-----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, UtJqHpuFM+kIOlUnSCbTcyFYQS58tbXN44gc5r1seav7xdyA/cql8x1uQ81Nn4BM /Chl7YihZ1ZcnIQfgXPrNQ== 0000891618-98-002426.txt : 19980518 0000891618-98-002426.hdr.sgml : 19980518 ACCESSION NUMBER: 0000891618-98-002426 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 98622086 BUSINESS ADDRESS: STREET 1: 3865 N BUSINESS CENTER DRIVE CITY: TUCSON STATE: AZ ZIP: 85705 BUSINESS PHONE: 5202272155 MAIL ADDRESS: STREET 1: 3865 N BUSINESS CENTER DR CITY: TUCSON STATE: AZ ZIP: 85705 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 1 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Period Ended March 31, 1998, 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--13,264,325 shares as of May 11, 1998. 2 VENTANA MEDICAL SYSTEMS, INC. INDEX TO FORM 10-Q Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets March 31, 1998 (Unaudited) and December 31, 1997 Condensed Consolidated Statements of Operations Three months ended March 31, 1998 and 1997 (Unaudited) Condensed Consolidated Statements of Cash Flows Three months ended March 31, 1998 and 1997 (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)
March 31, December 31, ASSETS 1998 1997 ----------- ------------ (Unaudited) (Note) Current assets: Cash and cash equivalents $ 20,350 $ 18,902 Accounts receivable 8,249 8,047 Inventories (Note 2) 5,971 5,134 Other current assets 1,416 2,109 -------- -------- Total current assets 35,986 34,192 Property and equipment, net (Note 3) 6,328 6,105 Intangibles, net (Note 4) 7,916 8,055 -------- -------- Total assets $ 50,230 $ 48,352 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 2,188 $ 2,584 Other current liabilities (Note 5) 3,196 2,894 -------- -------- Total current liabilities 5,384 5,478 Long term debt 697 471 Stockholders' equity: Preferred stock - $.001 par value; 5,000,000 shares authorized (Note 7) -- -- Common stock - $.001 par value; 50,000,000 shares authorized; 13,263,459 and 13,247,226 shares issued and outstanding at March 31, 1998 and December 31, 1997, respectively 13 13 Additional Paid-In Capital 77,227 76,313 Accumulated deficit (32,971) (33,782) Cumulative foreign currency translation adjustment (120) (141) -------- -------- Total stockholders' equity 44,149 42,403 -------- -------- Total liabilities and stockholders' equity $ 50,230 $ 48,352 ======== ========
Note: The condensed consolidated balance sheet at December 31, 1997 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 March 31 ------------------------ 1998 1997 ------- ------- Sales: Instruments $ 3,595 $ 1,971 Reagents and other 6,760 4,987 ------- ------- Total net sales 10,355 6,958 Cost of goods sold 3,453 2,701 ------- ------- Gross profit 6,902 4,257 Operating expenses: Research and development 1,200 729 Selling, general and administrative 4,974 3,378 Amortization of acquisition costs 127 127 ------- ------- Income from operations 601 23 Other income 210 186 ------- ------- Net income $ 811 $ 209 ======= =======
See accompanying notes 3 5 VENTANA MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Three Months Ended March 31 --------------------------- 1998 1997 -------- -------- OPERATING ACTIVITIES: Net Income $ 811 $ 209 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 545 422 Changes in operating assets and liabilities, net (488) 692 -------- -------- Net cash provided by operating activities 868 1,323 INVESTING ACTIVITIES: Purchase of property and equipment, net (342) (876) Purchase of intangible assets (Note 4) (1) (37) -------- -------- Net cash used in investing activities (343) (913) FINANCING ACTIVITIES: Issuance (repayment) of debt (including amounts from related parties) and stock 902 (10,408) Net proceeds from public offering -- 26,134 -------- -------- Net cash provided by financing activities 902 15,726 Effect of exchange rate change on cash 21 (251) -------- -------- Net increase in cash and cash equivalents 1,448 15,885 Cash and cash equivalents, beginning of period 18,902 11,067 -------- -------- Cash and cash equivalents, end of period $ 20,350 $ 26,952 ======== ========
See accompanying notes 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, 1997. 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:
March 31 December 31 1998 1997 -------- ----------- (in thousands) Raw material and work-in-process $4,755 $4,033 Finished goods 1,216 1,101 ------ ------ $5,971 $5,134 ====== ======
5 7 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
March 31 December 31 1998 1997 -------- ----------- (in thousands) Diagnostic instruments $ 4,952 $ 4,830 Machinery and equipment 3,697 3,464 Computers and related equipment 1,421 1,190 Leasehold improvements 480 472 Furniture and fixtures 181 177 ------- ------- 10,730 10,133 Less accumulated depreciation and amortization 4,402 4,028 ------- ------- $ 6,328 $ 6,105 ======= =======
4. INTANGIBLES Intangibles consist of the following:
