Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File No. 000-20931
----------------
VENTANA MEDICAL SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-2976937
(State of Incorporation) (IRS Employer
Identification No.)
3865 North Business Center Drive
Tucson, AZ 85705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (520) 887-2155
----------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
----------------
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate value of voting stock held by non-affiliates of the Registrant
was approximately $298,747,235 based upon the average of the high and low
prices of the Registrant's Common Stock reported for such date on the Nasdaq
National Market. Shares of Common Stock have been excluded in that such persons
may be deemed to be affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of December 31,
2000, the Registrant had outstanding 15,444,122 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
Item 1. Description of Business
This report on Form 10-K may contain projections, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
For a discussion of factors which may affect the outcome projected in such
statements, see "Cautionary Factors That May Affect Future Results," beginning
on page 14. While this outlook represents our current judgment on the future
direction of our business, such risks could cause actual results to differ
materially from our future performance listed below. We undertake no
obligation to release publicly the results of any revisions to these forward-
looking statements to reflect events and circumstances arising after the date
of this report on Form 10-K.
For our current and historical financial positions, see "Selected Financial
Data," beginning on page 26.
Summary of Our Business
Unless the context requires otherwise, all references to we, our or us
refer to Ventana Medical Systems, Inc., a corporation originally incorporated
in the state of Delaware in 1993, and its six subsidiaries:
. Ventana Medical Systems GmbH
. Ventana Medical Systems Japan K.K.
. Ventana Medical Systems, Pty. Ltd.
. Ventana Medical Systems, S.A.
. BioTek Solutions, Inc.
. BioTechnology Tools, Inc.
We develop, manufacture and market instruments and consumables that are
used to automate diagnostic and drug discovery procedures in clinical
histology laboratories and drug discovery laboratories worldwide. Our
instrument-reagent systems are designed to prepare and stain patient tissue or
cells mounted on a microscope slide for examination by a pathologist. The
consumable products we market that are required to operate our instruments
include reagents and other accessories. Our systems are designed to provide
users with high-quality and consistent results, high throughput and
significant labor savings. Our clinical products are used by histology labs,
which are labs that focus on the analysis of human tissue, to assist
anatomical pathologists in the diagnosis of cancer and infectious diseases.
Most histology labs are hospital based although some independent reference
labs offer histology services. Our drug discovery products are used by
research labs at large pharmaceutical and biotechnology companies and medical
research centers to assist in the discovery of new drugs. Our instruments have
been placed in the majority of the top fifty U.S. cancer centers, which are
recognized as leaders in cancer research and treatment as reported in the July
2000 issue of U.S. News and World Report. These include Johns Hopkins
Hospital, the Mayo Clinic, Memorial Sloan-Kettering Cancer Center and M.D.
Anderson Medical Center.
Histology tests performed on our instruments are used by pathologists and
oncologists to assist in diagnosis of cancer and infectious diseases and to
select an appropriate therapy. According to the National Cancer Institute,
cancer is the second leading cause of death in the United States. Currently
8.4 million people in the U.S. have a history of invasive cancer. Mortality
rates are improved by early detection and the selection of appropriate
therapies. Based upon our modeling of the market, we estimate that histology
labs worldwide purchase in excess of $1.3 billion in instruments and
consumables on an annual basis. In addition, the pharmaceutical and
biotechnology companies who are analyzing the human genome and proteome to
accelerate new drug discovery also benefit from automating the analysis of
human and animal tissue and cells.
1
Industry Overview
We target our instrument-reagent systems at two markets: the histology lab
and the drug discovery lab. We currently derive the majority of our revenues
and profits from ongoing sales of consumables to histology labs and the sale
of instrument systems, although we expect sales to research labs engaged in
drug discovery to grow over time.
Histology
Histology is the study of the microscopic structure of tissues. In a
histology lab, an anatomical pathologist attempts to identify the causes and
consequences of disease in a specific part of the body. An anatomical
pathologist uses tools ranging from the naked eye to powerful microscopes and
even molecular analysis of cell proteins and genes. This is done by examining
tissue samples obtained during surgery or through biopsy procedures to
identify structural and other changes in cells, tissues and organs. Anatomical
pathology examinations are among the most reliable ways to establish: (1) a
diagnosis of the type of disease suffered by the patient, (2) a prognosis on
the likely progression of the disease, and (3) a determination as to which
therapies are most likely to be effective in treating the patient.
Based upon a survey of hospitals, we estimate that there are about 6,000
histology labs worldwide. Of this total we estimate about 2,900 are in North
America, 2,000 in Europe and 1,100 in Japan and the remainder of the world.
Histology is principally a North American term. In many countries histology
(the analysis of tissue) and cytology (the analysis of cells) labs are
combined into a single anatomical pathology lab.
All patient samples entering the histology lab move through seven basic
processing steps or work cells:
. Accessioning--Tissue is entered into the hospital information system for
medical records and billing purposes.
. Grossing--Following accessioning, the gross patient tissue specimen is
examined by a pathologist. Several tissue samples are then cut from the
gross specimen for further examination and placed in small plastic
cassettes.
. Tissue Processing--Cassettes from gross specimens are generated
throughout the day and placed at the end of the day in an instrument
called a tissue processor for overnight batch processing. Tissue
processors preserve the tissue through the use of a fixative, usually
formalin, and infusing the tissue with paraffin so it can be more
readily sectioned or cut. An alternative to using a fixative is to
freeze tissue and handle it in a frozen state although, we estimate that
less than 5% of patient specimens entering histology labs are frozen.
. Embedding--The first activity that usually occurs in a histology
laboratory each morning is to remove the processed tissue from each
cassette and embed it in a paraffin block. This work is performed
manually and is undertaken to produce a specimen of uniform size that
can be cut on a microtome.
. Sectioning--Each tissue block is next transferred to the sectioning area
of the lab where very thin sections are cut on a microtome and mounted
on a microscope slide. The number of slides that are cut from each block
varies according to the case and is usually determined by the
pathologist who is performing the gross analysis.
. Hemotoxlyn and Eosin, or H&E, Staining--Each microscope slide is then
stained with two basic stains, Hemotoxlyn and Eosin, that help the
pathologist identify each cell's nucleus, cytoplasm and membrane.
. Microscopic Examination--Finally, each H&E stained slide is examined by
a pathologist using a microscope to determine if the tissue or cells are
healthy or diseased. In particular, the pathologist is looking for the
presence of microorganisms that could indicate an infectious disease or
deformed cells that could indicate the presence of cancer. In cases
where an H&E stained slide appears to have abnormalities, the
pathologist performing the initial examination of a patient specimen may
request that the slide undergo additional testing. We estimate this
happens in approximately 15% of cases.
2
Additional tests which may be requested by the pathologist include
immunohistochemistry, Special Stains or in situ hybridization tests. These
tests are significantly more complex than the H&E stains and require special
reagents.
. Immunohistochemistry, or IHC, stains are used primarily by pathologists
and oncologists to assist in the diagnosis of cancer and to determine
different treatment options. Pathologists use IHC stains to test for the
presence or over expression of the proteins involved in cancer.
. Special Stains are used primarily to assist in the diagnosis of
infectious diseases, although they can also be used to assist in cancer
diagnosis. Special Stains are chemical dye stains that localize to
microorganisms located in tissue and to specific tissue types.
. In situ hybridization, or ISH, stains can be used to assist in the
diagnosis of infectious diseases or genetic mutations that are usually
associated with the presence of cancer.
We do not currently participate in all histology lab work cells. We
currently offer products that are used in tissue processing, IHC staining,
Special Stains and ISH staining.
Tissue Processing. In developed nations, all histology labs have at least
one automated tissue processor instrument and most labs have two or more. In
less developed countries, tissue processing is still performed manually in
most labs. We estimate that the worldwide installed base of tissue processing
instruments is greater than 10,000 and, based upon our field experience, we
estimate annual shipments to be between 1,000 and 1,500 instruments. The size
of the annual market is driven primarily by replacements, although some
shipments reflect growth driven by an increase in surgical procedures. Tissue
processors consume a substantial quantity of reagents (fixatives, alcohol,
xylene, paraffin), however we do not participate in this reagent market.
IHC Staining. We estimate that there are in excess of 30 million slides
stained with IHC annually on a worldwide basis. The majority of these slides
are stained in the approximately 6,000 hospital-based histology labs. However,
in North America and Japan some hospitals send their IHC slides to regional
reference labs for staining rather than performing the work themselves. We
estimate that the number of IHC slides processed by labs in the U.S. on an
annual basis is growing at about a 6%-8% rate due to:
. increasing acceptance of the value of the technology by pathologists and
oncologists;
. the increasing incidence of cancer as the population ages;
. the emergence of new stains that may influence therapy choices; and
. the shifting of the market from manual to automated IHC slide
processing.
We estimate that approximately 50% of the IHC slides processed in North
America and Europe are stained on automated instruments. Most of the rest of
the world is using manual staining, which we believe represents a substantial
growth opportunity as a portion of these users are converted to automated
systems.
IHC instruments require reagents and accessories to operate. We supply a
full line of these consumables for use with our instruments. Our experience in
the industry suggests that we are the worldwide market leader in supplying
automated IHC staining systems.
