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, 1997
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:
Name of Exchange on which
Title of Each Class Registered
- ------------------------------------ ------------------------------
Common Stock, $.001 Par Value NASDAQ National Market
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 15, 1998, based upon the last sale price reported for
such date on the NASDAQ National Market, was $177,955,444.
The number of outstanding shares of the Registrant's Common Stock as of March
15, 1998 was 9,366,076.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the Proxy Statement for Registrant's 1998 Annual Meeting
of Stockholders (the "Proxy Statement") are incorporated by reference into Part
III of this Form 10-K Report.
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
____________________________________________________________________________________________________________________
Molecular Devices Corporation
<S> <C> <C> <C>
PART I Item 1. Business.......................................................... 3
The Company..................................... 3
Industry Background............................. 3
The Molecular Devices Solution.................. 4
Business Strategy .............................. 5
Core Technologies ............................. 5
Products........................................ 7
Business Risks.................................. 12
Research and Development........................ 13
Marketing and Customers......................... 14
Manufacturing................................... 15
Patents and Proprietary Technologies............ 15
Competition..................................... 16
Government Regulations.......................... 16
Human Resources................................. 18
Item 2. Properties........................................................ 18
Item 3. Legal Proceedings................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............... 18
____________________________________________________________________________________________________________________
PART II Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters....................................... 19
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
____________________________________________________________________________________________________________________
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
____________________________________________________________________________________________________________________
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
</TABLE>
2
<PAGE>
PART 1
________________________________________________________________________________
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 software and 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, Cell Analysis Systems and Threshold
System.* 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 validation
microplates for certain of the MAXline Microplate Readers, disposable capsules
for certain of the Cell Analysis Systems and assay kits for the Threshold
System, as well as software upgrades, and service on a contract basis. The
Company's systems have applications in many aspects of life science including
the therapeutic development process, from drug discovery and clinical research
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.
- ----------------
*SPECTRAmax(TM), Vmas(R), SOFTmax(R), PathCheck(TM), 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.
3
<PAGE>
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, 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
software and consumables, designed to accelerate and improve the
cost-effectiveness of the drug discovery and development process. The Company
has integrated its expertise in engineering, biology and chemistry with 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. The Company has also incorporated research
and development expertise to couple silicon semiconductor technology with
biological systems to measure subtle molecular and cellular events. 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,
Cell Analysis Systems and Threshold System have applications in many aspects of
life science including 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's SPECTRAmax PLUS microplate reader is believed to be the
industry's only spectrophotometer that offers the high throughput of a
microplate reader. The Fluorometric 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. 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 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. 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.
4
<PAGE>
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:
Enhance Core Technology Base. The Company has developed a number of
proprietary core technologies in vertical beam photometry, PathCheck detection,
object-oriented software, biosensors, chemical complexes, microphysiometry, and
limited depth of field fluorometry 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 10,000 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. In a further expansion of applications, the Company has shown that
G-protein technology may be successfully used to render representatives of all
classes of G-protein coupled receptors amenable to screening on FLIPR. 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, PathCheck detection, object-oriented software,
biosensors, chemical complexes, microphysiometry, and limited depth-of-field
fluorometry.
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.
PathCheck detection. PathCheck detection, for which the Company was
awarded a U.S. patent in 1997, enables the Company's SPECTRAmax PLUS microplate
reader to employ the efficient, high-throughput vertical light path used
5
<PAGE>
by microplate readers for biological absorbance measurements, but still achieve
the performance associated with the fixed horizontal light path of
spectrophotometers for life science applications.
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.
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 instrumentation with
living cells and tissues to develop "microphysiometry," the monitoring of cell
reactions to different chemicals in real-time without destruction of the cells.
Microphysiometry, using Cytosensor, was developed by scientists at Molecular
Devices, 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.
Limited depth-of-field Fluorometry. The Company has a 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.
6
<PAGE>
<TABLE>
Products
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, Cell Analysis products and Threshold represented
55%, 33%, and 12%, respectively, of the Company's product revenues for the year
ended December 31, 1997.
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Year of Initial Worldwide List
Products Introduction Prices Primary Applications
- -----------------------------------------------------------------------------------------------------------------
Microplate Readers
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
SPECTRAmax PLUS 1997 $22,500-$26,100 of DNA, proteins and RNA.
Software:
SOFTmax 1987 $1,295-$1,600
SOFTmax PRO 1994 $1,975-$2,500
Consumables:
SPECTRAtest 1997 $2,495
- -----------------------------------------------------------------------------------------------------------------
Cell Analysis Systems
- -----------------------------------------------------------------------------------------------------------------
Fluorometric Imaging Plate Reader
FLIPR 1996 $250,000-$275,000 High throughput, high
sensitivity optical screening
instrument.
Cytosensor
Instrument Platform:
Cytosensor 1992 $59,500-$120,000 Ultrasensitive single-assay
Cytosampler 1995 $19,500-$24,500 system capable of detecting
Cystosoft 1992 * receptor activation and
signal transduction events in
real-time.
Consumables:
Capsule Kit 1992 $370-$465
- -----------------------------------------------------------------------------------------------------------------
High Sensitivity Assay System
- -----------------------------------------------------------------------------------------------------------------
Threshold
Instrument Platform:
Threshold 1989 $49,500-$55,000 High sensitivity detection of
trace contaminants in
Software: biopharmaceuticals and
THS Software 1989 * analysis of biomolecules such
Consumables: as DNA, proteins and mRNA.
Total DNA Assay Kit 1989 $750-$1,295
Immuno-Ligand Assay Kit 1990 $480-$875
- -----------------------------------------------------------------------------------------------------------------
<FN>
* Bundled with instrument platforms
</FN>
</TABLE>
7
<PAGE>
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 next 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 newest generation of microplate readers, the SPECTRAmax
PLUS, is the industry's only spectrophotometer to offer the high throughput
traditionally associated with microplate readers. This competitive advantage
stems from the PathCheck detection technology which enables the SPECTRAmax PLUS
to employ the efficient, high-throughput vertical light path used by microplate
readers for biological absorbance measurements, but still achieve the
performance associated with the fixed horizontal light path of
spectrophotometers for life sciences applications.
The Company's Vmax, Emax and THERMOmax microplate readers have in certain
instances been used in clinical or diagnostic applications. Under applicable
United States Food and Drug Administration ("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 "premarket notification
("510(k)") or a premarket approval ("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, however, that 510(k) clearance
for any future product or modification of an existing product will be granted.
Vmax. The Company's first microplate reader, which was 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.
8
<PAGE>
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 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 represented 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.
SPECTRAmax PLUS. The Company's first microplate reader aimed at the
spectrophotometer market. It is the industry's only spectrophotometer to offer
the high throughput traditionally associated with microplate readers, but still
achieve the performance associated with fixed pathlength horizontal beam
spectrophotometers as a result of the patented PathCheck technology developed by
the Company. The SPECTRAmax PLUS is the first microplate reader with the ability
to read wavelengths as short as 190 nanometers and as long as 1,000 nanometers,
the equivalent range to a spectrophotometer.