March 31 December 31 1998 1997 -------- ----------- (in thousands) Customer base $4,100 $4,100 Developed technology 2,800 2,800 Goodwill, patents and other 2,244 2,244 ------ ------ 9,144 9,144 Less accumulated amortization 1,228 1,089 ------ ------ $7,916 $8,055 ====== ======
5. OTHER CURRENT LIABILITIES: Other current liabilities consist of the following:
March 31 December 31 1998 1997 -------- ----------- (in thousands) Accrued payroll and payroll taxes $ 698 $ 421 Accrued commissions 252 146 Deferred revenue 446 334 Accrued legal reserves 884 946 Sales tax payable 187 410 Other accrued liabilities 729 637 ------ ------ $3,196 $2,894 ====== ======
6. EARNINGS PER SHARE: In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share, which is required to be adopted by the Company on December 31, 1997. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share and is computed using the weighted average number of shares of common stock outstanding in the period presented, adjusted for the effect of dilutive securities on the balance sheet date. Net income per share for both periods has been presented in conformance with the requirements of SFAS No. 128 as well as Staff Accounting Bulletin No. 98 issued by the Securities and Exchange Commission in February 1998. 6 8 Statement of Computation of Weighted Average Shares Outstanding (in thousands except per share data) (Unaudited)
Three Months Ended March 31, ------------------------ 1998 1997 ------- ------- Net income $ 811 $ 209 Weighted average common shares outstanding, basic 13,255 11,931 Add: dilutive stock options and warrants 1,302 993 ------- ------- Weighted average common shares outstanding, diluted 14,557 12,924 Net income per share, basic $ 0.06 $ 0.02 ======= ======= Net income per share, diluted $ 0.06 $ 0.02 ======= =======
7. PREFERRED SHARES PURCHASE RIGHTS DIVIDEND: On March 9, 1998, the Company's Board of Directors approved the establishment of a rights plan. Pursuant to this plan, the Board of Directors declared a dividend distribution of one Preferred Shares Purchase Right on each outstanding share of the Company's Common Stock for shareholders of record on May 8, 1998. Each right entitles stockholders to buy 1/1000th of a share of the Company's Series A Participating Preferred Stock at an exercise price of eighty-five dollars ($85.00). The Rights become exercisable following the tenth day after a person or group announces an acquisition of 20% or more of the Company's Common Stock or announces commencement of a tender offer the consummation of which would result in ownership by the person or group of 20% or more of the Common Stock. The Company is entitled to redeem the Rights at $0.01 per Right at any time on or before the tenth day following acquisition by a person or group of 20% or more of the Company's Common Stock. If, prior to redemption of the Rights, a person or group acquires 20% or more of the Company's Common Stock, each Right not owned by a holder of 20% or more of the Common Stock will entitle its holder to purchase, at the Right's then current exercise price, that number of shares of Common Stock of the Company (or, in certain circumstances as determined by the Board of Directors, cash, other property or other securities) having a market value at that time of twice the Right's exercise price. If, after the tenth day following acquisition by a person or group of 20% or more of the Company's Common Stock, the Company sells more than 50% of its assets or earning power or is acquired in a merger or other business combination transaction, the acquiring person must assume the obligation under the Rights and the Right will become exercisable to acquire Common Stock of the acquiring person at the discounted price. At any time after an event triggering exercisability of the Rights at a discounted price and prior to the acquisition by the acquiring person of 50% or more of the outstanding Common Stock, the Board of Directors of the Company may exchange the Rights (other than those owned by the acquiring person or its affiliates) for Common Stock of the Company at an exchange ratio of one share of Common Stock per Right. 7 9 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. 8 10 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. BioTek's instruments also use a detection chemistry and batch processing approach which differ from the Company's proprietary system and which also contribute to those products' lower margins. Ventana's strategy regarding BioTek is to continue to integrate the operations of BioTek into the Ventana business model, in which most manufacturing, sales and marketing activities are performed by the Company. The United States distribution agreement between BioTek and CMS was terminated by mutual agreement in October 1997. The international distribution agreement with DAKO expires in December 1999. The Company places instruments through direct sales, including nonrecourse leases, instrument rentals and the Company's qualified reagent installed base program ("QRIB"). In a QRIB, the Company provides the customer with the use of an instrument for a period of up to