UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 28, 1997, or
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[_] 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
928 East Arques Avenue
Sunnyvale, California 94086
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 773-1222
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by
nonaffiliates of the Registrant, as of March 18, 1998 was approximately
$98,834,000 (based upon the closing price for shares of the Registrant's Common
Stock as reported by the National Market System of the National Association of
Securities Dealers, Inc. Automated Quotation System on that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On March 18, 1998, approximately 10,443,495 shares of Common
Stock, $.01 par value, were outstanding.
Documents Incorporated by Reference
Designated portions of the following documents are
incorporated by reference into this Annual Report on Form 10-K where indicated:
Molecular Dynamics, Inc. Proxy Statement for the 1998 Annual
Meeting of Stockholders to be held on May 19, 1998, Part III.
<PAGE>
PART I
Item 1. Business
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 and under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors that May Affect Future
Results."
Overview
Molecular Dynamics is a leading developer, manufacturer and
international marketer of systems that accelerate genetic discovery and
analysis. The Company markets a family of systems that significantly
enhance the ability of scientists to visualize, quantify and analyze
genetic information. These instrument systems improve the productivity of
the life science researcher by automating widely used biotechnology
research procedures and offering quantitative imaging solutions. The
Company believes the dramatic increases in analytical sensitivity and speed
provided by its products enable advances in life science research that
would not otherwise be possible.
The Company markets its products worldwide to universities,
government research laboratories, and biotechnology, pharmaceutical,
genomics and chemical companies. It provides direct sales, service and
support of its products in the United States, the United Kingdom, Germany,
France, Japan, and Canada and through exclusive distributors in other
countries. Molecular Dynamics has shipped more than 4,000 instrument
systems to customers in 43 countries.
The Company was incorporated in Delaware on March 10, 1992 to
succeed to the business of a California corporation named "Molecular
Dynamics," which was incorporated on July 2, 1987. This reincorporation
was consummated in April 1992. References to "Molecular Dynamics",
"Molecular", and "the Company" refer to Molecular Dynamics, Inc., including
its California predecessor, and its subsidiaries.
Scientific Background
General
Over the past ten years, molecular biology research has produced
many important breakthroughs in our understanding and treatment of disease
and genetic disorders. New methods of genetic analysis are also being used
to improve the productivity and disease resistance of crops and livestock.
The continued development of innovative techniques for identification and
analysis of genes and proteins has fueled the rapid progress of
biotechnology research.
In order to remain competitive in life science research, scientists
require advanced instrumentation that enables efficient use of these
powerful new molecular techniques. Although most of these techniques began
as labor-intensive manual procedures, increased competition among academic
and commercial research groups and overall increases in the number of
laboratory experiments have resulted in scientists seeking more efficient
methods for conducting and analyzing experiments.
In molecular biology, almost all experiments start with a complex
mixture of DNA or proteins that require separation so that individual
molecules may be identified and analyzed. The separations are generally
accomplished by gel electrophoresis, a process that results in a two-
dimensional pattern of macromolecules containing information about their
size, amount, and identity. Traditionally, the electrophoresis pattern was
visualized by staining or imaging on film. Older, slower methods for
analyzing the molecules are rapidly becoming replaced by faster, more
automated methods in an ongoing quest to increase the rate of research
progress in molecular biology labs.
Similar challenges apply to the field of cell biology. Many
experiments in this area have recently become possible as increasingly
efficient, accurate and miniaturized technology has been developed to
rapidly visualize and store digital images and provide quantitative
analysis of the resulting data.
Both academic and commercial life science laboratories operate in
highly competitive environments, where efficient data acquisition and
analysis are crucial to success. Research organizations and government
regulatory agencies, such as the Food and Drug Administration, are
demanding increasingly accurate and quantitative analyses. The Company
believes that its current and future products are well positioned to serve
the growing and evolving needs of researchers in these areas.
Genomics
The plan to sequence the entire human genome, conceived in the late
1980s, has spawned a genomics revolution whose scope and impact will most
likely be greater than originally anticipated. The visionaries who
founded the early genomics companies believed that sequencing the human
genome was the beginning of a fundamental change in biological
understanding that will alter disease diagnostics, pharmaceutical discovery
and development, and the very nature of medical practice.
The pharmaceutical industry has embraced the promise of the genomics
revolution, and collaborative research and investment agreements between
pharmaceutical, genomics and educational entities are now common.
Products and Systems
Molecular Dynamics was founded to develop a new generation of
instrumentation that automates existing procedures and enables new
analytical techniques in molecular and cell biology research. The
Company's gel and blot scanning systems, which to date have represented the
bulk of the Company's sales, use lasers to image and analyze
electrophoresis gels and other two-dimensional arrays. These products use
various detection methods, including radioactivity and fluorescence.
Radioactivity as a method of detection is decreasing because of handling
hazards and waste disposal problems, whereas the use of fluorescence is
growing rapidly. For several years, Molecular Dynamics has had a strategic
focus on the emerging fluorescence opportunity that offers the potential
for an additional revenue source in the form of consumable reagents.
The Company has historically targeted its products to meet the needs
of more than 50,000 research groups worldwide engaged in life science
research. These groups include academic institutions, government
laboratories, private foundations and biotechnology, pharmaceutical and
chemical companies. These groups are estimated to have spent over $1
billion in 1997 on bioanalytical instrumentation, including liquid
chromatography, gel electrophoresis, sequencing, synthesis, confocal
microscopy, and microplate detection. The need to maximize productivity
influences the researcher's allocation of capital funds among this
instrumentation. Until 1997, the Company's products addressed only the
portion of this market relating to gel electrophoresis and, to a lesser
extent, confocal microscopy and microplate detection.
Over the past several years, the Company has invested heavily in the
development of systems that address larger and rapidly-growing markets.
These markets, which include pharmaceuticals, genomics, forensics,
agriculture and clinical diagnostics, are characterized by the need for
high throughput analysis and complete analytical solutions requiring a
combination of automated instrumentation, reagent chemistry kits and
optimized application software. Two new product lines have recently been
introduced. The first, the Microarray system, prepares and analyzes DNA in
a microchip format and is exclusively marketed on a technology access
basis. The second is a high-throughput, automated DNA sequencing
instrument branded MegaBACETM 1000. Both new product lines use matched
fluorescence reagents and consumables being developed by the Company's
strategic alliance partner, Amersham Pharmacia Biotech (Amersham). The
Company believes that these new offerings can accelerate the expansion of
molecular biology techniques from research through to commercial
applications.
Products: Visualization Technique:
Gel and Blot Scanning Products
Personal Densitometer SI Staining, Radioactivity, Chemiluminescence
PhosphorImager SI Radioactivity
Storm 860 Fluorescence, Radioactivity, Chemifluorescence
Storm 840 Chemifluorescence, Radioactivity
Storm 830 Fluorescence, Radioactivity
Storm 820 Radioactivity
FluorImager SI Fluorescence, Chemifluorescence
FluorImager 595 Fluorescence, Chemifluorescence
BioLumin 960 Fluorescence, Absorption
Microarray Systems
Microarray Spotter Fluorescence
Microarray Scanner Fluorescence
Sequencing Products
MegaBACE 1000 Fluorescence
Gel and Blot Scanner Product Family
Background
Gel electrophoresis is the most widely used technique for the
separation and analysis of biologically important macromolecules such as
proteins and DNA. Because of its versatility in separating molecules of
vastly different sizes, virtually every molecular biology laboratory uses
gel electrophoresis as one of its primary analytical techniques.
Electrophoresis is the fundamental technology for DNA sequencing, gene
mapping, DNA fingerprinting, and one- or two-dimensional protein
separation. Electrophoresis is usually performed in a porous matrix, or
gel, in a slab format, which acts as a support for several samples, which
are then separated in parallel. Using this technique, charged molecules in
solution separate by size as they migrate in an electric field.
The Company's core business, gel and blot scanning products, employ
several detection techniques to acquire and analyze data from gel
electrophoresis and other two-dimensional molecular sample formats.