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
SPECTRAtest is a comprehensive validation package for optical performance
verification of the Company's SPECTRAmax systems.
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 FLIPR and Cytosensor Systems.
9
<PAGE>
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
high throughput rate (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 in-built 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, thus
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 because of its high throughput. Cells can be engineered to broaden
their ability to provide intracellular signaling support to a wider range of
receptors (e.g., by inclusion of proteins such as G alpha 16 or chimeric G
proteins).
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. For example, in the evaluation of pharmacological effects on live
human cells, Cytosensor offers unique enabling capabilities.
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
10
<PAGE>
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. The Cytosensor System provides 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 interest to the pharmaceutical industry. The Cytosensor System
does not require extensive knowledge of the receptor signaling mechanism and,
therefore, may be utilized for orphan receptor screening and identification.
Pharmacological Profiling of Primary Human Cells. Cytosensor offers
unique capabilities for evaluating the effects of pharmacological agents on
primary human cells.
In Vitro 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 great sensitivity.
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 is 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 need 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), can be 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
11
<PAGE>
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.
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.
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 90 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 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 of 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
12
<PAGE>
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 and
1997, 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 Reliance on Sole Source Suppliers. 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.
o Year 2000 Compliance. There can be no assurances that the vendors
of the Company will be in compliance, and the Company has no
control over whether such vendors will be in compliance, with year
2000 requirements. Any failure on the part of the Company's
vendors could materially adversely effect the Company's business,
financial condition and results of operations.
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 in the life sciences instrumentation market which is
highly competitive and expected by the Company to increase (see
"Competition" on page 16); (v) the Company's ability to obtain and
maintain patent and other intellectual property protection for its
products and technology; (vi) compliance with governmental
regulations, including those promulgated by the United Sates Food
and Drug Administration and similar state and foreign agencies;
and (vii) 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.
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
13
<PAGE>
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 $4,721,000, $4,581,000 and $3,639,000 during 1997, 1996 and 1995,
respectively. The Company expects to continue to increase its Company-funded
research and development expenditures, as new products are developed to address
the evolving needs of its customers. 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 10,000 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 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 38%, 40% and 37% of the Company's product revenues in 1997, 1996
and 1995, 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 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.
14
<PAGE>
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 90 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 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
15
<PAGE>
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 55%,
54% and 56% of product revenues in 1997, 1996 and 1995, 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.
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
16
<PAGE>
currently require 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 510(k) or a 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, 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
17
<PAGE>
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, 1997, Molecular Devices employed 146 persons full
time, including 37 in research and development, 43 in manufacturing, 52 in
marketing and sales and 14 in general administration and finance. Of these
employees, 32 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.
18
<PAGE>
PART II
________________________________________________________________________________
Item 5 - Market for 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."
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.
1997 1996
----------------------------- -----------------------------
High Low High Low
---- --- ---- ---
First Quarter 16 3/4 13 3/8 13 1/4 8 5/8
Second Quarter 17 5/8 12 1/2 13 3/4 8 3/8
Third Quarter 21 7/8 16 1/2 11 1/2 7 1/4
Fourth Quarter 23 3/4 14 7/8 16 1/8 11
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 15, 1998, there were approximately 2,130 stockholders of the
Company.
On March 15, 1998, the last sale price reported on the Nasdaq National
Market for the Company's common stock was $19.00 per share.
19
<PAGE>
<TABLE>
Item 6 - Selected Consolidated Financial Data
The following table sets forth selected historical financial
information for the Company certain portions of which are 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,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Consolidated Statements of Income Data: (In thousand, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues
Product Revenues $ 38,245 $ 30,596 $ 23,116 $ 18,516 $ 14,872
Contract Revenues 41 330 2,499 3,944 3,761
-------- -------- -------- -------- --------
Total Revenues 38,286 30,926 25,615 22,460 18,633
-------- -------- -------- -------- --------
Income from operations 7,256 47 3,011 1,763 636
Other income (expense), net 1,220 1,079 (33) (201) (124)
-------- -------- -------- -------- --------
Income before income taxes 8,476 1,126 2,978 1,562 512
Income tax (provision) benefit (3,174) 1,126 1,081 (43) -
-------- -------- -------- -------- --------
Net income $ 5,302 $ 2,252 $ 4,059 $ 1,519 $ 512
======== ======== ======== ======== ========
Basic net income per share $ 0.58 $ 0.26 $ 0.58 $ 0.22 $ 0.07
======== ======== ======== ======== ========
Diluted income per share $ 0.55 $ 0.24 $ 0.53 $ 0.21 $ 0.07
======== ======== ======== ======== ========
Shares used in computing basic net
income per share 9,137 8,828 7,031 6,920 6,909
======== ======== ======== ======== ========
Shares used in computing diluted net
income per share 9,721 9,524 7,644 7,310 7,359
======== ======== ======== ======== ========
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 26,773 $ 23,727 $ 20,379 $ 2,201 $ 2,976
Working capital 35,752 27,395 22,786 3,681 2,990
Total assets 42,791 36,833 28,800 9,020 7,272
Long-term obligations, less current portion - - - 1,582 1,635
Accumulated deficit (2,546) (7,848) (10,100) (14,159) (15,678)
Total stockholders' equity 37,417 29,277 24,525 3,757 2,233
<FN>
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.
</FN>
</TABLE>
20
<PAGE>
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 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. In 1997, the Company launched its next generation
MAXline product, the SPECTRAmax PLUS, which is the Company's first microplate
reader that offers the same precision and accuracy as a spectrophotometer.
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 (Fluorometric Imaging Plate
Reader) system. The FLIPR system joined 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 55%, 54% and 56%
of product revenues in 1997, 1996 and 1995, respectively. The Company believes
that sales of MAXline products will continue to account for a significant
portion of its product revenues. Both the Cell Analysis and Threshold 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.
The Company also develops and markets a broad range of services,
software and consumables including validation microplates for the MAXline
Microplate Readers, disposable capsules for the Cytosensor System, and assay
kits for the Threshold System. Sales of service, software and consumables
accounted for 15%, 17% and 23% of product revenues in 1997, 1996 and 1995,
respectively.
The Company's contract revenues between 1990 and 1996 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
1995, the Company restructured its research and development activities to
increase focus on commercial opportunities. As a result, the development and
engineering groups increased in size, while the research group was reduced,
leading to an overall reduction in research and development spending but to an
increase in spending for Company-funded research and
21
<PAGE>
development. The Company believes that contract research revenues will continue
to be insignificant in future periods, and that product revenues will continue
to 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 38%, 40% and 37% of the Company's product revenues in 1997, 1996
and 1995, respectively.
During 1996 and 1995, the Company recorded income tax benefits (by way
of a reduced valuation allowance) related primarily to the Company's net
operating loss carry forwards expected to be utilized in future years. As of
December 31, 1996, management concluded that no valuation allowance was required
based on its assessment that current levels of taxable income would be
sufficient to realize the tax benefit. During 1997, a tax provision of
approximately $3.2 million was recorded.
