SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
For the transition period from_____________________ to_________________________
Commission file number 0-27316
Molecular Devices Corporation
(Exact name of Registrant as specified in its charter)
Delaware 94-2914362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1311 Orleans Drive
Sunnyvale, California 94089
(Address of principal executive offices, including zip code)
(408) 747-1700
(Registrant's telephone number, including area code)
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 (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 20, 1997, based upon the last sale price reported for
such date on the Nasdaq National Market, was $126,533,736.
The number of outstanding shares of the Registrant's Common Stock as of March
20, 1997 was 9,038,124.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the Proxy Statement for Registrant's 1997 Annual Meeting
of Stockholders (the "Proxy Statement") are incorporated by reference into Part
III of this Form 10-K Report.
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TABLE OF CONTENTS
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Molecular Devices Corporation
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PART I Item 1. Business.......................................................... 3
The Company..................................... 3
Industry Background............................. 3
The Molecular Devices Solution.................. 4
Business Strategy .............................. 4
Core Technologies .............................. 5
Products........................................ 8
Business Risks.................................. 13
Research and Development........................ 14
Marketing and Customers......................... 15
Manufacturing................................... 16
Patents and Proprietary Technologies............ 16
Competition..................................... 17
Government Regulations.......................... 18
Human Resources................................. 19
Item 2. Properties........................................................ 19
Item 3. Legal Proceedings................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............... 19
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PART II Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters....................................... 20
Item 6. Selected Consolidated Financial Data.............................. 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 21
Item 8. Financial Statements and Supplementary Data....................... 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................ 24
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PART III Item 10. Directors and Executive Officers of the Registrant................ 25
Item 11. Executive Compensation............................................ 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................... 25
Item 13. Certain Relationships and Related Transactions.................... 25
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PART IV Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................................... 26
(a) Documents Filed with Report
(b) Reports on Form 8-K
(c) Exhibits
(d) Financial Statement Schedules
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PART 1
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Item 1 - Business
The Company
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section under "Business
Risks" as well as in the section entitled "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Molecular Devices Corporation ("Molecular Devices" or the "Company")
designs, develops, manufactures and markets proprietary, high performance,
bioanalytical measurement systems, including consumables, designed to accelerate
and improve the cost-effectiveness of the drug discovery and development
process. The Company integrates its expertise in engineering, molecular and cell
biology and chemistry to develop proprietary core technologies which it
incorporates into its sophisticated bioanalytical systems, including MAXline
Microplate Readers, Threshold System and Cell Analysis Systems1. The Company's
innovative bioanalytical systems are designed to provide greater speed,
sensitivity and reproducibility than traditional instruments or methods. As part
of its strategy to provide complete customer solutions, the Company also offers
a broad range of consumables, including ultraviolet-transparent microplates for
certain of the MAXline Microplate Readers, assay kits for the Threshold System
and disposable capsules for certain of the Cell Analysis System, as well as
software upgrades, and service on a contract basis. The Company's systems have
applications in many aspects of the therapeutic development process, from drug
discovery and clinical development through manufacturing and quality control.
Industry Background
During the past decade, significant advances in life sciences research
and a growing complexity of the biological problems under investigation have
highlighted the limitations of traditional approaches to drug discovery and
development. These limitations, together with heightened competition in the
biotechnology and pharmaceutical industries, have fueled the need for
increasingly advanced bioanalytical tools that increase productivity and reduce
product development time and costs. To date, traditional instruments and methods
have not fully addressed the complexities of modern drug discovery. However,
advances in biology, chemistry and engineering are providing the technologies
necessary for the development of advanced bioanalytical tools.
The research, development, manufacture and commercialization of
biotechnology and pharmaceutical products involves a sequence of interrelated
activities. In the research phase, scientists identify and characterize a
candidate molecule that has potential therapeutic benefit. In preclinical
development, relatively small, highly purified quantities of the lead compound
are produced and the compound is tested in vitro and in animals. After
establishing the therapeutic potential of the lead compound and receiving
approval from the regulatory agencies, multi-phase clinical trials are conducted
to establish the safety and efficacy of the potential product in humans. In
addition, an approved manufacturing process to produce clinical quantities of
the purified therapeutic must be established. If the drug receives regulatory
approval, commercial-scale manufacturing capacity must be developed with the
required quality control to ensure a commercial product of sufficient purity and
consistent quality. The entire drug discovery and development process typically
requires five to ten years to complete and can cost hundreds of millions of
dollars.
Industry sources estimate that approximately 50,000 research groups are
engaged in life sciences research activities worldwide, including academic
institutions, government laboratories and private foundations, as well as
biotechnology,
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SPECTRAmax(TM), Vmax(R), SOFTmax(R), Threshold(R), Cytosensor(R), Cytosoft(R),
Liveware(TM), FLIPR(TM), ROBOmax(TM) and Molecular Devices(R) are trademarks of
the Company. This Form 10-K also includes trademarks of companies other than the
Company.
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pharmaceutical and chemical companies. The increased emphasis on reducing costs
and optimizing resources in the life sciences is forcing these organizations to
be more selective in the allocation of their research budgets by embracing new
technologies which accelerate and improve the cost-effectiveness of the drug
discovery and development process. As a result, research groups are increasingly
relying on a variety of advanced techniques to develop novel therapeutics that
address complex biological problems in fields such as oncology, virology,
neurology and auto-immune diseases. Through combinatorial chemistry (the process
of assembling chemical molecules to rapidly produce many ordered sequences of
such molecules), scientists are creating large libraries of novel compound
structures, thereby dramatically augmenting compound libraries historically
limited to natural molecule sources, such as plant extracts or microbial
fermentation broths. The worldwide effort to sequence the human genome is
beginning to identify novel molecules that will likely become targets for new
therapeutic products. Molecular biology continues to provide the capability to
manipulate living systems through an enhanced understanding of the role played
by DNA, proteins and RNA in cellular processes.
The volume of new genetic discoveries arising out of these efforts, the
need to analyze more subtle biological events and the enormous costs involved in
the development process have increased the need for a selection process that
effectively eliminates unpromising leads at an early stage of research.
Traditional bioanalytical instruments and methods were not designed to rapidly
analyze subtle biological events and process large volumes of complex data
necessary to evaluate biological functions of genetic discoveries and to
understand and quantify biological mechanisms and interactions.
The Molecular Devices Solution
Molecular Devices designs, develops, manufactures and markets
proprietary, high-performance, bioanalytical measurement systems, including
consumables, designed to accelerate and improve the cost-effectiveness of the
drug discovery and development process. The Company has integrated its expertise
in engineering, molecular and cell biology and chemistry to couple silicon
semiconductor technology with biological systems to measure subtle molecular and
cellular events. The Company has also developed advanced optical technology that
permits high-throughput, multisample detection of biochemical reactions, and
object-oriented software applications that rapidly convert large amounts of
complex data into meaningful information. The Company has incorporated these
technologies into sophisticated yet easy-to-use bioanalytical tools that
accurately measure, analyze, quantify and record large volumes of complex
biological data. As a result of the Company's fully-integrated systems,
researchers are able to address increasingly complex biological problems that
could not previously be addressed fully by traditional technologies.
The Company's current systems, including the MAXline Microplate Readers,
Threshold System and Cell Analysis Systems, have applications in many aspects of
the therapeutic development process, from drug discovery and clinical
development through manufacturing and quality control. The Company is widely
perceived as a leader in microplate technology and believes it was the first to
introduce microplate readers that allowed high-throughput kinetic analysis and
the direct quantitation of DNA, proteins, and RNA in a 96-well format. The
Company believes that the Threshold System is the only commercially available,
fully-integrated system with picogram level sensitivity that rapidly quantitates
complex biological molecules, such as DNA, proteins and mRNA, with accuracy,
precision and reproducibility. The Company also believes that the Cytosensor
System, a Cell Analysis product, is the only single-assay system capable of
measuring multiple cellular mechanisms in a real-time, noninvasive manner. The
Fluorescent Imaging Plate Reader System ("FLIPR"), introduced in 1996 as a
member of the Cell Analysis product family, is believed to be the first
instrument of its kind which bridges the gap between high throughput and high
sensitivity screening. As part of its goal of providing complete solutions for
its customers, the Company offers a broad range of consumables, including
easy-to-use, highly sensitive reagent kits and sophisticated software
applications for use in its systems. The Company also provides service for all
of its systems on a contract basis.
Business Strategy
The Company's mission is (i) to identify attractive market opportunities
for sophisticated bioanalytical systems arising out of the rapid and fundamental
changes occurring in the life sciences industry, and (ii) to offer a portfolio
of easy-to-use, value-added products and services based on enabling technologies
in engineering and molecular and cell biology. The key elements of the Company's
business strategy include the following:
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Enhance Core Technology Base. The Company has developed a number of
proprietary core technologies in vertical beam photometry, limited depth of
field fluorometry, object-oriented software, biosensors, chemical complexes and
microphysiometry that it has incorporated into three commercialized product
families. The Company has a portfolio of United States patents and patent
applications and corresponding foreign patents and applications. The Company is
dedicated to maintaining a leading technological position.
Lead Through Innovation. The Company intends to continue leveraging its
core technologies to develop and provide innovative solutions for the
increasingly complex biological problems under investigation. For example, the
Company developed the Cytosensor System in response to the need for a fast,
reliable, single assay system to investigate multiple cellular functions in
numerous cell types without destroying the cells. The Company will focus on
developing novel bioanalytical systems which accelerate and improve the
cost-effectiveness of the drug discovery and development process. This strategy
also includes potential acquisition of technologies that are complimentary to
our existing core technologies.
Leverage Installed Customer Base and Reputation. The Company intends to
leverage its installed base of over 8,600 units as well as its reputation for
developing innovative bioanalytical systems of superior quality and reliability
to build new markets for its products and to accelerate the adoption of new,
more sophisticated technologies and products. The Company also intends to
leverage its current product platforms by introducing enhancements to existing
products that increase their functionality, speed and performance. The Company
intends to continue to develop and market consumables, including easy-to-use,
highly sensitive reagent kits and sophisticated software applications for use in
their bioanalytical systems. Consumables enable the Company to deliver a
complete solution to its customers and provide the Company with a recurring
revenue stream.
Expand Applications for Existing Products. The Company believes that its
products and technologies have potential applications in a variety of settings,
including environmental and clinical diagnostic settings, particularly in fields
such as immunology, microbiology and oncology. For example, the Threshold System
was selected by the U.S. Army as part of a mobile biological warfare detection
unit. There are significant risks involved in developing and marketing new
applications of the Company's products and there can be no assurance that the
Company will be successful in expanding applications of its products.
Implementation of the Company's strategy is subject to numerous risks and
uncertainties. See "Business Risks."
Core Technologies
The Company has established a multi-disciplinary approach to product
development based on core competencies in advanced technologies including
vertical beam photometry, limited depth-of-field fluorometry, object-oriented
software, biosensors, chemical complexes and microphysiometry.
Vertical Beam Photometry. The Company has a patented technology using
vertical beam photometry, which has become the basis for the Company's entry
into the high-throughput spectrophotometer market. This core technology
incorporates flashlamp UV light sources, monochromator design, fiber optics,
array optics and low-level signal detection.
Limited depth-of-field fluorometry. The Company has an exclusive license
to the patented technology used in FLIPR to capture fluorescence from live cells
on the bottom of the microplate wells, and exclude most of that from the
solution above the cells, so greatly increasing the measurement sensitivity.
Object-Oriented Software. The Company develops software applications for
instrument control of its bioanalysis systems and for data analysis.
Applications are developed in-house by software engineers using object-oriented
technology and an advanced porting technology that allows near simultaneous
release on both Microsoft Windows and the Apple Macintosh OS platforms, as well
as common interface, file formats and documentation. The Company's
object-oriented software is a leader in its class for features and usability.
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Biosensor Technology. The Company's Light Addressable Potentiometric
Sensor ("LAPS") technology is a detection system capable of measuring a wide
variety of chemical reactions as they occur on the surface of a silicon based
sensor. The LAPS technology is a key element in the Company's Threshold System
and Cytosensor Systems.
The sensor consists of a flat silicon semiconductor chip with a
proprietary insulating layer. This insulating layer allows the sensor to be
placed in contact with electrolyte solutions or biological samples. The silicon
sensor measures at discrete test sites on the chip's surface reactions of
chemistries such as ions, enzymes or living cells as they occur. The sensor
works by converting a chemical reaction, such as a change in acidity (or "pH"),
into an electronic signal using light from light-emitting diodes ("LEDs")
focused against the back of the silicon chip, to create a photoelectric
response.
Molecular Devices believes that its LAPS technology offers a combination
of speed, sensitivity and flexibility not available in other detection systems.
The primary attributes of LAPS are (i) multiple detection sites can be
fabricated on the surface of the silicon chip, permitting measurement of
multiple samples on a single chip; (ii) responses are provided in real-time with
reduced complexity, cost and error rate and at increased speeds because LAPS
measures the biochemical reaction directly, rather than by linking the reaction
to changes in color, fluorescence or radioactivity; (iii) the entire chip can be
read in approximately one second and may be reused for numerous measurement
cycles; and (iv) the small size and optical flatness of LAPS permits highly
accurate measurements in volumes as low as 700 nanoliters.
