTS................................... 15 5.9 SECRETARY......................................... 15 5.10 CHIEF FINANCIAL OFFICER........................... 15 5.11 ASSISTANT SECRETARY............................... 16
-ii- 4 TABLE OF CONTENTS (CONTINUED)
Page 5.12 ADMINISTRATIVE OFFICERS................................... 16 5.13 AUTHORITY AND DUTIES OF OFFICERS.......................... 16 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS................................................. 17 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS................. 17 6.2 INDEMNIFICATION OF OTHERS................................. 18 6.3 INSURANCE................................................. 18 ARTICLE VII RECORDS AND REPORTS.............................................. 18 7.1 MAINTENANCE AND INSPECTION OF RECORDS..................... 18 7.2 INSPECTION BY DIRECTORS................................... 19 7.3 ANNUAL STATEMENT TO STOCKHOLDERS.......................... 19 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............ 19 7.5 CERTIFICATION AND INSPECTION OF BYLAWS.................... 19 ARTICLE VIII GENERAL MATTERS.................................................. 19 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.................................................... 19 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS................. 20 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED........ 20 8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES.......... 20 8.5 SPECIAL DESIGNATION ON CERTIFICATES....................... 21 8.6 LOST CERTIFICATES......................................... 21 8.7 TRANSFER AGENTS AND REGISTRARS............................ 22 8.8 CONSTRUCTION; DEFINITIONS................................. 22 ARTICLE IX AMENDMENTS....................................................... 22
-iii- 5 BYLAWS OF VENTANA MEDICAL SYSTEMS, INC. (a Delaware corporation) ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be fixed in the certificate of incorporation of the corporation. 1.2 OTHER OFFICES The board of directors may at any time establish branch or subordinate 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 principal executive 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 stockholders shall be held on the second Tuesday in May in 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 full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 6 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, by the chairman of the board or by the president. No other person or persons are permitted to call a special meeting. If a special meeting is called by any person or persons other than the board of directors, then 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. 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 2.6 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. 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 of stockholders shall be sent or otherwise given in accordance with Section 2.6 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the purpose or purposes for which the meeting is called (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, (a) nominations for the election of directors, and (b) business proposed to be brought before any stockholder meeting may be made by the board of directors or proxy committee appointed by the board of directors or by any stockholder entitled to vote in the election of directors generally if such nomination or business proposed -2- 7 is otherwise proper business before such meeting. However, any such stockholder may nominate one or more persons for election as directors at a meeting or propose business to be brought before a meeting, or both, only if such stockholder has given timely notice in proper written form of their intent to make such nomination or nominations or to propose such business. To be timely, such stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. To be in proper form, a stockholder's notice to the secretary shall set forth: (i) the name and address of the stockholder who intends to make the nominations or propose the business and, as the case may be, of the person or persons to be nominated or of the business to be proposed; (ii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) if applicable, a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each nominee or each matter of business to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the board of directors; and (v) if applicable, the consent of each nominee to serve as director of the corporation if so elected. The chairman of the meeting shall refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders shall be given either personally or by first-class mail or by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the -3- 8 books of the corporation or given by the stockholder to the corporation for the purpose of notice. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.7 QUORUM The holders of a majority in voting power 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 stock holders for the transaction of business except as otherwise provided 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 in accordance with Section 2.7 of these bylaws. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the laws of the State of Delaware or of the certificate of incorporation or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of the question. If a quorum be initially present, the stockholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken is approved by a majority of the stockholders initially constituting the quorum. 2.8 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time and 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. 2.9 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 217 -4- 9 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners, and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation or these bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder and stockholders shall not be entitled to cumulate their votes in the election of directors or with respect to any matter submitted to a vote of the stockholders. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise provided in the certificate of incorporation, any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be 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. Such consents shall be delivered to the corporation by delivery to its registered office in the state of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat, the board of directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors and which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting, and in such event only stockholders of record on the date so fixed are entitled to notice and to vote, notwithstanding any transfer of any shares on the books of the corporation after the record date. If the board of directors does not so fix a record date, 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 business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. 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 unless the board of directors fixes a new record date for the adjourned meeting, but the board of directors shall fix a new record date if the meeting is adjourned for more than thirty (30) days from the date set for the original meeting. The record date for any other purpose shall be as provided in Section 8.1 of these bylaws. -5- 10 2.12 PROXIES Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person 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, telecopy 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(e) of the General Corporation Law of Delaware. 2.13 ORGANIZATION The president, or in the absence of the president, the chairman of the board, or, in the absence of the president and the chairman of the board, one of the corporation's vice presidents, shall call the meeting of the stockholders to order, and shall act as chairman of the meeting. In the absence of the president, the chairman of the board, and all of the vice presidents, the stockholders shall appoint a chairman for such meeting. The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such matters as the regulation of the manner of voting and the conduct of business. The secretary of the corporation shall act as secretary of all meetings of the stockholders, but in the absence of the secretary at any meeting of the stockholders, the chairman of the meeting may appoint any person to act as secretary of the meeting. 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE 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, 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. 2.15 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 -6- 11 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. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and to 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 board of directors shall consist of ten (10) members. The number of directors may be changed by an amendment to this bylaw, duly adopted by the board of directors or by the stockholders, or by a duly adopted amendment to the certificate of incorporation. Upon the closing of the first sale of the corporation's common stock pursuant to a firmly underwritten registered public offering (the "IPO"), the directors shall be divided into three classes, with the term of office of the first class, which class shall initially consist of three (3) directors, to expire at the first annual meeting of stockholders held after the IPO; the term of office of the second class, which class shall initially consist of three (3) directors, to expire at the second annual meeting of stockholders held after the IPO; the term of office of the third class, which class shall initially consist of four (4) directors, to expire at the third annual meeting of stockholders held after the IPO; and thereafter for each such term to expire at each third succeeding annual meeting of stockholders held after such election. 3.3 ELECTION 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 as provided in Section 3.2 of these bylaws. Each director, including a director elected or appointed to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. -7- 12 Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum). Each director so elected shall hold office for a term expiring at the next annual meeting of the stockholders at which the term of office of the class to which such director has been elected expires. 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 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 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; provided, however, that, if and so long as stockholders of the corporation are entitled to cumulative voting, if less than the entire board is -8- 13 to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire board of directors. 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting of the board, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such participating directors shall be deemed to be present in person at the meeting. 3.7 FIRST MEETINGS The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. 3.8 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time as shall from time to time be determined by the board of directors. If any regular meeting day shall fall on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. 3.9 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 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, telecopy 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 four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, telecopy or telegram, it shall be delivered personally -9- 14 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 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. 3.10 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.12 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the certificate of incorporation and applicable law. 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 quorum for that meeting. 3.11 WAIVER OF NOTICE Notice of a meeting need not be given to any director (i) who signs a waiver of notice, whether before or after the meeting, or (ii) who attends the meeting other than 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. All such waivers shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.12 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting of the board to another time and place. 3.13 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting of the board need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.9 of these bylaws, to the directors who were not present at the time of the adjournment. -10- 15 3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board of directors. 3.15 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.15 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.16 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 any of its subsidiaries, including any officer or employee who is a director of the corporation or any of its subsidiaries, 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 contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION In the event only one director is required by these bylaws or the certificate of incorporation, then any reference herein to notices, waivers, consents, meetings or other actions by a majority or quorum of the directors shall be deemed to refer to such notice, waiver, etc., by such sole director, who shall have all the rights and duties and shall be entitled to exercise all of the powers and shall assume all the responsibilities otherwise herein described as given to the board of directors. -11- 16 ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have and may exercise all the powers and authority of the board, 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); (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 provides, 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 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the following provisions of Article III of these bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.8 (regular meetings), Section 3.9 (special meetings; notice), Section 3.10 (quorum), Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section 3.13 (notice of adjournment) and Section 3.14 (board action by written consent 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. -12- 17 4.3 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. ARTICLE V OFFICERS 5.1 OFFICERS The Corporate Officers of the corporation shall be a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents (however denominated), one or more assistant secretaries, a treasurer and one or more assistant treasurers, and 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. In addition to the Corporate Officers of the Company described above, there may also be such Administrative Officers of the corporation as may be designated and appointed from time to time by the president of the corporation in accordance with the provisions of Section 5.12 of these bylaws. 5.2 ELECTION OF OFFICERS The Corporate Officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment, and shall hold their respective offices for such terms as the board of directors may from time to time determine. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or may empower the president to appoint, such other Corporate Officers as the business of the corporation may require, each of whom shall hold office for such period, have such power and authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. The president may from time to time designate and appoint Administrative Officers of the corporation in accordance with the provisions of Section 5.12 of these bylaws. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of a Corporate Officer under any contract of employment, any Corporate Officer may be removed, either with or without cause, by the board of directors at any regular -13- 18 or special meeting of the board or, except in case of a Corporate Officer chosen by the board of directors, by any Corporate Officer upon whom such power of removal may be conferred by the board of directors. Any Corporate 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 Corporate Officer is a party. Any Administrative Officer designated and appointed by the president may be removed, either with or without cause, at any time by the president. Any Administrative Officer may resign at any time by giving written notice to the president or to the secretary of the corporation. 5.5 VACANCIES IN OFFICES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 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 such other powers and perform such other 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 or she 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 or she 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 perform such other duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS In the absence or disability of the president, and if there is no chairman of the board, 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 -14- 19 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 the board 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 or she 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 CHIEF FINANCIAL OFFICER The chief financial officer 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, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director for a purpose reasonably related to his position as a director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He or she 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 of his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.11 ASSISTANT SECRETARY The assistant secretary, if any, or, if there is more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their -15- 20 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 the board of directors may from time to time prescribe. 5.12 ADMINISTRATIVE OFFICERS In addition to the Corporate Officers of the corporation as provided in Section 5.1 of these bylaws and such subordinate Corporate Officers as may be appointed in accordance with Section 5.3 of these bylaws, there may also be such Administrative Officers of the corporation as may be designated and appointed from time to time by the president of the corporation. Administrative Officers shall perform such duties and have such powers as from time to time may be determined by the president or the board of directors in order to assist the Corporate Officers in the furtherance of their duties. In the performance of such duties and the exercise of such powers, however, such Administrative Officers shall have limited authority to act on behalf of the corporation as the board of directors shall establish, including but not limited to limitations on the dollar amount and on the scope of agreements or commitments that may be made by such Administrative Officers on behalf of the corporation, which limitations may not be exceeded by such individuals or altered by the president without further approval by the board of directors. 5.13 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing powers, authority and duties, all officers of the corporation shall respectively have such authority and powers 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. -16- 21 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, indemnify any person against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was a director or officer of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation shall mean any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. The corporation shall be required to indemnify a director or officer in connection with an action, suit, or proceeding (or part thereof) initiated by such director or officer only if the initiation of such action, suit, or proceeding (or part thereof) by the director or officer was authorized by the board of directors of the corporation. The corporation shall pay the expenses (including attorney's fees) incurred by a director or officer of the corporation entitled to indemnification hereunder in defending any action, suit or proceeding referred to in this Section 6.1 in advance of its final disposition; provided, however, that payment of expenses incurred by a director or officer of the corporation in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should ultimately be determined that the director of officer is not entitled to be indemnified under this Section 6.1 or otherwise. The rights conferred on any person by this Article VI shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the corporation's certificate of incorporation, these bylaws, agreement, vote of the stockholders or disinterested directors or otherwise. Any repeal or modification of the foregoing provisions of this Article VI shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. -17- 22 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, to indemnify any person (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding, in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was an employee or agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) shall mean any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE The corporation may 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 or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 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 of its business and properties. 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 -18- 23 of attorney or such other writing that authorizes the attorney or other agent to so 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. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine (and to make copies of) the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. 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. 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, if any, the president, any vice president, the chief financial officer, the secretary or any 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 the stock of any other corporation or corporations standing in the name of this corporation. The authority herein granted 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. 7.5 CERTIFICATION AND INSPECTION OF BYLAWS The original or a copy of these bylaws, as amended or otherwise altered to date, certified by the secretary, shall be kept at the corporation's principal executive office and shall be open to inspection by the stockholders of the corporation, at all reasonable times during office hours. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders 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 record date, which shall not precede the date upon which the resolution -19- 24 fixing the record date is adopted and which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided by law. If the board of directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the applicable resolution. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS 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. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED The board of directors, except as otherwise provided in these bylaws, may authorize and empower 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 power and 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. 8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may 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 treasurer 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 or she were such officer, transfer agent or registrar at the date of issue. -20- 25 Certificates for shares shall be of such form and device as the board of directors may designate and shall state the name of the record holder of the shares represented thereby; its number; date of issuance; the number of shares for which it is issued; a summary statement or reference to the powers, designations, preferences or other special rights of such stock and the qualifications, limitations or restrictions of such preferences and/or rights, if any; a statement or summary of liens, if any; a conspicuous notice of restrictions upon transfer or registration of transfer, if any; a statement as to any applicable voting trust agreement; if the shares be assessable, or, if assessments are collectible by personal action, a plain statement of such facts. Upon surrender to the secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment 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 upon its books. 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, or 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. 8.5 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 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. 8.6 LOST CERTIFICATES Except as provided in this Section 8.6, 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 board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or -21- 26 other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.7 TRANSFER AGENTS AND REGISTRARS The board of directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, each of which shall be an incorporated bank or trust company, either domestic or foreign, who shall be appointed at such times and places as the requirements of the corporation may necessitate and the board of directors may designate. 8.8 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws. Without limiting the generality of this provision, as used in these bylaws, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both an entity and a natural person. ARTICLE IX AMENDMENTS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote or by the board of directors of the corporation. 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. Whenever an amendment or new bylaw is adopted, it shall be copied in the book of bylaws with the original bylaws, in the appropriate place. If any bylaw is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or the filing of the operative written consent(s) shall be stated in said book. -22- 27 CERTIFICATE OF ADOPTION OF BYLAWS OF VENTANA MEDICAL SYSTEMS, INC. The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of Ventana Medical Systems, Inc. and that the foregoing Bylaws were adopted as the Bylaws of the corporation effective as of June 28, 1996 by the board of directors of the corporation and by written consent of the stockholders of the corporation effective as of such date.. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this ___ day of June 1996. __________________________________ R. Michael Rodgers, Secretary -23- EX-4.1 5 SPECIMEN COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 [VENTANA LOGO] VENTANA MEDICAL SYSTEMS, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE This Certificate is transferable in Minneapolis, MN or New York, NY See reverse for statements relating to rights, preferences, privileges and restrictions, if any. This Certifies that ----------------------------------------- is the owner of ------------------------------------------ FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE, OF VENTANA MEDICAL SYSTEMS, INC. transferable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile signatures of its duly authorized officers. Dated /s/ R. Michael Rodgers /s/ James Danehy - ------------------------- ----------------------- Vice President, Chief President and Chief Financial Officer Executive Officer and Secretary Countersigned and registered: Norwest Bank Minnesota, N.A. Transfer Agent and Registrar By: _________________________ Authorized Signature 2 VENTANA MEDICAL SYSTEMS, INC. A statement of the powers, designations, preferences and 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 as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of determination, the number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof upon request and without charge at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GFT MIN ACT -- _______________ Custodian _________________ (Cust) (Minor) under Uniform Gifts to Minors Act________________________________________ (State) UNIF TRF MIN ACT -- _______________ Custodian (until age _____) (Cust) ____________________under Uniform Transfers (Minor) to Minors Act______________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, _______________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ ______________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated_____________________________ X________________________________________________ X________________________________________________ THE SIGNATURE(S) TO THIS ASSIGNMENT MUST NOTICE: CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By_______________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.2(A) 6 KOLLSMAN SECURED PROMISSORY NOTE DATED 12/4/94 1 EXHIBIT 10.2(a) THIS NOTE HAS BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND QUALIFICATION OR AN EXEMPTION THEREFROM. THIS NOTE CONTAINS RESTRICTIONS ON TRANSFER OR ASSIGNMENT. BIOTEK SOLUTIONS, INC. SECURED PROMISSORY NOTE 400,000 Santa Barbara, California December 9, 1994 FOR VALUE RECEIVED, BIOTEK SOLUTIONS, INC., a California corporation ("Maker"), unconditionally promises to pay to the order of DAKO A/S, a Danish corporation ("Payee"), in lawful money of the United States of America by check to the address of Payee maintained in the records of Maker, the principal amount of $400,000 or such lesser amount that shall remain unpaid or unrecouped (as described in Section 3 below) on the Maturity Date (defined below). Maker also promises to pay interest on the unpaid principal amount hereof (in lawful money of the United States of America by check to the address of Payee maintained in the records of Maker) from the date hereof until paid in full at a rate per annum equal to 5%. Interest on this Note shall be payable in arrears on March 31, June 30, September 30 and December 31 of each year commencing March 31, 1995, upon any prepayment of this Note (to the extent accrued on the amount being prepaid) and at maturity. All computations of interest shall be made by Payee on the basis of a 365-day year, for the actual number of days elapsed in the relevant periods (including the first day, but excluding the last day). 1. Issuance Pursuant to Agreement. This Note is issued pursuant to the Distribution Agreement between the Maker and the Payee dated as of September 27, 1994 (as the same may hereinafter be amended, the "Distribution Agreement"). All terms defined in the Distribution Agreement shall have the same meaning in this Note unless otherwise defined in this Note. 2 2. Maturity Date. This Note is due and payable: (a) in full, on the termination date of the Distribution Agreement, if such termination is made by the Maker; or (b) in twelve (12) equal quarterly installments commencing on the first day of the fiscal quarter which immediately follows the earlier of the following events: (1) the date on which Payee makes the election set forth in Section 21g(y) of the Distribution Agreement and sends written notice thereof (which election relates to the occurrence of a Delivery Failure by Maker); or (2) the termination date of the Distribution Agreement (other than due to a breach by the Maker in its obligations thereunder), if such termination is made by the Payee. 3. Reduction of Principal Amount Due. In the event and to the extent that the Payee recoups the Kollsman Prepayment pursuant to Section 20b of the Distribution Agreement, the principal amount of this Note shall be reduced in an amount equal to such recoupment. 4. Prepayments. Maker shall have the right at any time and from time to time to prepay the principal of this Note in whole or in part without premium or penalty. 5. Security Interest. (a) As security for the payment of this Note, Maker hereby grants to Payee a security interest in the assets described in Schedule A hereto (the "Collateral"). (b) Concurrently with the delivery of this Note, Maker will execute, file and/or record in the appropriate jurisdiction a UCC-1 Financing Statement covering the Collateral and naming Payee as secured party. Maker will give, execute, file and/or record any further notice, financing statement, instrument, document or agreement that Payee may reasonably consider necessary or desirable to create, preserve, continue, perfect or validate the security interest granted hereby or which Payee may reasonably consider necessary or desirable to exercise or enforce its rights hereunder with respect to such security interest; provided, however, Payee acknowledges that its security interest shall remain subordinate to those of Maker's present Senior Secured Note Holders. 2 3 6. Covenant. Maker covenants and agrees that until this Note is paid in full, Maker will, promptly upon the occurrence of an Event of Default (defined below) or any event, act or condition which, with notice or lapse of time or both, would constitute an Event of Default, provide Payee with a certificate of the chief executive officer or chief financial officer of Maker specifying the nature thereof and Maker's proposed response thereto. 7. Representations and Warranties. Maker hereby represents and warrants to Payee that: (a) Maker is a duly incorporated and validly existing corporation in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority to own and operate is properties, to transact the business in which it is now engaged and to execute and deliver this Note; (b) this Note constitutes the duly authorized, legally valid and binding obligation of Maker, enforceable against Maker in accordance with its terms, except as may be limited by bankruptcy, moratorium, insolvency, reorganization and other similar laws relating to or affecting creditor's rights generally and by general principles or equity; and (c) the execution, delivery and performance by Maker of this Note will not violate any law, governmental rule or regulation, court order to agreement to which its is subject or by which its properties are bound or the Articles of Incorporation or Bylaws of Maker. 8. Events of Default. The occurrence of any of the following events shall constitute an "Event of Default": (a) failure of Maker to pay any principal under this Note when due, by acceleration, by notice of prepayment or otherwise; provided, however, that the failure of Maker to pay principal under this Note pursuant to Section 2(b) hereof shall only constitute an Event of Default hereunder in the event that such payment remains unpaid thirty (30) days after the same has become due and payable pursuant to said Section 2(b); or (b) failure of Maker to pay any interest due under this Note within 15 days after the date due; or (c) the Maker shall receive: (i) a notice of sale pursuant to California Commercial Code Section 9504, (ii) a notice of intent to retain possession pursuant to California Commercial Code Section 9505, or (iii) a notice of any similar action or proceeding by a creditor asserting a lien against an asset of the Maker; or 3 4 (d) (i) a court having jurisdiction over the Maker shall enter a decree or order for relief in respect of Maker in an involuntary case under Title 11 of the United States Code entitled "Bankruptcy" (as now and hereinafter in effect, or any successor thereto the "Bankruptcy Code") or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, which decree or order is not stayed; or (ii) an involuntary case shall be commenced against Maker under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; or a decree or order of a court having jurisdiction over the Maker for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Maker over all or a substantial part of its property shall have been entered; or the involuntary appointment of an interim receiver, trustee or other custodian of Maker of all or a substantial part of its property shall have occurred; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of Maker; or (e) an order for relief under the Bankruptcy Code shall have been entered with respect to Maker or Maker shall have commenced a voluntary case under the Bankruptcy Code or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or Maker shall make an assignment for the benefit of creditors; or Maker shall be unable or fail, or shall admit in writing its inability, to pay its debts as such debts become due. 9. Remedies. Upon the occurrence of any Event of Default, the unpaid principal amount of this Note shall become immediately due and payable, without presentment, demand, notice, protest or other requirements of any kind (all of which are hereby expressly waived by Maker), and Payee shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as in force in the State of California and any other applicable laws. 10. Restrictions of Transfer. THIS NOTE MAY NOT BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR ASSIGNED BY PAYEE UNLESS PRIOR TO SUCH TRANSFER, SALE, PLEDGE, HYPOTHECATION OR ASSIGNMENT PAYEE HAS PROVIDED MAKER WITH AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO MAKER AND ITS COUNSEL, TO THE EFFECT THAT SUCH TRANSFER, SALE, PLEDGE, HYPOTHECATION OR ASSIGNMENT IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ALL RELEVANT STATE SECURITIES LAWS. 4 5 11. Miscellaneous. (a) All notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, telecopier or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered as follows: if to Maker, at its address specified opposite its signature below; and if to Payee, at Payee's address as shown in the records of Maker; or in each case at such other address as shall be designated by Payee or Maker in a written notice to the other. All such notices and communications shall, when mailed, telegraphed, telexed, telecopied or cabled or sent by overnight courier, be effective when deposited in the mails, delivered to the telegraph company, cable company or overnight courier, as the case may be, or sent by telex or telecopier. (b) THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. Maker shall pay to the holder of this Note all reasonable costs and expenses (including reasonable attorneys' fees) incurred by the holder in collecting amounts due under this Note or enforcing the terms hereof. IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered by its duly authorized officer as of the day and year and at the place first above written. BIOTEK SOLUTIONS, INC. By: /s/ MICHAEL C. MILLER ----------------------------- Michael C. Miller, CEO Address: 120-B Cremona Drive Santa Barbara, CA 93117 5 6 SCHEDULE A The collateral in which the security interest is created (hereinafter referred to as the "Collateral") shall consist of: (a) Any and all of BioTek Solution Inc.'s ("BioTek's") accounts, contract rights, and other rights to the payment of monies, now existing or hereafter acquired, including all repossessions and returns (the "Accounts"), and all proceeds of the Accounts; (b) Any and all of BioTek's inventory in all of its forms, now or hereafter existing, including but not limited to all finished goods, work in process and raw materials, and goods which are returned to or repossessed by BioTek (the "Inventory"), and all proceeds of the Inventory; (c) Any and all of BioTek's equipment, now or hereafter acquired, used in manufacture or otherwise used in the conduct of BioTek's business, including but not limited to manufacturing equipment, field service equipment, office equipment, furniture and fixtures and leasehold improvements to the full extent of BioTek's interest in all of the above (the "Equipment"), and all proceeds of the Equipment, provided, that the Collateral shall not include Equipment (or BioTek's leasehold interest therein) presently being purchased or leased by BioTek to the extent that the inclusion of such Equipment (or BioTek's leasehold interest therein) would violate the terms of such agreements; (d) Any and all patents, patent rights, inventions, processes, formulas, licenses, trade secrets, know-how and other proprietary rights and data, engineering calculations, technical plans, drawings and data, trademarks, trademark rights, service marks, service mark rights, trade name, trade name rights, copyrights, copyright rights, mask works and all other technology or proprietary rights of BioTek, and all applications to acquire any such rights, in each case, whether now owned or hereafter created, acquired or issued (collectively, the "Technology"); (e) Any and all licenses, sublicenses and franchises, whether now owned or hereafter acquired, granted in any of the Technology, including, without limitation, any present or future right of BioTek to receive royalties or other payments from those to whom licenses, sublicenses or franchises have been or will be granted; (f) All presently existing and hereafter arising general intangibles (as that term is defined in the California Uniform Commercial Code); (g) All other personal property and fixtures of BioTek, whether now or hereafter existing, or now owned or hereafter acquired and wherever located, of every kind and description, tangible and intangible, including, but not limited to, the balance of every deposit account, now or hereafter existing of BioTek with any bank or financial institution and all money, 6 7 goods, instruments, securities, documents, chattel paper, accounts, contract rights, general intangibles, credits, claims, demands, precious metals and any other property rights and interests of BioTek; and (h) Any and all proceeds (including insurance proceeds) and products of any and all of the foregoing. 7 EX-10.2(B) 7 DEVELOPMENT SECURED PROMISSORY NOTE DATED 3/24/95 1 EXHIBIT 10.2(b) THIS NOTE HAS BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND QUALIFICATION OR AN EXEMPTION THEREFROM. THIS NOTE CONTAINS RESTRICTIONS ON TRANSFER OR ASSIGNMENT. BIOTEK SOLUTIONS, INC. SECURED PROMISSORY NOTE $1,700,000 Santa Barbara, California March 24, 1995 FOR VALUE RECEIVED, BIOTEK SOLUTIONS, INC., a California corporation ("Maker"), unconditionally promises to pay to the order of DAKO A/S, a Danish corporation ("Payee"), in lawful money of the United States of America by check to the address of Payee maintained in the records of Maker, the principal amount of $1,700,000 or such lesser amount that shall (a) actually have been advanced by Payee to Maker pursuant to Section 21 of the Distribution Agreement (defined below) or (b) remain unpaid or unrecouped (as described in Section 3 below) on the Maturity Date (defined below). 1. Issuance Pursuant to Agreement. This Note is issued pursuant to the Distribution Agreement between the Maker and the Payee dated as of September 27, 1994 and amended on March 24, 1995 (the "Distribution Agreement"). All terms defined in the Distribution Agreement shall have the same meaning in this Note unless otherwise defined in this Note. 2. Maturity Date. This Note is due and payable: (a) in full, on the termination date of the Distribution Agreement, if such termination is made by the Maker; or (b) in twelve (12) equal quarterly installments commencing on the first day of the fiscal quarter which immediately follows the earlier of the following events: (1) the date on which Payee makes the election set forth in Section 21d(i)(2) of the Distribution Agreement and sends written notice thereof (which election relates to the occurrence of a Milestone Default by Payee); or 2 (2) the date on which Payee sends Maker a Sales Failure Notice pursuant to Section 21f of the Distribution Agreement; or (3) the date on which Payee makes the election set forth in Section 21g(y) of the Distribution Agreement and sends written notice thereof (which election relates to the occurrence of a Delivery Failure by Maker); or (4) the termination date of the Distribution Agreement (other than due to a breach by the Maker in its obligations thereunder), if such termination is made by the Payee. 3. Reduction of Principal Amount Due. In the event and to the extent that the Payee recoups the Development Prepayment pursuant to Section 21e of the Distribution Agreement, the principal amount of this Note shall be reduced in an amount equal to such recoupment. 4. Prepayments. Maker shall have the right at any time and from time to time to prepay the principal of this Note in whole or in part without premium or penalty. 5. Security Agreement. The obligations of the Maker hereunder are secured by the security interest granted in the Collateral of the Maker pursuant to Section 23 of the Distribution Agreement. 6. Covenant. Maker covenants and agrees that until this Note is paid in full, Maker will, promptly upon the occurrence of an Event of Default (defined below) or any event, act or condition which, with notice or lapse of time or both, would constitute an Event of Default, provide Payee with a certificate of the chief executive officer or chief financial officer of Maker specifying the nature thereof and Maker's proposed response thereto. 7. Representations and Warranties. Maker hereby represents and warrants to Payee that: (a) Maker is a duly incorporated and validly existing corporation in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority to own and operate is properties, to transact the business in which it is now engaged and to execute and deliver this Note; (b) this Note constitutes the duly authorized, legally valid and binding obligation of Maker, enforceable against Maker in accordance with its terms, except as may be limited by bankruptcy, moratorium, insolvency, reorganization and other similar laws relating to or affecting creditor's rights generally and by general principles or equity; and 2 3 (c) the execution, delivery and performance by Maker of this Note will not violate any law, governmental rule or regulation, court order to agreement to which its is subject or by which its properties are bound or the Articles of Incorporation or Bylaws of Maker. 8. Events of Default. The occurrence of any of the following events shall constitute an "Event of Default": (a) failure of Maker to pay an principal under this Note when due, by acceleration, by notice of prepayment or otherwise; provided, however, that the failure of Maker to pay principal under this Note pursuant to Section 2(b) hereof shall only constitute an Event of Default hereunder in the event that such payment remains unpaid thirty (30) days after the same has become due and payable pursuant to said Section 2(b); or (b) the Maker shall receive: (i) a notice of sale pursuant to California Commercial Code Section 9504, (ii) a notice of intent to retain possession pursuant to California Commercial Code Section 9505, or (iii) a notice of any similar action or proceeding by a creditor asserting a lien against an asset of the Maker; or (c) (i) a court having jurisdiction over the Maker shall enter a decree or order for relief in respect of Maker in an involuntary case under Title 11 of the United States Code entitled "Bankruptcy" (as now and hereinafter in effect, or any successor thereto, the "Bankruptcy Code") or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, which decree or order is not stayed; or (ii) an involuntary case shall be commenced against Maker under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; or a decree or order of a court having jurisdiction over the Maker for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Maker over all or a substantial part of its property shall have been entered; or the involuntary appointment of an interim receiver, trustee or other custodian of Maker of all or a substantial part of its property shall have occurred; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of Maker; or (d) an order for relief under the Bankruptcy Code shall have been entered with respect to Maker or Maker shall have commenced a voluntary case under the Bankruptcy Code or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or Maker shall make an assignment for the benefit of creditors; or Maker shall be unable or fail, or shall admit in writing its inability, to pay its debts as such debts become due. 3 4 9. Remedies. Upon the occurrence of any Event of Default, the unpaid principal amount of this Note shall become immediately due and payable, without presentment, demand, notice, protest or other requirements of any kind (all of which are hereby expressly waived by Maker), and Payee shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as in force in the State of California and any other applicable laws. 10. Restrictions of Transfer. THIS NOTE MAY NOT BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR ASSIGNED BY PAYEE UNLESS PRIOR TO SUCH TRANSFER, SALE, PLEDGE, HYPOTHECATION OR ASSIGNMENT PAYEE HAS PROVIDED MAKER WITH AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO MAKER AND ITS COUNSEL, TO THE EFFECT THAT SUCH TRANSFER, SALE, PLEDGE, HYPOTHECATION OR ASSIGNMENT IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ALL RELEVANT STATE SECURITIES LAWS. 11. Termination. Maker's obligations under this Note shall automatically terminate in the event that the Payee sends Maker the Termination Notice referenced in Section 21d(ii) of the Distribution Agreement. 12. Miscellaneous. (a) All notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, telecopier or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered as follows: if to Maker, at its address specified opposite its signature below; and if to Payee, at Payee's address as shown in the records of Maker; or in each case at such other address as shall be designated by Payee or Maker in a written notice to the other. All such notices and communications shall, when mailed, telegraphed, telexed, telecopied or cabled or sent by overnight courier, be effective when deposited in the mails, delivered to the telegraph company, cable company or overnight courier, as the case may be, or sent by telex or telecopier. (b) THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. Maker shall pay to the holder of this Note all reasonable costs and expenses (including reasonable attorneys' fees) incurred by the holder in collecting amounts due under this Note or enforcing the terms hereof. 4 5 IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered by its duly authorized officer as of the day and year and at the place first above written. BIOTEK SOLUTIONS, INC. By: /s/ MICHAEL C. MILLER ------------------------------------ Michael C. Miller, CEO Address: 120-B Cremona Drive Santa Barbara, CA 93117 5 EX-10.6 8 FORM OF INDEMNIFICATION AGREEMENT FOR DIRECTORS 1 EXHIBIT 10.6 VENTANA MEDICAL SYSTEMS, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is effective as of _______, 199__ by and between Ventana Medical Systems, Inc., a Delaware corporation (the "Company"), and ___________ ("Indemnitee"). WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and its related entities; WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and the advancement of expenses to, Indemnitee to the maximum extent permitted by law; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been limited; and WHEREAS, the Company and Indemnitee desire to continue to have in place the additional protection provided by an indemnification agreement to provide indemnification and advancement of expenses to the Indemnitee to the maximum extent permitted by Delaware law; WHEREAS, in view of the considerations set forth above, the Company desires that Indemnitee shall be indemnified and advanced expenses by the Company as set forth herein; NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below. 1. Certain Definitions. a. "Change in Control" shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the 2 Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. b. "Claim" shall mean with respect to a Covered Event: any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. c. References to the "Company" shall include, in addition to Ventana Medical Systems, Inc., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which Ventana Medical Systems, Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. d. "Covered Event" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity. e. "Expenses" shall mean any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, to be a witness in or to participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of any Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. f. "Expense Advance" shall mean a payment to Indemnitee pursuant to Section 3 of Expenses in advance of the settlement of or final judgement in any action, suit, proceeding or alternative dispute resolution mechanism, hearing, inquiry or investigation which constitutes a Claim. -2- 3 g. "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other Indemnitees under similar indemnity agreements). h. References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. i. "Reviewing Party" shall mean, subject to the provisions of Section 2(d), any person or body appointed by the Board of Directors in accordance with applicable law to review the Company's obligations hereunder and under applicable law, which may include a member or members of the Company's Board of Directors, Independent Legal Counsel or any other person or body not a party to the particular Claim for which Indemnitee is seeking indemnification. j. "Section" refers to a section of this Agreement unless otherwise indicated. k. "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 2. Indemnification. a. Indemnification of Expenses. Subject to the provisions of Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any Claim (whether by reason of or arising in part out of a Covered Event), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. b. Review of Indemnification Obligations. Notwithstanding the foregoing, in the event any Reviewing Party shall have determined (in a written opinion, in any case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee is not entitled to be indemnified hereunder under applicable law, (i) the Company shall have no further obligation under Section 2(a) to make any payments to Indemnitee not made prior to such determination by such Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all Expenses theretofore paid to Indemnitee to which Indemnitee is not entitled hereunder under applicable law; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings -3- 4 in a court of competent jurisdiction to secure a determination that Indemnitee is entitled to be indemnified hereunder under applicable law, any determination made by any Reviewing Party that Indemnitee is not entitled to be indemnified hereunder under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expenses theretofore paid in indemnifying Indemnitee until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expenses shall be unsecured and no interest shall be charged thereon. c. Indemnitee Rights on Unfavorable Determination; Binding Effect. If any Reviewing Party determines that Indemnitee substantively is not entitled to be indemnified hereunder in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by such Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and, subject to the provisions of Section 15, the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by any Reviewing Party shall be conclusive and binding on the Company and Indemnitee. d. Selection of Reviewing Party; Change in Control. If there has not been a Change in Control, any Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), any Reviewing Party with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnification of Expenses under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, or under any other applicable law, if desired by Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be entitled to be indemnified hereunder under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay Expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the employment of separate counsel by one or more Indemnitees has been previously authorized by the Company in writing, or (ii) an Indemnitee shall have provided to the Company a written statement that such Indemnitee has reasonably concluded that there may be a conflict of interest between such Indemnitee and the other Indemnitees with respect to the matters arising under this Agreement. e. Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement other than Section 10 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Claim, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection -4- 5 therewith. 3. Expense Advances. a. Obligation to Make Expense Advances. Upon receipt of a written undertaking by or on behalf of the Indemnitee to repay such amounts if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified therefore by the Company hereunder under applicable law, the Company shall make Expense Advances to Indemnitee. b. Form of Undertaking. Any obligation to repay any Expense Advances hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured and no interest shall be charged thereon. c. Determination of Reasonable Expense Advances. The parties agree that for the purposes of any Expense Advance for which Indemnitee has made written demand to the Company in accordance with this Agreement, all Expenses included in such Expense Advance that are certified by affidavit of Indemnitee's counsel as being reasonable shall be presumed conclusively to be reasonable. 4. Procedures for Indemnification and Expense Advances. a. Timing of Payments. All payments of Expenses (including without limitation Expense Advances) by the Company to the Indemnitee pursuant to this Agreement shall be made to the fullest extent permitted by law as soon as practicable after written demand by Indemnitee therefor is presented to the Company, but in no event later than thirty (30) business days after such written demand by Indemnitee is presented to the Company, except in the case of Expense Advances, which shall be made no later than ten (10) business days after such written demand by Indemnitee is presented to the Company. b. Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified or Indemnitee's right to receive Expense Advances under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. c. No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, neither the failure of any Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any -5- 6 Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under this Agreement under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by any Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder under applicable law, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. d. Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies. e. Selection of Counsel. In the event the Company shall be obligated hereunder to provide indemnification for or make any Expense Advances with respect to the Expenses of any Claim, the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of separate counsel subsequently retained by or on behalf of Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be Expenses for which Indemnitee may receive indemnification or Expense Advances hereunder. 5. Additional Indemnification Rights; Nonexclusivity. a. Scope. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 10(a) hereof. -6- 7 b. Nonexclusivity. The indemnification and the payment of Expense Advances provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification and the payment of Expense Advances provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though subsequent thereto Indemnitee may have ceased to serve in such capacity. 6. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's Certificate of Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder. 7. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 9. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 10. Exceptions. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement: a. Excluded Actions or Omissions. To indemnify or make Expense Advances to Indemnitee with respect to Claims arising out of acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under applicable law. b. Claims Initiated by Indemnitee. To indemnify or make Expense Advances to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy -7- 8 or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Covered Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, Expense Advances, or insurance recovery, as the case may be. c. Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to any action instituted (i) by Indemnitee to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous. d. Claims Under Section 16(b). To indemnify Indemnitee for Expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company's request. 13. Expenses Incurred in Action Relating to Enforcement or Interpretation. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee with respect to such action (including without limitation attorneys' fees), regardless of whether Indemnitee is ultimately successful in such action, unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such -8- 9 action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee in defense of such action (including without limitation costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. 14. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 15. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 16. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 17. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including without limitation each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. -9- 10 18. Choice of Law. This Agreement, and all rights, remedies, liabilities, powers and duties of the parties to this Agreement, shall be governed by and construed in accordance with the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely in the State of Delaware without regard to principles of conflicts of laws. 19. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 20. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. 21. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 22. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities. -10- 11 IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. VENTANA MEDICAL SYSTEMS, INC. By: _____________________________ Name: _____________________________ Title: _____________________________ Address: 3865 North Business Center Drive Tucson, Arizona 85705 AGREED TO AND ACCEPTED INDEMNITEE: ______________________________________ (signature) ______________________________________ Name ______________________________________ Address ______________________________________ -11- EX-10.8(C) 9 1996 DIRECTORS OPTION PLAN 1 EXHIBIT 10.8(c) VENTANA MEDICAL SYSTEMS, INC. 1996 DIRECTOR OPTION PLAN 1. Purposes of the Plan. The purposes of this 1996 Director Option Plan are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Common Stock" means the Common Stock of the Company. (d) "Company" means Ventana Medical Systems, Inc., a Delaware corporation. (e) "Director" means a member of the Board. (f) "Employee" means 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 in and of itself to constitute "employment" by the Company. (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (h) "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 date of 2 determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (iii) 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. (i) "Inside Director" means a Director who is an Employee. (j) "Option" means a stock option granted pursuant to the Plan. (k) "Optioned Stock" means the Common Stock subject to an Option. (l) "Optionee" means a Director who holds an Option. (m) "Outside Director" means a Director who is not an Employee. (n) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (o) "Plan" means this 1996 Director Option Plan. (p) "Share" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (q) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986. 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 250,000 Shares of Common Stock (the "Pool"). The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. Administration and Grants of Options under the Plan. (a) Procedure for Grants. The provisions set forth in this Section 4(a) shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. All grants of Options to Outside Directors under this Plan shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: -2- 3 (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each Outside Director shall be automatically granted an Option to purchase that number of Shares equal to 5,000 Shares multiplied by the Determination Fraction (as defined below) on the date of each annual meeting of stockholders of the corporation, commencing with the first annual meeting of stockholders held after January 1, 1997, and provided that such Outside Director was elected or reelected at such annual meeting of stockholders. The "Determination Fraction" shall be as follows: the numerator of the Determination Fraction shall be $15 and the denominator of the Determination Fraction shall be the Fair Market Value of the Common Stock on the Date of Grant. Notwithstanding the foregoing, each annual Option grant will be for at least 3,300 Shares and will not be in excess of 6,700 Shares. (iii) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any exercise of an Option granted before the Company has obtained shareholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such shareholder approval of the Plan in accordance with Section 16 hereof. (iv) The terms of Options granted hereunder shall be as follows: (A) the term of the Option shall be ten (10) years. (B) the Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Option. In the event that the date of grant of the -3- 4 Option is not a trading day, the exercise price per Share shall be the Fair Market Value on the next trading day immediately following the date of grant of the Option. (D) subject to Section 10 hereof, the Option shall become exercisable as to 1/12th of the Shares subject to the Option every month over one year from the date of grant, provided that the Optionee continues to serve as a Director on such monthly vesting dates. (v) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the Board or the shareholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. 5. Eligibility. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4 hereof. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate the Director's relationship with the Company at any time. 6. Term of Plan. The Plan shall become effective upon the effective date of the initial public offering of the Common Stock of the Company that is registered with the Securities and Exchange Commission. It shall continue in effect for a term of five (5) years unless sooner terminated under Section 11 of the Plan. 7. Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) 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 (y) 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, (iv) delivery of a properly executed exercise notice together with such other documentation as the Company 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 (v) any combination of the foregoing methods of payment. 8. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until shareholder approval of the Plan in accordance with Section 16 hereof has been obtained. -4- 5 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 consist of any consideration and method of payment allowable under Section 7 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. 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 shall 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 10 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) Rule 16b-3. Options granted to Outside Directors must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act or any successor thereto and shall contain such additional conditions or restrictions as may be required thereunder to qualify Plan transactions, and other transactions by Outside Directors that otherwise could be matched with Plan transactions, for the maximum exemption from Section 16 of the Exchange Act. (c) Termination of Continuous Status as a Director. Subject to Section 10 hereof, in the event an Optionee's status as a Director terminates (other than upon the Optionee's death or total and permanent disability (as defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her Option, but only within three (3) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (d) Disability of Optionee. In the event Optionee's status as a Director terminates as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but only within twelve (12) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. -5- 6 (e) Death of Optionee. In the event of an Optionee's death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and only to the extent that the Optionee was entitled to exercise it on the date of death (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of death, and to the extent that the Optionee's estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. 9. 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. 10. 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 covered by each outstanding Option, the number of Shares 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 covered by each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares 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 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." 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 subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it shall 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, outstanding Options may be assumed or equivalent options may be substituted by the successor corporation or a Parent or Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or substituted for, the Option or equivalent option shall continue to be exercisable as provided in Section 4 hereof for so long as the Optionee serves as a Director or a director of the Successor Corporation. Following such assumption or substitution, if the Optionee's status as a Director or director of the Successor Corporation, as applicable, is terminated other than upon a voluntary resignation by the Optionee, the Option or option shall become fully exercisable, including as to Shares for which it would not -6- 7 otherwise be exercisable. Thereafter, the Option or option shall remain exercisable in accordance with Sections 8(c) through (e) above. If the Successor Corporation does not assume an outstanding Option or substitute for it an equivalent option, the Option shall become fully vested and exercisable, including as to Shares for which it would not otherwise be exercisable. In such event 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 upon the expiration of such period the Option shall terminate. For the purposes of this Section 10(c), an Option shall be considered assumed if, following the merger or sale of assets, the Option 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). 11. Amendment and Termination of the Plan. (a) Amendment and Termination. Except as set forth in Section 4, the Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) 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 as if this Plan had not been amended or terminated. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4 hereof. 13. 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 there under, state securities laws, 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 -7- 8 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. 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. 14. 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. 15. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company at or prior to the first annual meeting of shareholders held subsequent to the granting of an Option hereunder. Such shareholder approval shall be obtained in the degree and manner required under applicable state and federal law. -8- EX-10.19(A) 10 SILICON VALLEY BANK LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.19(a) - -------------------------------------------------------------------------------- VENTANA MEDICAL SYSTEMS, INC. LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS AND CONSTRUCTION.............................................. 1 1.1 Definitions............................................. 1 1.2 Accounting Terms........................................ 6 2. LOAN AND TERMS OF PAYMENT................................................. 6 2.1 Revolving Advances...................................... 6 2.2 Overadvances............................................ 7 2.3 Interest Rates, Payments, and Calculations.............. 7 2.4 Crediting Payments...................................... 8 2.5 Fees.................................................... 8 2.6 Additional Costs........................................ 8 2.7 Term.................................................... 8 3. CONDITIONS OF LOANS....................................................... 9 3.1 Conditions Precedent to Initial Loan.................... 9 3.2 Conditions Precedent to all Loans....................... 9 4. CREATION OF SECURITY INTEREST............................................. 9 4.1 Grant of Security Interest.............................. 9 4.2 Delivery of Additional Documentation Required........... 9 4.3 Right to Inspect........................................ 10 5. REPRESENTATIONS AND WARRANTIES............................................ 10 5.1 Due Organization and Qualification...................... 10 5.2 Due Authorization; No Conflict.......................... 10 5.3 No Prior Encumbrances................................... 10 5.4 Bona Fide Accounts...................................... 10 5.5 Merchantable Inventory.................................. 10 5.6 Name; Location of Chief Executive Office................ 10 5.7 Intellectual Property................................... 11 5.8 Litigation.............................................. 11 5.9 No Material Adverse Change in Financial Statements...... 11 5.10 Solvency................................................ 11 5.11 Regulatory Compliance................................... 11 5.12 Environmental Condition................................. 11 5.13 Taxes................................................... 11 5.14 Subsidiaries............................................ 12 5.15 Government Consents..................................... 12 5.16 Full Disclosure......................................... 12 6. AFFIRMATIVE COVENANTS..................................................... 12 6.1 Good Standing........................................... 12 6.2 Government Compliance................................... 12 6.3 Financial Statements, Reports, Certificates............. 12 6.4 Returns................................................. 13 6.5 Taxes................................................... 13 6.6 Insurance............................................... 13 6.7 Principal Depository.................................... 13 6.8 Quick Ratio............................................. 13 6.9 Tangible Net Worth...................................... 13
i 3 6.10 Debt-Net Worth Ratio.................................... 13 6.11 Profitability........................................... 13 6.12 Vendor Financing Program................................ 14 6.13 Additional Equity....................................... 14 6.14 Further Assurances...................................... 14 7. NEGATIVE COVENANTS........................................................ 14 7.1 Extraordinary Transactions and Disposal of Assets....... 14 7.2 Loans; Contingent Liabilities........................... 14 7.3 Restructure............................................. 14 7.4 Mergers or Acquisitions................................. 14 7.5 Indebtedness............................................ 14 7.6 Encumbrances............................................ 14 7.7 Distributions........................................... 14 7.8 Investments............................................. 14 7.9 Transactions with Affiliates............................ 15 7.10 Subordinated Debt....................................... 15 7.11 Compliance.............................................. 15 8. EVENTS OF DEFAULT......................................................... 15 8.1 Payment Default......................................... 15 8.2 Covenant Default........................................ 15 8.3 Material Adverse Change................................. 15 8.4 Attachment.............................................. 15 8.5 Insolvency.............................................. 15 8.6 Other Agreements........................................ 16 8.7 Subordinated Debt....................................... 16 8.8 Judgments............................................... 16 8.9 Misrepresentations...................................... 16 9. BANK'S RIGHTS AND REMEDIES................................................ 16 9.1 Rights and Remedies..................................... 16 9.2 Power of Attorney....................................... 17 9.3 Accounts Collection..................................... 17 9.4 Bank Expenses........................................... 17 9.5 Remedies Cumulative..................................... 17 10. WAIVERS; INDEMNIFICATION.................................................. 18 10.1 Demand; Protest......................................... 18 10.2 Bank's Liability for Collateral......................... 18 10.3 Indemnification......................................... 18 11. NOTICES................................................................... 18 12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER................................ 18 13. GENERAL PROVISIONS........................................................ 19 13.1 Successors and Assigns.................................. 19 13.2 Time of Essence......................................... 19 13.3 Severability of Provisions.............................. 19 13.4 Amendments in Writing, Integration...................... 19 13.5 Counterparts............................................ 19 13.6 Survival................................................ 19
ii 4 This LOAN AND SECURITY AGREEMENT is entered into as of February 20, 1995, by and between SILICON VALLEY BANK ("Bank") and VENTANA MEDICAL SYSTEMS, INC., a Delaware corporation ("Borrower"). RECITALS Borrower wishes to borrow money from time to time from Bank, and Bank desires to lead money to Borrower. This Agreement sets forth the terms on which Bank will lend to Borrower, and Borrower will repay the loan to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Affiliate" means any person or entity that owns or controls directly or indirectly more than ten percent or more of the stock of another entity, any person that controls or is controlled by or is under common control with such persons or any Affiliate of such persons or each of such person's officers, directors, joint ventures or partners. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration; and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" has the meaning set forth in Section 2.1 hereof. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the Uniform Commercial Code, as adopted by the State of California and in effect from time to time. "Collateral" means the property described on Exhibit A attached hereto. 1 5 "Committed Line" means Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000). "Contingent Obligation" means, as applied to any person, any direct or indirect liability, contingent or otherwise, of that person with respect to any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), co-made or discounted or sold with recourse by that person, or in respect of which that person is otherwise directly or indirectly liable. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported. "Current Assets" means, as of any applicable date, all amounts that should, in accordance with generally accepted accounting principles, be included as current assets on the balance sheet of Borrower as at such date. "Current Liabilities" means as of any applicable date, all amounts that should, in accordance with generally accepted accounting principles, be included as current liabilities on the balance sheet of Borrower as at such date, plus, to the extent not already included therein, all Advances made under this Agreement, and all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Borrower or any subsidiary to a date more than one year from the date of determination. "Daily Balance" means the amount of the Obligations owed at the end of a given day. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business from Borrower's sale or lease of goods or rendering of services that have been validly assigned and comply with all of Borrower's representations and warranties to Bank and that are and at all times shall continue to be acceptable to Bank in all respects, together with Accounts of a like character acquired by Borrower from other entities; provided, that standards of eligibility may be fixed and revised from time to time by Bank in Bank's reasonable judgment and upon notification thereof to the Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, fifty percent (50%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower; (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (e) Accounts with respect to which the account debtor is an Affiliate of Borrower; (f) Accounts with respect to which the account debtor is not a resident of the United States unless Bank shall have approved specific such Accounts in its sole discretion; (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States; 2 6 (h) Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower; (i) Accounts with respect to an account debtor, including subsidiaries and affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage; (j) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (k) Accounts the collection of which Bank reasonably determines after reasonable inquiry to be doubtful by reason of the account debtor's financial condition. "Equipment" means machinery, equipment, furniture, fixtures, vehicles, tools, parts and attachments. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect from time to time. "General Intangibles" means general intangibles and other personal property (including chooses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, monies due under any royalty or licensing agreements, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims) other than goods, Equipment and Accounts, and Borrower's Books relating to any of the foregoing. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and team of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations, and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. 3 7 "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into between Borrower and Bank in connection with this Agreement, all as amended or extended from time to time. "Maturity Date" means January 15, 1996. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing. "Obligations" means all debt, principal, interest and other amounts (including all amounts charged to Borrower's loan account pursuant to any agreement authorizing Bank to charge Borrower's loan account), obligations, covenants, and duties owing by Borrower to Bank of any kind and description (whether pursuant to or evidenced by the Loan Documents, or by any other agreement between Bank and Borrower, and whether or not for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise, and further including all interest not paid when due and all Bank Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. "Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement; (b) The existing Indebtedness disclosed on the schedule of exceptions attached hereto (the "Schedule"); (c) Subordinated Debt; (d) Indebtedness under capital leases and/or similar equipment financings, but only to the extent of the Permitted Liens securing the same; (e) Indebtedness to trade creditors incurred in the ordinary course of business; and (f) Extensions of any of items of Permitted Indebtedness (a) through (d) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof 4 8 and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank. "Permitted Liens means the following: (a) Any Liens existing as of the date hereof and disclosed in the Schedule; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any equipment acquired or held by the Borrower or any of its subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; and (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) and (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Prime Rate" means the variable rate of interest per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Quick Assets" means at any date as of which the amount thereof shall be determined, the consolidated cash, accounts receivable and investments with maturities not to exceed 90 days of Borrower. "Revolving Facility" means the facility under which Borrower may request Bank to issue cash advances or commercial letters of credit or enter into foreign currency transactions, as specified in Section 2.1 hereof. "Revolving Note" means a promissory note in substantially the form of Exhibit B attached hereto. "Subordinated Debt" means any debt subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank. "Tangible Net Worth" means at any date as of which the amount thereof shall be determined, the total assets of Borrower on an unconsolidated basis minus (i) the sum of any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, (c) all reserves not already deducted from assets, and (d) investments in any other person or entity and (ii) Total Liabilities. "Total Liabilities" means at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness, but specifically excluding Subordinated Debt. 5 9 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. LOAN AND TERMS OF PAYMENT 2.1 Revolving Advances. Subject to the terms and conditions of this Agreement, Bank agrees to make revolving advances ("Advances") and to issue letters of credit ("Letters of Credit") to Borrower and to arrange the purchase by Borrower of spot and future foreign exchange contracts (the "Exchange Contracts"), together at any one time in an amount not to exceed the lesser of the Committed Line or the Borrowing Base (the "Maximum Availability"). For purposes of this Agreement "Borrowing Base" shall mean an amount equal to eighty percent (80%) of Eligible Accounts. To evidence the Advances, Borrower shall execute and deliver to Bank on the date hereof the Revolving Note. Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 11:00 a.m. California time, one Business Day before the day the Advance is to be made. Each such notification shall be promptly confirmed by a Borrowing Certificate in substantially the form of Schedule 2.1 hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from an officer of Borrower, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank will credit the amount of Advances made under this Section 2.1 to Borrower's loan account. Amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time during the term of this Agreement so long as no Event of Default has occurred and is continuing. The Revolving Facility shall terminate on the Maturity Date, at which time all amounts advanced under this Section 2. shall be immediately due and payable. (a) Letter of Credit Sublimit. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Borrower set forth herein, at any time and from time to time from the date hereof through the Business Day immediately prior to the Maturity Date, Bank shall issue for the account of Borrower such Letters of Credit as Borrower may request, which request shall be made by delivering to Bank a duly executed letter of credit application on Bank's standard form. Notwithstanding anything to the contrary contained in this Agreement, upon issuing any such Letter of Credit, the aggregate principal amount outstanding and undrawn under all Letters of Credit together with all outstanding Advances and Foreign Exchange Reserve shall not exceed One Million Dollars ($1,000,000). No Letter of Credit shall have an expiration date that is later than the Maturity Date. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form application and letter of credit agreement. (b) Foreign Exchange Sublimit. Borrower may utilize the Committed Line for Exchange Contracts, provided that all Exchange Contracts must provide for delivery or settlement on or before the Maturity Date. Notwithstanding anything to the contrary contained in this Agreement, after giving effect to any such Exchange Contract, the aggregate principal amount of Advances outstanding, the outstanding and undrawn amount of Letters of Credit and the Foreign Exchange Reserve shall not exceed the Maximum Availability. The Foreign Exchange Reserve on each day (the "Determination Date") shall mean: (i) on all outstanding Exchange Contracts on which delivery is to be affected or settlement allowed more than two business days from the Determination Date, 10% of the gross amount of the Exchange Contracts; plus (ii) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed within two business days after the Determination Date, 100% of the gross amount of the Exchange Contracts. In lieu of the Foreign 6 10 Exchange Reserve for 100% of the gross amount of any Exchange Contract, the Borrower may request that Bank debit the Borrower's bank account with Bank for such amount, provided Borrower has immediately available funds in such amounts in its bank account. Bank may, in its discretion, terminate the Exchange Contracts at any time (a) that an Event of Default occurs or (b) that there is no sufficient availability under the Committed Line and Borrower does not have available funds in its bank account to satisfy the Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, and without limitation of the FX Indemnity Provisions (as referred to below), Borrower agrees to reimburse Bank for any and all fees, costs and expenses relating thereto or arising in connection therewith. Borrower shall not permit the total gross amount of all Exchange Contracts on which delivery is to be effected and settlement allowed in any two business day period to be more than One Million Dollars ($1,000,000), nor shall Borrower permit the total gross amount of all Exchange Contracts to which Borrower is a party, outstanding at any one time, to exceed the lesser of (a) One Million Dollars ($1,000,000) and (b) the Maximum Availability. The Borrower shall execute all standard form applications and agreements of Bank in connection with the Exchange Contracts, and without limiting any of the terms of such applications and agreements the Borrower will pay all standard fees and charges of Bank in connection with the Exchange Contracts. Without limiting any of the other terms of this Agreement or any such standard form applications and agreement of Bank, Borrower agrees to indemnify Bank and hold it harmless, from and against any and all claims, debts, liabilities, demands, obligations, actions, costs and expenses (including, without limitation, attorneys fees of counsel of Bank's choice), of every nature and description which it way sustain or incur, based upon, arising out of, or in any way relating to any of the Exchange Contracts or any transactions relating thereto or contemplated thereby (collectively referred to as the "FX Indemnity Provisions"). 2.2 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Bank pursuant to Section 2.1 of this Agreement is greater than the lesser of (i) the Committed Line or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 2.3 Interest Rates, Payments, and Calculations. (a) Interest Rate. Any Advances evidenced by the Note shall bear interests, on the average Daily Balance, at a rate per annum equal to two percentage points (2.00%) above the Prime Rate. (b) Default Rate. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) Payments. Interest on Advances shall be due and payable on the last Business Day of each calendar month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against Borrower's deposit account or against the Committed Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased contemporaneously with such change by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 7 11 2.4 Crediting Payments. The receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce obligations, but shall not be considered a payment on account unless such wire transfer is of immediately available federal funds and is made to the appropriate deposit account of Bank or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 11:00 a.m. California time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. 2.5 Fees. Borrower shall pay to Bank the following: (a) Loan Fee. Upon the date hereof, a nonrefundable Loan Fee equal to Twenty-Seven Thousand, Five Hundred Dollars ($27,500), which shall be due upon the date of this Agreement and shall be fully earned and nonrefundable; (b) Letter of Credit Fees. Bank's customary fees and commissions for standby and commercial letters of credit; (c) Financial Examination and Appraisal Fees. Bank's customary fees and out- of-pocket expenses for Bank's audits of Borrower's Accounts and Inventory, and for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by Bank or its agents; and (d) Bank Expenses. Upon the date hereof, all Bank Expenses incurred through the date hereof, including reasonable attorneys' fees and expenses. 2.6 Additional Costs. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court of any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); or (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement in the amount and setting forth Bank's calculation thereof, which statement shall be deemed true and correct absent manifest error. 2.7 Term. This Agreement shall become effective upon acceptance by Bank and shall continue in full force and effect for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate this Agreement immediately and without notice upon the occurrence of an Event of Default. 8 12 3. CONDITIONS OF LOANS 3.1 Conditions Precedent to Initial Loan. The obligation of Bank to make the initial Advance is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement and the Note, each duly executed by Borrower; (b) a certificate of the secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) an accounts receivable audit; (d) a collateral assignment and patent mortgage to be filed with the United States Patent and Trademark Office; (e) a financing statement on Form UCC-1; (f) payment of the fees and Bank Expenses then due specified in section 2.5 hereof; and (g) such other documents, and completion of such other matters, as Bank may deem necessary or appropriate. 3.2 Conditions Precedent to all Loans. The obligation of Bank to make each Advance, including the initial Advance, is further subject to the following conditions: (a) timely receipt by Bank of the Notice of Borrowing as provided in Section 2.1; and (b) the representations and warranties contained in Section 5 shall be true and accurate in all material respects on and as of the date of such Notice of Borrowing and on the effective date of each Advance as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Advance. The making of each Advance shall be deemed to be a representation and warranty by Borrower on the date of such Advance as to the accuracy of the facts referred to in subsection (b) of this Section 3.2. 4. CREATION OF SECURITY INTEREST 4.1 Grant of Security Interest. Borrower grants to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Such security interest constitutes a valid, first priority security interest in the Collateral. 4.2 Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all financing statements, registrations and assignments of intellectual property and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 9 13 4.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES Borrower represents, warrants and covenants as follows: 5.1 Due Organization and Qualification. Borrower is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified, except for such states as to which any failure so to qualify would not have a material adverse effect on Borrower. 5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a material adverse effect on the financial condition or business operations of Borrower. 5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of liens, claims, security interests, or encumbrances, except as held by Bank and except for Permitted Liens. Except as disclosed in the Schedule, Borrower has not acquired any part of the Collateral from an assignor outside the ordinary course of such assignor's business. 5.4 Bona Fide Accounts. The Eligible Accounts are and shall remain bona fide existing obligations created by the sale and delivery of Inventory or the rendition of services to account debtors in the ordinary course of Borrower's business, unconditionally owed to Borrower without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. The property giving rise to such Eligible Accounts has been delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not, and at all times hereafter, shall not have, received notice of actual or imminent bankruptcy or insolvency of any account debtor at the time an account due from such account debtor is included in any Borrowing Base as an Eligible Account. 5.5 Merchantable Inventory. All Inventory is now and at all times hereafter shall be in all material respects of good and marketable quality, and free from all material defects. Without the Bank's prior consent, the Inventory is not now and shall not at any time hereafter be stored with a bailee, warehouseman, or similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory only at the location set forth in Section 11 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 5.6 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 11 hereof. Borrower will not, without thirty (30) days prior written notification to Bank, relocate such chief executive office. 10 14 5.7 Intellectual Property. Borrower and, to the best of Borrower's knowledge, each of Borrower's subsidiaries, possess and own all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses which are material to the conduct of its business as now operated. All copyrights material to the conduct of Borrower's and its subsidiaries' business have been registered in the United States Copyright Office. Borrower and, to the best of Borrower's knowledge, each of Borrower's subsidiaries conducts its business without infringement or, to the best of Borrower's knowledge, claim of infringement of any trademark, trade name, trade secret, service mark, patent, copyright, license or other intellectual property right of others. There is no infringement or, to the best of Borrower's knowledge, claim of infringement by others of any material trademark, trade name, trade secret, service mark, patent, copyright, license or other intellectual property right of Borrower or any of Borrower's subsidiaries. 5.8 Litigation. There are no actions or proceedings pending by or against Borrower before any court or administrative agency in which an adverse decision could have a material adverse effect on Borrower or the Collateral. Borrower does not have knowledge of any such pending or threatened actions or proceedings. Borrower will promptly notify Bank in writing if any action, proceeding or governmental investigation involving Borrower is commenced that may result in damages or costs to Borrower of One Hundred Thousand Dollars ($100,000) or more. 5.9 No Material Adverse Change in Financial Statements. All financial statements relating to Borrower or any Affiliate that have been or may hereafter be delivered by Borrower to Bank fairly present in all material respects Borrower's financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has not been a material adverse change in the financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank. 5.10 Solvency. Borrower and each of Borrower's subsidiaries is solvent and able to pay its debts (including trade debts) as they mature. 5.11 Regulatory Compliance. Borrower has met and at all times will meet the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a material adverse effect on the financial condition or business operations of Borrower. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System), and the proceeds of the Advances will not be used for such purpose. Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. 5.12 Environmental Condition. Except as set forth on Schedule 5.12 hereto, none of Borrower's properties or assets has ever been used by Borrower or, to the best of Borrower's knowledge, by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower; and Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 5.13 Taxes. Borrower has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes that are due and payable. 11 15 5.14 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any entity, except for (i) 100% of the capital stock of Ventana France, a corporation organized under the laws of France, (ii) 100% of the capital stock of Ventana GMBH, a corporation organized under the laws of Germany, and (iii) Permitted Investments. 5.15 Government Consents. Borrower has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted. 5.16 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Lender contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, until payment in full of the Obligations, Borrower shall do all of the following: 6.1 Good Standing. Borrower shall maintain its corporate existence and its good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a material adverse effect on the financial condition, operations or business of Borrower. Borrower shall maintain in form all licenses, approvals and agreements, the loss of which could have a material adverse effect on its financial condition, operations or business. 6.2 Government Compliance. Borrower shall, and shall cause each of its subsidiaries to, comply with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could materially adversely affect the financial condition, operations or business of Borrower. 6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each month, company prepared consolidated and consolidating balance sheets, income statements and cash flow statements covering Borrower's operations during such period, certified by an officer of Borrower reasonably acceptable to Bank; (b) as soon as available, but in any event within ninety (90) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank, the auditor-prepared consolidating financial statements, and (at the time of filing with the appropriate tax authorities) the tax returns of Borrower, (c) promptly upon becoming available, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders; (d) immediately upon receipt of notice thereof, a report of any material legal actions pending or threatened against Borrower; and (e) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. Within fifteen (15) days of the last day of each month, Borrower shall deliver to Bank a borrowing base certificate signed by an officer of Borrower in substantially the form of Schedule 6.3(a) hereto, together with aged listings of accounts receivable and accounts payable. Borrower shall deliver to Bank with the monthly financial statements a compliance certificate signed by an officer of Borrower in substantially the form of Schedule 6.3(b) hereto. 12 16 Bank shall have a right from time to time thereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred. 6.4 Returns. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Fifty Thousand Dollars ($50,000). 6.5 Taxes. Borrower shall make due and timely payment or deposit of all federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower has made such payments or deposits; provided that Borrower need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is adequately reserved against by Borrower. 6.6 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazardous and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 Principal Depository. Borrower shall maintain its primary depository and operating accounts with Bank. 6.8 Quick Ratio. Borrower shall maintain, on a monthly basis and without consolidation, a ratio of Quick Assets to Current Liabilities of at least 1.00:1. 6.9 Tangible Net Worth. Borrower shall maintain, on a monthly basis and without consolidation, a tangible net worth of not less than Three Million Five Hundred Thousand Dollars ($3,500,000). 6.10 Debt-Net Worth Ratio. Borrower shall maintain, an a monthly basis and without consolidation, a ratio of Total Liabilities to Tangible Net Worth of not more than 0.85:1.00. 6.11 Profitability. Borrower, on a consolidated basis, shall be profitable before taxes and after taxes for each fiscal quarter, beginning with the quarter ending December 31, 1995. Quarterly losses on a consolidated basis on an after tax basis shall not exceed ($800,000) for the quarter ended March 31, 1995; ($550,000) for the quarter ended June 30, 1995; and ($250,000) for the quarter ended September 30, 1995. 13 17 6.12 Vendor Financing Program. Borrower shall maintain its current vendor financing program with Copelco, or a similar vendor financing program acceptable to Bank. 6.13 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the Obligations, Borrower will not do any of the following: 7.1 Extraordinary Transactions and Disposal of Assets. Unless otherwise approved by Bank, enter into any transaction not in the ordinary and usual course of Borrower's business, including, but not limited to, the sale, lease, or other disposition of, moving, relocation, or transfer, whether by sale or otherwise, of Borrower's assets, other than (i) sales of Inventory in the ordinary and usual course of Borrower's business as presently conducted and (ii) sales or other dispositions in the ordinary course of business of assets that have become worn out or obsolete or that are promptly being replaced. 7.2 Loans; Contingent Liabilities. Except for Permitted Investments or as otherwise permitted by Section 7.8 below, make or accrue any loans or advances of money to any third party, or, except for Permitted Indebtedness, guarantee or otherwise become in any way liable with respect to the obligations of any third party except by endorsement of instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to Bank. 7.3 Restructure. Change Borrower's name; make any material change in Borrower's financial structure or business operations; cause, permit, or suffer any material change in Borrower's ownership; or suspend operation of Borrower's business. 7.4 Mergers or Acquisitions. Merge or consolidate with or into any other business organization, or acquire directly or indirectly all or substantially all of the capital stock or property of another person, without the express written consent of the Bank. Such consent, as to acquisitions by Borrower, shall not be unreasonably withheld. 7.5 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness other than Permitted Indebtedness. 7.6 Encumbrances. Create, incur, assume or suffer to exist any mortgage, lien, security interest or other encumbrance with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, except for Permitted Liens. 7.7 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock. 7.8 Investments. Directly or indirectly make or own any beneficial interest in (including stock, partnership interest, or other securities of), or make any loan, advance, or capital contribution to, any corporation, association, person, or entity, other than (i) Permitted Investments, and (ii) investments in subsidiaries in the ordinary course of business. 14 18 7.9 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any person or entity controlling, controlled by, or under common control (whether by contract, ownership of voting securities, or otherwise) with Borrower (each, an "Affiliate" and each such transaction, an "Affiliate Transaction") except for Affiliate Transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated person or entity. 7.10 Subordinated Debt. Make any payment in respect of any Subordinated Debt except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt if such amendment would adversely affect the interests of Bank. 7.11 Compliance. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, or violate any law or regulation, which violation could have a material adverse effect on the condition or prospects of Borrower. 8. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 Payment Default. If Borrower fails to pay when due and payable or when declared due and payable in accordance with the Loan Documents, any portion of the Obligations; 8.2 Covenant Default. If Borrower fails to perform any obligation under Sections 6.6, 6.7, 6.8, 6.9, 6.10 or 6.11, or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within five (5) days after the occurrence of such default (provided that no Advances will be made during such cure period); 8.3 Material Adverse Change. If there occurs a material adverse change in Borrower's business, or if there is a material impairment of the prospect of repayment of any portion of the Obligations owing to Bank or a material impairment of the value or priority of Bank's security interests in the Collateral; 8.4 Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contesting by Borrower (provided that no Advances will be made during such cure period); 8.5 Insolvency. If an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed within ten (10) days (provided that no Advances will be made prior to the dismissal of such case); 15 19 8.6 Other Agreements. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness; 8.7 Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 8.8 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Advances will be made prior to the satisfaction or stay of such judgment); or 8.9 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty, representation, statement, or report made to Bank by Borrower or any officer, employee, agent, or director of Borrower. 