Although the Company has been profitable in each of the last five
years, the Company had an accumulated deficit of approximately $2.5 million at
December 31, 1997.
Results of Operations
Years ended December 31, 1997, 1996 and 1995
Product revenues. Product revenues for 1997 increased by 25% to
approximately $38.2 million from approximately $30.6 million in 1996. The
MAXline and Cell Analysis product families showed increased levels of revenue.
MAXline product revenues increased primarily due to greater sales of new
products and increased penetration of MAXline products into international
distribution channels. Cell Analysis product revenues increased primarily due to
greater sales of new products worldwide. Threshold revenues decreased primarily
due to lower shipments to the U.S. Army and decreased shipments of commercial
Threshold products internationally.
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.
Contract revenues. Contract revenues for 1997 decreased by 88% to
approximately $41,000 from approximately $330,000 in 1996. Contract revenues for
1996 decreased by 87% to approximately $330,000 from approximately $2.5 million
in 1995. The reduction in the contract revenue for both periods is due to the
substantial completion of the Company's ARPA contract in late 1995. The Company
believes that contract research revenues will continue to be insignificant in
future periods.
Gross margin on product revenues. In 1997, gross margin on product
revenues increased nominally from 62.1% in 1996 to 62.3% in 1997. This increase
relates primarily to increased sales of new higher margin MAXline products and
improved margins on sales of Cell Analysis products.
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.
22
<PAGE>
Cost of contract revenues. Consistent with the decreased contract
revenues due to the substantial completion of the Company's ARPA contract in
late 1995, cost of contract revenues declined to approximately $160,000 in 1996
(a 92% decrease compared to 1995) and zero in 1997.
Company-funded research and development. Company-funded research and
development expenses for 1997 increased nominally by 3% to approximately $4.7
million from approximately $4.6 million for 1996 and by 26% in 1996 from
approximately $3.6 million in 1995. The increased spending in 1996 was due to
the building of research and development projects focused on commercial products
independent of government-funded research products. The relatively flat spending
in 1997 as compared to 1996 is due to increased spending on headcount as
partially offset by decreased development costs. Company-funded research and
development expenses as a percentage of product revenues were 12.3%, 15.0% and
15.7% for 1997, 1996 and 1995, 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 1997 increased by 20% to approximately $11.9 million
from approximately $9.9 million in 1996 and by 16% in 1996 compared to
approximately $8.5 million in 1995. The increased spending for both periods is
primarily the result of additional spending on marketing, sales and service
related activities (including increased headcount) as the Company continued to
expand worldwide market coverage and introduce new products. Selling, general
and administrative expenses as a percentage of product revenues were 31.1%,
32.4% and 37.0% in 1997, 1996 and 1995, respectively.
Interest income (expense) net. Net interest and other income was $1.2
million and $1.1 million, respectively, in 1997 and 1996 as compared to net
interest and other expense of approximately $33,000 for 1995. 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 and cash generated from operations in 1996 and 1997. In addition,
interest expense decreased in 1996 as the proceeds of the offering were used to
repay certain debt instruments in December 1995.
Provision for taxes. The Company recorded an income tax provision of
approximately $3.2 million in 1997 as compared to income tax benefits of
approximately $1.1 million recorded in 1996 and 1995. The benefits recorded in
1996 and 1995, which had the effect of increasing net income, related primarily
to a reduced valuation allowance on the Company's net deferred tax asset. As of
December 31, 1996, management concluded that no valuation allowance was required
on the net deferred tax asset based on its assessment that current levels of
income would be sufficient to realize the tax benefit.
Liquidity and Capital Resources
Since 1993, the Company has financed its operations primarily from cash
flows provided by operations, which contributed approximately $4.4 million, $4.6
million and $4.5 million in 1997, 1996 and 1995, respectively. Net cash used in
investing activities was approximately $543,000, $1.9 million and $562,000 in
1997, 1996 and 1995, respectively, primarily for capital expenditures, and, in
1996, approximately $1.2 million of cash was used in investing activities
related to the acquisition of NovelTech. Net cash provided by financing
activities was approximately $534,000 and $14.3 million, respectively, for 1996
and 1995, while net cash used in financing activities was approximately $567,000
for 1997. The larger cash provided 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.
23
<PAGE>
The 1997 use of funds reflects repayment of the $1.5 million promissory note
related to the 1996 acquisition of NovelTech as partially offset by proceeds
from stock option exercises.
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. There can
be no assurance that additional funding will 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-17.
Financial Statements:
o Report of Ernst & Young LLP, Independent Auditors
o Consolidated Balance Sheets at December 31, 1997 and 1996
o Consolidated Statements of Income for each of the three years
in the period ended December 31, 1997
o Consolidated Statement of Stockholders' Equity for the three
years in the period ended December 31, 1997
o Consolidated Statements of Cash Flow for each of the three
years in the period ended December 31, 1997
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 and
Financial Disclosure
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 solicitation of
proxies for the Company's Annual Meeting of Stockholders to be held on May 22,
1998 (the "Proxy Statement"). 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
The information required by this item is set forth in the Proxy
Statement under the heading "Certain Relationships and Related Transactions,"
which information is incorporated herein by reference.
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
Number Description of Document
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-Employee
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).................................
26
<PAGE>
10.17* Chief Executive Officer Separation Agreement..........................
10.18* Chief Financial Officer Employment Agreement..........................
21.1(1) Subsidiaries of the Registrant........................................
23.1 Consent of Independent Auditors, Ernst & Young LLP ...................
27 Financial Data Schedule...............................................
- -------------------
(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).
* Management Contract
(b) Reports on Form 8-K
None.
(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, 1998.