Currently, these products are the Personal Densitometer R SI, the
PhosphorImager R SI, the Storm R 820, 830, 840, and 860, the FluorImager R
SI, and the FluorImager 595. The BioLuminR 960 enables high-sensitivity
quantitation of 96-well microplates. The Company's confocal microscopes
enable high resolution, three-dimensional imaging of cells and other
biological specimens. Most of the Company's instruments operate on
multiple computer platforms and are networkable. Proprietary software for
image analysis and data reduction is included with each product. Sales of
gel imaging products accounted for approximately 77%, 92% and 87% of
instrument sales in 1997, 1996 and 1995, respectively. Sales of BioLumin
and confocal microscopes accounted for 6%, 8% and 13% of instrument sales
in 1997, 1996 and 1995, respectively.
PhosphorImager Systems
The Company's PhosphorImager systems and associated storage phosphor
screens have accounted for more than half of the Company's total sales
since their introduction in 1989. The PhosphorImager replaces the use of
film and densitometry in traditional autoradiographic analysis by use of a
storage phosphor screen to record the position of radioactive
macromolecules in an electrophoresis gel or blot. The PhosphorImager scans
the screen with a laser beam, and accurately quantifies the radioactive
energy emitted from the original sample. The PhosphorImager SI has been
sold by the Company since 1994, and its current selling price ranges from
$25,000 to $40,000, depending on options and accessories.
The Storm systems, which began shipping in the third quarter of
1995, were designed to incorporate two non-radioactive detection modes as
well as the radioactive capability used in the PhosphorImagers. These
instruments give customers the ability to move to fluorescent analysis
methods without giving up popular radioisotope techniques. The Company
currently offers four versions of Storm, the Storm 820, 830, 840, and 860.
These instruments provide researchers the ability to use various labelling
techniques ranging from storage phosphor technology alone, to a combination
of storage phosphor, chemiluminescence and direct red and blue excited
fluorescence. The Storm 820, 830 and 840 are upgradable in the field to
add additional detection capabilities. The Storm instruments sell for
$45,000 to $90,000, depending on options and accessories.
FluorImager Systems
The Company sells two high-sensitivity fluorescence-only gel
scanning instruments, designed to detect fluorescent labels as an
alternative to radioactive labeling. Use of fluorescence chemistry
complements and, in some cases, substitutes for the use of radioactive
labels, particularly in cases where safety and radioactive disposal are
major concerns. The Company believes, however, that radioactivity will
continue to be widely used, particularly in the study of metabolic
processes. The FluorImager SI is designed to scan the results of a
complete experiment in less than three minutes, and researchers may conduct
their experiments in parallel and rapidly analyze them using the
FluorImager SI.
The FluorImager 595, using a dual-line laser, offers two-color
imaging of samples and standards in a single lane, which improves accuracy
and throughput. The FluorImager instruments sell for $40,000 to $100,000,
depending on options and accessories.
Densitometer
A densitometer measures optical density by determining the amount of
light absorbed by a film or stained gel. The optical density of the bands
on the film or stain in the gel is a measure of the quantity of the
biological molecules under study. The Personal Densitometer SI uses a
laser light source and a proprietary optical system to capture a two-
dimensional image of a stained gel or a film exposed by autoradiography or
chemiluminescence. The Personal Densitometer SI is designed specifically
for the individual researcher or small research group and sells for $15,000
to $25,000, depending on options and accessories.
BioLumin 960 Microplate System
Microplates are used for high-throughput assays in biomedical and
pharmaceutical research. A microplate is a multiple-well cassette that
allows the parallel processing of large numbers of small-volume samples in
a standardized format. They have largely replaced test tubes and cuvettes
for most life science applications.
The BioLumin 960 microplate reader is the first commercial product
resulting from Molecular Dynamics' acquisition of technology and assets
from BioLumin Corporation in 1995, and combines absorbance and fluorescence
detection in one instrument. The BioLumin 960 works with the BioTrak*
series of microplate assay reagents from Amersham Pharmacia Biotech, as
well as other off-the-shelf reagents and protocols. The Company began
shipping the BioLumin 960 in the first half of 1996. The selling price of
the BioLumin 960 ranges from $25,000 to $35,000, depending on options and
accessories.
Microarray Systems
A microarray consists of hundreds or thousands of DNA samples
deposited or synthesized in small spots on the surface of a slide or
other substrate. Microarrays are powerful tools that help scientists
understand the role of genes in human health, identify targets for drug
development, and ultimately develop new diagnostics and therapeutics.
The Company's microarray platform, developed with matched reagents
and consumables from Amersham Pharmacia Biotech, consists of an array
spotter to create these high-density arrays, a laser fluorescence array
scanner to read them, and a suite of software for downstream analysis.
While the system is being developed for commercial availability, the
Company has made it available to selected pharmaceutical, biotechnology and
genomics companies through a Microarray Technology Access Program (MTAP).
These are collaborations that provide early access to the systems in
exchange for a combination of an access fee, instrument purchases and
feedback on the systems' performance that will be used in development of
future generations of the systems. The Company has entered into 11 such
arrangements since December 1996 and anticipates that the program will
continue during 1998. Sales of Microarray systems under these agreements
accounted for approximately 9% of instrument sales in 1997, and less than
1% in 1996.
DNA Sequencing Products
The genome of an organism contains its genetic code, the blueprint
for its cellular structures and activities. The goal of the Human
Genome Project is to "sequence,"or decode, the three billion elements
of the genome by 2005, a critical step in developing tools to use this
information in the study of human biology and medicine. So far, only
about 2% of the human genome has been sequenced. To meet the 2005 goal,
the world's DNA sequencing laboratories require next-generation
instrumentation that can increase their throughput and reduce costs.
The Company's high-throughput DNA sequencing instrument, the
MegaBACE 1000, was introduced in 1997 and achieves throughput several times
that of instruments using slab gel electrophoresis. The use of 96 parallel
capillaries allows automation of previously manual steps to save time and
labor costs. Amersham Pharmacia Biotech provides integrated reagent
chemistries that help optimize the system's performance. Sales of the
MegaBACE 1000 under the first phase of a three-phase introduction program
accounted for approximately 8% of instrument sales in 1997.
Proprietary Software Products
The Company has invested significant resources in the development of
proprietary software for all its product lines. The MegaBACE software
integrates sample log-in, instrument control and analysis of all 96
capillaries operating in parallel on the MegaBACE 1000 DNA Sequencing
system. ImageQuaNTr, ImageQuaNT Tools, FluorSepr, and Fragment AnalysisT
software provide cross platform solutions for interactive and semi-
automated analysis of electrophoretic separations, dot blots and slot
blots. The XperimentT software manages the acquisition and analysis of
microassay data on the BioLumin instrument, while the ImageSpacer software
delivers an integrated environment for 3-D quantitation and visualization
of confocal microscopy data.
Sales and Marketing
Molecular Dynamics has made a substantial investment in building a
direct sales, service and technical support organization. Because the
Company's products are technically sophisticated and buyers are often Ph.D.
- -level researchers, scientifically qualified and highly trained sales
personnel are required. Virtually all of the Company's sales personnel have
degrees in the life sciences and have substantial experience in selling
premium-priced capital instrumentation. The Company's marketing activities
include product advertising and application notes where appropriate, and
participation in trade shows and product seminars.
The Company has 122 direct sales, marketing and service personnel,
supported by an in-house staff of application specialists. U.S. sales,
marketing and service are handled by 87 individuals located throughout the
country. In Europe and the Pacific Rim, the Company has 35 direct sales,
marketing and service personnel and 37 distributors. The Company moved its
European headquarters from the United Kingdom to the Netherlands in 1995.
This headquarters is responsible for support for the Company's subsidiaries
in the U.K., Germany and France. The Netherlands subsidiary also selects
and supports independent distributors throughout Europe and in the Middle
East. Sales in the Pacific Rim and elsewhere are managed from the Company's
Sunnyvale, California headquarters. The Company's wholly-owned subsidiary
in Japan provides direct sales and support of its products in that country.
