-----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, SWZK90EjcTKyR2UAPQMlnAWO4aJfk29YhjyTvypGGkU46JiHGiEkVr+ZegAY2TEq TUHN+o97FIquRJYgytNutQ== 0001019687-99-000704.txt : 19991117 0001019687-99-000704.hdr.sgml : 19991117 ACCESSION NUMBER: 0001019687-99-000704 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99751609 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 VENTANA MEDICAL SYSTEMS, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended September 30, 1999. 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 85705 Center Drive (Zip Code) Tucson, AZ (Address of principal executive offices) Registrant's telephone number, including area code: (520) 887-2155 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 period 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 (Formal name, former address and former fiscal year, if changed from last report) 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 --- 13,588,335 shares as of October 29, 1999. VENTANA MEDICAL SYSTEMS, INC. INDEX TO FORM 10-Q ------------------ Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets September 30, 1999 (Unaudited) and December 31, 1998 Condensed Consolidated Statements of Operations Three and nine months ended September 30, 1999 and 1998 (Unaudited) Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 1999 and 1998 (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 6. Exhibits and Reports on Form 8-K Signature 2 - ------------------------------------------------------------------------------------------------------ VENTANA MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands except share data)
September 30, December 31, ASSETS 1999 1998 (Unaudited) (Note) ------------- ------------- Current assets: Cash and cash equivalents $ 971 $ 2,424 Accounts receivable 18,060 16,531 Inventories (Note 2) 11,261 11,009 Other current assets 2,576 1,787 ------------- ------------- Total current assets 32,868 31,751 Property and equipment, net 15,692 9,937 Intangibles, net 14,332 14,592 ------------- ------------- Total assets $ 62,892 $ 56,280 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,029 $ 3,536 Other current liabilities 6,326 5,053 ------------- ------------- Total current liabilities 9,355 8,589 Long term debt 1,764 1,907 Stockholders' equity Common stock - $.001 par value; 50,000,000 shares authorized; 13,568,631 and 13,421,819 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 13 13 Additional Paid-In Capital 80,209 78,716 Accumulated deficit (27,751) (32,152) Accumulated other comprehensive income (98) (193) Treasury Stock - 40,000 shares, at cost (600) (600) ------------- ------------- Total stockholders' equity 51,773 45,784 ------------- ------------- Total liabilities and stockholders' equity $ 62,892 $ 56,280 ============= ============= Note: The consolidated balance sheet at December 31, 1998 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 - ------------------------------------------------------------------------------------------------------ 3
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 ------------ ------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Sales: Instruments $ 4,733 $ 3,047 $ 14,579 $ 10,469 Reagents and other 11,679 8,061 33,780 22,576 ----------- ----------- ----------- ----------- Total net sales 16,412 11,108 48,359 33,045 Cost of goods sold 5,148 3,303 14,901 10,233 ----------- ----------- ----------- ----------- Gross profit 11,264 7,805 33,458 22,812 Operating expenses: Research and development 1,696 1,435 5,232 4,026 Selling, general and administrative 7,829 5,699 23,104 16,220 Amortization of intangibles 256 128 767 382 ----------- ----------- ----------- ----------- Income from operations 1,483 543 4,355 2,184 Other income 44 594 46 1,066 ----------- ----------- ----------- ----------- Pretax income 1,527 1,137 4,401 3,250 Provision for income tax (Note 5) - - - - ----------- ----------- ----------- ----------- Net income $ 1,527 $ 1,137 $ 4,401 $ 3,250 =========== =========== =========== =========== Net income per share (Note 3) Basic $ 0.11 $ 0.09 $ 0.33 $ 0.24 =========== =========== =========== =========== Diluted $ 0.11 $ 0.08 $ 0.30 $ 0.22 =========== =========== =========== =========== See accompanying notes 4
