-----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, RW5Vy7axcoZ7cZt5esXpVVy37KrkoTQhm3AftIID9hBiCHzkMv+ktChSbiFu/wKt tfXoDcr9TuVHo3Pvkf1mqg== 0000891618-97-004601.txt : 19971113 0000891618-97-004601.hdr.sgml : 19971113 ACCESSION NUMBER: 0000891618-97-004601 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-20931 FILM NUMBER: 97715980 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 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED 9/30/97 1 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Period Ended September 30, 1997, or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period From ___________ to ___________ Commission file number 000-20931. VENTANA MEDICAL SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-2976937 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3865 North Business Center Drive Tucson, Arizona 85705 (Address of principal executive offices) (Zip Code) (520) 887-2155 (Registrant's telephone number, including area code) Not Applicable (Formal name, former address and former fiscal year, if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or For such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years Indicate by check mark whether the registrant has filed all documents and reports required to be Filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes_____ No_____ Applicable Only to Corporate Issuers Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of The latest practical date. Common Stock, $0.001 par value--13,099,915 shares as of November 6, 1997. 2 VENTANA MEDICAL SYSTEMS, INC. INDEX TO FORM 10-Q Part I. Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets September 30, 1997 (Unaudited) and December 31, 1996 Condensed Consolidated Statements of Operations Three months ended September 30, 1997 and 1996 (Unaudited) Nine months ended September 30, 1997 and 1996 (Unaudited) Condensed Consolidated Statement of Cash Flows Nine months ended September 30, 1997 and 1996 (Unaudited) Notes to Condensed Consolidated Financial Statements Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K. Signature 3 VENTANA MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands except share data)
September 30, December 31, ASSETS 1997 1996 ------------- ------------ (Unaudited) (Note) Current assets: Cash and cash equivalents $ 21,937 $ 11,067 Accounts receivable 6,104 5,145 Inventories (Note 2) 4,084 3,272 Other 2,679 1,044 -------- -------- Total current assets 34,804 20,528 Property and equipment, net (Note 3) 5,365 3,301 Intangibles, net (Notes 4 and 5) 8,197 8,581 -------- -------- Total assets $ 48,366 $ 32,410 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 2,316 $ 1,738 Other current liabilities 3,472 2,902 -------- -------- Total current liabilities 5,788 4,640 Long term debt (Note 6) 1,139 12,500 Stockholders' equity (Note 7): Preferred stock - $.001 par value; 5,000,000 shares authorized; no shares issued or outstanding -- -- Common stock - $.001 par value; 50,000,000 shares authorized; 10,978,238 and 13,098,772 shares issued and outstanding at December 31, 1996 and September 30, 1997, respectively 76,074 48,896 Accumulated deficit (34,466) (33,410) Cumulative foreign currency translation adjustment (169) (216) -------- -------- Total stockholders' equity 41,439 15,270 -------- -------- Total liabilities and stockholders' equity $ 48,366 $ 32,410 ======== ========
Note: The condensed consolidated balance sheet at December 31, 1996 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes 2 4 VENTANA MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30 September 30 ----------------------- ----------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Sales: Instruments $ 2,142 $ 1,554 $ 6,032 $ 4,854 Reagents and other 5,872 4,654 16,393 11,041 -------- -------- -------- -------- Total net sales 8,014 6,208 22,425 15,895 Cost of goods sold 2,511 2,685 7,992 6,543 -------- -------- -------- -------- Gross profit 5,503 3,523 14,433 9,352 Operating expenses: Research and development 702 809 2,145 2,176 Selling, general and administrative 4,555 3,036 11,563 8,107 Non-recurring expenses -- 67 1,656 10,262 Amortization of intangibles 128 134 382 315 -------- -------- -------- -------- Income (loss) from operations 118 (523) (1,313) (11,508) Other income (expense) (5) 38 257 (26) -------- -------- -------- -------- Net income (loss) $ 113 $ (485) $ (1,056) $(11,534) ======== ======== ======== ======== Net income (loss) per share, as adjusted (Note 8) $ 0.01 $ (0.05) $ (0.08) $ (1.20) ======== ======== ======== ======== Shares used in computing net per share 13,989 10,196 12,629 9,581 ======== ======== ======== ========
See accompanying notes 3 5 VENTANA MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Nine Months Ended September 30 ----------------------- 1997 1996 -------- -------- OPERATING ACTIVITIES: Net loss $ (1,056) $(11,534) Adjustments to reconcile net loss to cash used in operating activities: Purchase in process research and development (Note 5) -- 7,900 Depreciation and amortization 1,505 1,196 Changes in operating assets and liabilities, net (2,258) (1,735) -------- -------- Net cash used in operating activities (1,809) (4,173) INVESTING ACTIVITIES: Purchase of property and equipment, net (3,142) (891) Purchase of intangible assets (Note 4) (43) (3,362) Acquisition of BioTek Solutions, Inc. (Note 5) -- (2,500) -------- -------- Net cash used in investing activities (3,185) (6,753) FINANCING ACTIVITIES: Issuance (repayment) of debt (including amounts from related parties) and stock (Note 6) (10,321) 8,772 Net proceeds from public offering (Note 7) 26,138 18,265 -------- -------- Net cash provided by financing activities 15,817 27,037 Effect of exchange rate change on cash 47 (99) -------- -------- Net increase in cash and cash equivalents 10,870 16,012 Cash and cash equivalents, beginning of period 11,067 1,104 -------- -------- Cash and cash equivalents, end of period $ 21,937 $ 17,116 ======== ========
4 6 VENTANA MEDICAL SYSTEMS, INC. Notes to Condensed Consolidated Financial Statements 1. SIGNIFICANT ACCOUNTING POLICIES: The accompanying condensed consolidated financial statements are unaudited. They have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and are subject to year-end audit by independent auditors. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is suggested that the consolidated financial statements be read in conjunction with the financial statements and notes included in the Company's Annual Report and Form 10-K for the year ended December 31, 1996. The information furnished reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. Such adjustments consisted only of normal recurring items. It should also be noted that results for the interim periods are not necessarily indicative of the results expected for the full year or any future period. The presentation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. INVENTORIES Inventories consist of the following:
September 30 December 31 1997 1996 ------------ ----------- (in thousands) Raw material and work-in-process $ 3,506 $ 2,379 Finished goods 578 893 ------- ------- $ 4,084 $ 3,272 ======= =======
5 7 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
September 30 December 31 1997 1996 ------------ ----------- (in thousands) Diagnostic instruments $3,780 $2,762 Machinery and equipment 3,901 2,193 Computers and related equipment 919 945 Furniture and fixtures 121 292 Leasehold improvements 394 253 ------ ------ 9,115 6,445 Less accumulated depreciation and amortization 3,750 3,144 ------ ------ $5,365 $3,301 ====== ======
4. INTANGIBLES Intangibles consist of the following:
September 30 December 31 1997 1996 ------------ ----------- (in thousands) Goodwill $1,756 $1,756 Developed technology 2,800 2,800 Customer list 4,100 4,100 Patents 488 444 ------ ------ 9,144 9,100 Less accumulated amortization 947 519 ------ ------ $8,197 $8,581 ====== ======
5. ACQUISITION OF BIOTEK SOLUTIONS, INC. The Company acquired BioTek Solutions, Inc. ("BioTek") for $19.1 million on February 26, 1996. The acquisition has been accounted for as a purchase. The consolidated financial statements include the operations of BioTek from the date of 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:
(in thousands) -------------- Cash consideration $ 2,500 Stock issued to BioTek noteholders 3,016 Exchange Notes issued 8,968 Note payable - escrow for contingencies 234 Net historical liabilities acquired 4,389 ------- Total purchase price $19,107 =======
6 8 The purchase price was allocated as follows:
(in thousands) Tangible net assets $ 2,252 In-process research and development 7,900 Goodwill and other intangibles 2,055 Developed technology 2,800 Customer list 4,100 ------- $19,107 =======
In accordance with Statement of Financial Accounting Standard 2 ("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. 6. LONG-TERM DEBT: On February 19, 1997, the Company repaid the remaining $10.3 million of outstanding exchange notes and Ventana notes which were issued in connection with the acquisition of BioTek discussed in Note 5 above out of the proceeds of its secondary offering completed in the first quarter of 1997. Such repayment was made in accordance with provisions of the notes to the effect that no interest would be due and payable thereon if full repayment was made prior to February 26, 1997. 7. PUBLIC OFFERING: In February 1997, the Company sold, through an underwritten secondary offering, 1,850,000 shares of its Common Stock at $15.00 per share plus an additional 31,066 shares issued upon exercise of the underwriter's over-allotment option, resulting in net proceeds of $26.1 million to the Company. Legal and accounting fees associated with the offering totaled $0.5 million. 8. NET INCOME (LOSS) PER SHARE: Net income (loss) per share for the three months ended September 30, 1997 and 1996 and the nine months ended September 30, 1997 and 1996 is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding, except that for periods prior to the effective date of the Company's initial public offering of July 26, 1996, in accordance with Securities and Exchange Commission requirements, common shares issued during the twelve month period prior to the filing of the Company's initial public offering have been included in the calculation as if they were outstanding for the entire period. Also, in February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted by the Company on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. Statement 128 will therefore have an impact on the Company's net income per 7 9 share for the quarter ended September 30, 1997, but not on the net loss for the quarter ended September 30, 1996, because stock options and warrants are already excluded from per share calculations in a loss period under existing rules, due to the potentially antidilutive effect of their inclusion in such periods. Statement of Computation of Weighted Average Shares Outstanding (in thousands except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 1997 1996 1997 1996 -------- -------- -------- -------- (Unaudited) (Unaudited) Net income (loss) $ 113 $ (485) $ (1,056) $(11,534) Weighted average common shares outstanding 13,031 10,196 12,629 9,581 Dilutive stock options and warrants 958 -- -- -- Weighted average common shares outstanding during the period 13,989 10,196 12,629 9,581 Net income (loss) per share $ 0.01 $ (0.05) $ (0.08) $ (1.20) ======== ======== ======== ========
8 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS: The following discussion of the financial condition and results of operations of Ventana should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes thereto included elsewhere in this Form 10-Q. This Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual events or results may differ materially from those anticipated by such forward-looking statements as a result of the factors described herein and in the documents incorporated herein by reference. Such forward-looking statements include, but are not limited to, statements concerning risks associated with the incidence of cancer and cancer screening, improvements in automated IHC; the ability of the Company to implement its business strategy; development and introduction of new products by the Company or other parties; research and development; marketing, sales and distribution; manufacturing; competition; third-party reimbursement; government regulation; and operating and capital requirements. OVERVIEW: Ventana Medical Systems, Inc. ("Ventana or the Company") 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. Each Ventana proprietary system placed typically provides a recurring revenue stream as customers consume reagents and supplies sold by the Company for each test conducted. Reagents consist of two principal 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. There can be no assurance that the Company's market expansion strategy will produce the level of revenues expected, that the Company will achieve profitability or that these revenues and profitability, if achieved, will be sustainable. Ventana is a medical device company and, as such, is regulated by the United States Food and Drug Administration ("FDA"). As a result, the majority of the Company's products are regulated by FDA regulations which include the 510(k) pre-market notification ("510(k)") process, pre-market approval ("PMA") process, good manufacturing procedures ("GMP") and the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). See "Certain Factors Which May Affect Future Results" elsewhere in this report. In February 1996, Ventana acquired BioTek Solutions, Inc. ("BioTek"), for an aggregate consideration of $19.1 million, consisting of cash, promissory notes, and the assumption of liabilities. The transaction was accounted for as a purchase. The purchase price was allocated between tangible net assets and intangible assets consisting of developed technology, customer list, goodwill and in-process research and development. 