MOLECULAR DEVICES CORPORATION
By: Andre F. Marion
-----------------------------------
Andre F. Marion
<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>
Andre F. Marion Interim President, Chief Executive Officer March 26, 1998
- ---------------------------------- and Director (Principal Executive Officer)
Andre F. Marion
Andrew H. Galligan Vice President, Finance and March 26, 1998
- ---------------------------------- Chief Financial Officer (Principal
Andrew H. Galligan Financial and Accounting Officer)
Moshe H. Alafi March 26, 1998
- ----------------------------------
Moshe H. Alafi Director
David L. Anderson March 26, 1998
- ----------------------------------
David L. Anderson Director
A. Blaine Bowman March 26, 1998
- ----------------------------------
A. Blaine Bowman Director
Paul Goddard, Ph.D. March 26, 1998
- ----------------------------------
Paul Goddard, Ph.D. Director
Harden M. McConnell, Ph.D. March 26, 1998
- ----------------------------------
Harden M. McConnell, Ph.D. Director
J. Allan Waitz, Ph.D. March 26, 1998
- ----------------------------------
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, 1997 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, 1997. 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, 1997 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, 1997, 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.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 14, 1998
F-1
<PAGE>
<TABLE>
MOLECULAR DEVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<CAPTION>
December 31,
--------------------------
1997 1996
--------------------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 26,773 $ 23,727
Accounts receivable,
net of allowance for doubtful
accounts of $180 and $196 at
December 31, 1997 and 1996, respectively 8,899 5,396
Inventories 3,465 2,470
Deferred tax asset 1,867 3,216
Other current assets 122 142
-------- --------
Total current assets 41,126 34,951
Equipment and leasehold improvements, net 1,497 1,632
Other assets 168 250
-------- --------
$ 42,791 $ 36,833
======== ========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable 1,316 1,933
Accrued compensation 1,252 1,027
Other accrued liabilities 1,798 2,500
Deferred revenue 1,008 596
Current obligations under promissory notes - 1,500
-------- --------
Total current liabilities 5,374 7,556
Commitments
Stockholders' equity:
Preferred stock, no par value, issuable in series;
3,000,000 shares authorized, no shares issued and
outstanding at December 31, 1997 and 1996,
respectively - -
Common stock, $.001 par value; 30,000,000
shares authorized; 9,331,599 and
8,988,094 shares issued and outstanding,
respectively, at December 31, 1997 and 1996 9 9
Additional paid-in capital 40,302 37,462
Accumulated deficit (2,546) (7,848)
Deferred compensation (148) (401)
Accumulated translation adjustment (200) 55
-------- --------
Total stockholders' equity 37,417 29,277
-------- --------
$ 42,791 $ 36,833
======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-2
<PAGE>
<TABLE>
MOLECULAR DEVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product revenues $ 38,245 $ 30,596 $ 23,116
Contract revenues 41 330 2,499
-------- -------- --------
Total revenues 38,286 30,926 25,615
-------- -------- --------
Cost of revenues:
Cost of product revenues 14,426 11,581 8,482
Cost of contract revenues - 160 1,934
-------- -------- --------
Total cost of revenues 14,426 11,741 10,416
-------- -------- --------
Gross margin 23,860 19,185 15,199
-------- -------- --------
Operating expenses:
Company-funded research and development 4,721 4,581 3,639
Charge for acquired in-process research
and development - 4,637 -
Selling, general and administrative 11,883 9,920 8,549
-------- -------- --------
Total operating expenses 16,604 19,138 12,188
-------- -------- --------
Income from operations 7,256 47 3,011
Interest income 1,240 1,071 188
Interest expense - (6) (221)
Other expense, net (20) 14 -
-------- -------- --------
Income before income taxes 8,476 1,126 2,978
Income tax (provision) benefit (3,174) 1,126 1,081
-------- -------- --------
Net income $ 5,302 $ 2,252 $ 4,059
======== ======== ========
Basic net income per share $ 0.58 $ 0.26 $ 0.58
======== ======== ========
Diluted net income per share $ 0.55 $ 0.24 $ 0.53
======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-3
<PAGE>
MOLECULAR DEVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
<TABLE>
<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, 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
Issuance of 318,370 shares of
common stock for options
exercised -- -- 933 -- -- -- 933
Issuance of 25,135 shares of common
stock under Employee Stock
Purchase Plan -- -- 332 -- -- -- 332
Tax benefits from employee stock
transactions -- -- 1,706 -- -- -- 1,706
Amortization of deferred
compensation -- -- -- -- 122 -- 122
Reversal of deferred compensation
for terminated employees -- -- (131) -- 131 -- --
Currency translation adjustment -- -- -- -- -- (255) (255)
Net income -- -- -- 5,302 -- -- 5,302
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 $ -- $ 9 $ 40,302 $ (2,546) $ (148) $ (200) $ 37,417
======== ======== ======== ======== ======== ======== ========
</TABLE>
F-4
<PAGE>
<TABLE>
MOLECULAR DEVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands, except share amounts)
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,302 $ 2,252 $ 4,059
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 729 636 671
Loss on disposal of fixed assets 31 40 26
Charge for acquired in-process research and development - 4,425 -
Amortization of deferred compensation 122 136 41
(Increase) decrease in assets:
Accounts receivable (3,503) (1,160) (372)
Inventories (995) (817) 37
Deferred tax asset 1,349 (2,055) (1,161)
Other current assets 20 (1) (25)
Increase (decrease) in liabilities:
Accounts payable (617) 916 (87)
Accrued compensation 225 151 178
Other accrued liabilities 1,336 (31) 882
Deferred revenue 412 120 203
---------- ---------- ---------
Net cash provided by operating activities 4,411 4,612 4,452
---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures (625) (711) (495)
Acquisition of NovelTech Systems, Inc. net of cash on hand - (1,198) -
Other assets 82 51 (67)
---------- ---------- ---------
Net cash used in investing activities (543) (1,858) (562)
---------- ---------- ---------
Cash flows from financing activities:
Repayments on credit arrangements - (76) (2,379)
Repayment of promissory notes (1,500) - -
Issuance of common stock, net 933 610 16,654
---------- ---------- ---------
Net cash (used in) provided by financing activities (567) 534 14,275
---------- ---------- ---------
Effect of exchange rate changes on cash (255) 60 13
---------- ---------- ---------
Net increase in cash and cash equivalents 3,046 3,348 18,178
Cash and cash equivalents at beginning of year 23,727 20,379 2,201
---------- ---------- ---------
Cash and cash equivalents at end of year 26,773 23,727 20,379
========== ========== =========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ - $ 6 $ 218
Income taxes $ 472 $ 360 $ 40
========== ========== =========
Supplemental schedule of noncash
investing and financing activities:
Equipment and leasehold improvements financed
under secured credit agreements $ - $ - $ 215
========== ========== =========
Disposals of fully depreciated equipment
and leasehold improvements $ 85 $ 465 $ 385
========== ========== =========
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, 1997 are comprised of short-term
corporate and government and non-government 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, 1997, 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 $641,000, $680,000 and $611,000 for
1997, 1996, and 1995, respectively.
Per Share Data
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share." As required by SFAS 128, all prior periods presented have been restated.
The impact of SFAS 128 on the Company's reported EPS was not material.
Under the new requirements for calculating EPS, the dilutive effect of
stock options is excluded from a new EPS measure, Basic EPS. Except as noted
below, diluted EPS 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.
Basic and diluted EPS for 1995 have been retroactively restated to apply
the requirements of Staff Accounting Bulletin No. 98, issued by the SEC in
February 1998 (SAB 98). Under SAB 98, certain shares of common stock and options
and warrants to purchase shares of common stock issued at prices substantially
below the per share price of shares sold in the Company's initial public
offering previously included in the computation of shares outstanding pursuant
to the Staff Accounting Bulletins No.s 55, 64 and 83 are now excluded from the
computation.