Special Stains. We estimate that the Special Stains market is slightly
smaller than the worldwide IHC market and growing rapidly. There is an
opportunity to place instruments with virtually every hospital-based histology
lab as Special Stains slides are rarely sent to reference labs. Currently,
nearly all Special Stains slides are manually processed. We believe that a
major segment of the market will switch toward automated slide processing over
the next 5-10 years.
ISH Staining. The clinical market for ISH staining is currently very small
due to the difficulty of performing ISH stains manually and the small number
of stains accepted for clinical use. We expect automation to grow the clinical
market. Currently, the principal clinical tests are used to detect infectious
diseases, primarily
3
viruses, in tissue. However, ISH tests for genetic mutations may eventually
become important clinical tests. One of the few ISH genetic mutation tests
performed in the histology lab today is the test for Her-2/neu gene over-
amplification in cancerous breast tissue. This is currently a small market as
most laboratories prefer to measure Her-2/neu status using an IHC stain.
New Drug Research
The research market for new drugs comprises over 500,000 researchers
worldwide located in labs operated by traditional pharmaceutical companies,
biopharmaceutical companies, governments and medical research centers. In
these labs, research is being conducted to determine the causes of disease and
the discovery of drugs to treat disease. Genomics, or the study of genes and
their function, is seeking to accelerate the drug discovery process by
understanding the molecular mechanisms of disease. The genomics revolution is
providing researchers with a dramatic increase in the number of potential drug
targets, such as a specific protein involved in a disease process, against
which to conduct screens of compound collections, or compound libraries.
Genomics is the analysis of nucleic acids, which are the fundamental
regulatory molecules of life. Nucleic acids take two forms, DNA or RNA. These
molecules contain and convey the instructions that govern all cellular
activities, including protein manufacture and cell reproduction. DNA and RNA
consist of linear strands of nucleotide bases, the specific sequences of which
constitute the genetic information in the cell. The unique genetic blueprint
for all living organisms is encoded in the DNA. The entire DNA content of an
organism is known as its genome, which is organized into functional units
called genes. Any defect or mutation in the sequence of nucleotide bases in
the DNA or RNA can disrupt cell or protein function and lead to disease.
Genomics has created opportunities to fundamentally alter the field of
human medicine through the discovery of new biological targets for drugs and
an improved ability to diagnose and manage disease. Interest in understanding
the relationships between genes and disease has generated a worldwide effort
to identify and sequence the genes of many organisms, including the
approximately three billion nucleotide pairs and the estimated 30,000 genes
within the human genome. Once researchers identify the genes and their
nucleotide sequences, we anticipate that an understanding of the specific
function of each of these genes and the role that different genes play in
disease will require many years of additional research.
Proteomics is the analysis of proteins which are encoded by active genes
and are the direct cause of diseases in the body. It is believed that there
are many more proteins in the human body than genes. The human proteome is
years away from being decoded but this task will be simplified as the function
of the estimated 30,000 human genes is uncovered. Proteomics is likely to
increase in importance in drug discovery labs.
Business Strategy
Our objectives are to: (1) expand our worldwide leadership position in
automating histology labs and (2) leverage the core technologies we have
developed for the histology lab into drug discovery labs. Our business
strategies to achieve these objectives are as follows:
. Provide high-quality, innovative and flexible automation systems for
tissue analysis. Our position as a leader in the histology lab
automation market has been built on innovative automated
instrument-reagent systems. Our systems have been designed as broad
enabling platforms that permit customers to easily expand their test
menu. These automated systems allow for superior patient care by
providing anatomical pathologists with higher quality, more consistent
and more timely staining than through manual methods. Further, labs
benefit by increasing output and reducing labor costs through automation
and walk-away convenience.
. Provide high throughput, value-added testing systems for drug discovery
applications. We intend to pursue the same broad strategies in the drug
discovery market as we are pursuing in the histology market. We also
intend to consider developing relationships with other organizations
with complementary skills or technologies, which should allow us to
quickly acquire capabilities we need in a rapidly changing market.
4
. Maximize placement of our automated systems in histology and drug
discovery laboratories both domestically and worldwide. Rapidly
automating manual work cells permits us to strengthen our competitive
position by establishing a large base of instruments that current or
future market entrants must overcome. We estimate that our worldwide
installed base of IHC and Special Stains instruments is significantly
larger than the combined installed bases of instruments of all of our
current competitors. We believe that the size and quality of our direct
sales coverage will permit us to maximize instrument placements and
maximize revenue stream per placement.
. Ensure a steady sales stream of consumables for use in these
instruments. Each IHC, Special Stain and ISH instrument placed typically
provides us with a recurring revenue stream through the sale of reagents
and other consumable supplies. Our strategy is to increase this revenue
stream by converting all existing manual tests performed by the customer
to full automation and by selling the customer all the required reagents
for the automated tests. We intend to expand our menu of automated tests
over time, which should increase the consumable revenue we receive from
each instrument placement, as typically our systems are closed systems
which can only be operated with consumables produced by us.
. Continue ongoing technological development and improvement of our
instruments and reagents. We design all of our own products, unlike most
of our competitors, who rely on outside design firms to create their
instruments. We are developing new instruments and enhancing existing
instruments and developing reagents for our installed base of
instruments as well as for new products. Our engineering, marketing and
reagent research and development organizations work closely with their
manufacturing counterparts on all new products to ensure they can be
produced cost effectively. We protect our designs with an aggressive
intellectual property strategy.
History of the Company
We were incorporated in California in 1985 by a pathologist practicing at
the University of Arizona Medical Center who was interested in automating IHC
staining. In 1989 we procured venture capital funding and launched our first
instrument-reagent system in 1991. In 1993 we were reincorporated in Delaware.
We have launched multiple new systems since then, some of which were developed
internally and some of which were acquired.
5
Our Products
We market four product lines: tissue processors, IHC staining instruments,
Special Stains instruments and ISH staining instruments. All of these
instruments use consumables such as reagents, barcode labels, and wicking
pads, many of which we sell. Our product offerings are summarized in the table
below:
Product Offerings
Instrument Targeted Customers Uses Consumables
---------- ------------------ ---- -----------
Renaissance Tissue Histology Labs Fix tissue and embed Yes--but largely
Processor sample in paraffin. supplied by third
parties
TechMate 500 System Histology Labs Stain tissue with 10 accessory products
Reference Labs antibodies and 2 detection systems
detection chemistry 30 primary antibodies
to identify proteins.
BenchMark IHC and ISH Histology Labs Prepare and stain 16 accessory products
System Reference Labs issue with antibodies 6 detection systems
and detection 30 primary antibodies
chemistry to identify
proteins. Prepare and
stain tissue with
probes and detection
chemistry to help
identify infectious
diseases and genetic
mutations.
NexES IHC System Histology Labs Stain tissue with 6 detection systems
antibodies and 214 primary
detection chemistry antibodies
to identify proteins.
NexES Special Stains Histology Labs Stain tissue with 14 accessory products
System Reference Labs chemical dyes to 14 Special Stains
identify
microorganisms and
specific types of
tissue.
Discovery ISH and Biotechnology Hybridize nucleic 13 accessory products
IHC System Companies, acid microarrays with 2 detection systems
Pharmaceutical ISH probes.
Companies, Government Conduct mRNA studies
Labs, Medical in tissue.
Research Labs Prepare and stain
tissue with
antibodies and
detection chemistry
to identify proteins.
Tissue Processors
We entered the tissue processing work cell when we acquired BioTechnology
Tools. BioTechnology Tools designed, manufactured and marketed through
distributors a tissue processor known as the PTP-1530 which we have
subsequently modified and now market as the Renaissance.
Our Renaissance tissue processor is a batch instrument that can accommodate
up to 350 specimens at a time. This completely enclosed system can be
configured as a floor or bench top unit. It has easy-to-use software with
flexible programmability and a pulse magnetic stirrer that significantly
improves the quality of prepared
6
tissue. The Renaissance quality control system allows the customer to monitor
the quality of the reagents being used, and to extend the life of their
reagents using a paraffin cleaning system. We do not market a complementary
line of consumables with the Renaissance.
Staining Systems and Associated Reagents
The principal benefits of automated cellular and tissue analysis using our
integrated systems as compared with manual methods are:
. improved reliability, reproducibility and consistency of test results;
. faster turnaround time for test results;
. increased test throughput for the testing;
. reduced dependence on skilled technicians;
. ability to obtain maximum clinical information from minimally-sized
biopsies;
. ability to document processing protocols;
. enhanced cellular differentiation through multiple staining on a single
slide; and
. standardization of slide preparation among institutions.
In addition to these critical clinical and operational advantages, we have
determined that our automated approach has cost advantages as well.
IHC Staining. Our first product launch in 1991 was an instrument-reagent
system to automate IHC staining. Prior to the introduction of this system, all
IHC staining was performed manually or using low-level automation. In early
1996, we acquired our principal competitor in the IHC market, BioTek
Solutions, Inc. We now enjoy a leading market share position in automated IHC
staining worldwide.
We currently market three IHC instrument systems with a full line of
complementary reagents and accessories. Our line of IHC products includes
batch-processing systems targeted to large hospital clinical labs and
reference labs and patient priority systems targeted to hospital clinical labs
and fast turn around time applications in reference labs. Although our
existing batch processing systems are "open," providing the customer with the
ability to purchase reagents from either us or other sources, the majority of
our United States customers with batch processing systems regularly purchase
reagents from us. Our patient priority systems are "closed" in that customers
must purchase detection chemistries from us in order to operate the
instruments.
