-----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, E3AWlcuGljGyMakVudJiNH4FQaQnE/EUcj03l8m/WT4oUfsV5wdpA9TXgbLAGJws mcWUtAsMbM0bvARB91flkQ== 0000891618-96-003146.txt : 19961223 0000891618-96-003146.hdr.sgml : 19961223 ACCESSION NUMBER: 0000891618-96-003146 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19961220 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VENTANA MEDICAL SYSTEMS INC CENTRAL INDEX KEY: 0000893160 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 942976937 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-18471 FILM NUMBER: 96684348 BUSINESS ADDRESS: STREET 1: 3865 N BUSINESS CENTER DRIVE CITY: TUCSON STATE: AZ ZIP: 85705 BUSINESS PHONE: 5208872155 MAIL ADDRESS: STREET 1: 3865 N BUSINESS CENTER DR CITY: TUCSON STATE: AZ ZIP: 85705 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ VENTANA MEDICAL SYSTEMS, INC. (Exact name of Registrant as specified in its charter) ------------------------ DELAWARE 3841 94-2976937 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
------------------------ 3865 NORTH BUSINESS CENTER DRIVE TUCSON, ARIZONA 85705 (520) 887-2155 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------ R. JAMES DANEHY PRESIDENT AND CHIEF EXECUTIVE OFFICER VENTANA MEDICAL SYSTEMS, INC. 3865 NORTH BUSINESS CENTER DRIVE TUCSON, ARIZONA 85705 (520) 887-2155 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ COPIES TO: BARRY E. TAYLOR, ESQ. GARY L. SELLERS, ESQ. CHRISTOPHER D. MITCHELL, ESQ. SIMPSON THACHER & BARTLETT TREVOR J. CHAPLICK, ESQ. 425 LEXINGTON AVENUE WILSON SONSINI GOODRICH & ROSATI NEW YORK, NEW YORK 10017-3954 PROFESSIONAL CORPORATION (212) 455-2000 650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94304-1050 (415) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PRICE PER OFFERING PRICE(2) REGISTRATION FEE SHARE(2) - -------------------------------------------------------------------------------------------------------------------- Common Stock, $0.001 par value...... 3,277,500 shares $15.75 $ 51,620,625 $ 15,643 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
(1) Includes 427,500 shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 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 DECEMBER 20, 1996 2,850,000 SHARES LOGO VENTANA MEDICAL SYSTEMS, INC. COMMON STOCK Of the 2,850,000 shares (the "Shares") of common stock, par value $.001 per share (the "Common Stock"), offered hereby (the "Offering"), 1,850,000 Shares are being sold by Ventana Medical Systems, Inc. ("Ventana" or the "Company") and 1,000,000 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. The Common Stock is quoted on the Nasdaq National Market ("Nasdaq") under the symbol "VMSI." On December 19, 1996, the last reported sale price of the Company's Common Stock on Nasdaq was $16.00 per share. See "Price Range of Common Stock and Dividend Policy." For a discussion of certain risks of an investment in the shares of Common Stock offered hereby, see "Risk Factors" on pages 6 to 17. ------------------------ 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* COMPANY+ STOCKHOLDER++ Per Share..................... $ $ $ $ Total++....................... $ $ $ $
- --------------- * The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." + Before deducting expenses of this Offering payable by the Company estimated to be $525,000. ++ Certain of the Selling Stockholders have granted the Underwriters a 30-day option to purchase up to 427,500 additional shares of Common Stock on the same terms per share solely to cover over-allotments, if any. If such option is exercised in full, the total price to public will be $ , the total underwriting discounts and commissions will be $ and the total proceeds to Selling Stockholders will be $ . See "Underwriting" and "Principal and Selling Stockholders." ------------------------ The Common Stock is being offered by the Underwriters as set forth under "Underwriting" herein. It is expected that the delivery of certificates therefor will be made through the offices of Dillon, Read & Co. Inc., New York, New York, on or about , 1997. The Underwriters include: DILLON, READ & CO. INC. BEAR, STEARNS & CO. INC. COWEN & COMPANY The date of this Prospectus is , 1997 3 ------------------------ IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 4 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 assumes no exercise of the Underwriters' over-allotment option. 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 and the timing of events could differ materially from those contemplated by such forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. 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 appropriate treatment for cancer. With a worldwide installed base of 674 instruments as of September 30, 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 four 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, the M.D. Anderson Cancer Center and the Fred Hutchinson 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, including its installed instrument base and complementary "batch processing" systems, which perform single tests on multiple patient biopsies. These complementary systems enable the Company to serve the full range of health care institutions that conduct IHC tests. Ventana increased its installed base by 287 instruments as a result of the acquisition, thereby increasing the corresponding aggregate recurring reagent revenue stream and positioning the Company as the worldwide leader in automated IHC testing. Ventana believes significant synergies and margin improvements can continue to be realized from the further 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 approximately 25% of deaths. Currently, approximately 10 million people in the United States have a history of invasive cancer. It is estimated that 1.4 million new cases of invasive cancer will be diagnosed each year. Recently, the mortality rates of certain types of cancer have decreased due to, among other factors, earlier detection and selection of appropriate therapies. The vast majority of IHC testing associated with cancer diagnosis and treatment in the United States is conducted in an aggregate of approximately 2,200 clinical institutions and reference and research laboratories which the Company estimates create 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 will need to overcome. To achieve this objective, the Company plans to introduce a lower cost instrument which targets potential patient priority customers (the Ventana NexES) and has commenced European sales of a lower cost instrument for potential batch processing customers (the TechMate 250). The Company believes that the introduction of the NexES 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 with the objective of creating recurring 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 for many potential customers, will be eliminated. 3 5 THE OFFERING Common Stock offered by the Company............................ 1,850,000 shares Common Stock offered by the Selling Stockholders..................... 1,000,000 shares Total............................ 2,850,000 shares Common Stock to be outstanding after the Offering................. 12,815,418 shares(1) Use of proceeds.................... For general corporate purposes, which may include expansion of sales and marketing activities, research and development, clinical trials, capital expenditures, repayment of indebtedness and working capital. Nasdaq National Market symbol...... VMSI - --------------- (1) Includes 10,965,418 outstanding shares of Common Stock and the 1,850,000 Shares of Common Stock offered by the Company hereby. Excludes 784,612 shares of Common Stock issuable upon exercise of outstanding warrants and 819,728 shares of Common Stock issuable upon the exercise of options outstanding under the Company's stock option plans. 4 6 SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
ACTUAL ------------------------------------------------ PRO FORMA(1) NINE MONTHS ---------------------------- YEAR ENDED ENDED SEPTEMBER NINE MONTHS DECEMBER 31, 30, YEAR ENDED ENDED --------------------------- ------------------ DECEMBER 31, SEPTEMBER 30, 1993 1994 1995 1995 1996 1995 1996 ------- ------- ------- ------- -------- ------------ ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Sales: Instruments.......................... $ 1,162 $ 2,588 $ 4,644 $ 3,365 $ 4,853 $ 8,396 $ 4,992 Reagents and other................... 1,519 3,339 5,969 4,229 11,042 11,079 11,985 ------- ------- ------- ------- -------- -------- ------- Total net sales.................... 2,681 5,927 10,613 7,594 15,895 19,475 16,977 Cost of goods sold..................... 1,722 2,531 4,282 3,043 6,513 9,096 6,708 ------- ------- ------- ------- -------- -------- ------- Gross profit........................... 959 3,396 6,331 4,551 9,382 10,379 10,269 Operating expenses: Research and development............. 2,100 1,926 2,239 1,754 2,176 4,407 2,334 Selling, general and administrative..................... 4,067 6,899 7,435 5,317 8,135 10,968 8,859 Nonrecurring expenses................ -- -- -- -- 10,262 9,983 279 Amortization of intangibles.......... -- -- -- -- 315 557 407 ------- ------- ------- ------- -------- -------- ------- Loss from operations................... (5,208) (5,429) (3,343) (2,520) (11,506) (15,536) (1,610) Interest income (expense).............. 229 59 74 111 (28) 74 (28) ------- ------- ------- ------- -------- -------- ------- Net loss............................... $(4,979) $(5,370) $(3,269) $(2,409) $(11,534) $(15,462) $(1,638) ======= ======= ======= ======= ======== ======== ======= Net loss per share, as adjusted(2)..... $ (0.38) $ (0.28) $ (1.20) $ (1.52) $ (0.15) ======= ======= ======== ======== ======= Shares used in computing net loss per share, as adjusted(2)................ 8,664 8,600 9,581 10,167 10,628 ======= ======= ======== ======== =======
SEPTEMBER 30, 1996 --------------------------- ACTUAL AS ADJUSTED(3) -------- -------------- BALANCE SHEET DATA: Cash and cash equivalents................................................................ $ 17,116 $ 44,563 Long-term debt........................................................................... 15,937 15,937 Working capital.......................................................................... 18,184 45,631 Total assets............................................................................. 39,614 67,061 Accumulated deficit...................................................................... (33,663) (33,663) Total stockholders' equity............................................................... 17,011 44,458
- --------------- (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 receipt of the net proceeds thereof (at an assumed public offering price of $16.00 per share). See "Use of Proceeds," "Capitalization" and "Price Range of Common Stock and Dividend Policy." 5 7 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 and the timing of events could differ materially from those contemplated by such forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in Risk Factors and elsewhere in this Prospectus. CONTINUING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company has incurred cumulative losses of $33.7 million from its inception in 1985 through September 30, 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's ability to achieve and sustain profitability is dependent on a variety of factors including the extent to which its instrument and reagent systems continue to achieve market acceptance, the Company's ability to sell reagents to its customers, the Company's ability to compete successfully, the Company's ability to develop, introduce, market and distribute existing and new diagnostic systems, the level of expenditures incurred by the Company in investing in product development and sales and marketing, the Company's ability to expand manufacturing capacity as required and the receipt of required regulatory approvals for products developed 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 or that the Company will not incur operating losses in the future. 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. 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, if any. 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. Furthermore, due both to the Company's increased sales focus on smaller hospitals and 6 8 laboratories and the relatively high reagent sales growth rates in recent fiscal periods, the rate of growth in reagent sales in future periods is likely to be below that experienced during the past several fiscal periods. Other factors that may result in fluctuations in operating results include the timing of new product announcements and the introduction of new products and new technologies by the Company and its competitors, market acceptance of the Company's current or new products, developments with respect to regulatory matters, availability and cost of raw materials from its suppliers, competitive pricing pressures, increased research and development expenses, and increased marketing and sales expenses associated with the implementation of the Company's market expansion strategies for its instrument and reagent products. Future instrument and reagent sales could also be adversely affected by the configuration of the Company's patient priority systems, which require the use of the Company's detection chemistries, particularly if and to the extent that competitors are successful in developing and introducing new IHC instruments or if competitors offer reagent supply arrangements having pricing or other terms more favorable than those offered by the Company. Such increased competition in reagent supply could also adversely affect sales of reagents to batch processing instrument customers since those instruments do not require the use of the Company's reagents. In connection with future introductions of new products, the Company may be required to incur charges for inventory obsolescence in connection with unsold inventory of older generations of products. To date, however, the Company has not incurred material charges or expenses associated with inventory obsolescence in connection with new product introductions. In addition, a significant portion of the Company's expense levels is based on its expectation of a higher level of revenues in the future and are relatively fixed in nature. Therefore, if revenue levels are below expectations, operating results in a given period are likely to be adversely affected. 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 and its competitors' products. The Company's products could also be rendered obsolete or noncompetitive by virtue of technological innovations in the fields of cellular or molecular diagnostics. Failure of the Company's products to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. 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 diagnosing and selecting appropriate treatment for cancer and additional disease states. In particular, the Company must successfully introduce the NexES on a timely basis and continue the commercialization of the TechMate 250. These instruments are smaller capacity, lower cost instruments than the Company's current instruments and are necessary to expand the market opportunity at smaller hospitals and reference laboratories in the United States and Europe. The Company depends in part on the success of medical research in developing new antibodies, nucleic acid probes and clinical diagnostic procedures that can be adapted for use in the Company's systems. In addition, the Company will need to obtain licenses on satisfactory terms to certain of these technologies, for which there can be no assurance. Certain of the Company's products are currently under development, initial testing or preclinical or clinical evaluation by the Company. Other products are scheduled for future development. Products under development or scheduled for future development may prove to be unreliable from a diagnostic standpoint, may be difficult to manufacture in an efficient manner, may fail to receive necessary regulatory clearances, may not achieve market acceptance or may encounter other unanticipated 7 9 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 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, DAKO has recently introduced a lower priced automated IHC instrument in the United States and is offering reagent supply arrangements that have resulted in increased competition for both instruments and reagents. In addition, other 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." 8 10 MANUFACTURING RISKS The Company has only manufactured patient priority instruments and reagents for commercial sale since late 1991, and manufacturing of the Company's batch processing instruments is performed by third parties. As the Company continues to increase production of such instruments and reagents and develops and introduces new products, it may from time to time experience difficulties in manufacturing. The Company must continue to increase production volumes of instruments and reagents in a cost-effective manner in order to be profitable. To increase production levels, the Company will need to scale-up its manufacturing facilities, increase its automated manufacturing capabilities and continue to comply with the current good manufacturing practices ("GMPs") prescribed by the United States Food and Drug Administration ("FDA") and other standards prescribed by various federal, state and local regulatory agencies in the United States and other countries, including the International Standards Organization ("ISO") 9000 Series certifications. There can be no assurance that manufacturing and quality problems will not arise as the Company increases its manufacturing operations or that such scale-up can be achieved in a timely manner or at a commercially reasonable cost. Manufacturing or quality problems or difficulties or delays in manufacturing scale-up could have a material adverse effect on the Company's business, financial condition and results of operations. 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 under a contractual relationship with the Company. The Company has entered into a contract manufacturing agreement with LJL BioSystems, Inc. ("LJL") for the manufacture of the TechMate 250 instrument. There can be no assurance that these manufacturers will be able to meet the Company's product needs in a satisfactory, cost effective or timely manner. The Company's reliance on third-party manufacturers involves a number of additional risks, including the absence of guaranteed capacity and reduced control over delivery schedules, quality assurance and costs. The amount and timing of resources to be devoted to these activities by such manufacturers are not within the control of the Company, and there can be no assurance that manufacturing problems will not occur in the future. Any such manufacturing or supply problems could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." 9 11 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 Fisher Scientific, Inc. ("CMS"), under an exclusive agreement that expires in April 1998. United States sales through CMS are subject to several operating conditions and risks. In particular, it has historically been necessary for BioTek to support, 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. In addition, the Company has notified CMS that CMS has not fulfilled its obligations under the agreement, both with respect to purchases of units and support and promotion of batch processing instruments in the United States. CMS has responded to the Company's notice, denied breach of the agreement, suggested that certain activities undertaken by the Company may constitute a breach of the agreement by the Company or may otherwise be actionable, and suggested that the Company and CMS attempt to reach a negotiated settlement. There can be no assurance that the Company and CMS will be able to reach a negotiated settlement or that the Company will not become involved in litigation or other disputes with CMS which could involve substantial costs and diversion of management time. As a result of these factors and due to the presence of the Company's direct sales force in the United States, the Company does not intend to renew the agreement with CMS upon its April 1998 expiration. In the event that CMS does not adequately promote and market batch processing instruments and reagents or manage customer relationships during the remaining term of the agreement or in the event that difficulties continue 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. 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. On September 25, 1996, BioTek and DAKO entered into an amendment to their existing agreement (the "Amendment Agreement") for the purpose of addressing several matters, including repayment of these secured loans and prepayments. The aggregate balance of the secured loans and prepayments was $1.6 million and $0.9 million, respectively, at the time of the Amendment Agreement. Of these 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. In connection with the Amendment Agreement, DAKO paid the Company a royalty of $0.5 million and the Company paid DAKO $0.5 million as a reduction of the balance of the prepayments. Under the Amendment Agreement, the remaining $2.0 million of secured loans and prepayments will be repaid through discounts on DAKO purchases of TechMate instruments from BioTek at recoupment rates specified in the Amendment Agreement. The Amendment Agreement also establishes certain minimum purchase and delivery commitments for TechMate 250 and TechMate 500 instruments, as well as pricing for certain quantities of TechMate 250 instruments. Pricing for additional quantities of TechMate 250 instruments was not resolved in the Amendment Agreement and the parties are 10 12 currently in disagreement as to such pricing. Currently, DAKO is purchasing such instruments at the price levels established by the Company. However, the parties may, pursuant to the distribution agreement, initiate binding arbitration proceedings to resolve such pricing. In the event such arbitration proceedings are initiated and are determined adversely to the Company, the pricing of TechMate 250 instruments to DAKO would be on terms less favorable to the Company than the current pricing terms and the amount of secured loans and prepayments recouped per instrument sale would also be reduced. In connection with the negotiations for the Amendment Agreement, DAKO and the Company have agreed to enter into negotiations regarding a possible broader marketing arrangement for international sales of both batch processing instruments and patient priority instruments. There can be no assurance that negotiations for this arrangement will be successfully concluded and that the Company will enter into a broader marketing arrangement with DAKO. Furthermore, during the course of ongoing discussions with DAKO since the acquisition of BioTek, DAKO has, among other things, asserted that BioTek has not fulfilled its obligations with respect to the development and commercial introduction of the TechMate 250 instrument. The Company denies this assertion and believes that it is in substantial compliance with its obligations under these development milestones and has asserted that DAKO has not met certain obligations under such agreement. In particular, the Company believes that its contract manufacturing agreement with LJL will enable it to satisfy DAKO's requirements for TechMate 250 instruments. Nevertheless, the negotiations with DAKO could result in an attempt by DAKO to exercise contractual remedies available to it under the distribution agreement and the terms of the secured loans, which remedies include (i) requiring repayment of the secured loans in 12 equal quarterly installments commencing upon a default by BioTek and (ii) an irrevocable license to manufacture TechMate instruments for resale internationally and a related reduction in the fixed dollar royalty rate paid by DAKO to BioTek for each instrument included in the royalty base. The Company could also experience an interruption in the distribution of batch processing instruments outside the United States or become involved in litigation with DAKO with respect to the current distribution agreement, which would involve significant costs as well as diversion of management time. There can be no assurance that the Company would prevail in any litigation involving the agreement. Furthermore, there can be no assurance as to the future course or outcome of the Company's negotiations with DAKO or as to the Company's future relationship with DAKO. If DAKO were successful in obtaining a manufacturing license for TechMate instruments, the Company could experience a loss of instrument revenue which could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH PAST AND FUTURE ACQUISITIONS 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 completing the integration of the BioTek operations or with respect to any future acquisitions, and there can be no assurance that the acquisition of BioTek or any future acquisitions will result in the Company becoming profitable or, if the Company achieves profitability, that such acquisition will increase the Company's profitability. Furthermore, there can be no assurance that the Company will realize value from any such acquisition which equals or exceeds the consideration paid. Any such problems could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any future acquisitions by the Company may result in dilutive issuances of equity securities, the incurrence of additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in amortization expense. These factors could have a material adverse effect on the 11 13 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 adequate protection against competitive technologies or will be held valid if challenged. Others may independently develop products similar to those of the Company or design around or otherwise circumvent patents issued to the Company. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of each of such patents or to redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. If the Company does not obtain necessary licenses, it could be subject to litigation and encounter delays in product introductions while it attempts to design around such patents. Alternatively, the 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, and available borrowing capacity under the Company's revolving credit line will be adequate to satisfy its capital requirements for at least the next 18 months. The Company's future capital requirements will depend on many factors, including the extent to which the Company's products gain market acceptance, the mix of instruments placed through direct sales or through 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, the Company's ability to achieve and sustain profitability and timing of regulatory approvals. The Company may require additional capital resources and there is no assurance such capital will be available to the extent required, on terms acceptable to the Company or at all. Any such future capital requirements could result in the issuance of equity securities which would be dilutive to existing stockholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 12 14 DEPENDENCE ON KEY PERSONNEL The Company is dependent upon the retention of principal members of its management, Board of Directors, scientific, technical, marketing and sales staff and the recruitment of additional personnel. The Company does not 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. In addition, in November 1996, R. James Danehy, the Company's President and Chief Executive Officer, notified the Company that he would not be able to relocate permanently to Tucson for family and personal reasons and, as a result, the Company has initiated a search for a new Chief Executive Officer. It is expected that Mr. Danehy will remain as President and Chief Executive Officer until his replacement joins the Company and that he will continue to serve as a member of the Company's Board of Directors. 