VENTANA MEDICAL SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Nine Months Ended September 30 1999 1998 ----------- ----------- Operating activities: Net Income $ 4,401 $ 3,250 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,769 1,990 Changes in operating assets and liabilities, net (3,157) (6,301) ----------- ----------- Net cash provided by (used in) operating activities 4,013 (1,061) Investing activities: Purchase of property and equipment, net (7,718) (2,113) Purchase of intangible assets (546) - ----------- ----------- Net cash used in investing activities (8,264) (2,113) Financing activities: Issuance of debt 1,400 - Issuance of stock 1,493 1,835 ----------- ----------- Net cash provided by financing activities 2,893 1,835 Effect of exchange rate change on cash (95) (288) ----------- ----------- Net decrease in cash and cash equivalents (1,453) (1,627) Cash and cash equivalents, beginning of period 2,424 18,902 ----------- ----------- Cash and cash equivalents, end of period $ 971 $ 17,275 =========== =========== See accompanying notes
5 VENTANA MEDICAL SYSTEMS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 condensed 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, 1998. 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, 1999 1998 ------------- ------------ (in thousands) Raw material and work-in-process $ 4,910 $ 5,165 Finished goods 6,351 5,844 ------------- ------------ $ 11,261 $ 11,009 ============= ============ 6 VENTANA MEDICAL SYSTEMS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 3. EARNINGS PER SHARE The following sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands except per share data).
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net income $ 1,527 $ 1,137 $ 4,401 $ 3,250 Weighted average common shares outstanding, basic 13,520 13,351 13,462 13,301 Add: dilutive stock options and warrants 945 1,391 1,141 1,390 ----------- ----------- ----------- ----------- Weighted average common shares outstanding, diluted 14,465 14,742 14,603 14,691 =========== =========== =========== =========== Net income per share, basic $ 0.11 $ 0.09 $ 0.33 $ 0.24 =========== =========== =========== =========== Net income per share, diluted $ 0.11 $ 0.08 $ 0.30 $ 0.22 =========== =========== =========== ===========
7 VENTANA MEDICAL SYSTEMS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 4. COMPREHENSIVE INCOME The components of comprehensive income for the three and nine month periods ended September 30, 1999 and 1998 are as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net income $ 1,527 $ 1,137 $ 4,401 $ 3,250 Foreign currency translation 95 (252) 95 (288) ---------- ---------- ---------- ---------- Comprehensive income $ 1,622 $ 885 $ 4,496 $ 2,962 ========== ========== ========== ==========
Accumulated other comprehensive income consists exclusively of foreign currency translation adjustments. 5. PROVISION FOR INCOME TAXES Management believes no provision for income taxes is required in the three or nine month period ended September 30, 1999 due to the existence of deferred tax assets not previously recognized. 6. LINE OF CREDIT The Company, under its revolving line of credit agreement, has $10 million available, which is subject to renewal on March 31, 2000. At September 30, 1999, $1.4 million was outstanding under the line of credit. Amounts outstanding bear interest at the bank's prime rate. 7. OPERATING SEGMENT AND ENTERPRISE DATA The Company has two reportable segments: United States, and International (primarily France, Germany, and Japan). Prior to the three months ended September 30, 1999, the Company had three reportable segments: North America, Europe, and Japan. Segment information at and for the three and nine months ended September 30, 1999 and 1998 follows (in thousands): 8
Three months ended September 30, 1999 ------------------------------------- Elimina- U.S. International tions Totals ---------------------------------------------------------- Sales to external customers $ 13,626 $ 2,786 $ - $ 16,412 Segment profit (loss) 1,870 (290) (53) 1,527 Three months ended September 30, 1998 ------------------------------------- Elimina- U.S. International tions Totals ---------------------------------------------------------- Sales to external customers $ 9,899 $ 1,209 $ - $ 11,108 Segment profit (loss) 1,611 (385) (89) 1,137 Nine months ended September 30, 1999 ------------------------------------ Elimina- U.S. International tions Totals ---------------------------------------------------------- Sales to external customers $ 39,891 $ 8,468 $ - $ 48,359 Segment profit (loss) 5,240 (817) (22) 4,401 Segment assets 74,331 9,871 (21,310) 62,892 Nine months ended September 30, 1998 ------------------------------------ Elimina- U.S. International tions Totals ---------------------------------------------------------- Sales to external customers $ 29,461 $ 3,584 $ - $ 33,045 Segment profit (loss) 4,625 (1,300) (75) 3,250 Segment assets 66,810 6,466 (18,652) 54,624