Chemical Complexes. Molecular Devices develops proprietary chemical
reagents and application protocols for its consumables which, when used with the
LAPS technology, help its customers rapidly and accurately quantitate
biomolecules, such as DNA, proteins and mRNA. Chemical research, development and
production is performed in-house in the areas of enzyme conjugation,
purification, analytical methods, physical chemistry and organic chemistry. The
Company has developed patented reagent kits for DNA detection as well as
labeling of antibodies by using a proprietary chromophore (a chemical compound
that, when attached to a molecule to be identified, produces a specific color
upon detection of that molecule) and a general format Immuno-Ligand Assay (ILA)
Kit with application-specific protocols to assure customers' success with new
assays.
Microphysiometry. The Company maintains a core expertise in cell and
molecular biology, including cell and tissue culture facilities, that is applied
toward research, development and product application activities. The Company's
capabilities include molecular pharmacology, the analysis of cellular
signal-transduction mechanisms and the use of recombinant DNA technology to
express receptors and other proteins in living cells. This expertise in cell and
molecular biology has allowed the Company to configure LAPS-based
instrumentation and other proprietary technologies with living cells and tissues
to develop "microphysiometry," the monitoring of cell reactions to different
chemicals in real-time without destruction or invasion of the cells.
Microphysiometry, which was developed by scientists at Molecular Devices, is
based on the underlying biological principle that the responses of cells to the
introduction of different chemical agents are reflected in changes in metabolic
rates.
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The diagram below depicts certain aspects of the process of cellular
metabolism:
[GRAPHIC OMITTED][GRAPHIC OMITTED]
[GRAPHIC OMITTED]
As indicated above, cells take up glucose and oxygen and, through a
series of metabolic steps, "burn" the glucose to form lactic acid and carbon
dioxide. Through this process, cells produce the energy required for normal
cellular maintenance. When a ligand (a receptor binding molecule such as a
hormone, neurotransmitter or cytokine) binds to a receptor on the cell surface,
the receptor becomes activated and triggers a biochemical cascade of "second
messengers" within the cell. These transformations are the normal biological
response of the cell to the ligand and cause a change in extracellular
acidification rate that is measured by the Company's LAPS technology.
The Company believes that its microphysiometry technology offers
advantages over conventional bioassay techniques. With conventional bioassay
techniques, not only must the second messenger pathway be known, but these
techniques can only measure a limited number of second messenger events. With
microphysiometry, because intracellular communication typically results in a
change in the rate of cellular acid production, cellular events can be measured
even without knowledge of the second messenger pathway.
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Products
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The following table identifies, for each of the Company's product
families, the year of initial introduction, list price range and primary
applications. Sales of MAXline, Threshold and Cell Analysis products represented
54%, 16% and 30%, respectively, of the Company's product revenues for the year
ended December 31, 1996.
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Worldwide List
Year of Initial Prices
Products Introduction Primary Applications
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Microplate Readers
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MAXline
Instrument Platform:
Vmax 1987 $9,495-$10,800 High-throughput detection and
Emax 1988 $7,695-$7,900 analysis of biochemical
THERMOmax 1989 $11,895-$15,600 reactions in immunoassays
SPECTRAmax 250 1994 $17,525-$21,900 such as ELISA, evaluation of
SPECTRAmax 340 1995 $12,895-$16,250 enzyme activity, detection of
fMAX 1996 $24,575-$25,965 cell growth, testing for
ROBOmax 1996 $9,850-$12,500 endotoxins, and measurement
Software: of DNA, proteins and RNA.
SOFTmax 1987 $1,295-$1,600
SOFTmax PRO 1994 $1,975-$2,500
Consumables:
UV-Transparent Microplates 1994 $375-$495
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High Sensitivity Assay System
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Threshold
Instrument Platform:
Threshold 1989 $49,500-$55,000 High sensitivity detection of
Software: trace contaminants in
THS Software 1989 * biopharmaceuticals and
Consumables: analysis of biomolecules such
Total DNA Assay Kit 1989 $750-$1,295 as DNA, proteins and mRNA.
Immuno-Ligand Assay Kit 1990 $480-$875
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Cell Analysis Systems
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Cytosensor
Instrument Platform: Ultrasensitive single-assay
Cytosensor 1992 $59,500-$120,000 system capable of detecting
Cytosampler 1995 $19,500-$24,500 receptor activation and
Cystosoft 1992 * signal transduction events in
Consumables: real-time
Capsule Kit 1992 $370-$465
Fluorescent Imaging Plate Reader
FLIPR 1996 $250,000-$275,000
High throughput, high
sensitivity optical screening
instrument
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* Bundled with instrument platforms
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MAXline Products
Microplate readers have become one of the most fundamental tools used in
life sciences research by addressing the increasing need for the acquisition and
processing of large quantities of biochemical and biological data. Microplate
readers provide scientists the benefit of high-throughput analysis in a
standardized, multi-sample format. Because of the productivity gains using a
multi-sample format, microplates have largely replaced test tubes and cuvettes
for many life sciences applications.
A microplate is a disposable plastic vessel that is used with a
microplate reader to measure light absorbance. The basic principles of
microplate readers are that light from an appropriate source is directed to a
wavelength selection device, such as a monochromator, and its intensity is
measured prior to, and after, passing through each of the 96 samples in the
wells of the microplate. Application of a mathematical formula to the light
intensity measurements, before and after passage through each well, provides a
measure of the absorbance of the sample. The absorbance, also known as optical
density, is generally proportional to the concentration of the substance that is
being measured.
Until 1987, microplate readers were limited primarily to performing
immunoassays (ELISA) (methods of determining the amount of a specific molecule
present in a sample through its binding to an antibody containing a detector
enzyme, which is a protein that causes a specific change, for the purpose of
measuring the amount of the molecule present). As a result, microplate readers
had only limited application in the life sciences research market. The
introduction in 1987 of Vmax, the Company's first microplate reader, expanded
the utility of microplate readers by increasing the number and complexity of
assays that could be rapidly and accurately analyzed in the 96-well microplate
format. The Company believes that the Vmax was the first commercial microplate
reader product capable of performing kinetic analysis, by incorporating
technologies that ensure uniform temperature of the reading chamber and allow
the entire microplate to be read in approximately five seconds. These features
have enabled assays previously analyzed with slow, single-sample-at-a-time
spectrophotometers to now be analyzed with a rapid 96-well microplate format.
Since the introduction of Vmax, the Company has continued to introduce
innovative capabilities in a microplate format, thereby expanding the assays
that can be analyzed in a microplate reader. The Company's new generation of
microplate readers, SPECTRAmax, has incorporated features such as a
monochromator-based grating system for continuous wavelength selection so that
researchers for the first time can spectrally scan a sample in a 96-well
microplate format to help identify the compound by determining its optimal
absorbance wavelength. This capability also allows researchers to instantly
access 501 wavelengths through software control, a significant improvement over
conventional microplate readers which are typically limited to only six
wavelength selections using manually installed interference filters.
Additionally, for the first time DNA, RNA and proteins can be assayed directly
in a high-throughput, multi-sample format, as a result of SPECTRAmax 250's
capability to read at wavelengths as short as those in the true ultraviolet
range.
The Company's Vmax, Emax and THERMOmax microplate readers have in certain
instances been used in clinical or diagnostic applications. Under applicable FDA
regulations, to the extent that an analytical instrument will be used in a
clinical or diagnostic application, the manufacturer of that instrument must
submit to the FDA, prior to commercial distribution of that instrument, a 510(k)
or PMA application. The Company has obtained 510(k) clearance with respect to
the clinical applications of its MAXline microplate readers. There can be no
assurance that 510(k) clearance for any future product or modification of an
existing product will be granted.
Vmax. The Company's first microplate reader, launched in 1987, with
kinetic read capability was primarily designed to address the needs of
biochemists. The Company believes that this innovation, along with its powerful
analytical software program, SOFTmax, was instrumental in significantly
expanding the market for microplate readers.
Emax. Unlike Vmax, this product is aimed at the market for traditional
microplate readers that do not use kinetic capability. It was introduced by the
Company to provide a microplate reader, compatible with the SOFTmax software,
for customers in academia with restricted capital budgets.
THERMOmax. This reader provides high-quality thermal control of the
microplate at elevated temperatures, usually body temperature. Offering superior
thermal and kinetic capabilities, THERMOmax is primarily designed to work with
living cells, and for the study of clot formation and lysis. This latter type of
application includes endotoxin testing via the
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various Limulus Amebocyte Lysis (LAL) methods, a type of testing required for
all batches of injectable drugs and other injectable products, such as saline
for intravenous drips.
SPECTRAmax 250. The SPECTRAmax 250 represents the first of a new
generation of microplate readers incorporating a monochromator for continuous
wavelength selection over a wide range, rather than a set of six optical filters
each with a fixed wavelength. This capability provides for enhanced convenience
and flexibility in assay design. A second major feature of SPECTRAmax 250 is the
ability to read wavelengths as short as 250 nanometers, thus addressing direct
quantitation of DNA, RNA and protein samples. In addition, SPECTRAmax 250 is
capable of scanning absorbance as a function of wavelength over 96 samples in
high-throughput spectral analysis.
SPECTRAmax 340. Similar to the SPECTRAmax 250, this product was designed
to address the needs of researchers for continuous wavelength selection in the
near ultraviolet and visible range.
fMAX. The Company's first fluorescence microplate reader, fMAX is one of
the fastest fluorescence microplate readers available and is ideal for kinetic
reactions.
ROBOmax. The Company's first robotic microplate handling system that will
interface with the Maxline microplate readers.
SOFTmax PRO. This software platform, introduced along with the SPECTRAmax
250, has greater power and flexibility than SOFTmax. SOFTmax PRO provides a
comprehensive set of features to display the data collected in various formats,
define standard correction schemes, quantify the data, generate summary reports,
analyze the data and export data to other applications such as Microsoft Excel
and Prism Graphpad. All the MAXline software products are compatible with both
Microsoft Windows and Apple Macintosh OS systems and can be used with the
Company's microplate readers.
Disposables. Spectraplates are proprietary 96-well microplates for use
with the SPECTRAmax 250. The Spectraplate is made with plastic transparent to UV
light as short as 250 nanometers and represents the Company's first MAXline
disposable product.
Threshold System Products
The Company's Threshold System is a high sensitivity assay system that
incorporates the Company's LAPS technology to rapidly and accurately quantitate
a variety of biomolecules such as DNA, proteins and mRNA. The demand for systems
which can quantitate contaminants in the manufacturing and quality control of
bioengineered products has increased in response to the growing number of
therapeutics both entering clinical trials and receiving regulatory approval for
commercial sale. The Threshold System emerged from a demand by biopharmaceutical
companies for more sensitive and reproducible methods to detect contaminants in
biopharmaceuticals during the manufacturing and quality control process.
Traditional detection methods, such as DNA hybridization (a method of binding
DNA to a membrane for the purpose of determining if a specific sequence is
present), are slow, difficult to use in a manner that provides reproducible and
transferable results, and often require the use of radioactive materials for
detection.
A typical assay using the Threshold System occurs in multiple stages. In
the reaction stage, certain binding agents, such as antibodies, binding proteins
or nucleic acid probes, interact in solution with the specific biomolecule of
interest creating what is termed a "sandwich." In the separation stage, the
sandwich complex is filtered through a membrane under a controlled vacuum to
allow the sandwich complex to become tightly bound to the membrane. The captured
reaction complex on the membrane is then placed into the Threshold Reader which
contains the LAPS and a detector enzyme substrate. Proprietary software
developed by the Company then collects and analyzes the data.
The Threshold family of products includes a workstation, software and
consumable reagent kits. The Total DNA Assay Kit allows for the detection of any
DNA without sequence specificity at levels as low as two picograms. The ILA Kit
is a flexible format that can be used to detect and quantitate numerous
contaminants, such as host cell proteins and bovine serum albumin, in the
manufacturing of bioengineered products. In addition, using labeled probes, the
ILA Kit allows for the accurate and sensitive quantitation of specific sequences
of DNA or mRNA, which is essential for solving complex biological problems at
the genetic level, such as quantitating gene expression in gene therapy.
Typically, the Threshold's sensitivity is equal to or better than traditional
detection methods, but without their limitations.
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The Threshold System incorporates several important features:
o The interaction between binding agents and the antigen of interest
occurs in solution where the molecules are maintained in their
native conformation and retain 100% of their activity. Other
methods such as ELISA require binding agents to be coated onto
microplate wells or beads resulting in denaturation and loss of
activity.
o The LAPS technology, which converts minute changes in pH into an
electronic signal, produces very low electronic noise to provide
accurate quantitation at low signal levels.
o Typical Threshold System assays have a dynamic range of two logs
or greater, thereby reducing the number of sample dilutions
required to accurately quantitate from the standard curve with
precision and reproducibility.
o New assays are rapidly developed using complete, optimized reagent
kits, which can reduce the time required for development of
traditional ELISA assay methods by weeks or months.