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 many of the Company's research customers to purchase the Company's products. FDA AND OTHER GOVERNMENT REGULATION The manufacturing, marketing and sale of the Company's products are subject to extensive and rigorous government regulation in the United States and in other countries. In the United States and certain other countries, the process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. In the United States, the FDA regulates, as medical devices, clinical diagnostic tests and reagents, as well as instruments used in the diagnosis of adverse conditions. The Federal Food, Drug, and Cosmetic Act governs the design, testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. There are two principal FDA regulatory review paths for medical devices: the 510(k) pre-market notification ("510(k)") process and the pre-market approval ("PMA") process. The PMA process typically requires the submission of more extensive clinical data and is costlier and more time-consuming to complete than the 510(k) process. 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 13 15 delays adversely affecting the marketing and sale of the Company's products. Further, clearances or approvals may place substantial restrictions on the indications for which the product may be marketed or to whom it may be marketed. Additionally, there can be no assurance that the FDA will not require additional data, require that the Company conduct further clinical studies or obtain a PMA causing the Company to incur further cost and delay. With respect to automated IHC testing functions, the Company's instruments have been categorized by the FDA as automated cell staining devices and have been exempted from the 510(k) notification process. To date, ISH tests have not received FDA approval or clearance and, therefore, use of the gen II for ISH tests will be restricted to research applications. New instrument products that the Company may introduce could require future 510(k) clearances. Certain antibodies that the Company may wish to market with labeling indicating that they can be used in the diagnosis of particular diseases may require PMA approval. In addition, the FDA has proposed that some of the antibody products that Ventana may wish to market be subjected to a pre-filing certification process. Certain of the Company's products are currently sold for research use and are labeled as such. Failure to comply with applicable regulatory requirements can, among other consequences, result in fines, injunctions, civil penalties, suspensions or loss of regulatory approvals, recalls or seizures of products, operating restrictions and criminal prosecutions. In particular, the FDA enforces regulations prohibiting the marketing of products for nonindicated uses. In addition, governmental regulations may be established that could prevent or delay regulatory approval of the Company's products. Delays in or failure to receive approval of products the Company plans to introduce, loss of or additional restrictions or limitations relating to previously received approvals, other regulatory action against the Company or changes in the applicable regulatory climate could individually or in the aggregate have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also required to register as a medical device manufacturer with the FDA and is inspected on a routine basis by the FDA for compliance with its regulations. The Company's clinical laboratory customers are subject to CLIA, which is intended to ensure the quality and reliability of medical testing. In addition to these regulations, the Company is subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions and environmental matters. There can be no assurance that such laws or regulations will not in the future have a material adverse effect on the Company's business, financial condition and results of operations. 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, the availability of third-party reimbursement is limited and uncertain for some IHC tests. In the United States, the Company's products are purchased primarily by medical institutions and laboratories which bill various third-party payors, such as Medicare, Medicaid, other government programs and private insurance plans, for the health care services provided to their patients. Third-party payors may deny reimbursement to the Company's customers if they determine that a prescribed device or diagnostic test has not received appropriate FDA or other governmental regulatory clearances or approvals, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. The success of the Company's products may depend on the extent to which appropriate reimbursement levels for the costs of such products and related treatment are obtained by the Company's customers from government authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). Third-party payors are increasingly challenging the prices charged for medical products and services. The 14 16 trend towards managed health care in the United States and the concurrent growth of organizations such as HMOs could significantly influence the purchase of health care services and products. In addition, the federal government and certain members of Congress have proposed, and various state governments have adopted or are considering, programs to reform the health care system. These proposals are focused, in large part, on controlling the escalation of health care expenditures. The cost containment measures that health care payors are instituting and the impact of any health care reform could have a material adverse effect on the levels of reimbursement the Company's customers receive from third-party payors and the Company's ability to market and sell its products and consequently could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Third-Party Reimbursement." PRODUCT LIABILITY AND RECALLS; PRODUCT LIABILITY INSURANCE 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 Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH LEVERAGE The Company currently has outstanding $10.6 million in principal amount of indebtedness incurred in connection with the acquisition of BioTek (the "Acquisition Debt"). The Company may use a portion of the net proceeds of this Offering to repay all or a portion of the Acquisition Debt. However, the Company's management will have broad discretion to allocate the net proceeds of this Offering and may elect to defer repayment of the Acquisition Debt until its maturity in February 1998. The Acquisition Debt bears interest at 7% per annum; however, accrued interest will be forgiven if the entire remaining principal balance is repaid prior to February 26, 1997. In the event the Company does not repay the Acquisition Debt with the proceeds of this Offering, the Company will continue to be subject to the risks associated with leverage, which risks include (i) principal and interest repayment obligations which require the expenditure of substantial amounts of cash, the availability of which will be dependent on the Company's future performance, (ii) inability to repay principal at maturity, which could result in default on the Acquisition Debt and legal action against the Company by the holders of the Acquisition Debt and (iii) adverse effects of interest expense on the Company's results of operations. Leverage could also limit the Company's ability to obtain additional financing in the future, to withstand competitive pressure and adverse economic conditions (including a downturn in its business) or to take advantage of significant business opportunities, such as opportunities to acquire complementary businesses, products and technologies. 15 17 BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS The Company anticipates that the net proceeds of this Offering will be used for general corporate purposes, which may include expansion of sales and marketing activities, research and development, clinical trials, capital expenditures, repayment of all or a portion of the remaining outstanding Acquisition Debt and working capital. Accordingly, 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 and in allocating the net proceeds of this Offering. 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 50.7% of the Company's outstanding Common Stock. These stockholders will be able to exercise significant influence over the election of members of the Company's Board of Directors and 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." VOLATILITY OF STOCK PRICE The Company's Common Stock, like the securities of other medical device and life sciences companies, has exhibited price volatility, and such volatility may occur in the future. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that have affected the market price of many companies and have often been unrelated to the operating performance of particular companies. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, FDA and other government regulation, developments with respect to patents or proprietary rights, public concern as to the safety of products developed by the Company or others, changes in financial analysts' estimates or recommendations regarding the Company and general market conditions may have a material adverse effect on the market price of the Company's Common Stock. The Company's results of operations may, in future periods, fall below the expectations of public market analysts and investors and, in such event, the market price of the Company's Common Stock could be materially adversely affected. 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 12,815,418 shares of Common Stock outstanding, of which 5,294,774 Shares will be freely tradable (unless held by affiliates of the Company) and the remaining 7,520,644 shares will be restricted securities within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). Approximately of such shares will be available for 16 18 immediate public resale on the date of this Offering. An additional shares of Common Stock will be saleable between the date of this Offering and 120 days after this Offering. The Selling Stockholders, the Company's directors and executive officers and certain other stockholders, who will in the aggregate hold shares of Common Stock of the Company upon the completion of this Offering, have entered into lock-up agreements under which they have agreed not to sell, directly or indirectly, any shares owned by them for a period of 120 days after the date of this Prospectus without the prior written consent of Dillon, Read & Co. Inc. Upon expiration of the 120-day lock-up agreements, approximately shares of Common Stock (including approximately 341,366 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 323,355 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. Approximately of the shares outstanding immediately following the completion of this Offering, excluding all of the Company's outstanding warrants which may be converted on a cash basis into 784,612 shares of the Company's Common Stock, 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 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 "Price Range of Common Stock and Dividend Policy." 17 19 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, ES(TM), gen II, TechMate(TM), Liquid Coverslip(TM) and ChemMate(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 $27.4 million after deducting the estimated underwriting discounts and commissions and expenses of the Offering. The Company intends to use the net proceeds of this Offering for general corporate purposes, which may include expansion of sales and marketing activities, research and development, clinical trials, capital expenditures, repayment of all or a portion of the remaining outstanding Acquisition Debt and working capital. The Acquisition Debt bears interest at 7% per annum and matures in February 1998; however, accrued interest will be forgiven if the entire remaining principal is repaid prior to February 26, 1997. 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. The Company's management will have broad discretion in determining the amount and timing of expenditures and in allocating the net proceeds of this Offering. Pending the foregoing 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. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Since July 26, 1996, the Common Stock has traded on the Nasdaq National Market under the symbol "VMSI." The following table sets forth the periods indicated the high and low sale prices of the Common Stock as reported by the Nasdaq National Market.
1996 HIGH LOW -------------------------------------------------------------------- ----- ----- 3rd Quarter....................................................... $19 1/2 $9 1/4 4th Quarter (through December 19, 1996)........................... 18 1/2 14 3/4
On December 19, 1996, the last reported sale price of the Common Stock on the Nasdaq National Market was $16.00 per share. As of such date, there were 400 holders of record of the Common Stock. The Company has never declared or paid any cash dividends on its Common Stock. The Company presently intends to retain any future earnings for use in its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. Covenants in the Company's bank credit agreement prohibit the payment of cash dividends. 18 20 DILUTION The net tangible book value of the Company at September 30, 1996 was $5.4 million or $0.50 per share. 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. 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 the sale of Shares offered by the Company hereby at an assumed public offering price of $16.00 per share, the estimated net proceeds to the Company would be approximately $27.4 million and the net tangible book value of the Company at September 30, 1996 would be $32.8 million or $2.58 per share. This represents an immediate increase in net tangible book value of $2.08 per share to existing stockholders and an immediate dilution in net tangible book value of $13.42 per share to new investors purchasing Shares at the assumed public offering price. The following table illustrates this per share dilution: Assumed public offering price per share............................ $16.00 Net tangible book value per share before the Offering.............. $0.50 Increase per share attributable to new investors................... 2.08 ----- Net tangible book value per share after the Offering............... 2.58 ------ Immediate dilution per share to new investors...................... $13.42 ======
The following table summarizes, as of September 30, 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 (at an assumed public offering price of $16.00 per share):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ---------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing stockholders.......... 10,876,082 85% $50,892,000 63% $ 4.68 New investors.................. 1,850,000 15% 29,600,000 37 16.00 ---------- --- ----------- --- Total................ 12,726,082 100% $80,492,000 100% ========== === =========== ===
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, and (iii) do not give effect to stock issuance activity subsequent to September 30, 1996, which consists of 89,336 shares issued upon the exercise of options and warrants through December 1, 1996. At December 1, 1996 there were options outstanding to purchase 819,728 shares of Common Stock at a weighted average exercise price of $3.73 per share and warrants outstanding to purchase 784,612 shares of Common Stock at an exercise price of $5.82 per share. 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 11 to the Consolidated Financial Statements. 19 21 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1996 and as adjusted for the receipt of the estimated net proceeds from the sale of Common Stock offered by the Company hereby:
SEPTEMBER 30, 1996 --------------------- AS ACTUAL ADJUSTED(1) -------- -------- (IN THOUSANDS) Long-term debt(2)............................................ $ 15,937 $ 15,937 Stockholders' equity: Preferred Stock: $.001 par value, 5,000,000 shares authorized; none outstanding............................ -- -- Common Stock: $.001 par value, 50,000,000 shares authorized; 10,876,082 shares issued and outstanding and; 12,726,082 shares issued and outstanding, as adjusted -- amount paid in(3)(4)........................ 50,892 78,339 Accumulated deficit........................................ (33,663) (33,663) Cumulative foreign currency translation adjustment......... (218) (218) -------- -------- Total stockholders' equity(4)........................... 17,011 44,458 -------- -------- Total capitalization............................... $ 32,948 $ 60,395 ======== ========
- --------------- (1) As adjusted shares outstanding excludes 819,728 shares issuable upon exercise of stock options outstanding under the Company's 1988 and 1996 Incentive Stock Option Plans as of December 1, 1996 and outstanding warrants to purchase 784,612 shares of Common Stock at an exercise price of $5.82 per share. As adjusted shares outstanding does not give effect to stock issuance activity after September 30, 1996, which consists of 89,336 shares issued upon exercise of options and warrants through December 1, 1996. See "Management -- Incentive Stock Plans," "Description of Capital Stock" and Notes 7 and 11 to the Consolidated Financial Statements. (2) As of September 30, 1996, the Company had no outstanding borrowings under its revolving bank credit agreement and had $14.3 million in outstanding Acquisition Debt. In September 1996, the Company offered to pay an aggregate of $4.0 million of Exchange Notes and Ventana Notes at 90.5% of the principal amount of such notes. On October 18, 1996, the Company repaid $3.7 million of Exchange Notes and Ventana Notes at a discounted amount of $3.4 million. All notes tendered for repayment were repaid on the foregoing terms. Following such repayment, the aggregate outstanding principal amount of Exchange Notes and Ventana Notes was $10.6 million. See "Use of Proceeds." (3) Assumes net proceeds of $27.4 million from this Offering based on an assumed public offering price of $16.00 per share. (4) See Notes 6 and 7 to the Consolidated Financial Statements. 20 22 SELECTED CONSOLIDATED ACTUAL AND PRO FORMA FINANCIAL DATA The selected actual 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 actual 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 nine months ended September 30, 1996 and 1995, the components of net sales for all periods presented, and the balance sheet data at September 30, 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 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.
PRO FORMA(1) ACTUAL --------------------------- -------------------------------------------------------------- NINE NINE MONTHS YEAR MONTHS ENDED ENDED ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, ------------------------------------------- ----------------- ------------ ------------- STATEMENT OF OPERATIONS DATA: 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 $ 3,365 $ 4,853 $ 8,396 $ 4,992 Reagents and other................ 28 452 1,519 3,339 5,969 4,229 11,042 11,079 11,985 ------- ------- ------- ------- ------- ------- -------- -------- ------- Total net sales................. 78 1,169 2,681 5,927 10,613 7,594 15,895 19,475 16,977 Cost of goods sold.................. 49 832 1,722 2,531 4,282 3,043 6,513 9,096 6,708 ------- ------- ------- ------- ------- ------- -------- -------- ------- Gross profit........................ 29 337 959 3,396 6,331 4,551 9,382 10,379 10,269 Operating expenses: Research and development.......... 1,352 1,194 2,100 1,926 2,239 1,754 2,176 4,407 2,334 Selling, general and administrative.................. 892 2,465 4,067 6,899 7,435 5,317 8,135 10,968 8,859 Nonrecurring expenses............. -- -- -- -- -- -- 10,262 9,983 279 Amortization of intangibles....... -- -- -- -- -- -- 315 557 407 ------- ------- ------- ------- ------- ------- -------- -------- ------- Loss from operations................ (2,215) (3,322) (5,208) (5,429) (3,343) (2,520) (11,506) (15,536) (1,610) Interest income (expense)........... 23 48 229 59 74 111 (28) 74 (28) ------- ------- ------- ------- ------- ------- -------- -------- ------- Net loss............................ $(2,192) $(3,274) $(4,979) $(5,370) $(3,269) $(2,409) $(11,534) $(15,462) $(1,638) ======= ======= ======= ======= ======= ======= ======== ======== ======= Per share data(2): Net loss per share, as adjusted... $ (0.38) $ (0.28) $ (1.20) $ (1.52) $ (0.15) ======= ======= ======== ======== ======= Shares used in computing net loss per share, as adjusted.......... 8,664 8,600 9,581 10,167 10,628 ======= ======= ======== ======== =======
SEPTEMBER 30, 1996 ------------------------- AS ACTUAL ADJUSTED(3) -------- -------------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents........................................................................... $ 17,116 $ 44,563 Long-term debt...................................................................................... 15,937 15,937 Working capital..................................................................................... 18,184 45,631 Total assets........................................................................................ 39,614 67,061 Accumulated deficit................................................................................. (33,663) (33,663) Total stockholders' equity.......................................................................... 17,011 44,458
- --------------- (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 at an assumed offering price of $16.00 per share. See "Use of Proceeds," and "Capitalization" and "Price Range of Common Stock and Dividend Policy." 21 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 and the timing of events could differ materially from those contemplated 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 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 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 components of its business operations. BioTek's instruments were produced by third-party manufacturers which prevented BioTek from capturing manufacturing margin. BioTek's instruments have an open configuration, enabling the customer to use reagents purchased from BioTek or others which impacted both the price and volume of reagents purchased by customers from BioTek. In contrast, patient priority instruments have a closed configuration requiring the customer to use Ventana's prepackaged detection chemistries. BioTek also realized lower gross margins on reagents than Ventana due to its utilization of intermediate materials in the manufacturing process which resulted in the capture of fewer value-added steps. BioTek used CMS and DAKO as third-party distributors in the United States and international markets, respectively, and supported its United States sales efforts with field sales and technical support personnel. As a result, BioTek experienced lower gross margins than if it had sold its products directly as well as a higher level of selling expense than typically incurred in conjunction with third-party distribution arrangements. Ventana's strategy regarding BioTek is to continue to integrate the operations of BioTek into the Ventana business model, in which manufacturing, sales and marketing activities are performed by Company employees. 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 international distribution agreement with DAKO expires in December 1999. The Company is engaged in discussions with DAKO regarding a proposed broader international distribution arrangement, however, there can be no assurance as to when or whether the Company will enter into any such arrangement. The Company completed the consolidation of BioTek's reagent manufacturing into Ventana's Tucson facilities in September 1996. The Company is currently in the process of converting 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 22 24 to continue sourcing batch processing instruments from third-party manufacturers. The Company has entered into manufacturing agreements with Kollsman for production of the TechMate 500 instrument and with LJL for production of the Company's next generation batch processing instrument, the TechMate 250. 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 with the objective of creating recurring 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. 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 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 September 30, 1996, the Company had placed 90 instruments through RPs. From its inception in 1985 through September 30, 1996, Ventana incurred aggregate net losses of $33.7 million, including $10.3 million related to the expensing of in-process research and development and restructuring costs associated with the acquisition of BioTek. Similarly, BioTek incurred $18.2 million in losses from operations from its inception in October 1990 until its acquisition by the Company in February 1996. 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'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. Furthermore, due both to the Company's increased sales focus on smaller hospitals and laboratories and the relatively high reagent sales growth 23 25 rates in recent fiscal periods, the rate of growth in reagent sales in future periods is likely to be below that experienced during the past several fiscal periods. Other factors that may result in fluctuations in operating results include the timing of new product announcements and the introduction of new products and new technologies by the Company and its competitors, market acceptance of the Company's current or new products, developments with respect to regulatory matters, availability and cost of raw materials purchased from suppliers, competitive pricing pressures, increased sales and marketing expenses associated with the implementation of the Company's market expansion strategies for its instruments and reagent products, and increased research and development expenditures. Future instrument and reagent sales could also be adversely affected by the configuration of the Company's patient priority systems, which require the use of the Company's detection chemistries, particularly if and to the extent that competitors are successful in developing and introducing new IHC instruments or if competitors offer reagent supply arrangements having pricing or other terms more favorable than those offered by the Company. Such increased competition in reagent supply could also adversely affect sales of reagents to batch processing instrument customers since those instruments do not require the use of the Company's reagents. In connection with future introductions of new products the Company may be required to incur charges for inventory obsolescence in connection with unsold inventory of older generations of products. To date, however, the Company has not incurred material charges or expenses associated with inventory obsolescence in connection with new product introductions. In addition, a significant portion of the Company's expense levels is based on its expectation of a higher level of revenues in the future and is relatively fixed in nature. Therefore, if revenue levels are below expectations, operating results in a given period are likely to be adversely affected. Total net sales grew from $2.7 million in 1993 to $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. RESULTS OF OPERATIONS Nine Months Ended September 30, 1996 and 1995 Ventana acquired BioTek on February 26, 1996. Consequently, approximately seven months of BioTek operations are included in the results of operations for the nine months ended September 30, 1996. 24 26 Net Sales. Presented below is a summary of net sales for the nine months ended September 30, 1996 and 1995.