9. BANK'S RIGHTS AND REMEDIES 9.1 Rights and Remedies. Upon the occurrence of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (d) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, for up to one hundred twenty (120) days in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (e) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Without limiting any rights granted Bank in any other Loan Document, Bank is hereby granted a license or other right, solely pursuant to the provisions of this section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a 16 20 similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (g) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable; (h) Bank may credit bid and purchase at any public sale; and (i) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 Power of Attorney. Borrower hereby irrevocably and appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interests in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign the name of Borrower on any of the documents described in Section 4.2; (d) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (e) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; and (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 9.3 Accounts Collection. Upon the occurrence of an Event of Default, Borrower shall, upon the request of Bank and in addition to all other rights or remedies available to Bank, open and maintain with Bank an account (the "Collateral Account") into which all funds received by Borrower from any source shall immediately be deposited. Borrower shall direct all account debtors or other persons owing money to Borrower who make payments by electronic transfer of funds to wire such funds directly to the Collateral Account. Borrower irrevocably authorizes Bank to transfer to the Collateral Account any funds that have been deposited into any other accounts or that Bank has otherwise raised. Upon the occurrence of an Event of Default and if requested by Bank, Borrower shall not establish or maintain any accounts with any person other than Bank except for accounts opened in the ordinary course of business from which all funds are transferred on a daily basis to the Collateral Account. 9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves in Borrower's loan account as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. 17 21 10. WAIVERS; INDEMNIFICATION 10.1 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10.2 Bank's Liability for Collateral. So long as Bank complies with its obligations, if any, under Section 9207 of the Code and reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 10.3 Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement, and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 11. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by certified mail, postage prepaid, return receipt requested, or by prepaid telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower: Ventana Medical Systems, Inc. 3865 North Business Center Drive Tucson, Arizona 85705 Attn: Chief Financial Officer FAX: (602) 887-2558 If to Bank: Silicon Valley Bank 3000 Lakeside Drive Santa Clara, CA 95054 Attn: Legal Department FAX: (408) 748-9478 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. Borrower and Bank hereby waive their respective rights to a jury trial of any claim or cause of action based upon or arising out of any of the Loan Documents or any of the transactions contemplated therein, including contract claims, tort claims, breach of duty claims, and all other common law or statutory claims. 18 22 13. GENERAL PROVISIONS 13.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participations in all or any part of, or any interest in Bank's rights and benefits hereunder. 13.2 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 13.3 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 13.4 Amendments in Writing, Integration. This Agreement cannot be changed or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement. 13.5 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 13.6 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 10.3 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. VENTANA MEDICAL SYSTEMS, INC. By: /s/ R. MICHAEL RODGERS --------------------------- Title: Vice President ------------------------ SILICON VALLEY BANK By: /s/ DEBRA R. GUERIN --------------------------- Title: Vice President ------------------------ 19 23 EXHIBIT A The Collateral shall consist of all right, title and interest of Borrower in and to the following: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing; (c) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and tights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing; (e) All documents, cash, deposit accounts, securities, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; (f) All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, registered or unregistered, now owned or hereafter acquired; (g) All trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; (h) All claims for damages by way of any past, present and future infringement of any of the rights described above; and (i) Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. The Collateral shall specifically exclude equipment manufactured by Borrower and sold to a third party vendor financing entity for inclusion in the Borrower's vendor financing program. 24 EXHIBIT B Revolving Promissory Note U.S. $ 2,750,000. Santa Clara, California February 20, 1995 FOR VALUE RECEIVED, the undersigned, VENTANA MEDICAL SYSTEMS, INC. (the "Borrower"), promises to pay to the order of Silicon Valley Bank ("Bank"), at such place as the holder hereof may designate, in lawful money of the United States of America, the aggregate unpaid principal amount of all advances ("Advances") made by Bank to Borrower under the terms of this Note, up to a maximum principal amount of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000). Borrower shall also pay interest on the aggregate unpaid principal amount of such Advances at the rates and in accordance with the terms of the Loan and Security Agreement between Borrower and Bank of even date herewith, as amended from time to time (the "Loan Agreement"). The entire principal amount and all accrued interest shall be due and payable on the Maturity Date (as defined in the Loan Agreement). Borrower irrevocably waives the right to direct the application of any and all payments at any time hereafter received by Bank from or on behalf of Borrower, and Borrower irrevocably agrees that Bank shall have the continuing exclusive right to apply any and all such payments against the then due and owing obligations of Borrower as Bank may deem advisable. In the absence of a specific determination by Bank with respect thereto, all payments shall be applied in the following order: (a) then due and payable fees and expenses; (b) then due and payable interest payments and mandatory prepayments; and (c) then due and payable principal payments and optional prepayments. Bank is hereby authorized by Borrower to endorse on Bank's books and records each Advance made by Bank under this Note and the amount of each payment or prepayment of principal of each such Advance received by Bank; it being understood, however, that failure to make any such endorsement (or any errors in notation) shall not affect the obligations of Borrower with respect to Advances made hereunder, and payments of principal by Borrower shall be credited to Borrower notwithstanding the failure to make a notation (or any errors in notation) thereof on such books and records. Borrower promises to pay Bank all costs and expenses of collection of this Note and to pay all reasonable attorneys' fees incurred in such collection or in any suit or action to collect this Note or in any appeal thereof. Borrower waives presentment, demand, protest, notice of protest, notice of dishonor, notice of nonpayment, and any and all other notices and demands in connection with the delivery, acceptance, performance, default or enforcement of this Note, as well as any applicable statute of limitations. No delay by Bank in exercising any power or right hereunder shall operate as a waiver of any power or right. Time is of the essence as to all obligations hereunder. This Note is issued pursuant to the Loan Agreement, which shall govern the rights and obligations of Borrower with respect to all obligations hereunder. This Note shall be deemed to be made under, and shall be construed in accordance with and governed by, the laws of the State of California, excluding conflicts of laws principles. VENTANA MEDICAL SYSTEMS, INC. By: /s/ R. MICHAEL RODGERS --------------------------- Title: Vice President ------------------------ 25 SCHEDULE 2.1 BORROWING CERTIFICATE The undersigned hereby certifies as follows: I, __________________, am the duly elected and acting __________________ of VENTANA MEDICAL SYSTEMS, INC. ("Borrower"). This certificate is delivered pursuant to Section 2.1 of that certain Loan and Security Agreement by and between Borrower and Silicon Valley Bank ("Bank") (the "Loan Agreement"). The terms used in this Borrowing Certificate which are defined in the Loan Agreement have the same meaning herein as ascribed to them therein. Borrower is confirming its telephone request made on __________, 19__ for an Advance as follows: (a) The date on which the Advance is to be made is ____________, 19__. (b) The amount of the Advance is to be $__________. All representations and warranties of Borrower stated in the Loan Agreement are true, accurate and complete in all material respects as of the date of the telephone request for and Advance confirmed by this Borrowing Certificate; provided, however, that those representations and warranties expressly referring to another date shall be true, accurate and complete in all material respects as of such date. IN WITNESS WHEREOF, this Borrowing Certificate is executed by the undersigned as of this _____ day of __________, 199__. VENTANA MEDICAL SYSTEMS, INC. By: --------------------------- Title: ------------------------ 22 26 SCHEDULE 6.3(a) BORROWING BASE CERTIFICATE Borrower. Ventana Medical Systems, Inc. Lender. Silicon Valley Bank 3865 North Business Center Drive 3000 Lakeside Drive Tucson, Arizona 85705 Santa Clara, CA 95054 Commitment Amount: $2,750,000 ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of _____ $____________ 2. Additions (please explain on reverse) $____________ 3. TOTAL ACCOUNTS RECEIVABLE $____________ ACCOUNTS RECEIVABLE DEDUCTIONS 4. Amounts over 90 days past invoice date (excluding credit balances $_________ 5. Balance of 50% over 90 day accounts $_________ 6. Concentration Limits $_________ 7. Foreign Accounts $_________ 8. Governmental Accounts $_________ 9. Contra Accounts $_________ 10. Promotion or Demo Accounts $_________ 11. Intercompany/Employee Accounts $_________ 12. Other (please explain on reverse) $_________ 13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $____________ 14. Eligible Accounts (No. 3-No. 14) $____________ 15. LOAN VALUE OF ACCOUNTS (70% of No. 14) $____________ BALANCES 16. Maximum Loan Amount $2,750,000 17. Total Funds Available (Lesser of #16 or #15) $____________ 18. Present balance owing on Line of Credit $____________ 19. Outstanding under Sublimits (Letter of Credit, Foreign Exchange) $____________ 20. RESERVE POSITIVE (#17-#l8 and #19) $____________
The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Silicon Valley Bank. COMMENTS: BANK USE ONLY Rec'd By:_________________ Auth. Signer Date:_____________________ Ventana Medical Systems, Inc. Verified:_________________ By:______________________ Auth. Signer Authorized Signer Date:_____________________ __________________________ 27 SCHEDULE 6.3(b) COMPLIANCE CERTIFICATE TO: Silicon Valley Bank 3000 Lakeside Drive Santa Clara, CA 95054 FROM: Ventana Medical Systems, Inc. 3865 North Business Center Drive Tucson, Arizona 85705 The undersigned authorized officer of Ventana Medical Systems, Inc. hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending ____________ of all required conditions and terms except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true, accurate and complete in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principals (GAAP) and are consistency from one period to the next except as explained in an accompanying letter or footnotes. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
Reporting Covenant Required Complies - ------------------ -------- -------- Monthly financial statements Monthly within 30 days Yes No Annual (CPA Audited) FYE within 90 days Yes No A/R & A/P Agings and Borrowing Base Certificate Monthly within 15 days Yes No A/R Audit Initial and Semi-Annual Yes No
Financial Covenant Required Actual Complies ------------------ -------- ------ -------- Maintain on a Monthly Basis: Minimum Quick Ratio 1.00:1.00 ___________:1.0 Yes No Minimum TNW $3,500,000 $______________ Yes No Maximum quarterly loss after tax 0.85:1.00 ___________:1.0 Yes No 3/31/95 ($800,000) _______________ Yes No 6/30/95 ($550,000), _______________ Yes No 9/30/95 ($250,000), _______________ Yes No Profitability 12/31/95 and thereafter, on both a before and after tax basis
COMMENTS REGARDING EXCEPTIONS: BANK USE ONLY Received by:_________________ Sincerely, AUTHORIZED SIGNER Date:________________________ ________________________ SIGNATURE Verified:____________________ AUTHORIZED SIGNER ________________________ TITLE Date:________________________ ________________________ Compliance Status: Yes No DATE 28 Revolving Promissory Note U.S. $ 2,750,000. Santa Clara, California February 20, 1995 FOR VALUE RECEIVED, the undersigned, Ventana Medical Systems, Inc. (the "Borrower"), promises to pay to the order of Silicon Valley Bank ("Bank"), at such place as the holder hereof may designate, in lawful money of the United States of America, the aggregate unpaid principal amount of all advances ("Advances") made by Bank to Borrower under the terms of this Note, up to a maximum principal amount of Two Million Seven Hundred Fifty Thousand Dollars ($2,700,000). Borrower shall also pay interest on the aggregate unpaid principal amount of such Advances at the rates and in accordance with the terms of the Loan and Security Agreement between Borrower and Bank of even date herewith, as amended from time to time (the "Loan Agreement"). The entire principal amount and all accrued interest shall be due and payable on the Maturity Date (as defined in the Loan Agreement). Borrower irrevocably waives the right to direct the application of any and all payments at any time hereafter received by Bank from or on behalf of Borrower, and Borrower irrevocably agrees that Bank shall have the continuing exclusive right to apply any and all such payments against the then due and owing obligations of Borrower as Bank may deem advisable. In the absence of a specific determination by Bank with respect thereto, all payments shall be applied in the following order: (a) then due and payable fees and expenses; (b) then due and payable interest payments and mandatory prepayments; and (c) then due and payable principal payments and optional prepayments. Bank is hereby authorized by Borrower to endorse on Bank's books and records each Advance made by Bank under this Note and the amount of each payment or prepayment of principal of each such Advance received by Bank; it being understood, however, that failure to make any such endorsement (or any errors in notation) shall not affect the obligations of Borrower with respect to Advances made hereunder, and payments of principal by Borrower shall be credited to Borrower notwithstanding the failure to make a notation (or any errors in notation) thereof on such books and records. Borrower promises to pay Bank all costs and expenses of collection of this Note and to pay all reasonable attorneys' fees incurred in such collection or in any suit or action to collect this Note or in any appeal thereof. Borrower waives presentment, demand, protest, notice of protest, notice of dishonor, notice of nonpayment and any and all other notices and demands in connection with the delivery, acceptance, performance, default or enforcement of this Note, as well as any applicable statute of limitations. No delay by Bank in exercising any power or right hereunder shall operate as a waiver of any power or right. Time is of the essence as to all obligations hereunder. This Note is issued pursuant to the Loan Agreement, which shall govern the rights and obligations of Borrower with respect to all obligations hereunder. This Note shall be deemed to be made under, and shall be construed in accordance with and governed by, the laws of the State of California, excluding conflicts of laws principles. Ventana Medical Systems, Inc. By: /s/ R. MICHAEL RODGERS ------------------------- Title: Vice President ----------------------- 29 REORDER FROM REGISTRE, INC. NOTE: SHEET 2 SIGNED SEPARATELY 514 PIERCE ST. P.O. BOX 218 ANOKA, MN 55303 (612) 421-1713
Approved by The Secretary of State of Arizona, Rev. 10/90 FORM UCC-1 Space below used by filing office - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Return copy or recorded original to: ARIZONA UNIFORM COMMERCIAL CODE Silicon Valley Bank FINANCING STATEMENT -- FORM UCC-1 Attn: Loan Services This FINANCING STATEMENT is presented for filing 3003 Tasman Drive (recording) pursuant to the Arizona Uniform Commercial Santa Clara, CA 95054 Code. - -------------------------------------------------------------------------------------------------------------------- 1. Debtor(s) (last name first and address): 2. Secured Party(ies) and address: Bio Tek Solutions, Inc. Silicon Valley Bank 3865 North Business Center Drive 1731 Embarcadero Road, Suite 220 Tucson, AZ 85705 Palo Alto, CA 94303 - -------------------------------------------------------------------------------------------------------------------- 3. Name and Address of Assignee of Secured Party(ies): 4. /X/ If checked, products of collateral are also covered. ----------------------------------------------------------- 5. This Financing Statement covers the following types (or items) of property: - ------------------------------------------------------ Collateral is described in Exhibit A attached. 6. If the collateral is crops, the crops are growing or to be grown on the following described real estate: - -------------------------------------------------------------------------------------------------------------------- 7. If the collateral is (a) goods which are or are to become fixtures; (b) timber to be cut; or (c) minerals or the like (including oil and gas), or accounts resulting from the sale thereof at the wellhead or minehead to which the security interest attaches upon extraction, the legal description of the real estate concerned is: And, this Financing Statement is to be recorded in the office where a mortgage on such real estate would be recorded. If the Debtor does not have an interest of record, the name of a record owner is: - -------------------------------------------------------------------------------------------------------------------- 8. This Financing Statement is signed by the Secured Party instead of the debtor to perfect or continue perfection of a security interest in: / / collateral already subject to a security interest in / / collateral as to which the filing has lapsed jurisdiction when it was brought into this state. or will lapse. / / proceeds of collateral because of a change in type / / collateral acquired after a change of name, or use. identity, or corporate structure of the Debtor. - --------------------------------------------------------------------------------------------------------------------
Bio Tek Solutions, Inc. (Use Dated: - ------------------------------- whichever ------------------- /s/ Bio Tek Solutions, Inc. EX-10.19(B) 11 AMENDMENT TO SILICON VALLEY BANK LOAN AGREEMENT 1 EXHIBIT 10.19(b) AMENDMENT TO LOAN AND SECURITY AGREEMENT This Amendment to Loan and Security Agreement is entered into on this 28th day of March, 1996 by and between Silicon Valley Bank ("Bank") and Ventana Medical Systems, Inc. ("Borrower"). RECITALS Borrower and Bank are parties to that certain Loan and Security Agreement dated as of February 20, 1995, as amended from time to time (the "Agreement"). Borrower has acquired the outstanding stock of Bio Tek Solutions, Inc. ("Bio Tek") and has asked Bank to lend Borrower additional money and otherwise to amend the Agreement to reflect, among other things, Borrower's consolidated financial condition. Bank has agreed to do so, provided Borrower enters into this Amendment and Bio Tek guarantees Borrower's performance under the Agreement. NOW, THEREFORE, the parties agree as follows: 1. Section 1.1 of the Loan Agreement is amended to include the following defined terms: "Maturity Date" means March 15, 1999. "Revolving Maturity Date" means March 15, 1997. 2. Section 2.1 of the Loan Agreement is hereby amended by replacing in each instance the words "Maturity Date" with the words "Revolving Maturity Date." 3. Section 1.1 of the Loan Agreement is further amended by amending the definition of "Eligible Accounts" to include Accounts that arise in the ordinary course of Bio Tek's business, provided that all of the provisions and exclusions including those set forth in clauses (a) through (k), relating to Eligible Accounts shall apply to such Bio Tek Accounts. 4. The following Section 2.1.1 is added to the Agreement: 2.1.1 Term Loan. Bank shall make a term loan (the "Term Loan") to Borrower consisting of one (1) Advance in the principal amount of Two Million Dollars ($2,000,000). Borrower shall pay interest on the Term Loan at a rate per annum equal to two percentage points (2.00%) above the Prime Rate, beginning on April 15, 1996 and continuing on the fifteenth day of each month thereafter through and including March 15, 1997. Thereafter, Borrower shall repay the Term Loan in twenty-four (24) equal monthly installments of principal, plus accrued interest, beginning April 15, 1997, and continuing on the fifteenth day of each month thereafter through and including the Maturity Date, on which date the entire principal balance, any unpaid interest, and all other amounts outstanding under this Agreement shall be due and payable. 2 5. Sections 6.8, 6.9, 6.10, 6.11, 6.12 and 6.13 are added to the Agreement, as follows, and Sections 6.12 and 6.13 are added to the Agreement are renumbered as Sections 6.14 and 6.15, respectively: 6.8 Quick Ratio: On a consolidated basis, Borrower shall maintain as of the last day of each calendar month, a ratio of Quick Assets to Current Liabilities of at least 0.85 to 1.0. 6.9 Debt-Tangible Net Worth. On a consolidated basis, Borrower shall maintain, as of the last day of each calendar month, a ratio of Total Liabilities to Tangible Net Worth of not more than 1.5 to 1.0. 6.10 Profitability. On a consolidated basis, Borrower shall not suffer a loss in excess of $2,000,000 for the fiscal quarter ending March 31, 1996, a loss in excess of $1,500,000 for the fiscal quarter ending June 30, 1996, a loss in excess of $350,000 for the fiscal quarter ending September 30, 1996, or a loss in excess of $250,000 for the fiscal quarter ending December 31, 1996. Thereafter, Borrower shall be profitable for each fiscal quarter. 6.11 Liquidity Coverage. Subject to Section 6.13, Borrower shall maintain, as of the last day of each calendar month, Liquidity Coverage that is at least 1.8 times the outstanding balance of the Term Loan. "Liquidity Coverage" means the sum of cash and cash equivalents plus the Borrowing Base, less the principal amount of Advances outstanding hereunder. 6.12 Tangible Net Worth. On a consolidated basis, Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth of not less than Five Million Dollars ($5,000,000). 6.13 Debt Service Coverage. From and after the time when Borrower has maintained a Debt Service Coverage of at least 2.0 to 1.0 for six (6) consecutive months, Borrower shall maintain, as of the last day of each calendar month, a Debt Service Coverage of not less than 2.0 to 1.0. "Debt Service Coverage" means (i) earnings before interest, taxes, depreciation and amortization, divided by (ii) the current portion of long term debt and lease obligations plus interest expense. From and after the date that this covenant becomes effective, Section 6.11 shall be of no further force or effect. 6. Exhibit D of the Loan Agreement is hereby replaced by Exhibit D attached to this Amendment. -2- 3 7. Conditions Precedent to Effectiveness. The effectiveness of this Amendment is subject to the conditions precedent that. a. Borrower shall have paid to Bank: i. a nonrefundable fee equal to Thirty Three Thousand Seven Hundred Fifty ($33,750); and ii. all Bank Expenses incurred through the date hereof, including reasonable attorneys' fees and expenses. b. Bank shall have received, in form and substance satisfactory to Bank: i. a certificate of the secretary of Borrower with respect to incumbency and resolutions authorizing the execution, delivery and performance of this Amendment, and confirming that the copies of the Articles of Incorporation and By Laws previously delivered to Bank have not been amended and remain in full force and effect; ii. a copy of this Amendment duly executed by Borrower; and iii. a Guaranty and Security Agreement of even date herewith duly executed by Bio Tek and such related instruments and certificates as Bank may reasonably request. 8. No Defenses of Borrower. Borrower agrees, as of this date, that it has no defenses against the obligations to pay any amounts under the Indebtedness. 9. Interpretation. Unless otherwise defined, all capitalized terms in this Amendment shall be as defined in the Agreement. Except as amended, the Agreement remains in full force and effect. 10. Representations. Borrower represents and warrants that the Representations and Warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing. 11. Counterparts. This Amendment to Loan and Security Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. -3- 4 IN WITNESS WHEREOF, the undersigned have executed this Amendment to Loan and Security Agreement as of the first date above written. VENTANA MEDICAL SYSTEMS, INC. By:__________________________ Title:_______________________ SILICON VALLEY BANK By:__________________________ Title:_______________________ -4- 5 EXHIBIT C BORROWING BASE CERTIFICATE Borrower: Ventana Medical Systems, Inc. Lender: Silicon Valley Bank Commitment Amount: $2,750,000 ACCOUNTS RECEIVABLE ACTIVITY
VENTANA BIO TEK 1. Accounts Receivable Balance as of ___________ $_______ $_______ 2. Total Accounts Receivable (Ventana and Bio Tek) $_______ 3. Minus: Ineligible Accounts Amounts over 90 days $_______ $_______ Balance of 50% over 90 day accounts $_______ $_______ Excess 25% concentration $_______ $_______ Credit Balances over 90 days $_______ $_______ Foreign Accounts (other than eligibles) $_______ $_______ Governmental Accounts $_______ $_______ Contra Accounts $_______ $_______ Promotion or Demo Accounts $_______ $_______ Intercompany/Employee Accounts $_______ $_______ Other (please explain on reverse) $_______ $_______ Total Ineligible Accounts $_______ $_______ 4. Eligible Accounts Receivable (Line 1 - Line 3) $_______ $_______ 5. Funds Available $_______ $_______ (80%-Line 4) (80% of Line 4) 6. Total Funds Available (Line 5-Ventana & Bio Tek) $_______ LOAN ACTIVITY 7. Total Funds Available (Lesser of $2,750,000 or Line 6) $_______ 8. Loan balance as of __________________ $_______ 9. Reserve Position (Line 7 minus Line 8) $_______
The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base complies with the representations and warranties set forth in the Loan and Security Agreement as amended from time to time, between the undersigned and Silicon Valley Bank, as amended. COMMENTS: BANK USE ONLY Rec'd By:___________________ Ventana Medical Systems, Inc. Date:_______________________ Verified:___________________ Name:_________________________ Title:________________________ -5- 6 EXHIBIT D COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK FROM: VENTANA MEDICAL SYSTEMS, INC. The undersigned authorized officer of Ventana Medical Systems, Inc. hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. Please indicate compliance status by circling Yes/No under "Complies" column.