Additionally, the Company sold its products through a wholly-owned
subsidiary in Australia until March 1998, when the Company began using
Amersham Pharmacia Biotech as a distributor in that country. The Company
operates through specialized distributors in the European countries where
it does not have wholly-owned subsidiaries, as well as in India, Taiwan,
Korea, China, Australia, New Zealand, Mexico and Hong Kong. Approximately
$20,961,000, $21,584,000 and $19,224,000, or 38%, 44% and 49% of the
Company's sales in 1997, 1996 and 1995, respectively, were to markets
outside the United States. Foreign sales are denominated in both U.S.
dollars and local currencies, and it is the Company's policy to hedge
accounts receivable denominated in foreign currencies that result from
foreign sales. The Company periodically reviews international prices for
its products and makes appropriate adjustments to account for currency
fluctuations.
Manufacturing
The Company manufactures its own components and subassemblies only
where it believes significant value can be added. Accordingly, the Company
focuses primarily on assembly of precision optical components and final
assembly and test of components and assemblies made by outside vendors to
the Company's specifications. The Company's products are assembled from
numerous components based on a wide variety of technologies, including
laser optics, computers, printed circuit boards and software. Cost savings
in manufacturing are achieved through use of the same components in
multiple instruments. The Company believes its current manufacturing
facilities are sufficient to support its expected level of operations
through 1998.
Certain components used in the Company's products, including the
storage phosphor screens used with the PhosphorImager and the capillary
arrays used with the MegaBACE 1000, are currently purchased from single
sources. The storage phosphor screens are manufactured by Eastman Kodak
Company (Kodak). Although such screens are commercially available from
Kodak, the Company believes that the Company and Kodak, which uses the
screens for medical imaging applications, are the only significant
customers. Any disruption or delay in the supply of screens by Kodak would
have a material adverse effect on the Company. The capillary arrays used
by the MegaBACE 1000 are manufactured by Polymicro Technologies, Inc.
(PTI). Should there be a disruption or delay in the supply of capillary
arrays from PTI, Molecular has sufficient raw materials, engineering and
process documentation to continue manufacturing arrays to forecast for some
time. The Company has qualified a second vendor that can manufacture
arrays, after a setup time. Additional components, such as computers,
lasers, optical elements and galvanometers are currently purchased in
configurations specific to and integrated into the Company's products.
While the Company believes that most of the components used in its products
are available from alternate sources, any unanticipated interruption of the
supply of these additional components or other supplies could require the
Company to redesign its products.
The Company manufactures its products to forecast rather than to
outstanding orders, and products are typically shipped within 30 to 90 days
of order receipt. As a result, the Company does not generally carry a
substantial backlog, and the amount of backlog at any particular date is
generally not indicative of its future level of sales. The amount of
backlog and the timing of shipment of products are subject to variation,
especially in connection with the introduction of new products, such as
occurred with the introduction of the Company's Storm product in 1995. In
addition, delivery of components of unacceptable quality could delay
shipment of the Company's products, or result in returns of products
incorporating such components by customers, which could have a material
adverse effect on the Company's business, financial condition or results of
operations. Products are typically warranted for one year. At the end of
that period, the Company offers additional warranty coverage. Service on
out-of-warranty instruments is invoiced on the basis of parts, labor and
travel. The Company's products are not subject to regulation by the U.S.
Food and Drug Administration; however, the products are subject to
Department of Commerce export controls and the European Union's unified
import regulations. The Company has experienced no material difficulties
in obtaining necessary export licenses to date.
Product Development
The Company pursues active development programs in the areas of new
detection techniques, optical and electronic systems, and computer
software. The Company's development staff consisted of 86 people on
December 31, 1997.
In the fourth quarter of 1994, as part of a consortium led by
Affymetrix, Inc., the Company was awarded funding from the Advanced
Technology Program of the National Institute of Standards and Technology
(NIST). The two companies collaborate with researchers at several academic
and research institutions in an effort to develop miniaturized DNA
diagnostic systems. The Company has received notification from NIST that
funding has been authorized for the remaining term of the grant, which ends
January 2000. The two companies will receive up to $31 million in matching
funds, to be divided 33% to the Company and 67% to Affymetrix, over the
five years beginning in January 1995, for research and development in the
field of DNA diagnostic devices, with a total shared project cost of $63
million. The additional funding is allowing the Company to work toward
developing new fluorescence detection technologies and DNA separation
devices and to apply these to the expanding field of molecular genetics.
In 1997, 1996 and 1995, the Company recognized credits to its expenses of
approximately $2.1 million, $1.9 and $1.5 million, and reduced its
capitalized software by $498,000, $337,000 and $134,000, respectively,
representing support from the grant.
In December 1997, the Company and Affymetrix announced the
formation of the Genetic Analysis Technology ConsortiumT (GATCT), which
was formed to provide a unified set of specifications for the design,
processing, reading and analysis of DNA microarrays. In connection with
this agreement, the two companies also signed a non-exclusive,
worldwide, royalty-bearing license granting Molecular Dynamics rights to
certain Affymetrix patents for commercializing low and medium density
DNA microarrays. Under the terms of the patent license agreement, the
Company paid Affymetrix an up-front license fee, and will pay operating
fees for instruments if certain patents issue in the future, as well as
royalties in the future associated with product sales. In addition,
Molecular Dynamics granted a license to Affymetrix under certain of its
patents in the array reader field for commercialization of systems
related to microarrays.
The Company engages in several product development programs
simultaneously, and prioritizes these programs to take advantage of the
most significant market opportunities. Accordingly, the Company may change
its product development schedule to accelerate the introduction of products
for which it perceives a higher market demand and to delay products
currently under development. Research and development expenses were
approximately $6,871,000, $6,628,000 and $5,533,000 during 1997, 1996 and
1995, respectively, including a reduction in expenses of $2,069,000,
$1,945,000 and $1,531,000, respectively, representing support from the
Company's NIST grant. Expenses also exclude $778,000, $456,000 and $514,000
of capitalized software costs in 1997, 1996 and 1995, respectively, after
considering credits to capitalized software of $498,000, $337,000 and
$134,000 in 1997, 1996 and 1995, respectively, representing support from
the NIST grant.
The Company and Amersham Pharmacia Biotech are developing systems
for gene expression analysis using DNA microarrays. By the end of 1997,
the Company had entered into 11 agreements with genomics and
pharmaceutical companies and academic institutions for early access to
its microarray technologies. Under the terms of these agreements,
participating companies and educational institutions provide funding and
technical feedback in exchange for delivery of various generations of
microarray systems and a period of exclusive access to the Company's
technology. At the end of 1997, Molecular Dynamics had delivered multiple
microarray systems. Research and development expenses were reduced by
$1.7 million and an immaterial amount in 1997 and 1996, respectively,
from credits representing amortization of fees from clients
participating in the Technology Access Program. Molecular Dynamics and
Amersham Pharmacia Biotech intend to pursue similar collaborations in
the future, with companies and researchers who have need of this
technology and the ability to fund its development prior to its release
to the general market.
Patents and Proprietary Rights
The Company holds patents on the utilization of 3-D reconstruction
techniques of confocal images issued in the United States and Canada, with
one patent pending in Japan. The Company has informed other suppliers of
competitive confocal laser scanning microscopes that it believes these
suppliers are violating Molecular Dynamics' U.S. patent. The Company
currently has three licensees. In April 1996, the Company filed suit
against Leica, Inc., one of several companies that the Company believes are
infringing its U.S. patent. This suit is currently on-going and may result
in substantial future legal expenses for the Company.
The Company's patent portfolio includes 16 granted U.S. patents, 10
U.S. patent applications on file, three granted foreign patents, and 14
foreign patent applications on file. The Company actively seeks, where
appropriate, intellectual property protection for its products and
proprietary information by means of United States and foreign patents and
trademarks. In addition, the Company relies upon trade secrets and
contractual arrangements to protect certain of its proprietary information
and products.
The Company is a party to an agreement with Fuji Photo Film Co.,
Ltd. ("Fuji"), pursuant to which the Company received a license to certain
patents held by Fuji that affect the Company's PhosphorImager product line.
In addition, the Company obtained a nonexclusive license to certain patents
for all markets outside Japan in exchange for an ongoing royalty on the
sales price of all current and future products using certain storage
phosphor technology. The terms of this licensing agreement were
renegotiated in 1997, permitting PhosphorImager products to be sold in
Japan.
The Company also relies on trade secrets and proprietary know-how.