Our TechMate 500 batch processing instruments has a 120-slide capacity and
is designed for large volume testing using a single antibody on multiple
patient biopsies and research applications in which long incubation times and
unique detection chemistries are required. Our batch processing instruments
employ capillary action to perform IHC tests. Patient biopsies are placed on
capillary gap slides, which maintain a space of predetermined width between
adjacent slides when loaded into TechMate 500 systems. Reagents are loaded
into disposable reagent trays and programmable software directs the instrument
to apply the reagents in the proper sequence. The instrument immerses the
bottoms of the slides in the reagents as programmed and the reagents are drawn
up the slide and over the tissue specimen by capillary action. After each
reagent application and incubation, the instrument removes the reagent from
the specimen by placing the slides onto disposable blotting pads. In
North America, we directly manufacture and market reagents for use in our
TechMate systems. The TechMate 500 is applicable to both large and moderately
sized reference labs and large research labs.
Our premier IHC system is the BenchMark which was launched in late 2000. We
believe this is a revolutionary instrument from two perspectives. First, it
automates all of the steps in the IHC workcell from "BTS" (baking through
staining), saving up to 90 minutes of manual preparatory work required prior
to an IHC run. Second, the BenchMark will perform both IHC and more complex
ISH stains. The BenchMark system is
7
barcode driven and is designed for multiple tests on a single patient biopsy
with rapid turnaround time and walk-away convenience. A barcode label affixed
to each slide positively identifies the slide and the test procedures to be
performed. The instrument scans the barcodes on the slides and the reagent
dispenses and processes each slide with the unique steps necessary to perform
each test. Our proprietary software controls all aspects of the test
procedures. The steps of dispensing, incubating (i.e. temperature and time
control) and washing are performed by the instrument using a series of
proprietary chemical/mechanical methods developed by us. These methods are
critical to obtaining precise, sensitive and rapid test results and make the
system reliable and easy to use. Typically, the processing of slides on the
instrument requires less than two hours.
The BenchMark is based upon a modular design and an external personal
computer operating under a Windows environment for software control. Each
module holds up to 20 slides in the reaction chamber and 25 reagents on its
reagent carousel. The modular design of the BenchMark and external personal
computer permits the linkage of up to eight BenchMark IHC/ISH or NexES Special
Stains modules together, creating the capacity to process up to 160 slides.
The BenchMark therefore offers users a significant degree of flexibility as
users can purchase from one to eight modules depending upon their test volume
requirements.
Reagent products are composed of bulk reagents, for example, reagents that
remove paraffin from tissue samples and condition the cells, and dispenser
administered reagents such as primary antibodies and detection chemistries,
each of which is required for an IHC test. Customers that have patient
priority systems must use our detection chemistries on all tests. They have
the option of purchasing primary antibodies from us or other sources.
Customers who have our batch processing systems have the option of purchasing
both antibodies and detection chemistries from us or other sources. Users of a
majority of our United States installed batch processing systems regularly
purchase reagents from us.
Our NexES IHC staining system continues to be a key tool in supporting
automation of mid-size and smaller volume customer accounts in IHC.
We sell a line of over 214 primary antibodies for use on our IHC systems.
These are used to detect antigens in combination with detection chemistry kits
on our instruments. The antibodies we market to perform IHC tests currently
account for more than 90% of total IHC test volume.
We estimate that detection chemistries typically account for approximately
60% of the total expenditures for reagents required to perform IHC tests using
our instruments. This figure will decrease as we continue to place BenchMarks.
Reagents used to prepare tissue prior to applying a primary antibody will
become an important source of revenue to us. We produce a line of detection
chemistries for use on both patient priority and batch processing systems
which provide the user with standardized reagents, thereby giving the user
convenient and rapid results. The detection chemistries have been developed by
using proprietary formulations which, when combined with our primary
antibodies and other reagents, optimize the results of tests performed on our
instruments. These kits generate the visual signal in an IHC reaction at the
site where a primary antibody is bound to a specific antigen or molecule in
the cell or tissue. The patient priority system utilizes detection kits which
include: (i) a DAB Kit which generates a brown color; (ii) an AEC Kit which
generates a deep red color; (iii) an Alkaline Phosphatase Red Kit which
generates a bright red color; and (iv) an Alkaline Phosphatase Blue Kit which
generates a deep blue color. We currently sell DAB and Alkaline Phosphatase
Red for use with our batch processing instruments. The detection kits are
designed to perform tests on a wide variety of specimens, so a lab can, for
example, perform tests on tissue preserved in paraffin and on frozen tissue
simultaneously. Our detection chemistries have been formulated to provide long
term stability for reproducibility and ease of use as well as a high signal to
noise ratio for optimal sensitivity.
We offer a line of consumable ancillary products that are necessary for
processing slides on our instruments. These include buffers for optimizing the
IHC reaction and counterstains for staining cell nuclei, which are used with
both patient priority and batch processing instruments. The buffers ensure
good morphology, low backgrounds and high signals. The counterstains provide
additional convenience for the customer by eliminating the need for additional
processing of the slides after staining on the instrument. For use with
patient priority
8
instruments, we also supply a proprietary liquid coverslip used to inhibit
evaporation during processing in the instrument, fixatives for maintaining the
morphology of cells or tissues, enzymes for unmasking antigens and slide
barcodes for use in identifying the slide and its specific IHC reaction steps.
For use with batch processing instruments, we also provide disposable reagent
trays which are used to hold the reagents during IHC reactions, capillary gap
slides and wicking pads used for reagent removal between applications.
Special Stains. In late 1998, we launched our second instrument-reagent
system which handles Special Stains testing. It was the first automated
Special Stains system offered to histology labs. We believe that we have
established ourselves as the clear market leader in this product segment. We
supply both an automated instrument for Special Staining and all the reagents
needed to operate the instrument. Two competitors have entered the automated
Special Staining market since we launched our system.
The Special Stains module can be operated by the same control computer that
operates our NexES IHC modules. Any combination of up to eight Special Stains
and IHC modules may be operated by a single control computer. This flexibility
enables customers to design a combination Special Stains/IHC system that meets
the specific needs of their lab. It also provides future flexibility for
handling lab growth.
The Special Stains module uses a different approach for dispensing reagents
than the IHC system. The Special Stains aspiration and dispense system permits
us to use a low cost container for our reagents.
We currently market fourteen different Special Stains kits that we estimate
account for approximately 90% of all types of Special Stains performed in
histology labs. We plan to expand this test menu in the future so that our
Special Stain system can meet more than 95% of most laboratories Special
Staining needs. All of our Special Stain kits were developed using proprietary
protocols.
ISH Staining. We entered the ISH staining market with the launch of our
GenII system in 1995. The GenII was primarily sold into the drug discovery
market although some instruments were placed in histology labs for clinical
use. We have not aggressively marketed the GenII in recent years due to high
field support requirements and low consumption of reagents and accessories.
Our recently launched BenchMark instrument has ISH capability. We plan to
leverage this capability with a broad menu of clinical ISH tests. ISH tests to
identify Epstein Barr Virus and Cytomegalovirus were launched in late 2000.
This menu will be supplemented with the launch of Human Papilloma Virus and
Her-2/neu gene amplification tests in early 2001.
We launched an ISH and IHC staining system for drug discovery labs in
December 1999 called the Discovery. The Discovery system can function as a
high throughput processor of DNA and RNA microarrays. It can also be used as a
high throughput processor of tissue stains used to validate gene drug leads.
We anticipate that this system will primarily be sold to companies involved in
drug research.
The Discovery staining system consists of a staining module and a full line
of complementary reagents and accessories. The "front-end" of the system is
open, permitting researchers to use their own molecular probes in searching
for genetic mutations or antibodies in searching for proteins. The "back-end"
of the system, consisting of detection chemistry that attaches to the
molecular probe or protein and permits the researcher to visualize the target,
is closed and must be purchased from us. The only exception to this is where
the detection chemistry is mounted on the target probe. This is the case when
a fluorescent in situ hybridization, or FISH, stain is performed.
Like the BenchMark system, the Discovery system incorporates a number of
important technological advances over our earlier NexES IHC and Special
Staining systems. The principal advantage is the ability to accurately control
the reaction temperature. In contrast, the NexES IHC and Special Stain modules
heat the entire reaction chamber to a pre-set temperature and maintain that
temperature during the entire processing cycle. Individual slide heaters in
the Discovery permit an optimal protocol to be developed for each test. It
also permits the unwinding or denaturing step that is critical to detecting
DNA abnormalities. We have filed a number of patents to protect inventions
incorporated into the Discovery system. Many of these inventions are also
incorporated in our BenchMark system.
9
Our Discovery system is currently being used, or tested for use, in the
following drug discovery applications:
. Processing Nucleic Acid Microarrays. These assays are used to identify
genes that are possible targets for drug therapy. Our Discovery
instrument can be used to process DNA and RNA assays.
. Processing Tissue Samples. Companies engaged in drug discovery are
confirming gene and protein in traditional tissue slides. Our Discovery
instrument can be used to detect gene expression levels in tissue and to
identify protein levels in tissue.
Research & Development
Our research and development group is divided into two teams: one that is
responsible for instrument development and a second which develops staining
protocol and reagents. We have focused our efforts on the development of
innovative combined instrument-reagent systems. We are developing new
instruments and enhancing existing instruments. In addition, we are developing
reagents for our installed base of instruments as well as for new products.