six months provided the customer purchases a minimum amount of reagents and consumables. At the end of the six month period, the customer must elect to purchase, rent or return the system. For QRIB placements, the Company incurs the cost of manufacturing or procuring instruments and recognizes revenues only at the time the instrument is either sold or rented rather than at the time of instrument placement. The manufacturing cost of instruments placed through QRIBs and rentals is charged to cost of goods sold by depreciating standard costs over a period of four years. The Company's future results of operations may fluctuate significantly from period to period due to a variety of factors. The initial placement of an instrument is subject to a longer, less consistent sales cycle than the sales of reagents, which begin and typically are recurring once an instrument is placed. The Company's operating results in the future are likely to fluctuate substantially from period to period because instrument sales are likely to remain an important part of revenues in the near future. The degree of fluctuation will depend on the timing, level and mix of instruments placed through direct sales and instruments placed through QRIBs or rentals. In addition, average daily reagent use by customers may also fluctuate from period to period, which may contribute to future fluctuations in revenues. Sales of instruments may also fluctuate from period to period because sales to the Company's international distributors typically provide such distributors with several months of instrument inventory, which the distributors will subsequently seek to place with end-users. The Company's instrument installed base includes instruments shipped to DAKO and recognized as sales. Furthermore, due both to the Company's increased sales focus on smaller hospitals and laboratories and the relatively high reagent sales growth rates in recent fiscal periods, the rate of growth in reagent sales in future periods 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 9 11 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 MONTHS ENDED MARCH 31, 1998 AND 1997: Net Sales: Net sales for the three months ended March 31, 1998 as compared to the same period in 1997 increased 49% to $10.4 million from $7.0 million. The increase in net sales was attributable to an 82% increase in instrument sales and a 36% increase in reagent and other sales. Instrument sales increased primarily due to large numbers of prior period QRIB placements being converted to direct sale placements in 1998 and an increase in placements to DAKO, the Company's European distributor. Reagent and other sales increased due to sales of reagents to new customers and increased shipments to existing customers. Gross Margin: Gross profit for the three months ended March 31, 1998 increased to $6.9 million from $4.3 million for the same period in 1997, whereas the Company's gross margin increased to 67% from 61% for the respective periods. Gross margins on instruments increased during the 1998 period as a result of sales of the Company's new NexES instrument, which was introduced in late 1997 and which has a lower manufacturing cost than its predecessor. Gross margins on reagent and other sales increased primarily due to a higher mix of proprietary reagent products, which carry a higher margin than batch processing reagents, which have increased at a slower rate. In addition, higher pricing for reagents and increased service profitability contributed to the margin improvements. Research and Development: Research and development expenses were $1.2 million for the three months ended March 31, 1998, a 65% increase over the $0.7 million spent in the corresponding period in 1997. This 10 12 increase resulted primarily from accelerated development work on new special stains and in situ hybridization instrumentation, but also reflected a general increase in research activity and headcount investment. Research and development expenses also increased as a percent of sales to approximately 12% for the three months ended March 31, 1998 compared to approximately 10% for the same period during 1997, for the same reasons noted above. Research and development expenses for the three months ended March 31, 1997 related primarily to the development of new prognostic markers. Selling, General and Administrative ("SG&A"): Presented below is a summary of SG&A expense for the three months ended March 31, 1998 and 1997. SG&A SUMMARY:
Three Months Ended March 31, ------------------------------------------ 1998 1997 ---------------- ----------------- % % $ Sales $ Sales ------ ----- ------ ----- ($ in thousands) Sales and marketing $3,851 37% $2,450 36% Administration 1,123 11% 928 13% ------ -- ------ -- Total SG&A $4,974 48% $3,378 49% ====== == ====== ==