The Company believes that the Threshold System is the only commercially
available, fully-integrated system capable of rapidly and accurately
quantitating DNA with picogram-level sensitivity.
Biopharmaceuticals. The Threshold System was developed in response to the
growing number of biopharmaceuticals entering clinical trials and the need for
more sensitive and reproducible methods to detect contaminants in therapeutics
during the manufacturing and quality control process. Traditional detection
methods, such as DNA hybridization, are slow, difficult to use in a manner that
provide reproducible and transferable results, and often require the use of
radioactive materials for detection.
Environmental Testing. The Threshold System was selected by the U.S. Army
for incorporation into mobile detection stations for the early warning of
biological warfare agents.
Cell Analysis Systems
Many therapeutic drugs are targeted to cell membrane receptors: special
proteins that function as control switches for cell activity and are triggered
by the specific binding of soluble natural substances (such as hormones and
neurotransmitters) to relay messages to the cell via "signal transduction"
mechanisms. Therapeutic drugs which act on receptors either mimic or block the
action of the natural receptor-specific substance. The therapeutic potential of
such drugs is, therefore, most appropriately studied using live cell systems.
These studies are inherently challenging, but a high value is placed upon them
by the pharmaceutical industry and the research community. A focus of the
Company is the provision of tools for studying the response of live cells to
different compounds, both for research and for drug screening purposes. Examples
of these tools are the Company's Cytosensor and FLIPR Systems.
Cytosensor Products
The Cytosensor System was introduced in 1992 in response to the growing
market need for bioanalytical tools that increase productivity, reduce product
development time and improve the cost-effectiveness of the drug discovery and
development process. Prior to the introduction of the Cytosensor System,
researchers were required to utilize multiple instruments and test
methodologies, each with its set of limitations, to investigate certain complex
biological events. The use of traditional instruments and methodologies is
time-consuming and expensive as many tasks are performed manually.
In response to these limitations, and the corresponding need for a fast,
reliable, single assay system to investigate multiple cellular functions in
numerous cell types, the Company developed the Cytosensor System. The Cytosensor
System incorporates the Company's core LAPS technology into a patented system
that permits researchers to conduct microphysiometry, the monitoring of the
metabolic state of living cells in real-time without destroying the cells.
Cellular metabolism is the most fundamental and essential of all physiological
processes, and allows for the monitoring of cell activation, stimulation,
growth, toxicity and other biochemical events crucial to the development of new
therapeutics.
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In the Cytosensor System, living cells are maintained in a chamber near
the LAPS surface. The compound to be tested is pumped through a chamber and
cellular waste products are flushed away. As long as the flow of culture medium
continues, the pH measured by the LAPS remains steady at a normal physiological
value. When the flow is interrupted at regular intervals, the concentration of
acid metabolites in the sensor chamber increases. The Cytosensor System detects
this acidification change within seconds and calculates its rate of increase in
response to stimulation (or decrease in response to toxic compounds) over time.
The rate of acidification of the medium correlates with the metabolic rate of
the cells. Unless the biochemical state of the cells is altered, the rates
remain consistent from one measurement to the next. The LAPS technology permits
the measurement of small amounts of sample compounds, which is an important
feature for researchers working with synthetic chemical libraries or
natural-compound isolates where sample quantities are often in short supply.
The Company offers a range of Cytosensor products for varying customer
needs. These products include a 4-chamber system targeting customers with
relatively low throughput requirements and an 8-chamber system for customers who
require higher throughput. In addition, in November 1995, the Company introduced
the Cytosampler Automated Delivery System to be used in combination with the
4-chamber and 8-chamber systems. In addition to allowing for the unattended
operation of the Cytosensor System platform, the Cytosampler increases
throughput as a result of incorporating the industry standardized 96-well
microplate format.
The Company believes that the Cytosensor System has a number of current
pharmacological and microbiological applications, including:
Receptor Characterization. Companies are continually searching for more
reliable ways to increase the success rate of drug discovery. Successful
compound screening is highly dependent on understanding the activity and
function of receptors. Prior to the introduction of the Cytosensor System,
multiple instruments and test methodologies were needed to investigate certain
biological events, resulting in a significant investment of resources. The
Cytosensor System provides this biological information in a single platform in
less time and at a lower cost than traditional equipment and methods. Receptor
responses to drug compounds can be detected in minutes, producing functional
dose response information in hours rather than days.
Orphan Receptor Identification. Cellular receptors are most often the
targets for drugs. While known receptors are well-characterized, a large number
of new and incompletely identified receptor subtypes, known as orphan receptors,
are becoming of great interest to the pharmaceutical industry. Traditional
functional assays are of limited use in identifying orphan receptors because the
secondary signal mechanisms, and, therefore, the appropriate second messenger
systems for such receptors are not known. In contrast, the Cytosensor System
does not require extensive knowledge of the receptor signaling mechanism and,
therefore, may be utilized for orphan receptor screening and identification.
Microbiology. The Company believes that a substantial opportunity exists
for application of the Cytosensor System to microbiological analysis,
particularly in the area of determining antibiotic susceptibility and
sensitivity in slow-growing microorganisms. The Company has already demonstrated
that the Cytosensor System can perform those assays in less time and with
greater sensitivity than existing instrumentation. For example, one of the
Company's customers is using the Cytosensor System to detect inhibitory response
of H. pylori, the bacterium responsible for stomach and duodenal ulcers, to
certain antibiotics.
In Vitro Toxicology. Several consumer product companies are currently
conducting research to develop alternatives to animal testing for toxicology.
The Cytosensor System has been used to test specific cell lines, such as human
and animal skin cells, with potential consumer products. Toxic effects can be
quickly determined through monitoring changes in the metabolic activity of the
cells. In published independent studies, the Cytosensor System demonstrated a
high correlation with the Draize ocular irritancy test, a widely used measure of
toxicity in consumer products. The Cytosensor System has further demonstrated
the ability to detect neurotoxic events with greater sensitivity than
traditional assays.
Clinical Research Applications. By detecting minute changes in cellular
metabolic activity, the Cytosensor System provides the potential to tailor
patient-specific therapeutic regimes based on the patient's own cellular
response to individual drugs. Patient-derived tumors could potentially be
evaluated against a variety of chemotherapeutic agents to quickly determine the
best course of treatment. This could reduce or eliminate the need to subject the
patient to various chemotherapies and their resulting side effects during the
clinician's efforts to determine the most effective therapy. Changes in cell
function can be the earliest changes associated with a disease process. The
Cytosensor System may provide clinical
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diagnostic value in assessing a patient's damage from myocardial infarction and
progress of therapeutic regime. The Company currently has research
collaborations with several university medical centers to investigate these
clinical applications.
FLIPR System Product
The Company acquired NovelTech in June of 1996 and subsequently
integrated its FLIPR system with the other Cell Analysis systems. FLIPR
satisfies a demand from pharmaceutical companies for live cell analysis at a
throughput rate compatible with current screening needs (up to one hundred
96-well microplates per day). The cellular signals measured by FLIPR at this
time are intracellular calcium ion flux and membrane potential change. These
measurements provide information on the activation of cells by test compounds.
The FLIPR limited depth-of-field fluorometry optical design is patented.
Cells, along with appropriate fluorescent dyes, are maintained in open 96-well
plates in a humidified, thermally-controlled compartment together with either
one, or two, 96-well compound-addition plates. A laser provides excitation
illumination, and fluorescence from cells growing on, or centrifuged onto, the
bottom of the wells is passed through one or two optical filters and monitored
continuously by a CCD camera, at intervals of less than 1 second for all 96
wells. During the reading cycle, an inbuilt 96-channel pipettor transfers 96
samples from a compound-addition plate to the cell plate. This strategy allows
for real-time monitoring of cells before and after compound addition, so
allowing the measurement of rapid non-linear, response kinetics and providing
correction for variation such as cell number and dye-loading, among others.
The Company believes that the FLIPR system has a number of current
pharmacological applications including:
Drug screening. Over $1 billion is spent annually on screening new
compounds. The Company believes that fluorescence technology is key to new
methodology in this field because it offers high sensitivity and hence the
promise of further miniaturization and increased throughput. Live cell targets
have been challenging and are of particularly high value to the pharmaceutical
industry because more than half of all drug targets are cell membrane receptors
that are best studied when incorporated in functional cells.
Orphan receptor identification. While not as comprehensive as Cytosensor
in its ability to detect intracellular signaling events, FLIPR has utility in
this field. As cells are engineered to broaden their ability to provide
intracellular signaling support to a wider range of receptors (e.g., by
inclusion of G alpha 16 or chimeric G proteins) then FLIPR will become more
useful in this field.
Business Risks
The Company's business, financial condition and results of operations are
subject to various risk factors, including those described below and elsewhere
in this report.
o Uncertainty of Future Operating Results. Future operating results
will depend on many factors, including demand for the Company's
products, the levels and timing of government and private sector
funding of life sciences research activities, the timing of the
introduction of new products by the Company or by competing
companies, the integration of acquired products and technology
into manufacturing and distribution processes, the Company's
ability to control costs and its ability to attract and retain
highly qualified personnel. Furthermore, the Company's gross
margins can be significantly affected by many factors, including
shifts in product mix, the mix of direct sales as compared with
sales through distributors, competitive price pressures or
quarterly fluctuations in sales levels relative to fixed costs.
o Fluctuations in Quarterly Operating Results; Lack of Backlog. The
Company manufactures its products to forecast rather than to
outstanding orders, and products are typically shipped within 30
to 60 days of purchase order receipt. As a result, the Company
does not believe the amount of backlog at any particular date is
indicative of its future level of sales. The Company's
manufacturing procedures may in certain instances create a risk
of excess or inadequate inventory levels if orders do not match
forecasts. The Company's expense levels are based, in part, on
expected future sales. If sales levels in a particular quarter do
not meet expectations, the Company may not be able to adjust
operating expenses sufficiently quickly to compensate
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for the shortfall, and the Company's results of operations may be
materially adversely affected. Many of the Company's products are
subject to long customer procurement processes. Accordingly, the
timing of capital equipment purchases by customers is expected to
be uneven and difficult to predict. In addition, a significant
portion of the Company's revenues is typically derived from sales
of a small number of relatively high-priced systems, and sales of
such products may increase as a percentage of revenue in the
future. Delays in receipt of anticipated orders or such products
could lead to substantial variability from quarter to quarter. In
addition, the Company has historically received purchase orders
and made a significant portion of each quarter's product
shipments near the end of the quarter. If that pattern continues,
even short delays in the receipt of orders or shipment of
products at the end of a quarter could have a material adverse
effect on results of operations for that quarter. The Company
typically experiences a decrease in the level of sales in the
first calendar quarter as compared to the fourth quarter of the
preceding year because of budgetary and capital equipment
purchasing patterns in the life sciences industry. In 1995, the
Company also experienced a decrease in product revenues in the
third quarter compared to the second quarter, related to
seasonality primarily associated with lower European and academic
sales during the summer months. The Company's product revenues
increased in the third quarter of 1996 compared to the second
quarter of 1996 primarily due to the introduction of a new Cell
Analysis product. The Company, however, expects the third quarter
seasonality trend to continue in future years as the Company
increases its efforts to penetrate international markets.
Operating results in any period should not be considered
indicative of the results to be expected for any future period.
o Dependency on New Products; Rapid Technological Change. The life
sciences instrumentation market is characterized by rapid
technological change and frequent new product introductions. The
Company's future success will depend on its ability to enhance
its current products and to develop and introduce, on a timely
basis, new products that address the evolving needs of its
customers.
o Other Factors. The Company's business is affected by other
factors, including: (i) the possibility that the introduction or
announcement of new products would render existing products
obsolete or result in a delay or decrease in purchase orders for
existing products; (ii) the extent to which and the timing in
which the Company's products achieve market acceptance; (iii) the
capital spending policies of the Company's customers (which
depend on various factors, including the resources available to
such customers, the spending priorities among various types of
research equipment and the policies regarding capital
expenditures during recessionary periods), including those
policies of universities, government research laboratories and
other institutions whose funding is dependent on grants from
government agencies; (iv) competition; (v) the Company's ability
to obtain and maintain patent and other intellectual property
protection for its products and technology; (vi) the Company's
ability to obtain in a timely manner certain components used in
its products which are currently obtained from single sources;
(vii) compliance with governmental regulations, including those
promulgated by the United Sates Food and Drug Administration and
similar state and foreign agencies; and (viii) the extent of the
Company's sales outside the United States, which involve certain
specific risks, including risks related to currency fluctuations,
imposition of government controls, export license requirements,
restrictions on export of critical technology, political and
economic instability or conflicts, trade restrictions, changes in
tariffs and taxes, difficulties in staffing and managing
international operations and international distributor
relationships and general economic conditions.
Research and Development
The Company's research and development activities are focused on (i)
providing more sensitive quantitation of biological events; (ii) providing
greater throughput capability, especially with smaller sample volumes; (iii)
developing biological capability to broaden its technology solution, including
developing "liveware" (genetically engineered cells) for use with
microphysiometry; and (iv) developing increasingly sophisticated data management
and analysis capability.