Our research and development activities are performed primarily by our
staff of 76 employees. These efforts are supplemented by consulting services
and assistance from scientific advisors. We spent $11.1 million in 2000,
$7.1 million in 1999 and $5.1 million in 1998 on research and development.
Instrumentation Development Projects
Our instrumentation development is focused on continuous product
improvement and new product development. We believe that the modular platform
used by our NexES IHC system has enabled us to develop new products more
rapidly. We implemented this strategy with the launch of the NexES Special
Stains system in 1998, our Discovery System launched in late 1999 and the
BenchMark launched in late 2000. We expect to continue this modular
development strategy in the future. We continue to explore new opportunities
in instrument systems that add value to our customer, including automating
other manual processes in the histology lab.
Reagent Development Projects
Our reagent development is divided into five principal areas:
. new antibody development;
. detection chemistries;
. Special Stain chemistries;
. ISH clinical chemistries for BenchMark; and
. ISH and IHC applications for the Discovery.
We continue to monitor third-party development of new primary antibodies
and will license or purchase these as appropriate. Primary antibodies are used
to identify abnormal levels of patient expression which assists pathologists
in recommending treatment protocols for cancer patients. We also continue to
improve the sensitivity and specificity of our detection chemistries. New
detection chemistries with higher signal strength and lower background noise
were introduced in early 1999.
Reagent development also supports the development of new instrument
systems. A complete reagent product line was introduced in conjunction with
the October 1998 launch of the Special Stain module. Development of reagents
to support our Discovery ISH instrument is ongoing. These include applications
to hybridize microarrays and to conduct message expression studies in tissue.
10
Customers
Our customers consist of clinical histology labs and the drug discovery
labs of large pharmaceutical companies, biotechnology companies, government
labs and medical research centers. None of our customers accounted for more
than 5% of our consolidated revenues in 2000, 1999 or 1998.
Patents and Proprietary Rights
We have pursued a strategy of patenting key technologies that relate to
both the automation and chemistry of analyzing cells and tissues on microscope
slides. We presently own 32 United States patents and numerous corresponding
foreign patents. We have also filed patent applications in the U.S. and abroad
that cover research and development as it relates to existing and future
products. In 2000, three of our U.S. patents issued. We also have access to
some key technology through exclusive and nonexclusive licenses, such as
patented Human Papilloma Virus sequences.
Our patent portfolio is divided roughly into two segments: instruments and
reagents. Patents and applications related to instruments include:
. three U.S. patents directed to the Liquid Cover Slip(TM) technology;
. the suite of patents related to the TechMate instrument that covers all
aspects of the instrument including the algorithm for the interleaving
of steps of a run;
. two separate U.S. patents on reagent dispenser designs;
. apparatus for automated IHC tissue staining; and
. independently heatable slide staining apparatus.
Reagent patents and applications include:
. tissue fixatives;
. hybridization methods and compositions;
. IHC staining methods and reagents;
. biotin/avidin formulations and methods; and
. compositions for manual and automated assessment of various types of
cancer including breast, leukemia and prostate.
Sales and Marketing
Our histology lab strategy involves providing customers with superior
levels of customer service. We believe this can only be achieved by selling
our products directly to customers, rather than through distributors, in our
major markets and by controlling our own telephone and field service forces.
Based on our experience in the industry, we believe we have the world's
largest direct sales force covering histology labs. We believe that the size
and quality of our direct sales coverage will permit us to maximize instrument
placements and maximize revenue stream per placement. This sales force is
organized geographically by region in North America and by country
internationally. In North America we also have a separate sales organization
focused solely on national and key accounts. In North America, Japan and in
most major European markets we sell all of our products on a direct basis. In
most other countries, we rely on distributors to sell and service our
products.
We also have a dedicated Worldwide Marketing team responsible for
identifying new product opportunity, working with R&D on product development
and driving revenues worldwide through tactical marketing support.
11
We are in the process of building separate tactical marketing and sales
organizations in North America, Western Europe and Japan to cover the drug
discovery labs of biotechnology and pharmaceutical companies and medical
research labs. These sales forces will primarily promote our Discovery
instruments and related consumables.
In addition to maintaining direct sales organizations in our major markets,
we also maintain direct customer telephone and field service operations. This
permits us to maintain a close relationship with our customers which we hope
to leverage from instrument placement, through reagent and consumable sales to
instrument replacement. This relationship will also allow us to provide high
quality and rapid service in response to customer feedback.
We also have a comprehensive customer education program, which includes on-
site technical training in instrument use, user group meetings and sponsored
national teleconferences with leading medical experts who regularly update our
customers on diagnostic and testing developments.
Competition
We face a wide array of different competitors in the histology lab and drug
discovery markets. In many product segments our competitors have substantially
greater experience than us and far greater name recognition by our customers.
In most product segments competition is intense and is based on product
performance and price, the breadth of a company's product line, and after-
sales service.
Histology
Our competitors in histology vary by product category. Our principal
competitor in tissue processing is Sakura Fine Technical Co., Ltd., a
privately held Japanese company with far greater market share, experience and
name recognition than we have. Additional competitors in tissue processing
include Leica Microsystems Group, a German based competitor, and Thermo
BioAnalysis Group, a U.S. public company that owns Shandon Lipshaw, a
formidable competitor worldwide in histology lab equipment. Despite the strong
entrenched competition in this segment we believe we are increasing our market
share through strong sales increases of our Renaissance tissue processor.
We are the market share leader in automated IHC staining. We have a
worldwide installed base of instruments that exceeds all of our competitors
combined. Historically, we have also placed more new instruments each year
than all of our competitors combined. Nevertheless, we face strong competition
on two fronts. Indirect competition comes from the manual method of performing
IHC tests. A number of histology labs in the U.S. and the majority of
histology labs outside the U.S. still perform their IHC slide staining
manually. Significant barriers to automation of this process exists in some
countries where reimbursement for IHC tests by insurance companies and
government health care plans is low. Further, significant barriers to
automation exist in a number of labs where pathologists prefer manually
stained slides which were created using their own staining protocols.
Direct competition currently comes from four competitors who market
instrument-reagent IHC staining systems. The competitors are Dako, a privately
held Danish company that dominates the market for manual IHC reagents;
BioGenex Laboratories, Inc., a privately held U.S. company that markets its
own instrument and line of reagents; LabVision Corporation, a subsidiary of
publicly traded Sybron Corporation, supplies Dako with instruments and also
markets its own instruments both on a direct basis and through distributors in
most major markets and Diagnostics Products Corp., which markets a high volume
IHC slide stainer, principally in Europe.
Two automated Special Staining systems compete with our Special Staining
module. CytoLogix Corp., a venture-backed, U.S.-based, early-stage company
markets the Artisan Staining System. The CytoLogix system has expanded its
menu of reagents to include IHC stains and potentially ISH stains. BioGenex
also markets a line of Special Stains instruments called Optimax which was
originally designed for IHC staining. We believe
12
that the initial success we have enjoyed in automating the Special Stains
market will attract additional competitors.
Drug Discovery
The two principle drug discovery applications we are focusing on are
hybridizing nucleic acid microarrays and conducting messenger RNA expression
studies in tissue. Other companies providing nucleic acid microarray
hybridizers include Genomic Solutions, Inc. and Molecular Dynamics, subsidiary
of publicly traded Amersham Pharmacia Biotech. We do not currently face any
other competitors that provide automated systems for conducting messenger RNA
studies in tissue. We also sell Discovery IHC staining capabilities to drug
discovery labs. Other competitors providing this capability include our
clinical IHC competitors Dako and BioGenex, among others.
Manufacturing
We manufacture all of our own instruments except the TechMate 500 system.
This product is produced by a third-party manufacturer and accounts for only a
small portion of our total sales. We maintain three manufacturing facilities--
an instrument manufacturing facility located in Tucson, Arizona, a separate
reagent manufacturing facility also located in Tucson, Arizona and a second
reagent manufacturing facility located in Gaithersburg, Maryland. We have
announced plans to relocate our Gaithersburg, Maryland facility and
consolidate our manufacturing operations in the third quarter of 2001 into our
new facility under construction near Tucson, Arizona.
Our manufacturing operations are required to follow the FDA Quality Systems
Regulations. These regulations require us to maintain documentation and
process control in a prescribed manner with respect to manufacturing, testing
and quality control. We are also subject to FDA inspections to verify
compliance with FDA requirements. We also intend to implement manufacturing
policies and procedures that will enable us to receive ISO 9001 certification.
ISO 9001 standards are global standards for design and manufacturing process
control and quality assurance. Finally, we are required to obtain the CE mark
for sale of our products in the countries comprising the European Union. The
CE mark is an international symbol of quality assurance and compliance with
applicable European Union medical device directives.
Contracts
We place instruments through direct sales, including nonrecourse leases,
instrument rentals and our Performance Evaluation Period program. The program
is intended to permit a customer to use an instrument, generally for a period
of up to three months, provided that the customer purchases all the
consumables needed to operate the instrument from us. At the end of the three-
month period, the customer elects to purchase, rent or return the system. For
placement of instruments under this program, we incur the cost of
manufacturing instruments and we recognize revenue only at the time the
instrument is either sold or rented rather than at the time of instrument
placement.
Employees
As of December 31, 2000 we had approximately 515 full-time employees,
including our 12 officers.