9 11 As a result of the merger, the Company assumed certain contractual obligations and contingent liabilities including contractual arrangements with DAKO A/S ("DAKO"), Curtin Matheson Scientific, Inc. ( a subsidiary of Fisher Scientific, Inc.) ("CMS"), Kollsman Manufacturing Company, Inc. ("Kollsman") and LJL BioSystems, Inc. ("LJL"). BioTek used CMS and DAKO as third-party distributors in the United States and international markets, respectively, and supported its United States sales efforts with field sales and technical support personnel. As a result, BioTek experienced lower gross margins on United States sales than if it had sold its products directly as well as a higher level of selling expense than typically incurred in conjunction with third-party distribution arrangements. 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 the Company. The Company does not intend to renew the United States distribution agreement with CMS which expires in April 1998, and as of July 8, 1997, ceased shipping products to CMS pending resolution of contractual disputes. The international distribution agreement with DAKO expires in December 1999. The Company places instruments through direct sales, including nonrecourse leases and through RPs. In an RP, the Company has provided the customer with the use of an instrument with no capital investment with the objective of creating reagent revenue. Until September 1997, the terms and conditions of RP instrument placements could vary from formal agreements specifying minimum volumes and premium pricing for reagent purchases to short term, informal arrangements where customers purchased reagents on a month to month basis. In addition, this category of placements included a small number of month to month instrument rentals wherein the rental fee replaced premium unit pricing which otherwise would have been charged. In September 1997, the Company modified the program for non-rental RPs to provide that these placements will convert to a sale or rental within six months. This new approach reflects a recognition by the Company that a rental provides an increased assurance of capital cost recovery. The manufacturing cost of instruments placed through RPs, (including rentals) 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. Instruments provided to customers under non-rental RPs are only considered placements if and when certain reagent purchase criteria are met by the customer. As of September 30, 1997, the Company had placed a total of 177 instruments through RPs. The Company's future results of operations may fluctuate significantly from period to period due to a variety of factors. The initial placement of an instrument is subject to a longer, less consistent sales cycle than the sales of reagents, which begin and typically are recurring once an instrument is placed. The Company's operating results in the future are likely to fluctuate substantially from period to period because instrument sales are likely to remain an important part of revenues in the near future. The degree of fluctuation will depend on the timing, level and mix of instruments placed through direct sales and instruments placed through RPs. In addition, average daily reagent use by customers may also fluctuate from period to period, which may contribute to future fluctuations in revenues. Sales of instruments may also fluctuate from period to period because sales to the Company's international distributors typically provide such distributors with several months of instrument inventory, which the distributors will subsequently seek to place with end-users. The Company's instrument installed base includes 10 12 instruments shipped to DAKO and recognized as sales. Furthermore, due both to the Company's increased sales focus on smaller hospitals and laboratories and the relatively high reagent sales growth rates in recent fiscal periods, the rate of growth in reagent sales in future periods 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 generation products. To date, however, the Company has not incurred material charges or expenses associated with inventory obsolescence in connection with new product introductions. In addition, a significant portion of the Company's expense levels is based on its expectation of higher levels of revenues in the future and is relatively fixed in nature. Therefore, if revenue levels are below expectations, operating results in a given period are likely to be adversely affected. RESULTS OF OPERATIONS: THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996: Net Sales: Net sales for the three and nine months ended September 30, 1997 as compared to the same periods of 1996 increased 29% and 41% to $8.0 million and $22.4 million from $6.2 million and $15.9 million, respectively. The increase in net sales was attributable to a 38% and 24% increase in instrument sales for the quarter and nine months and a 26% and 48% increase in reagent and other sales for the quarter and nine months. Instrument sales increased due to an overall increase in instrument placements as well as higher sales of the TechMate instruments, which were only sold by the Company after the February 1996 acquisition of BioTek. Reagent sales increased due to sales of reagents to new customers, increased sales to existing customers and sales to new customers resulting from the acquisition of BioTek. Excluding a one-time royalty pre-payment of $0.5 million recorded as revenue during the three months ended September 30, 1996, the quarterly and nine-month percentage increases in reagent and other sales would have been 42% and 56%, respectively. 