<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO____________.
COMMISSION FILE NUMBER 0-19955
MOLECULAR DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3050031
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
928 EAST ARQUES AVENUE, SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices and zip code)
(408) 773-1222
(Registrant's telephone number, including area code)
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.
[X] Yes [ ] No
As of July 28, 1996, 10,208,356 shares of Common Stock of the Registrant were
outstanding.
1
<PAGE> 2
MOLECULAR DYNAMICS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page(s)
Condensed Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 1996 and 1995 . . . . 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and 1995 . . . . . . . . . 5
Notes to Interim Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 8-10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,934 $ 2,727
Short-term investments 9,842 14,895
Accounts receivable, net 14,904 12,173
Inventories 5,956 7,470
Prepaids and other current assets 536 403
------- -------
Total current assets 37,172 37,668
Property and equipment, net 2,637 2,788
Other assets, net 2,225 2,289
------- -------
Total assets $42,034 $42,745
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,574 $ 4,197
Accrued expenses 4,348 3,754
Unearned revenue 911 1,149
------- -------
Total current liabilities 7,833 9,100
------- -------
Stockholders' equity:
Common stock and additional paid-in capital 40,050 40,180
Accumulated deficit (4,917) (5,834)
Cumulative translation adjustment (96) 11
Unrealized gain/(loss) on short-term investments (40) 43
Less 124,918 and 128,600 shares of common
stock in treasury in 1996 and 1995,
respectively, at cost (796) (755)
------- -------
Total stockholders' equity 34,201 33,645
------- -------
Total liabilities and stockholders' equity $42,034 $42,745
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 12,151 $ 10,355 $ 23,035 $ 20,136
Cost of sales 5,191 4,480 9,941 9,023
-------- -------- -------- --------
Gross profit 6,960 5,875 13,094 11,113
-------- -------- -------- --------
Operating expenses:
Research and development 1,743 1,189 3,347 2,417
Sales and marketing 3,804 3,454 7,463 6,767
General and administrative 882 1,012 1,685 1,932
-------- -------- -------- --------
Total operating expenses 6,429 5,655 12,495 11,116
-------- -------- -------- --------
Operating income 531 220 599 (3)
Interest income, net 162 227 374 487
Other income/(expense) 7 (8) 26 30
-------- -------- -------- --------
Income before income taxes 700 439 999 514
Provision for income taxes 70 22 82 26
-------- -------- -------- --------
Net income $ 630 $ 417 $ 917 $ 488
======== ======== ======== ========
Earnings per share $ .06 $ .04 $ .09 $ .05
======== ======== ======== ========
Weighted averages shares outstanding 10,681 10,816 10,687 10,730
-------- -------- -------- --------
</TABLE>
See accompanying notes.
4
<PAGE> 5
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES: -------- --------
<S> <C> <C>
Net income $ 917 $ 488
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 941 975
Loss on disposition of assets 57 --
Changes in items affecting operations:
Accounts receivable (2,899) (1,233)
Inventories 1,496 134
Prepaids and other current assets (213) (105)
Accounts payable and other current liabilities (1,220) (1,420)
-------- --------
Net cash used by operating activities (921) (1,161)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (556) (517)
Capitalized software development costs (264) (300)
Purchases of short-term investments (6,594) (4,984)
Maturities and sales of short-term investments 11,564 9,216
Other assets 17 (108)
-------- --------
Net cash provided by investing activities 4,167 3,307
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock option exercises -- 17
Proceeds from employee stock purchase plan -- 391
Purchase of treasury stock (650) (869)
Reissuance of treasury stock 478 198
Other liabilities -- (42)
-------- --------
Net cash used by financing activities (172) (305)
-------- --------
Effect of exchange rate changes on cash 133 (220)
-------- --------
Net increase in cash and cash equivalents 3,207 1,621
Cash and cash equivalents at beginning of period 2,727 2,097
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,934 $ 3,718
======== ========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid:
Interest $ 2 $ 4
-------- --------
Income taxes $ 28 $ 16
-------- --------
</TABLE>
See accompanying notes.
5
<PAGE> 6
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Basis of Presentation
The accompanying condensed consolidated balance sheets of Molecular
Dynamics, Inc. and subsidiaries (Molecular Dynamics or the Company) as of June
30, 1996 and December 31, 1995 and the related condensed consolidated
statements of operations for the three and six month periods ended June 30,
1996 and 1995 and condensed consolidated statements of cash flows for the six
months ended June 30, 1996 and 1995 have been prepared on substantially the
same basis as are the annual consolidated financial statements. In the opinion
of management, the financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial position, operating results and cash flows for those periods
presented. The results of operations for the three and six months ended June
30, 1996 are not necessarily indicative of results to be expected for the
entire year. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements, and notes thereto,
for the year ended December 31, 1995 included in the Company's Form 10-K.
For clarity of presentation the Company has indicated that its second
quarters ended June 30, whereas in fact, the Company's second quarters for
fiscal years 1996 and 1995 ended on June 30, 1996 and July 2, 1995,
respectively.
NOTE 2 - Inventories
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Raw material $ 3,030 $ 3,316
Work-in-process 1,434 956
Finished goods 1,492 3,198
------- -------
$ 5,956 $ 7,470
------- -------
</TABLE>
NOTE 3 - Net Income per Share
Net income per share amounts are based on the weighted average number of
common shares and common stock equivalents, where dilutive, outstanding during
the period. Common stock equivalents arise from outstanding stock options and
are computed using the treasury stock method.