F-7
<PAGE>
Note 1. Summary of Significant Accounting Policies (Continued)
<TABLE>
Computation of Earnings Per Share is as follows:
(in thousands except per share amounts)
<CAPTION>
BASIC Years Ended December 31,
--------------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Weighted average common shares outstanding for
the period 9,137 8,828 7,031
=========== ============ ===========
Net income 5,302 $ 2,252 $ 4,059
=========== ============ ===========
Net income per share $ 0.58 $ 0.26 $ 0.58
=========== ============ ===========
DILUTED Years Ended December 31,
--------------------------------------------
1997 1996 1995
----------- ------------ -----------
Weighted average common shares outstanding for
the period 9,137 8,828 7,031
Common equivalent shares assuming exercise of
stock options under the treasury stock method 584 696 613
----------- ------------ -----------
Shares used in per share calculation 9,721 9,524 7,644
=========== ============ ===========
Net income $ 5,302 $ 2,252 $ 4,059
=========== ============ ===========
Net income per share $ 0.55 $ 0.24 $ 0.53
=========== ============ ===========
</TABLE>
Options to purchase 48,500 shares of common stock at $19.50 per share
were outstanding during 1997, but were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of the common shares and, therefore, the effect would
be antidilutive.
Stock Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," 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 each of the
three years in the period ended December 31, 1997, if the Company had elected to
recognize compensation cost based on the fair value of the options granted as
prescribed by SFAS 123.
F-8
<PAGE>
Note 1. Summary of Significant Accounting Policies (Continued)
Reclassifications
Certain reclassifications have been made to the 1996 financial statements
to conform with the 1997 presentation.
New Accounting Pronouncements.
In June 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," and Financial Accounting Standards No. 131 (SFAS 131), "Disclosures
About Segments of an Enterprise and Related Information," which will be required
to be adopted by the Company in fiscal 1998. Adoption of these statements is not
expected to have a significant impact on the Company's consolidated financial
position, results of operations or cashflow.
Note 2. Balance Sheet Amounts
December 31,
-----------------------
1997 1996
--------- --------
(In thousands)
Inventories:
Raw materials $ 849 $ 895
Work-in-process 565 488
Finished goods and demonstration equipment 2,051 1,087
--------- --------
$ 3,465 $ 2,470
========= ========
Equipment and leasehold improvements:
Machinery and equipment $ 4,815 $ 4,343
Furniture and fixtures 701 685
Leasehold improvements 509 488
--------- --------
6,025 5,516
Less accumulated depreciation and amortization 4,528 3,884
--------- --------
Net equipment and leasehold improvements $ 1,497 $ 1,632
========= ========
Other accrued liabilities:
Accrued income tax $ 213 $ 440
Warranty 249 278
Customer deposits 3 379
Sales tax payable 352 307
Other 981 1,096
--------- --------
$ 1,798 $ 2,500
========= ========
Note 3. Commitments
Net rental expense under operating leases related to the Company's
facilities was approximately $541,000, for each of the three years in the period
ended December 31, 1997.
Annual future minimum lease payments under operating leases as of
December 31, 1997 are as follows: 1998 - $613,000; 1999 - $608,000; 2000 -
$595,000; 2001 - $405,000.
F-9
<PAGE>
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 notes were repaid in full on January 2, 1997. The
acquisition was accounted for as a 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 (in thousands):
Excess of liabilities over tangible assets $ (95)
Acquired developed technology 150
Acquired in-process technology and acquisition related costs 4,637
===============
Total purchase price $ 4,692
===============
The purchase price allocation 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 0.70
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.
F-10
<PAGE>
Note 5. Stockholders' Equity (continued)
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.
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.
As permitted by Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," 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 123, net
income and earnings per share would have been reduced to the pro forma amounts
indicated in the table below (in thousands, except per share amounts):
1997 1996 1995
---- ---- ----
Net income as reported $ 5,302 $ 2,252 $ 4,059
Pro forma $ 4,887 $ 1,901 $ 4,010
Basic earnings per share as reported $ 0.58 $ 0.26 $ 0.58
Pro forma $ 0.53 $ 0.22 $ 0.57
Diluted earnings per share as reported $ 0.55 $ 0.24 $ 0.53
Pro forma $ 0.51 $ 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 51.4-61.7%
Risk-free interest rate 5.38%- 7.56%
Expected life of options 5 years
F-11
<PAGE>
Note 5. Stockholders' Equity (continued)
Stock activity under the 1988 and 1995 Stock Option Plans and the Directors'
Plan was as follows:
Shares Options Weighted
Available for Outstanding Average
Future Grant Exercise Price
--------------------------------------------------
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
Cancelled 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
Cancelled 40,647 (40,647) 3.66
-------- --------- ------
Balance December 31, 1996 858,059 931,828 4.14
Granted (323,250) 323,250 14.68
Exercised - (295,554) 2.94
Cancelled 165,790 (165,790) 7.55
-------- --------- ------
Balance December 31, 1997 700,599 793,734 $ 8.08
======== ========= ======
<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 82,093 3.8 $1.73 80,973 $1.72
$3.00 149,011 6.9 $3.00 89,107 3.00
$5.25 240,030 7.7 $5.25 118,471 5.25
$8.00 37,850 8.6 $8.00 5,250 8.00
$12.00 - 13.38 143,500 9.2 $13.37 200 12.00
$13.50 - 15.38 92,750 9.4 $14.88 2,800 14.13
$19.50 48,500 9.8 $19.50 --- ---
-------------- ---------------
793,734 296,801
============== ===============
</TABLE>
In September 1995, nonqualified options for 56,223 shares were granted at
an exercise price of $5.25 outside of the plans. During 1997, options on 22,816
shares were exercised and the remaining options on 33,407 shares were cancelled.
These options are not included in the tables above.
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. Additionally, $131,000
of unvested deferred compensation was reversed in 1997 due to employee
terminations.
F-12
<PAGE>
Note 5. Stockholders' Equity (continued)
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, 1997,
133,768 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.
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 were recognized in 1995. All
significant research activity was completed in December 1995.
Note 7. Income Taxes
The components of the (provisions) benefits for income taxes consist
of the following:
Years ended December 31,
---------------------------------------------
1997 1996 1995
---------- --------- ----------
(In thousands)
Current:
Federal $ (1,227) $ (524) $ (33)
State (350) (340) (9)
Foreign (248) (65) (38)
---------- --------- ----------
(1,825) (929) (80)
Deferred:
Federal (969) 1,645 1,018
State (380) 410 143
Foreign - - -
---------- --------- ----------
(1,349) 2,055 1,161
---------- --------- ----------
$ (3,174) $ 1,126 $ 1,081
========== ========= ==========
F-13
<PAGE>
Note 7. Income Taxes (Continued)
<TABLE>
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:
<CAPTION>
Years ended December 31,
-------------------------------------------
1997 1996 1995
--------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Income before provision for income taxes $ 8,476 $ 1,126 $ 2,978
Income tax at statutory federal rate
(34% for 1995, 35% for 1996 and 1997) $ (2,967) $ (394) $(1,013)
State income tax, net of federal benefit (360) 46 (9)
Net operating loss carry forwards - 1,748 980
Foreign income taxes - (65) (38)
Change in valuation allowance - 1,289 1,161
Foreign sales corp 168 136 -
Charge for acquired in-process research and development - (1,623) -
Other (15) (11) -
--------- ---------- -------
$ (3,174) $ 1,126 $ 1,081
========= ========== =======
</TABLE>
Foreign pretax income was $360,000 and $72,000 in 1997 and 1996,
respectively, while foreign pretax loss was $158,000 in 1995.