There can be no assurance that the trade secret or proprietary nature of
such information will not be wrongfully breached by employees, consultants,
advisors or others, or that the Company's trade secrets or proprietary
know-how will not otherwise become known or be independently developed by
competitors in such a manner that the Company has no practical recourse.
In December 1994, the Company entered into an agreement with
BioLumin Corporation (BioLumin), in order to allow it to pursue the
development of technology developed by BioLumin. Under the terms of this
agreement, the Company acquired an option for $1 million to purchase
BioLumin's technology and assets under certain conditions. The Company
exercised this option in 1995, and paid an additional amount of $1.1
million. The total amount was recorded as acquired in-process research and
development for the year ended December 31, 1995. The agreement with
BioLumin also provides for royalty payments to be made by the Company on
sales of the product. In 1997 and 1996, the Company recorded approximately
$89,000 and an immaterial amount, respectively, for these royalties.
The Company has entered into exclusive license agreements for two
patents with the University of California at Berkeley, pursuant to which it
acquired certain rights to design, manufacture and sell products based on
technology relating to confocal fluorescence gel scanning. The Company
will pay a royalty under these licenses based on sales of products
incorporating the licensed technology. The first patent covered by this
agreement was issued in February 1992, and the second was issued in
December 1993. Because the technology was developed in part through the
use of federal government funds, the Company's licenses of such patent
rights may be subject to certain rights of the United States governmental
agencies to use the technology.
The Company is a party to an agreement with Dr. Bala S. Manian, a
co-founder of the Company, pursuant to which it received certain licenses
to technology developed by Dr. Manian.
In conjunction with the GATC agreement with Affymetrix, the Company
has a non-exclusive license to certain Affymetrix patents relevant to DNA
microarrays, and the Company has granted Affymetrix rights to certain of
its patents. See Product Development for more information.
In September 1997, the Company entered into a software license
agreement with Incyte Pharmaceuticals, Inc. to secure access to Incyte's
LifeArrayT gene expression database management software. LifeArray
software allows scientists to view, manage, and compare data from thousands
of microarray experiments and detect the meaningful changes in gene
expression patterns.
Competition
The market for the Company's products is generally highly
competitive, and Molecular Dynamics expects competition to increase. The
Company competes with many other instrumentation companies for the
researcher's allocation of capital funds, including those which do not
manufacture image-scanning, DNA sequencing or microarray products directly
competitive with those of the Company. Many of these companies have
significantly greater research and development, marketing and financial
resources than the Company, and therefore represent significant
competition. The Company believes that the primary competitive factors in
the market for the Company's products are breadth of applications, ease of
use, productivity, quantitative accuracy and price.
The Company's densitometer products compete with products offered by
Bio-Rad Laboratories (Bio-Rad) and Shimadzu Scientific Instruments, Inc.,
among others. The Company believes that it competes favorably with the
above companies' products. In addition, many small companies offer
inexpensive document scanners and camera systems with custom image analysis
software for customers who require a lower level of quantitative accuracy
than provided by the Company's products.
Until early 1994, the Company's direct competition for the
PhosphorImager was relatively limited. Fuji offers a product competitive
to the Company's PhosphorImager SI and Storm. Before 1997, pursuant to a
licensing agreement with Fuji, the Company did not sell its PhosphorImager
products in Japan. This licensing agreement was renegotiated in 1997, and
these products are now sold in Japan, in competition with Fuji. The
Company believes that its products have certain advantages with respect to
performance, additional imaging technologies, price and size of the system
compared to the Fuji product. Bio-Rad has offered a competitive product
since 1993. The Company believes that the PhosphorImager SI and Storm have
certain advantages with respect to performance and additional imaging
technologies compared to the Bio-Rad product. Each of these companies is
substantially larger than the Company and there can be no assurance that
the Company will be able to compete successfully against them.
The Company believes that the FluorImager was the first general
purpose gel and blot scanning instrument to use fluorescence as a detection
technique. Market acceptance of the FluorImager depends upon the
willingness of customers to shift from the use of radioactivity to
fluorescence. The Company introduced the Storm product line in order to
facilitate the shift to fluorescent detection while simultaneously
providing detection of radioactivity. The Company is experiencing
competition from Hitachi Instruments, Inc., which sells a fluorescence
scanner featuring rapid multi-color scanning and a large scan area.
The Company's BioLumin 960 product competes with products offered by
many manufacturers, including Perseptive Biosystems, Dynatech, BioTek and
Molecular Devices. The Company believes that its product competes
favorably with products of these companies due to the combination of
fluorescence and absorbance detection methods in one instrument.
The MegaBACE 1000 competes with the PrismT DNA Sequencers
manufactured by the Applied Biosystems Division of Perkin-Elmer, Inc.,
which dominates the market for fluorescent DNA sequencing instruments. The
Company believes that the MegaBACE 1000 competes favorably with the
competitive products in the areas of automation and rate of throughput.
Perkin-Elmer is substantially larger than the Company and there can be no
assurance that the Company will be able to compete successfully against it.
Currently, the Company is not aware of any companies other than
Molecular Dynamics that are selling microarray spotter-scanner systems.
Affymetrix, Inc. sells standard and custom high-density Genechipr arrays,
which are manufactured by Affymetrix using a high resolution
photolithographic process adapted from the semiconductor industry.
Hewlett-Packard Company manufactures microarray scanners, for analysis of
the Genechip. Affymetrix, Amersham Pharmacia Biotech and Hewlett-Packard
Company all sell these scanners. General Scanning, Inc. manufactures and
sells a microarray scanner. Incyte Pharmaceuticals, Inc. provides customer
services that return gene expression information to its pharmaceutical
customers.
Agreements with Amersham Pharmacia Biotech
In April 1994, the Company concluded a series of agreements with
Amersham Pharmacia Biotech whereby Molecular Dynamics would take
responsibility for development and sales of certain instrumentation, and
Amersham would develop and sell associated reagents. Development costs and
profits of these reagent and instrument sales will be shared between the
two companies. Products that are currently included in the profit-sharing
arrangement are the MegaBACE 1000 and the Microarray Technology Access
Program. Amersham has acquired approximately one million shares of the
Company's capital stock on the open market as part of this agreement.
Human Resources
As of December 28, 1997, the Company had 286 full-time employees, of
which 86 were in product development, 55 were in manufacturing, 122 were in
sales and marketing and 23 were in administration. The Company's success
will depend in part on its continued ability to attract and retain high-
quality employees. The Company considers its relations with employees to
be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company and their
respective ages and positions are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------- ---- ----------------------------------------------------
<S> <C> <C>
James M. Schlater 61 Chairman of the Board of Directors
Jay Flatley 45 President, Chief Executive Officer, Chief Operating
Officer, Acting Chief Financial Officer and Director
David L. Barker 56 Vice President, Scientific Development
Bud L. Bromley 47 Sr. Vice President, Sales and Marketing
Bruce K. Leisz 46 Vice President, Operations
Mark J. Sutherland 41 Vice President, Microarray Business Segment
</TABLE>
Officers are elected by and serve at the discretion of the Board of
Directors.
Mr. Schlater, a co-founder of the Company, has served as a director
of the Company since September 1987, and was appointed Chairman of the
Board of Directors in August 1991. From August 1991 to July 1994, he
served as Chief Executive Officer of the Company. From September 1987 to
August 1991, he served as President and Chief Financial Officer. Prior to
co-founding the Company, Mr. Schlater co-founded Applied Biosystems, Inc.,
a bioanalytical research instrumentation company, and served as a Senior
Vice President responsible for sales and marketing from October 1981 to
January 1987.
Mr. Flatley, a co-founder of the Company, joined the Company as Vice
President of Operations in September 1987 and served in that position until
January 1990, when he was appointed Senior Vice President and Chief
Operating Officer. He was appointed President of the Company in August
1991 and Chief Executive Officer of the Company in July 1994 and has served
as Acting Chief Financial Officer since October 28, 1994. He has served as
a member of the Company's Board of Directors since March 1992. Mr. Flatley
holds a B.A. in Economics from Claremont Men's College and B.S. and M.S.
degrees in Industrial Engineering from Stanford University.