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 Medical Systems, Inc. ("Ventana" or "the Company") 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. OVERVIEW Ventana develops, manufactures and markets proprietary instrument/reagent systems that automate tissue preparation, IHC tests, special stains ("SS") tests and IN SITU hybridization ("ISH") tests for the analysis of cells and tissues on microscope slides. RESULTS OF OPERATIONS NET SALES Net sales for the three and nine months ended September 30, 1999 as compared to the same periods in 1998 increased 48% and 46% to $16.4 million and $48.4 million from $11.1 million and $33.0 million, respectively. The increase in net sales was attributable to a 55% and 39% increase in instrument sales for the three month and nine month periods and a 45% and 50% increase in reagent and other sales for the three and nine month periods. Instrument sales increased primarily due to the introduction and growing acceptance of the Special Stain system and electron microscopy instruments which were not offered by the Company in the first three quarters of 1998. Reagent revenue continued a strong growth trend due to a growing installed base, while service revenue also increased due to the growing number of instruments coming off warranty. Sales increased in the 1999 three and nine month periods compared to the same periods in 1998 in both geographic segments: 38% and 35% in the U.S. ($13.6 million and $39.9 million versus $9.9 million and $29.5 million), and 130% and 136% internationally ($2.8 million and $8.5 million versus $1.2 million and $3.6 million). GROSS PROFIT Gross profit for the three and nine months ended September 30, 1999 increased to $11.3 million and $33.5 million, respectively, from $7.8 million and $22.8 million for the same periods in 1998. The Company's gross margin for the three month period decreased slightly to 69% from 70% in the same period of the prior year. However, the gross margin of 69% for the nine month period remained consistent with the same period in the prior year. The slight gross margin decrease for the three month period is a result of instrument revenue being a greater percentage of total revenue, as instruments carry lower margins than reagents. 10 RESEARCH AND DEVELOPMENT Research and development expenses were $1.7 million for the three months ended September 30, 1999 and $5.2 million for the nine months ended September 30, 1999. These amounts represent an 18% increase for the three month period and a 30% increase for the nine month period over the prior year. The increase results primarily from substantial development work on new products. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") Presented below is a summary of SG&A expense for the three and nine months ended September 30, 1999 and 1998. SG&A SUMMARY
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- % % % % $ Sales $ Sales $ Sales $ Sales --------------- --------------- --------------- --------------- Sales and marketing $ 6,074 37% $ 4,337 39% $18,454 38% $12,548 38% Administration 1,755 11% 1,362 12% 4,650 10% 3,672 11% --------------- --------------- --------------- --------------- Total SG&A $ 7,829 48% $ 5,699 51% $23,104 48% $16,220 49% =============== =============== =============== ===============
SG&A expense for the three and nine months ended September 30, 1999 increased to $7.8 million and $23.1 million from $5.7 million and $16.2 million for the same periods of the prior year. SG&A expense as a percentage of net sales decreased slightly during the respective periods in 1998 and 1999. Total SG&A expenses increased in absolute terms due primarily to the Company's expanding business base in Europe and Japan plus costs associated with implementing new administrative systems and functions. AMORTIZATION OF INTANGIBLES Intangible assets consist primarily of goodwill, customer base and developed technology resulting from acquisitions and patents. Such assets are amortized to expense over estimated useful lives of 15 to 20 years resulting in quarterly costs approximating $0.3 million. Additionally, the Company will review the utility of these assets each quarter to assess their continued value and recognize any impairment should the Company determine such a condition exists. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1999 the Company's principal source of liquidity consisted of cash and cash equivalents of $1.0 million. The Company also had a $10 million revolving bank credit facility and $1.4 million outstanding thereunder as of September 30, 1999. 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. 11 The Company has used a significant portion of its available resources during the current year for fixed asset expenditures to increase manufacturing capacity, increase instrument placements with new and existing customers, and enhance 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, 1999, net cash used in operations and investing activities was approximately $4.3 million, versus $3.2 million in the nine months ended September 30, 1998, primarily due to purchases of property and equipment. 