NOTE 4. - Collaboration with Affymetrix, Inc.
In the third quarter of 1994, a consortium led by Affymetrix, Inc. and the
Company was awarded funding from the Advanced Technology Program of the National
Institute of Standards and Technology (NIST). The Company and its partner,
Affymetrix, will collaborate in an effort to develop miniaturized DNA diagnostic
Systems. The amount of the grant for the two companies is up to $31 million in
matching funds over the five years which began in January, 1995, for research
and development in the field of DNA diagnostic devices with a total shared
6
<PAGE> 7
project cost of $63 million. Approximately $5 million of the $31
million was available for the first year of the grant period, which ended in
January 1996, and approximately $7 million is available for the second year of
the grant period, which ends in January 1997. According to the terms of the
grant, these funds are divided 33% to the Company and 67% to Affymetrix. The
additional funding will allow the Company to work toward developing new
fluorescence detection technologies and DNA separation devices and apply these
to the expanding field of molecular genetics. In the second quarter and first
six months of 1996, the Company recognized credits to its expenses of
approximately $475,000 and $994,000, respectively, representing support from
the grant, compared to approximately $100,000 and $561,000 in the prior year
periods. The Company has been notified by the Advanced Technology Program that
funding under the program will continue at least through the year ending in
January, 1997. Availability of funds for the years after January, 1997 is
contingent upon annual Congressional approval. Should funding of the ATP not
be approved in years after January 1997, this would have a material adverse
effect on the Company's research and development efforts and its business,
financial condition and results of operations.
NOTE 5. - Stock Repurchase Program
In May 1994, the Board of Directors authorized the purchase of up to 1,000,000
shares of the Company's common stock in the open market. The Company has
purchased approximately 513,000 shares under this program as of June 30, 1996.
Of these shares, approximately 388,000 shares were reissued under the Company's
Employee Stock Option and Purchase Plans, of which approximately 22,000 shares
were reissued during the second quarter of 1996. The Company purchased 100,000
shares under the stock repurchase program during the second quarter of 1996.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the fiscal year
ended December 31, 1995.
Except for the historical information contained herein, the matters
discussed in this document are forward-looking statements that involve certain
risks and uncertainties, including the risks and uncertainties set forth below
under "Factors That May Affect Future Results".
RESULTS OF OPERATIONS
Sales. The Company's second quarter 1996 sales of $12.2 million increased 17%
from sales of $10.4 million in the second quarter of 1995. Additionally, sales
for the six months ended June 30, 1996 were $23.0 million, an increase of 14%
from sales of $20.1 million in the comparable prior year period. This increase
resulted primarily from growth in sales of the Company's Storm(TM) products,
which the Company began to sell in the third quarter of 1995. Foreign currency
fluctuations had the effect of reducing revenue by approximately $96,000 for the
six months ended June 30, 1996 compared to the prior-year period. Foreign
currency fluctuations for the second quarter of 1996 had an immaterial effect
on revenue as compared to the prior-year period.
The Company believes that a majority of its sales are generated from
research groups which depend on grant funding from governmental agencies. The
remaining portion is primarily from biotechnology, pharmaceutical and chemical
companies. The Company's revenues are directly affected by the availability,
timing and amount of funding for these research groups and companies. Such
funding is generally subject to a grant or capital budgeting process that
affects the sales cycle for the Company's products.
Gross margins. Gross margins for the second quarter and first six months of
1996 were 57.3% and 56.8%, respectively, compared to 56.7% and 55.2% in each of
the respective prior year periods. The increase in gross margins is primarily
due to a greater proportion of instrument sales to total sales, and to growth in
sales of high margin Storm products.
Research and development. Research and development expenses for the second
quarter and first six months of 1996 were $1.7 and $3.3 million, respectively,
compared to $1.2 and $2.4 million in the respective prior year periods. The 42%
and 38% increase over the second quarter and six month period, respectively,
resulted from the expansion of a number of major development programs, partially
offset by credits representing support from the Company's NIST Grant. Due to
this expansion, research and development expenses increased as a percentage of
sales to 14% and 15% in the second quarter and first six months of 1996 from
11.5% and 12.0% for the second quarter and first six months of 1995. Research
and development expenses for the second quarter and first six months of 1996
were reduced by $475,000 and $994,000, respectively, of credits representing
support from the Company's NIST grant, compared to $100,000 and $561,000 of
credits in the prior year periods. The second quarter and first six months of
1996 also exclude $91,000 and $264,000, respectively, of capitalized software
development costs, compared to $128,000 and $300,000 in the comparable prior
year periods.
8
<PAGE> 9
Sales and marketing. Sales and marketing expenses for the second quarter and
first half of 1996 were $3.8 and $7.5 million as compared to $3.5 and $6.8
million in the respective prior year periods. This increase is primarily the
result of increased investment in sales and marketing efforts and greater
commission expense associated with the increase in sales. As a percentage of
sales, sales and marketing expenses decreased to 31.3% and 32.3%, from 33.4% and
33.6% in the respective prior periods, primarily due to the increase in sales.