11 13 Gross Margin: Gross profit for the three and nine months ended September 30, 1997 increased to $5.5 million and $14.4 million, respectively, from $3.5 million and $9.4 million for the same periods in 1996. Gross margin for the three and nine months ended September 30, 1997 increased to 69% and 64% from 57% and 59% for the same periods during 1996. Gross margins on instrument sales increased slightly in the three-month period ended September 30, 1997 compared to the corresponding period in 1996 as a result of the August 1997 introduction of the NexES instrument, which has a lower manufacturing cost than the ES. Instrument gross margins in the nine-month period ended September 30, 1997 decreased slightly when compared to the same period in 1996, primarily due to an increase of low-margin distributor sales in Europe, coupled with unfavorable European exchange rates and increased sales of lower margin batch processing instruments, offset by manufacturing efficiencies and increased absorption of manufacturing overhead. Gross margins on reagent and other sales increased in both the three and nine month periods ended September 30, 1997 compared to the corresponding periods in 1996 due to increased economies of scale and manufacturing efficiencies brought about by the integration of batch processing reagent manufacturing into Ventana's Tucson, Arizona reagent manufacturing operations. In addition, higher pricing for reagents and increased service profitability contributed to both the three-month and nine-month margin improvements. Research and Development: Research and development expenses were $0.7 million for the three months ended September 30, 1997 and $2.1 million for the nine months ended September 30, 1997. This represents a 13% decrease for the three month period and a 1% decrease for the nine month period as compared to the respective periods of the prior year. The decrease in the current quarter was due to the capitalization of $0.1 million in software development costs. No such costs were capitalized in the comparable period of 1996. Research and development expenses declined as a percent of sales to approximately 9% and 10% for the three and nine month periods, respectively, in 1997 compared to approximately 13% and 14% for the same periods during 1996. This decline was primarily due to increased sales. Research and development expenses for the three and nine months ended September 30, 1997 related primarily to the development of new reagents and instruments, including the NexES patient priority instrument and new prognostic markers. Research and development expenses for the three and nine months ended September 30, 1996 related primarily to the gen II instrument and IHC reagent development. 12 14 Selling, General and Administrative ("SG&A"): Presented below is a summary of SG&A expense for the three and nine months ended September 30, 1997 and 1996. SG&A SUMMARY:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------ ------------------------------------------ 1997 1996 1997 1996 ------------------- ------------------- ------------------- ------------------- % % % % $ Sales $ Sales $ Sales $ Sales ------- ----- ------- ----- ------- ----- ------- ----- ($ in thousands) Sales and marketing $ 3,272 41% $ 2,276 37% $ 8,470 38% $ 6,185 39% Administration 1,283 16% 760 12% 3,093 14% 1,922 12% ------- -- ------- -- ------- -- ------- -- Total SG&A $ 4,555 57% $ 3,036 49% $11,563 52% $ 8,107 51% ======= == ======= == ======= == ======= ==
SG&A expense for the three and nine months ended September 30, 1997 increased to $4.6 million and $11.6 million from $3.0 million and $8.1 million for the three and nine months ended September 30, 1996, respectively. SG&A expense as a percentage of net sales increased to 57% and 52% for the three and nine months ended September 30, 1997 compared to 49% and 51% for the same periods during 1996. 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 and a corresponding increase in infrastructure expenses to support a larger business base. The growth in sales and marketing expense is the result of the Company's decision to service the market through its own sales and marketing staff, 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 were necessitated by an expanding business base, especially in Europe, and legal expenses primarily associated with pending litigation. Non-recurring Expenses: The $1.6 million in non-recurring expenses for the nine months ended September 30, 1997 is primarily related to a judgment against the Company's BioTek subsidiary, relating to a patent infringement suit filed against BioTek by BioGenex. The expenses included the original judgment of $404,150, $303,113 in enhanced damages (per a June 30, 1997 court judgment), interest and Ventana's legal expenses. 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 13 15 intangible assets. Additionally, the Company will review the utility of these assets each quarter to assess their continued value. Should the Company determine that any of these assets are impaired, it will write them down to their estimated fair market value. LIQUIDITY AND CAPITAL RESOURCES: Since inception, the Company's expenses have significantly exceeded its revenues, resulting in accumulated losses of $34.5 million as of September 30, 1997. The Company has funded its operations primarily through the private placement of approximately $31.0 million in equity and debt securities, its July 1996 initial public offering which resulted in net proceeds to the Company of $18.3 million and its secondary offering completed in February 1997 which resulted in net proceeds of $26.1 million. As of September 30, 1997 the Company's principal source of liquidity consisted of cash and cash equivalents of $21.9 million and borrowing capacity under its bank revolving line of credit. The Company has a $2.7 million revolving bank credit facility, which expires on February 15, 1998. As of September 30, 1997, letters of credit were issued under this line to facilitate certain contract manufacturing arrangements for the production of TechMate instruments ($0.5 million) and to secure a legal judgment in favor of BioGenex ($0.9 million) pending appeal by the Company, leaving an available revolving credit facility of approximately $1.3 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. On February 18, 1997, the Company completed a public offering of its Common Stock resulting in net proceeds of $26.1 million to the Company. During February 1997, the Company repaid the $10.3 million of outstanding notes issued in connection with the acquisition of BioTek. Such repayment was made in accordance with