SG&A expense for the three month ended March 31, 1998 increased to $5.0 million from $3.4 for the three months ended March 31, 1996. SG&A expense as a percentage of net sales decreased slightly to 48% as compared to 49% for the same period in 1997. The fluctuation in SG&A expenses 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 as a percentage of sales is the result of the Company's decision to service the market through its own sales and marketing staff and expenses necessary to support the growth of the Company. The decline in administrative expenses as percentage of sales in the 1998 period was due to a relative decline in litigation-related expenses. However, administrative expenses did increase in absolute terms due primarily to the Company's expanding business base in Europe and Japan. Amortization of Intangibles: Intangible assets consist primarily of goodwill, customer base and developed technology acquired in the BioTek acquisition, and patents. Such assets are amortized to expense over estimated useful lives of 15 to 20 years. As a result, the Company will charge to expense each quarter approximately $0.1 million for the amortization of these intangible assets. Additionally, the Company will review the utility of these assets each quarter to assess their continued value. Should the Company determine that any of these assets are impaired, it will write them down to their estimated fair market value. 11 13 LIQUIDITY AND CAPITAL RESOURCES: As of March 31, 1998 the Company's principal source of liquidity consisted of cash and cash equivalents of $20.4 million. In addition, as of March 31, 1998, letters of credit were issued 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 Laboratories ($0.9 million). The Company is currently negotiating an increase to $5.0 million in its revolving bank credit facility. 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. Accrued interest of $0.6 million was reversed into income in February 1997. The Company expects to use approximately $2.5 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 three months ended March 31, 1998 the Company generated from operations and investing activities approximately $0.5 million in cash versus $0.4 million for the three months ended March 31, 1997. 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 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. In September 1996, BioTek and DAKO entered in to the Amendment Agreement for the purpose of addressing several matters, including repayment of the secured loans and prepayments. 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 March 31, 1998, the total outstanding balance of the secured loans and prepayments was $0.4 million. Upon termination of the distribution agreement or in the 12 14 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 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 QRIBs and rentals. In addition, average daily reagent use by customers may fluctuate from period to period, which may contribute to future fluctuations in revenues. 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. 13 15 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. 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 14 16 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 have been sold under distribution agreements entered into by BioTek. In the United States, batch processing instruments and reagents were sold through Curtin Matheson Scientific, Inc. a subsidiary of Fisher Scientific, Inc. ("CMS"), under an exclusive agreement until it was terminated by mutual agreement in October 1997. United States sales through CMS were subject to several operating conditions and risks. In particular, it had been historically necessary for BioTek to support the efforts of CMS with direct field sales and support personnel. As a result, the Company generated lower gross margins on sales through CMS that it would generate were it to sell directly to end-users and incurs higher selling expenses than typically associated with third-party distribution arrangements. The Company has been distributing all batch processing products directly to end-users in the United States since the termination of this agreement. 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. 15 17 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. 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 16 18 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. 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, QRIBs 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 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. 17 19 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 good manufacturing procedures 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 Improvement Amendments of 1988 ("CLIA") regulations. 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. 18 20 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. 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 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 cash dividends since its inception and does not intend to pay any cash dividends in the foreseeable future. In addition, the Company's bank credit agreement currently prohibits the Company from paying cash dividends. 