General and administrative. General and administrative expenses for the second
quarter and first six months of 1996 were $882,000 and $1.7 million, as compared
to $1.0 million and $1.9 million in the respective prior periods. The decrease
is the result of continuing cost control measures. General and administrative
expenses, as a percentage of sales, decreased to 7.3% for both the second
quarter and first six months of 1996, from 9.8% and 9.6% in the respective prior
periods, primarily due to the increase in sales.
Interest and other income, net. Interest and other income, net, for the second
quarter and first six months of 1996 were $169,000 and $400,000, as compared to
$219,000 and $517,000 for the respective prior year periods. The decreases
resulted primarily from the effect of lower average investment balances.
Provision for income taxes. During the second quarter and first six
months of 1996, the Company recorded tax expense utilizing an annual effective
tax rate of 8% as compared to a rate of 5% for the second quarter and first
half of 1995. The low tax rates in 1996 and 1995 are attributable to usage of
net operating loss carryovers and consist of state and federal Alternative
Minimum Taxes.
Earnings per share. The Company generated earnings per share of $.06
and $.09, respectively, in the second quarter and first six months of 1996 as
compared to earnings per share of $.04 and $.05 in the respective comparable
periods of 1995. This improvement is due primarily to the increase in revenue
and gross margins. Weighted average shares outstanding used in computing
earnings per share were 10.7 million shares for both the second quarter and
first six months of 1996 as compared to 10.8 and 10.7 million shares for the
comparable periods in 1995. The decrease in the comparable second quarters of
1996 and 1995 was primarily due to the Company's purchase of 100,000 shares of
its stock in the second quarter of 1996.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company believes that results of operations in any quarterly period may be
impacted by factors such as the effect of announcements of new competitive
products, delays in the introduction or shipment of new products, difficulty in
acquiring critical product components of acceptable quality and in required
quantity, increased competition, changes in the Company's product mix, a slower
growth rate in the Company's target markets, order deferrals in anticipation of
new product releases, or lack of market acceptance of new products, reduction or
delay of government and private sector funding of research activities, legal
expenses or adverse changes in economic conditions in any of the countries in
which the Company does business. Specifically, the Company is experiencing some
limitations in ramping up production of its newer products. Also, with a
significant portion of net sales and net income contributed by international
operations, fluctuations of the U.S. dollar against foreign currencies such as
those that have occurred in the past could affect the Company's results of
operations and financial condition in a particular quarter. In addition,
availability of funds under the Company's ATP grant for the years after January,
1997 is contingent upon annual Congressional approval. Should funding of the
ATP not be approved in years after January 1997, this would have a material
adverse effect on the Company's research and development efforts and its
business, financial condition and results of operations. There can be no
assurance that the Company will be able to grow in future periods or continue
profitability on a quarterly basis.
9
<PAGE> 10
Due to the factors noted above, the Company's future earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenues or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
the Company's common stock. The Company typically recognizes a substantial
portion of sales near the end of a quarter. Therefore, the Company may not
become aware of such shortfalls until late in a quarter, which may result in an
adverse effect on the trading price of the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of June 30, 1996 was $29.3 million, compared to $28.6 million
at December 31, 1995.
The Company's principal commitments at June 30, 1996 consisted of obligations
under operating leases for facilities and equipment. Long term cash
requirements, other than normal operating expenses, are anticipated for
development of new products, enhancement of existing products, financing
continued growth, and possible acquisition of products, technologies or
businesses complementary to the Company's business. The Company believes its
cash, short-term investments, and cash flows from operating activities will be
sufficient to satisfy its working capital requirements for the foreseeable
future.
10
<PAGE> 11
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security-Holders
On May 22, 1996 the Company held its Annual Meeting of
Stockholders (the "Annual Meeting"). The following matters were voted on at the
Annual Meeting:
1. The directors of the Company were all re-elected by the
following votes:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES AGAINST WITHHELD
---- --------- ------------- --------
<S> <C> <C> <C>
James Schlater 8,678,395 0 303,405
Jay Flatley 8,678,395 0 303,405
Robert Keeley 8,678,395 0 303,405
Janice M. LeCocq 8,678,395 0 303,405
Jack Lloyd 8,678,395 0 303,405
C. Woodrow Rea, Jr. 8,671,279 0 310,521
</TABLE>
2. The appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the fiscal year ending December 29, 1996. The
proposal was ratified by the following vote:
VOTES FOR VOTES AGAINST VOTES WITHHELD
--------- ------------- --------------
8,963,665 14,935 3,200
3. An increase of 250,000 shares to the authorized number of
shares reserved for issuance under the Company's Restated 1987 Stock Option
Plan was approved by the following vote:
VOTES FOR VOTES AGAINST VOTES WITHHELD BROKER NON-VOTES
- --------- ------------- -------------- ----------------
7,065,613 1,679,591 9,596 227,000
The foregoing matters are described in detail in the
Registrant's definitive proxy statement dated April 25, 1996, for the Annual
Meeting of Stockholders held on May 22, 1996.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 - Settlement Agreement by and between
Molecular Dynamics, Inc. and Meridian Instruments, Inc.,
dated as of March 20, 1996.
(b) Exhibit 11.1 - Statement re Computation of Earnings Per
Share
(c) There were no reports on Form 8-K during the quarter ended
June 30, 1996.