13
Cautionary Factors That May Affect Future Results
Risks Relating to Our ability to sustain revenue growth and
Availability of Third-Party profitability may depend on the ability of our
Reimbursement and Potential customers to obtain adequate levels of third-
Adverse Effects of Health party reimbursement for use of certain
Care Reform diagnostic tests in the United States, Europe
and other countries. Currently, the
availability of third-party reimbursement is
limited and uncertain for some IHC tests.
In the United States, our products are
purchased primarily by medical institutions and
laboratories which bill various third-party
payors, such as Medicare, Medicaid, other
government programs and private insurance
plans, for the health care services provided to
their patients. Third-party payors may deny
reimbursement to our customers if they
determine that a prescribed device or
diagnostic test has not received appropriate
FDA or other governmental regulatory clearances
or approvals, is not used in accordance with
cost-effective treatment methods as determined
by the payor, or is experimental, unnecessary
or inappropriate. The success of our products
may depend on the extent to which appropriate
reimbursement levels for the costs of such
products and related treatment are obtained by
our customers from government authorities,
private health insurers and other
organizations, such as health maintenance
organizations, or HMOs.
Third-party payors are increasingly challenging
the prices charged for medical products and
services. The trend towards managed health care
in the United States and the concurrent growth
of organizations such as HMOs could
significantly influence the purchase of health
care services and products.
In addition, the federal government and certain
members of Congress have proposed, and various
state governments have adopted or are
considering, programs to reform the health care
system. These proposals are focused, in large
part, on controlling the escalation of health
care expenditures. The cost containment
measures that health care payors are
instituting and the impact of any health care
reform could have a material adverse effect on
the levels of reimbursement the Company's
customers receive from third-party payors and
the Company's ability to market and sell its
products and consequently could have a material
adverse effect on the Company's business,
financial condition and results of operations.
A reduction in government A portion of our products are sold to
funding to research centers universities, research laboratories, private
will reduce their ability to foundations and other institutions where
purchase our products funding is dependent upon grants from
government agencies, such as the National
Institutes of Health. Research funding by the
government could be significantly reduced. Any
such reduction may materially affect the
ability of many of our research customers to
purchase our products.
14
Future operating results may Our operating results may fluctuate depending
fluctuate depending on: on sales of instruments and sales of reagents.
If our actual earnings in a given quarter under
perform analyst estimates, our stock price
could be adversely affected.
--how many instruments we The initial placement of an instrument is
sell and under what terms subject to a longer, less consistent sales
they are sold cycle than the sale of reagents, which begin
and are typically recurring once an instrument
is placed. Instruments are typically sold in
the latter part of a quarter and in the fourth
quarter of the year due to capital expenditure
buying patterns of our customers. The degree of
fluctuation will depend on the timing, level
and mix of instruments placed through direct
sales and instruments placed through
Performance Evaluation Period programs and
rentals. Our 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.
--changes in our sales Historically we have experienced turnover in
force our sales force. A portion of our sales force
is new and we have recently restructured our
sales program. If we fail to replace members of
our sales force in a timely manner or if our
training programs are not successful, it may
adversely affect our ability to sell
instruments and reagents.
--how much reagent our In addition, average daily reagent use by
customers use customers may fluctuate from period to period,
which may contribute to future fluctuations in
revenues.
--our operating results may Other factors that may result in fluctuations
be effected by other in operating results include:
factors
. the timing of new product announcements and
the introduction of new products and new
technologies by us and our competitors;
. our ability to collect receivables and
maximize payables;
. market acceptance of our current or new
products;
. quarter-to-quarter buying patterns of our
customers;
. developments with respect to regulatory
matters;
. availability and cost of raw materials from
our suppliers;
. competitive pricing pressures;
. increased research and development expenses;
and
. increased marketing and sales expenses
associated with the implementation of our
market expansion strategy for our instrument
and reagent products.
15
Our inability to protect our Our inability to protect our patents and other
patents and other proprietary rights could adversely affect our
proprietary rights could business. We currently hold 32 United States
adversely affect our patents and numerous corresponding foreign
business patents and we have filed additional United
States and foreign patent applications. The
expiration dates of our issued United States
patents range from September 2005 to November
2013.
--we now own a number of We cannot assure you that our patent
U.S. patents and we have applications will result in patents being
applied for others but we issued or that any issued patents will provide
cannot assure you that we adequate protection against competitive
will be issued new technologies or will be held valid if
patents challenged. Others may independently develop
products or processes similar to ours or design
around or otherwise circumvent our patents.
--we cannot be sure that we We cannot be certain that we were the first
were the first to create creator of inventions covered by our patents or
any of our inventions pending patent applications or that we were the
because of the way the first to file patent applications for such
U.S. patent system works inventions. Patent applications in the United
States are maintained in secrecy until patents
are issued and publication of discoveries in
scientific literature tends to lag behind
actual discoveries by several months.
Therefore, we cannot be certain that we were
the first creator of inventions covered by our
patents or pending patent applications or that
we were the first to file patent applications
for such inventions.
--if we are using We may have to participate in "interference"
inventions that have been proceedings declared by the United States
patented by others we Patent and Trademark Office to determine the
would have to stop using priority of inventions. This could result in
the invention, obtain a substantial costs for us. If any of the claims
license for it or of third-party patents that purport to
redesign our product to interfere with one of our patents or patents
get around the relevant pending are upheld as valid and enforceable, we
patent could be prevented from using the subject
matter claimed in those patents. Alternatively,
we would be required to obtain licenses from
the patent owners of each of those patents or
to redesign our products or processes to avoid
infringement. We cannot assure you that we
would be able to obtain a license or, if we
could, that the terms available would be
acceptable to us or that we would be successful
in any attempt to redesign our products or
processes to avoid infringement.
--if we cannot get a If we do not obtain the necessary licenses, we
license from the owner of could be subject to litigation and we could
a patent and we cannot encounter delays in product introductions while
design around the patent we attempt to design around such patents.
we may be subject to Alternatively, the development, manufacture or
litigation sale of such products could be prevented.
Litigation would result in significant cost to
us as well as diversion of management time. We
cannot predict the outcome of this type of
litigation. If litigation is decided against
us, our results of operations would suffer.
16
--we also rely on trade We also rely upon trade secret protection for
secret protection for our our confidential and proprietary information.
confidential and We cannot assure you that others will not
proprietary information independently develop proprietary information
or techniques similar to ours, gain access to
our trade secrets or disclose our technology,
or that we can effectively protect our trade
secrets. If we are forced to litigate to
protect our trade secrets we would have to
absorb significant costs as well as diversion
of our management. If any of the litigation we
undertake is unsuccessful and results in the
disclosure of our trade secrets our results of
operations would suffer.
--we cannot assure you that Our policy is to require our employees,
confidentiality consultants and significant scientific
agreements with our collaborators to sign confidentiality
employees, consultants agreements when they begin work with us. These
and collaborators will agreements generally provide that all
serve their intended confidential information developed or made
purpose known to the individual during the course of
the individual's relationship with us is to be
kept confidential and not disclosed to third
parties except in specific circumstances.
Agreements with employees provide that all
inventions conceived by the individual while
working for us are our exclusive property.
However, we cannot assure you that these
agreements will not be broken or that they will
provide meaningful protection or adequate
remedies for unauthorized use or disclosure of
our trade secrets.
Effectively managing our We have grown and continue to grow rapidly both
growth may be difficult by adding new products and hiring new
employees. This growth is likely to place a
significant strain on our managerial,
accounting, operational and financial resources
and systems. To manage our growth, we must
implement systems and train and manage our
employees. If we are not successful in managing
our expanding operations effectively, we may
experience operating problems such as customer
service issues, reduced sales, and internal
operating issues.
Some of our senior management have only
recently joined us. Of the 12 employees listed
in the management section of this prospectus, 3
have worked for us less than one year. We
cannot assure you that our management will be
able to effectively or successfully manage our
growth.
Our ability to develop new Our future growth and profitability will be
products will be important dependent, in large part, on our ability to
to our success: develop, introduce and market new instruments
and reagents used in diagnosing and selecting
appropriate treatment for cancer and additional
disease states. Our products could also be
rendered obsolete or noncompetitive by virtue
of technological innovations in the fields of
cellular or molecular diagnostics.
--our ability to develop We depend in part on the success of medical
new products is partly research done by others in developing new
dependent on the work of antibodies, nucleic acid probes and clinical
others and our ability to diagnostic procedures that can be adapted for
license their work use in the our systems. We will then need to
license certain of these technologies. We may
not be able to get these licenses on terms that
would allow us to economically develop and
market new instruments. If this were to occur
our operating results would suffer.
17
--if any of our products We have products that are currently under
under development or development, initial testing or preclinical or
those planned for clinical evaluation and we have other products
development are not that are scheduled for future development.
successful our operating These products:
results would suffer
. 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.
If any of these things were to occur our
operating results would suffer.
A large portion of our A significant portion of our expense levels are
expenses are fixed so if our based on our expectation of a higher level of
revenues are below revenues in the future and are relatively fixed
expectations we may not in nature. Therefore, if revenue levels are
perform as expected below expectations, operating results in a
given period are likely to be adversely
affected because we will not be able to spread
these expenses over a larger revenue base.