The Company is currently developing a microplate reader technology
designed to replace spectrophotometers capable of analyzing assays in the far
ultraviolet through the visible wavelength. The Company believes that this new
system will have the accuracy of a spectrophotometer but with the high
throughput of the industry standardized 96-well microplate format. In addition,
the Company is developing a limited-featured, lower-priced Cytosensor targeted
toward research organizations with restricted capital budgets. This system will
possess reduced throughput and less flexibility than the
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Company's existing Cytosensor System. There can be no assurance that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products or product enhancements.
The Company has experienced, and may in the future experience, delays in the
development and introduction of new products and product enhancements, and there
can be no assurance that the Company will not experience additional delays in
the future. In addition, there can be no assurance that new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce products in a timely manner in response to changing market
environments or customer requirements, there could be a material adverse effect
on the Company's business, financial condition and results of operations.
The Company's future success will depend on its ability to enhance its
current products and to develop and introduce, on a timely basis, new products
that keep pace with technological developments and address the evolving needs of
its customers. The Company pursues active development programs in the areas of
spectroscopy, molecular and cell biology, electronic systems and computer
software. Company-funded research and development expenditures were
approximately $4,637,000, $3,639,000 and $2,676,000 during 1996, 1995 and 1994,
respectively. The Company expects to continue to increase its Company-funded
research and development expenditures, as contract research revenues and related
expenditures become less significant to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Marketing and Customers
The Company markets and sells high performance bioanalytical systems to
technically sophisticated customers. To access and support this market
appropriately, the Company is continuing to make a significant investment in
building a direct sales, service and technical support organization worldwide.
The Company believes that providing high quality technical assistance to
customers is critical to its long-term success.
The Company has an installed base of approximately 8,600 units worldwide
and has sold multiple systems to many of its customers.
The Company distributes its products primarily through direct sales
representatives in the United States and Europe, as well as through multiple
distributors in certain geographic markets. The Company also distributes certain
of its MAXline products through a national scientific products distribution
company in the United States. The sales effort in the United States is supported
by a team of service, technical and applications specialists employed by the
Company.
The Company has subsidiaries in the United Kingdom and Germany
responsible for selling and servicing the Company's products. The Company's
products are also sold through international distributors, most of which enter
into distribution agreements with the Company that provide for exclusive
distribution arrangements and minimum purchase targets. Such agreements also
generally prohibit the distributors from designing, manufacturing, promoting or
selling any products that are competitive with the Company's products. The use
of distributors involves certain risks, including the risks that distributors
will be unable to satisfy financial obligations to the Company or will cease
operations. The Company also does not currently have distributors in a number of
significant international markets that it has targeted and will need to
establish additional international distribution relationships. There can be no
assurance that the Company will engage qualified distributors in a timely
manner, and the failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
Product sales to customers outside of the United States accounted for
approximately 40%, 37% and 38% of the Company's product revenues in 1996, 1995
and 1994, respectively. International sales are anticipated to account for an
increasing percentage of revenues in the future. The Company expects to continue
expanding its international operations in order to take advantage of increasing
international market opportunities resulting from worldwide growth in the life
sciences industry. The Company faces a number of risks in its international
sales and operations. Although currently a majority of the Company's
international sales are denominated in U.S. dollars, as the Company expands its
international operations it may be required to invoice a greater proportion of
its sales in local currencies. Consequently, fluctuations in the value of
foreign currencies relative to the U.S. dollar may adversely affect the
Company's results of operations because of currency translation adjustments or
adversely impact sales and profitability if the value of foreign currencies
declines relative to the U.S. dollar. International sales and operations may
also be materially adversely affected by the imposition of government controls,
export license requirements, restrictions of the export of critical technology,
political and economic instability or
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conflicts, trade restrictions, changes in tariffs and taxes, difficulties in
staffing and managing international operations, problems in establishing or
managing distributor relationships and general economic conditions.
The Company believes that, to a significant extent, its growth prospects
depend on capital spending policies of its customers, levels of government
research funding, and the Company's ability to gain acceptance by a broader
group of customers of the efficiency and efficacy of the Company's innovative
technologies, including the Cell Analysis Systems.
Manufacturing
Molecular Devices manufactures its products at its facility in Sunnyvale,
California. The Company manufactures its own components where it believes it
adds significant value, but relies on suppliers for the manufacture of selected
components and subassemblies, which are manufactured to the Company's
specifications. The Company conducts all final testing and inspection of its
products. The Company has established a quality control program, including a set
of standard manufacturing and documentation procedures intended to ensure that,
where required, the Company's instruments are manufactured in accordance with
Good Manufacturing Practices ("GMP").
Certain components used in the Company's products are currently purchased
from single sources. Any delay in the manufacture of such components could
materially adversely affect the Company's business, financial condition and
results of operations. Additional components, such as optical, electronic and
pneumatic devices, are currently purchased in configurations specific to the
Company's requirements and, together with certain other components, such as
computers, are integrated into the Company's products. Although the Company
believes that most of the components used in its products are available from
alternate sources, any unanticipated interruption in the supply of these
components or other supplies, or changes to the specifications or interface of
standard components or supplies adopted unilaterally by their manufacturers,
could require the Company to redesign its products to utilize alternative or
modified components or supplies. The Company's reliance on sole-source vendors
involves several risks in addition to potential shortages of supply, including
reduced control over delivery schedules, and risks of adverse manufacturing
yields, reduced quality and higher costs. In the event of yield, quality,
delivery or supply problems, the Company could be forced to delay shipment of
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company manufactures its products to forecast rather than to
outstanding orders, and products are typically shipped within 30 to 60 days of
purchase order receipt. As a result, the Company does not have substantial
backlog, and the amount of backlog at any particular date is generally not
indicative of its future level of sales.
The Company typically warrants its products for one year. Historically,
the Company's warranty repairs and returns have been immaterial.
Patents and Proprietary Technologies
The Company relies on patents and other proprietary rights, including
trade secrets, to protect its competitive position. There can be no assurance
that any applications will result in the issuance of a patent or that any issued
patent will afford the Company any significant protection from competition.
The patent positions of life sciences instrumentation firms, including
the Company, are uncertain and involve complex legal and factual questions. In
addition, the coverage claimed in a patent application can be significantly
reduced before the patent is issued. Consequently, the Company does not know
whether any of its applications will result in the issuance of patents or, if
any patents are issued, whether they will provide significant proprietary
protection or will be challenged, circumvented or invalidated. Since patent
applications in the United States are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, the Company cannot be certain that it was
the first creator of inventions covered by its pending patent applications or
that it was the first to file patent applications for such inventions. Moreover,
the Company may have to participate in interference proceedings declared by the
U.S. Patent and Trademark Office to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. There can be no assurance that the Company's patents,
if issued, would be held valid. Because many holders of patents in the field of
life sciences instrumentation have substantially greater resources than the
Company and because patent litigation is very expensive, Molecular Devices may
not have the resources necessary to successfully challenge the validity of such
patents or
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withstand claims of infringement in cases where the Company's position has
merit. Even if the Company is successful in prevailing in such actions, the cost
of such litigation could have a material adverse effect on the Company's
financial condition and results of operations. An adverse outcome in any future
patent dispute could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require
the Company to cease using the infringed technology. No assurance can be given
that the Company would be able to obtain licenses to these patents on
commercially reasonable terms, if at all, or develop or obtain alternative
technology.
The Company also relies on trade secret and copyright law, employee and
third-party nondisclosure agreements and other protective measures to protect
its intellectual property rights pertaining to its products and technology.
There can be no assurance that these agreements and measures will provide
meaningful protection of the Company's trade secrets, know-how, or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure or that others will not independently develop substantially
equivalent proprietary technologies. In addition, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States. There can be no assurance that the
Company will be able to protect its intellectual property successfully.
Competition
The market for life sciences instrumentation is highly competitive, and
the Company expects competition to increase. There are three principal sources
of competition for the Company's products. First, the Company competes for the
allocation of customer capital funds with many other companies marketing capital
equipment, including those not directly competitive with any of the Company's
products.
Second, some of the Company's products compete directly with similar
products from other companies. Since their introduction in 1987, the MAXline
microplate readers have been the Company's primary product, accounting for 54%,
56% and 60% of product revenues in 1996, 1995 and 1994, respectively. The market
for microplate readers is divided into three general segments: inexpensive
microplate readers for customers that require relatively low levels of
quantitative accuracy; higher performance microplate readers; and premium
performance microplate readers. The Company does not compete in the first
segment of this market. The second segment of the microplate reader market is
characterized by intense competition from a number of companies including
Bio-Rad Laboratories, Inc., Thermo Bioanalysis Corporation and Bio-Tek
Instruments, Inc., that offer, or may in the future offer, products with
performance capabilities generally similar to those offered by the Company's
products. The Company currently experiences less competition in the third
segment of the microplate reader market, although the Company expects that
competition is likely to increase in the future, as several current and
potential competitors have the technological and financial ability to enter this
segment of the market. Some of the Company's competitors have substantially
greater financial, technical, marketing, sales and other resources than the
Company, and certain of these companies have a larger market share worldwide.
The Company's MAXline products are generally priced at a premium to other
microplate readers. The Company competes in the microplate reader market
primarily on the basis of performance and productivity, and there can be no
assurance that the Company can continue to compete successfully in this market.
Third, many companies, research institutions and government organizations
that might otherwise be customers for the Company's products employ methods for
bioanalytical analysis that are internally developed. Many of these companies
also have significantly greater financial, technical, marketing, sales and other
resources than does the Company. In addition, these companies and institutions
compete with the Company in recruiting and retaining highly qualified scientific
and management personnel.
Although the Company is not aware of fully-integrated systems on the
market that compete directly with its Threshold or Cell Analysis products,
competitive products using new technologies may be introduced. While the Company
believes that most methods developed internally are manual, there can be no
assurance that other organizations will not succeed in developing technologies
and products that are more effective than those of the Company or that would
render the Company's products obsolete or noncompetitive. The Company believes
that the primary competitive factors in the market for the Company's products
are breadth of applications, ease-of-use, productivity enhancement, quantitative
accuracy, quality, support and price/performance. The Company believes that it
competes favorably with respect to these factors.
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Government Regulations
Government regulations play a significant role in the research,
development, production and commercialization of health care products, such as
pharmaceuticals, diagnostics and certain instrumentation. None of the Company's
products currently requires FDA approval except for certain of the Company's
MAXline Microplate Readers that are used in clinical or diagnostic applications.
FDA regulations apply not only to therapeutics and other health care products,
but also to the processes and production facilities used to produce such
products.
Clinical diagnostic applications of the Company's products are and will
continue to be subject to FDA device and reagent approval and regulations.
Before a medical device can be commercially distributed, the manufacturer must
submit to the FDA either a premarket notification ("510(k)") or a premarket
approval ("PMA") application. A 510(k) notification can be submitted when the
device is substantially equivalent to another device currently being marketed in
the classes of devices eligible for marketing pursuant to 510(k) notifications.
Receipt of 510(k) clearance takes at least three months, but may take much
longer and may require the submission of clinical safety and efficacy data to
the FDA. There can be no assurance that the use of a 510(k) notification will be
available for any clinical application of the Company's products or for any of
the Company's potential diagnostic products.
A PMA, which is required for medical devices not eligible to be marketed
under a 510(k) notification, must demonstrate that the product is safe and
effective and thus requires more time to prepare and a more complex submission
to the FDA. Following completion of laboratory evaluations and adequate
controlled clinical trials to establish safety and efficacy of the product for
its intended use, the Company would be required to file a PMA application, which
includes the results of all research and product development, clinical studies
and related information. Among the conditions for FDA approval is the
requirement that the prospective manufacturer's quality control and
manufacturing and documentation procedures conform to GMP. Domestic
manufacturing facilities are subject to biennial FDA inspections and foreign
manufacturing facilities are subject to periodic FDA inspections, or inspections
by the foreign regulatory authorities with reciprocal inspection agreements with
the FDA. FDA review and approval of a PMA application often requires 12 to 18
months, or even longer, and must be completed before the product may be sold for
clinical diagnostic use in the United States. The process of obtaining PMAs from
the FDA and other regulatory authorities can be costly, time consuming and
subject to unanticipated delays.
The Company has limited experience in obtaining regulatory approvals. The
Company has, to date, been required to obtain 510(k) clearance with respect to
certain clinical applications of its MAXline Microplate Readers. There can be no
assurance that 510(k) clearance for any future product or modification of an
existing product will be granted by the FDA within a reasonable time frame, or
at all, or that in the future the FDA will not require manufacturers of certain
medical devices to engage in a more thorough and time consuming approval process
than the 510(k) process, or that the FDA or certain corresponding government
agencies will permit marketing of the Company's systems in their respective
jurisdictions. There can be no assurance that the approvals of the Company's or
its customers' products, processes or facilities will be granted. Any failure to
obtain, or delay in obtaining, any such required approval could adversely affect
the Company's marketing efforts.
As a result of the clinical applications of certain of the Company's
MAXline Microplate Readers, the Company is registered with the FDA as a medical
device manufacturer. As such, the Company may be inspected on a routine basis by
the FDA for compliance with the FDA's GMP and other applicable regulations.