11
<PAGE> 12
MOLECULAR DYNAMICS, INC.
SIGNATURES
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOLECULAR DYNAMICS, INC.
(Registrant)
Date: August 9, 1996 By: /s/ Jay Flatley
-----------------------------------------
Jay Flatley
President, Chief Executive
Officer & Chief Financial Officer
Date: August 9, 1996 By: /s/ Lynne R. Wagoner
-----------------------------------------
Lynne R. Wagoner
Director of Finance
(Principal Accounting Officer)
12
<PAGE> 13
EXHIBIT INDEX
(a) Exhibit 10.1 - Settlement Agreement by and between Molecular
Dynamics, Inc. and Meridian Instruments, Inc., dated as of March
20, 1996.
(b) Exhibit 11.1 - Statement re Computation of Earnings Per Share
(c) There were no reports on Form 8-K during the quarter ended June
30, 1996.
<PAGE> 1
SETTLEMENT AGREEMENT
This Settlement Agreement is effective as of March 20, 1996, and is made and
entered into by and between: Molecular Dynamics, Inc. (hereinafter referred to
as "MOLECULAR"), a California corporation, which has offices at 928 East Arques
Avenue, Sunnyvale, California 94086; and Meridian Instruments, Inc.,
(hereinafter referred to as "MERIDIAN"), a Michigan corporation, which has
offices at 2310 Science Parkway, Okemos, Michigan 48864.
WHEREAS, litigation is currently pending in the United States District Court for
the Northern District of California, Molecular Dynamics, Inc. v. Meridian
Instruments, Inc., Civil Action No. C 94-4292 SAW (JSB) ENE (hereinafter
referred to as "District Court Action") initiated by MOLECULAR, alleging that
MERIDIAN is infringing U.S. Patent Re. 34,214 (sometimes hereinafter referred to
as "the '214 patent");
WHEREAS, MERIDIAN has asserted a counterclaim ("MERIDIAN's Counterclaim") in the
District Court Action for declaratory relief alleging that U.S. Patent Re.
34,214 is invalid, not infringed, and unenforceable;
WHEREAS, MOLECULAR represents that it is the owner of all right, title, and
interest in and to U.S. Patent Re. 34,214 and its related foreign patents and
patent applications;
WHEREAS, MOLECULAR and MERIDIAN wish to resolve all claims relating to U.S.
Patent Re. 34,214 and its related foreign patents and patent applications,
including all claims and counterclaims asserted in the District Court Action and
any claims which MOLECULAR may have against any customer of MERIDIAN;
NOW, THEREFORE, the parties to this Settlement Agreement, in reliance upon the
above-recited representations and in consideration of the terms and covenants
set forth below, agree as follows:
1. Mutual Releases
a. MOLECULAR hereby grants to MERIDIAN and its successors, assigns,
agents, distributors, and anyone acting for or on behalf of
MERIDIAN and to all of MERIDIAN's customers and their agents,
employees, representatives, and assigns, a release from all
liability owing to MOLECULAR as a result of MOLECULAR's claims
asserted in the District Court Action.
b. MERIDIAN hereby grants to MOLECULAR and its successors, assigns,
and those acting for or on behalf of MOLECULAR, a release from
all liability owing to MERIDIAN as a result of MERIDIAN's
Counterclaim asserted in the District Court Action.
2. Dismissal of District Court Action
The parties hereby agree and stipulate that the District Court Action will be
dismissed with prejudice pursuant to a Stipulation and Order of Dismissal with
Prejudice in the form shown in
<PAGE> 2
Exhibit A hereto to be executed by their respective counsel of record which will
be submitted to the Court for entry but will be effective upon execution by all
counsel for the parties hereto.
3. License Grant
a. MOLECULAR hereby grants to MERIDIAN and its Affiliates a
non-exclusive transferable worldwide license under U.S. Patent
Re. 34,214 and all related foreign patents and patent
applications, and any divisions, continuations, reissues or
extensions thereof (collectively, the "Patents"), subject to the
terms and conditions of this Agreement. The term "Affiliates"
shall mean companies the majority of whose voting shares are now
or hereafter owned or controlled directly or indirectly by
MERIDIAN. A company shall be considered an Affiliate for only so
long as such ownership or control exists.
b. Without limitation of the foregoing, such license shall entitle
MERIDIAN and its Affiliates to make, have made, import, use,
offer to sell, and sell any products, components or subassemblies
and to practice any methods or processes within the claims of the
Patents. No rights or licenses are granted or deemed granted
hereunder or in connection herewith, other than those rights and
licenses expressly granted in this Agreement, and MOLECULAR has
no obligation to provide MERIDIAN with any information or
know-how.
4. Grant of Stock
a. In consideration, MERIDIAN will issue to MOLECULAR [*] shares of
common stock of MERIDIAN Instruments, Inc., (hereinafter referred
to as the "Shares"), within thirty days after the effective date
of this Agreement. The Shares issued to MOLECULAR shall be
subject to the terms and conditions set forth below.
b. MOLECULAR represents and warrants to MERIDIAN as follows:
i. Investment. MOLECULAR is acquiring the Shares for investment
purposes, without a view to or for resale in connection
with, any distribution thereof.
ii. Transfers. MOLECULAR understands that since the Shares have
not been registered under the Securities Act or applicable
state securities laws, MOLECULAR must bear the economic risk
of an investment in such securities for an indefinite period
of time unless they are subsequently registered under the
Securities Act and applicable state securities laws or an
exemption from such registration is available. In that
regard, MOLECULAR has been advised that:
(1) MERIDIAN has no obligation to register the Shares under
the Securities Act or any Blue Sky Laws.