We need to persuade the The use of automated systems to perform
medical community of the diagnostic tests is relatively new.
benefits of our products in Historically, the diagnostic tests performed by
order to be successful our systems have been performed manually by
laboratory personnel. Our ability to sell our
products will be largely dependent on our
ability to persuade the medical community of
the benefits of automated diagnostic testing
using our products. The quality and price of
our products as compared to manual testing and
as to our competitor's products will affect
acceptance and sales of our products.
Our products are subject to The manufacturing, marketing and sale of our
extensive government products are subject to extensive government
regulation in the U.S. and regulation in the U.S. and in other countries.
abroad The process of obtaining and maintaining
regulatory approval can be lengthy, expensive
and uncertain.
--in the U.S. our products In the U.S. the FDA regulates, as medical
are regulated as medical devices, instruments, diagnostic tests and
devices by the FDA reagents that are traditionally manufactured
and commercially marketed as finished test kits
or equipment. Some clinical laboratories,
however, choose to purchase individual reagents
intended for specific analyses and develop and
prepare their own finished diagnostic tests.
The FDA has recently promulgated a rule that
regulates the reagents sold to clinical
laboratories as analyte specific reagents. The
rule restricts sales of these reagents to
clinical laboratories certified under the
Clinical Laboratory Improvement Amendments of
1988, or CLIA, as high complexity testing
laboratories. We intend to market some
diagnostic products as finished test kits or
equipment and others as individual reagents;
consequently, some of these products are
regulated as analyte specific reagents.
18
--the specific requirements The Federal Food, Drug, and Cosmetic Act
that we must follow are governs the design, testing, manufacture,
contained in the Federal safety, efficacy, labeling, storage, record
Food, Drug, and keeping, approval, advertising and promotion of
Cosmetic Act our products. There are two principal FDA
regulatory review paths for medical devices:
the 510(k) pre-market notification process and
the pre-market approval, or 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.
--Medical devices require Medical devices generally require FDA approval
FDA approval prior to or clearance prior to being marketed in the
being marketed in the United States. The process of obtaining FDA
U.S. clearances or approvals necessary to market
medical devices can be time-consuming,
expensive and uncertain, and we cannot assure
you that any clearance or approval we seek will
be granted or that FDA review will not involve
delays which would harm our ability to market
and sell our products.
Further, clearances or approvals may be
conditional in that they place substantial
restrictions on the indications for which the
product may be marketed or to whom it may be
marketed. We can also not assure you that the
FDA will not require additional data, require
us to conduct further clinical studies or
obtain a PMA causing us to incur further cost
and delay.
--although our IHC and ISH With respect to automated IHC testing
products have not needed functions, our instruments have been
510(k) approval to date categorized by the FDA as automated cell
some of our future staining devices and have been exempted from
products may the 510(k) notification process. To date, ISH
tests have not received FDA approval or
clearance and, therefore, use of the Discovery
for ISH tests will be restricted to research
applications. New instrument products that we
may introduce could require future 510(k)
clearances.
--some of our antibody Certain antibodies that we may wish to market
products may require PMA with labeling indicating that they can be used
approval if we market in the diagnosis of particular diseases may
them in a certain way require PMA approval. In addition, the FDA has
proposed that some of the antibody products
that we may wish to market be subjected to a
pre-filing certification process. Certain of
our products are currently sold for research
use and are labeled accordingly.
--if we do not comply with If we do not comply with applicable regulatory
regulatory requirements, requirements we could be subject to, among
or we fail to get other consequences, fines, injunctions, civil
approval for our penalties, suspensions or loss of regulatory
products, our results of approvals, recalls or seizures of products,
operations would suffer operating restrictions and criminal
prosecutions. In particular, the FDA enforces
regulations prohibiting the marketing of
products for non-indicated uses. In addition,
governmental regulations may be established
that could prevent or delay regulatory approval
of our products. Delays in or failure to
receive approval of products we plan to
introduce, loss of or additional restrictions
or limitations relating to previously received
approvals, other regulatory action against us
or changes in the applicable regulatory climate
could individually or in the aggregate cause
our results of operations to suffer.
19
--we and our customers are We are also required to register as a medical
inspected for compliance device manufacturer with the FDA and are
with FDA regulations inspected on a routine basis by the FDA for
compliance with their regulations. Our clinical
laboratory customers are subject to CLIA, which
is intended to ensure the quality and
reliability of medical testing.
--other laws and In addition to these regulations, we are
regulations may adversely subject to numerous federal, state and local
affect our operations laws and regulations relating to such matters
as safe working conditions and environmental
matters. We cannot assure you that these laws
will not adversely affect our results of
operations in the future.
There are risks associated We may make additional acquisitions of
with the acquisition of complementary businesses, products or
businesses, products or technologies in the future. Acquisitions of
technologies companies, divisions of companies, or products
entail numerous risks, including:
. the potential inability to successfully
integrate acquired operations and products
or to realize anticipated synergies,
economies of scale or other value;
. diversion of management's attention; and
. loss of key employees of acquired
operations.
--acquisitions may not be We cannot assure you that we will not incur
profitable and returns problems with respect to any future
may not justify the price acquisitions, or that any future acquisitions
we paid will increase our profitability. We can also
not assure you that we will realize value from
any acquisitions which would justify the
consideration paid. Any problems like these
could cause our results of operations to
suffer.
--we may issue more stock, Any future acquisitions may also result in the
borrow more money, incur issuance of shares of our equity securities,
one-time expenses or including our common stock. The issuance of
create goodwill additional shares of our common stock could
affect the market price. We might also borrow
more money, have large one-time write-offs and
create goodwill or other intangible assets that
could result in amortization expense. These
factors may cause our results of operations to
suffer.
We might be affected if a In the future, our ability to sell instruments
competitor develops and and reagents might be affected by the design of
markets a new instrument our systems, which require that customers buy
that uses cheaper reagents their reagents from us. This would be
especially true if and to the extent that
competitors are successful in developing and
introducing new IHC instruments or if they
offer reagent supply arrangements having
pricing or other terms more favorable than
those offered by us. Increased competition in
reagent supply could also affect sales of
reagents to batch processing instrument
customers since those instruments do not
require the use of our reagents.
20
We depend on key personnel We are dependent upon the retention of
with whom we have no principal members of our management, Board of
employment contracts Directors, scientific, technical, marketing and
sales staff and the recruitment of additional
personnel. We do not have employment agreements
with any of our executive officers and we do
not maintain "key person" life insurance on any
of our personnel. We compete with other
companies, academic institutions, government
entities and other organizations for qualified
personnel. If we could not hire or retain
qualified personnel it would cause our results
of operations to suffer.
Manufacturing Risks
--as we increase production We have only manufactured patient priority
of our products we may instruments and reagents for commercial sale
experience problems in since late 1991, and manufacturing of our
production Techmate 500 instrument is performed by third
parties. As we continue to increase production
of such instruments and reagents and develop
and introduce new products, we may from time to
time experience difficulties in manufacturing.
We must continue to increase production volumes
of instruments and reagents in a cost-effective
manner in order to be profitable.
--we must stay in To increase production levels, we will need to
compliance with the rules scale-up our manufacturing facilities, increase
and regulations of our automated manufacturing capabilities and
various agencies as we continue to comply with FDA Quality Systems
increase production Regulations and other standards prescribed by
various federal, state and local regulatory
agencies in the United States and other
countries, including the ISO 9000 Series
certifications.
--our operating results We cannot assure you that manufacturing and
would suffer if we quality problems will not arise as we increase
experienced either our manufacturing operations or that such
production or quality scale-up can be achieved in a timely manner or
problems at a commercially reasonable cost.
Manufacturing or quality problems or
difficulties or delays in manufacturing scale-
up would affect our operating results.
We depend on key suppliers Our reagent products are formulated from both
to provide some of the chemical and biological materials using
components and raw materials proprietary technology as well as standard
for our reagents; if that processing techniques. We currently purchase
supply is interrupted our some components and raw materials, primarily
results of operations could antibodies, that we use to make our reagent
suffer products from single-source vendors. We cannot
assure you that the materials or reagents we
need will be available in commercial quantities
or at acceptable prices. Any supply
interruption or yield problems encountered in
the use of materials from these vendors could
have a material adverse effect on our ability
to manufacture our products until a new source
of supply is obtained. Finding and using
alternative or additional suppliers could be
time consuming and expensive.
21
We rely on others to make A number of the components used to make our
certain custom parts for our instruments are made on a custom basis to our
instruments, if these parts specifications and are currently available from
were not delivered on time a limited number of sources. If the supply of
or not at all our results of materials or components from any of these
operations would suffer vendors were delayed or interrupted for any
reason or if the quality or reliability of the
materials or components is not adequate for use
in our instruments, our ability to make
instruments in a timely fashion could be
impaired and our results of operations would
suffer.
Some of our manufacturing Certain of our manufacturing processes,
processes involve the use of primarily those involved in manufacturing
environmentally hazardous certain of our reagent products, require the
materials use of potentially hazardous and carcinogenic
chemicals. We are required to comply with
applicable federal, state and local laws
regarding the use, storage and disposal of
these materials.
--we could incur We currently use third-party disposal services
substantial liability if to remove and dispose of the hazardous
it is found that either materials we use. We could in the future
we or the third party encounter claims from individuals, governmental
disposal service we use authorities or other persons or entities in
has violated any connection with exposure to or disposal or
environmental laws handling of these hazardous materials or
violations of environmental laws by our
contractors or us. We could also be required to
incur additional expenditures for hazardous
materials management or environmental
compliance. The costs associated with
environmental claims, violations of
environmental laws or regulations, hazardous
materials management and compliance with
environmental laws could cause our results of
operations to suffer.