Reporting Covenant Required Complies ------------------ -------- -------- Monthly financial statements Monthly within 30 days Yes No Annual (CPA Audited) FYE within 90 days Yes No A/R & A/P Agings Monthly within 15 days Yes No A/R Audit Initial and Semi-Annual Yes No
Financial Covenant Required Actual Complies ------------------ -------- ------ -------- Maintain on a Monthly Basis: Minimum Quick Ratio 0.85:1.0 ___:1.0 Yes No Debt/TNW 1.5:1.0 Liquidity Coverage 1.8xTerm Balance* ___:1.0 Yes No Minimum Tangible Net Worth $5,000,000 $______ Yes No Debt Service Coverage 2.0:1.0** ___:1.0 Yes No Profitability (Quarterly) See Agreement $______ Yes No
* Replaced by Debt Service Coverage after 6 consecutive months of 2:1 DSC. ** Becomes applicable after 6 consecutive months of compliance -6- 7 Comments Regarding Exceptions: See BANK USE ONLY Attached. Sincerely, Received by:__________________ AUTHORIZED ___________________________ SIGNER SIGNATURE Date:_________________________ Verified:_____________________ ___________________________ AUTHORIZED TITLE SIGNER Date:_________________________ ___________________________ Compliance State: Yes No DATE -7- 8 CORPORATE RESOLUTIONS TO BORROW Borrower: Ventana Medical Systems, Inc. I, the undersigned Secretary or Assistant Secretary of Ventana Medical Systems, Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Delaware. I FURTHER CERTIFY that the Certificate of Incorporation and Bylaws of the Corporation, previously delivered to Silicon Valley Bank have not been amended or modified and are in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation duly called and held, at which a quorum was present and voting (or by other duly authorized corporate action in lieu of a meeting), the following resolutions were adopted. BE IT RESOLVED, that any one (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES _____________________ _________________ _____________________ _____________________ _________________ _____________________ _____________________ _________________ _____________________ _____________________ _________________ _____________________ _____________________ _________________ _____________________ acting for an on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: BORROW MONEY. To borrow from time to time from Silicon Valley Bank ("Bank'), on such terms as may be agreed upon between the officers, employees, or agents and Bank, such sum or sums of money as in their judgment should be borrowed, without limitation, including such sums as are specified in that certain Loan and Security Agreement dated as of February 20, 1995, as amended by the Loan Modification Agreement dated as of March 22, 1996 (the "Loan Agreement"). EXECUTE NOTES. To execute and deliver to Bank the Loan Agreement and any promissory note or notes of the Corporation, on Bank's forms, at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of the Corporation to Bank, and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the notes, or any portion of the notes. -8- 9 GRANT SECURITY. To grant a security interest to Bank in the Collateral described in the Loan Agreement, which security interest shall secure all of the Corporation's Obligations, as described in the Loan Agreement. NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on March __, 1996 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFY TO AND ATTEST BY: x_______________________________ -9- 10 CORPORATE RESOLUTION TO GUARANTEE Guarantor: Bio Tek Solutions, Inc. I, the undersigned Secretary or Assistant Secretary of Bio Tek Solutions, Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Delaware. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation duly called and held, at which a quorum was present and voting, (or by other duly authorized corporate action in lieu of a meeting), the following resolutions were adopted. BE IT RESOLVED, that any one (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES _____________________ _________________ _____________________ _____________________ _________________ _____________________ _____________________ _________________ _____________________ _____________________ _________________ _____________________ _____________________ _________________ _____________________ acting for an on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: GUARANTEE INDEBTEDNESS. To guarantee amounts borrowed from time to time from Silicon Valley Bank ("Bank'), by Ventana Medical Systems ("Borrower") pursuant to that certain Loan and Security Agreement between Bank and Borrower, as amended from time to time as of March 22, 1996 (the "Loan Agreement). EXECUTE GUARANTY. To execute and deliver to Bank the guaranty of the Corporation (the "Guaranty"), on Bank's forms, and also to execute and deliver to Bank one or more renewals, extensions, modifications, consolidations, or substitutions therefor. GRANT SECURITY. To grant a security interest to Bank in the Collateral, if any, described in the Guaranty, which security interest shall secure all of the Corporation's obligations under the Guaranty. FURTHER ACTS. To do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their -10- 11 discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on ___________, 1996 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: x____________________________ -11- 12 This SECURITY AGREEMENT is entered into as of March 22, 1996 by and between SILICON VALLEY BANK ("Bank") and BIO TEK SOLUTIONS, INC. ("Guarantor"). RECITALS Ventana Medical Systems, Inc. wishes to obtain credit from time to time from Bank pursuant to a Loan and Security Agreement, as amended by an Amendment to Loan and Security Agreement of even date (the "Loan Agreement"). Bank has agreed to enter into the Loan Agreement, provided Guarantor guarantees payment and performance obligations under the Loan Agreement in accordance with the terms of the Guaranty, and secures the Guaranty pursuant to the terms of this Agreement. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, whether or not suit is brought. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend, letter of credit or other obligation of another, including without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Equipment" means machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments. 13 "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect from time to time. "Guarantor's Books" means all of Guarantor's books and records including ledgers; records concerning Guarantor's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Guaranty" means the unconditional guaranty executed by Guarantor for the benefit of Bank, as amended from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, the Guaranty executed by Guarantor, and any other agreement entered into between Guarantor and Bank, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on the business operations or financial condition of Guarantor and its Subsidiaries taken as a whole. "Negotiable Collateral" means all of Guarantor's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Guarantor's Books relating to any of the foregoing. "Obligations" means all amounts owed to the Bank by Guarantor pursuant to the Guaranty, this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising. "Permitted Indebtedness" means: (a) Existing Indebtedness disclosed to Bank in writing; -2- 14 (b) Subordinated Debt; and (c) Indebtedness to trade creditors incurred in the ordinary course of business. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed to Bank in writing; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank. "Permitted Liens" means the following. (a) Any Liens existing as of the date hereof and disclosed to Bank in writing or arising under this Agreement; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any equipment acquired or held by the Guarantor or any of its subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; and (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (d) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Subordinated Debt" means any debt incurred by Guarantor after the date hereof that is subordinated to the debt owing by Guarantor to Bank on terms acceptable to Bank (and identified as being such by the Company and the Bank). "Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power -3- 15 to elect the Board of Directors, managers or trustees of the entity shall, at the time as of which any determination is being made, is owned by Guarantor, either directly or through an Affiliate. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. CREATION OF SECURITY INTEREST 2.1 Grant of Security Interest. Guarantor grants to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Guarantor of each of its covenants and duties under the Loan Documents. Such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. 2.2 Delivery of Additional Documentation Required. Guarantor shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 2.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Guarantor's usual business hours, to inspect Guarantor's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Guarantor's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 3. REPRESENTATIONS AND WARRANTIES Guarantor represents and warrants as follows: 3.1 Due Organization and Qualification. Guarantor is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified. 3.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Guarantor's powers, have been duly authorized and are not in conflict with nor constitute a breach of any provision contained in Guarantor's Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Guarantor is a party or by which Guarantor is bound. Guarantor is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 3.3 No Prior Encumbrances. Guarantor has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. -4- 16 3.4 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Guarantor has not done business under any name other than that specified on the signature page hereof. The chief executive office of Guarantor is located at the address indicated in Section 10 hereof. 3.5 Litigation. There are no actions or proceedings pending by or against Guarantor before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Guarantor's interest or Bank's security interest in the Collateral. Guarantor does not have knowledge of any such pending or threatened actions or proceedings. 3.6 Solvency. Guarantor is solvent and able to pay its debts (including trade debts) as they mature. 3.7 Regulatory Compliance. Guarantor has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Guarantor's failure to comply with ERISA that is reasonably likely to result in Guarantor's incurring any liability that could have a material adverse effect on the financial condition or business operations of Guarantor. Guarantor is not an "investment company" or a company of controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Guarantor is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Guarantor has complied with all the provisions of the Federal Fair Labor Standards Act. 3.8 Environmental Condition. None of Guarantor's properties or assets has ever been used by Guarantor or, to the best of Guarantor's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Guarantor's knowledge, none of Guarantor's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Guarantor; and Guarantor has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Guarantor resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment.. 3.9 Taxes. Guarantor has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 3.10 Government Consents. Guarantor has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Guarantor's business as currently conducted. 3.11 Full Disclosure. No representation, warranty or other statement made by Guarantor in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. -5- 17 4. AFFIRMATIVE COVENANTS Guarantor covenants and agrees that, until payment in full of all outstanding Obligations under the Loan Agreement and this Agreement, and for so long as Bank may have any commitment to make an Advance under the Loan Agreement, Guarantor shall do all of the following-. 4.1 Good Standing. Guarantor shall maintain its corporate existence and its good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Guarantor shall maintain in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 4.2 Government Compliance. Guarantor shall comply with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 4.3 Inventory; Returns. Guarantor shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Guarantor and its account debtors shall be on the same basis and in accordance with the usual customary practices of Guarantor, as they exist at the time of the execution and delivery of this Agreement. Guarantor shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Fifty Thousand Dollars ($50,000). 4.4 Taxes. Guarantor shall make due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Guarantor will make timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Guarantor has made such payments or deposits; provided that Guarantor need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Guarantor. 4.5 Insurance. (a) Guarantor, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Guarantor's business is conducted on the date hereof. Guarantor shall also maintain insurance relating to Guarantor's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Guarantors. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a tender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy -6- 18 for any reason. Guarantor shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 4.6 Further Assurances. At any time and from time to time Guarantor shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 5. NEGATIVE COVENANTS Guarantor covenants and agrees that until payment in full of all outstanding Obligations under the Loan Agreement and this Agreement, Guarantor will not do any of the following- 5.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), all or any part of its business or property, other than: (i) Transfers in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Guarantor or its Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment. 5.2 Change in Business. Engage in any business other than the businesses currently engaged in by Guarantor and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Guarantor's ownership. Guarantor will not, without thirty (30) days prior written notification to Bank, relocate its chief executive office. 5.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. 5.4 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness other than Permitted Indebtedness. 5.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 5.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock. 5.7 Investments. Directly or indirectly acquire or own any beneficial interest in (including stock, partnership interest, or other securities of), or make any loan, advance, or capital contribution to, any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 5.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Guarantor except for transactions that are in the ordinary course of Guarantor's business, upon fair and reasonable terms that are no less favorable to Guarantor than would be obtained in an arm's length transaction with a nonaffiliated Person or entity. -7- 19 5.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 5.10 Inventory. Store the Inventory with a bailee, warehouseman, or similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Guarantor shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which Guarantor gives Bank prior written notice and as to which Guarantor signs and files a financing statement where needed to perfect Bank's security interest. 5.11 Compliance. Become an "investment company" controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 6. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Guarantor under the Agreement: 6.1 Payment Default. If Guarantor fails to pay any amount under the Guaranty when due and payable. 6.2 Covenant Default. If Guarantor violates any of the covenants contained in Article 5 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in the Guaranty or this Agreement, in any of the Loan Documents, or in any other present or future agreement between Guarantor and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after the Guarantor receives notice thereof or any officer of Guarantor become aware thereof (provided that no Advances will be required to be made during such cure period); provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Guarantor be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Guarantor shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default; 6.3 Material Adverse Change. If there occurs a material adverse change in Guarantor's business, or if there is a material impairment of the prospect of repayment of any portion of the Obligations owing to Bank or a material impairment of the value or priority of Bank's security interests in the Collateral; -8- 20 6.4 Attachment. If any material portion of Guarantor's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Guarantor is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Guarantor's assets, or if a notice of lein, levy, or assessment is filed of record with respect to any of Guarantor's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Guarantor receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contesting by Guarantor; 6.5 Insolvency. If an Insolvency Proceeding is commenced by Guarantor, or if an Insolvency Proceeding is commenced against Guarantor and is not dismissed or stayed within ten (10) days; 6.6 Other Agreements. If there is a default in any agreement to which Guarantor is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or which could have a Material Adverse Effect; 6.7 Subordinated Debt. If Guarantor makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 6.8 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000) shall be rendered against Guarantor and shall remain unsatisfied and unstayed for a period of ten (10) days; 6.9 Loan Agreement. ff an Event of Default occurs under the Loan Agreement; or 6.10 Representations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 7. BANK'S RIGHT'S AND REMEDIES 7.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Guarantor: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 6.5 all Obligations shall become immediately due and payable without any action by Bank); -9- 21 (b) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (c) Without notice to or demand upon Guarantor, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Guarantor agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Guarantor author Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Guarantor's owned premises, Guarantor hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (d) Without notice to Guarantor set off and apply to the Obligations any and all 4(i) balances and deposits of Guarantor held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Guarantor held by Bank; (e) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 7.1, to use, without charge, Guarantor's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section, Guarantor's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (f) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Guarantor's premises) as Bank determines is commercially reasonable; (g) Bank may credit bid and purchase at any public sale; and (h) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Guarantor. 7.2 Power of Attorney . Effective only upon the occurrence and during the continuance of an Event of Default, Guarantor hereby irrevocably and appoints Bank (and any of Bank's designated officers, or employees) as Guarantor's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Guarantor's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Guarantor's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Guarantor's policies of insurance; and (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; provided Bank may exercise such power of attorney to sign the name of Guarantor on any of the documents described in -10- 22 Section 2.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Guarantor's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 7.3 Bank Expenses. If Guarantor fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof, or (b) obtain and maintain insurance policies of the type discussed in this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 7.4 Bank's Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Guarantor. 7.5 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Guarantor's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. 7.6 Demand; Protest. Guarantor waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Guarantor may in any way be liable. 8. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by certified mail, postage prepaid, return receipt requested, or by prepaid telefacsimile to Guarantor or to Bank, as the case may be, at its addresses set forth below: If to Guarantor: Bio Tek Solutions, Inc. 3865 North Business Center Drive Tuscon, AZ 85705 Attn:_____________________ FAX:______________________ -11- 23 If to Bank: Silicon Valley Bank 1731 Embarcadero Road, Suite 220 Palo Alto, CA 94303 Attn: Kevin Conway FAX: (415) 812-0640 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 9. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Guarantor and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. GUARANTOR AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 10. GENERAL PROVISIONS 10.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Guarantor without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Guarantor to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in Bank's obligations, rights and benefits hereunder. 10.2 Indemnification. Guarantor shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Guarantor whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 10.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 10.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 10.5 Amendments in Writing, Integration. This Agreement cannot be changed or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. -12- 24 10.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 10.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Guarantor to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 10.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. IN WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. BIO TEK SOLUTIONS, INC. By:_______________________________________________ Title:____________________________________________ SILICON VALLEY BANK By:_______________________________________________ Title:____________________________________________ -13- 25 EXHIBIT A The Collateral shall consist of all right, title and interest of Guarantor in and to the following: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory, now owned or hereafter acquired, including, without limitation, an merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Guarantor's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Guarantor's Books relating to any of the foregoing; (c) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Guarantor arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Guarantor, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or recorded by Guarantor and Guarantor's Books relating to any of the foregoing; (e) All documents, cash, deposit accounts, securities, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Guarantor's Books relating to the foregoing; (f) All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and (g) Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. -14- 26 - ------------------------------------------------------------------------------- BIO TEK SOLUTIONS, INC. GUARANTOR SECURITY AGREEMENT - ------------------------------------------------------------------------------- 27