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 1995 1996 -------------- --------------- $ % $ % ------ --- ------- --- (DOLLARS IN THOUSANDS) SALES SUMMARY: Instruments..................................... $3,365 44% $ 4,853 31% Reagents and other.............................. 4,229 56% 11,042 69% ------ ---- ------- ---- Total net sales....................... $7,594 100% $15,895 100% ====== ==== ======= ====
Net sales for the nine months ended September 30, 1996 versus the comparable period of 1995 increased 109% to $15.9 million compared to $7.6 million during the 1995 period. The increase in net sales was attributable to a 44% increase in instrument sales and a 161% increase in reagent sales. Instrument sales increased due to increased instrument placements, higher selling prices, the introduction of the gen II ISH instrument and $1.0 million of instrument sales resulting from the BioTek acquisition. Reagent sales increased due to sales of reagents to new customers, higher selling prices, increased sales to existing customers and $3.4 million of reagent sales to customers acquired with the acquisition of BioTek. Gross Margin. Gross profit for the nine months ended September 30, 1996 increased to $9.4 million from $4.6 million for the same period in 1995. Gross margin for the nine months ended September 30, 1996 and 1995 was 59%. Gross margins on instrument sales were adversely impacted by increased sales of lower margin TechMate batch processing instruments, offset by manufacturing efficiencies on other instrument products and increased absorption of manufacturing overhead. Gross margins on reagent sales were adversely impacted by increased sales of lower margin batch processing reagents to United States and European distributors, offset by increased economies of scale and manufacturing efficiencies brought about by the integration of batch processing reagent manufacturing into Ventana's Tucson, Arizona manufacturing operations. Research and Development. Research and development expenses were $2.2 million for the nine months ended September 30, 1996 as compared to $1.8 million during the comparable period of 1995. Research and development expenses declined as a percent of sales to 14% for the nine months ended September 30, 1996 compared to 23% for the comparable period of 1995. Research and development expenses for the nine months ended September 30, 1996 related primarily to the development of new reagents and instruments, including the NexES patient priority instrument and new prognostic markers. Research and development expense for the nine months ended September 30, 1995 related primarily to the gen II instrument and IHC reagent development. Selling, General and Administrative ("SG&A"). Presented below is a summary of the components of SG&A expense and their respective percentages of net sales during the nine months ended September 30, 1996 and 1995.
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------- 1995 1996 ----------------- ----------------- $ % SALES $ % SALES ------ ------- ------ ------- (DOLLARS IN THOUSANDS) SG&A SUMMARY: Sales and marketing................................. $4,074 54% $6,182 39% Administration...................................... 1,243 16% 1,953 12% ------ --- ------ --- Total SG&A................................ $5,317 70% $8,135 51% ====== === ====== ===
25 27 SG&A expense for the nine months ended September 30, 1996 increased to $8.1 million from $5.3 million for the nine months ended September 30, 1995. SG&A expense as a percent of net sales declined to 51% for the nine months ended September 30, 1996 compared to 70% for the comparable period of 1995. The fluctuation in SG&A expense from period to period reflects the growth of Ventana's sales and marketing organization to facilitate its market expansion strategy, a corresponding increase in infrastructure expenses to support a larger business base and ongoing clinical practice standardization programs. The growth in sales and marketing expense in absolute dollars is the result of the Company's decision to service the market through its own sales and marketing staff, expenses necessary to support the growth of the Company and expenses associated with the ongoing support activities resulting from the BioTek acquisition. Increases in administrative expenses 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. Amortization of Intangibles. As a result of the acquisition of BioTek, the Company has recorded certain intangible assets. These intangible assets include developed technology, customer list, goodwill and other intangible assets which are amortized to expense over a period of 15 to 20 years based upon the Company's estimate of the economic utility of these assets. As a result, the Company will charge to expense each quarter approximately $0.1 million for the amortization of these intangible assets. Additionally, the Company will review the utility of these assets each quarter to ensure their continued value. Should the Company determine that any of these assets are impaired it will revalue them to their estimated fair market value. Years Ended December 31, 1995, 1994 and 1993 Net Sales. Presented below is a summary of net sales 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) SALES SUMMARY: Instruments.................. $1,162 43% $2,588 44% $ 4,644 44% Reagents and other........... 1,519 57% 3,339 56% 5,969 56% ------ ---- ------ ---- ------- ---- Total net sales.... $2,681 100% $5,927 100% $10,613 100% ====== ==== ====== ==== ======= ====
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 26 28 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 components of SG&A expense and their respective percentages of net sales during the years ended December 31, 1995, 1994 and 1993.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1993 1994 1995 -------------------- -------------------- -------------------- $ % OF SALES $ % OF SALES $ % OF SALES ------ ---------- ------ ---------- ------ ---------- (DOLLARS IN THOUSANDS) SG&A SUMMARY: 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 27 29 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, a significant amount of 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 to reflect the sale by the Company of 1,890,907 shares of Common Stock in its initial public offering and 1,850,000 shares of Common Stock 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. 28 30 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 $2.4 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. PRO FORMA RESULTS OF OPERATIONS Year Ended December 31, 1995 and Nine Months Ended September 30, 1996 Net Sales. Presented below is a summary of pro forma consolidated net sales for the year ended December 31, 1995 and the nine months ended September 30, 1996.
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1995 1996 --------------- --------------- $ % $ % ------- --- ------- --- (DOLLARS IN THOUSANDS) SALES SUMMARY: Instruments...................................... $ 8,396 43% $ 4,992 29% Reagents and other............................... 11,079 57% 11,985 71% ------- --- ------- --- Total net sales........................ $19,475 100% $16,977 100% ======= === ======= ===
Pro forma instrument 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 60% in the nine months ended September 30, 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 prior to the acquisition 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. Pro forma SG&A expenditures for 1995 reflects duplicate overhead from the two companies. During the first quarter of 1996, BioTek reduced research and development and SG&A expenditures due to working capital constraints. QUARTERLY PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS The following table contains summary unaudited quarterly pro forma consolidated statements of operations data for the seven quarters ended September 30, 1996. Management has prepared the 29 31 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
1995 1996 -------------------------------------------- ------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER -------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Sales: Instruments.......................... $ 2,040 $ 2,148 $2,461 $ 1,747 $1,733 $1,706 $1,554 Reagents and other................... 2,378 2,484 2,931 3,286 3,495 3,835 4,654 -------- ------- ------ ------- ------ ------ ------ Total net sales................ 4,418 4,632 5,392 5,033 5,228 5,541 6,208 Cost of goods sold..................... 2,134 2,236 2,438 2,288 1,924 2,129 2,655 -------- ------- ------ ------- ------ ------ ------ Gross profit........................... 2,284 2,396 2,954 2,745 3,304 3,412 3,553 Operating expenses: Research and development........... 721 1,815 1,002 869 771 754 809 Selling, general and administrative................... 2,367 3,130 2,675 2,796 2,799 2,994 3,066 Nonrecurring expenses................ 9,983 -- -- -- -- 212 67 Amortization of intangibles.......... 139 139 140 139 139 134 134 -------- ------- ------ ------- ------ ------ ------ Loss from operations................... (2,688) (863 ) (1,059) (405 ) (682 ) (523 ) Interest income (expense).............. 50 37 25 (38) (5 ) (61 ) 38 -------- ------- ------ ------- ------ ------ ------ Net loss............................... $(10,876) $(2,651) $ (838 ) $(1,097) $ (410 ) $ (743 ) $ (485 ) ======== ======= ====== ======= ====== ====== ====== Pro forma net loss per share........... $ (1.11) $ (0.27) $(0.08 ) $ (0.11) $(0.04 ) $(0.08 ) $(0.05 ) ======== ======= ====== ======= ====== ====== ====== Pro forma shares used in computing net loss per share....................... 9,840 9,962 10,034 10,060 10,398 9,137 10,196
LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company's expenses have significantly exceeded its revenues, resulting in accumulated losses of $33.7 million as of September 30, 1996. The Company has funded its operations primarily through the private placement of approximately $31.0 million in equity and debt securities and its July 1996 initial public offering which resulted in net proceeds to the Company of $18.3 million (after giving effect to the partial exercise of the underwriter's over-allotment option). As of September 30, 1996 the Company's principal source of liquidity consisted of cash and cash equivalents of $17.1 million and borrowing capacity under its bank term credit facility and revolving line of credit. The bank term loan facility of $2.0 million was repaid in full on July 30, 1996 from the proceeds of the Company's initial public offering. The Company also has a $2.8 million revolving bank credit facility. As of September 30, 1996, approximately $0.4 million of this revolving line of credit had been utilized for letters of credit to facilitate certain contract manufacturing arrangements for the production of TechMate 250 instruments leaving an available revolving credit facility of approximately $2.4 million. Borrowings under the Company's bank credit facility are secured by a pledge of substantially all of the Company's assets and bear interest at the bank's prime rate plus 2.0% per annum. During the period from March through May 1996, the Company raised $5.1 million through the private placement of subordinated notes ("Ventana Notes"). In connection with the issuance of the Ventana Notes, the Company issued warrants to purchase an aggregate of 887,740 shares of Common Stock of the Company at an exercise price of $5.82 per share. The proceeds of the Ventana Notes were used to fund the cash portion of the BioTek acquisition consideration and to provide working capital. The Ventana Notes bear interest at 7% per annum, which will be forgiven if the notes are repaid in full prior to February 26, 1997. Additionally, 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 30 32 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 in full prior to February 26, 1997. The Exchange Notes provided each holder with the opportunity, during a 30-day period, to convert Exchange Notes into shares of Ventana Common Stock at a conversion price of $13.53 per share. Upon expiration of the conversion period, an aggregate of $3.0 million in principal amount of Exchange Notes were converted into 222,973 shares of Common Stock and an aggregate of $9.2 million of Exchange Notes remained outstanding. In September 1996, the Company offered to pay an aggregate of $4.0 million of Exchange Notes and Ventana Notes at 90.5% of the principal amount of such notes. On October 18, 1996, the Company repaid $3.7 million of Exchange Notes and Ventana Notes at a discounted amount of $3.4 million. All notes tendered for repayment were repaid on the foregoing terms. Following such repayment, the aggregate outstanding principal amount of Exchange Notes and Ventana Notes was $10.6 million. See "Use of Proceeds." The Company expects to use approximately $2.8 million of the proceeds of this Offering during the next twelve months for capital expenditures for manufacturing capacity expansion and enhancements to its business application computer hardware and software resources. During the nine months ended September 30, 1996 the Company used for operations and investing activities approximately $10.9 million in cash versus $2.7 million for the nine months ended September 30, 1995 due primarily to the acquisition of BioTek and increased emphasis on the Company's RP program. In connection with BioTek's agreement with DAKO, DAKO made two loans secured by a pledge of substantially all of BioTek's assets. DAKO also made prepayments on future instrument sales and reagent royalties to BioTek. These loans and prepayments were used to fund TechMate 250 instrument development and working capital requirements. On September 25, 1996, BioTek and DAKO entered into the Amendment Agreement for the purpose of addressing several matters, including repayment of the secured loans and prepayments. The aggregate balance of the secured loans and prepayments was $1.6 million and $0.9 million, respectively, at the time of the Amendment Agreement. Of the secured loans, $0.3 million bears interest at 5% per annum and the remaining $1.3 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. Pursuant to the Amendment Agreement, DAKO paid the Company a royalty of $0.5 million and the Company paid DAKO $0.5 million as a reduction of the balance of the prepayments. Under the Amendment Agreement, the remaining $2.0 million of secured loans and prepayments will be repaid through discounts on DAKO purchases of TechMate instruments from BioTek at recoupment rates specified in the Amendment Agreement. Upon termination of the distribution agreement or in the event of a default by BioTek under the distribution agreement, these loans may be converted to fixed term loans that will be due and payable in 12 equal quarterly installments commencing upon such event. See "Business -- Sales, Marketing and Customer Support." The Company believes that the proceeds of this offering, together with its existing capital resources, cash generated from product sales and available borrowing capacity under bank credit facilities will be sufficient to satisfy its working capital requirements for at least the next 18 months. The Company's future capital requirements will depend on many factors, including the extent to which the Company's products gain market acceptance, the mix of instruments placed through direct sales 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 the timing of regulatory approvals. The Company may be required to raise additional capital in the future through the issuance of either debt instruments or equity securities, or both. There is no assurance that such capital will be available to the extent required or on terms acceptable to the Company, or at all. 31 33 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 appropriate treatment for cancer. The Company believes that it is the worldwide leader in the automated IHC testing market, as the Company estimates that its worldwide installed base of 674 instruments as of September 30, 1996 is approximately four times as large as the combined installed base of all of the Company's current competitors. Ventana has placed instruments with 36 of the 42 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 typically 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 approximately 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 1.4 million new cases of invasive cancer will be diagnosed each year. Recently, the mortality rates of certain types of cancer have decreased due to, among other factors, earlier detection and selection of appropriate therapies. The vast majority of IHC testing associated with cancer diagnosis and treatment in the United States is conducted in an aggregate of approximately 2,200 clinical institutions and reference and research laboratories which the Company estimates creates the opportunity for the placement of as many as 2,500 automated IHC testing instruments. The Company believes that less than 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 32 34 critical, expanding role in cancer science as researchers will use Ventana systems to accelerate the identification and development of new tests and that its installed base of instruments will speed the commercialization and clinical implementation of such new tests. The Company anticipates that its reagent test menu will expand due to the major emphasis of cancer research on the identification of new prognostic IHC and ISH indicators. ACQUISITION OF BIOTEK Ventana acquired BioTek in February 1996 for total consideration of $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 increased by 287 instruments as a result of the acquisition which 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 created the opportunity for operational synergies including the change to higher value-added activities 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 is continuing 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 has entered into an Amendment Agreement with DAKO relating to certain provisions of the distribution agreement between BioTek and DAKO, which agreement expires in December 1999. In September 1996, the Company completed the consolidation of BioTek's reagent manufacturing into Ventana's Tucson facilities. 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 manufacturing agreements with Kollsman for production of the TechMate 500 instrument and with LJL for production of the TechMate 250 instrument. INDUSTRY BACKGROUND Immunohistochemistry Cancer is the second leading cause of death in the United States accounting for approximately 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 1.4 million new cases will be diagnosed each year. In the United States, the lifetime risk of developing invasive cancer is 47% for 33 35 males and 38% for females. The risk of developing cancer increases with age. Among the principal forms of cancer are prostate, lung, breast, colon, rectal, urinary, ovarian and cervical cancer, along with leukemia and lymphoma. Early detection is one of the primary factors in increasing the long term survival of cancer patients. It is believed to be at least partially responsible for decreases in mortality rates that have recently been observed for several types of cancer. Health care professionals are increasing their emphasis on and use of screening and early detection programs for cancer because cancer treatments are generally significantly more effective and less costly the earlier that cancer is detected. Complementing screening and early detection are recent advances in less invasive biopsy methods that can obtain tissue samples from progressively smaller tumors. As a result of these developments, there has been a steady increase in the initial diagnosis of invasive cancer. However, smaller tissue samples are often difficult to analyze with traditional diagnostic tests, increasing the dependence of surgical pathologists on IHC for accurate diagnosis of early stage cancer. After preliminary screening of a biopsy to determine the presence of cancer, IHC is the principal diagnostic test method used for cancer diagnosis and therapy selection. IHC tests use specific antibodies to identify and detect antigens (proteins) in cells and tissues which assist pathologists in assessing various aspects of a patient's cancer. IHC tests, or assays, have two major components: primary antibodies and detection chemistries. The primary antibody is the specific antibody used to bind to the antigen in question. Detection chemistries are composed of multiple reagents including secondary antibodies, enzyme conjugates/complexes and chromogenic enzyme substrates which allow visualization of the primary antibody. IHC tests are performed on cells and tumor tissue to: - 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 34 36 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. 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 degreesC to 98 degreesC. Furthermore, the conditions for each of these processes is dependent upon the specific probe being used. Due to this extreme degree of technical difficulty, there are very few clinical laboratories capable of performing manual ISH assays. Ventana's gen II system represents a fundamental enabling technology for the rapid, accurate and cost effective identification of unique RNA and DNA (probe diagnostics) and is designed to overcome the inherent limitations of manual processing. VENTANA STRATEGY The Company's strategy is to strengthen its worldwide leadership position in the automated IHC testing market and to develop and expand the automated ISH testing market. In order to implement this strategy, the Company intends to: Maximize Instrument Placements. The Company's strategy is to strengthen its competitive position in the automation of IHC testing by establishing a larger installed base of instruments that current or future market entrants must overcome. The Company estimates that its worldwide installed base of 674 instruments is approximately four times as large as the combined installed base of instruments of all of the Company's current competitors. The Company believes that its placement of instruments in 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 with the objective of creating recurring 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 for many customers, will be eliminated. In addition, the Company has commenced international commercial shipments of a lower cost batch processing instrument, the TechMate 250. 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 35 37 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 76 new reagents. The Company commenced commercial shipments of its lower cost batch processing instrument, the TechMate 250, in international markets in the fourth quarter of 1996 and intends to introduce a lower cost patient priority instrument which it expects will be placed 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 24 systems in leading research sites in the United States and Europe. Ventana has also developed 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 Company commenced sales of the improved ER assay for research use only in the fourth quarter of 1996. The Company intends to continue to innovate in the field of automated cellular diagnostics through the development and introduction of new instruments, software and reagents. Encourage Standardization of Clinical Diagnostic Practices. The Company intends to support efforts to standardize clinical practices in the diagnosis and complete characterization of various types of cancer through professional education programs for pathologists and research collaborations. Uniform practice guidelines for the laboratory diagnosis of cancer are just now beginning to be established and accepted. As an example, the American Society of Clinical Oncology recently released its recommendations for the use of selected hormone/protein markers in which it recommended that all breast cancer cases be tested for estrogen receptor and progesterone receptor in order to select the optimal course of therapy. The Company's automated systems allow for the widespread standardization of testing methods that could be clinically relevant in this effort. In addition, the Company's educational programs will be designed to disseminate these and other practice recommendations as they are developed and to assist clinicians and professional organizations in the formulation of additional guidelines. Expand Intellectual Property Position. The Company seeks to expand its intellectual property position by entering into strategic alliances, acquiring rights of first refusal on future commercial developments and licensing existing technologies. The Company evaluates and intends to pursue the licensing of nucleic acid probe technology for ISH applications from biopharmaceutical companies, research institutions and others. In conjunction with gen II system placements, the Company has 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 36 38 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 - 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 - standardization of slide preparation among institutions In addition to these critical clinical and operational advantages, the Company has determined that its automated approach has cost advantages as well. To confirm the cost advantages of automated analysis using the Company's instruments as compared to manual methods, the Company completed a cost study involving 11 representative users of the Company's systems. These users encompass a cross-section of the Company's customers and include hospitals of varying sizes and a reference laboratory. The cost data compiled in the study was based on the users' internal allocations of IHC test costs and includes equipment amortization. The results of the study indicate that automated IHC analysis using the Company's products results in cost savings per test of approximately 10% as compared to manual methods. Instrument Products Patient Priority Instruments. Ventana currently offers two patient priority systems, the Ventana 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 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 degreesC, (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. 