These regulations require that the Company manufacture its products and maintain
related documentation in a prescribed manner with respect to manufacturing,
testing and quality control activities. Further, the Company is required to
comply with various FDA requirements for reporting of product malfunctions and
other matters. The regulatory standards for manufacturing are currently being
applied stringently by the FDA and state regulatory agencies. Noncompliance with
FDA or applicable state agency regulations or discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions on
such product or manufacturer, including fines, costly recalls, injunction or
seizure of products, refusal of the government to approve or clear product
approval applications or to allow the Company to enter into government supply
contracts or even withdrawal of the product from the market or criminal
prosecution, all of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
A significant percentage of the Company's product revenues are derived
from sales outside of the United States. International regulatory bodies often
establish varying regulations governing product standards, packaging
requirements,
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labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. As a result of the Company's sales in Europe, the Company may be
required to obtain ISO 9000 certification and has had to obtain a "CE" mark
certification for its products, an international symbol of quality and
compliance with applicable European medical device and instrument manufacturing
directives. While the Company expects to institute an ISO 9000 compliance
program once regulations are finalized, there can be no assurance that the
Company will be successful in meeting certification requirements.
The Company is also subject to numerous environmental and safety laws and
regulations, including those governing use of hazardous materials. Any violation
of, and the cost of compliance with, these regulations could adversely impact
the Company's operations.
Human Resources
As of December 31, 1996, Molecular Devices employed 134 persons full
time, including 32 in research and development, 36 in manufacturing, 50 in
marketing and sales and 16 in general administration and finance. Of these
employees, 36 hold Ph.D. or other advanced degrees. None of the Company's
employees is covered by collective bargaining agreements, and the Company
considers relations with its employees to be good.
Item 2 - Properties
Molecular Devices leases approximately 60,000 square feet of laboratory,
manufacturing and administrative space in Sunnyvale, California. The Company's
lease expires in August 2001. The Company believes that its facilities will be
sufficient for its operations for the indefinite future. The Company also
maintains a sales and service office in the United Kingdom and a sales and
technical office in Germany.
Item 3 - Legal Proceedings
The Company is not currently a party to any material legal proceedings.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
19
<PAGE>
PART II
- -------------------------------------------------------------------------------
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock is traded on the Nasdaq National Market tier
of the Nasdaq Stock Market under the symbol "MDCC." Public trading of the common
stock commenced on December 13, 1995. Prior to that date, there was no public
market for the common stock.
The prices per share reflected on the table below represent the range of
high and low closing prices of the common stock on the Nasdaq National Market,
for the period indicated.
1996 1995
----------------------------- -----------------------------
High Low High Low
---- --- ---- ---
First Quarter 13 1/4 8 5/8 -- --
Second Quarter 13 3/4 8 3/8 -- --
Third Quarter 11 1/2 7 1/4 -- --
Fourth Quarter 16 1/8 11 11 3/8 10
Historically, the Company has not paid cash dividends on its common
stock and does not intend to pay any cash dividends in the foreseeable future.
Any future cash dividends will be determined by the Board of Directors
As of March 20, 1997, there were approximately 1,855 stockholders of
record of the Company.
Item 6 - Selected Consolidated Financial Data
<TABLE>
The following table sets forth selected historical financial
information for the Company certain of which is based on, and should be read in
conjunction with, the Company's audited financial statements that are being
filed as a part of this report.
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues
Product revenues $ 30,596 $ 23,116 $ 18,516 $ 14,872 $ 12,671
Contract revenues 330 2,499 3,944 3,761 3,388
-------- -------- -------- -------- --------
Total revenues 30,926 25,615 22,460 18,633 16,059
-------- -------- -------- -------- --------
Income (loss) from operations 47 3,011 1,763 636 (522)
Other income (expense), net 1,079 (33) (201) (124) (136)
-------- -------- -------- -------- --------
Income (loss) before income taxes 1,126 2,978 1,562 512 (658)
Income tax benefit (provision) 1,126 1,081 (43) -- --
-------- -------- -------- -------- --------
Net income (loss) $ 2,252 $ 4,059 $ 1,519 $ 512 $ (658)
======== ======== ======== ======== ========
Net income (loss) per share $ 0.24 $ 0.52 $ 0.20 $ 0.07 $ (0.09)
======== ======== ======== ======== ========
Shares used in computing net
income (loss) per share 9,524 7,851 7,586 7,635 7,181
20
<PAGE>
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 23,727 $ 20,379 $ 2,201 $ 2,976 $ 2,461
Working capital 27,395 22,786 3,681 2,990 3,096
Total Assets 36,833 28,800 9,020 7,272 7,175
Long-term obligations, less current portion -- -- 1,582 1,635 2,290
Accumulated deficit (7,848) (10,100) (14,159) (15,678) (16,190)
Total stockholders' equity 29,277 24,525 3,757 2,233 1,715
</TABLE>
Note that the income from operations for the fiscal year ended December
31, 1996, includes a $4.6 million charge for the acquisition of in-process
technology and acquisition costs related to the Company's acquisition of
NovelTech Systems, Inc.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section as well as
under "Item I. Business - Business Risks."
Molecular Devices was founded in 1983 to address new fundamental
scientific discoveries and develop bioanalytical tools in order to accelerate
and improve the cost effectiveness of the drug discovery and development
process. The Company has made significant investment in developing a portfolio
of proprietary core technologies. The Company's first product, the Vmax, was
introduced in 1987. Vmax was the first in a series of products establishing the
Company's MAXline family of microplate readers. In 1989, the Company
commercialized its first biosensor product using its proprietary Light
Addressable Potentiometric Sensor ("LAPS") technology with the introduction of
the Threshold product family. In 1992, the second biosensor product, Cytosensor,
was introduced, thus broadening the application of the Company's LAPS
technology. In 1994, the Company launched the first in a new generation of the
MAXline product family, SPECTRAmax 250 followed by the SPECTRAmax 340 in 1995.
In November 1995, the Company introduced the Cytosampler Automated Delivery
System, which allows unattended continuous operation of the Company's existing
4- and 8-chamber Cytosensor Systems. In the second half of 1996 the Company
launched the first MAXline product with fluorescence reading capability, the
fMAX, and a robotics device that compliments the entire MAXline product family,
the ROBOmax.
On June 7, 1996, the Company acquired all of the outstanding stock of
NovelTech Systems, Inc. ("NovelTech"). The purchase price of approximately $4.7
million consisted of a cash payment at closing of $1.5 million, issuance of two
promissory notes valued at $750,000 each, issuance of 146,342 shares of the
Company's Common Stock valued at approximately $1.48 million, and acquisition
related costs of $210,000. The second quarter of 1996 included a $4.6 million
one-time charge for acquired in-process technology related to the acquisition of
NovelTech. See "Charge for Acquired In-Process Research and Development" below.
Subsequent to the acquisition of NovelTech, the Company introduced its
first high throughput optical screening tool, the FLIPR (Flourometric Imaging
Plate Reader) system. The FLIPR system joins Cytosensor as a member of the
Company's Cell Analysis product family.
The Company's revenues have historically been generated by bioanalytical
instrument and consumable sales and contract research revenues. Sales of the
Company's MAXline Microplate Readers accounted for 54%, 56% and 60% of product
revenues in 1996, 1995 and 1994, respectively. The Company believes that sales
of MAXline products will continue to account for a significant portion of its
product revenues. Both the Threshold and Cell Analysis Systems are subject to
long customer procurement processes as a result of the significant capital
commitments required by customers. For example, the Company estimates that the
sales cycle for a Cell Analysis System typically ranges from three to twelve
months from initial inquiry to purchase order. Consequently, the Company
believes that any significant sales increase for these products would take
longer to materialize than that seen with MAXline.
21
<PAGE>
The Company also develops and markets a broad range of services, software
and consumables including ultraviolet-transparent microplates for the MAXline
Microplate Readers, assay kits for the Threshold System and disposable capsules
for the Cytosensor System. Sales of service, software and consumables accounted
for 17%, 23% and 24% of product revenues in 1996, 1995 and 1994, respectively.
The Company's contract revenues since 1990 have consisted primarily of
research funding from the United States Advanced Research Projects Agency
("ARPA") pursuant to a research contract that concluded in early 1996. In
connection with the completion of the ARPA contract, the Company restructured
its research and development activities to increase focus on commercial
opportunities. As a result, the development and engineering groups have
increased in size, while the research group has been reduced, leading to an
overall reduction in research and development spending but to an increase in
spending for Company-funded research and development. The Company believes that
contract research revenues will be less significant in future periods, and that
product revenues will be its primary source of revenues.
The Company's revenues tend to exhibit a seasonal pattern, with the
Company typically experiencing a decrease in sales in the first quarter as
compared to the fourth quarter because of budgetary and capital equipment
purchasing patterns in the life sciences industry. The Company has also
typically experienced a decrease in product revenues in the third quarter
compared to the second quarter, related to seasonality primarily associated with
lower European and academic sales during the summer months. The Company's
product revenues increased in the third quarter of 1996 compared to the second
quarter of 1996 primarily due to the introduction of new Cell Analysis products.
The Company, however, expects the third quarter seasonality trend to continue in
future years as the Company increases its efforts to penetrate international
markets. Product sales to customers outside of the United States accounted for
approximately 40%, 37% and 38% of the Company's product revenues in 1996, 1995
and 1994, respectively.
During 1994, 1995 and 1996, the Company had not provided for income taxes
outside of some minor federal, state and foreign taxes. As of December 31, 1996,
the Company had federal and state net operating loss carryforwards of
approximately $3.4 million and $940,000, respectively. The Company also had
federal research and development tax credit carryforwards of approximately
$672,000. The federal net operating loss and credits will expire at various
dates beginning in 2004 through 2007, if not utilized. The state net operating
loss and credits will expire at various dates beginning in 1997 through 1998, if
not utilized. For the year ended December 31, 1996, the tax provision reflects a
benefit of approximately 100% of income before taxes, relating primarily to net
deferred tax assets which have been recorded (by way of a reduced valuation
allowance). The net deferred tax assets recorded represent the Company's net
operating loss carryforwards expected to be utilized in 1997. Based upon the
results of operations over the last several years, the Company believes that it
is more likely than not that these tax benefits will be realized. However,
realization of the net deferred tax assets will depend on future earnings
resulting from continued success from the Company's operations. Once the Company
utilizes its net operating loss carryforwards and tax credits, it expects its
tax liability to reflect effective tax rates of 37% to 39%, absent changes in
tax rates.
Although the Company has been profitable in each of the last seventeen
quarters, excluding the $4.6 million charge for the acquisition of in-process
technology and acquisition costs in the second quarter of 1996, the Company had
an accumulated deficit of approximately $7.8 million at December 31, 1996.
Results of Operations
Years ended December 31, 1996, 1995 and 1994
Product revenues. Product revenues for 1996 increased by 32% to
approximately $30.6 million from approximately $23.1 million in 1995. The
MAXline and Cell Analysis product families showed increased levels of revenue.
MAXline product revenues increased primarily due to greater sales of SPECTRAmax
products worldwide. Cell Analysis product revenues increased due to the
introduction of new products and increased international instrument shipments.
Threshold product family revenues decreased primarily due to lower shipments to
the US Army and decreased revenues from the sale of commercial Threshold
products worldwide.
Product revenues for 1995 increased by 25% to approximately $23.1 million
from approximately $18.5 million in 1994. All of the Company's product families
showed increased levels of revenues both in the US and internationally.
22
<PAGE>
MAXline product revenues increased primarily due to sales of the SPECTRAmax 250
and 340. Threshold product revenues increased primarily as a result of growth in
US Government orders. Cell Analysis product revenues increased primarily as a
result of the Company's Academic Grant Placement Program, which had the effect
of increasing instrument unit sales. This program targeted academic institutions
for placement of Cytosensors utilizing a matching grant by the Company to the
institution for use in purchasing the Company's products. The increase in
instrument unit sales was offset partially by a decrease in average selling
price.
Contract revenues. Contract revenues for 1996 decreased by 87% to
approximately $330,000 from $2.5 million in 1995. Contract revenues for 1995
decreased by 37% to approximately $2.5 million from approximately $3.9 million
in 1994. The reduction in the contract revenue for both periods is due primarily
to the substantial completion of the Company's ARPA contract in late 1995.
Gross margin on product revenues. In 1996, gross margin on product
revenues decreased to 62.1% from 63.3% in 1995. The decrease was primarily due
to the introduction of new lower margin Cell Analysis products and decreased
Threshold product shipments.
In 1995, gross margin on product revenues increased to 63.3% from 62.5%
in 1994. The increase in gross margin on product revenues in 1995 over 1994
primarily resulted from volume-related cost improvements which were partially
offset by lower margins due to the Company's Academic Grant Placement Program.
Cost of contract revenues. The cost of contract revenues for 1996
decreased by 92% to approximately $160,000 from approximately $1.9 million in
1995. The cost of contract revenues for 1995 decreased by 41% to approximately
$1.9 million from approximately $3.3 million in 1994. The reduction in cost of
contract revenues for both periods is in line with the corresponding reduction
in contract revenues.