As of December 31, 1997, the Company had federal research and development
tax credit carryforwards of approximately $660,000. The federal credit
carryforwards will expire at various dates beginning in 2001 through 2007, if
not utilized.
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.
Years ended
December 31,
-------------------------
1997 1996
---------- ---------
(In thousands)
Deferred tax assets:
Net operating loss carryforwards $ - $ 1,247
Research and development credit carryforwards 660 836
Non-deductible reserves 356 370
Warranty and accrued expenses 568 450
Net undistributed profits of foreign subsidiaries 182 40
Other 101 273
---------- ---------
Total deferred tax assets $ 1,867 $ 3,216
========== =========
The net valuation allowance decreased by $3,600,000 for the year ended
December 31, 1996.
F-14
<PAGE>
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% of
total revenue in 1995.
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 $7,793,000, $7,828,000 and $5,043,000 in 1997, 1996 and 1995,
respectively. This included revenue from Europe of approximately $2,602,000,
$3,394,000 and $2,239,000 in 1997, 1996 and 1995, respectively. In 1997 and
1996, U.S. export sales included revenue from Asia of approximately $3,704,000
and $3,470,000, respectively.
<TABLE>
Summarized data for the Company's domestic and international operations
are as follows:
<CAPTION>
United Adjustments and
States Europe Eliminations Total
------ ------ --------------- -----
(In thousands)
<S> <C> <C> <C> <C>
Year Ended
December 31, 1997
Revenues $ 35,640 $ 6,752 $ (4,106) $ 38,286
Income from operations 7,047 374 (165) 7,256
Identifiable assets 42,939 4,318 (4,466) 42,791
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
</TABLE>
F-15
<PAGE>
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)
<S> <C> <C> <C> <C>
Fiscal 1997
Net revenues $ 8,306 $ 9,818 $ 9,527 $ 10,635
Gross profits 5,115 5,943 6,046 6,756
Net income 1,027 1,315 1,370 1,590
Diluted net income per share $ 0.11 $ 0.14 $ 0.14 $ 0.16
Fiscal 1996
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
Diluted net income per share $ 0.12 $ (0.36) $ 0.18 $ 0.26
</TABLE>
F-16
<PAGE>
SCHEDULE II
________________________________________________________________________________
<TABLE>
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, 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
Balance for the year ended December 31, 1997:
Allowance for doubtful accounts receivable 196 --- (16) 180
</TABLE>
F-17
EXHIBIT 10.17
October 2, 1997
James Iuliano
c/o Molecular Devices Corporation
1311 Orleans Drive
Sunnyvale, CA 94089
Dear Jim:
On behalf of the Board of Directors, I wish to express our disappointment over
your decision to resign. We understand, however, your desire to be close to your
family. Accordingly, this letter sets forth the substance of the separation
agreement (the "Agreement") that Molecular Devices Corporation (the "Company")
is offering to you to aid in your employment transition.
1. Resignation. Your last day of work as an employee and officer of the
Company will be October 13, 1997 (the "Separation Date"). In addition, you have
agreed to provide transition support through October 31, 1997 to Andre Marion,
the Company's interim Chief Executive Officer, at the level of several hours per
week.
2. Accrued Salary and Paid Time Off. On the Separation Date, the
Company will pay you all accrued salary, and all accrued and unused vacation
earned through the Separation Date, subject to standard payroll deductions and
withholdings. You are entitled to these payments regardless of whether or not
you sign this Agreement.
3. Severance Benefits. In recognition of your leadership to date and
your extraordinary efforts over the last few months, the Company will make
severance payments to you in the form of continuation of your base salary in
effect on the Separation Date through March 31, 1998. These payments will be
made on the Company's ordinary payroll dates, and will be subject to standard
payroll deductions and withholdings.
4. Health Insurance. To the extent permitted by the federal COBRA law
and by the Company's current group health insurance policies, you will be
eligible to continue your health insurance benefits at your own expense. Later,
you may be able to convert to an individual policy. You will be provided with a
separate notice of your COBRA rights. If you elect continued coverage under
COBRA, the Company, as part of this Agreement, will pay your COBRA premiums
through March 31, 1998, and will provide additional compensation, if necessary,
to avoid any tax consequences from the payment of these premiums. If you become
eligible for other health insurance benefits at the expense of a new employer,
however, the Company's obligation to make these payments will cease upon the
date of coverage by the new employer. Prior to March 31, 1998, you agree to
notify a duly authorized officer of the Company, in writing, immediately upon
your acceptance of any employment that provides health insurance benefits.
5. Stock Options. The Company and you each acknowledge that, pursuant
to the terms of your outstanding stock options (the "Options"), the Options will
cease vesting and terminate in accordance with their terms on November 1, 1997.
6. Bonus. You will be eligible to receive a bonus for 1997 of $60,000
(the "Bonus") in accordance with the Company's Executive Compensation Plan (the
"Plan"), attached as Exhibit C, provided that any one of the following 3
conditions is met: (a) the Company meets its 1997 financial goal of $0.52 per
share before extraordinary items, including, but not limited to the expenses
related to the Company's search and hiring of a new Chief Executive Officer; (b)
the Board of Directors (the "Board") approves any bonus under the Plan; or (c)
the Board approves your Bonus. The Bonus, if any, will be paid in accordance
with the Company's normal business practice.
7. Indemnification. The Company acknowledges that its indemnification
obligations, if any, will continue after the Separation Date in accordance with
the terms of any applicable directors and officers indemnity agreement.
<PAGE>
8. Other Compensation or Benefits. You acknowledge that, except as
expressly provided in this Agreement, you will not receive any additional
compensation, severance or benefits after the Separation Date.
9. Expense Reimbursements. You agree that, within 10 days of the
Separation Date, you will submit your final documented expense reimbursement
statement reflecting all business expenses you incurred through the Separation
Date, if any, for which you seek reimbursement. The Company will reimburse you
for these expenses pursuant to its regular business practice.
10. Return of Company Property. By the Separation Date, you agree to
return the following to the Company: (a) all confidential Company information
(and all copies thereof), including, but not limited to, confidential Company
documents, files, notes, drawings, records, business plans and forecasts,
financial information, specifications, and computer-recorded information; (b)
all nondocumentary Company property that you have in your possession, including,
but not limited to, tangible property (including, but not limited to,
computers), credit cards, entry cards, and identification badges and keys; and,
(c) any materials of any kind that contain or embody any proprietary or
confidential information of the Company (and all reproductions thereof).
Notwithstanding the above, the Company agrees to give you its IBM ThinkPad
currently in your possession, provided that you return all computer-recorded
confidential Company information contained in the ThinkPad by the Separation
Date.
11. Proprietary Information Obligations. Both during and after your
employment, you acknowledge your continuing obligations under your Proprietary
Information and Inventions Agreement not to use or disclose any confidential or
proprietary information of the Company without prior written authorization from
a duly authorized representative of the Company. A copy of your Proprietary
Information and Inventions Agreement is attached hereto as Exhibit B.