We cannot assure you that we We anticipate that our existing capital
will be able to fund our resources and available borrowing capacity
future capital requirements under our revolving credit line will be
through internal sources, adequate to satisfy our capital requirements
our existing line of credit for the next 12 months. Our future capital
or from other sources requirements will depend on many factors
including:
. the extent to which our products gain market
acceptance;
. the mix of instruments placed through direct
sales or through our performance evaluation
period;
. progress of our product development
programs;
. competing technological and market
developments;
. expansion of our sales and marketing
activities;
. the cost of manufacturing scale-up
activities;
. possible acquisitions of complementary
businesses, products or technologies; and
. our ability to sustain profitability and
timing of regulatory approvals.
We may require additional capital resources and
we cannot assure you that capital will be
available to the extent required, on terms
acceptable to us or at all. Any such future
capital requirements could result in the
issuance of our equity securities, which may
affect the market price of our common stock and
would dilute our existing stockholders.
22
Item 2. Properties
Currently, our U.S. research laboratories, instrument and reagent
manufacturing facilities and administrative offices are located in
approximately 90,000 square feet of leased space in Tucson, Arizona and
Gaithersburg, Maryland. The leases for these facilities expire at various
times between January 2002 and November 2004, subject to renewal terms. In May
2000, we purchased vacant land in Tucson and initiated construction of a
182,400 square foot mixed-use facility to house all of our operations that are
now resident in various locations around Tucson. Our expected completion date
is the third and fourth quarters of 2001. Manufacturing will move into the new
facility in the third quarter of 2001. R&D and administration will move in the
fourth quarter of 2001. In cases where leases on current facilities expire
prior to the completion of this facility, we plan to negotiate month-to-month
lease arrangements.
Currently, our European headquarters operations are located in an office
building we own that consists of 39,000 square feet in Strasbourg, France.
This building was acquired in June 2000 and financed through a sale/leaseback.
We have leased approximately half of the building square footage to a third
party.
Our Japanese operations are located in 3,000 square feet of leased office
space in Tokyo. We moved into this space in July 2000 and signed a 2 year
lease that expires in July, 2002.
Once we complete the construction of the new Tucson facility we believe
that we will have sufficient space for the foreseeable future.
Item 3. Legal Proceedings
In January 1997, four individuals who are former BioTek noteholders who
held in the aggregate approximately $1.1 million in principal amount of BioTek
notes filed an action, Tse, et al. v. Ventana Medical Systems, Inc., et al.
No. 97-37, against the Company and certain of its directors and stockholders
in the United States District Court for the District of Delaware. The
complaint alleged, 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 compensatory damages in excess of the principal amount of
their BioTek notes, as well as punitive damages, and fees and costs.
On April 25, 1997, plaintiffs filed an Amended Complaint. The Amended
Complaint made the same allegations as the original Complaint and added a
claim under North Carolina securities laws. On December 16, 1997, we filed a
motion to dismiss plaintiffs' Amended Complaint. On September 23, 1998, the
Court issued its Order granting in part and denying in part our motion to
dismiss. The Court dismissed plaintiffs' claims based upon the North Carolina
securities laws and California's insider-trading statute. Plaintiffs'
surviving claims included violations of federal and California securities
laws, common law fraud and breach of fiduciary duty. On June 5, 2000, we filed
a motion for summary judgment on all of plaintiffs' remaining claims. On
November 22, 2000, the Court issued an Order granting our motion for summary
judgment in its entirety. Plaintiffs filed a notice of appeal on December 8,
2000 and will file their appellate brief in May 2001. Based on the facts known
to date, we believe that the claims are without merit and we will vigorously
defend this suit.
On April 1, 1999, a shareholder derivative and class action suit was filed
in the Court of Chancery for the State of Delaware entitled Leung v. Ventana
Medical Systems, Inc., et al., C.A. No. 17089. Plaintiff, who is related to
the plaintiffs in the above federal securities action, alleges breach of
fiduciary duty and breach of contract relating to our merger with BioTek and
the related conversion of BioTek notes into Ventana notes, as well as our
decision to compensate two of our directors by selling Ventana stock to them
at a fixed price. On May 6, 1999, we filed a motion to dismiss, or in the
alternative, to stay this action in favor of the federal securities action.
These motions were heard on October 18, 1999, and on February 29, 2000, the
Court granted our motion, dismissing the action in its entirety. Plaintiff
filed his notice of appeal on October 24, 2000, and all appellate briefing was
completed in March 2001. The hearing of this appeal is not specifically
scheduled but the
23
Delaware Supreme Court has indicated that the hearing will take place in May
2001. Based on the facts known to date, we believe that the claims are without
merit and we intend to vigorously defend this suit.
On June 15, 1999 we filed a proof of claim against Oncor, Inc. in an action
pending in the United States Bankruptcy Court for the District of Delaware
titled In re Oncor, Inc., No. 9-437 (JJF). Our claims arise out of an Asset
Purchase Agreement dated November 23, 1998 and related documents wherein we
acquired Oncor's unincorporated In Situ Hybridization Technology Division and
rights related thereto. In February 2000, we filed an amended proof of claim
alleging, inter alia, that Oncor breached the terms of the Asset Purchase
Agreement by purporting to transfer or assign to us Oncor's rights under a
license agreement, which were not transferable or assignable under the
circumstances then existing. The amended proof of claim seeks damages of no
less than approximately $7.3 million. On August 17, 2000, Oncor filed an
Omnibus Objection to Claims which included our claims. However, the Omnibus
Objection did not set forth any specific allegations with respect to our
claims. We continue to believe our claims are meritorious and that we will
prevail, however, the results of the proceedings are uncertain and there can
be no assurance to that effect.
On December 9, 1999 we filed an action, Ventana Medical Systems, Inc. v.
CytoLogix Corp., No. CIV99-606 TUC FRZ, alleging patent infringement seeking
monetary damages and injunctive relief in the United States District Court in
Tucson. The original complaint was amended March 21, 2000 by the addition of
another patent to the litigation. We believe our claims are meritorious and
that we will prevail, however, because little discovery has been completed,
results of the proceedings are uncertain and there can be no assurance to that
effect.
CytoLogix Corp. has filed three separate actions against us in various
courts. The first action is CytoLogix v. Ventana, Case No. CV 12231 REK, filed
Oct. 27, 2000 in federal district court in Boston. The complaint claims, under
state-law based unfair competition law, that Ventana misappropriated
CytoLogix's trade secrets related to individual slide heating and incorporated
such secrets into our Discovery and BenchMark instruments. CytoLogix seeks
assignment of our patent applications relating to individual slide heating
claiming the idea, treble damages (unspecified amount) and an injunction
against our further sales of Discovery and BenchMark instruments. We believe
that we have meritorious defenses to the claims in this action and that
resolution of this matter will not have a material adverse effect on our
business, financial condition or results of operation; however, this
litigation is in an early stage and the results of the proceeding are
uncertain and there can be no assurance to that effect.
The second is CytoLogix v. Ventana, Case No. 4 Ni 54/00 (EU) (Nullity
suit), filed November 9, 2000 in the German Federal Patent Court, Munich,
Germany. CytoLogix seeks to invalidate our German patent (no. DE 69117052.5)
which covers various aspects of our automated slide staining system. We
believe we can defend this patent through the Nullity proceeding, however
because this action is relatively new, results of the proceeding are uncertain
and there can be no assurance to that effect. We have responded to this action
and now await further orders from the German Federal Patent Court.
The third action is CytoLogix v. Ventana, Case No. 01-10178 REK, filed
January 30, 2001 in the U.S. District Court, Eastern District of
Massachusetts. This complaint claims that we infringed on CytoLogix's patent
No. 6,180,061, entitled "Moving Platform Slide Stainer with Heating Elements,"
and was later amended to add U.S. Patent No. 6,183,693, issued Feb. 7, 2001,
entitled "Random Access Slide Stainer with Independent Slide Heating
Regulation," both assigned to CytoLogix Corporation. CytoLogix seeks
assignment of our patent applications claiming the independent slide heater
idea, treble damages (unspecified amount) and an injunction against our
further sales of Discovery and BenchMark instruments. We believe that we have
meritorious defenses to the claims in this action and that resolution of this
matter will not have a material adverse effect on our business, financial
condition or results of operation; however, this litigation is in an early
stage and the results of the proceeding are uncertain and there can be no
assurance to that effect.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matter for a vote by our shareholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is listed on the NASDAQ National Market. The closing price
of our common stock on December 29, 2000 was $18.50. The following table shows
the high and low bid prices in dollars per share for the last two years as
reported by NASDAQ. These prices may not be the prices that you would pay to
purchase a share of our common stock during the periods shown.
Low High
------ ------
Year Ended December 31, 1999
First Quarter............................................... $16.75 $23.88
Second Quarter.............................................. $17.13 $28.63
Third Quarter............................................... $13.75 $22.25
Fourth Quarter.............................................. $15.69 $34.75
Year Ended December 31, 2000
First Quarter............................................... $21.63 $69.50
Second Quarter.............................................. $23.00 $49.25
Third Quarter............................................... $20.00 $28.63
Fourth Quarter.............................................. $17.06 $33.00
As of December 31, 2000, there were approximately 3,600 beneficial holders
of our common stock.