37 39 The Company is currently in the process of developing a new IHC instrument, the NexES, a patient priority system having IHC capabilities similar to the Ventana 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. 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 has initiated commercial production of the TechMate 250 instrument. The TechMate 250, which has a 40 slide capacity, is targeted primarily for the European and other international markets. 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. 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 65-70% of the total expenditures for reagents required to perform IHC tests using the Company's instruments. Ventana produces a line of detection chemistries for use on both patient priority and batch processing systems which provide the user with standardized reagents, thereby giving the user convenient and rapid results. The detection chemistries have been developed by the Company using proprietary formulations which, when combined with the Company's primary antibodies and other reagents, optimize the results 38 40 of tests performed on the Company's instruments. These kits generate the visual signal in an IHC reaction at the site where a primary antibody is bound to a specific antigen or molecule in the cell or tissue. The patient priority system utilizes detection kits which include (i) a DAB Kit which generates a brown color; (ii) an AEC Kit which generates a deep red color; (iii) an Alkaline Phosphatase Red Kit which generates a bright red color; and (iv) an Alkaline Phosphatase Blue Kit which generates a deep blue color. The Company currently sells DAB and Alkaline Phosphatase Red for use with its batch processing instruments. The detection kits are designed to perform tests on a wide variety of specimens, so a laboratory can, for example, perform tests on tissue preserved in paraffin and on frozen tissue simultaneously. The Company's detection chemistries have been formulated to provide long term stability for reproducibility and ease of use as well as a high signal to noise ratio for optimal sensitivity. Consumable Products Ventana offers a line of consumable ancillary products that are necessary for processing slides on the Company's instruments. These include buffers for optimizing the IHC reaction and counterstains for staining cell nuclei, which are used with both patient priority and batch processing instruments. The buffers ensure good morphology, low backgrounds and high signals. The counterstains provide additional convenience for the customer by eliminating the need for additional processing of the slides after staining on the instrument. For use with patient priority instruments, Ventana also supplies a proprietary liquid coverslip used to inhibit evaporation during processing in the instrument, fixatives for maintaining the morphology of cells or tissues, enzymes for unmasking antigens and slide barcodes for use in identifying the slide and its specific IHC reaction steps. For use with batch processing instruments, the Company also provides disposable reagent trays which are used to hold the reagents during IHC reactions, capillary gap slides and wicking pads used for reagent removal between applications. MARKETS AND CUSTOMERS There are approximately 4,200 acute care hospitals and clinics in the United States. Of these, there are approximately 1,900 hospitals with over 200 beds which perform the vast majority of surgical and other medical procedures related to cancer diagnosis and treatment. In addition, there are approximately 200 reference and research laboratories and approximately 100 biotechnology and pharmaceutical companies which also perform substantial numbers of IHC and ISH tests. These health care institutions represent a total instrument site potential of 2,200 locations. Ventana considers this to be its core market segment for cancer testing and focuses the bulk of its sales and marketing efforts on these institutions. The Company estimates there are as many as 2,500 instrument placement opportunities in the 2,200 potential instrument site locations in the United States. The international market for instrument placements is 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 September 30, 1996, the Company had 512 instrument placements in approximately 475 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 674 instruments as of September 30, 1996 is approximately four times as large as the combined installed base of instruments of all of the Company's current competitors. Ventana has placed instruments with 36 of the top 42 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. 39 41 The Company plans to introduce a lower cost instrument for patient priority customers (the NexES) and has recently introduced a lower cost instrument for potential batch processing customers (the TechMate 250). The Company believes that lower cost systems and RP placements will have particular appeal to those hospitals which are currently losing reimbursement revenue as a result of not performing IHC tests internally. The Company's RP placement program may enhance smaller hospitals' ability to compete with larger hospitals by providing on-site IHC testing and consultation without an initial capital expenditure. SALES, MARKETING AND CUSTOMER SUPPORT Ventana markets and sells its instruments and reagents 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. 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 and reagents, 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. In addition, the Company believes that CMS has not fulfilled its obligations under the agreement, both with respect to purchases of units and support and promotion of batch processing instruments in the United States. The Company has formally notified CMS that it believes CMS is in default under the agreement. CMS has responded to the Company's notice, denied breach of the agreement, suggested that certain activities undertaken by the Company may represent a breach of the agreement by the Company and suggested that the Company and CMS attempt to reach a negotiated settlement. There can be no assurance that the Company and CMS will be able to reach a negotiated settlement or that the Company will not become involved in litigation or other disputes with CMS. The Company believes that the resolution of the situation with CMS will not have a material 40 42 adverse effect on the business, financial condition or results of operations of the Company. As a result of these factors and due to the presence of the Company's direct sales force in the United States, the Company does not intend to renew the agreement with CMS upon its April 1998 expiration. Ventana's sales force in Europe consists of nine sales and support personnel located in France and Germany. 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 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 September 30, 1996, there were 92 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. On September 25, 1996, BioTek and DAKO entered into the Amendment Agreement for the purpose of addressing several matters, including repayment of the secured loans and prepayments. The aggregate balance of the secured loans and prepayments was $1.6 million and $0.9 million, respectively, at the time of the Amendment Agreement. Of these 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. In connection with the Amendment Agreement, DAKO paid the Company a royalty of $0.5 million and the Company paid DAKO $0.5 million as a reduction of the balance of the prepayments. Under the Amendment Agreement, the remaining $2.0 million of secured loans and prepayments will be repaid through discounts on DAKO purchases of TechMate instruments from BioTek at recoupment rates specified in the Amendment Agreement. The Amendment Agreement also establishes certain minimum purchase and delivery commitments for TechMate 250 instruments, as well as pricing for certain quantities of TechMate 250 instruments. Pricing for additional quantities of TechMate 250 instruments was not resolved in the Amendment Agreement and the parties are currently in disagreement as to such pricing. Currently, DAKO is purchasing such instruments at the price levels established by the Company. However, DAKO may, pursuant to the distribution agreement, initiate binding arbitration proceedings to resolve such pricing. In the event such arbitration proceedings are initiated and are determined adversely to the Company, the pricing of TechMate 250 instruments to DAKO would be on terms less favorable to the Company than the current pricing terms and the amount of secured loans and prepayments recouped per instrument sale would also be reduced. In connection with the negotiations for the Amendment Agreement, DAKO and the Company have also discussed a possible broader marketing arrangement for international sales of both batch processing instruments and patient priority instruments. There can, however, be no assurance that negotiations for this arrangement will be successfully concluded and that the Company will enter into a broader marketing arrangement with DAKO. Furthermore, during the course of ongoing discussions with DAKO since the acquisition of BioTek, DAKO has, among other things, asserted that BioTek has not fulfilled its obligations with respect to the development and commercial introduction of the TechMate 250 instrument. The Company denies this assertion and believes that it is in substantial compliance with its obligations under these development milestones. In particular, the Company believes that its contract manufacturing agreement with LJL will enable it to satisfy DAKO's 41 43 requirements for TechMate 250 instruments. Nevertheless, the negotiations with DAKO could result in an attempt by DAKO to exercise contractual remedies available to it under the distribution agreement and the terms of the secured loans, which remedies include (i) requiring repayment of the secured loans in 12 equal quarterly installments commencing upon a default by BioTek and (ii) an irrevocable license to manufacture TechMate instruments for resale internationally and a related reduction in the fixed dollar royalty rate paid by DAKO to BioTek for each instrument included in the royalty base. The Company could also experience an interruption in the distribution of batch processing instruments outside the United States or become involved in litigation with DAKO with respect to the current distribution agreement, which would involve significant costs as well as diversion of management time. There can be no assurance that the Company would prevail in any litigation involving the agreement. Furthermore, there can be no assurance as to the future course or outcome of the Company's negotiations with DAKO or as to the Company's future relationship with DAKO. If DAKO were successful in obtaining a manufacturing license for TechMate instruments, the Company could experience a loss of instrument revenue which could have a material adverse effect on the Company's business, financial condition and results of operations. 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 recurring 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. 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 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 September 30, 1996, the Company had placed 90 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. MANUFACTURING The Company manufactures its patient priority instruments at its facilities in Tucson, Arizona. The Company has recently expanded its patient priority instrument manufacturing facilities and operations in Tucson and believes that this expansion will provide the Company with sufficient manufacturing capacity to meet its anticipated requirements for patient priority instruments for approximately the next three years. Components for patient priority instruments are purchased from a variety of vendors, subject to stringent quality specifications. The components are assembled by Ventana's highly skilled manufacturing technicians into finished products. A quality assurance group 42 44 performs tests at regular intervals in the manufacturing cycle to verify compliance with the Company's specifications and regulatory requirements, including 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 has contracted with Kollsman for the manufacture of TechMate 500 instruments and with LJL for the manufacture of TechMate 250 instruments. Reagents sold for use with the Company's patient priority instruments are manufactured by Ventana, which purchases basic raw materials and performs value-added manufacturing processes, such as formulation and packaging, at its facilities. Certain components and raw materials, primarily antibodies, used in the manufacturing of the Company's reagent products are currently provided by single source vendors. To date, the Company has not experienced any material disruptions in supply from these vendors and has experienced levels of manufacturing waste in the reagent manufacturing process that it believes to be below industry averages. Reagents sold for use with the Company's batch processing instruments have historically been manufactured by third parties, with only a few final steps in the manufacturing process being performed internally. The Company completed the consolidation of batch processing reagent manufacturing into Ventana's Tucson facilities in September 1996. Ventana has converted the manufacturing process for such reagents to the process used by Ventana in which basic raw materials are used and important value-added activities are performed internally. As a result of this transition, Ventana is positioned to capture margin and value added which was lost through payments to third-party manufacturers, to increase economies of scale in both raw material purchasing and manufacturing, to standardize procedures and processes, to increase control over scheduling and to improve manufacturing flexibility. The Company's reagent manufacturing process at its Tucson, Arizona facility is currently semi-automated. The Company anticipates that as production volumes increase it will increase the level of automation. The Company currently has sufficient reagent manufacturing capacity to meet its anticipated needs for approximately the next 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 GMP requirements. GMP requires the Company to maintain documentation and process control in a prescribed manner with respect to manufacturing, testing and quality control. In addition, the Company is subject to FDA inspections to verify compliance with FDA requirements. The Company also intends to implement manufacturing policies and 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. 43 45 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. Reagent Development Projects 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 improving its detection chemistry sensitivity by developing a first generation amplification kit. This amplification kit will be compatible with 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 currently undergoing beta testing with availability for commercial sale for research use expected in 1997. The Company is currently in discussions with a number of universities, hospitals and commercial organizations regarding potential collaborations for the development of standardized probes for use in ISH tests. 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 conducting market research with respect to the potential for a barcode label printing system. At September 30, 1996, Ventana's research and development group consisted of 20 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 TechMate 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 nine months ended September 30, 1996 and the years ended December 31, 1995, 1994 and 1993, Ventana spent $2.2 million, $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 44 46 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 aspects of the capillary gap technology and methods and devices for batch processing of slides. Pending applications relate to mechanical aspects of automated instruments for performing reactions on slides and processing methods used in these instruments. In addition, a patent application filed by the Company covers an evaporation inhibitor liquid that is effective for high temperature applications. The expiration dates of the Company's issued United States patents range from September 2005 to November 2013. There can be no assurance that the Company's patent applications will result in patents being issued or that any issued patents will provide adequate protection against competitive technologies or will be held valid if challenged. Others may independently develop products or processes similar to those of the Company or design around or otherwise circumvent patents issued to the Company. Because patent applications in the United States are maintained in secrecy until patents are issued and since publication of discoveries in scientific literature tends to lag behind actual discoveries by several months, Ventana cannot be certain that it was the first creator of inventions covered by its patents or pending patent applications or that it was the first to file patent applications for such inventions. Moreover, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions, which could result in substantial cost to the Company. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of each of such patents or to redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be available on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. If the Company does not obtain necessary licenses, it could be subject to litigation and encounter delays in product introductions while it attempts to design around such patents. Alternatively, the development, manufacture or sale of such products could be prevented. Litigation would result in significant cost to the Company as well as diversion of management time. The outcome of any such litigation cannot be predicted with any assurance. Adverse determinations in any such proceedings could have a material adverse effect on the Company's business, financial condition and results of operations. BioTek is a party to litigation initiated by BioGenex 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 45 47 agreements will not be breached or that they will provide meaningful protection or adequate remedies for unauthorized use or disclosure of Ventana's trade secrets. COMPETITION Competition in the diagnostic industry is intense and is expected to increase. Competition in the diagnostic industry is based on, among other things, product quality, performance, price and the breadth of a company's product offerings. Ventana's instrument and reagent systems for IHC tests compete with products offered by various manufacturers as well as with manual diagnostic methods. In addition, flow cytometry can be used for cellular testing and may, in certain markets, be competitive with the Company's products. The Company's competitors may succeed in developing products that are more reliable or effective or less costly than those developed by the Company and may be more successful than the Company in manufacturing and marketing their products. Although the Company plans to continue to develop new and improved products, there are other companies engaged in research and development of diagnostic devices or reagents, and the introduction of such devices or alternative methods for diagnostic testing could hinder the Company's ability to compete effectively and could have a material adverse effect on the Company's business, financial condition and results of operations. In the instrument market, several companies, including Leica (a division of Leitz Microscope GmbH), Shandon Scientific Limited (a division of Life Sciences International PLC), BioGenex and DAKO (U.S.), offer instruments that perform IHC tests and can be used with any supplier's reagents, which may be attractive to certain customers. As of September 30, 1996, the Company had an installed base of 674 instruments which the Company estimates is more than four times the combined installed base of instruments of all of the Company's current competitors. The Company has included semi-automated instruments manufactured by its competitors in arriving at its estimates of its market share. In addition, 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 Immunotech. The principal suppliers of detection chemistries in the United States are Vector Laboratories, BioGenex and DAKO. The Company's patient priority instruments require the use of the Company's detection chemistries but can be used with primary antibodies supplied by third parties, and the Company's batch processing instruments can be used with both detection chemistries and primary antibodies supplied by third parties. Accordingly, the Company encounters significant competition in the sale of reagents for use on those of its instruments that can be used with reagents supplied by third parties. Lower prices for reagents used in manual IHC tests could also limit the growth of automation. Certain of the Company's current and potential competitors in the reagent market have financial, manufacturing, marketing and distribution resources greater than those of the Company. Competition in the market for reagents could also increase as a result of new market entrants providing more favorable reagent supply arrangements than the Company, including lower reagent prices. In particular, DAKO has recently introduced a lower cost automated IHC instrument in the United States and is offering reagent supply arrangements that have resulted in increased competition for both instruments and reagents. In addition, new entrants in the instrument market may seek to enhance their competitive position through reduced 46 48 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. 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 47 49 application will ultimately be approved. Further, clearance or approval may place substantial restrictions on to whom and the indications for which the product may be marketed or to whom it may be marketed. Additionally, there can be no assurance that the FDA will not request additional data, or request that the Company conduct further clinical studies. With respect to automated IHC testing functions, the Company's instruments have been categorized by the FDA as automated cell staining devices and have been exempted from the 510(k) notification process. To date, ISH tests have not received FDA approval and, therefore, use of the gen II for ISH tests will be restricted to research applications. New instrument products that the Company may develop and introduce could require 510(k) notifications and clearances or PMA applications. All of the detection chemistries and most of the primary antibody products being sold by the Company are currently classified as Class II devices. Many of Ventana's detection chemistries have received 510(k) clearance from the FDA. Some of the antibodies being marketed by the Company are labeled for diagnostic use and have received 510(k) clearance from the FDA. The Company may wish to market certain antibodies with a label indicating that they can be used in the diagnosis of particular diseases, including cancer. These devices may be classified as Class III devices and may therefore require a PMA. After products have been cleared for marketing by the FDA, the Company will be subject to continuing FDA obligations. Clearances may be withdrawn or products may be recalled if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. The FDA may require surveillance programs to monitor the effect of products which have been commercialized, and has the power to prevent or limit further marketing of the product based on the results of these post-marketing programs. The FDA enforces regulations prohibiting the marketing of products for unapproved uses. Further, if the Company wanted to make changes on a product after FDA clearance or approval, including changes in indications or intended use or other significant modifications to labeling or manufacturing, additional clearances or approvals would be required. The FDA has broad regulatory and enforcement powers including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products, withdraw clearances or approvals, restrict or enjoin the marketing of products, and impose civil and criminal penalties, any one or more of which could have a material adverse effect upon the Company. 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 48 50 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. 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 36,000 square feet of leased space in Tucson, Arizona. The leases for these facilities expire at various times between November 1999 and March 2001, subject to renewal terms. The Company believes its facilities are adequate to meet its current requirements and facilities for anticipated future requirements will be available on commercially reasonable terms. EMPLOYEES As of September 30, 1996, Ventana employed 138 persons full time. Of these employees, 64 were engaged in sales and marketing, 20 in research and development, 37 in manufacturing and 17 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. 49 51 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 court-mandated judicial settlement conference is scheduled for January 13, 1997 and a trial is currently scheduled for March 18, 1997. 