Company-funded research and development. Company-funded research and
development expenses for 1996 increased by 26% to approximately $4.6 million
from approximately $3.6 million for 1995 and by 36% in 1995 from approximately
$2.7 million in 1994. These increases were both due to the continued buildup of
research and development projects focused on commercial products independent of
government-funded research projects. Company-funded research and development
expenses as a percentage of product revenues were 15.0%, 15.7% and 14.4% for
1996, 1995 and 1994, respectively.
Charge for acquired in-process research and development. The Company
recorded a charge of approximately $4.6 million during the second quarter of
1996 due to the write-off of acquired in-process research and development and
acquisition related costs related to the Company's acquisition of NovelTech
Systems, Inc. on June 7, 1996. The acquired in-process technology represents the
appraised value of technology in the development stage that had not yet reached
economic and technological feasibility and does not have alternative future
uses. The Company determined this amount to be in-process research and
development and recorded the charge based on, among other factors, the stage of
development of each product acquired, the time and resources needed to complete
product development, expected income and associated risks. A total of $150,000
of the purchase price was capitalized as completed research and development and
is being amortized over two years, the estimated useful life of the acquired
technology. See Note 4 of "Notes to Consolidated Financial Statements" included
in Part IV.
Selling, general and administrative. Selling, general and administrative
expenses for 1996 increased by 16% to approximately $9.9 million from
approximately $8.5 million in 1995 and by 9% in 1995 compared to $7.8 million in
1994. The increased spending for both periods is primarily the result of
additional spending on marketing and sales related activities as the Company
continued to expand market coverage. Selling, general and administrative
expenses as a percentage of product revenues were 32.4%, 37% and 42.2% in 1996,
1995 and 1994, respectively.
Interest income (expense) net. Net interest and other income for 1996 was
approximately $1.1 million as compared to net interest and other expense of
approximately $33,000 and $201,000 for 1995 and 1994, respectively. The
increased net interest and other income for both periods relates primarily to
interest income earned on the proceeds of the Company's initial public offering
completed in December 1995. In addition, interest expense decreased as the
proceeds of the offering were used to repay certain interest-bearing debt
instruments in December 1995.
23
<PAGE>
Provision for taxes. For the years ended December 31, 1996 and 1995, the
Company recorded income tax benefits of approximately $1.1 million for both
periods relating primarily to a reduced valuation allowance on the Company's net
deferred tax assets. The income tax benefit had the effect of increasing net
income for that period.
Liquidity and Capital Resources
Since 1993, the Company has financed its operations primarily from cash
flow provided by operations, which contributed $4.6 million, $4.5 million and
$758,000 in 1996, 1995 and 1994, respectively. Net cash used in investing
activities was $1.9 million, $562,000 and $978,000 in 1996, 1995 and 1994,
respectively, primarily for capital expenditures, and, in 1996, $1.2 million of
cash was used in investing activities related to the acquisition of NovelTech.
The larger capital expenditure use in 1994 reflected expenditures associated
with the Company's relocation into new facilities. Net cash provided by
financing activities was $535,000 and $14.3 million, respectively, for 1996 and
1995, while net cash used in financing activities was $547,000 for 1994. The
larger proceeds in 1995 reflected primarily the proceeds from the initial public
offering as offset by repayment of various debt instruments from the proceeds of
the offering. The 1996 proceeds relate primarily to stock option exercises and
issuance of stock under the 1995 Stock Purchase Plan. The 1994 use of funds
reflected primarily repayments of credit arrangements.
The Company believes that existing capital resources will be sufficient
to fund its operations through at least 1998. However, the Company's future
liquidity and capital requirements will depend upon numerous factors, including
the resources the Company devotes to developing, manufacturing and marketing its
products, the extent to which the Company's products generate market acceptance
and demand and other factors. As such, there can be no assurances that the
Company will not require additional financing within this time frame and,
therefore, the Company may in the future seek to raise additional funds through
bank facilities, debt or equity offerings or other sources of capital.
Additional funding may not be available when needed or on terms acceptable to
the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Item 8 - Financial Statements and Supplementary Data
The following consolidated financial statements of the Company and
financial statement schedules are attached to this report as pages F-1 through
F-15.
Financial Statements:
o Report of Ernst & Young LLP, Independent Auditors
o Consolidated Balance Sheets at December 31, 1996 and 1995
o Consolidated Statements of Income for each of the three
years in the period ended December 31, 1996
o Consolidated Statement of Stockholders' Equity for the three
years in the period ended December 31, 1996
o Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1996
o Notes to Consolidated Financial Statements
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
Item 9 - Changes In and Disagreements with Accountants on Accounting Financial
Disclosures
Not applicable.
24
<PAGE>
PART III
- --------------------------------------------------------------------------------
Item 10 - Directors and Executive Officers of the Registrant
Information with respect to Directors and Executive Officers may be found
in the Sections entitled "Proposal 1 -- Election of Directors," and "Executive
Officers of the Company", respectively, appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on May 16, 1997. Such information is incorporated
herein by reference.
Item 11 - Executive Compensation
The information required by this item is set forth in the Proxy Statement
under the heading "Executive Compensation," which information is incorporated
herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth in the Proxy Statement
under the heading "Security Ownership of Certain Beneficial Owners and
Management," which information is incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
None.
25
<PAGE>
PART IV
- --------------------------------------------------------------------------------
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements - See Index to Consolidated Financial Statements
as Item 8 on page 24 of this report.
2. Financial Statement Schedules - See Index to Consolidated Financial
Statements as Item 8 on page 24 of this report.
3. Exhibits
Exhibit Description of Document
Number
2.1 (1) Form of Agreement and Plan of Merger between the Registrant and
Molecular Devices Corporation, a California Corporation ..........
3.1 (1) Amended and Restated Certificate of Incorporation of Registrant .
3.2 (1) Bylaws of the Registrant .........................................
4.1 (1) Specimen Certificate of Common Stock of Registrant ...............
4.2 (1) Reference is made to Exhibits 3.1 through 3.2 ....................
10.1 (1) 1988 Stock Option Plan ...........................................
10.2 (1) Form of Incentive Stock Option under the 1988 Stock Option Plan ..
10.3 (1) Form of Supplemental Stock Option under the 1988 Stock Option Plan
10.4 (1) 1995 Employee Stock Purchase Plan ...............................
10.5 (1) 1995 Non-Employee Directors' Stock Option Plan ..................
10.6 (1) Form of Nonstatutory Stock Option under the 1995 Non-Empolyee
Directors' Stock Option Plan .....................................
10.7 (1) 1995 Stock Option Plan ...........................................
10.8 (1) Form of Incentive Stock Option under the 1995 Stock Option Plan..
10.9 (1) Form of Nonstatutory Stock Option under the 1995 Stock Option Plan
10.10(1) Form of Early Exercise Stock Purchase Agreement under the 1995
Stock Option Plan ................................................
10.11(1) Form of Indemnity Agreement between the Registrant and its
Directors and Executive Officers .................................
10.12(1) Consulting Agreement dated July 20, 1988 by and between the
Registrant and Harden M. McConnell, Ph.D. ........................
10.13(1) Lease Agreement dated January 17, 1994 by and between Aetna Life
Insurance Company and the Registrant .............................
10.14(1) Business Loan Agreement dated March 26, 1991 by and between the
Registrant and Silicon Valley Bank with related Promissory Note
dated April 17, 1995. Loan Modification Agreement dated April 17,
1995 and Security Agreement dated November 22, 1989 ..............
10.15(1) Series E Preferred Stock Purchase Agreement dated December 12,
1989 of the Registrant ...........................................
10.16(2) Stock Purchase Agreement dated June 7, 1996, by and between the
Registrant and NovelTech Systems, Inc., Brad Neagle and Kirk
Schroeder (with Exhibit A. Certain Definitions) ..................
11.1 Computation of Net Income Per Share .............................
21.1 (1) Subsidiaries of the Registrant ...................................
23.1 Consent of Independent Auditors, Ernst & Young LLP ...............
- --------------------
(1) Incorporated by reference to the similarly described exhibit in
the Company's Registration statement on Form S-1 (File No.
33-98926), as amended.
(2) Incorporated by reference to the similarly described exhibit in
the Company's Form 8-K Current Report dated June 7, 1996, and
filed June 21, 1996 (as amended August 31, 1996).
26
<PAGE>
(b) Reports on Form 8-K
A report on Form 8-K dated June 7, 1996, was filed on June 21,
1996. An amended report on Form 8-K dated June 7, 1996, was filed
on August 13, 1996.
(c) Exhibits
See Item 14(a) above.
(d) Financial Statement Schedule
See Item 14(a) above.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized on March
26, 1996.
MOLECULAR DEVICES CORPORATION
By: James P. Iuliano
----------------------------------
President and Chief Executive Officer
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
James P. Iuliano President, Chief Executive Officer and March 27, 1997
- -------------------------------------------- Director (Principal Executive Officer)
James P. Iuliano
Andrew H. Galligan Vice President, Finance and Chief March 27, 1997
- -------------------------------------------- Financial Officer (Principal
Andrew H. Galligan Financial and Accounting Officer)
Moshe H. Alafi March 27, 1997
- --------------------------------------------
Moshe H. Alafi Director
David L. Anderson March 27, 1997
- --------------------------------------------
David L. Anderson Director
A. Blaine Bowman March 27, 1997
- --------------------------------------------
A. Blaine Bowman Director
Paul Goddard, Ph.D. March 27, 1997
- --------------------------------------------
Paul Goddard, Ph.D. Director
Andre F. Marion March 27, 1997
- --------------------------------------------
Andre F. Marion Director
Harden M. McConnell, Ph.D. March 27, 1997
- --------------------------------------------
Harden M. McConnell, Ph.D. Director
J. Allan Waitz, Ph.D. March 27, 1997
- --------------------------------------------
J. Allan Waitz, Ph.D. Director
</TABLE>
28
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Molecular Devices Corporation
We have audited the accompanying consolidated balance sheets of
Molecular Devices Corporation as of December 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. Our audit also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Molecular Devices Corporation at December 31, 1995 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
January 14, 1997
F-1
<PAGE>
<TABLE>
MOLECULAR DEVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ----------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 23,727 $ 20,379
Accounts receivable including contract
receivables, net of allowance for doubtful
accounts of $196 and $168 at
December 31, 1996 and 1995, respectively 5,396 3,987
Inventories 2,470 1,393
Deferred tax asset 3,216 1,161
Other current assets 142 141
----------- -----------
Total current assets 34,951 27,061
Equipment and leasehold improvements, net 1,632 1,588
Other assets 250 151
----------- -----------
$ 36,833 $ 28,800
=========== ===========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 1,933 $ 932
Accrued compensation 1,027 876
Other accrued liabilities 2,500 1,915
Deferred revenue 596 476
Current obligations under credit arrangements -- 76
Current obligations under promissory notes 1,500 --
----------- -----------
Total current liabilities 7,556 4,275
Commitments
Stockholders' equity:
Preferred stock, no par value, issuable in series;
3,000,000 shares authorized, no shares issued
and outstanding at December 31, 1996 and 1995,
respectively -- --
Common stock, $.001 par value; 30,000,000
shares authorized; 8,988,094 and
8,687,791 shares issued and outstanding,
respectively, at December 31, 1996 and 1995 9 8
Additional paid-in capital 37,462 35,159
Accumulated deficit (7,848) (10,100)
Deferred compensation (401) (537)
Accumulated translation adjustment 55 (5)
----------- -----------
Total stockholders' equity 29,277 24,525
----------- -----------
$ 36,833 $ 28,800
=========== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-2
<PAGE>
MOLECULAR DEVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Revenues:
Product revenues $ 30,596 $ 23,116 $ 18,516
Contract revenues 330 2,499 3,944
-------- -------- --------
Total revenues 30,926 25,615 22,460
-------- -------- --------
Cost of revenues:
Cost of product revenues 11,581 8,482 6,939
Cost of contract revenues 160 1,934 3,260
-------- -------- --------
Total cost of revenues 11,741 10,416 10,199
-------- -------- --------
Gross margin 19,185 15,199 12,261
-------- -------- --------
Operating expenses:
Company-funded research and development 4,581 3,639 2,676
Charge for acquired in-process research
and development 4,637 -- --
Selling, general and administrative 9,920 8,549 7,822
-------- -------- --------
Total operating expenses 19,138 12,188 10,498
-------- -------- --------
Income from operations 47 3,011 1,763
Interest income 1,071 188 57
Interest expense (6) (221) (256)
Other expense, net 14 -- (2)
-------- -------- --------
Income before income taxes 1,126 2,978 1,562
Income tax benefit (provision) 1,126 1,081 (43)
-------- -------- --------
Net income $ 2,252 $ 4,059 $ 1,519
======== ======== ========
Net income per share (fully diluted for 1995) $ 0.24 $ 0.52 $ 0.20
======== ======== ========
Shares used in computing net income per share 9,524 7,851 7,586
======== ======== ========
See accompanying notes.