19 21 PART II - OTHER INFORMATION ITEM 3. LEGAL PROCEEDINGS. In March 1995, BioGenex Laboratories sued BioTek in the U.S. 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. BioGenex's claims include claims of both direct, indirect and contributory infringement. BioTek denied infringement and asserted several defenses, including the 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 infringement. In May 1997, a judgment for approximately $850,000 was rendered against BioTek, which BioTek appealed. In June 1997, the Company obtained a letter of credit for approximately $900,000 to cover the judgment and interest. In April 1998, the Court of Appeals denied the appeal and the Company plans no further action. In January 1997, four individuals who are former BioTek noteholders who held in the aggregate approximately $1.1 million in principal amount of BioTek notes filed an action, Tse, et al v. Ventana Medical Systems, Inc., et al. No. 97-37, against the Company and certain of its directors and stockholders in the U.S. District Court for the District of Delaware. The complaint alleges, among other things, that the Company violated federal and California securities laws and engaged in common law fraud in connection with the BioTek shareholders' consent to the February 1996 merger of BioTek into Ventana and the related conversion of BioTek notes into Ventana notes. Plaintiffs seek substantial compensatory damages several times in excess of the principal amount of their BioTek notes, as well as substantial punitive damages, fees and costs. On April 25, 1997, plaintiffs filed an amended complaint. The amended complaint makes the same allegations as the original complaint and adds a claim under North Carolina securities laws. In May 1997, the Company made a motion to transfer the action to the district of Arizona, or alternatively to the Central District of California, which was denied by the Court. On December 16, 1997, the Company filed a motion to dismiss the amended complaint, which is pending in the Court. There is currently a stay of discovery while the motion to dismiss is pending. Based on the facts known to date, the Company believes the claims are without merit and intends to vigorously contest this suit. After consideration of the nature of the claims and the facts relating to the merger and the BioTek note exchange, the Company believes that it has meritorious defenses to the claims and that resolution of this matter will not have a material adverse effect on the Company's business, financial condition and results of operations; however, the results of the proceedings are uncertain and there can be no assurance to that effect. On July 16, 1997, a shareholder demand to review and copy corporate documents pursuant to Section 220 of the Delaware General Corporation Law was denied by the Company. As a result, as action entitled, , CA. Leung v. Ventana Medical Systems, Inc., No. 15812, was filed in the Court of Chancery for the State of Delaware. The plaintiff, whi is related to the plaintiffs in the securities action discussed in the preceding paragraph, seeks inspection of certain books and records of the Company. The Company believes the plaintiff seeks the documents for an improper purpose and intends to defend this case vigorously. A trial on March 3, 1998 resulted in the judge ordering the parties to reach an agreement without a court order. The agreement provides for the plaintiff's attorney only to review the corporate documents supplied. In connection with a disagreement as to which price should be charged by BioTek to DAKO for the sale of TechMate 250 instruments, DAKO filed an arbitration request with the International 20 22 Chamber of Commerce in July 1997. The arbitration is currently scheduled for October 1998. The Company believes its position is meritorious; however, the results of the proceedings are uncertain. An adverse determination would require the Company to refund to DAKO a portion of the purchase price paid for some or all TechMate 250s sold to DAKO since its introduction in late 1996. 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 The annual meeting of stockholders of the Company was held on April 30, 1998, for the purpose of electing two Class II directors, Edward M. Giles and Rex J. Bates, increasing the number of shares reserved for issuance under the 1996 Stock Option Plan, approving the appointment of auditors and transacting any other business that might be brought forth. Proxies for the meeting were solicited pursuant to section 14(a) of the Securities and Exchange Act of 1934 and there were no solicitations in opposition to management's solicitations. Management's nominees for Class II directors, as listed in the proxy statement were elected with the following vote:
Shares Shares Shares voted "for" "withheld" not voted ----------- ---------- --------- Edward M. Giles 10,814,920 354,230 2,089,631 Rex J. Bates 10,812,412 356,738 2,089,631