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. Two of such former employees have filed lawsuits against the Company alleging that certain commitments made to them in connection with their employment by BioTek were breached. 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. 50 52 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the directors and executive officers of the Company as of December 1, 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................... 39 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 Johnny D. Powers, Ph.D. ....... 35 Vice President, Operations 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)......... 61 Director Thomas M. Grogan, M.D.(III).... 51 Director John Patience(2)(III).......... 48 Director C. Anthony Stellar, M.D.(I).... 66 Director 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 51 53 through 1989, Mr. Danehy held marketing and general management responsibilities in Abbott's Diagnostics Division that included Product Manager for hepatitis products, Marketing Manager for Clinical Chemistry Systems, Group Marketing Manager for TDx Systems, Director of Marketing for North America and General Manager for Transfusion Diagnostics which included the AIDS test. Mr. Danehy received a B.S. in Chemistry from St. Joseph's College and an M.B.A. from Loyola University of Chicago. In November 1996, Mr. Danehy notified the Company that he would not be able to relocate permanently to Tucson for family and personal reasons and, as result, the Company has initiated a search for a new Chief Executive Officer. It is expected that Mr. Danehy will remain as President and Chief Executive Officer until his replacement joins the Company and that he will continue to serve as a member of the Company's Board of Directors. 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 of 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 June 1982 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 assumed responsibility as Vice President, International in June 1996. Mr. Cusack has also served as President Directeur General of Ventana Medical Systems, S.A., a wholly-owned subsidiary of Ventana, since September 1995. From November 1992 until joining Ventana, Mr. Cusack acted as General Manager, Europe and Mideast for CYTYC S.A.R.L., a medical diagnostics company with operations in the United States and abroad. Prior to CYTYC, Mr. Cusack held various marketing and managerial positions with Abbott's Diagnostics Division. Mr. Cusack received a B.S. from the University of Delaware and an M.B.A. from Temple University. MR. 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 52 54 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. DR. POWERS joined Ventana as Vice President, of Operations in November 1996. From June 1990 until joining Ventana, Dr. Powers held various management positions with Organon Teknika Corporation, a medical diagnostic company, serving most recently as Director of Manufacturing Technologies. Dr. Powers holds a Ph.D. in Chemical Engineering from North Carolina State University, an M.S. in Chemical Engineering from Clemson University, an M.B.A. from Duke University and a B.A. in Chemistry from Wake Forest University. MR. QUESTIER has served as Vice President of European Operations of Ventana since February 1996. From October 1990 until joining Ventana in October 1995, Mr. Questier held a number of management positions in E.I. DuPont de Nemours, most recently as Business Manager for 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 a 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 53 55 firm of McKinsey & Co., specializing in health care. He is currently a director of TRO Learning, Inc. and Stericycle, Inc. Mr. Patience received a B.A. in Liberal Arts and an L.L.B. from the University of Sydney, Australia and an M.B.A. from the University of Pennsylvania Wharton School of Business. 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 M.B.A. from Stanford University. BOARD OF DIRECTORS The Company's Bylaws authorize and the Company currently has a board of 10 directors. All directors hold office until the next annual meeting of stockholders or until their successors have been elected. The Company's certificate of incorporation and Bylaws, however, provide that the Board of Directors is divided into three classes. Each class consists of three or four directors. The terms of office of class I, class II and class III directors 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, 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. 54 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 $8,800 annual automobile allowance. (4) Consists entirely of commissions earned through employment as the Company's Northern Regional Sales Manager prior to his promotion to National Sales Manager in June of 1995. 55 57 STOCK OPTION INFORMATION The following table contains information concerning the stock option grants made to each of the Named Executive Officers for the year ended December 31, 1995. OPTION GRANTS IN LAST YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ---------------------------------------------------- VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS EXERCISE PRICE APPRECIATION UNDERLYING GRANTED TO OR BASE FOR OPTION TERM(4) OPTIONS EMPLOYEES PRICE EXPIRATION --------------------- NAME GRANTED(1) IN 1995(2) ($/SH)(3) DATE 5%($) 10%($) - ---------------------------- ---------- ---------- --------- -------- ------- ------- R. James Danehy............. -- -- -- -- -- -- Bernard O. C. Questier...... 36,956 11.39% $0.84 10/4/05 $19,523 $49,476 David P. Pauluzzi........... 23,098 7.12 0.84 4/4/05- 12,202 30,922 6/30/05 Michael K. Cusack........... -- -- -- -- -- -- R. Michael Rodgers.......... 15,152 4.67 0.84 4/4/05 8,005 20,286
- --------------- (1) Options were granted under the Company's 1988 Stock Option Plan. These generally vest over four years from the date of grant. (2) Based on an aggregate of 324,505 options granted by the Company in the year ended December 31, 1995 under the Company's 1988 Stock Option Plan to all employees of and consultants to the Company, including the Named Executive Officers. (3) The exercise price per share of each option was equal to the fair market value of the Common Stock on the date of grant as determined by the Company's Board of Directors. (4) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission. There can be no assurance provided to any executive officer or any other holder of the Company's securities that the actual stock price appreciation over the 10-year option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the executive officers. AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES The following table sets forth, for each of the Named Executive Officers, the shares acquired and the value realized on exercises of stock options during the year ended December 31, 1995 and the year-end number and value of exercisable and unexercisable options.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS SHARES AT DECEMBER 31, 1995 AT DECEMBER 31, 1995(1) ACQUIRED ON VALUE ---------------------------- ---------------------------- NAME EXERCISE(#) REALIZED($) 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. 56 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 and approved by the Company's stockholders in July 1996. A total of 1,000,000 shares of Common Stock are reserved for issuance under the 1996 Stock Plan. As of December 1, 1996, no shares of Common Stock had been issued pursuant to stock option exercises, options to purchase 81,830 shares of Common Stock were outstanding at a weighted average exercise price of $15.71 per share, and 918,170 shares remained available for future issuance under 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's Board of Directors adopted, and in July 1996 the Company's stockholders approved, 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. 57 59 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 December 1, 1996, 431,082 shares of Common Stock had been issued upon exercise of stock options, options to purchase an aggregate of 737,878 shares were outstanding at a weighted average exercise price of $2.41 per share, and 170,683 shares remained available for future issuance under the 1988 Stock Plan. 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 and was approved by the Company's stockholders in July 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 commenced on August 1, 1996. 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. 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 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. 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 58 60 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. 59 61 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 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
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. 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 canceled 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 $1.62 per share. 60 62 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 provided 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 onehalf 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. Each share of Preferred Stock was converted into 0.37 shares of Common Stock upon the closing of the Company's initial public offering. In connection with the acquisition of BioTek in February 1996, the Company issued (the "BioTek Financing") $4.6 million of convertible subordinated notes (the "Ventana 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 Ventana 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 Ventana Notes and Warrants to acquire 87,384 shares of Series D Preferred Stock were issued. The Ventana 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 Ventana Notes into Common Stock. The following table sets forth the aggregate principal amount of the Ventana 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:
PREFERRED ORIGINAL SHARES LOAN UNDERLYING NAME 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 11,728 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. 61 63 In September 1996, the Company offered to repay an aggregate of $4.0 million of Exchange Notes and Ventana Notes at 90.5% of the principal amount of such notes. On October 18, 1996, the Company repaid $3.7 million of Exchange Notes and Ventana Notes at a discounted amount of $3.4 million. As part of such repayments, the Company repaid $62,500.00, $168,000.00 and $50,000.00 in original principal amount of Exchange Notes and Ventana Notes held by directors Jack Schuler, Anthony Stellar and John Patience for payments of $56,562.50, $152,040.00 and $45,250.00, respectively. 62 64 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 December 1, 1996 (assuming the exercise of all outstanding warrants 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 OWNED AFTER THE OFFERING(1)(2) NUMBER OF OFFERING(3) EXECUTIVE OFFICERS, DIRECTORS --------------------- SHARES BEING --------------------- OR 5% STOCKHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT - ------------------------------------ --------- ------- ------------ --------- ------- Entities affiliated with Marquette Venture Partners(4) 520 Lake Cook Rd., Suite 450 Deerfield, IL 60015............... 1,918,650 17.5% 375,000 1,543,650 12.0% MBW Venture Partners, L.P.(5) James R. Weersing 365 South Street Morristown, NJ 07960.............. 1,442,351 13.0% -- 1,442,351 11.1% State Farm Mutual Automobile Insurance Company(6) One State Farm Plaza Bloomington, IL 61701............. 887,173 8.0% -- 887,173 6.9% Jack W. Schuler(7) 1419 Lake Cook Road, Suite 415 Deerfield, IL 60015............... 965,607 8.7% -- 965,607 7.5% R. James Danehy(8).................. 320,656 2.9% -- 320,656 2.5% R. Michael Rodgers(9)............... 40,616 * -- 40,616 * Michael K. Cusack(10)............... 19,605 * -- 19,605 * Carl W. Hull........................ 1,396 * -- 1,396 * David P. Pauluzzi(11)............... 15,516 * -- 15,516 * Bernard O.C. Questier(12)........... 11,550 * -- 11,550 * John Powers......................... 0 * -- 0 * Rex J. Bates(13).................... 31,152 * -- 31,152 * Michael R. Danzi(14)................ 9,566 * -- 9,566 * Edward M. Giles(15)................. 279,333 2.5% -- 279,333 2.2% Thomas M. Grogan, M.D.(16).......... 173,526 1.6% -- 173,526 1.4% John Patience(17)................... 292,789 2.6% -- 292,789 2.3% C. Anthony Stellar, M.D.(18)........ 19,959 * -- 19,959 * James M. Strickland(19)............. 402,547 3.7% -- 402,547 3.1% James R. Weersing(5)(20)............ 1,452,858 13.1% -- 1,452,858 11.2% All directors and executive officers as a group (19 persons)........... 4,107,057 35.2% -- 4,107,057 30.4% OTHER SELLING STOCKHOLDERS Interwest Partners IV, L.P.(3)...... 370,900 3.4% 148,360 222,540 1.7% The CIT Group/Venture Capital, Inc.(3)........................... 346,386 3.2% 138,555 207,831 1.6% Other Selling Stockholders, each holding prior to the offering less than 1% of the outstanding shares of Common Stock(3)................ 338,085
63 65 - --------------- * 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 10,965,418 shares of Common Stock outstanding as of December 1, 1996 together with shares issuable pursuant to applicable options and warrants of such stockholder which may be exercised within 60 days after December 1, 1996. Shares of Common Stock subject to options and warrants currently exercisable or exercisable within 60 days after December 1, 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. (3) Assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." Applicable percentage ownership is based upon 12,815,418 shares of Common Stock outstanding as of December 1, 1996 (after giving effect to the shares offered by the Company hereby) together with shares issuable pursuant to applicable options and warrants for each stockholder currently exercisable or exercisable within 60 days after December 1, 1996. In the event that the over-allotment option is exercised, The CIT Group/Venture Capital, Inc., Interwest Partners IV, L.P. and the Other Selling Stockholders 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 162,060 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. (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 145,488 shares issuable upon the exercise of options exercisable within 60 days of December 1, 1996 held by Mr. Danehy. (9) Includes 7,138 shares issuable upon the exercise of options exercisable within 60 days of December 1, 1996 held by Mr. Rodgers. (10) Includes 3,696 shares issuable upon the exercise of options exercisable within 60 days of December 1, 1996 held by Mr. Cusack. (11) Includes 4,275 shares issuable upon the exercise of options exercisable within 60 days of December 1, 1996 held by Mr. Pauluzzi. (12) Includes 11,550 shares issuable upon the exercise of options exercisable within 60 days of December 1, 1996 by Mr. Questier. (13) Includes 11,143 shares issuable upon the exercise of warrants held by Mr. Bates. (14) Includes 1,087 shares beneficially owned by Barbara A. Danzi. 64 66 (15) Includes 122,814 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.); 36,869 shares beneficially owned by Vertical Medical Partners, L.P.; 68,542 shares beneficially owned by Vertical Fund Associates, L.P.; and 27,679 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. (16) 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 13,548 shares issuable upon exercise of options exercisable within 60 days of December 1, 1996 held by Dr. Grogan. (17) Includes 96,689 shares issuable upon the exercise of warrants held by Mr. Patience. (18) Includes 740 shares beneficially owned by Diane Stellar, and 740 shares beneficially owned by Andrew Stellar. (19) 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-Investors 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. (20) 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. 65 67 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock and 5,000,000 shares of preferred 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 December 1, 1996, there were 10,965,418 shares of Common Stock outstanding which were held of record by 400 stockholders. 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 The Company is authorized to issue 5,000,000 shares of undesignated preferred stock. 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, none of the preferred stock is outstanding and the Company has no plans to issue any of the preferred stock. WARRANTS At December 1, 1996, the Company had outstanding warrants to purchase 784,612 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 antitakeover 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 66 68 "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of a corporation's voting stock. The existence of this provision would be expected to have an antitakeover 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 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 12,815,418 shares of Common Stock outstanding, assuming no exercise of options or warrants after December 1, 1996. Of these 12,815,418 shares, 5,294,774 shares 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 7,520,644 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 ("restricted securities"). 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 and executive officers, the Selling Stockholders and certain other stockholders, who will in the aggregate hold shares of Common Stock upon the completion of this Offering, 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 120 days after the date of this Prospectus, without the prior written consent of Dillon, Read & 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. Of the 7,520,644 outstanding shares of the Company's Common Stock that represent restricted securities, approximately shares will be available for immediate public resale on the date of this Offering. An additional shares of Common Stock will be saleable between the effective date of this Offering and 120 days after the Offering. Upon expiration of the lock-up agreements, approximately shares of Common Stock (including approximately 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 shares comprising restricted securities 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. Approximately of the shares outstanding immediately following the completion of this Offering, excluding all of the Company's outstanding warrants which may be converted on a cash basis into shares of the Company's Common Stock 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. 67 69 As of December 1, 1996, 819,728 shares were subject to outstanding options. Certain of these shares are subject to the lock-up agreements described above. The Company has filed a Registration Statement on Form S-8 covering shares issuable under the Company's 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, subject, in certain cases, to expiration of 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 128,154 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 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 the Company's initial public 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. 68 70 UNDERWRITING The underwriters named below (the "Underwriters"), for whom Dillon, Read & Co. Inc., Bear, Stearns & Co. Inc. and Cowen & Company 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 UNDERWRITERS OF SHARES ------------------------------------------------------------------------- ---------- Dillon, Read & Co. Inc................................................... Bear, Stearns & Co. Inc.................................................. Cowen & Company.......................................................... --------- Total.......................................................... 2,850,000 =========
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 public offering, the public offering price and other selling terms may be changed by the Underwriters. Certain Selling Stockholders have granted to the Underwriters an option to purchase up to 427,500 additional Shares of Common Stock, respectively, at the 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 executive officers and directors of the Company, the Selling Stockholders and certain other stockholders, who will in the aggregate own shares of Common Stock upon the completion of this offering, have agreed that they will not, without the prior written consent of Dillon, Read & 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 120 day period following the date of this Prospectus. The Company has agreed that it will not, without the prior written consent of Dillon, Read & Co. Inc., offer, sell or 69 71 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 120 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. In connection with this Offering, certain Underwriters and selling group members or their affiliates may engage in passive marketing making transactions in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") during the two business day period before the commencement of sales in this Offering. Passive market making consists of, among other things, displaying bids on the Nasdaq National Market limited by the bid prices of independent market makers and purchases limited by such prices and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the Common Stock during a specified prior period and all possible market making activity must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. 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 converted into 25,784 shares of Common Stock upon the completion of the Company's initial public 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 6,660 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 70 72 with respect thereto, and are included herein in reliance upon the authority of such firm as experts in giving said reports. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information may be inspected and copied at the principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and should be available at the Commission's Regional Offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a site on the World Wide Web at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Company has filed with the Commission 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. 71 73 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 September 30, 1996... F-3 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1995.......................................................... F-4 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 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 September 30, 1996 (unaudited)...................................................................... F-9 Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and nine months ended September 30, 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 nine months ended September 30, 1996 (unaudited)...................................... F-11 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and nine months ended September 30, 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 74 VENTANA MEDICAL SYSTEMS, INC. INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited pro forma consolidated balance sheet as of September 30, 1996 includes the February 26, 1996 acquisition of BioTek Solutions, Inc. (BioTek). The accompanying pro forma condensed consolidated statements of operations for the year ended December 31, 1995 and for the nine months ended September 30, 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 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 the Prospectus. F-2 75 VENTANA MEDICAL SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (IN THOUSANDS)
PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS AS ADJUSTED ---------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents.......................... $ 17,116 $ 27,447(a) $ 44,563 Accounts receivable................................ 3,534 -- 3,534 Inventories........................................ 3,226 -- 3,226 Other.............................................. 974 -- 974 ------- -------- -------- Total current assets................................. 24,850 27,447 52,297 Property, plant and equipment, net................... 3,142 -- 3,142 Intangibles, net..................................... 11,622 -- 11,622 ------- -------- -------- Total assets............................... $ 39,614 $ 27,447 $ 67,061 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................... $ 2,412 $ -- $ 2,412 Other current liabilities.......................... 4,254 -- 4,254 ------- -------- -------- Total current liabilities............................ 6,666 -- 6,666 Long-term debt....................................... 15,937 (--)(a) 15,937 Stockholders' equity Common stock -- amount paid in..................... 50,892 27,447(a) 78,339 Accumulated deficit................................ (33,663) -- (33,663) Cumulative foreign currency transaction adjustment...................................... (218) -- (218) ------- -------- -------- Total stockholders' equity................. 17,011 27,447 44,458 ------- -------- -------- Total liabilities and stockholders' equity................................... $ 39,614 $ 27,447 $ 67,061 ======= ======== ========
See accompanying notes. F-3 76 VENTANA MEDICAL SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
VENTANA BIOTEK PRO FORMA PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS AS ADJUSTED ---------- ---------- ----------- ----------- Net sales................................. $ 10,613 $ 6,920 $ 1,942(2) $ 19,475 Cost of goods sold........................ 4,282 4,294 520 ( ),(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 ( ),(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................................ $ (0.38) $ (1.52) ======= ======== Pro forma weighted average shares outstanding, as adjusted................ 8,664 10,167 ======= ========