PAGE ---- 1. DEFINITIONS AND CONSTRUCTION.............................. 1 1.1 Definitions...................................... 1 1.2 Accounting Terms................................. 4 2. CREATION OF SECURITY INTEREST............................. 4 2.1 Grant of Security Interest....................... 4 2.2 Delivery of Additional Documentation Required.... 4 2.3 Right to Inspect................................. 4 3. REPRESENTATIONS AND WARRANTIES............................ 4 3.1 Due Organization and Qualification............... 4 3.2 Due Authorization; No Conflict................... 4 3.3 No Prior Encumbrances............................ 4 3.4 Name; Location of Chief Executive Office......... 4 3.5 Litigation....................................... 5 3.6 Solvency......................................... 5 3.7 Regulatory Compliance............................ 5 3.8 Environmental.................................... 5 3.9 Taxes............................................ 5 3.10 Government Consents.............................. 5 3.11 Full Disclosure.................................. 5 4. AFFIRMATIVE COVENANTS..................................... 5 4.1 Good Standing.................................... 6 4.2 Government Compliance............................ 6 4.3 Inventory; Returns............................... 6 4.4 Taxes............................................ 6 4.5 Insurance........................................ 6 4.6 Further Assurances............................... 6 5. NEGATIVE COVENANTS........................................ 7 5.1 Dispositions..................................... 7 5.2 Change in Business............................... 7 5.3 Mergers or Acquisitions.......................... 7 5.4 Indebtedness..................................... 7 5.5 Encumbrances..................................... 7 5.6 Distributions.................................... 7 5.7 Investments...................................... 7 5.8 Transactions with Affiliates..................... 7 5.9 Subordinated Debt................................ 7 5.10 Inventory........................................ 7 5.11 Compliance....................................... 8 6. EVENTS OF DEFAULT......................................... 8 6.1 Payment Default.................................. 8 6.2 Covenant Default................................. 8 6.3 Material Adverse Change.......................... 8 6.4 Attachment....................................... 8
-i- 28 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 6.5 Insolvency....................................... 9 6.6 Other Agreements................................. 9 6.7 Subordinated Debt................................ 9 6.8 Judgments........................................ 9 6.9 Loan Agreement................................... 9 6.10 Representations.................................. 9 7. BANK'S RIGHT'S AND REMEDIES............................... 9 7.1 Rights and Remedies.............................. 9 7.2 Power of Attorney ............................... 10 7.3 Bank Expenses.................................... 10 7.4 Bank's Liability for Collateral.................. 10 7.5 Remedies Cumulative.............................. 11 7.6 Demand; Protest.................................. 11 8. NOTICES................................................... 11 9. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER................ 11 10. GENERAL PROVISIONS........................................ 12 10.1 Successors and Assigns........................... 12 10.2 Indemnification.................................. 12 10.3 Time of Essence.................................. 12 10.4 Severability of Provisions....................... 12 10.5 Amendments in Writing, Integration............... 12 10.6 Counterparts..................................... 12 10.7 Survival......................................... 12
-ii- 29 COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT This Collateral Assignment, Patent Mortgage and Security Agreement is made as of the 20 day of February, 1995, by and between Ventana Medical Systems, Inc., a Delaware corporation ("Assignor"), and Silicon Valley Bank, a California banking corporation ("Assignee"). RECITALS A. Assignee has agreed to lend to Assignor certain funds (the "Loan"), pursuant to a Loan and Security Agreement dated as of February 20, 1995 (the "Loan Agreement") and Assignor desires to borrow such funds from Assignee. The Loan is or will be by one or more promissory notes (a "Note" or, collectively, the "Notes") and is secured pursuant to the terms of the Loan Agreement. B. In order to induce Assignee to make or amend the terms of the Loan, Assignor has agreed to assign certain intangible property to Assignee for purposes of securing the obligations of Assignor to Assignee. NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS: 1. ASSIGNMENT, PATENT MORTGAGE AND GRANT OF SECURITY INTEREST. As collateral security for the prompt and complete payment and performance of all of Assignor's present or future indebtedness, obligations and liabilities to Assignee, Assignor hereby assigns, transfers, conveys and grants a security interest and mortgage to Assignee, as security, but not as an ownership interest in and to Assignor's entire right, title and interest in, to and under the following (all of which shall collectively be called the "Collateral"): (a) Any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held, including without limitation those set forth on EXHIBIT A attached hereto (collectively, the "Copyrights"); (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; (c) Any and all design rights which may be available to Assignor now or hereafter existing, created, acquired or held; (d) All patents, patent applications and like protections including, without limitation, improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, including without limitation the patents and patent applications set forth on EXHIBIT B attached hereto (collectively, the "Patents"); (e) Any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Assignor connected with and symbolized by such trademarks, including without limitation those set forth on EXHIBIT C attached hereto (collectively, the "Trademarks"); (f) Any and all claims for damages by way of past, present and future infringements of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; 30 (g) All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; and (h) All amendments, extensions, renewals and extensions of any of the Copyrights, Trademarks or Patents; and (i) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. THE INTEREST IN THE COLLATERAL BEING ASSIGNED HEREUNDER SHALL NOT BE CONSTRUED AS A CURRENT ASSIGNMENT, BUT AS A CONTINGENT ASSIGNMENT TO SECURE ASSIGNOR'S OBLIGATIONS TO ASSIGNEE UNDER THE NOTE AND THE LOAN AGREEMENT. 2. AUTHORIZATION AND REQUEST. Assignor authorizes and requests that the Register of Copyrights and the Commissioner of Patents and Trademarks, as applicable, record this conditional assignment. 3. COVENANTS AND WARRANTIES. Assignor represents, warrants, covenants and agrees as follows: (a) Assignor is now the sole owner of the Collateral, except for non-exclusive licenses granted by Assignor to its customers in the ordinary course of business; (b) Performance of this Assignment does not conflict with or result in a breach of any agreement to which Assignor is bound, except to the extent that certain intellectual property agreements prohibit the assignment of the rights thereunder to a third party without the licensor's or other party's consent and this Assignment constitutes an assignment; (c) During the term of this Agreement, Assignor will not transfer or otherwise encumber any interest in the Collateral except for non-exclusive licenses granted by Assignor in the ordinary course of business or as set forth in this Assignment; (d) To its knowledge, each of the Patents is valid and enforceable, and no part of the Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Collateral violates the rights of any third party; (e) Assignor shall promptly advise Assignee of any material adverse change in the composition of the Collateral, including but not limited to any subsequent ownership right of the Assignor in or to any Trademark, Patent or Copyright not specified in this Assignment; (f) Assignor shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Assignee in writing of material infringements detected and (iii) not allow any Trademarks, Patents, or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Assignee, which shall not be unreasonably withheld unless Assignor determines that reasonable business practices suggest that abandonment is appropriate. (g) Assignor shall promptly register the most recent version of any of Assignor's Copyrights, if not so already registered, and shall, from time to time, execute and file such other instruments, and take such further actions as Assignee may reasonably request from time to time to perfect or continue the perfection of Assignee's interest in the Collateral; (h) This Assignment creates, and in the case of after acquired Collateral, this Assignment will create at the time Assignor first has rights in such after acquired Collateral, in favor of Assignee a valid and perfected first priority -2- 31 security interest in the Collateral in the United States securing the payment and performance of the obligations evidenced by the Note upon making the filings referred to in clause (i) below; (i) To its knowledge, except for, and upon, the filing with the United States Patent and Trademark office with respect to the Patents and Trademarks and the Register of Copyrights with respect to the Copyrights necessary to perfect the security interests and assignment created hereunder and except as has been already made or obtained, no authorization, approval or other action by, and no notice to or filing with, any U.S. governmental authority of U.S. regulatory body is required either (i) for the grant by Assignor of the security interest granted hereby or for the execution, delivery or performance of this Assignment by Assignor in the U.S. or (ii) for the perfection in the United States or the exercise by Assignee of its rights and remedies thereunder; (j) All information heretofore, herein or hereafter supplied to Assignee by of on behalf of Assignor with respect to the Collateral is accurate and complete in all respects. (k) Assignor shall not enter into any agreement that would materially impair or conflict with Assignor's obligations hereunder without Assignee's prior written consent, which consent shall not be unreasonably withheld. Assignor shall not permit the inclusion in any material contract to which it becomes a party of any provisions that could or might in any way prevent the creation of a security interest in Assignor's rights and interest in any property included within the definition of the Collateral acquired under such contracts, except that certain contacts may contain anti-assignment provisions that could in effect prohibit the creation of a security interest in such contracts. (l) Upon any executive officer of Assignor obtaining actual knowledge thereof, Assignor will promptly notify Assignee in writing of any event that materially adversely affects the value of any material Collateral, the ability of Assignor to dispose of any material Collateral of the rights and remedies of Assignee in relation thereto, including the levy of any legal process against any of the Collateral. 4. ASSIGNEE'S RIGHTS. Assignee shall have the right, but not the obligation, to take, at Assignor's sole expense, any actions that Assignor is required under this Assignment to take but which Assignor fails to take, after fifteen (15) days' notice to Assignor. Assignor shall reimburse and indemnify Assignee for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 4. 5. INSPECTION RIGHTS. Assignor hereby grants to Assignee and its employees, representatives and agents the right to visit, during reasonable hours upon prior reasonable written notice to Assignor, and any of Assignor's plants and facilities that manufacture, install of store products (or that have done so during the prior six-month period) that are sold utilizing any of the Collateral, and to inspect the products and quality control records relating thereto upon reasonable written notice to Assignor and as often as may be reasonably requested, but not more than one (1) in every six (6) months; provided, however, nothing herein shall entitle Assignee access to Assignor's trade secrets and other proprietary information. 6. FURTHER ASSURANCES; ATTORNEY IN FACT (a) On a continuing basis, Assignor will, subject to any prior licenses, encumbrances and restrictions and prospective licenses, make, execute, acknowledge and deliver, and file and record in the proper filing and recording places in the United States, all such instruments, including, appropriate financing and continuation statements and collateral agreements and filings with the United States Patent and Trademarks Office, and the Register of Copyrights, and take all such action as may reasonably be deemed necessary or advisable, or as requested by Assignee, to perfect Assignee's security interest in all Copyrights, Patents and Trademarks and otherwise to carry out the intent and purposes of this Collateral Assignment, or for assuring and confirming to Assignee the grant or perfection of a security interest in all Collateral. (b) Assignor hereby irrevocably appoints Assignee as Assignor's attorney-in-fact, with full authority in the place and stead of Assignor and in the name of Assignor, Assignee or otherwise, from time to time in Assignee's discretion, upon Assignor's failure or inability to do so, to take any action and to execute any instrument which Assignee may deem necessary or advisable to accomplish the purposes of this Collateral Assignment, including: -3- 32 (i) To modify, in its sole discretion, this Collateral Assignment without first obtaining Assignor's approval of or signature to such modification by amending Exhibit A, Exhibit B and Exhibit C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Assignor after the execution hereof or to delete any reference to any right, title of interest in any Copyrights, Patents or Trademarks in which Assignor no longer has or claim any right, title or interest; and (ii) To file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Assignor where permitted by law. 7. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an Event of Default under the Assignment: (a) An Event of Default occurs under the Loan Agreement or any Note; or (b) Assignor breaches any warranty, covenant or agreement made by Assignor in this Assignment, of if such breach is capable of being cured, Assignor fails to cure such breach within five (5) days of the occurrence of such breach. 8. REMEDIES. Upon the occurrence and continuance of an Event of Default, Assignee shall have the right to exercise all the remedies of a secured party under the California Uniform Commercial Code, including without limitation the right to require Assignor to assemble the Collateral and any tangible property in which Assignee has a security interest and to make it available to Assignee at a place designated by Assignee, Assignee shall have a nonexclusive, royalty free license to use the Copyrights, Patents and Trademarks to the extent reasonably necessity to permit Assignee to exercise its rights and remedies upon the occurrence of an Event of Default. Assignor will pay any expenses (including reasonable attorney's fees) incurred by Assignee in connection with the exercise of any of Assignee's rights hereunder, including without limitation any expenses incurred in disposing of the Collateral. All of Assignee's rights and remedies with respect to the Collateral shall be cumulative. 9. INDEMNITY. Assignor agrees to defend, indemnify and hold harmless Assignee and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party on connection with the transactions contemplated by this Agreement, and (b) all losses or expenses in any way suffered, incurred, or paid by Assignee as a result of or in any way arising out of, following or consequential to transactions between Assignee and Assignor, whether under this Assignment or otherwise (including without limitation, reasonable attorneys fees and reasonable expenses), except for losses arising from or out of Assignee's gross negligence of willful misconduct. 10. REASSIGNMENT. At such time as Assignor shall completely satisfy all of the obligations secured hereunder, Assignee shall execute and deliver to Assignor all deed, assignments, and other instruments as may necessary or proper to reinvest in Assignor full title to the property assigned hereunder, subject to any disposition thereof which may have been made by Assignee pursuant hereto. 11. COURSE OF DEALING. No course of dealing, nor any failure to exercise, nor any delay in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 12. ATTORNEYS' FEES. If any action relating to this Assignment is brought by either party hereto against the other party, the prevailing party shall be entitled to recover reasonable attorneys fees, costs and disbursements. 13. AMENDMENTS. This Assignment may be amended only by a written instrument signed by both parties hereto. 33 14. COUNTERPARTS. This Assignment may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute the same instrument. 15. CALIFORNIA LAW AND JURISDICTION. This Assignment shall be governed by the laws of the State of California, without regard for choice of law provisions. Assignor and Assignee consent to the nonexclusive jurisdiction of any state or federal court located in Santa Clara County, California. 16. CONFIDENTIALITY. In handling any confidential information, Assignee shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Assignment except that the disclosure of this information may be made (i) to the affiliates of the Assignee, (ii) to prospective transferee or purchasers of an interest in the obligations secured hereby, provided that they have entered into comparable confidentiality agreement in favor of Assignor and have delivered a copy to Assignor, (iii) as required by law, regulation, rule or order, subpoena judicial order or similar order and (iv) as may be required in connection with the examination, audit or similar investigation of Assignee. IN WITNESS WHEREOF, the parties hereto have executed this Assignment on the day and year first above written. ADDRESS OF ASSIGNOR: ASSIGNOR: 3865 North Business Center Drive VENTANA MEDICAL SYSTEMS, INC. Tucson, Arizona 85705 By: /s/ R. MICHAEL RODGERS ------------------------ Name: R. Michael Rodgers ------------------------ Title: Vice President ------------------------ ADDRESS OF ASSIGNEE: ASSIGNEE: 1731 Embarcadero Road, Suite 220 Silicon Valley Bank Palo Alto, California 94303 By: /s/ DEBRA R. GUERIN ------------------------ Name: Debra R. Guerin ------------------------ Title: Vice President/Mgr National Accts. Services ------------------------ -5- 34 Exhibit "A" attached to that certain Collateral Assignment, Patent Mortgage and Security Agreement dated February 20, 1995. EXHIBIT "A" COPYRIGHTS SCHEDULE A - ISSUED COPYRIGHTS
COPYRIGHT REGISTRATION DATE OF DESCRIPTION NUMBER ISSUANCE ----------- ------------ --------- NONE
SCHEDULE B - PENDING COPYRIGHT APPLICATIONS
FIRST DATE COPYRIGHT APPLICATION DATE OF DATE OF OF PUBLIC DESCRIPTION NUMBER FILING CREATION DISTRIBUTION ----------- ----------- ------- -------- ------------ NONE
SCHEDULE C - UNREGISTERED COPYRIGHTS (Where No Copyright Application is Pending)
DATE AND RECORDATION NUMBER ORIGINAL OF ASSIGNMENT TO AUTHOR OR ORIGINAL AUTHOR OR OWNER OF ASSIGNOR (IF FIRST DATE COPYRIGHT OWNER OF COPYRIGHT COPYRIGHT DATE OF OF (IF DIFFERENT IS DIFFERENT FROM DESCRIPTION CREATION DISTRIBUTION FROM ASSIGNOR ASSIGNOR - ---------- -------- ------------ -------------- ------------------ NONE
35 Exhibit "B" attached to that certain Collateral Assignment, Patent Mortgage and Security Agreement dated February 20, 1995. EXHIBIT "B" PATENTS
PATENT DESCRIPTION DOCKET NO. COUNTRY SERIAL NO. FILING DATE STATUS - ----------- ---------- ------- ------------ ----------- ------- Immunohistochemical Staining Method and Reagants Therefor M-1654 US 07/488348 03/02/90 Granted Immunohistochemical Staining Method and Reagants Therefor M-1654-1P CA 2077451-7 02/27/91 Pending Immunohistochemical Staining Method and Reagants Therefor M-1654-1P EP 91905916.2 02/27/91 Pending Immunohistochemical Staining Method and Reagants Therefor M-1654-1P JP 505979/91 02/27/91 Pending Immunohistochemical Staining Method and Reagants Therefor M-1654-1P US 07/924053 08/31/92 Granted Improved Immunohistochemical Staining Method and Reagants Therefor M-1654-2D US 08/212415 03/11/94 Allowed Automated Biological Reaction Apparatus M-1665-1P CA 2077452-5 02/28/91 Pending Automated Biological Reaction Apparatus M-1665-1P EP 91906210.9 02/28/91 Pending Automated Biological Reaction Apparatus M-1665-1P JP 505990/91 02/28/91 Pending Liquid Dispenser M-1767 CA 2116101 09/04/92 Pending Liquid Dispenser M-1767 EP 92920004.6 09/04/92 Pending Liquid Dispenser M-1767 JP 506079/93 03/03/94 Pending Liquid Dispenser M-1767 US 07/762327 09/18/91 Granted High Temperature Evaporation Inhibitor Liquid M-2450 US 08/155935 11/15/93 Pending High Temperature Evaporation Inhibitor Liquid M-2450 PCT US94/12627 11/02/94 Pending Bisulfite-Based Tissue Fixative M-2539 US 08/152864 11/15/93 Allowed Biotin/Avidin Formulation M-2599 US 08/152864 11/15/93 Pending
36 EXHIBIT "B" PATENTS
PATENT DESCRIPTION DOCKET NO. COUNTRY SERIAL NO. FILING DATE STATUS - ---------------------------------- ---------- ------- ---------- ----------- ------ Automated Biological Reaction M-1665-2C US 08/352966 12/09/94 Pending Apparatus Specimen Slide with Reagent M-3164 US Applied 02/17/95 Pending Channel and Method for Using Same
-2- 37 Exhibit "C" attached to that certain Collateral Assignment, Patent Mortgage and Security Agreement dated February 20, 1995. EXHIBIT "C" TRADEMARKS
TRADEMARK DESCRIPTION COUNTRY SERIAL NO. REG. NO STATUS ----------- ------- ---------- ------- ------ NONE