Certain information on this page has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
-2-
<PAGE> 3
(2) MERIDIAN is not subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended, and
Rule 144 is not presently available for public release
of the Shares. It acknowledges that the Shares must be
held indefinitely unless they are subsequently
registered under the Securities Act or an exemption
from such registration is available. It has been
advised or is aware of the provisions of Rule 144
promulgated under the Securities Act, which permits
limited resale of securities purchased in a private
placement subject to the satisfaction of certain
conditions.
iii. Ability to Bear Risk. MOLECULAR is able to bear the economic
risk of an investment in the Shares, including, without
limiting the generality of the foregoing, the risk of losing
part or all of its investment and the possible inability to
sell or transfer the Shares for an indefinite period of
time.
iv. Accredited Investor. MOLECULAR is an "accredited investor,"
as that term is defined in Rule 501 of Regulation D
promulgated under the Securities Act.
v. Restrictive Legend. MOLECULAR agrees that the certificates
representing the Shares will bear the following restrictive
legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY
MAY NOT BE SOLD OR OFFERED FOR SALE, PLEDGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAW OR UNLESS THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED TO
EFFECTUATE SUCH TRANSACTION.
vi. Liquidity. MOLECULAR's financial condition is such that the
undersigned is under no present need to dispose of any
portion of the Shares to satisfy any existing or
contemplated undertaking or indebtedness.
vii. Risk Factors. MOLECULAR understands that investment in the
Shares is speculative and involves significant risks. In
addition to the general economic risks inherent in most
businesses and the uncertainties associated with
anticipating and predicting business behavior and results,
MOLECULAR has been advised that the following factors are
those which, at the date of this Agreement, are considered
by management of MERIDIAN to represent the principal
significant risks applicable to an investment in the Shares,
although other factors may ultimately affect
-3-
<PAGE> 4
MERIDIAN or an investment in it in a manner and to a
degree which cannot be foreseen:
(1) [*]
(2) Arbitrary Sales Price. The sales price of the Shares
has been arbitrarily set by MERIDIAN and bears no
relation to assets, book value or other established
criteria of value.
(3) No Operating Control. MOLECULAR will not be able to
control operations or remove, replace or direct
management in the activities of MERIDIAN.
viii. Sophistication. By reason of MOLECULAR's knowledge and
experience in financial and business matters in general,
the industry of which MERIDIAN is a part, and investments
of this type in particular, MOLECULAR is capable of
evaluating the merits and risks of any investment in the
Shares.
5. Stock Put
a. If any of the following conditions occurs prior to July 31, 1999,
MOLECULAR shall have the right to require MERIDIAN to purchase
the Shares upon the terms and provisions hereinafter set forth
(which right of MOLECULAR is hereinafter referred to as the
"Put"), subject to the provisions of Paragraph 6(b) hereof:
i. MOLECULAR [*]
ii. MOLECULAR [*] and is [*]. MOLECULAR [*].
iii. MOLECULAR [*].
Certain information on this page has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
-4-
<PAGE> 5
[*]
iv. [*] Upon execution of this agreement, [*]
(1) If [*] then [*]
(2) As to [*]
b. The purchase price for the Shares upon exercise of the Put shall
be the sum of $[*] plus $[*] per month starting May 1, 1995.
c. In the event MOLECULAR shall satisfy any of the conditions set
forth in Paragraph 5(a) hereof prior to July 31, 1999, the
license granted to MERIDIAN under Paragraph 3 shall be subject to
the terms set forth in Paragraph 8.
d. If the Put is not exercised within 90 days of the fulfillment of
one of the conditions of Paragraph 5(a), MOLECULAR shall retain
the Shares but the right to exercise the Put terminates.
e. In the event that MOLECULAR exercises the Put, MERIDIAN shall pay
the purchase price for the Shares purchased from MOLECULAR
according to the following payment schedule:
i. If the Put is exercised in 1996, MERIDIAN shall pay
MOLECULAR [*] of the purchase price upon the exercise
of the Put and shall pay the remainder of the purchase
price [********] thereafter;
ii. If the Put is exercised in 1997, MERIDIAN shall pay
MOLECULAR [*] of the purchase price upon the
exercise of the Put, and shall pay the remainder of the
purchase price [*] thereafter;
Certain information on this page has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
-5-
<PAGE> 6
iii. If the Put is exercised in 1998, MERIDIAN shall pay
MOLECULAR [*] of the purchase price upon the
exercise of the Put, and shall pay the remainder of the
purchase price [*] thereafter;
iv. If the Put is exercised in 1999, MERIDIAN shall pay
MOLECULAR [*********]of the purchase price upon the
exercise of the Put, and shall pay the remainder of the
purchase price in [************************] thereafter.
f. Upon request by MERIDIAN, MOLECULAR shall subordinate MERIDIAN's
obligation to pay the balance of the purchase price for the
Shares pursuant to such Subordination Agreement as may be
reasonably requested by any bank or other financial institution
providing financing to MERIDIAN, and any other secured creditor
of MERIDIAN.