See accompanying notes. F-4 77 VENTANA MEDICAL SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA VENTANA BIOTEK PRO FORMA AS HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTED ---------- ---------- ----------- ---------- Net sales................................. $ 15,895 $ 1,097 $ (15)(2) $ 16,977 Cost of goods sold........................ 6,513 593 (398)( ,(3) 6,708 -------- ------- ------- ------- Gross profit.............................. 9,382 504 383 10,269 Operating expenses: Research and development................ 2,176 163 (5)(3) 2,334 Selling, general and administrative..... 8,135 368 356 ( ),(4 8,859 Nonrecurring expenses................... 10,262 413 (10,396)(5) 279 Amortization of intangibles............. 315 -- 92(6) 407 -------- ------- ------- ------- Loss from operations...................... (11,506) (440) 10,336 (1,610) Interest (expense) income................. (28) (944) 944(7) (28) -------- ------- ------- ------- Net loss.................................. $ (11,534) $ (1,384) $11,280 $ (1,638) ======== ======= ======= ======= Pro forma net loss per share, as adjusted................................ $ (1.20) $ (0.15) ======== ======= Pro forma weighted average shares outstanding, as adjusted................ 9,581 10,628 ======== =======
See accompanying notes. F-5 78 VENTANA MEDICAL SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) 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 been acquired BioTek on January 1, 1995 and are adjusted to reflect the sale of 1,850,000 shares of Common Stock 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 Notes 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 ------- 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 been established and where there are no alternative future uses. Intangible assets consists 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 payment of outstanding Exchange Notes assuming that the terms of the final Offering are consistent with this document. Ventana acquired BioTek on February 26, 1996. Therefore, the pro forma condensed consolidated statement of operations for the nine months ended September 30, 1996 reflects operating results as if the merger had occurred on January 1, 1996. STATEMENT OF OPERATIONS ADJUSTMENTS (1) BioTek's historical fiscal year ended 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 cost of goods sold reflect the accounting policy of recognizing revenue, for sales in the United States only, upon the ultimate sale of products to the end-users as if such policy had been in F-6 79 VENTANA MEDICAL SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) 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 the difference 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 July 17, 1996, the Santa Barbara facility was shut-down. 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 sales and marketing organizations of Ventana and BioTek, and (iii) the elimination of certain redundant administrative positions. A summary of the net savings in the pro forma selling, general and administrative expense follows:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1995 1996 ------------ ------------- Distribution expense................................... $1,038 $ 1,038 Sales and marketing.................................... (92) 275 General and administrative............................. (910) (957) ------ ----- $ 36 $ 356 ====== =====
(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, $2.4 million associated with the acquisition and integration of BioTek and $0.4 million in fees incurred related to the BioTek acquisition. These changes were incurred in the first, second and third quarters 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. F-7 80 VENTANA MEDICAL SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS) (8) The calculation of pro forma weighted average number of shares outstanding is as follows:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1995 1996 ------------ ------------- Weighted average shares outstanding.................... 7,571 8,396 Stock, options and warrants issued within one year of the initial filing................................... 1,093 729 Shares of Common Stock issued in connection with the offering to be used partially to retire acquisition debt................................................. 1,503 1,503 ---------- --------- - Weighted average shares outstanding, as adjusted....... 10,167 10,628 ---------- --------- -
F-8 81 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. ERNST & YOUNG LLP Tucson, Arizona February 28, 1996, except for Note 11, as to which the date is December 19, 1996 F-9 82 VENTANA MEDICAL SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, --------------------- SEPTEMBER 30, 1994 1995 1996 -------- -------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................ $ 2,511 $ 1,103 $ 17,116 Accounts receivable.................................. 1,451 1,925 3,534 Inventories (Note 2)................................. 893 1,767 3,226 Other................................................ 38 24 974 ------ ------ ------- Total current assets................................... 4,893 4,819 24,850 Property and equipment, net (Note 3)................... 2,169 2,258 3,142 Intangibles, net (Note 11)............................. 217 301 11,622 ------ ------ ------- Total assets................................. $ 7,279 $ 7,378 $ 39,614 ====== ====== ======= LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable..................................... $ 639 $ 1,061 $ 2,412 Other current liabilities (Note 4)................... 534 993 4,254 ------ ------ ------- Total current liabilities.............................. 1,173 2,054 6,666 Long-term debt......................................... -- -- 15,937 Commitments (Notes 6, 9 and 11) Convertible redeemable preferred stock at aggregate mandatory redemption value (Notes 6 and 10).......... 30,237 35,180 -- 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 September 30, 1996)............................ -- -- -- Common stock -- $.001 par value; 50,000,000 shares authorized, 875,005, 1,020,164, and 10,876,082 shares issued and outstanding at December 31, 1994 and 1995 and September 30, 1996, respectively -- amount paid in.................... 190 244 50,892 Accumulated deficit.................................... (24,275) (29,980) (33,663) Cumulative foreign currency translation adjustment..... (46) (120) (218) ------ ------ ------- Total stockholders' equity (deficit)......... (24,131) (29,856) 17,011 ------ ------ ------- Total liabilities, convertible redeemable preferred stock, and stockholders' equity..................................... $7,279... $ 7,378 $ 39,614 ====== ====== =======
See accompanying notes. F-10 83 VENTANA MEDICAL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ------------------ 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- (UNAUDITED) Net sales..................................... $ 2,681 $ 5,927 $10,613 $ 7,594 $ 15,895 Cost of goods sold............................ 1,722 2,531 4,282 3,043 6,513 ------- ------- ------- ------- -------- 959 3,396 6,331 4,551 9,382 Operating expenses: Research and development.................... 2,100 1,926 2,239 1,754 2,176 Selling, general and administrative......... 4,067 6,899 7,435 5,317 8,135 Nonrecurring expenses....................... -- -- -- -- 10,262 Amortization of intangibles................. -- -- -- -- 315 ------- ------- ------- ------- -------- Loss from operations.......................... (5,208) (5,429) (3,343) (2,520) (11,506) Interest income (expense)..................... 229 59 74 111 (28) ------- ------- ------- ------- -------- Net loss...................................... $(4,979) $(5,370) $(3,269) $(2,409) $(11,534) ======= ======= ======= ======= ======== Net loss per share, as adjusted............... $ (0.38) $ (0.28) $ (1.20) ======= ======= ======== Shares used in computing net loss per share, as adjusted................................. 8,664 8,600 9,581 ======= ======= ========
See accompanying notes. F-11 84 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) Proceeds of initial public offering, net of expenses of $925 (unaudited).......... -- -- -- -- 1,963,975 18,265 -- -- 18,265 Sale of Series D preferred stock (unaudited).......... -- -- 413 413 -- -- -- -- -- Accretion of preferred stock redemption requirement (unaudited).......... -- 328 1,027 1,355 -- -- (1,355) -- (1,355) Conversion of preferred stock upon completion of initial public offering (unaudited).......... (536) (11,024) (25,388) (36,948) 6,716,997 27,742 9,206 -- 36,948 Conversion of debt into common stock (unaudited).......... -- -- -- -- 222,973 3,007 -- -- 3,007 Sales of common stock -- other (unaudited).......... -- -- -- -- 951,973 1,634 -- -- 1,634 Translation adjustment (unaudited).......... -- -- -- -- -- -- -- (98) (98) Net loss (unaudited)... -- -- -- -- -- -- (11,534) -- (11,534) ----- -------- -------- -------- --------- ------- -------- ----- -------- Balance at September 30, 1996 (unaudited)....... $ -- $ -- $ -- $ -- 10,876,082 $50,892 $ (33,663) $ (218) $ 17,011 ===== ======== ======== ======== ========= ======= ======== ===== ========
See accompanying notes. F-12 85 VENTANA MEDICAL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ------------------ 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- (UNAUDITED) OPERATING ACTIVITIES: Net loss...................................... $(4,979) $(5,370) $(3,269) $(2,409) $(11,534) Adjustments to reconcile net loss to net cash used in operating activities: Purchased in-process research and development.............................. -- -- -- -- 7,900 Depreciation and amortization............... 334 477 911 612 1,196 Changes in operating assets and liabilities: Accounts receivable......................... (244) (941) (474) (343) (987) Inventories................................. (258) (24) (874) (325) (1,331) Other assets................................ (126) 37 (114) 38 26 Accounts payable............................ 69 321 422 60 855 Other current liabilities................... 110 224 459 531 (298) ------- ------- ------- ------- -------- Net cash used in operating activities......... (5,094) (5,276) (2,939) (1,836) (4,173) INVESTING ACTIVITIES: Purchase of property and equipment, net....... (1,700) (604) (956) (720) (891) Purchase of intangible assets................. -- -- -- (111) (3,362) 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) (831) (6,753) FINANCING ACTIVITIES: Repayments of notes payable................... (42) (36) -- -- -- Net proceeds from initial public offering..... -- -- -- -- 18,265 Issuance of debt (including amounts from related parties) and stock.................. 5,147 3,035 2,561 2,478 8,772 ------- ------- ------- ------- -------- Net cash provided by financing activities..... 5,105 2,999 2,561 2,478 27,037 Effect of exchange rate changes on cash....... -- (46) (74) 2 (98) ------- ------- ------- ------- -------- Net (decrease) increase in cash and cash equivalents................................. (5,752) 1,136 (1,408) (187) 16,013 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 $ 2,324 $ 17,116 ======= ======= ======= ======= ========
See accompanying notes. F-13 86 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 (INFORMATION FOR THE PERIODS ENDED SEPTEMBER 30, 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 September 30, 1996 and for the nine months ended September 30, 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 nine months ended September 30, 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 F-14 87 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assets to their carrying values. The Company will periodically evaluate the useful lives assigned to the various categories of intangible assets considering such factors as (i) demand, obsolescence, competition, market share, and other economic factors; (ii) legal and regulatory provisions; and (iii) the periods expected to be benefited. Revenue Recognition: Sales of instruments and reagents are generally recognized upon shipment. 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 for periods prior to the effective date of the Company's initial public offering (see Note 11), 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 F-15 88 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 initial public offering price. Net loss per common share was as follows:
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- -------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- (IN THOUSANDS) Net loss.............................. $(4,979) $(5,370) $(3,269) $(2,409) $(11,534) Less accretion of preferred stock redemption requirement.............. (1,796) (1,983) (2,436) (1,739) (1,355) ------- ------- ------- ------- -------- Net loss applicable to common stock... $(6,775) $(7,353) $(5,705) $(4,148) $(12,889) ======= ======= ======= ======= ======== Net loss per common share............. $ (3.47) $ (3.66) $ (2.78) $ (2.04) $ (3.04) ======= ======= ======= ======= ======== Weighted average shares outstanding... 1,950 2,010 2,050 2,032 4,241 ======= ======= ======= ======= ========
The as adjusted calculation of net loss per share presented in the consolidated statements of operations has been computed as described above, but also gives effect to the conversion of all outstanding shares of convertible redeemable preferred stock into common stock upon closing of the Company's initial public offering (determined using the if-converted method) and the exercise of warrants to purchase Series D preferred stock which would otherwise have expired upon completion of the Offering. 2. INVENTORIES Inventories consist of the following:
DECEMBER 31, --------------- SEPTEMBER 30, 1994 1995 1996 ---- ------ ------------- (IN THOUSANDS) Raw materials and work-in-process.................... $752 $1,265 $ 2,619 Finished goods....................................... 141 502 607 ---- ------ ------ $893 $1,767 $ 3,226 ==== ====== ======
3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, ----------------- SEPTEMBER 30, 1994 1995 1996 ------ ------ ------------- (IN THOUSANDS) Diagnostic instruments............................. $1,544 $2,008 $ 1,828 Machinery and equipment............................ 1,356 1,501 2,966 Computers and related equipment.................... 187 284 611 Furniture and fixtures............................. 116 272 291 Leasehold improvements............................. 39 133 217 ------ ------ ------ 3,242 4,198 5,913 Less accumulated depreciation and amortization... 1,073 1,940 2,771 ------ ------ ------ $2,169 $2,258 $ 3,142 ====== ====== ======
F-16 89 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. OTHER CURRENT LIABILITIES Other current liabilities consist of the following:
DECEMBER 31, ------------- SEPTEMBER 30, 1994 1995 1996 ---- ---- ------------- (IN THOUSANDS) Accrued payroll and payroll taxes...................... $205 $289 $ 397 Accrued commissions.................................... 150 198 193 Deferred revenue....................................... 46 127 1,235 Advances from distributor.............................. -- -- 400 Accrued integration costs.............................. -- -- 498 Accrued legal fees and settlement costs................ -- -- 331 Sales tax payable...................................... -- 167 428 Other accrued expenses................................. 133 212 772 ---- ---- ------ $534 $993 $ 4,254 ==== ==== ======
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-17 90 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of mandatory redemption value, accumulated unpaid dividends and authorized, issued, and outstanding shares:
DECEMBER 31, ---------------------------------------- 1993 1994 1995 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) Series A (non-cumulative): Mandatory redemption............................... $ 536 $ 536 $ 536 Authorized shares.................................. 750,000 750,000 750,000 Issued and outstanding shares...................... 750,000 750,000 750,000 Series C (9% cumulative): Mandatory redemption, including accumulated dividends....................................... $ 9,385 $ 10,041 $ 10,696 Accumulated dividends.............................. $ 2,109 $ 2,765 $ 3,420 Authorized shares.................................. 8,300,000 8,300,000 8,300,000 Issued and outstanding shares...................... 8,083,039 8,084,543 8,084,543 Series D (9% cumulative): Mandatory redemption, including accumulated dividends....................................... $ 15,291 $ 19,660 $ 23,948 Accumulated dividends.............................. $ 1,338 $ 2,650 $ 4,431 Authorized shares.................................. 6,750,000 10,250,000 10,250,000 Issued and outstanding shares...................... 6,489,954 7,911,836 9,098,741 Totals Mandatory redemption, including accumulated dividends....................................... $ 25,212 $ 30,237 35,180 Accumulated dividends.............................. $ 3,447 $ 5,415 $ 7,851 Authorized shares.................................. 15,800,000 19,300,000 19,300,000 Issued and outstanding shares...................... 15,322,993 16,746,379 17,933,284
All shares of Series A, C, and D preferred stock were converted to common stock upon completion of the Company's initial public offering. (See Note 11). Upon 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-18 91 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 were exercised upon the initial public offering. (See Note 11). 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................................................. 318,416 1.62- 13.50 Exercised............................................... (173,099) 0.24- 1.62 Canceled................................................ (35,849) 0.24- 1.62 -------- ----------- Balance at September 30, 1996............................. 759,922 0.24- 13.50
Options to purchase 133,716 shares of common stock were immediately exercisable at December 31, 1995. F-19 92 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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-20 93 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 On July 26, 1996, the Company sold, through an underwritten public offering, 1,890,907 shares of its Common Stock at $10.00 per share. Upon closing of the Company's initial public offering, all outstanding shares of its Series A, C and D Redeemable Convertible Preferred stock were converted into 6,716,997 shares of Common Stock, after giving effect to the Company's 1 for 2.7059046 reverse stock split. On August 25, 1996, the Company's underwriters exercised a portion of their overallotment option. The underwriters purchased an additional 73,068 shares of Common Stock from the Company, resulting in net proceeds of $679,532 to the Company. All share and per share amounts have been retroactively adjusted to reflect the reverse stock split. In December 1996, the Company's Board of Directors authorized the Company to file a Registration Statement with the Securities and Exchange Commission to sell an additional 1,850,000 shares of common stock in an underwritten public offering. F-21 94 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 February 26, 1997, no interest is payable. On September 9, 1996, the Company offered to redeem up to $4.0 million of Exchange Notes at an early payment discount of 9.5% of the face value of the notes. On October 18, 1996, the Company redeemed for $3.4 million Exchange Notes with a face value of $3.7 million. The resulting gain on extinguishment of debt will be reflected in operating results for the fourth quarter of 1996. 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 2,402,058 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 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 F-22 95 VENTANA MEDICAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) February 26, 1997. 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-23 96 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-24 97 BIOTEK SOLUTIONS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 1995 1995 -------- ------------ ASSETS (NOTE 8) 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 -------- -------- Total assets................................................. $ 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) -------- -------- Total liabilities and stockholders' equity................... $ 2,488 $ 2,594 ======== ========
See accompanying notes. F-25 98 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-26 99 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-27 100 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-28 101 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 F-29 102 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Financial Instruments. The carrying value of these financial instruments is a reasonable approximation of fair value. 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-30 103 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%. F-31 104 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 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 $ 0.45 - $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 $ 0.45 - $3.00 ======== =============
F-32 105 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. 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, F-33 106 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. 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-34 107 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-35 108 BIOTEK SOLUTIONS, INC. BALANCE SHEETS AS OF JUNE 30, 1993 AND 1994
1993 1994 ----------- ----------- ASSETS 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-36 109 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-37 110 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-38 111 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 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-39 112 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 April 1998, and the international distribution agreement expires in December 1999, if not renewed by the parties. F-40 113 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 F-41 114 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 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 F-42 115 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 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 F-43 116 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 Company, interest at 7.5 percent payable quarterly, due 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 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 F-44 117 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 F-45 118 BIOTEK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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-46 119 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON 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.......................... 18 Use of Proceeds...................... 18 Price Range of Common Stock and Dividend Policy.................... 18 Dilution............................. 19 Capitalization....................... 20 Selected Consolidated Actual and Pro Forma Financial Data............... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22 Business............................. 32 Management........................... 51 Certain Transactions................. 60 Principal and Selling Stockholders... 63 Description of Capital Stock......... 66 Shares Eligible for Future Sale...... 67 Underwriting......................... 69 Legal Matters........................ 70 Experts.............................. 70 Available Information................ 71 Index to Financial Statements........ F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ VENTANA MEDICAL SYSTEMS, INC. LOGO ------------------------------ 2,850,000 SHARES COMMON STOCK PROSPECTUS , 1997 ------------------------------ DILLON, READ & CO. INC. BEAR, STEARNS & CO. INC. COWEN & COMPANY - ------------------------------------------------------ - ------------------------------------------------------ 120 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...................................................... $ 15,643 NASD filing fee........................................................... 5,663 Nasdaq National Market additional shares listing fee...................... 17,500 Printing and engraving costs.............................................. 150,000 Legal fees and expenses (company counsel)................................. 150,000 Legal fees and expenses (Selling Stockholders counsel).................... 25,000 Accounting fees and expenses.............................................. 50,000 Blue Sky fees and expenses................................................ 20,000 Transfer Agent and Registrar fees......................................... 5,000 Miscellaneous expenses.................................................... 86,194 -------- Total........................................................... $525,000 ========
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 or the conversion of preferred stock to common stock, both effected prior to the closing of the Company's initial public 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-1 121 (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 this 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). On October 18, 1996 the Company repaid $3.7 million of Exchange Notes and convertible subordinated debt at a discounted amount of $3.4 million. (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)(b)(1) Restated Certificate of Incorporation of Registrant. 3.1(ii)(b)(1) Bylaws of Registrant. 4.1(1) Specimen Common Stock Certificate. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1(a)(1)+ DAKO Distribution Agreement dated September 27, 1994. 10.1(b)(1)+ First Amendment to DAKO Distribution Agreement dated March 24, 1995.