Dr. Barker joined the Company as Director of Biochemical Research in
February 1988 and was appointed Vice President, Scientific Development in
March 1991. From May 1985 to January 1988, Dr. Barker was employed as
Scientific Sales Consultant for Protein Databases, Inc., a protein
separation and analysis company. Dr. Barker holds a B.S. in Chemistry from
the California Institute of Technology and a Ph.D. in Biochemistry from
Brandeis University, and he was a Postdoctoral Research Fellow at Harvard
Medical School from 1969 to 1971.
Mr. Bromley joined the Company in November 1995 as Senior Vice
President, Sales and Marketing. Prior to working for the Company, Mr.
Bromley held a variety of positions with Hewlett-Packard Company (HP) in
the Chemical Analysis Group. From November 1994, Mr. Bromley was the
Manager of Information Architecture, HP Chemical Analysis Group Sales and
Marketing. From July 1993 to November 1994 he was Worldwide Bioscience
Sales and Marketing Manager. From November 1988 to July 1993 he was Global
Accounts Marketing Manager, Chemical Analysis Group. Mr. Bromley holds a
B.S. in Natural Sciences with a Chemistry concentration from Mercer
University.
Mr. Leisz joined the Company in February 1988 as Director of
Manufacturing and was appointed Vice President, Manufacturing in January
1990. In February 1995, Mr. Leisz was appointed Vice President of
Operations. From April 1983 to February 1988, Mr. Leisz served as Vice
President, Manufacturing of Ridge Computers, a manufacturer of RISC-based
computers. Mr. Leisz holds a B.S. in Mechanical Engineering and an M.B.A.
from the University of California at Berkeley.
Mr. Sutherland joined the Company in August 1988 as Asia/Pacific
Sales Manager and in 1994 was appointed Vice President, Strategic Programs.
In June 1997, he was appointed Vice President, Microarray Business Segment.
Mr. Sutherland holds a B.S. in Chemistry from Stanford University.
Item 2. Properties
The Company leases approximately 83,000 square feet in Sunnyvale,
California, under a lease expiring January 31, 2001. The Company also
leases sales offices in the United Kingdom, Germany, France, Japan and
Australia, and an administrative office in the Netherlands.
Item 3. Legal Proceedings
The Company owns U.S. Patent No. 34,214, which relates to systems
used for generating 3-D images from confocal microscopes. The Company
asserted this patent against Leica, Inc. in a patent infringement suit
filed on April 11, 1996, in federal district court, Northern California,
Molecular Dynamics, Inc. v. Leica, Inc. C96-20280 RMW (PVT). This suit is
currently ongoing and may result in future legal expenses for the Company.
Fact discovery is complete, and the expert discovery process is ongoing. A
trial date of November 9, 1998 has been scheduled.
On November 18, 1996, the Company filed a complaint against a former
employee and DenOptix, Inc. The complaint, filed in the California Superior
Court for Santa Clara County, sought damages and injunctive relief for
breach of contract and unfair competition based upon improper use of the
Company's information and property in developing a competing instrument.
Molecular Dynamics, Inc. v. DenOptix, Inc. CV762 197. This suit was
satisfactorily resolved in 1997 through a confidential settlement agreement
whereby the Company acquired certain rights and consideration, and the
action was thereafter dismissed.
On March 13, 1998, Molecular Dynamics, Amersham Pharmacia Biotech
UK Limited and Amersham Life Science Inc. were served with a complaint
brought by the Perkin-Elmer Corporation, PE Applied Biosystems Division
("Applied Biosystems") alleging willful infringement by the Company of
two United States Patents owned by Perkin-Elmer and seeking a
declaratory judgment that either Applied Biosystems does not infringe a
United States patent exclusively licensed to Amersham Pharmacia Biotech,
or such patent is invalid. This alleged infringement relates to
Molecular Dynamics' MegaBACE 1000 DNA Sequencing Systems and FluorImager
595 Imaging Systems. Applied Biosystems is seeking injunctive relief as
well as a claim for damages regarding the alleged infringement, along
with attorneys' fees. No trial date has been set, and no response to
the complaint has yet been filed. The complaint was filed in United
States District Court, Northern District of California. Although
Management believes that the ultimate disposition of this matter will
not materially affect the financial position, results of operations or
liquidity of the Company, significant legal expenses could be incurred
relative to such lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 28, 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since February 5, 1993, the Company's common stock, par value
$.01 has been traded on the Nasdaq National Market under the symbol MDYN. The
following table sets forth the high and low closing sales price on the National
Market system for fiscal years 1996 and 1997. The approximate number of record
holders of the Company's common stock as of March 18, 1998 was 133.
High Low
-------- --------
1st Quarter 1996 $8.00 $5.50
2nd Quarter 1996 8.75 4.86
3rd Quarter 1996 7.63 5.25
4th Quarter 1996 14.63 7.38
1st Quarter 1997 $16.75 $10.63
2nd Quarter 1997 17.50 10.50
3rd Quarter 1997 28.13 12.63
4th Quarter 1997 27.38 13.63
Dividend Policy
The Company has not paid any cash dividends since its inception and
does not anticipate paying cash dividends in the foreseeable future.
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Years Ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales and other revenue $55,715 $49,378 $38,938 $33,860 $38,084
Cost of sales and other
revenue 25,456 21,471 17,532 15,919 16,684
--------- --------- --------- --------- ---------
Gross margin 30,259 27,907 21,406 17,941 21,400
--------- --------- --------- --------- ---------
Operating expenses:
Research and development 6,871 6,628 5,533 4,953 4,025
Sales and marketing 14,351 14,662 14,017 12,463 10,828
General and administrative 4,697 3,723 3,728 3,642 2,399
Acquired in-process
research and development -- -- 2,082 -- --
Litigation settlement -- -- -- 1,975 --
--------- --------- --------- --------- ---------
Operating income (loss) 4,340 2,894 (3,954) (5,092) 4,148
Interest income 1,106 844 918 1,032 898
Other income 77 49 69 72 49
--------- --------- --------- --------- ---------
Income (loss) before income
taxes 5,523 3,787 (2,967) (3,988) 5,095
Income taxes 663 379 20 716 1,119
--------- --------- --------- --------- ---------
Net income (loss) $4,860 $3,408 ($2,987) ($4,704) $3,976
========= ========= ========= ========= =========
Earnings (loss) per share (1):
Basic $0.48 $0.34 ($0.30) ($0.47) $0.42
========= ========= ========= ========= =========
Diluted $0.43 $0.32 ($0.30) ($0.47) $0.39
========= ========= ========= ========= =========
Shares used to compute
earnings (loss) per share:
Basic 10,181 10,058 10,095 10,056 9,524
========= ========= ========= ========= =========
Diluted 11,368 10,715 10,095 10,056 10,295
========= ========= ========= ========= =========
<CAPTION>
December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $34,351 $27,889 $28,568 $30,237 $36,707
Total assets 59,055 46,043 42,745 45,067 47,032
Stockholders' equity 41,918 33,514 33,645 36,454 41,418
(1) The earnings (loss) per share amounts for years prior to 1997 have been restated
required to comply with Statement of Financial Accounting Standards No. 128,
"Earnings per Share." See Note 1 of Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements contained herein. 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. See
"Factors That May Affect Future Results."
RESULTS OF OPERATIONS
The following table sets forth the percentage of Sales and
other revenue for certain items in the Company's consolidated statements of
operations for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Sales and other revenue 100.0% 100.0% 100.0%
Gross margin 54.3% 56.5% 55.0%
Operating expenses:
Research and development 12.3% 13.4% 14.2%
Sales and marketing 25.8% 29.7% 36.0%
General and administrative 8.4% 7.5% 9.6%
Acquired in-process research and
development -- -- 5.3%
Operating income (loss) 7.8% 5.9% -10.2%
Income (loss) before income taxes 9.9% 7.7% -7.6%
Net income (loss) 8.7% 6.9% -7.7%
</TABLE>
1997 Compared to 1996
Sales and Other Revenue. The Company's Sales and other revenue
increased by 13% to $55.7 million in 1997 from $49.4 million in 1996. The
increase resulted from recognition of revenue pursuant to agreements for
early access to systems and technology for the analysis of DNA in
microarrays and an increase in sales due to the introduction of
MegaBACET1000 high-throughput sequencing instruments to test-site
customers. The increase occurred primarily in the United States, offset by
small declines in Europe, Japan and Australia. The Company's Gel and Blot
Scanner sales, including related screens and cassettes, remained nearly
equal in dollars to those in 1996, and represented 70% of sales during
1997, compared with 81% in 1996. The Gel and Blot Scanner products include
the Company's PhosphorImager, Storm, FluorImager, Densitometer, and
BioLumin instruments. The percentage decrease from the prior year is due
to increases in sales of the Company's other products. International sales
constituted 38% of sales in 1997 compared to 44% in 1996. The Company
sells its products through direct sales operations in North America, the
United Kingdom, Germany, France, Japan and Australia. Changes in foreign
currency exchange rates from the prior period had the effect of decreasing
the Company's sales by approximately 2.4% for 1997 compared to 1996.