the provisions of the Notes which provided that no interest would be due and payable thereon if full repayment was made prior to February 26, 1997. The Company expects to use approximately $2.6 million of its available capital resources during the next twelve months for capital expenditures for manufacturing capacity expansion and enhancements to its business application computer hardware and software resources. The Company anticipates that its remaining capital resources will be used for working capital and general corporate purposes. Pending such uses, the Company intends to invest its cash resources in short-term, interest bearing, investment grade securities. During the nine months ended September 30, 1997 the Company used for operations and investing activities approximately $5.0 million in cash versus $10.9 million for the nine months ended September 30, 1996. A substantial portion of the 1996 net cash outflow related to the acquisition of BioTek. In connection with BioTek's agreement with DAKO, DAKO made two loans to BioTek secured by a pledge of substantially all of BioTek's assets. DAKO also made prepayments to BioTek for future instrument purchases and reagent royalties. These loans and prepayments were used to fund TechMate 250 instrument development and working capital requirements. On September 25, 1996, BioTek and DAKO entered in to the Amendment Agreement for the purpose of 14 16 addressing several matters, including repayment of the secured loans and prepayments. The aggregate balance of the secured loans and prepayments was $1.4 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 $1.1 million does not bear interest. The prepayments do not bear interest. The secured loans and prepayments are recorded as long term debt in the Company's Condensed 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 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. At September 30, 1997, the outstanding balance of the secured loans and prepayments was $0.7 million and $0.4 million, respectively. 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. The Company believes that its existing capital resources, together with cash generated from product sales and available borrowing capacity under its bank credit facilities will be sufficient to satisfy its working capital requirements for the foreseeable future. The Company's future capital requirements will depend on many factors, including the extent to which the Company's products gain market acceptance, the mix of instruments placed through direct sales or rentals, progress of the Company's product development programs, competing technological and market developments, expansion of the Company's sales and marketing activities, the cost of manufacturing scale up activities, possible acquisitions of complementary businesses, products or technologies, the extent and duration of operating losses and the timing of regulatory approvals. The Company may be required to raise additional capital in the future through the issuance of either debt instruments or equity securities, or both. There is no assurance that such capital will be available to the extent required or on terms acceptable to the Company, or at all. CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS: The following discussion of the Company's risk factors should be read in conjunction with the foregoing Management Discussion and Analysis of financial condition and results of operations and the Company's financial statements and related notes thereto. Because of these and other factors, past financial performance should not be considered an indication of future performance. HISTORY OF LOSSES. The Company has incurred substantial losses since inception. The Company does not expect such losses to continue in the foreseeable future. However, consistent earnings may be difficult to achieve due to planned product development efforts, expansion of sales and marketing activities both domestically and internationally, market acceptance of existing and future instrument and reagent systems, competitive conditions, FDA regulations and related product approvals, product development efforts and the integration of BioTek's operations. FUTURE FLUCTUATIONS IN OPERATING RESULTS. The Company derives revenues from the sale of instruments and reagents through its direct sales force and certain domestic and international distributors. There can be no assurances that these outside distributors will continue to meet 15 17 their contractual commitments, or their historical sales rates or that these distributors contracts will remain in effect. The initial placement of an instrument is subject to a longer, less consistent sales cycle than the sale of reagents, which begin and are typically recurring once the instrument is placed. Consequently, the Company's future operating results are likely to fluctuate substantially from period to period because instrument sales are likely to remain an important part of revenues in the near future. The degree of fluctuation will depend on the timing, level and mix of instruments placed through direct sale versus RPs and rentals. The Company anticipates that the percentage of instruments placed through RPs and rentals, will increase in the future which is likely to result in a decrease in instrument sales. In addition, average daily reagent use by customers may fluctuate from period to period, which may contribute to future fluctuations in revenues. In particular, customers who have received instruments under rental arrangements do not necessarily provide for specified reagent purchase commitments and there can be no assurance regarding the timing or volume of reagent purchases by such customers. Furthermore, customers that have entered into agreements may cancel those agreements. Accordingly, there can be no assurance regarding the level of revenues that will be generated by customers procuring instruments through rental arrangements; therefore, the Company's business, financial condition and results of operations could be materially and adversely affected. 