II-2 122
EXHIBIT NUMBER DESCRIPTION - ------------- ----------------------------------------------------------------------------- 10.1(c)(1)+ Further amendments to First Amendment to DAKO Distribution Agreement dated March 24, 1995. 10.1(d)++ Second amendment to DAKO Distribution Agreement dated September 25, 1996. 10.2(a)(1) Kollsman Secured Promissory Note dated December 4, 1994. 10.2(b)(1) Development Secured Promissory Note dated March 24, 1995. 10.3(1)+ Curtin Matheson Scientific, Inc. Distribution Agreement dated January 18, 1993. 10.4(a)(1) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 1. 10.4(b)(1) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 2. 10.4(c)(1) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 3. 10.5(a)(1) Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 -- Tranche 1. 10.5(b)(1) Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 -- Tranche 2. 10.6(1) Form of Indemnification Agreement for directors and officers. 10.7(a)(1) 1988 Stock Option Plan and forms of agreements thereunder. 10.7(b)(1) 1996 Stock Option Plan and forms of agreements thereunder. 10.8(a)(1) 1991 Employee Stock Purchase Plan. 10.8(b)(1) 1996 Employee Stock Purchase Plan. 10.8(c)(1) 1996 Directors Option Plan. 10.9(1) Questier Employment Agreement dated October 20, 1995. 10.10(1) Restated Investors Rights Agreement dated February 20, 1996. 10.11(1) Sublease of Premises between the Registrant and Jerry R. Jones & Associates, Inc., dated February 29, 1996, with attached Master Lease, dated October 26, 1988. 10.12(1) Master Lease Purchase Agreement between the Registrant and Copelco Leasing Corporation dated April 13, 1994. 10.13(a)(1) Agreement and Plan of Reorganization dated January 19, 1996. 10.13(b)(1) Agreement and Plan of Merger dated February 26, 1996. 10.13(c)(1) Escrow Agreement dated February 26, 1996. 10.14(a)(1) Form of Stock Purchase Warrant to Purchase shares of Series D Preferred Stock. 10.14(b)(1) Form of Preferred Stock Purchase Warrant. 10.14(c)(1) MBW and Marquette Warrants dated August 21, 1992. 10.14(d)(1) Schuler Warrant dated September 30, 1992. 10.15(a)(1) Form of Convertible Unsecured Promissory Note. 10.15(b)(1) Form of Convertible Unsecured Promissory Note. 10.17(1)+ Novocastra Laboratories Ltd. Distribution Agreement dated August 19, 1992. 10.18(1)+ LJL BioSystems, Inc. Techmate 250 Production Agreement dated May 1, 1996. 10.19(a)(1) Silicon Valley Bank Loan and Security Agreement dated February 20, 1995. 10.19(b)(1) Amendment to Silicon Valley Bank Loan and Security Agreement dated March 28, 1996.
II-3 123
EXHIBIT NUMBER DESCRIPTION - ------------- ----------------------------------------------------------------------------- 11.1 Statement regarding computation of Per Share Earnings. 21.1(1) Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Ernst & Young LLP, Independent Auditors. 23.3 Consent of Arthur Andersen LLP, Independent Public Accountants. 23.4 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-5). 27.1 Financial Data Schedule.
- --------------- (1) Incorporated by reference to the like-numbered exhibit to Registrant's Registration Statement on Form S-1 (Commission File No. 333-4461), declared effective by the Commission July 26, 1996. + Confidential Treatment has been granted for certain portions of this Exhibit. ++ Confidential Treatment has been requested for certain portions of this Exhibit. (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-4 124 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tucson, State of Arizona, on the 19th day of December, 1996. VENTANA MEDICAL SYSTEMS, INC. By: /s/ R. JAMES DANEHY -------------------------------------- R. James Danehy, President and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. James Danehy and R. Michael Rodgers and each of them, his attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ----------------------------------- ----------------------------------- ------------------ /s/ R. JAMES DANEHY President, Chief Executive Officer December 19, 1996 - ----------------------------------- and Director (Principal Executive (R. James Danehy) Officer) /s/ R. MICHAEL RODGERS Vice President and Chief Financial December 19, 1996 - ----------------------------------- Officer (Principal Financial and (R. Michael Rodgers) Accounting Officer) /s/ BATES REX J. Director December 19, 1996 - ----------------------------------- (Rex J. Bates) /s/ MICHAEL R. Director December 19, 1996 DANZI - ----------------------------------- (Michael R. Danzi) /s/ EDWARD M. GILES Director December 19, 1996 - ----------------------------------- (Edward M. Giles) /s/ THOMAS M. GROGAN, M.D Director December 19, 1996 - ----------------------------------- (Thomas M. Grogan, M.D.) /s/ JOHN Director December 19, 1996 PATIENCE - ----------------------------------- (John Patience)
II-5 125
SIGNATURE TITLE DATE - ----------------------------------- ----------------------------------- ------------------ /s/ JACK W. SCHULER Director December 19, 1996 - ----------------------------------- (Jack W. Schuler) /s/ C. ANTHONY STELLAR, M.D. Director December 19, 1996 - ----------------------------------- (C. Anthony Stellar, M.D.) /s/ JAMES M. STRICKLAND Director December 19, 1996 - ----------------------------------- (James M. Strickland) /s/ JAMES R. WEERSING Director December 19, 1996 - ----------------------------------- (James R. Weersing)
II-6 126 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBITS PAGE - ------------- -------------------------------------------------------------------- 1.1 Form of Underwriting Agreement. 3.1(i)(b)(1) Restated Certificate of Incorporation of Registrant. 3.1(ii)(b)(1) Bylaws of Registrant. 4.1(1) Specimen Common Stock Certificate. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1(a)(1)+ DAKO Distribution Agreement dated September 27, 1994. 10.1(b)(1)+ First Amendment to DAKO Distribution Agreement dated March 24, 1995. 10.1(c)(1)+ Further amendments to First Amendment to DAKO Distribution Agreement dated March 24, 1995. 10.1(d)++ Second amendment to DAKO Distribution Agreement dated September 25, 1996. 10.2(a)(1) Kollsman Secured Promissory Note dated December 4, 1994. 10.2(b)(1) Development Secured Promissory Note dated March 24, 1995. 10.3(1)+ Curtin Matheson Scientific, Inc. Distribution Agreement dated January 18, 1993. 10.4(a)(1) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 1. 10.4(b)(1) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 2. 10.4(c)(1) Restricted Stock Purchase Agreement with Jack W. Schuler dated April 19, 1996 -- Tranche 3. 10.5(a)(1) Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 -- Tranche 1. 10.5(b)(1) Restricted Stock Purchase Agreement with John Patience dated April 19, 1996 -- Tranche 2. 10.6(1) Form of Indemnification Agreement for directors and officers. 10.7(a)(1) 1988 Stock Option Plan and forms of agreements thereunder. 10.7(b)(1) 1996 Stock Option Plan and forms of agreements thereunder. 10.8(a)(1) 1991 Employee Stock Purchase Plan. 10.8(b)(1) 1996 Employee Stock Purchase Plan. 10.8(c)(1) 1996 Directors Option Plan. 10.9(1) Questier Employment Agreement dated October 20, 1995. 10.10(1) Restated Investors Rights Agreement dated February 20, 1996. 10.11(1) Sublease of Premises between the Registrant and Jerry R. Jones & Associates, Inc., dated February 29, 1996, with attached Master Lease, dated October 26, 1988. 10.12(1) Master Lease Purchase Agreement between the Registrant and Copelco Leasing Corporation dated April 13, 1994. 10.13(a)(1) Agreement and Plan of Reorganization dated January 19, 1996. 10.13(b)(1) Agreement and Plan of Merger dated February 26, 1996. 10.13(c)(1) Escrow Agreement dated February 26, 1996.
127
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBITS PAGE - ------------- -------------------------------------------------------------------- 10.14(a)(1) Form of Stock Purchase Warrant to Purchase shares of Series D Preferred Stock. 10.14(b)(1) Form of Preferred Stock Purchase Warrant. 10.14(c)(1) MBW and Marquette Warrants dated August 21, 1992. 10.14(d)(1) Schuler Warrant dated September 30, 1992. 10.15(a)(1) Form of Convertible Unsecured Promissory Note. 10.15(b)(1) Form of Convertible Unsecured Promissory Note. 10.17(1)+ Novocastra Laboratories Ltd. Distribution Agreement dated August 19, 1992. 10.18(1)+ LJL BioSystems, Inc. Techmate 250 Production Agreement dated May 1, 1996. 10.19(a)(1) Silicon Valley Bank Loan and Security Agreement dated February 20, 1995. 10.19(b)(1) Amendment to Silicon Valley Bank Loan and Security Agreement dated March 28, 1996. 11.1 Statement regarding computation of Per Share Earnings. 21.1(1) Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Ernst & Young LLP, Independent Auditors. 23.3 Consent of Arthur Andersen LLP, Independent Public Accountants. 23.4 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-5). 27.1 Financial Data Schedule.
- --------------- (1) Incorporated by reference to the like-numbered exhibit to Registrant's Registration Statement on Form S-1 (Commission File No. 333-4461), declared effective by the Commission July 26, 1996. + Confidential Treatment has been granted for certain portions of this Exhibit. ++ Confidential Treatment has been requested for certain portions of this Exhibit. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 Draft - 12/18/96 2,850,000 Shares of Common Stock VENTANA MEDICAL SYSTEMS, INC. UNDERWRITING AGREEMENT ---------------------- February __, 1997 DILLON, READ & CO. INC. BEAR, STEARNS & CO. INC. COWEN & COMPANY as Representatives of the several Underwriters named in Schedule I attached hereto c/o Dillon, Read & Co. Inc. 535 Madison Avenue New York, New York 10022 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 2,850,000 shares (the "Firm Shares") of the Company's common stock, par value $0.001 per share (the "Common Stock"). Of the 2,850,000 Firm Shares, 1,850,000 Firm Shares are being sold by the Company and 1,000,000 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, options to purchase an aggregate of up to an additional 427,500 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 2 2 thereto, on Form S-1 (No. ________), for the registration of the Shares under the Securities Act of 1933, as amended (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 3 3 any related preliminary prospectus or any amendment thereof or supplement thereto in reliance upon and in conformity 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 4 4 assets may be bound or (ii) violate or conflict with any provision of the certificate of incorporation or by-laws of 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 December 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, 5 5 lease and operate its properties and conduct its business as now being conducted and as described in the Registration 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, other than such rights which have been exercised in connection with the offering of the Shares. (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. 6 6 (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 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 7 7 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 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. 8 8 (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. (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 120 days after the date of the Prospectus, without the prior written consent of Dillon, Read & 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. (v) The Shares are authorized for inclusion in the National Association of Securities Dealers Automated Quotation (National Market) System. (w) The Company has filed with the Commission such reports on Form SR as are required pursuant to Rule 463 of the Regulations. 2. Representations and Warranties of the Selling Stockholders. Each Selling Stockholder severally and not jointly 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 9 9 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 persons, as attorneys-in-fact, with full power of substitution, and with full authority on the terms set forth therein (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 10 10 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 such Selling Stockholder has no actual knowledge of facts 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 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 1,850,000 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 Dillon, Read & Co. Inc., 535 Madison Avenue, New York, New York 10022, 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 11 11 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, or by wire transfer for settlement 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 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 an aggregate of 427,500 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 12 12 Underwriter in Schedule I hereto (or such number increased as set forth in Section 11 hereof) bears to 2,850,000 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 sold as the number of Firm Shares set forth opposite the name of such Option Stockholder on Schedule II bears to the total number of Firm Shares being sold 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, or by wire transfer for settlement in, New York Clearing House or similar next day funds, each payable to the order of the Option Stockholders at the offices of Dillon, Read & Co. Inc., 535 Madison Avenue, New York, New York 10022, 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 13 13 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 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 14 14 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. (f) During the period of 120 days from the date of the Prospectus, the Company will not, without the prior written consent of Dillon, Read & 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, 1996 Director Option 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) During the period of 120 days from the date of the Prospectus, the Company will, unless otherwise consented to in writing by Dillon, Read & Co. Inc., strictly enforce each Lock-Up Agreement. 6. Covenants of the Selling Stockholders. Each Selling Stockholder covenants and agrees that: (a) For a period of 120 days from the date of the Prospectus, it will not, directly or indirectly, sell, offer 15 15 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 Dillon, Read & 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 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 for the Company and the Selling Stockholders), the underwriting documents (including, without 16 16 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 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 the Custodian (and any other attorney-in-fact for the Selling Stockholders) and any transfer agent or registrar. 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: 17 17 (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 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 18 18 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 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 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. 19 19 (viii) The Registration Statement is effective under the Act, and, to the 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 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 120 days after the date of the Prospectus, without the prior written consent of Dillon, Read & 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 20 20 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 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 Kahn & Associes, 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. 21 21 (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, 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. 22 22 (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 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 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. (e) At the Closing Date, you shall have received an opinion of McDonnell, Boehnen, Hobart & Bergoff, 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 23 23 captions "Risk Factors -- Risks Relating to 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 fairly summarize the legal matters, documents and proceedings described therein and are complete in all material respects. (f) Kirkland & Ellis, counsel for (1) the entities affiliated with Marquette Venture Partners, (each a "Marquette Entity" and collectively the "Marquette Entities"), (2) The CIT Group/Venture Capital, Inc. ("CIT") and (3) Interwest Partners IV, L.P. ("Interwest" and, together with the Marquette Entities and CIT, the "Institutional Entities") shall have furnished to the Underwriters their written opinion, as counsel to the Institutional Entities, addressed to the Underwriters and dated the Closing Date, in form and substance satisfactory to the Underwriters, to the effect that: (i) Each Institutional 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 Institutional Entity and the consummation by each Institutional 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 indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which such Institutional Entity is a party or by which it is bound or to which any of its property or assets is subject, nor will such actions result in any violation of the provisions of the constituent documents of such Institutional Entity or any statute, order, decree, judgment, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over such Institutional Entity or the property or assets of such Institutional Entity (but excluding federal and state securities laws); 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 Institutional Entity and the 24 24 consummation by each Institutional Entity of the transactions contemplated hereby and thereby; (ii) This Agreement has been duly authorized, executed and delivered by or on behalf of each Institutional Entity; (iii) A Power-of-Attorney and a Custody Agreement have been duly authorized, executed and delivered by each Institutional Entity and constitute valid and binding agreements of each Institutional Entity; and (iv) Upon payment for, and delivery of, the Shares to be sold by each Institutional Entity under this Agreement in accordance with the terms hereof, valid title to the Shares, free and clear of any adverse claims (within the meaning of the New York Uniform Commercial Code), will be transferred to the Underwriters, assuming that the Underwriters purchase the Shares in good faith without notice of any such adverse claim. In rendering such opinions, such counsel may rely as to matters of fact, to the extent they deem proper, on certificates of each Institutional 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 Institutional 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 25 25 documents of each such Selling Stockholder, if any, or any statute or any order, decree, judgment, 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 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 26 26 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 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 27 27 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, 1996, 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 December 31, 1996 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, 1996 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, 1996 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 28 28 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 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 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, or each such person shall be subject to 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 120 days after the date of the Prospectus. 29 29 (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, 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 30 30 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 severally, and not jointly, 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, 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. The Underwriters and the Company acknowledge that the statements specifically relating to each Selling Stockholder under the caption "Principal and Selling Stockholders" in the Prospectus constitute the only information furnished in writing by or on behalf of such Selling Stockholder 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. This indemnity agreement will be in addition to any liability which the Selling Stockholders may otherwise have, including under this Agreement; provided, however, that in no event shall the aggregate liability of any Selling Stockholder for any breach of the representations and warranties contained in Section 2(e) (when combined with any liability under the indemnity above) exceed the proceeds received by such Selling Stockholder from the sale of Shares under this Agreement. 31 31 (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 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 32 32 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 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 33 33 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 the underwriting discount applicable to the Shares purchased by such Underwriter hereunder, (ii) in no case shall any Selling Stockholder be liable or responsible for any amount in excess of the proceeds received by such Selling Stockholder from the sale of Shares under this Agreement and (iii) 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 34 34 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. (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 35 35 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 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 36 36 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. (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 37 37 writing and, if sent to any Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed in writing, to such Underwriter c/o Dillon, Read & Co. Inc., 535 Madison Avenue, Nev York, New York 10022, Attention: Eric W. Roberts, Managing Director; 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 R. Michael Rodgers, Chief Financial Officer, with a copy to Christopher D. Mitchell, Esq., Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304- 4050; and if sent to any Selling Stockholder, shall be mailed, delivered or telegraphed and confirmed in writing to such Selling Stockholder c/o Wilson Sonsini Goodrich and Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304-4050, Attention: Christopher D. Mitchell, Esq. 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. 38 38 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 DILLON, READ & CO. INC. BEAR, STEARNS & CO. INC. COWEN & COMPANY By: DILLON, READ & CO. INC. By: ---------------------------------- Title: On behalf of themselves and the other Underwriters named in Schedule I hereto. 39 39 SCHEDULE I