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 near future. However, the Company may be required to raise additional capital in the future for long term goals 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. READINESS FOR THE YEAR 2000 The Company is engaged in a company-wide project to prepare its business for the change in date from the year 1999 to 2000. The Company believes it has completed its compliance process beyond the deployment and testing phases for approximately 90 percent of its critical software and hardware systems. With regard to embedded technology, the Company has completed the remediation and testing phases for 80 percent of its facilities. The Company has completed its compliance process for all of its domestic critical systems and anticipates compliance for all critical systems within its international operations by the end of November 1999. The Company's target for completing its compliance process for its non-critical systems is the end of 1999. All costs and expenses incurred to address the Year 2000 issue are charged against income on a current basis. The total cost of the project is expected to be approximately $30,000. These costs include costs of internal employees and third-party consultants involved in the project and the costs of software and hardware. Management's estimates regarding expected completion dates and costs involved in the Company's Year 2000 project are based upon various assumptions regarding future events, including the availability of resources, the success of third parties in addressing their Year 2000 issues, and other factors. While management believes the Company is addressing the Year 2000 issue, there is no guarantee that these estimated completion dates and costs will be achieved. In the event that the estimated completion dates and costs differ materially from the actual completion dates and costs, such could have a materially adverse effect on the Company's financial condition and results of operations. In addition, the Company cannot reasonably estimate the impact of Year 2000 on the Company if key third parties, including financial institutions, suppliers, customers, service providers, public utilities and governments, are unsuccessful in completing their Year 2000 efforts. 12 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. In February 1996 the Company acquired BioTek Solutions, Inc. ("BioTek"). 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 original 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. The Company and two of its directors have filed an answer to the Complaint. Discovery has commenced and the Court has set a trial date of July 10, 2000. 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 April 16, 1999, a Ventana shareholder, Nelson Leung, who is related to the plaintiffs in the securities action discussed in the preceding paragraph filed suit in Chancery Court of the State of Delaware against the Company and certain of its former and present directors and officers arising out of the BioTek acquisition. The company alleges derivative claims for, inter alia, breach of the duty of good faith and waste and purported class claims for breach contract and breach of the fiduciary duty of disclosure. Many of these claims are similar to those asserted in the Tse suit. The suit seeks class action status for the BioTek shareholders. In July of 1999, the Company and the director defendants filed a motion to dismiss and an alternative motion to stay the action, which was heard by the Court of Chancery on October 18, 1999. The Court has yet to rule on those motions. 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. Because the results of the proceedings are uncertain; however, there can be no guarantee that resolution of this matter will not have a material adverse effect on the Company's business, financial condition and results of operations. In May 1998 a lawsuit was filed by a former employee against the Company alleging sexual discrimination and associated claims. The Company has filed an answer to the Complaint and awaits a trial date in November of 1999. Other than the foregoing proceedings, the Company is not a party to any material pending litigation. 13 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, 1999. 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 3, 1999 By: /s/ Jay Meridew ----------------------------- Jay Meridew Vice President of Finance EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 971 0 18620 560 11261 32868 23158 7466 62892 9355 0 0 0 13 51760 62892 48359 48359 14901 14901 29103 0 136 4401 0 4401 0 0 0 4401 .33 .30
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