12. Confidentiality. Until such time as the Company is required to
publicly file this Agreement, the provisions of this Agreement will be held in
strictest confidence by you and the Company and will not be publicized or
disclosed in any manner whatsoever; provided, however, that: (a) you may
disclose this Agreement to your immediate family; (b) the parties may disclose
this Agreement in confidence to their respective attorneys, accountants,
auditors, tax preparers, and financial advisors; (c) the Company may disclose
this Agreement as necessary to fulfill standard or legally required corporate
reporting or disclosure requirements; and (d) the parties may disclose this
Agreement insofar as such disclosure may be necessary to enforce its terms or as
otherwise required by law. In particular, and without limitation, you agree not
to discuss this Agreement with present or former Company employees or other
personnel. Notwithstanding the above, this paragraph 12 will no longer apply
after December 1, 1997.
13. Release. In exchange for the payments and other consideration under
this Agreement to which you would not otherwise be entitled, you agree to
execute the Employee Agreement and Release attached hereto as Exhibit A.
14. Miscellaneous. This Agreement, including Exhibits A, B and C,
constitutes the complete, final and exclusive embodiment of the entire agreement
between you and the Company with regard to this subject matter. It is entered
into without reliance on any promise or representation, written or oral, other
than those expressly contained herein, and it supersedes any other such
promises, warranties or representations. This Agreement may not be modified or
amended except in a writing signed by both you and a duly authorized officer of
the Company. This Agreement will bind the heirs, personal representatives,
successors and assigns of both you and the Company, and inure to the benefit of
both you and the Company, their heirs, successors and assigns. If any provision
of this Agreement is determined to be invalid or unenforceable, in whole or in
part, this determination will not affect any other provision of this Agreement
and the provision in question will be modified by the court so as to be rendered
enforceable. This Agreement is deemed to have been entered into and will be
construed and enforced in accordance with the laws of the State of California as
applied to contracts made and to be performed entirely within California.
2
<PAGE>
If this Agreement is acceptable to you, please sign below and on the attached
Employee Agreement and Release, which is part of this Agreement, and return the
originals of both to me.
I wish you luck in your future endeavors.
Sincerely,
MOLECULAR DEVICES CORPORATION
By: J. Allan Waitz//
--------------------------------------------
J. Allan Waitz
Chairman of the Compensation Committee
Exhibit A - Employee Agreement and Release
Exhibit B - Proprietary Information and Inventions Agreement
Exhibit C - Executive Compensation Plan
AGREED:
James P. Iuliano//
- -----------------------------------------------
James Iuliano
3
<PAGE>
EXHIBIT A
Except as otherwise set forth in this Agreement, I hereby release,
acquit and forever discharge the Company, its parents and subsidiaries, and
their officers, directors, agents, servants, employees, attorneys, shareholders,
successors, assigns and affiliates, of and from any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys fees, damages, indemnities
and obligations of every kind and nature, in law, equity, or otherwise, known
and unknown, suspected and unsuspected, disclosed and undisclosed, arising out
of or in any way related to agreements, events, acts or conduct at any time
prior to and including the execution date of this Agreement, including but not
limited to: all such claims and demands directly or indirectly arising out of or
in any way connected with my employment with the Company or the termination of
that employment; claims or demands related to salary, bonuses, commissions,
stock, stock options, or any other ownership interests in the Company, vacation
pay, fringe benefits, expense reimbursements, severance pay, or any other form
of compensation; claims pursuant to any federal, state or local law, statute, or
cause of action including, but not limited to, the federal Civil Rights Act of
1964, as amended; the federal Americans with Disabilities Act of 1990; the
federal Age Discrimination in Employment Act of 1967, as amended; the California
Fair Employment and Housing Act, as amended; tort law; contract law; wrongful
discharge; discrimination; harassment; fraud; defamation; emotional distress;
and breach of the implied covenant of good faith and fair dealing.
In giving this release, which includes claims that may be unknown to me
at present, I acknowledge that I have read and understand Section 1542 of the
California Civil Code, which reads as follows: " A general release does not
extend to claims which the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if known by him must have
materially affected his settlement with the debtor." I hereby expressly waive
and relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to my release of any claims I may
have against the company.
By: James P. Iuliano//
Date: 04 October 1997
4
<PAGE>
EXHIBIT B
EMPLOYEE CONFIDENTIALITY AND INVENTIONS AGREEMENT
MOLECULAR DEVICES CORPORATION June 28, 1990
1311 Orleans Drive
Sunnyvale, California 94089
Gentlemen:
The following confirms an agreement between me and MOLECULAR DEVICES
CORPORATION, a California corporation (the "Company"), which is a material part
of the consideration for my employment by the Company.
1. I recognize:
(a) that the Company is engaged in a continuous program of
research, development and production respecting its business, present and
future, including fields generally related to its business, and
(b) that the Company possesses and will continue to possess
information that has been created, discovered, developed or otherwise becomes
known to the Company (including, without limitation, information created by,
discovered or developed by, or made known to me during the period of or arising
out of my employment by the Company) and/or which property rights have been
assigned or otherwise conveyed to the Company which information and commercial
value in the business in which the Company is engaged. With respect to some of
such information, the Company is under an express obligation of confidentiality
to third parties. All of the aforementioned information is hereinafter called
"Proprietary Information." By way of illustration, but not limitation,
Proprietary Information includes trade secrets, processes, formulas, circuit
designs, improvements, inventions, techniques, marketing plans, strategies,
forecasts, computer programs and copyrightable materials and customer lists.
2. I understand that:
(a) As part of my employment I will be exposed to Proprietary
Information and may make new contributions and inventions of value to the
Company; and
(b) My employment creates a relationship of confidence and
trust between me and the Company with respect to any information which is not
generally available to the public or in the public domain and which is either:
(i) applicable to the business of the Company; or
(ii applicable to the business of any client or
customer of the Company or third party with which the Company has a business
relationship, which may be
5
<PAGE>
known to me by the Company or by any such client, customer or third party, or
learned by me during the period of my employment.
3. In consideration of my employment by the Company and the
compensation received by me from the Company, I hereby agree as follows:
(a) All Proprietary Information shall be the sole property of
the Company and its assigns, and the Company and its assigns shall be the sole
owner of all patents, copyrights and other rights in connection therewith. At
all times, both during my employment by the Company and after its termination, I
will keep in confidence and trust all Proprietary Information, and I will not
use or disclose any Proprietary Information or anything relating to it without
the written consent of the Company, except as may be necessary in the ordinary
course of performing my duties to the Company.
(b) All documents, records, apparatus, equipment and other
physical property, whether or not pertaining to Proprietary Information,
furnished to me by the Company or produced by myself or others in connection
with my employment shall be and remain the sole property of the Company and
shall be returned to it immediately as and when requested by the Company. Even
if the Company does not so request, I shall return and deliver all such property
upon termination of my employment by me or by the Company for any reason and I
will not take with me any such property or any reproduction of such property
upon such termination.