38 - -------------------------------------------------------------------------------- BIO TEK SOLUTIONS, INC. GUARANTOR SECURITY AGREEMENT - -------------------------------------------------------------------------------- 39 TABLE OF CONTENTS PAGE ---- 1. DEFINITIONS AND CONSTRUCTION.......................................... 1 1.1 Definitions...................................................... 1 1.2 Accounting Terms................................................. 4 2. CREATION OF SECURITY INTEREST ........................................ 4 2.1 Grant of Security Interest ...................................... 4 2.2 Delivery of Additional Documentation Required ................... 4 2.3 Right to Inspect ................................................ 4 3. REPRESENTATIONS AND WARRANTIES ....................................... 4 3.1 Due Organization and Qualification .............................. 4 3.2 Due Authorization; No Conflict .................................. 4 3.3 No Prior Encumbrances ........................................... 4 3.4 Name; Location of Chief Executive Office ........................ 4 3.5 Litigation ...................................................... 5 3.6 Solvency ........................................................ 5 3.7 Regulatory Compliance ........................................... 5 3.8 Environmental ................................................... 5 3.9 Taxes ........................................................... 5 3.10 Government Consents ............................................. 5 3.11 Full Disclosure ................................................. 5 4. AFFIRMATIVE COVENANTS ................................................ 5 4.1 Good Standing ................................................... 6 4.2 Government Compliance ........................................... 6 4.3 Inventory; Returns .............................................. 6 4.4 Taxes ........................................................... 6 4.5 Insurance ....................................................... 6 4.6 Further Assurances .............................................. 6 5. NEGATIVE COVENANTS ................................................... 7 5.1 Dispositions .................................................... 7 5.2 Change in Business .............................................. 7 5.3 Mergers or Acquisitions ......................................... 7 5.4 Indebtedness .................................................... 7 5.5 Encumbrances .................................................... 7 5.6 Distributions ................................................... 7 5.7 Investments ..................................................... 7 5.8 Transactions with Affiliates .................................... 7 5.9 Subordinated Debt ............................................... 7 5.10 Inventory ....................................................... 7 5.11 Compliance ...................................................... 8 6. EVENTS OF DEFAULT .................................................... 8 6.1 Payment Default ................................................. 8 6.2 Covenant Default ................................................ 8 6.3 Material Adverse Change ......................................... 8 6.4 Attachment ...................................................... 8 6.5 Insolvency ...................................................... 9 -i- 40 TABLE OF CONTENTS (CONTINUED) PAGE ---- 6.6 Other Agreements.................................. 9 6.7 Subordinated Debt................................. 9 6.8 Judgments......................................... 9 6.9 Loan Agreement.................................... 9 6.10 Representations................................... 9 7. BANK'S RIGHT'S AND REMEDIES............................... 9 7.1 Rights and Remedies............................... 9 7.2 Power of Attorney................................. 10 7.3 Bank Expenses..................................... 10 7.4 Bank's Liability for Collateral................... 10 7.5 Remedies Cumulative............................... 11 7.6 Demand; Protest................................... 11 8. NOTICES................................................... 11 9. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER................ 11 10. GENERAL PROVISIONS........................................ 12 10.1 Successors and Assigns............................ 12 10.2 Indemnification................................... 12 10.3 Time of Essence................................... 12 10.4 Severability of Provisions........................ 12 10.5 Amendments in Writing, Integration................ 12 10.6 Counterparts...................................... 12 10.7 Survival.......................................... 12 -ii- 41 This SECURITY AGREEMENT is entered into as of March 22, 1996 by and between SILICON VALLEY BANK ("Bank") and BIO TEK SOLUTIONS, INC. ("Guarantor"). RECITALS Ventana Medical Systems, Inc. wishes to obtain credit from time to time from Bank pursuant to a Loan and Security Agreement, as amended by an Amendment to Loan and Security Agreement of even date (the "Loan Agreement"). Bank has agreed to enter into the Loan Agreement, provided Guarantor guarantees payment and performance obligations under the Loan Agreement in accordance with the terms of the Guaranty, and secures the Guaranty pursuant to the terms of this Agreement. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, whether or not suit is brought. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend, letter of credit or other obligation of another, including without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Equipment" means machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments. 42 "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect from time to time. "Guarantor's Books" means all of Guarantor's books and records including ledgers; records concerning Guarantor's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Guaranty" means the unconditional guaranty executed by Guarantor for the benefit of Bank, as amended from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, hen, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, the Guaranty executed by Guarantor, and any other agreement entered into between Guarantor and Bank, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on the business operations or financial condition of Guarantor and its Subsidiaries taken as a whole. "Negotiable Collateral" means all of Guarantor's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Guarantor's Books relating to any of the foregoing. "Obligations" means all amounts owned to the Bank by Guarantor pursuant to the Guaranty, this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising. "Permitted Indebtedness" means: (a) Existing Indebtedness disclosed to Bank in writing; (b) Subordinated Debt; and -2- 43 (c) Indebtedness to trade creditors incurred in the ordinary course of business. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed to Bank in writing; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank. "Permitted Liens" means the following. (a) Any Liens existing as of the date hereof and disclosed to Bank in writing or arising under this Agreement; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any equipment acquired or held by the Guarantor or any of its subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; and (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (d) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Subordinated Debt" means any debt incurred by Guarantor after the date hereof that is subordinated to the debt owing by Guarantor to Bank on terms acceptable to Bank (and identified as being such by the Company and the Bank). "Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity shall, at the time as of which any determination is being made, is owned by Guarantor, either directly or through an Affiliate. -3- 44 1.2 Accounting Terms. All accounting terms not specifically, defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. CREATION OF SECURITY INTEREST 2.1 Grant of Security Interest. Guarantor grants to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Guarantor of each of its covenants and duties under the Loan Documents. Such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. 2.2 Delivery of Additional Documentation Required. Guarantor shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 2.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Guarantor's usual business hours, to inspect Guarantor's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Guarantor's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 3. REPRESENTATIONS AND WARRANTIES Guarantor represents and warrants as follows: 3.1 Due Organization and Qualification. Guarantor is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified. 3.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Guarantor's powers, have been duly authorized and are not in conflict with nor constitute a breach of any provision contained in Guarantor's Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Guarantor is a party or by which Guarantor is bound. Guarantor is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 3.3 No Prior Encumbrances. Guarantor has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 3.4 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Guarantor has not done business under any name other than that specified on the signature page hereof. The chief executive office of Guarantor is located at the address indicated in Section 10 hereof. -4- 45 3.5 Litigation. There are no actions or proceedings pending by or against Guarantor before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Guarantor's interest or Bank's security interest in the Collateral. Guarantor does not have knowledge of any such pending or threatened actions or proceedings. 3.6 Solvency. Guarantor is solvent and able to pay its debts (including trade debts) as they mature. 3.7 Regulatory Compliance. Guarantor has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Guarantor's failure to comply with ERISA that is reasonably likely to result in Guarantor's incurring any liability that could have a material adverse effect on the financial condition or business operations of Guarantor. Guarantor is not an "investment company" or a company of controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Guarantor is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Guarantor has complied with all the provisions of the Federal Fair Labor Standards Act. 3.8 Environment. Condition. None of Guarantor's properties or assets has ever been used by Guarantor or, to the best of Guarantor's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Guarantor's knowledge, none of Guarantor's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Guarantor; and Guarantor has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Guarantor resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 3.9 Taxes. Guarantor has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 3.10 Government Consents. Guarantor has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Guarantor's business as currently conducted. 3.11 Full Disclosure. No representation, warranty or other statement made by Guarantor in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 4. AFFIRMATIVE COVENANTS Guarantor covenants and agrees that, until payment in full of all outstanding Obligations under the Loan Agreement and this Agreement, and for so long as Bank may have any commitment to make an Advance under the Loan Agreement, Guarantor shall do all of the following. -5- 46 4.1 Good Standing. Guarantor shall maintain its corporate existence and its good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Guarantor shall maintain in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 4.2 Government Compliance. Guarantor shall comply with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 4.3 Inventory; Returns. Guarantor shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Guarantor and its account debtors shall be on the same basis and in accordance with the usual customary practices of Guarantor, as they exist at the time of the execution and delivery of this Agreement. Guarantor shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more that Fifty Thousand Dollars ($50,000). 4.4 Taxes. Guarantor shall make due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Guarantor will make timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Guarantor has made such payments or deposits; provided that Guarantor need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Guarantor. 4.5 Insurance. (a) Guarantor, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Guarantor's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Guarantors. (b) AU such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a tender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Guarantor shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 4.6 Further Assurances. At any time and from time to time Guarantor shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. -6- 47 5. NEGATIVE COVENANTS Guarantor covenants and agrees that until payment in full of all outstanding Obligations under the Loan Agreement and this Agreement, Guarantor will not do any of the following- 5.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), all or any part of its business or property, other than: (i) Transfers in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Guarantor or its Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment. 5.2 Change in Business. Engage in any business other than the businesses currently engaged in by Guarantor and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Guarantor's ownership. Guarantor will not, without thirty (30) days prior written notification to Bank, relocate its chief executive office. 5.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. 5.4 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness other than Permitted Indebtedness. 5.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 5.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock. 5.7 Investments. Directly or indirectly acquire or own any beneficial interest in (including stock, partnership interest, or other securities of), or make any loan, advance, or capital contribution to, any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 5.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Guarantor except for transactions that are in the ordinary course of Guarantor's business, upon fair and reasonable ten-ns that are no less favorable to Guarantor than would be obtained in an arm's length transaction with a nonaffiliated Person or entity. 5.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the ten-ns of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 5.10 Inventory. Store the Inventory with a bailee, warehouseman, or similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory. Except of Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Guarantor shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which -7- 48 Guarantor gives Bank prior written notice as as to which Guarantor signs and files a financing statement where needed to perfect Bank's security interest. 5.11 Compliance. Become an "investment company" controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 6. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Guarantor under the Agreement: 6.1 Payment Default. If Guarantor fails to pay any amount under the Guaranty when due and payable. 6.2 Covenant Default. If Guarantor violates any of the covenants contained in Article 5 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in the Guaranty or this Agreement, in any of the Loan Documents, or in any other present or future agreement between Guarantor and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after the Guarantor receives notice thereof or any officer of Guarantor become aware thereof (provided that no Advances will be required to be made during such cure period); provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Guarantor be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Guarantor shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default; 6.3 Material Adverse Change. If there occurs a material adverse change in Guarantor's business, or if there is a material impairment of the prospect of repayment of any portion of the Obligations owing to Bank or a material impairment of the value or priority of Bank's security interests in the Collateral; 6.4 Attachment. If any material portion of Guarantor's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Guarantor is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Guarantor's assets, or if a notice of hen, levy, or assessment is filed of record with respect to any of Guarantor's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Guarantor receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contesting by Guarantor; -8- 49 6.5 Insolvency. If an Insolvency Proceeding is commenced by Guarantor, or if an Insolvency Proceeding is commenced against Guarantor is not dismissed or stayed within the (10) days; 6.6 Other Agreements. If there is a default in any agreement to which Guarantor is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or which could have a Material Adverse Effect; 6.7 Subordinated Debt. If Guarantor makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 6.8 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000) shall be rendered against Guarantor and shall remain unsatisfied and unstayed for a period of ten (10) days; 6.9 Loan Agreement. ff an Event of Default occurs under the Loan Agreement; or 6.10 Representations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 7. BANK'S RIGHTS AND REMEDIES 7.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Guarantor: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 6.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (c) Without notice to or demand upon Guarantor, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Guarantor agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Guarantor author Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Guarantor's owned premises, Guarantor hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; -9- 50 (d) Without notice to Guarantor set off and apply to the Obligations any and all 4(i) balances and deposits of Guarantor held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Guarantor held by Bank; (e) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 7.1, to use, without charge, Guarantor's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section, Guarantor's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (f) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Guarantor's premises) as Bank determines is commercially reasonable; (g) Bank may credit bid and purchase at any public sale; and (h) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Guarantor. 7.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of default, Guarantor hereby irrevocably and appoints Bank (and any of Bank's designated officers, or employees) as Guarantor's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Guarantor's name on any checks or other forms-ns of payment or security that may come into Bank's possession; (c) sign Guarantor's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Guarantor's policies of insurance; and (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; provided Bank may exercise such power of attorney to sign the name of Guarantor on any of the documents described in Section 2.2. regardless of whether an Event of Default has occurred. The appointment of Bank as Guarantor's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 7.3 Bank Expenses. If Guarantor fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof, or (b) obtain and maintain insurance policies of the type discussed in this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 7.4 Bank's Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any -10- 51 diminution in the value thereof; or (d) any act or default or any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Guarantor. 7.5 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Guarantor's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. 7.6 Demand: Protest. Guarantor waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Guarantor may in any way be liable. 8. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by certified mail, postage prepaid, return receipt requested, or by prepaid telefacsimile to Guarantor or to Bank, as the case may be, at its addresses set forth below: If to Guarantor: Bio Tek Solutions, Inc. 3865 North Business Center Drive Tucson, AZ 85705 Attn: ___________________ FAX: ___________________ If to Bank: Silicon Valley Bank 1731 Embarcadero Road, Suite 220 Palo Alto, CA 94303 Attn: Kevin Conway FAX: (415) 812-0640 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 9. CHOICE OF LAW AND VENUE: JURY TRIAL WAIVER This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Guarantor and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. GUARANTOR AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. -11- 52 10. GENERAL PROVISIONS 10.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Guarantor without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Guarantor to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in Bank's obligations, rights and benefits hereunder. 10.2 Indemnification. Guarantor shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Guarantor whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 10.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 10.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 10.5 Amendments in Writing, Integration. This Agreement cannot be changed or terminated orally. AU prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 10.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 10.7 Survival. AU covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Guarantor to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 10.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. IN WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. BIO TEK SOLUTIONS, INC. By: ------------------------------------ Title: --------------------------------- SILICON VALLEY BANK By: ------------------------------------ Title: --------------------------------- -12- 53 EXHIBIT A The Collateral shall consist of all right, title and interest of Guarantor in and to the following: (a) AU goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, acccssions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory, now owned or hereafter acquired, including, without limitation, an merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Guarantor's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale of disposition of any of the foregoing and any documents of title representing any of the above, and Guarantor's Books relating to any of the foregoing; (c) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) AU now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Guarantor arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Guarantor, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or recorded by Guarantor and Guarantor's Books relating to any of the foregoing; (e) All documents, cash, deposit accounts, securities, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Guarantor's Books relating to the foregoing; (f) AU copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and (g) Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. -13- EX-11.1 12 STATEMENT RE: COMPUTATION 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) (10,307,000) 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) (10,912,000) ================================================================================== Weighted average common shares outstanding 857,191 917,179 957,280 903,013 1,119,455 Stock, options and warrants issued within one year of initial filing (May 24, 1996) 1,385,880 1,385,880 1,385,880 1,385,880 1,385,880 Weighted average common shares and common share equivalents ---------------------------------------------------------------------------------- outstanding during the period 2,243,071 2,303,059 2,343,160 2,288,893 2,505,335 ================================================================================== Net loss per share $(3.02) $(3.19) $(2.43) $(0.62) $(4.36) ================================================================================== Year Ended Three Months Ended December 31 March 31 -------------------------------------------------- 1995 1995 1996 -------------------------------------------------- (Unaudited) Pro Forma - --------- Net loss (3,269,000) (834,000) (10,307,000) ================================================== Weighted average common shares outstanding 957,280 903,013 1,119,455 Assumed conversion of Series A, C, and D preferred shares 6,579,489 6,499,219 6,648,290 Assumed exercise of Series D warrants 49,893 49,893 49,893 Stock, options and warrants issued within one year of initial filing (May 24, 1996) 1,385,880 1,385,880 1,385,880 -------------------------------------------------- Weighted average common shares and common share equivalents outstanding during the period 8,972,542 8,838,005 9,203,518 ================================================== Net loss per share $(0.36) $(0.09) $(1.12) ==================================================
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