Number of Firm Name of Underwriter Shares to be Purchased - ------------------- ---------------------- Dillon, Read & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . . Bear, Stearns & Co. Inc. . . . . . . . . . . . . . . . . . . . . . . . Cowen & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . ========= TOTAL UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,850,000
40 40 SCHEDULE II
Number of Number of Additional Firm Shares Shares to Name of Selling Stockholder to be Sold be Sold --------------------------- ----------- ----------- _________ _______ Total . . . . . . . . . . . . . . 1,000,000 427,500
41 41 SCHEDULE III Stockholders not subject to the 120 day lock-up provisions EX-5.1 3 OPINION OF WILSON SONSINI GOODRICH & ROSATI 1 [WILSON SONSINI GOODRICH & ROSATI LETTERHEAD] EXHIBIT 5.1 December 20, 1996 Ventana Medical Systems, Inc. 3865 North Business Center Drive Tucson, Arizona 85705 Re: Registration Statement on Form S-1 ---------------------------------- Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 to be filed by you with the Securities and Exchange Commission on December 20, 1996 (the "Registration Statement") in connection with the registration under the Securities Act of 1933, as amended, of 2,600,000 shares of Common Stock of Ventana Medical Systems, Inc. (the "Shares"). As your counsel in connection with this transaction, we have examined the proceedings proposed to be taken in connection with said sale and issuance of the Shares. It is our opinion that, upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, the Shares when issued and sold in the manner referred to in the Registration Statement will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement, including the prospectus constituting a part hereof, and any amendment thereto and any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) and all post-effective amendments thereto. Very truly yours, /s/ WILSON SONSINI GOODRICH & ROSATI ------------------------------------- WILSON SONSINI GOODRICH & ROSATI Professional Corporation EX-10.1 4 SECOND AMENDMENT TO DAKO DISTRIBUTION AGREEMENT 1 Exhibit 10.1 SECOND AMENDMENT TO DISTRIBUTION AGREEMENT The following has been agreed between BIOTEK SOLUTIONS INC., VENTANA MEDICAL SYSTEMS, INC. ("Ventana") and DAKO A/S in relation to that certain DISTRIBUTION AGREEMENT (the "Agreement") dated September 27, 1994, as amended by FIRST AMENDMENT of March 24, 1995 (the "First Amendment"). This Second Amendment to Distribution Agreement (this "Second Amendment") amends the Agreement, as amended by the First Amendment, as of the date of this Second Amendment, and makes Ventana party to the Agreement, as amended by the First Amendment and the Second Amendment and as set forth below, but only to the extent specifically set forth below. 1. VENTANA/DAKO STRATEGIC MARKETING ALLIANCE 1.1 Ventana and DAKO agree to negotiate in good faith a strategic marketing alliance that broadly follows the terms and conditions outlined in the attached Exhibit 1. Exhibit 1 reflects terms and conditions which have been discussed in detail between the parties. Both parties agree to aim at signing a definitive agreement concerning such strategic marketing alliance during October, 1996, with European implementation on January 1, 1997, and Japanese implementation to follow as soon as practicable thereafter. 1.2 The above commitment to negotiate in good faith does not impose any legal obligations on either of the parties and in case the parties do not reach a definitive agreement concerning such strategic marketing alliance the "Agreement", as amended by the First Amendment and under Sections 2 through 5 below, shall not be affected thereby. 2. TECHMATE(TM) 250 2.1 Ventana's Obligations a. This Section 2.1 applies with respect to the TechMate(TM) 250 only. b. BioTek will sell to Ventana [ * ] TechMate(TM) 250 instruments with respect to which there is a dispute between DAKO and BioTek regarding price (as set forth in Section 2.2 of this Second Amendment) and which BioTek is otherwise required to deliver to DAKO pursuant to the Agreement, First Amendment and this Second Amendment (and more specifically Section 2.4 of this Second Amendment). c. Ventana will sell to DAKO the TechMate(TM) 250 instruments sold to Ventana by BioTek pursuant to Paragraph 2.1.b. The prices for all such instruments to DAKO shall be the price set forth in Section 2.2 of this Second Amendment, as adjusted as required by Section 2.3 of this Second Amendment. * * * Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. 2 d. Nothing in this Section 2.1 is intended to affect the pricing of the TechMate(TM) 250 as called for by the Agreement, First Amendment and Second Amendment. Notwithstanding anything to the contrary in this Section 2.1.d., the parties agree that the final price to DAKO [ * ] TechMate(TM) 250 instruments referred to in Section 2.1.c. shall be determined by the arbitration process set forth in Section 2.2 of this Second Amendment. The parties further agree that should there be an adjustment in the price per instrument as a result of the arbitration described in Section 2.2 of this Second Amendment, then Ventana shall be solely and completely liable and responsible for the repayment to DAKO of all amounts DAKO paid Ventana for TechMate(TM) 250 instruments in excess of the arbitrated price, as set forth in Section 2.2 of this Second Amendment. e. Nothing in this Section 2.1 is intended to change, alter or waive in any way the obligations and/or rights and/or remedies of BioTek and DAKO as set forth in the Agreement, as amended by the First Amendment and/or the remainder of this Second Amendment other than this Section 2.1. The parties to this Second Amendment agree and acknowledge that this Section 2.1 is intended only to alter the manner in which BioTek will fulfill its obligations to deliver TechMate(TM) 250 instruments to DAKO. Not the obligation to deliver itself, with such alteration intended to make Ventana responsible for the payment to DAKO of any amounts due as described in paragraph 2.2.d of this Second Amendment. The parties to this Second Amendment agree that any failure by Ventana to deliver to DAKO the instruments BioTek would otherwise be required to deliver to DAKO pursuant to the Agreement, the First Amendment and/or the Second Amendment shall be deemed and considered a failure to deliver such instruments by BioTek under the Agreement, First Amendment and/or Second Amendment. 2.2 Pricing and Royalty a. Price per unit for [ * ] units shall be - [ * ] supplied to DAKO A/S (satisfies clause 4c of First Amendment [ * ] - [ * ] (satisfies clause 4c of First Amendment [ * ] - [ * ] [ * ] - These prices are firm and will not be later disputed by either party b. DAKO recognizes that some or all of these [ * ] will be shipped with resin cast skins and no plastic covers. The instruments so shipped will have plastic covers supplied for field retrofitting at a later date. These covers will be supplied at no additional charge. * * * Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -2- 3 BioTek will change to stamped metal skin technology with plastic covers included as soon as practicable. c. The parties disagree about the prices BioTek is entitled to charge under the Agreement for the next [ * ] covered by DAKO's firm order [ * ] referred to in 2.4 [ * ] referred to in 2.2.a). BioTek's interpretation of the contract is that it is entitled to charge the following prices: [ * ] d. DAKO's interpretation of the Agreement, as amended by the First Amendment, that the price per unit for the TechMate(TM) 250 cannot exceed [ * ]. The prices negotiated for [ * ] in 2.2.a. are without prejudice to the position of each party on additional instrument shipments. The parties hereto agree to submit their dispute regarding the pricing of the [ * ] to binding arbitration in accordance with Section 14 of the Distribution Agreement and that the final price of such units shall be determined by way of this arbitration. The parties agree that for this purpose the place of arbitration shall be Chicago, Illinois. The decision of the arbitration court with respect to pricing shall be based solely upon applicable law and the Agreement and shall not be influenced by: - the negotiations between the parties for the purpose of settling this dispute; - this Second Amendment or the provisions hereof concerning (i) conversion of periodic royalty to cash payment, or (ii) the terms of recoupment of payments, or (iii) the sale of instruments by BioTek to Ventana before such instruments are sold to DAKO by Ventana as set forth in Section 2.1 hereof. Until the price has been determined by way of arbitration, the prices for the TechMate(TM) 250 to DAKO shall be the prices detailed in 2.2.c. [ * ] * * * Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -3- 4 After the price has been determined by way of arbitration, such price shall be paid by DAKO for future deliveries. However, the price per unit for the TechMate(TM) 250 shall not exceed the above prices nor be [ * ]. In the event that the arbitration court determines that the price for any of [ * ] should be lower than the price invoiced by Ventana to DAKO for that unit, then, within 20 business days, Ventana shall repay to DAKO, for any of [ * ] which were paid for by DAKO prior to the fixing of the price by way of arbitration, the difference between the amount invoiced and the price determined by way of arbitration, together with simple interest on such difference at the rate of 7% per annum. Interest shall be calculated from the date Ventana receives payment from DAKO on an invoice to the date BioTek pays any difference. Ventana will be entitled to offset (on behalf of BioTek) against any such repayment by Ventana any Excess Recoupment, together with interest thereon, taken by DAKO as described in Section 2.3.b. Furthermore, DAKO shall be entitled to offset any amount then or subsequently due from DAKO to BioTek or Ventana against DAKO's claim for repayment, if any, including DAKO's claim for interest thereon. Each party may commence the above arbitration procedure when the party so desires. e. For the purpose of Section 22c of the Agreement as amended by the First Amendment, "the full transfer price in effect at such time that DAKO A/S begins using such license" for TechMate(TM) 250's shall be the full transfer price to be determined by way of arbitration in accordance with Section 2.2.d above. f. The provisions of Section 3.g.(ii) of the First Amendment to the contrary notwithstanding, the royalty on TechMate(TM) 250's for [ * ] shall be converted to an [ * ] on the price per unit, [ * ] to be added to the prices specified under Sections 2.2.a, and 2.2.c. The [ * ] will be paid at the time of purchase in one lump sum and will not be later disputed by either party. However, in accordance with clause 4c of First Amendment - [ * ] - [ * ] 2.3 Recoupment and Repayment of "Kollsman Prepayment" and "Development Prepayment" * * * Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -4- 5 a. The parties agree that the unrecouped amounts as of August 13, 1996 are as follows: Kollsman Prepayment [ * ] [ * ] Development Prepayment [ * ] Additional Prepayment [ * ] Total [ * ] The Additional Prepayment [ * ] was sent to LJL BioSystems in December 1995 by DAKO on BioTek's behalf. DAKO maintains the Additional Prepayment is part of the Development Prepayment while BioTek believes it was a prepayment on future instrument orders with recoupment terms to be agreed upon. To resolve this dispute amicably, the parties have agreed that the Additional Prepayment will be treated as part of the Development Prepayment for Recoupment purposes, but will not be treated as part of the Development Note. The said [ * ] shall be considered to be the first amount recouped under the terms set forth herein. b. The above [ * ] shall be recouped as follows: (i) At a rate of [ * ] for TechMate(TM) 250 instruments [ * ] sold to DAKO A/S or a customer of DAKO A/S. (ii) At a rate of [ * ] for any additional TechMate(TM) 250 instruments [ * ] sold to DAKO A/S or a customer of DAKO A/S until fully recouped, provided that the recoupment per unit shall never exceed 50% of the difference between [ * ] and the price paid for that unit as determined in accordance with Section 2.2.c. or 2.2.d. above. If arbitration subsequently reduces the price for any TechMate(TM) 250 already paid for by DAKO A/S, then the recoupment rate for that unit will be reduced to 50% of the difference between [ * ] and the price determined by arbitration (the Adjusted Recoupment Rate). The difference between the recoupment taken on payment of the original invoice and the Adjusted Recoupment Rate (Excess Recoupment) for units already paid for by DAKO shall be payable by DAKO to Ventana together with simple interest on such difference at the rate of 7% per annum within 20 business days of an arbitrator determining to reduce the price. * * * Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -5- 6 Interest shall be calculated from the date that Ventana received payment from DAKO on an invoice to the date that DAKO pays the Excess Recoupment. Alternatively, DAKO may offset amounts due from DAKO to Ventana for Excess Recoupment against DAKO's claim for repayment as described in Section 2.2.d. The above recoupment arrangement shall replace the recoupment arrangements set forth in the First Amendment. c. BioTek shall repay to DAKO the advance [ * ] made by DAKO A/S to BioTek. Such repayment shall be made by offsetting it against the amount payable by DAKO to BioTek under Section 3.2 hereof, effective as of the date of this Agreement, and the balance [ * ] delivered by BioTek to DAKO on or prior to September 30, 1996. d. Notwithstanding the above, the Security Agreement and the obligations to BioTek to repay (as opposed to recoupment) the Kollsman Prepayment and the Development Prepayment under certain circumstances set forth in the First Amendment (see First Amendment with Exhibits, here under the Secured Promissory Notes) shall remain unchanged. The Additional Prepayment shall be repaid in accordance with the terms applying to the Development Prepayment. e. The balance due under the Kollsman Prepayment [ * ] above under Section 2.3.a.) shall bear no interest. 2.4 Delivery (Firm Order + Forecast + Delivery Commitment) a. DAKO A/S hereby places a firm order for [ * ] BioTek hereby undertakes a firm obligation to supply [ * ] regardless of the result of the arbitration referenced herein, and DAKO has a firm obligation to accept delivery and pay for the instruments [ * ] to be determined by way of arbitration in accordance with 2.2.d. above unless the parties otherwise agree). b. The delivery schedule agreed to between the parties is as follows: [ * ] * * * Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -6- 7 3. TECHMATE(TM) 500 3.1 Firm Order + Forecast + Delivery Commitment a. DAKO A/S has placed a firm order [ * ] to be delivered as follows: [ * ] b. BioTek hereby undertakes a firm obligation to supply [ * ] DAKO undertakes a firm obligation to accept delivery and pay for the instruments and the royalty due thereon. c. The price of each TechMate(TM) 500 will be [ * ] 3.2 The parties agree that the monthly royalty on each TechMate(TM) 500 and TechMate(TM) 1000 instrument already supplied and later supplied, which has already been [ * ] with effect from November 1, 1995, shall be [ * ] with effect from September 1, 1996 (accordingly, for any TechMate(TM) or TechMate(TM) 1000 sold to DAKO A/S under the Agreement, commencing September 1, 1996 (or such later day as royalty first becomes payable) and continuing until the end of [ * ] for each instrument, the revised monthly royalty shall be [ * ] compared to the royalty specified in the Agreement, as amended by the First Amendment). In consideration for the [ * ] referred to in the previous paragraph, DAKO agrees to pay to BioTek [ * ]. Such payment shall be made by offsetting it against the amount payable under by BioTek to DAKO under Section 2.3.c. hereof, effective as of the date of this Agreement. 4. ALL INSTRUMENTS COVERED BY THE AGREEMENT, AS AMENDED 4.1 Future Design Changes Both parties reserve their legal position concerning the question whether the approval of DAKO A/S is necessary in case BioTek wants to make functional and/or other changes of the instruments. 4.2 Supply of Spare Parts and Accessories to DAKO A/S In case the Agreement, as amended, is terminated by one of the parties in accordance with its terms or for any other reason whatsoever BioTek shall continue to ensure that spare parts and * * * Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -7- 8 accessories (inclusive of any accessories covered by patents) for the operation by DAKO A/S and/or DAKO A/S' customers and repair of any instrument supplied to DAKO A/S under the Agreement, as amended, are available for purchase by DAKO A/S on the terms as specified in the Agreement, as amended. However, BioTek's obligation to supply spare parts and accessories to DAKO A/S for use by DAKO A/S or a customer in a specific instrument after the termination shall cease [ * ] after the instrument has been installed. 5. THE TERRITORY The definition of Territory is defined to exclude the United States, Canada, Australia, South America, Mexico, Central America and the Caribbean. Apart from what has been specifically agreed above, the Agreement and the First Amendment shall be unchanged. * * * Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. -8- 9 Signed this 25th day of September, 1996 For DAKO A/S For BioTek Solutions, Inc. /s/ Torben Jorgensen /s/ John Patience _____________________________________ _______________________________ By: Torben Jorgensen By: John Patience Managing Director Chairman /s/ N. Harboe _____________________________________ By: Niels Mathias Gunnersen Harboe Chairman Ventana Medical Systems, Inc. /s/ Jack W. Schuler _____________________________________ By: Jack W. Schuler Chairman EX-11.1 5 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11.1 VENTANA MEDICAL SYSTEMS, INC. NET LOSS PER COMMON SHARE
Nine Months Ended Year Ended December 31 September 30 ----------------------------------------------------------------------------------- 1993 1994 1995 1995 1996 ----------------------------------------------------------------------------------- (Unaudited) Historical - ---------- Net loss (4,979,000) (5,370,000) (3,269,000) (2,409,000) (11,534,000) Less accretion of preferred stock redemption requirement (1,796,000) (1,983,000) (2,436,000) (1,739,000) ( 1,355,000) ----------------------------------------------------------------------------------- Net loss applicable to common stock (6,775,000) (7,353,000) (5,705,000) (4,148,000) (12,889,000) =================================================================================== Weighted average common shares outstanding 857,191 917,179 957,280 938,829 3,512,583 Stock options and restricted stock issued within one year of initial filing (May 24, 1996) 1,092,779 1,092,779 1,092,779 1,092,779 728,519 ----------------------------------------------------------------------------------- Weighted average common shares and common share equivalents outstanding during the period 1,949,970 2,009,958 2,050,059 2,031,608 4,241,102 =================================================================================== Net loss per share $(3.47) $(3.66) $(2.78) $(2.04) $(3.04) =================================================================================== Year Ended Nine Months Ended December 31 September 30 ----------------------------------------------- 1995 1995 1996 ----------------------------------------------- Pro Forma - --------- Net loss (3,269,000) (2,409,000) (11,534,000) =============================================== Weighted average common shares outstanding 7,570,854 7,507,544 8,852,074 Stock options and restricted stock issued within one year of initial filing(2) 1,092,779 1,092,779 728,519 ----------------------------------------------- Weighted average common shares and common share equivalents outstanding during the period 8,663,633 8,600,323 9,580,593 =============================================== Net loss per share $(0.38) $(0.28) $(1.20) ===============================================
(1) Includes conversion of Series A, C and D Preferred Shares, which occurred upon completion of the Company's initial public offering on July 26, 1996. (2) Treated as outstanding for the quarters prior to the effective date of the Company's inital public offering on July 26, 1996. EX-23.1 6 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 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 December 19, 1996, of Ventana Medical Systems, Inc. in the Registration Statement (Form S-1) and related Prospectus of Ventana Medical Systems, Inc., for the registration of 2,850,000 shares of its common stock. ERNST & YOUNG LLP Tucson, Arizona December 19, 1996 EX-23.2 7 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 2, 1996, except for Note 10, as to which the date is February 20, 1996, of BioTek Solutions, Inc. in the Registration Statement (Form S-1) and related Prospectus of Ventana Medical Systems, Inc. for the registration of 2,850,000 shares of its common stock. ERNST & YOUNG LLP Tucson, Arizona December 19, 1996 EX-23.3 8 CONSENT OF ARTHUR ANDERSEN LLP 1 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 December 18, 1996 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 17,116 0 3,534 0 3,226 24,850 3,142 0 39,614 6,666 0 0 0 50,892 (33,881) 0 15,895 15,895 6,513 6,513 20,888 0 28 (11,534) 0 (11,534) 0 0 0 (11,534) (1.20) 0
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