The amendment to the Company's 1996 Stock Option Plan to increase the number of shares of common stock reserved for issuance thereunder by 750,000 shares to a new total of 1,750,000 was approved by the following vote:
Shares Shares Shares Shares voted "for" voted "against" "abstaining" not voted ----------- --------------- ------------ --------- 8,556,119 750,547 12,377 3,939,738
The appointment of Ernst & Young, LLP as independent auditors was approved by the following vote:
Shares Shares Shares Shares voted "for" voted "against" "abstaining" not voted ----------- --------------- ------------ --------- 11,162,556 1,800 4,794 2,089,631
No other matters were submitted for vote. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.20A Services agreement with John Patience dated February 26, 1998 10.20B Services agreement with Jack W. Schuler dated April 23, 1998 27.1 Financial Data Schedule. (b) Reports on Form 8-K. 21 23 No reports were filed on Form 8-K during the quarter ended March 31, 1998. 22 24 SIGNATURE Pursuant to the requirements of the securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Ventana Medical Systems, Inc. Date: May 13, 1998 By:____________________________________ Pierre Sice Vice President, Chief Financial Officer, Treasurer and Secretary. (Principal Financial and Accounting Officer) 23 25 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.20A Services agrement with John Patience dated February 26, 1998 10.20B Services agreement with Jack W. Schuler dated April 23, 1998 27.1 Financial Data Schedule
EX-10.20A 2 SERVICES AGREEMENT WITH JOHN PATIENCE 1 EXHIBIT 10.20A [VENTANA LETTERHEAD] February 26, 1998 Mr. John Patience C/O Crabtree Partners 1419 Lake Cook Road Suite 410 Deerfield, IL 60015 Dear John: This letter is to confirm the extension for an additional two years of the arrangement (the "Arrangement") under which you have agreed to devote a significant portion of your professional working time to the business and affairs of Ventana Medical Systems, Inc. ("Ventana" or the "Company"). Under the extension of the Arrangement, you would receive a grant of a nonstatutory option to purchase 150,000 shares of Common Stock of the Company at an exercise price of $12.625 per share, the fair market value of the Company's Common Stock on the date that the extension of the Arrangement, as well as the grant of these additional options, was approved by the Company's Board of Directors. These options would vest on a cumulative monthly basis over 24 months commencing February 26, 1998; provided that during such 24 month vesting period you devote, on a cumulative average basis, at least 50% of your professional working time to matters related to the Company. Please acknowledge your agreement with the foregoing by signing the enclosed counterpart of this letter. Very truly yours, /s/ HANK PIETRASZEK - ------------------- Hank Pietraszek President & CFO Acknowledged and agreed as of this 26th day of February, 1998. /s/ JOHN PATIENCE ------------------------- John Patience EX-10.20B 3 SERVICES AGREEMENT WITH JACK W. SCHULER 1 [VENTANA LETTERHEAD] EXHIBIT 10.20B February 26, 1998 Mr. Jack W. Schuler C/O Crabtree Partners 1419 Lake Cook Road Suite 410 Deerfield, IL 60015 Dear Jack: This letter is to confirm the extension for an additional two years of the arrangement (the "Arrangement") under which you have agreed to devote a significant portion of your professional working time to the business and affairs of Ventana Medical Systems, Inc., ("Ventana" or the "Company"). Under the extension of the Arrangement, you would receive a grant of a nonstatutory option to purchase 150,000 shares of Common Stock of the Company at an exercise price of $12.625 per share, the fair market value of the Company's Common Stock on the date that the extension of the Arrangement, as well as the grant of these additional options, was approved by the Company's Board of Directors. These options would vest on a cumulative monthly basis over 24 months commencing February 26, 1998; provided that during such 24 month vesting period you devote, on a cumulative average basis, at least 50% of your professional working time to matters related to the Company. Please acknowledge your agreement with the foregoing by signing the enclosed counterpart of this letter. Very truly yours, /s/ HANK PIETRASZEK - ------------------- Hank Pietraszek President & CFO Acknowledged and agreed as of this 23rd day of April , 1998. ------ ---------- /s/ JACK W. SCHULER --------------------------- Jack W. Schuler EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 3-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 MAR-31-1998 MAR-31-1997 20,350 11,672 0 15,280 8,585 5,102 336 47 5,971 4,044 35,986 37,217 10,730 7,321 4,402 3,424 50,230 49,590 5,384 5,607 0 0 0 0 0 0 13 13 44,136 42,536 50,230 49,590 10,355 6,958 10,355 6,958 3,453 2,701 3,543 2,701 6,301 4,234 40 0 0 0 811 209 0 0 811 209 0 0 0 0 0 0 811 209 .06 .02 .06 .02 FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
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