The Company believes that a majority of its sales are generated from
research groups that depend on grants or funding from governmental
agencies, and the remaining portion of the Company's sales is derived
primarily from genomics, biotechnology, pharmaceutical, and chemical
companies. The Company anticipates that an increased percentage of its
business will come from pharmaceutical and genomics companies in the
future. The Company's revenues and the sales cycle for the Company's
products are directly affected by the availability, timing, and amount of
funding for these organizations.
Gross Margins. Gross margins were 54.3% and 56.5% in 1997 and 1996,
respectively. The decrease in gross margins is primarily due to the
increase in the percentage of Sales and other revenue contributed by new
technologies and instruments, which typically contribute lower gross
margins early in product life cycles, and a lower proportion of Sales and
other revenue contributed by the Company's Gel and Blot Scanner products,
which have higher gross margins.
Research and Development Expense. Research and development expense
decreased as a percentage of sales to 12.3% in 1997 from 13.4% in 1996. In
absolute dollars, research and development expenses increased from $6.6
million in 1996 to $6.9 million in 1997 as a result of the expansion of a
number of development programs, offset by credits to expense representing
recognition of fees from clients participating in the Company's program for
early access to technology for the analysis of DNA in microarrays, and
support from the Company's NIST and other grants. Research and development
expenses for 1997 have been reduced by $1.9 million of credits representing
amortization of fees from clients participating in the Company's technology
access program. Comparable reductions were insignificant in 1996. Also,
research and development expenses for 1997 and 1996 have been reduced by
$2.1 million and $1.9 million, respectively, of credits representing
support from the NIST grant. Expenses in 1997 and 1996 also exclude
capitalized software development costs of $778,000 and $456,000,
respectively, after considering credits to capitalized software of $498,000
and $337,000 in 1997 and 1996, respectively, representing support from the
NIST grant.
Sales and Marketing Expense. Sales and marketing expense decreased
as a percentage of sales to 25.8% in 1997 from 29.7% in 1996, primarily due
to increased Sales and other revenues. In absolute dollars, sales and
marketing expense decreased to $14.4 million in 1997 from $14.7 million in
1996 primarily because of changes in resource allocations within the
Company's sales and marketing departments, which resulted in improved
efficiency. Changes in foreign currency exchange rates had the effect of
decreasing the Company's sales and marketing expenses by approximately 3%
for 1997 compared to 1996.
General and Administrative Expense. General and administrative
expense increased as a percentage of sales to 8.4% in 1997 from 7.5% in
1996, primarily as a result of legal expenses associated with patent and
general litigation issues, and other smaller changes in general corporate
expenditures.
Interest and Other Income, Net. Interest and other income, net,
increased to $1.2 million in 1997 from $0.9 million in 1996. This increase
resulted primarily from higher average cash and securities available-for-
sale balances and higher interest rates earned in 1997.
Provision for Income Taxes. The Company's income tax expense was
$663,000 and $379,000 in 1997 and 1996, respectively. In 1997, the
Company's effective tax rate of 12%, compared to a rate of 10% for 1996.
The increased tax rate in 1997 is attributable to the complete utilization
of federal, state and foreign net operating loss carryovers, (without
regard to amounts attributable to the exercise of stock options, for which
related tax benefits were credited to equity), during the year, while the
lower tax rate in 1996 is attributable to usage of net operating loss
carryovers. The income tax expense consists of state and federal
alternative minimum taxes, state minimum franchise taxes, as well as
foreign taxes.
Earnings (Loss) Per Share. Basic earnings per share were $0.48 in
1997, compared to $0.34 in 1996. Diluted earnings per share were $0.43 in
1997, compared to $0.32 in 1996. This increase is due to increases in
revenues, partially offset by increases in normal operating expenses. In
1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share. See
Note 1 to the financial statements for a description of SFAS No. 128.
1996 Compared to 1995
Sales and Other Revenue. The Company's Sales and other revenue
increased by 27% to $49.4 million in 1996 from $38.9 million in 1995. This
increase resulted primarily from increased sales in the United States and
the Pacific Rim, offset by a slight decline in sales in Europe caused by
decreased sales through European distributors. Sales of the PhosphorImager
product family, including the Storm products and related screens and
cassettes, contributed to the increased sales and represented 63% of sales
during 1996, compared with 48% in 1995. International sales constituted
44% of sales in 1996 compared to 49% in 1995. Changes in foreign currency
exchange rates from the prior period had the effect of decreasing the
Company's sales by 3% for the year ended December 31, 1996.
Gross Margins. Gross margins were 56.5% and 55.0% in 1996 and 1995,
respectively. The increase in gross margins is primarily due to the
increase in the percentage of revenue contributed by instruments compared
to lower margin service and accessories, and to an increase in sales of the
Storm products, which have higher gross margins than certain of the
Company's other products.
Research and Development Expense. Research and development expense
decreased as a percentage of sales from 14.2% in 1995 to 13.4% in 1996. In
absolute dollars, research and development expenses increased to $6.6
million in 1996 from $5.5 million in 1995 as a result of the expansion of a
number of major development programs, partially offset by support from the
Company's NIST grant. Research and development expenses for 1996 and 1995
have been reduced by $1.9 million and $1.5 million, respectively, of
credits representing support from the NIST grant. Expenses in 1996 and
1995 also exclude capitalized software development costs of $456,000 and
$514,000, respectively, after considering credits to capitalized software
of $337,000 and $134,000 in 1996 and 1995, respectively, representing
support from the NIST grant.
Sales and Marketing Expense. Sales and marketing expense decreased
as a percentage of sales from 36.0% in 1995 to 29.7% in 1996. In absolute
dollars, sales and marketing expense increased to $14.7 million in 1996
from $14.0 million in 1995 primarily because of promotional, sales and
marketing activities relating to the Company's Storm products.
General and Administrative Expense. General and administrative
expense decreased as a percentage of sales from 9.6% in 1995 to 7.5% in
1996. In absolute dollars, general and administrative expense remained at
$3.7 million in both years, as a result of continuing cost control
measures.
Acquired In-process Research and Development. The Company determined
that the technology acquired from BioLumin, Incorporated (BioLumin) in 1995
was in-process research and development, and therefore the amount of
$2,082,000 allocated to the technology was expensed as acquired in-process
research and development in the accompanying consolidated statement of
operations for 1995.
Interest and Other Income, Net. Interest and other income, net,
decreased to $893,000 in 1996 from $987,000 in 1995. This decrease
resulted primarily from lower average cash balances in 1996.
Provision for Income Taxes. The Company's income tax expense was
$379,000 and $20,000 in 1996 and 1995, respectively. In 1996, the Company
utilized NOL carryovers, but was subject to federal and state alternative
minimum taxes and foreign taxes. The relatively minor amount of income tax
expense recognized in 1995 relates to foreign and state income taxes.
Earnings (Loss) Per Share. Basic earnings per share were $0.34 in
1996, compared to a net loss per share of $0.30 in 1995. Diluted earnings
per share were $0.32 in 1996, compared to a net loss per share of $0.30 in
1995. The increase in basic earnings per share is due to increases in
revenues, only partially offset by increases in normal operating expenses,
and the fact that approximately $0.21 of the 1995 loss per share was due to
the acquisition of in-process research and development of BioLumin.