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 its products. The Company's products could also be rendered obsolete or noncompetitive by virtue of technological innovations in the fields of cellular or molecular diagnostics. RISKS ASSOCIATED WITH DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS. The Company's future growth and profitability will be dependent, in large part, on its ability to develop, introduce and market new instruments and reagents used in diagnosing and selecting treatment for cancer and other disease states. In particular, the Company must TIMELY AND successfully introduce its new smaller instruments to the market place. These instruments are smaller capacity, lower priced instruments than the Company's current instruments and are necessary to expand the market opportunity at smaller hospitals and reference laboratories in the United States and Europe. The Company depends, in part, on the success of medical research in developing new antibodies, nucleic acid probes and clinical diagnostic procedures that can be adapted for use in the Company's systems. In addition, the Company will need to obtain licenses, on satisfactory terms, for certain technologies, which cannot be assured. Certain of the Company's products are currently under development, initial testing or preclinical or clinical evaluation by the Company. Other products are scheduled for future development. Products under development or scheduled for future development may prove to be unreliable from a diagnostic standpoint, may be difficult to manufacture in an efficient manner, may fail to receive necessary regulatory clearances may not achieve market acceptance or may encounter other unanticipated difficulties. 16 18 COMPETITION. Competition in the diagnostic industry is intense and is expected to increase. Competition in the diagnostic industry is based on, among other things, product quality, price and the breadth of a company's product offerings. The Company's systems compete both with products manufactured by competitors and with traditional manual diagnostic procedures. The Company's competitors may succeed in developing products that are more reliable or effectively less costly than those developed by the Company and may be more successful than the Company in manufacturing and marketing their products. MANUFACTURING RISKS. The Company has only manufactured patient priority instruments and reagents for commercial sale since late 1991. Manufacturing of the Company's batch processing instruments is performed by third parties. As the Company continues to increase production of such instruments and reagents and develops and introduces new products, it may, from time to time, experience difficulties in manufacturing. The Company completed the consolidation of the former BioTek reagent manufacturing into its Tucson facility during July 1996. The Company must continue to increase production volumes of instruments and reagents, in a cost effective manner, in order to be profitable. To increase production levels, the Company will need to scale-up its manufacturing facilities, increase its automated manufacturing capabilities and continue to comply with current GMP regulations prescribed by the FDA and other standards prescribed by various federal, state and local regulatory agencies in the United States and other countries, including the International Standards Organization ("ISO") 9000 Series certifications. DEPENDENCE ON KEY SUPPLIERS. The Company's instruments and reagent products are formulated from chemicals, biological materials and parts utilizing proprietary Ventana technology as well as standard processing techniques. Certain components, raw materials and primary antibodies, used in the manufacturing of the Company's reagent products, are currently provided by single source vendors. There can be no assurance that the materials or parts or needed by the Company will be available in commercial quantities, at acceptable prices, or at all. Any supply interruption or related yield problems encountered in the use of materials from these vendors could have a material adverse effect on the Company's ability to manufacture its products until, or if, a new source of supply is obtained. DEPENDENCE UPON THIRD PARTY MANUFACTURERS FOR BATCH PROCESSING INSTRUMENTS. The Company relies on two outside parties to manufacture its batch processing instruments. 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 risks, including the absence of guaranteed capacity, reduced control over delivery schedules, quality assurance issues 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. RISKS ASSOCIATED WITH DISTRIBUTION RELATIONSHIPS. 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 have been 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 the efforts of CMS with direct field sales and support personnel. As a result, the 17 19 Company generates lower gross margins on sales through CMS that it would generate were it to sell directly to end-users and incurs higher selling expenses that 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. 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, especially in light of the fact that the Company ceased shipping products to CMS pending resolution of contractual disputes and that difficulties in the relationship between the Company and CMS have continued, 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. 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 an amendment (the "Amendment Agreement") entered into between DAKO and the Company in November 1996, certain minimum purchase and delivery commitments for TechMate 250 and TechMate 500 instruments, as well as pricing for certain quantities of TechMate 250 instruments, were established. 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 has initiated binding arbitration proceedings to resolve such pricing. In the event such arbitration proceedings 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 sales would also be reduced. Additionally, during the course of ongoing discussions with DAKO since the acquisition of BioTek, DAKO has asserted that BioTek has not fulfilled its obligations with respect to the development and commercial introduction of the TechMate 250 instrument. The Company denies this assertion and believes that it is in substantial compliance with its obligations under these development milestones 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. 