6. Stock Call
a. MERIDIAN shall have a right to purchase, for a total price of
$[*], the Shares if either of the following conditions occur:
i. MOLECULAR, [*]
ii. [*]
b. Upon any merger or consolidation of MERIDIAN, or a transfer of
more than 50% of the issued and outstanding common stock of
MERIDIAN or upon a sale of substantially all of the assets of
MERIDIAN, any of which transactions shall occur prior to such
time as MOLECULAR shall have the right to exercise the Put,
MERIDIAN shall have the right to purchase the Shares for a
purchase price equal to the purchase price which would be
applicable upon the exercise of the Put on such date, provided
however,
i. the entire purchase price shall be paid by MERIDIAN within
thirty days of notice of exercise of such purchase of the
Shares unless MOLECULAR shall have given the notice
contemplated by Paragraph 6(b)(ii) hereof, and
ii. MERIDIAN shall not have such right to purchase the Shares
under the terms of Paragraph 6(b) hereof if within fifteen
days after notice by MERIDIAN to MOLECULAR of the exercise
of such right to purchase the Shares, MOLECULAR shall
notify MERIDIAN that it is permanently and irrevocably
waiving any right to exercise the Put pursuant to
Paragraph 5 hereof, provided further, that such waiver by
MOLECULAR shall not affect the rights and obligations of
MERIDIAN and MOLECULAR under Paragraph 8 of this
-6-
<PAGE> 7
Agreement in the event that MOLECULAR shall satisfy any of
the conditions set forth in Paragraph 5(a) prior to July
31, 1999.
c. The rights of MERIDIAN set forth in each of Paragraph 6(a) above
and Paragraph 6(b) above are hereinafter individually, and
sometimes collectively, referred to as the "Call." In the event
of the exercise of the Call set forth in Paragraph 6(a) hereof,
or in the event of the exercise of the Call set forth in
Paragraph 6(b) hereof, if MOLECULAR does not elect to give the
notice contemplated by Paragraph 6(b)(ii),
i. the license under U.S. Patent Re. 34,214 set forth in
Paragraph 3 of this Agreement shall terminate as to
products not made prior to written notice of exercising
the Call;
ii. all products made prior to such written notice shall have
a continuing royalty-free license under U.S. Patent Re.
34,214; and
iii. all products, regardless of when made or sold by MERIDIAN
or its Affiliates, shall be licensed under a continuing
irrevocable royalty-free license under the related foreign
patents and patent applications.
7. Other Stock Provisions
a. MOLECULAR shall grant to MERIDIAN's Chief Executive Officer or
other designee of MERIDIAN's Board of Directors an irrevocable
voting proxy on the Shares in the form attached hereto as Exhibit
B.
b. MOLECULAR waives any rights as a shareholder to any financial
statements or other reports of MERIDIAN.
c. The shares issued to MOLECULAR are not transferable and will be
subject to a legend describing the Put and Call, and all other
restrictions applicable to the Shares under this Agreement.
8. License Provisions
The provisions of this paragraph come into effect if and when MOLECULAR shall
satisfy any of the conditions set forth in Paragraph 5(a) hereof prior to July
31, 1999. In such event:
a. MERIDIAN and its Affiliates shall continue to have a
non-exclusive transferable worldwide license under U.S. Patent
Re. 34,214 and all related foreign patents and patent
applications as set forth in Paragraph 3 of this Agreement.
b. For each Insight system or component, including the confocal
microscope, associated optics (including lenses), computers,
monitors, and software relevant to the generation of 3-D confocal
images, but excluding accessories or peripherals unrelated to the
generation of 3-D confocal images ("the LICENSED PRODUCTS"), made
used, shipped or sold by or for MERIDIAN in, from, or to
-7-
<PAGE> 8
the United States that is within the scope of any claim of U.S.
Patent Re. 34,214, MERIDIAN shall pay MOLECULAR a royalty of [*]%
of the net sales price of the LICENSED PRODUCTS. The royalty of
this subparagraph shall have a cap of $[*] for the first $[*] in
annual sales of the LICENSED PRODUCTS, but the cap is eliminated
for the year following any year in which the annual sales of the
LICENSED PRODUCTS exceed $[*].
c. Every ACAS, Ultima, or similar product made, used, sold,
imported, or offered for sale by or for MERIDIAN shall be
royalty-free.
d. Every product made and sold by or for MERIDIAN entirely outside
the United States shall be royalty-free.
e. Notwithstanding Paragraph 8(b) to the contrary, MERIDIAN shall
pay no royalties with respect to products shipped to Affiliates
of MERIDIAN for the sole and exclusive use of such Affiliates.
f. All royalty payments shall be due and payable on the 15th day of
the calendar quarter immediately succeeding the month in which
the sales price was collected. All payments shall be made to such
bank account or other location or person as MOLECULAR may
designate in writing from time to time.
g. MERIDIAN agrees to make and keep full and accurate books and
records in sufficient detail to enable royalties payable
hereunder to be determined. From time to time on reasonable
notice, MOLECULAR's certified public accountants shall have full
access to the books and records of MERIDIAN pertaining to
activities under this Agreement solely to verify the accuracy of
royalty payments. In no event shall such accountants be entitled
to make copies of any information relating to a particular
customer of MERIDIAN, and such accountants shall not disclose to
MOLECULAR the identity of, or any information relating to, any
customer of MERIDIAN. Prompt adjustment shall be made by the
proper party to compensate for any errors or omissions disclosed
by such audit.