F-3
<PAGE>
<TABLE>
MOLECULAR DEVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
<CAPTION>
Additional Accumulated Total
Preferred Common Paid-in Accumulated Deferred Translation Stockholders'
Stock Stock Capital Deficit Compensation Adjustment Equity
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 17,672 $ 250 $ -- $(15,678) $ -- $ (11) $ 2,233
Issuance of 8,472 shares of common
stock for options exercised -- 13 -- -- -- -- 13
Currenency translations adjustment -- -- -- -- -- (8) (8)
Net income -- -- -- 1,519 -- -- 1,519
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1994 17,672 263 -- (14,159) -- (19) 3,757
Issuance of 63,459 shares of
common stock for options
exercised -- 114 -- -- -- -- 114
Deferred compensation -- 578 -- -- (578) -- --
Establishment of $.001 per
share par value -- (954) 954 -- -- -- --
Conversion of 2,243,378 shares of
preferred stock (17,672) 5 17,667 -- -- -- --
Issuance of 1,700,000 shares of
common stock, net of issuance
costs -- 2 16,538 -- -- -- 16,540
Amortization of deferred
compensation -- -- -- -- 41 -- 41
Currency translation adjustment -- -- -- -- -- 14 14
Net income -- -- -- 4,059 -- -- 4,059
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1995 -- 8 35,159 (10,100) (537) (5) 24,525
Issuance of 112,864 shares of
common stock for options
exercised -- -- 273 -- -- -- 273
Issuance of 41,097 shares of
common stock under employee
stock purchase plan -- -- 337 -- -- -- 337
Issuance of 146,342 shares of
common stock in connection
with acquisition -- 1 1,482 -- -- -- 1,483
Tax benefits from employee stock
transactions -- -- 211 -- -- -- 211
Amortization of deferred
compensation -- -- -- -- 136 -- 136
Currency translation adjustment -- -- -- -- -- 60 60
Net income -- -- -- 2,252 -- -- 2,252
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 $ -- $ 9 $ 37,462 $ (7,848) $ (401) $ 55 $ 29,277
======== ======== ======== ======== ======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
MOLECULAR DEVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,252 $ 4,059 $ 1,519
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 636 671 588
Loss on disposal of fixed assets 40 26 --
Charge for acquired in-process research
and development 4,425 -- --
Amortization of deferred compensation 136 41 --
(Increase) decrease in assets:
Accounts receivable (1,160) (372) (1,463)
Inventories (817) 37 (220)
Deferred tax asset (2,055) (1,161) --
Other current assets (1) (25) (60)
Increase (decrease) in liabilities:
Accounts payable 916 (87) 386
Accrued compensation 151 178 (6)
Other accrued liabilities (31) 882 (259)
Deferred revenue 120 203 273
-------- -------- --------
Net cash provided by operating activities 4,612 4,452 758
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (711) (495) (985)
Acquisition of NovelTech Systems, Inc.
net of cash on hand (1,198) -- --
Other assets 51 (67) 7
-------- -------- --------
Net cash used in investing activities (1,858) (562) (978)
-------- -------- --------
Cash flows from financing activities:
Borrowings under credit arrangements -- -- 209
Repayments on credit arrangements (76) (2,379) (769)
Issuance of common stock, net 610 16,654 13
-------- -------- --------
Net cash provided by (used in)
financing activities 534 14,275 (547)
-------- -------- --------
Effect of exchange rate changes on cash 60 13 (8)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 3,348 18,178 (775)
Cash and cash equivalents at beginning of year 20,379 2,201 2,976
-------- -------- --------
Cash and cash equivalents at end of year $ 23,727 $ 20,379 $ 2,201
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 6 $ 218 $ 249
======== ======== ========
Income taxes $ 360 $ 40 $ 12
======== ======== ========
Supplemental schedule of noncash
investing and financing activities:
Equipment and leasehold improvements financed
under secured credit agreements $ -- $ 215 $ 390
======== ======== ========
Disposals of fully depreciated equipment
and leasehold improvements $ 465 $ 383 $ 736
======== ======== ========
Conversion of 2,243,378 shares of
preferred stock $ -- $ 17,672 $ --
======== ======== ========
Issuance of 146,342 shares of common stock
in connection with acquisition $ 1,483 $ -- $ --
======== ======== ========
Issuance of promissory notes in connection
with acquisition $ 1,500 $ -- $ --
======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-5
<PAGE>
MOLECULAR DEVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
Molecular Devices Corporation (the "Company") was reincorporated in
Delaware in December 1995. It was founded as a California Corporation in 1983
and is principally involved in the design, development, manufacture, sale and
service of bioanalytical measurement systems for life sciences applications. The
principal markets for the Company's products include pharmaceutical,
biotechnology and industrial companies, as well as universities, government
research laboratories and other institutions.
The consolidated financial statements include the accounts of the Company
and its wholly-owned foreign subsidiaries in Germany and the United Kingdom. All
significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company invests its excess cash primarily in demand deposits with
United States banks and money market accounts and short-term securities. These
securities, consisting of commercial paper and U.S. government treasury bills,
are carried at market value (which approximates cost), typically mature or are
redeemable within 90 days, and bear minimal risk. The Company has not
experienced any significant losses on the investments.
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents.
The Company's investments at December 31, 1996 are comprised of
short-term corporate and government and nongovernment debt instruments that are
classified as cash equivalents. Due to the highly liquid nature of the Company's
investments, the adjusted cost basis of the investments approximates fair value
at December 31, 1996, and therefore unrealized gains or losses at this date are
immaterial.
Concentration of Credit Risk
The Company sells its products primarily to corporations, academic
institutions, government entities and distributors within the life sciences
research market. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and such losses have been within
management's expectations.
Inventories
Inventories are stated on a first-in, first-out basis at the lower of
cost or market. Demonstration equipment, included in inventories, is amortized
over two years.
Equipment and Leasehold Improvements
Equipment is recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets (ranging from three to five
years). Leasehold improvements are amortized over the remaining term of the
lease.
F-6
<PAGE>
Note 1. Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation
The Company translates the assets and liabilities of its foreign
subsidiaries into dollars at the rates of exchange in effect at the end of the
period and translates revenues and expenses using rates in effect during the
period. Gains and losses from these translations are accumulated as a separate
component of stockholders' equity. Gains and losses resulting from foreign
currency transactions are immaterial and are included in the statements of
income.
Revenue Recognition and Warranty
The Company recognizes product revenue at the time of product shipment
directly either to a customer or to a distributor and provides for estimated
warranty expense at the time of sale. There are no significant customer
acceptance requirements or post shipment obligations on the part of the Company.
Service contract revenue is deferred at the time of sale and recognized ratably
over the period of performance.
Contract revenue consists of revenue from collaboration agreements,
substantially all of which have been with the U.S. government. The Company
recognizes revenues as costs are incurred for cost reimbursement contracts. The
costs incurred under these contracts are included in cost of contract revenues.
Advertising Costs
The Company expenses the cost of advertising as incurred. The Company
incurred advertising costs of approximately $680,000, $611,000 and $443,000 for
1996, 1995, and 1994, respectively.
Per Share Data
Except as noted below, net income per share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon conversion of the convertible preferred
stock (using the if-converted method) and shares issuable upon the exercise of
stock options (using the treasury stock method) when their effect is dilutive.
In addition, pursuant to Securities and Exchange Commission Staff Accounting
Bulletins and Staff policy, common and common equivalent shares issued by the
Company during the twelve-month period prior to the Company's initial public
offering have been included in the calculation of common and common equivalent
shares through September 30, 1995 using the treasury stock method and the public
offering price as if they were outstanding for all periods prior to the initial
public offering.
Stock Based Compensation
Effective January 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." As permitted by SFAS No. 123, the Company applies APB
Opinion 25 and related Interpretations in accounting for its Stock Option Plans
and, accordingly, recognizes no compensation expense for stock option grants
with an exercise price equal to the fair market value of the shares at the date
of grant. Note 5 to the Consolidated Financial Statements contains a summary of
the pro forma effects to reported net income and earnings per share for 1996 and
1995 if the Company had elected to recognize compensation cost based on the fair
value of the options granted as prescribed by SFAS No. 123.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform with the 1996 presentation.
F-7
<PAGE>
Note 2. Balance Sheet Amounts
December 31,
---------------------
1996 1995
---- ----
(In thousands)
Inventories:
Raw materials $ 895 $ 558
Work-in process 488 368
Finished goods and demonstration equipment 1,087 467
------ ------
$2,470 $1,393
====== ======
Equipment and leasehold improvements:
Machinery and equipment $4,343 $3,965
Machinery and equipment under capital lease -- 253
Furniture and fixtures 685 628
Leasehold improvements 488 452
------ ------
5,516 5,298
Less accumulated depreciation and amortization 3,884 3,710
------ ------
Net equipment and leasehold improvements $1,632 $1,588
====== ======
Other accrued liabilities:
Accrued income tax $ 440 $ 42
Warranty 278 302
Customer deposits 379 8
Sales tax payable 307 391
Initial public offering costs -- 300
Other 1,096 872
------ ------
$2,500 $1,915
====== ======
Note 3. Commitments
The Company occupies a facility under an operating lease which commenced
on September 1, 1994 and expires on August 31, 2001. Future minimum lease
payments under the operating lease at December 31, 1996 are $541,000 for each of
the next four years and $360,000 for the first eight months of 2001. Rent
expense under operating leases was approximately $541,000, $541,000 and $612,000
for 1996, 1995 and 1994, respectively (net of sublease income of approximately
$41,000 in 1994).
The company has contractual commitments for the purchase of certain
resale products with two different vendors. Minimum purchase commitments, at
current prices, are approximately $750,000 and $695,000 through September of
1997 and April of 1998, respectively. These purchase commitments are not
expected to result in losses.
Note 4. Acquisition of NovelTech Systems, Inc.
On June 7, 1996, the Company acquired all of the outstanding stock of
NovelTech Systems, Inc. ("NovelTech") for a cash payment at closing of
$1,500,000, issuance of two promissory notes valued at $750,000 each and
issuance of 146,342 shares of the Company's common stock valued at $1,482,444 as
of the closing date. The promissory notes were due and payable on the later of
January 2, 1997, or upon completion of "Technology Transfer." In the event that
payment was not made on the defined payment date, interest would commence to
accrue from the payment date on the unpaid principal balance at an annual rate
of 2% above prime rate charged by the United States major commercial banks in
effect at that time. The notes were repaid in full on January 2, 1997. The
acquisition was accounted for as a
F-8
<PAGE>
purchase and the total purchase price of $4,692,391, including $209,947 of
acquisition related costs, was allocated based on an independent appraisal as
follows:
Excess of liabilities over tangible assets $ (94,389)
Acquired developed technology 150,000
Acquired in-process technology and acquisition related costs 4,636,780
-----------
Total purchase price $ 4,692,391
===========
The purchase price allocation has resulted in a $4,636,780 charge to
acquired in-process technology and acquisition related costs in the second
quarter of 1996. This charge is not deductible for federal or state tax
purposes. The acquired in-process technology represents the appraised value of
technology in the development stage that had not yet reached technological
feasibility and does not have alternative future uses. In reaching this
determination, the Company considered, among other factors, the stage of
development of each product, the time and resources needed to complete each
product, and expected income and associated risks. The results of NovelTech are
consolidated from June 8, 1996.
Pro forma consolidated results for the Company as if the acquisition had
been consummated January 1, 1996, are as follows (in thousands except per share
amounts):
Year ended
December 31, 1996
-----------------
Revenue $ 31,647
Net income 6,741
Net income per share .70
The pro forma information does not purport to be indicative of the
results that actually would have occurred had the acquisition been consummated
January 1, 1996, or of results which may occur in the future. Nonrecurring
charges, such as the charge for acquired in-process technology and acquisition
related costs resulting from the acquisition, are not reflected in the pro forma
financial summary.
Note 5. Stockholders' Equity
Capital Stock
In December 1995, the Company completed the initial public offering of
its common stock. The Company issued 1,700,000 shares for net proceeds of
$16,540,000. Concurrent with the closing of the initial public offering,
previously outstanding shares of Series A, B, C, D and E preferred stock were
converted into shares of common stock at a rate of one-for-two. Additionally,
the previously outstanding shares of common stock were reverse split 2-for-3.
All the share and per share data in the accompanying financial statements has
been adjusted retroactively to give effect to the reverse stock split.
Concurrent with the reincorporation of the Company in Delaware, a par
value of $.001 per share was established by the Board of Directors and the
number of authorized shares of common stock was increased to 30,000,000 from
8,000,000.
Stock Options
Under the Company's 1995 Stock Option Plan ("1995 Plan"), a total of
750,000 shares of the Company's common stock have been reserved for issuance as
either incentive or nonqualified stock options to officers, directors, employees
and consultants of the Company. Option grants expire in ten years and generally
become exercisable in increments over a period of five years from the date of
grant. Options may be granted with different vesting terms from time to time.
F-9
<PAGE>
Note 5. Stockholders' Equity (continued)
Under the Company's 1988 Stock Option Plan ("1988 Plan"), the Company was
authorized to grant stock options for up to 1,000,000 shares with terms similar
to those of the 1995 Plan. The 1988 Plan was terminated subsequent to the
establishment of the 1995 Plan. Options that are not exercised which were
outstanding under the 1988 Plan are reserved for future issuance under the 1995
Plan.