Factors That May Affect Future Results
The Company believes that in the future, its results of operations
in a quarterly period may be impacted by factors such as delays in the
shipment of new products, difficulty in acquiring critical product
components of acceptable quality and in required quantity, decreases or
delays in the signing of Microarray Technology Access Agreements, increased
competition, the effect of announcements of new competitive products,
adverse changes in economic conditions in any of the countries in which the
Company does business, a slower growth rate in the Company's target
markets, effects of Year 2000 issues (see Year 2000), order deferrals in
anticipation of new product releases, decisions to invest in research and
development programs, legal expenses, reduction or delay of government and
private sector funding of research activities, the Company's profit-sharing
agreements with Amersham Pharmacia Biotech, the Company's ability to keep
pace with new technological developments, or lack of market acceptance of
new products. Specifically, the Company has experienced delays with
respect to the ramp-up of shipments of its MegaBACE product in the fourth
quarter of 1997 due to unforeseen difficulties in adapting the customers'
sample preparation processes to a capillary-based technology. The
challenges associated with integration of a system as complex as MegaBACE
into existing user environments can be expected to continue through at
least the first half of 1998 and may cause delays in transition to full
market availability. Additionally, with a significant portion of net
sales and net income contributed by international operations, fluctuations
of the U.S. dollar against foreign currencies could affect the Company's
consolidated results of operations and financial condition in a particular
quarter. There can be no assurance that the Company will be able to grow
in future periods or that it will be profitable on a quarterly or annual
basis.
The storage phosphor screens used with the Company's PhosphorImager
and Storm products are currently purchased from a single source. The
storage phosphor screens are manufactured by Eastman Kodak Company (Kodak).
Although these screens are available commercially from Kodak, the Company
believes that the Company and Kodak, which uses the screens for medical
imaging applications, are the only significant customers. Any disruption
or delay in the supply of screens by Kodak would have a material adverse
effect on the Company. The capillary arrays used by the MegaBACE 1000 are
manufactured by Polymicro Technologies, Inc. (PTI). Should there be a
disruption or delay in the supply of capillary arrays from PTI, Molecular
has sufficient raw materials, engineering and process documentation to
continue manufacturing arrays to forecast for some time. The Company has
qualified a second vendor that can manufacture arrays, after a setup time.
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, such
as the shortfall with respect to the fourth quarter of 1997, could have a
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, as occurred with respect to the
fourth quarter of 1997, 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.
The Asia-Pacific region is currently experiencing currency, economic
and political instability. To date, the Company's results of operations
have not experienced any significant adverse effects from this instability.
However, in late 1997, the Company's customers experienced a delay in
funding which resulted in a delay in orders. If the situation continues,
additional customers may delay or decide against purchases of the Company's
products. The Company cannot predict whether such a decrease in demand will
materialize and if it does, whether it will have an adverse material effect
on the Company's results of operations.
Liquidity and Capital Resources
The Company has financed its operations to date primarily through
internally generated funds and the sale of equity securities. At December
31, 1997 and 1996, cash and securities available-for-sale balances were
$20.1 million and $20.6 million, respectively, and working capital was
$34.4 million and $27.4 million, respectively. For the years ended December
31, 1997 and 1996, cash generated from operations was $0.5 million and $7.8
million, respectively. These changes are substantially due to profitable
operations and increases in current liabilities related to unearned revenue
for Technology Access Agreements and deferred service revenue, partially
offset by increased accounts receivable under the Company's Microarray
Technology Access agreements, inventory purchases in anticipation of future
shipments, especially related to the MegaBACE products, and a large
proportion of sales occurring near the end of the fourth quarter. The
Company spent $3.5 million, $1.5 million, and $1.2 million in connection
with the acquisition of equipment and leasehold improvements during 1997,
1996 and 1995, respectively.
The Company enters into foreign exchange contracts to hedge
receivables denominated in foreign currencies. The Company's forward
exchange hedge contracts require the Company to exchange foreign currencies
for U.S. dollars at rates agreed upon at the inception of the contracts. As
of December 31, 1997, the Company had approximately $2.6 million of forward
exchange contracts outstanding, consisting primarily of Japanese yen,
German marks, French francs and British pounds, to hedge firm commitments
relating to certain of its foreign receivables. The contracts mature at
various dates through June 1998.
During 1996, the Company instituted a factoring program in order to
shorten the time between customer shipments and receipt of payment. Since
the Company retains ultimate responsibility for collection of its Japan
accounts, amounts paid by the factoring entity are classified as
liabilities until the customer pays the factoring entity.
The Company's principal commitments as of December 31, 1997 consist
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 and securities available-for-sale will be
sufficient to satisfy its working capital requirements for at least the
next twelve months.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income which will be effective for financial statements
for periods beginning after December 15, 1997, and establishes standards
for reporting and display of comprehensive income and its components in
a full set of general purpose financial statements. Earlier application
is permitted. The Company will make the required reporting of
comprehensive income in its consolidated financial statements for the
fiscal year ending December 31, 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of a Business Enterprise which will be effective for financial
statements for periods beginning after December 15, 1997, and
establishes standards for disclosures about segments of an enterprise.
Earlier application is encouraged. The Company will make the required
disclosures under SFAS No. 131 in its consolidated financial statements
for the fiscal year ending December 31, 1998. The Company has not yet
assessed the future impact of the disclosures required by SFAS No. 131
on its financial statements.
Year 2000
The Company is reviewing its internal computer systems and product
offerings to ensure these systems and offerings are adequately able to
address the issues expected to arise in connection with the Year 2000.
These issues include the possibility that software which does not have
the capacity to recognize four digits in a date field may no longer
function properly when use of that date becomes necessary.
The Company expects to implement the systems and programming
changes necessary to address Year 2000 issues on an enterprise-wide
basis and is currently reviewing the cost of such actions. A
significant proportion of these costs are not expected to be incremental
costs to the Company, but will represent redeployment of existing
Company resources. The Company expects such modifications to its
products and internal systems will be made on a timely basis, and
presently believes that, with modifications to existing software or
converting to new software, the Year 2000 issue will not pose
significant operational problems for the Company's computer systems;
however, there can be no assurance there will not be a delay in, or
increased costs associated with, the implementation of such changes, and
the Company's inability to implement such changes could have an adverse
effect on future results of operations.