18 20 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 ACQUISITIONS. In February 1996 the Company acquired BioTek. Although the Company has no pending agreements or commitments, the Company may make additional acquisitions of complementary technologies or products in the future. Acquisitions of companies, divisions of companies, or products entail risks, including: (i) the potential inability to successfully integrate acquired operations and products or to realize anticipated synergies, economies of scale or other value, (ii) diversion of management's attention, (iii) loss of key employees of acquired operations and (iv) large one-time write-off and similar accounting changes including amortization of acquired goodwill. No assurance can be given that the Company will not incur problems in integrating BioTek's operations or any future acquisition and there can be no assurance that the acquisition of BioTek, or any future acquisition, will result in the Company becoming profitable or, if the Company achieves profitability, that such acquisition will increase the Company's profitability. Furthermore, there can be no assurance that the Company will realize value from any such acquisition which equals or exceeds the consideration paid. RISKS RELATING TO PATENTS AND PROPRIETARY RIGHTS. The Company's success depends, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of others. There can be no assurance that the Company's patent applications will result in patents being issued or that any issued patents will provide protection against competitive technologies or will be held valid if challenged. Others may independently develop products similar to those of the Company or design around or otherwise circumvent patents issued by the Company. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of each of such patents or to redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. If the Company does not obtain necessary licenses, it could be subject to litigation and encounter delays in product introductions while it attempts to design around such patents. Alternatively, the development, manufacture or sale of such products could be prevented. Litigation which could result would result in significant cost to the Company as well as diversion of management time. 19 21 UNCERTAINTY OF FUTURE FUNDING OF CAPITAL REQUIREMENTS. The Company anticipates that its existing capital resources will be adequate to satisfy its capital requirements through at least the next 18 months. The Company's future capital requirements will depend on many factors, including the extent to which the Company's products gain market acceptance, the mix of instruments placed through direct sales or through RPs, progress of the Company's product development programs, competing technological and market developments, expansion of the Company's sales and marketing activities, the cost of manufacturing scale up activities, possible acquisitions of complementary businesses, products or technologies, the extent and duration of operating losses and timing of regulatory approvals. The Company may require additional capital resources and there is no assurance such capital will be available to the extent required, on terms acceptable to the Company, or at all. Any such future capital requirements would result in the issuance of equity securities which could be dilutive to existing stockholders. DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the retention of principal members of its management, scientific, technical, marketing and sales staff and the recruitment of additional personnel. The Company does not maintain "key person" life insurance on any of its personnel. The Company competes with other companies, academic institutions, government entities and other organizations for qualified personnel in the areas of the Company's activities. The inability to hire or retain qualified personnel could have material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY RELATED TO GOVERNMENT FUNDING. A portion of the Company's products are sold to universities, research laboratories, private foundations and other institutions where funding is dependent upon grants from government agencies, such as the National Institutes of Health. However, research funding by the government may be significantly reduced under several budget proposals under consideration in the United States Congress, or for other reasons. Any such reduction may materially affect the ability of the Company's research customers to purchase the Company's products. FDA AND OTHER GOVERNMENT REGULATIONS. The manufacturing, marketing and sale of the Company's products are subject to extensive and rigorous government regulations in the United States and other countries. In the United States, and certain other countries, the process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. In the United States, the FDA regulates, as medical devices, clinical diagnostic tests and reagents, as well as instruments used in the diagnosis of adverse conditions. The Federal Food, Drug and Cosmetic Act governs the design, testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. There are two principal FDA regulatory review paths for medical devices: 510(k) process and the PMA process. The PMA process typically requires the submission of more extensive clinical data and is costlier and more time-consuming to complete than the 510(k) process. Regulator's of medical devices in foreign countries where the Company operates have regulations similar to the United States in most cases. Additionally, the Company is required to comply with the FDA's GMP regulations. These regulations mandate certain operating, control and documentation procedures when manufacturing medical products, instruments and devices. The Company is also required to comply with the FDA's Clinical Laboratory CLIA regulations. 20 22 These rules restrict the sale of reagents to clinical laboratories certified under CLIA. The full implementation of CLIA rules could limit the clinical customers to which the Company could sell reagents in the future. In addition to these regulations, the Company is subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions and environmental matters. There can be no assurance that such laws and regulations will not in the future have a material adverse effect on the Company's business, financial condition and results of operations. RISKS RELATING TO AVAILABILITY OF THIRD-PARTY REIMBURSEMENT AND POTENTIAL ADVERSE EFFECTS OF HEALTH CARE REFORM. The Company's ability to achieve revenue growth and profitability may depend on the ability of the Company's customers to obtain adequate levels of third-party reimbursement for the use of certain diagnostic tests in the United States, Europe and other countries. Currently, availability of third-party reimbursement is limited and uncertain for some IHC tests. PRODUCT LIABILITY AND RECALL; PRODUCT LIABILITY INSURANCE. The marketing and sales of the Company's diagnostic instruments and reagents entails risk of product liability claims. The Company has product liability insurance coverage with a per occurrence maximum of $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 