9. Validity and Infringement of U.S. Patent Re. 34,214
a. MERIDIAN agrees not to challenge the validity, infringement, or
enforceability of U.S. Patent Re. 34,214 either directly or
indirectly so long as MERIDIAN has a license under that patent.
However, MERIDIAN may raise issues of non-infringement for new
products initially sold after December 1, 1996.
b. The parties hereby agree that in the event that any claim of U.S.
Patent Re. 34,214 is held to be invalid or unenforceable, and
such judgment is final and non-appealable, then MERIDIAN shall
pay no further royalties with respect to the sale of any of
MERIDIAN's products. Notwithstanding the foregoing, MERIDIAN
shall have no right to repayment of any amounts previously paid
by MERIDIAN
Certain information on this page has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
-8-
<PAGE> 9
on account of such non-infringing or invalidated Patent, provided
that the foregoing shall not affect MERIDIAN's right to exercise
the Call.
10. Most Favored Licensee
In the event that MOLECULAR grants or has granted a license under U.S. Patent
Re. 34,214 where such other license includes terms more favorable to the
licensee than those contained in this Agreement, then the terms of this
Agreement shall be adjusted to the more favorable terms of such other license,
provided, however, MERIDIAN adopts any less favorable terms and conditions of
such other license. MOLECULAR shall supply to MERIDIAN's counsel, on an
"ATTORNEYS' EYES ONLY" basis, a copy of all such licenses within thirty days of
entry into such licenses. MOLECULAR and MERIDIAN's counsel shall agree on
redacted licenses or summaries of relevant terms to be supplied to MERIDIAN.
11. Image Space Software
MOLECULAR shall offer to MERIDIAN to resell MOLECULAR's Image Space software as
an OEM at a discount of [*]%. Whenever MERIDIAN sells Image Space software with
a Meridian product, the sale of such Meridian product shall be royalty free.
12. Disclosure of ENE Materials
The parties agree that the parties can disclose all communications made and
documents prepared in connection with the Early Neutral Evaluation proceeding of
November 14, 1995 to third parties under a confidentiality agreement. The
parties agree that such communications and documents shall not be used in any
connection in any other proceedings.
13. Destruction or Return of Confidential Materials
The parties and their attorneys agree that they will destroy or return to the
other party, pursuant to Paragraph 22 of the stipulated protective order in this
lawsuit, all documents originating from the other party and marked "Confidential
Information" or "Confidential -- Outside Counsel Only."
14. No Admission of Wrongdoing
Nothing in this Settlement Agreement shall be construed as an admission of
wrongdoing against any party hereto.
15. Scope and Transferability
a. This Agreement shall be binding upon and inure to the benefit of
the parties hereto, and each of them, and each of all of their
representatives, attorneys, officers, directors, shareholders,
heirs, partners, successors, assigns, licensees, employees,
affiliates and agents.
b. The patent license set forth in this Agreement shall be
transferable without restriction in the event of a sale or merger
of MERIDIAN or a sale of substantially
Certain information on this page has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
-9-
<PAGE> 10
all of the assets of MERIDIAN. No aspect of this Agreement shall
inhibit MERIDIAN's ability to enter into any financing agreement,
secured, unsecured, or otherwise. MOLECULAR shall promptly sign
any consent, verification, or other document reasonably required
for facilitation or closing of a sale or merger of MERIDIAN or a
financing by MERIDIAN of any type, including a secured financing.
16. Governing Law
This Agreement shall in all respects be governed, interpreted, and construed in
accordance with the laws of the State of California without regard to its
provisions with respect to conflicts of laws.
17. Waiver
A waiver of any breach of any provision of this Agreement shall not be construed
as a continuing waiver of other breaches of the same or other provisions of this
Agreement.
18. Notices
All notices shall be in writing and shall be given by registered or certified
letter to the parties at the addresses indicated above. Either party may change
its address by giving the other party notice of such new address.
19. Entire Understanding
This Agreement embodies the entire understanding between the parties relating to
the subject matter hereof, whether written or oral, and there are no prior
representations, warranties or agreements between the parties not contained in
this Agreement. Any amendment or modification of any provision of this Agreement
must be in writing, dated and signed by both parties hereto.
20. Invalidity of Agreement
If any provision of this Agreement is declared invalid or unenforceable by a
court having competent jurisdiction, it is mutually agreed that this Agreement
shall endure except for the part declared invalid or unenforceable by order of
such court. The parties shall consult and use their best efforts to agree upon a
valid and enforceable provision which shall be a reasonable substitute for such
invalid or unenforceable provision in light of the intent of this Agreement.
21. Counterparts
This Agreement may be executed in any number of counterparts and each such
counterpart shall be deemed to be an original.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in duplicate by their duly-authorized representatives, effective as of
the day and year first above written.
-10-
<PAGE> 11
MOLECULAR DYNAMICS, INC.
Dated: March 29, 1996. By: /s/ James M. Schlater
--------------------------
Name: James M. Schlater
------------------------
Title: Chairman of the Board
-----------------------
MERIDIAN INSTRUMENTS, INC.