In September 1995, the Company established the 1995 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). Under the Directors' Plan,
the Company is authorized to grant nonqualified stock options to purchase up to
247,500 shares of common stock at the fair market value of the common shares at
the date of grant. Options granted under the Directors' Plan vest and become
exercisable in three equal annual installments commencing one year from the date
of the grant.
Effective January 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." As permitted by SFAS No. 123, the Company applies APB
Opinion 25 and related Interpretations in accounting for its stock option plans
and, accordingly, recognizes no compensation expense for stock option grants
with an exercise price equal to the fair market value of the shares at the date
of grant. If the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS No. 123,
net income and earnings per share would have been reduced to the pro forma
amounts indicated in the table below (in thousands except for per share amount):
1996 1995
---- ----
Net income as reported $ 2,252 $ 4,059
Net income pro forma 1,901 4,010
Earnings per share as reported 0.24 0.52
Earnings per share pro forma 0.20 0.52
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 0%
Expected stock price volatility 61.7%
Risk-free interest rate 5.38% - 7.56%
Expected life of options 5 years
<TABLE>
Stock activity under the 1988 and 1995 Stock Option Plans and the
Directors' Plan was as follows:
<CAPTION>
Shares Weighted
Available for Options Average
Future Grant Outstanding Exercise Price
-------------------- ----------------- -------------------
<S> <C> <C> <C>
Balance, December 31, 1993 155,524 821,658 $3.04
Granted (315,970) 315,970 3.31
Exercised -- (8,472) 1.56
Canceled 395,422 (395,422) 4.71
-------------------- -----------------
Balance, December 31, 1994 234,976 733,734 2.27
Authorized 997,500 -- --
Granted (418,554) 418,554 5.00
Exercised -- (63,459) 1.81
Canceled 77,490 (77,490) 2.75
-------------------- -----------------
Balance December 31, 1995 891,412 1,011,339 3.39
Granted (74,000) 74,000 10.62
Exercised -- (112,864) 2.41
Canceled 40,647 (40,647) 3.66
-------------------- -----------------
Balance December 31, 1996 858,059 931,828 4.14
==================== =================
</TABLE>
F-10
<PAGE>
Note 5. Stockholders' Equity (continued)
<TABLE>
The following table summarizes information concerning currently
outstanding and exercisable options:
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- ------------------- -------------- -------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
$0.75 - 1.73 257,851 5.1 $1.73 225,998 $1.72
$3.00 - 5.25 599,977 8.35 $4.28 184,827 3.85
$8.00 - 12.00 42,500 9.59 $8.09 -- --
$13.50 - 14.38 31,500 9.70 $14.03 -- --
-------------- ---------------
931,828 410,825
============== ===============
</TABLE>
In September 1995, nonqualified options for 56,223 shares were granted at
an exercise price of $5.25 outside of the plans. These options will become
exercisable in increments over a period of five years from the date of grant.
These options are not included in the tables above.
In December 1994, the Company's Board of Directors approved a plan to
reprice options on 271,480 shares granted during the period from December 1993
through September 1994. Under the plan, employees had the option to amend the
terms of their outstanding options to (i) reset the vesting schedule and (ii)
lower the original exercise price of $6.00 per share to $3.00 per share. The
restated option exercise price represents the estimated fair value of the common
shares at the date of the approved plan change. The repriced options are
included as both grants and cancellations during 1994 in the above stock
activity table.
Deferred Compensation
For options granted in September 1995, the Company recognized $578,000 as
deferred compensation for the excess of the deemed value for accounting purposes
of the common stock issuable on exercise of such options over the aggregate
exercise price of such options. The deferred compensation expense is being
amortized ratably over the vesting period of the options.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (the "Purchase Plan") 200,000
shares of common stock have been authorized for issuance. Shares may be
purchased under the Purchase Plan at 85% of the lesser of the fair market value
of the common stock on the grant or purchase date. As of December 31, 1996,
158,903 shares remained available for purchase.
Note 6. Research and Development Contracts
Through December 31, 1996, the Company performed research under cost
reimbursement contracts with the U.S. government. In 1994, contract revenue
included approximately $286,000 related to the reimbursement of cancellation
costs recognized in 1993 for a fixed price U.S. government subcontract.
The Company's most significant government contract was a $12.4 million,
five-year, cost-reimbursement type contract with the Advanced Research Project
Administration (ARPA) which was substantially completed in late 1995. Under this
contract, revenues of approximately $2,259,000 and $3,375,000 were recognized in
1995 and 1994, respectively. All significant research activity was completed in
December 1995 and remaining funding approved and unbilled as of December 31,
1996 was $120,000.
F-11
<PAGE>
Note 7. Income Taxes
The components of the (provisions) benefits for income taxes consist
of the following:
Years ended December 31,
-----------------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
Current:
Federal $ (524) $ (33) $ (7)
State (340) (9) (3)
Foreign (65) (38) (33)
------- ------- -------
(929) (80) (43)
Deferred:
Federal 1,645 1,018 --
State 410 143 --
Foreign -- -- --
------- ------- -------
2,055 1,161 --
------- ------- -------
$ 1,126 $ 1,081 $ (43)
======= ======= =======
The (provisions) benefits for income taxes differ from the amounts
computed by applying the statutory federal income tax rate to income before
income taxes. The source and tax effects of the differences are as follows:
Years ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
(In thousands)
Income before provision for income taxes $ 1,126 $ 2,978 $ 1,562
------- ------- -------
Income tax at statutory federal rate
(34% for 1995, 35% for 1996) $ (394) $(1,013) $ (531)
State income tax, net of federal benefit 46 (9) (2)
Net operating loss carry forwards 1,748 980 523
Foreign income taxes (65) (38) (33)
Change in valuation allowance 1,289 1,161 --
Foreign sales corp 136 -- --
Charge for acquired in-process research
and development (1,623) -- --
Other (11) -- --
------- ------- -------
$ 1,126 $ 1,081 $ (43)
======= ======= =======
Foreign pretax income was $72,000 and $197,000 in 1996 and 1994,
respectively, while foreign pretax loss was $158,000 in 1995.
As of December 31, 1996, the company had federal and state net operating
loss carryforwards of approximately $3,400,000 and $940,000 respectively. The
Company also had federal research and development tax credit carryforwards of
approximately $672,000. The federal net operating loss and credit carryforwards
will expire at various dates beginning in 2004 through 2007, if not utilized.
The California net operating losses will expire at various dates beginning in
1997 through 1998, if not utilized.
F-12
<PAGE>
Note 7. Income Taxes (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting and the amount used for income tax purposes. For the year ended
December 31, 1996, management has concluded that no valuation allowance is
required based on its assessment that current levels of taxable income will be
sufficient to realize the tax benefit. Previously, based upon the Company's
earnings history, a valuation allowance for deferred tax assets of $3,600,000
and $5,790,000 at December 31, 1995, and December 31, 1994, respectively, was
required to reduce the Company's net deferred assets to the amount management
determined more likely than not to be realized. Significant components of the
Company's deferred tax assets and liabilities for federal and state income taxes
are as follows:
December 31,
-----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Deferred tax assets:
Net operating loss carryforwards $ 1,247 $ 2,979 $ 3,773
Research and development credit carryforwards 836 836 752
Non-deductible reserves 370 -- --
Warranty and accrued expenses 450 -- --
Other 313 946 1,265
------- ------- -------
Total deferred tax assets 3,216 4,761 5,790
Valuation allowance -- (3,600) (5,790)
------- ------- -------
Net deferred tax asset $ 3,216 $ 1,161 $ --
======= ======= =======
The net valuation allowance decreased by $3,600,000, $2,190,000 and
$571,000 for the years ended December 31, 1996, 1995, and 1994 respectively.
Note 8. Industry Segment, Geographic and Customer Information
The Company operates in a single industry segment; the design,
development, manufacture, sale and service of bioanalytical measurement systems
for life sciences applications.
One of the Company's research contract customers accounted for 10% and
16% of total revenue in 1995 and 1994, respectively.
Foreign operations of European subsidiaries consist of sales, service and
distribution. Intercompany transfers between geographic areas are accounted for
at prices that approximate arm's-length transactions. In addition, U.S. export
sales approximated $7,828,000, $5,043,000 and $4,840,000 in 1996, 1995, and
1994, respectively. This included revenue from Europe of approximately
$3,394,000, $2,239,000 and $2,827,000 in 1996, 1995 and 1994, respectively. In
1996 U.S. export sales included revenue from Asia of approximately $3,470,000.
F-13
<PAGE>
Note 8. Industry Segment, Geographic and Customer Information (Continued)
<TABLE>
Summarized data for the Company's domestic and international operations
are as follows:
<CAPTION>
Adjustments
United and
States Europe Eliminations Total
---------------- -------------- ------------------ --------------
(In thousands)
<S> <C> <C> <C> <C>
Year Ended
December 31, 1996
Revenues $29,102 $4,494 $ (2,670) $30,926
Income from operations (38) 56 29 47
Identifiable Assets 37,291 2,359 (2,817) 36,833
Year Ended
December 31, 1995
Revenues $23,810 $3,590 $ (1,785) $25,615
Income from operations 3,086 (175) 100 3,011
Identifiable assets 29,231 1,787 (2,218) 28,800
Year Ended
December 31, 1994
Revenues $21,757 $2,111 $ (1,408) $22,460
Income from operations 1,651 219 (107) 1,763
Identifiable assets 10,282 2,008 (3,270) 9,020
</TABLE>
Note 9. Comparative Quarterly Financial Data (unaudited)
<TABLE>
Summarized quarterly financial data is as follows:
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
(In thousands, except per share amounts)
Fiscal 1996
<S> <C> <C> <C> <C>
Net revenues $6,102 $ 7,647 $8,217 $8,960
Gross profits 3,860 4,788 5,042 5,495
Net income (loss) 1,093 (3,143) 1,758 2,544
Net income per share $ .12 $ (.36) $ .18 $ .26
Fiscal 1995
Net revenues $6,010 $ 6,537 $6,366 $6,702
Gross profits 3,383 3,926 3,747 4,143
Net income 687 1,080 882 1,410
Net income per share $ .09 $ .14 $ .12 $ .17
</TABLE>
F-14
<PAGE>
<TABLE>
SCHEDULE II
- ----------------------------------------------------------------------------------------------------------------------
MOLECULAR DEVICES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<CAPTION>
Balance at Balance at
Description Beginning of Charged to End
Period Costs Deductions of Period
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance for the year ended December 31, 1994:
Allowance for doubtful accounts receivable $ 376 $ -- $ (82) $ 294
Balance for the year ended December 31, 1995:
Allowance for doubtful accounts receivable 294 -- (126) 168
Balance for the year ended December 31, 1996:
Allowance for doubtful accounts receivable 168 35 (7) 196
</TABLE>
F-15
EXHIBIT 11.1
MOLECULAR DEVICES CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
PRIMARY Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Weighted average common shares outstanding for
the period 8,828 7,031 2,433
Common equivalent shares pursuant to Staff
Accounting Bulletin Nos. 64 & 83 -- 207 276
Common equivalent shares assuming conversion of
preferred stock -- -- 4,487
Common equivalent shares assuming exercise of
stock options under the treasury stock method 696 299 390
------ ------ ------
Shares used in per share calculation 9,524 7,537 7,586
====== ====== ======
Net income $2,252 $4,059 $1,519
====== ====== ======
Net income per share $ 0.24 $ 0.54 $ 0.20
====== ====== ======
FULLY DILUTED Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Weighted average common shares outstanding for
the period 8,828 7,031 2,433
Common equivalent shares pursuant to Staff
Accounting Bulletin Nos. 64 & 83 -- 207 276
Common equivalent shares assuming conversion of
preferred stock -- -- 4,487
Common equivalent shares assuming exercise of
stock options under the treasury stock method 777 613 390
------ ------ ------
Shares used in per share calculation 9,605 7,851 7,586
====== ====== ======
Net income $2,252 $4,059 $1,519
====== ====== ======
Net income per share $ 0.23 $ 0.52 $ 0.20
====== ====== ======
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements pertaining to the 1988 Stock Option Plan, the 1995 Stock Option Plan,
the 1995 Non-Employee Directors' Stock Option Plan, the 1995 Employee Stock
Purchase Plan, and options to purchase 56,223 shares of common stock granted on
September 13, 1995 outside of the option plans of Molecular Devices Corporation
of our report dated January 14, 1997, with respect to the consolidated financial
statements and schedule of Molecular Devices Corporation included in the Annual
Report (Form 10-K) for the year ended December 31, 1996.
Palo Alto, CA
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 23,727
<SECURITIES> 0
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<ALLOWANCES> 196
<INVENTORY> 2,470
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0
0
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<TOTAL-COSTS> 11,741
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<INCOME-PRETAX> 1,126
<INCOME-TAX> 1,126
<INCOME-CONTINUING> 2,252
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<EPS-DILUTED> 0.23
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