Dividend Policy
Holders of our common stock are entitled to receive dividends only when
declared by our Board of Directors. Our line of credit with Bank of America
forbids us from declaring dividends on any of our equity securities. To date
dividends have never been declared or paid and we do not plan to make any
dividend payments in the future. Instead we will reinvest in the expansion and
development of our business. If the Board of Directors decides to declare a
dividend in the future, the decision will be based on our earnings, financial
condition, cash requirements, and any other factors they deem relevant.
25
Item 6. Selected Financial Data
Selected Consolidated Financial Data
Year Ended December 31,
------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations
Data:
Sales:
Reagents and other........ $ 15,538 $ 22,905 $ 31,967 $ 45,340 $ 49,682
Instruments............... 8,591 9,248 15,737 24,069 21,467
-------- -------- -------- -------- --------
Total net sales......... 24,129 32,153 47,704 69,409 71,149
Cost of goods sold.......... 10,632 11,138 14,542 21,218 36,377
-------- -------- -------- -------- --------
Gross Profit................ 13,497 21,015 33,162 48,191 34,772
Operating expenses:
Selling, general and
administrative........... 11,206 16,953 23,805 32,381 43,800
Research and development.. 2,749 3,050 5,057 7,078 11,116
Nonrecurring expenses..... 10,262 1,656 3,160 -- 4,519
Amortization of
acquisition costs........ 424 509 599 1,051 1,474
-------- -------- -------- -------- --------
(Loss) income from
operations................. (11,144) (1,153) 541 7,681 (26,137)
Other (expense) income...... (137) 781 1,089 (370) 1,346
-------- -------- -------- -------- --------
(Loss) income before taxes
and cumulative effect of
accounting change.......... (11,281) (372) 1,630 7,311 (24,791)
Benefit from (provision for)
income taxes............... -- -- -- 5,500 (350)
-------- -------- -------- -------- --------
(Loss) income before
cumulative effect of
accounting change.......... (11,281) (372) 1,630 12,811 (25,141)
Cumulative effect of
accounting change, net of
tax(1)..................... -- -- -- -- (2,154)
-------- -------- -------- -------- --------
Net (loss) income....... $(11,281) $ (372) $ 1,630 $ 12,811 $(27,295)
======== ======== ======== ======== ========
Amounts per common share,
diluted:
(Loss) income before
cumulative effect of
accounting change........ $ (1.22) $ (.03) $ .11 $ .88 $ (1.70)
Cumulative effect of
accounting change........ -- -- -- -- (0.15)
-------- -------- -------- -------- --------
Net (loss) income per
share, diluted......... $ (1.22) $ (.03) $ .11 $ .88 $ (1.85)
======== ======== ======== ======== ========
Pro forma (loss) income
assuming the accounting
change is applied
retroactively:
Net (loss) income......... $(11,793) $ (523) $ 1,282 $ 11,668 $(25,141)
Net (loss) income per
common share, diluted.... $ (1.28) $ (0.04) $ 0.09 $ 0.80 $ (1.70)
Balance Sheet Data:
Cash, cash equivalents and
short-term investments..... $ 11,067 $ 18,902 $ 2,424 $ 1,787 $ 38,512
Long-term debt and
redeemable preferred
stock...................... 12,500 471 1,907 2,044 3,408
Working capital............. 15,888 28,524 22,277 28,408 49,977
Total assets................ 32,410 48,352 56,280 73,161 109,582
Accumulated deficit......... (33,410) (33,782) (32,152) (19,341) (46,636)
Total stockholders' equity.. 15,270 42,403 45,784 60,500 87,088
- --------
(1) During the fourth quarter of 2000, the Company changed its method of
accounting for revenue recognition in accordance with Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, effective
January 1, 2000. The cumulative effect of adopting this new accounting
principle amounted to a charge of $2,154, net of tax.
26
The following table contains summary unaudited quarterly consolidated
statements of operations for the four quarters ended December 31, 2000 and the
four quarters ended December 31, 1999. We have prepared the quarterly
consolidated statements of operations data on the same basis as the
Consolidated Statements of Operations beginning on page F-3. Our results of
operations have varied and may continue to fluctuate significantly from
quarter to quarter. Results of operations in any period should not be
considered indicative of the results to be expected for any future period.
Summary Quarterly
Condensed Consolidated Financial Data
Year Ended December 31, 2000
-----------------------------------------------------------------
Restated Restated Restated
First First Second Second Third Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- -------- -------- -------- ------- -------- -------
(in thousands, except per share data)
Statement of Operations
Data:
Sales:
Reagents and other.... $12,001 $12,001 $ 12,304 $ 12,304 $12,703 $12,703 $12,674
Instruments........... 5,828 5,125 5,436 6,419 4,899 5,196 4,727
------- ------- -------- -------- ------- ------- -------
Total net sales...... 17,829 17,126 17,740 18,723 17,602 17,899 17,401
Cost of goods sold...... 6,134 5,970 18,464 18,782 5,733 5,786 5,839
------- ------- -------- -------- ------- ------- -------
Gross profit (loss)..... 11,695 11,156 (724) (59) 11,869 12,113 11,562
Operating expenses:
Selling, general and
administrative....... 1,984 1,984 3,461 3,461 2,665 2,665 3,006
Research and
development.......... 7,960 7,960 14,930 14,930 9,816 9,816 11,094
Nonrecurring
expenses............. -- -- 4,519 4,519 -- -- --
Amortization of
acquisition costs.... 278 278 391 391 381 381 424
------- ------- -------- -------- ------- ------- -------
Income (loss) from
operations............. 1,473 934 (24,025) (23,360) (993) (749) (2,962)
Other (expense) income.. (48) (48) 452 452 508 508 434
------- ------- -------- -------- ------- ------- -------
Income (loss) before
taxes and cumulative
effect of accounting
change................. 1,425 886 (23,573) (22,908) (485) (241) (2,528)
(Provision for) benefit
from income taxes...... (456) (350) 106 -- -- -- --
------- ------- -------- -------- ------- ------- -------
Income (loss) before
cumulative effect of
accounting change...... 969 536 (23,467) (22,908) (485) (241) (2,528)
------- ------- -------- -------- ------- ------- -------
Cumulative effect of
accounting change, net
of tax(1).............. -- (2,154) -- -- -- -- --
------- ------- -------- -------- ------- ------- -------
Net income (loss).. $ 969 $(1,618) $(23,467) $(22,908) $ (485) $ (241) $(2,528)
======= ======= ======== ======== ======= ======= =======
Per Share Data:
Income (loss) before
cumulative effect of
accounting change:
--Basic.............. $ .07 $ .04 $ (1.55) $ (1.52) $ (.03) $ (.02) $ (.17)
--Diluted............ $ .06 $ .03 $ (1.55) $ (1.52) $ (.03) $ (.02) $ (.17)
Net Income:
--Basic.............. $ .07 $ (.11) $ (1.55) $ (1.52) $ (.03) $ (.02) $ (.17)
--Diluted............ $ .06 $ (.11) $ (1.55) $ (1.52) $ (.03) $ (.02) $ (.17)
Shares used in computing
net income (loss) per
share, basic........... 14,305 14,305 15,097 15,097 15,186 15,186 15,307
======= ======= ======== ======== ======= ======= =======
Shares used in computing
net income (loss) per
share, diluted......... 16,467 16,467 15,097 15,097 15,186 15,186 15,307
======= ======= ======== ======== ======= ======= =======
- --------
(1) During the fourth quarter of 2000, the Company changed its method of
accounting for revenue recognition in accordance with Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements. Pursuant to
Financial Accounting Statement No. 3, Reporting Financial Changes in
Interim Financial Statements, effective January 1, 2000, the Company
recorded the cumulative effect of the accounting change and accordingly,
the quarterly information for the first three quarters of 2000 which had
been previously reported have been restated. No restatement of 1999 is
required under the implementation guidance of Staff Accounting Bulletin
No. 101.
27
Summary Quarterly
Condensed Consolidated Financial Data
(Continued)
Year Ended December 31, 1999
---------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share
data)
Statement of Operations Data:
Sales:
Reagents and other....................... $10,512 $11,589 $11,679 $11,560
Instruments.............................. 5,120 4,726 4,733 9,490
------- ------- ------- -------
Total net sales........................ 15,632 16,315 16,412 21,050
Cost of goods sold......................... 4,988 4,765 5,148 6,317
------- ------- ------- -------
Gross profit............................... 10,644 11,550 11,264 14,733
Operating expenses:
Selling, general and administrative...... 7,399 7,875 7,829 9,278
Research and development................. 1,629 1,908 1,696 1,845
Nonrecurring expenses.................... 253 258 256 284
------- ------- ------- -------
Amortization of acquisition costs........ 1,363 1,509 1,483 3,326
Other (expense) income................... 24 (22) 44 (416)
------- ------- ------- -------
Income before income taxes............... 1,387 1,487 1,527 2,910
(Provision for) benefit from income
taxes................................... (138) 138 -- 5,500
------- ------- ------- -------
Net income........................... $ 1,249 $ 1,625 $ 1,527 $ 8,410
======= ======= ======= =======
Net income per common share:
--Basic.................................. $ .09 $ .12 $ .11 $ .62
=======