VENTANA MEDICAL SYSTEMS INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2003.

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to .

Commission File Number: 000-20931

Ventana Medical Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware

94-2976937

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification no.)

1910 Innovation Park Drive
Tucson, AZ		85737
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (520) 887-2155

Not Applicable

(Formal name, former address and former fiscal year, if changed from last report)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2) of the Exchange Act). Yes x No ¨

The number of shares outstanding of the registrant’s common stock, $0.001 par value, was 16,586,346 as of July 29, 2003.

Ventana Medical Systems, Inc.

INDEX

			PAGE
Part I. FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)

		Condensed Consolidated Balance Sheets June 30, 2003 and December 31, 2002	3

		Condensed Consolidated Statements of Operations Three and Six months ended June 30, 2003 and 2002	4

		Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2003 and 2002	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21

	Item 4.	Controls and Procedures	21

Part II. OTHER INFORMATION

	Item 1.	Legal Proceedings	22

	Item 4.	Submission of Matters to a Vote of Security Holders	25

	Item 6.	Exhibits and Reports on Form 8-K	25

Signature			26

Exhibits			27

Ventana Medical Systems, Inc.

Condensed Consolidated Balance Sheets

(in thousands except per share data)

(Unaudited)

	June 30, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	27,792		$	18,708
Accounts receivable, net		25,251			22,623
Inventories		9,762			13,901
Prepaid expenses		930			878
Deferred tax benefit, current portion		2,359			2,386
Other current assets		430			1,210

Total current assets		66,524			59,706
Property and equipment, net		43,853			43,777
Goodwill		2,804			2,804
Intangible assets, net		8,093			8,819
Other assets		3,744			3,615
Deferred tax benefit, long term portion		6,414			6,416

Total assets	$	131,432		$	125,137

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,292		$	8,446
Other current liabilities		12,836			12,230

Total current liabilities		22,128			20,676
Long term debt		2,331			2,357
Commitments and Contingencies
Stockholders’ equity:
Common stock—$.001 par value; 50,000 shares authorized; 16,410 and 16,346 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively		16			16
Additional paid-in capital		146,430			144,641
Accumulated deficit		(36,404	)		(41,121	)
Accumulated other comprehensive loss		(819	)		(832	)
Treasury stock—127 shares, at cost		(2,250	)		(600	)

Total stockholders’ equity		106,973			102,104

Total liabilities and stockholders’ equity	$	131,432		$	125,137

See accompanying notes

Ventana Medical Systems, Inc.

Condensed Consolidated Statements of Operations

(in thousands except per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30
	2003			2002			2003			2002
Sales:
Reagents and other	$	25,726		$	19,800		$	48,902		$	37,635
Instruments		7,725			5,951			13,809			10,298

Total net sales		33,451			25,751			62,711			47,933
Cost of goods sold		9,357			7,885			17,854			14,695

Gross profit		24,094			17,866			44,857			33,238
Operating expenses:
Research and development		4,872			3,849			9,167			7,471
Selling, general and administrative		15,615			12,930			30,308			24,638
Amortization of intangible assets		462			396			919			808

Income from operations		3,145			691			4,463			321
Interest and other income (expense), net		215			63			383			66

Income before taxes		3,360			754			4,846			387
Provision for income taxes		(62	)		(276	)		(129	)		(464	)

Net income (loss)	$	3,298		$	478		$	4,717		$	(77	)

Per share data:
Net income (loss)
—Basic	$	0.20		$	0.03		$	0.29		$	(0.00	)

—Diluted	$	0.20		$	0.03		$	0.28		$	(0.00	)

Shares used in computing per share data:
—Basic		16,354			16,258			16,358			16,225

—Diluted		16,878			16,622			16,766			16,225

See accompanying notes

Ventana Medical Systems, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Six Months Ended June 30,
	2003			2002
Operating activities:
Net income (loss)	$	4,717		$	(77	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization		4,635			3,819
Changes in operating assets and liabilities		3,591			(1,998	)

Net cash provided by operating activities		12,943			1,744

Investing activities:
Purchase of property and equipment		(3,792	)		(4,411	)
Purchase of intangible assets, net		(193	)		(158	)

Net cash used in investing activities		(3,985	)		(4,569	)

Financing activities:
Issuance of common stock		1,789			2,867
Repayments of debt		(26	)		(101	)
Repurchase of common stock		(1,650	)		—

Net cash provided by financing activities		113			2,766
Effect of exchange rate change on cash		13			174

Net increase in cash and cash equivalents		9,084			115
Cash and cash equivalents, beginning of period		18,708			12,280

Cash and cash equivalents, end of period	$	27,792		$	12,395

See accompanying notes

Ventana Medical Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share data)

(Unaudited)

1. Organization

and Significant Accounting Policies

Organization: Ventana Medical Systems, Inc. (“Ventana” or the “Company”) develops, manufactures and markets proprietary instrument and reagent systems that automate diagnostic procedures used for molecular analysis of tissues and cells. At present, the Company’s principal markets are North America, Europe, Japan and Australia.

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Recent Accounting Pronouncements: In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition of an “underlying” to conform it to the language used in FASB Interpretation No. 45, “Guarantor Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and amends certain other existing pronouncements. The Company does not have any derivative financial instruments. The Company does not anticipate that the adoption of SFAS No. 149 will have an impact on its consolidated balance sheets or statements of operations, shareholders’ equity and cash flows.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This Statement requires that certain instruments that were previously classified as equity on the Company’s statement of financial position now be classified as liabilities. The Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company currently has no instruments impacted by the adoption of this statement and therefore the adoption did not have an effect on the Company’s consolidated financial position, results of operations or cash flows.

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