Dated: March 20, 1996. By: /s/ Ian R.N. Bund
--------------------------
Name: Ian R.N. Bund
------------------------
Title: Chairman
-----------------------
-11-
<PAGE> 12
J. WILLIAM WIGERT, JR. (047,252)
STEPHEN M. EVERETT (121,619)
MARIA S. CEFALU (107,937)
LIMBACH & LIMBACH L.L.P.
2001 Ferry Building
San Francisco, CA 94111
(415) 433-4150
Attorneys for Defendant
MERIDIAN INSTRUMENTS, INC.
Noemi C. Espinosa (116,753)
Valerie Russell (172,531)
BROBECK, PHLEGER & HARRISON
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
(415) 424-0160
Attorneys for Plaintiff
MOLECULAR DYNAMICS, INC.
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
MOLECULAR DYNAMICS, INC., ) Civil Action No.
a California corporation, ) C 94-04292 SAW (JSB) ENE
)
Plaintiff, )
vs. ) STIPULATION AND ORDER OF
) DISMISSAL WTIH PREJUDICE
MERIDIAN INSTRUMENTS, INC., )
a Michigan corporation, )
)
Defendant. )
)
)
AND RELATED COUNTERCLAIM )
)
)
Plaintiff Molecular Dynamics, Inc. and defendant Meridian Instruments,
Inc., by their attorneys of record hereby stipulate
STIPULATION AND ORDER OF
DISMISSAL WITH PREJUDICE - 1 -
<PAGE> 13
to dismissal of all claims and counterclaims asserted in the above-entitled
action with prejudice.
BROBECK, PHLEGER & HARRISON
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
(415) 424-0160
Dated: _______________________ By:______________________________
Noemi C. Espinosa
Valerie Russell
Attorneys for Plaintiff
MOLECULAR DYNAMICS, INC.
LIMBACH & LIMBACH L.L.P.
2001 Ferry Building
San Francisco, CA 94111
(415) 433-4150
Dated: _______________________ By:______________________________
J. William Wigert, Jr.
Stephen M. Everett
Maria S. Cefalu
Attorneys for Defendant
MERIDIAN INSTRUMENTS, INC.
IT IS HEREBY ORDERED.
Dated: _______________________ ______________________________
U.S. District Judge
STIPULATION AND ORDER OF
DISMISSAL WITH PREJUDICE - 2 -
<PAGE> 14
IRREVOCABLE PROXY
(COUPLED WITH AN INTEREST)
Molecular Dynamics, Inc., being the record owner of [*] [*] ([*])
shares of common stock of Meridian Instruments, Inc., a Michigan corporation,
does hereby appoint Ian R. N. Bund as its proxy to execute written consents of
shareholders and to attend all meetings of the stockholders of Meridian
Instruments, Inc. with full power to vote and act for it in the same manner and
extent that it might were it personally present at said meetings.
The proxy shall have full power to substitute another person as my
proxy and to revoke the appointment of any such substitute proxy.
This proxy is given in connection with and pursuant to Paragraph 7(a)
of a certain Settlement Agreement dated January ____, 1996 between Molecular
Dynamics, Inc. and Meridian Instruments, Inc. By reason of the rights and
restrictions contained in such Settlement Agreement for the benefit of Meridian
Instruments, Inc. relating to the shares of common stock of Meridian
Instruments, Inc. owned by Molecular Dynamics, Inc., and Ian R. N. Bund being
the Chairman of the Board of Directors of Meridian Instruments, Inc., Molecular
Dynamics, Inc. hereby acknowledges and agrees that this proxy is coupled with an
interest, and therefore in accordance with Section 422(f) of the Michigan
Business Corporation Act, this proxy is irrevocable.
MOLECULAR DYNAMICS, INC.
Dated: March 29, 1996 By: /s/ James M. Schlater
---------------------------
Name: James M. Schlater
-------------------------
Title: Chairman of the Board
------------------------
EXHIBIT B TO SETTLEMENT AGREEMENT
Certain information on this page has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 1
EXHIBIT 11.1
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 630 $ 417 $ 917 $ 488
------- ------- ------- -------
Weighted average shares outstanding:
Common stock 10,105 10,190 10,113 10,125
Common stock equivalents - options 576 626 574 605
------- ------- ------- -------
10,681 10,816 10,687 10,730
------- ------- ------- -------
Earnings per share $ 0.06 $ 0.04 $ 0.09 $ 0.05
------- ------- ------- -------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,934
<SECURITIES> 9,842
<RECEIVABLES> 14,904
<ALLOWANCES> 0
<INVENTORY> 5,956
<CURRENT-ASSETS> 37,172
<PP&E> 2,637
<DEPRECIATION> 0
<TOTAL-ASSETS> 42,034
<CURRENT-LIABILITIES> 7,833
<BONDS> 0
0
0
<COMMON> 40,050
<OTHER-SE> (5,849)
<TOTAL-LIABILITY-AND-EQUITY> 42,034
<SALES> 12,151
<TOTAL-REVENUES> 12,151
<CGS> 5,191
<TOTAL-COSTS> 5,191
<OTHER-EXPENSES> 6,429
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 700
<INCOME-TAX> 70
<INCOME-CONTINUING> 630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 630
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