the processes. The Company could, in the future, encounter claims from individuals, governmental authorities or other persons or entities in connection with exposure to, disposal or handling of such hazardous materials or violations of environmental laws by the Company or its contractors and could also be required to incur additional expenditures for hazardous materials management or environmental compliance. Costs associated with environmental claims, violations of environmental laws or regulations, hazardous materials management and compliance with environmental laws could have a material adverse effect on the business, financial condition and results of operations of the Company. POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the Company's initial public offering on July 26, 1996, there was no public market for the Company's Common Stock or any other securities of the Company. There can be no assurance that an active trading market for the Company's Common Stock will continue to develop or, if developed, will be sustained. The market price of the Company's Common Stock, similar to the securities of other medical device and life sciences companies, is likely to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, FDA and other governmental regulations, developments with respect to patents or proprietary rights, public concern as to the safety of products developed by the Company or others, changes in financial analysts' estimated earnings or recommendations 21 23 regarding the Company and general market conditions may have a material adverse effect on the market price of the Company's Common Stock. The Company's results of operations may, in future periods, fall below the expectations of public market analysts and investors and, in such event, the market price of the Company's Common Stock could be materially and adversely affected. ABSENCE OF DIVIDENDS. The Company has not declared or paid any dividends since its inception and does not intend to pay any dividends in the foreseeable future. In addition, the Company's bank credit agreement currently prohibits the Company from paying cash dividends. 22 24 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. In March 1995, BioGenex sued BioTek in the United States District Court for the Northern District of California for infringement of certain patent rights held by BioGenex relating to an antigen retrieval method used in IHC tests. Following several unsuccessful attempts to settle the claims, a trial commenced in April 1997. Early in May 1997, the jury determined that the BioGenex patent was valid, that BioTek had willfully infringed and assessed a damage award of $404,150. As a result of the willful infringement finding, the judge increased the award by $303,112 and allowed pre-judgment interest of $102,470. BioTek has appealed this judgment. In January 1997, four individuals who are former BioTek noteholders who held in the aggregate approximately $1.1 million in principal amount of BioTek notes filed an action, Tse, et al v. Ventana Medical Systems, Inc., et al. No. 97-37, against the Company and certain of its directors and stockholders in the United States District Court for the District of Delaware. The complaint alleges, among other things, that the Company violated federal and California securities laws and engaged in common law fraud in connection with the BioTek shareholders' consent to the February 1996 merger of BioTek into Ventana and the related conversion of BioTek notes into Ventana notes. Plaintiffs seek substantial compensatory damages several times in excess of the principal amount of their BioTek notes, as well as substantial punitive damages, and fees and costs. The Company intends to vigorously contest this suit. After consideration of the nature of the claims and the facts relating to the merger and the BioTek note exchange, the Company believes that it has meritorious defenses to the claims and that resolution of this matter will not have a material adverse effect on the Company's business, financial condition and results of operations; however, the results of the proceedings are uncertain and there can be no assurance to that effect. In February 1997, the Company filed suit against Cell Marque Corporation for patent and trademark infringement and associated other claims in connection with the filling by Cell Marque Corporation of spent Ventana reagent dispensers with unapproved reagents. In March 1997, Cell Marque filed counterclaims against the Company alleging antitrust and Lanham Act violations. On August 12, 1997 the parties resolved their differences with the Company agreeing to market certain Cell Marque products and Cell Marque discontinuing its operation of refilling the Company's dispensers. In connection with a disagreement as to which price should be charged by BioTek to DAKO for the sale of TechMate 250 instruments, DAKO has filed an arbitration request with the International Chamber of Commerce. Arbitrators have been named by both BioTek and DAKO (one each) who must, in turn, agree on a third arbitrator. The Company believes its position is strong; however, the results of the proceedings are uncertain. The Company has received notices of various claims from certain of its and BioTek's former employees. Lawsuits have been filed against the Company and a certain former BioTek employee alleging that certain commitments made to a former employee in connection with his employment by BioTek were breached. Based on its review of the matter, the Company does not believe that its resolution will have a material adverse effect on the Company's business, financial condition or results of operations. 23 25 Other than the foregoing proceedings, the Company is not a party to any material pending litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule. (b) Reports on Form 8-K. No reports were filed on Form 8-K during the quarter ended September 30, 1997. 24 26 SIGNATURE Pursuant to the requirements of the securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Ventana Medical Systems, Inc. Date: November 10, 1997 By: /s/ Pierre Sice - --------------------------- -------------------------------------- Pierre Sice Vice President, Chief Financial Officer, Treasurer and Secretary. (Principal Financial and Accounting Officer) 25 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 21,937 0 6,151 47 4,084 34,804 9,115 3,750 48,366 5,788 0 0 0 76,074 (34,635) 48,366 22,425 22,425 7,992 7,992 15,746 0 0 (1,056) 0 (1,056) 0 0 0 (1,056) (.08) (.08)
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