(c) I will promptly disclose to the Company, or any persons
designated by it, all improvements, inventions, formulas, ideas, processes,
techniques, know-how and data, whether or not patentable, made or conceived or
reduced to practice or learned by me, either alone or jointly with others,
during the term of my employment (all such improvements, inventions, formulas,
ideas, processes, techniques, know-how and data shall hereinafter collectively
be called "Inventions").
(d) I agree that all Inventions which I develop, or have
developed, in whole or in part, either alone or jointly with others, during the
period of my employment by the Company;
(i) for and during the development of which I use or
used any equipment, supplies, facilities or trade secret information of the
Company; or
(ii) which results from work performed by me for the
Company shall be the sole property of the Company and its successors and
assigns, and the Company and its successors and assigns shall be the sole owner
of all patents, copyrights and other rights in connection with such Inventions.
I hereby assign to the Company any rights I may have or acquire in such
Inventions.
(e) At all times, both during the period of my employment by
the Company and after the termination thereof, I will keep in confidence and
trust all information which is not generally available to the public or in the
public domain, and I will not use or disclose any such information or anything
relating to it without the written consent of the Company, except as may be
necessary in the ordinary course of performing my duties for the Company.
6
<PAGE>
(f) I represent that my performance of all the terms of this
Agreement will not breach any agreement to keep in confidence proprietary
information acquired by me in confidence or in trust prior to my employment by
the Company. I have not entered into, and agree I will not enter into, any
agreement, either written or oral, in conflict herewith.
(g) I represent that execution of this Agreement, my
employment with the Company and my performance of my proposed duties to the
Company in the development of its business will not violate any obligations I
may have to any current or former employer.
(h) This Agreement does not require assignment of any
inventions which an employee cannot be obligated to assign under Section 2870 of
the California Labor Code (hereinafter called "Section 2870"). However, I will
disclose any Inventions as required by Section 3(c) hereof regardless of whether
I believe the Invention is protected by Section 2870, in order to permit the
Company to engage in a review process to determine such issues as may arise.
Such disclosure shall be received in confidence by the Company. Section 2870
provides as follows:
"Any Provision in an employment agreement which provides that an
employee shall assign or offer to assign any of his or her rights in an
invention to his or her employer shall not apply to an invention for
which no equipment, supplies, facility, or trade secret information of
the employer was used and which was developed entirely on the
employee's time, and (a) which does not relate (1) to the business of
the employer or (2) to the employer's actual or demonstrably
anticipated research or development, (b) which does not result from any
work performed by the employee for the employer. Any provision which
purports to apply to such an invention is to that extent against the
public policy of this state and is to that extent void and
unenforceable."
4. This Agreement shall be effective as of the first day of my
employment by the Company.
5. If any term, provision, covenant or condition of this Agreement
shall for any reason be held invalid, void or unenforceable by a court of
competent jurisdiction, the rest of this Agreement shall remain in full force
and effect and shall in no way be affected, impaired or invalidated.
6. This Agreement shall be governed and construed in accordance with
the laws of the State of California.
7. This Agreement represents my entire understanding with the Company
with respect to the subject matter hereof and supersedes all previous
understandings, written or oral. This Agreement may be amended or modified only
with the written consent of both the Company and me. No oral waiver, amendment
or modification shall be effective under any circumstances whatsoever.
7
<PAGE>
8. This Agreement shall be binding upon my heirs, executors,
administrators and assigns, and me and shall inure to the benefit of the Company
and its successors and assigns.
Dated: June 28, 1990
Accepted and Agreed to: James P. Iuliano//
MOLECULAR DEVICES CORPORATION
By: Greg Sessler//
8
<PAGE>
EXHIBIT C
1997 EXECUTIVE BONUS FORMULA
1997 Product Revenue - 1 x 1997 Actual Operating Income
--------------------------- ----------------------------------
1996 Product Revenue 1997 Budget Operating Income
x Executive Salaries
9
EXHIBIT 10.18
CONFIDENTIAL
September 3, 1997
Andrew Galligan
Chief Financial Officer
Molecular Devices Corporation
1311 Orleans Drive
Sunnyvale, California 94089-1136
Dear Andrew:
In view of your position as a Corporate Senior Manager at Molecular Devices, and
in consideration of your services in your capacity of Chief Financial Officer,
the Board of Directors has approved the commitment by the Company to you to
provide you with certain benefits in the event your employment is terminated for
specified reasons. The purpose of this letter agreement is to set forth the
terms and conditions of the Company's agreement with you concerning such
benefits.
First, the Compensation Committee of the Board has decided to raise your base
salary to $150,000 per year effective as of August 1, 1997. Congratulations for
this raise. Second, the Compensation Committee also confirmed that your 1997
bonus will be at the 1997 Management Bonus Plan level of 40% of your 1997
compensation, subject to the Company's meeting its financial objective of EPS at
$0.52 or more per share for calendar 1997 and to your continued employment
through that date. This bonus will be paid promptly following announcement by
the Company of its financial results for 1997 (expected in late January 1998).
In the event of a Change of Control and if you agree to continue your employment
through the effective Change-of-Control date, all your stock options will become
fully vested at such date, subject to the transaction not having to qualify as a
"pooling of interests." Of course, no such acceleration can take place in a
"pooling." In addition, at the time of your leaving the Company, at the
Change-of-Control closing date, the Company would pay you a one time severance
payment equal to the last twelve months of your total compensation (last 12
months salary plus most recent annual bonus awarded to you).
In the event a new CEO is appointed and you agree to remain in your present
position for a minimum of three months after the new CEO is in place, the
Company will pay you at the time of your departure a one time severance payment
equal to the last twelve months salary.
<PAGE>
CONFIDENTIAL
September 3, 1997
Page 2
I hope that presents a satisfactory arrangement and that the foregoing
clarifications assist you in the decision to continue to assist the Company.
Sincerely,
Andre F. Marion
- --------------------------------------------
Andre F. Marion
For the Compensation Committee
Approved this day: September 3, 1997
Andrew Galligan
- --------------------------------------------
Andrew Galligan
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, and the 1995 Employee Stock
Purchase Plan of Molecular Devices Corporation of our report dated January 14,
1998, 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, 1997.
/s/ ERNST & YOUNG LLP
Palo Alto, CA
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 26,773
<SECURITIES> 0
<RECEIVABLES> 9,079
<ALLOWANCES> 180
<INVENTORY> 3,465
<CURRENT-ASSETS> 41,126
<PP&E> 6,025
<DEPRECIATION> 4,528
<TOTAL-ASSETS> 42,791
<CURRENT-LIABILITIES> 5,374
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 37,408
<TOTAL-LIABILITY-AND-EQUITY> 42,791
<SALES> 38,245
<TOTAL-REVENUES> 38,286
<CGS> 14,426
<TOTAL-COSTS> 14,426
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,476
<INCOME-TAX> 3,174
<INCOME-CONTINUING> 5,302
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,302
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.55
</TABLE>