The Company has not fully determined the extent to which it may
be impacted by third parties' systems, which may not be Year 2000-
compliant. The Year 2000 computer issue creates risk for the Company
from third parties with whom the Company deals on financial transactions
worldwide. While the Company has begun efforts to seek reassurance from
its suppliers and service providers, there can be no assurance that the
systems of other companies that the Company deals with or on which the
Company's systems rely will be timely converted, or that any such
failure to convert by another company could not have an adverse effect
on the Company.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Auditors 31
Consolidated Balance Sheets as of December 31, 1997 and 1996 32
Consolidated Statements of Operations for each of the
years in the three-year period ended December 31, 1997 33
Consolidated Statements of Stockholders' Equity for each of the
years in the three-year period ended December 31, 1997 34
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31, 1997 35
Notes to Consolidated Financial Statements 36
Unaudited Quarterly Financial Data 56
<PAGE>
Report of Independent Auditors
The Board of Directors
and Stockholders
Molecular Dynamics, Inc.:
We have audited the accompanying consolidated balance sheets of Molecular
Dynamics, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December
31, 1997. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Molecular Dynamics, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Mountain View, California
January 28, 1998
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,571 $8,024
Securities available-for-sale 8,558 12,617
Trade accounts receivable, net of allowance for
doubtful accounts of $282 in 1997 and $254 in 1996 14,403 11,002
Other accounts receivable 5,721 1,559
Inventories 10,675 6,869
Prepaids and other current assets 560 347
--------- ---------
Total current assets 51,488 40,418
Property and equipment, net 4,722 2,997
Other assets, net 2,845 2,628
--------- ---------
$59,055 $46,043
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,554 $3,264
Accrued expenses 5,491 5,073
Factoring liability 447 1,124
Unearned revenue and customer advances 7,645 3,068
--------- ---------
Total current liabilities 17,137 12,529
--------- ---------
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; 30,000,000 shares
authorized; 10,366,772 and 10,208,356 shares issued
and outstanding in 1997 and 1996, respectively 104 102
Additional paid-in capital 39,467 39,862
Accumulated earnings (deficit) 2,434 (2,426)
Unrealized gain on securities available-for-sale 7 5
Cumulative translation adjustment (94) (86)
Less 445,800 shares of common stock in treasury
in 1996 at cost -- (3,943)
--------- ---------
Total stockholders' equity 41,918 33,514
--------- ---------
$59,055 $46,043
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Sales and other revenue $55,715 $49,378 $38,938
Cost of sales and other revenue 25,456 21,471 17,532
--------- --------- ---------
Gross margin 30,259 27,907 21,406
--------- --------- ---------
Operating expenses:
Research and development 6,871 6,628 5,533
Sales and marketing 14,351 14,662 14,017
General and administrative 4,697 3,723 3,728
Acquired in-process research and
development -- -- 2,082
--------- --------- ---------
Total operating expenses 25,919 25,013 25,360
--------- --------- ---------
Operating income (loss) 4,340 2,894 (3,954)
--------- --------- ---------
Other income:
Interest income 1,106 844 918
Other income 77 49 69
--------- --------- ---------
Total other income 1,183 893 987
--------- --------- ---------
Income (loss) before income taxes 5,523 3,787 (2,967)
Income taxes 663 379 20
--------- --------- ---------
Net income (loss) $4,860 $3,408 ($2,987)
========= ========= =========
Earnings (loss) per share:
Basic $0.48 $0.34 ($0.30)
========= ========= =========
Diluted $0.43 $0.32 ($0.30)
========= ========= =========
Shares used to compute earnings (loss)
per share:
Basic 10,181 10,058 10,095
========= ========= =========
Diluted 11,368 10,715 10,095
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Retained Unrealized Cumula-
Earnings Gain (loss) tive Total
Common Stock Additional (Accumu- on SecuritieTransla- Treasury Stock Stock-
------------------- Paid-in lated Available- tion ------------------ holders'
Shares Amount Capitsl Deficit) for-Sale Adjustment Shares Amount Equity
----------- ------- ----------- ---------- ----------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 10,152,344 $102 $40,433 ($2,847) ($497) $1 (115,155) ($738) $36,454
Treasury stock acquired -- -- -- -- -- -- (270,000) (1,662) (1,662)
Exercise of stock options 49,488 -- 36 -- -- -- -- -- 36
Treasury stock reissued in connection
with exercise of stock options -- -- (303) -- -- -- 121,974 785 482
Sale of common stock under
employee stock purchase plan 6,524 -- 35 -- -- -- -- -- 35
Treasury stock reissued in connection
with employee stock purchase plan -- -- (123) -- -- -- 134,581 860 737
Translation adjustment -- -- -- -- -- 10 -- -- 10
Unrealized gain on securities available-
for-sale -- -- -- -- 540 -- -- -- 540
Net loss -- -- -- (2,987) -- -- -- -- (2,987)
----------- ------- ----------- ---------- ----------- --------- --------- -------- ---------
Balances, December 31, 1995 10,208,356 102 40,078 (5,834) 43 11 (128,600) (755) 33,645
Treasury stock acquired -- -- -- -- -- -- (586,500) (4,855) (4,855)
Treasury stock reissued in connection
with exercise of stock options -- -- (216) -- -- -- 109,878 691 475
Treasury stock reissued in connection
with employee stock purchase plan -- -- (90) -- -- -- 159,422 976 886
Tax benefit of employee stock
transactions -- -- 90 -- -- -- -- -- 90
Translation adjustment -- -- -- -- -- (97) -- -- (97)
Unrealized loss on securities available-
for-sale -- -- -- -- (38) -- -- -- (38)
Net income -- -- -- 3,408 -- -- -- -- 3,408
----------- ------- ----------- ---------- ----------- --------- --------- -------- ---------
Balances, December 31, 1996 10,208,356 102 39,862 (2,426) 5 (86) (445,800) (3,943) 33,514
Treasury stock reissued in connection
with exercise of stock options -- -- (1,271) -- -- -- 355,125 3,093 1,822
Exercise of stock options 105,111 1 436 -- -- -- -- -- 437
Treasury stock reissued in connection
with employee stock purchase plan -- -- (368) -- -- -- 90,675 850 482
Sale of common stock under
employee stock purchase plan 53,305 1 566 -- -- -- -- -- 567
Tax benefit of employee stock
transactions -- -- 242 -- -- -- -- -- 242
Translation adjustment -- -- -- -- -- (8) -- -- (8)
Unrealized gain on securities available-
for-sale -- -- -- -- 2 -- -- -- 2
Net income -- -- -- 4,860 -- -- -- -- 4,860
----------- ------- ----------- ---------- ----------- --------- --------- -------- ---------
Balances, December 31, 1997 10,366,772 $104 $39,467 $2,434 $7 ($94) -- $-- $41,918
=========== ======= =========== ========== =========== ========= ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $4,860 $3,408 ($2,987)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,186 1,878 1,336
Provision for doubtful accounts 30 30 30
Loss on disposition of property 182 73 34
Tax benefit of employee stock transactio 242 90 --
Changes in items affecting operations:
Trade accounts receivable (3,936) 910 (3,210)
Other accounts receivable (4,181) (1,559) --
Inventories (3,880) 572 (1,129)
Prepaids and other current assets (204) (30) 79
Accounts payable 327 (899) 365
Accrued expenses (1,753) 1,745 (364)
Unearned revenue and customer
advances 6,661 1,689 508
--------- --------- ---------
Net cash provided by (used in)
operating activities 534 7,907 (5,338)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (3,458) (1,532) (1,189)
Capitalized software development costs (778) (456) (514)
Purchases of securities available-for-sale (52,447) (25,780) (18,858)
Sales and maturities of securities
available-for-sale 56,506 28,018 25,376
Other assets (146) (561) 1,515
--------- --------- ---------
Net cash (used in) provided by
investing activities (323) (311) 6,330
--------- --------- ---------
Cash flows from financing activities:
Proceeds from stock option exercises 437 -- 36
Proceeds from employee stock purchase plan 567 -- 35
Purchase of treasury stock -- (4,855) (1,662)
Reissuance of treasury stock 2,304 1,271 1,219
Proceeds from (repayments of) factoring, net (677) 1,124 --
Other liabilities -- -- (42)
--------- --------- ---------
Net cash provided by (used in)
financing activities 2,631 (2,460) (414)
--------- --------- ---------
Effect of exchange rate changes on cash 705 161 54
--------- --------- ---------
Net increase in cash and cash equivalents 3,547 5,297 632
Cash and cash equivalents, beginning of year 8,024 2,727 2,095
--------- --------- ---------
Cash and cash equivalents, end of year $11,571 $8,024 $2,727
========= ========= =========
Supplementary cash flow information:
Cash paid:
Interest $19 $8 $4
========= ========= =========
Income taxes $172 $91 $17
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of the Company and Significant Accounting Policies
(a) The Company
Molecular Dynamics, Inc. (the Company) develops,
manufactures and markets systems that accelerate genetic
discovery and analysis. The Company markets a family of
systems that significantly enhance the ability of scientists
to visualize, quantify and analyze genetic information.
Primary products of the Company include Gel and Blot
Scanners, Capillary Array Sequencers (including the MegaBACE
1000) and Microarray Systems. The Company markets its
products worldwide to universities, government research
laboratories, and biotechnology, pharmaceutical, genomics
and chemical companies. It provides direct sales, service
and support of its products in the United States, Canada,
Japan and several European countries and through exclusive
distributors in other countries.
(b) Basis of Presentation
The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned
subsidiaries. All intercompany transactions and balances
have been eliminated in consolidation. Certain
reclassifications have been made to prior-year amounts to
conform to current year presentation.
(c) Cash Equivalents
The Company considers all highly liquid investments, which
include U.S. government securities and corporate securities,
with original maturities of three months or less to be cash
equivalents.
(d) Inventories
Inventories are stated at the lower of cost (first-in,
first-out method) or market and include material, labor and
manufacturing overhead costs.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is provided
using the straight-line method over the estimated useful
lives of the respective assets, generally three to five
years. Leasehold improvements are amortized using the
straight-line method over the lesser of the lease terms or
the estimated useful lives of the related assets.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
In accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company reviews, as circumstances dictate, the
carrying amount of its long-lived assets. The purpose of
these reviews is to determine whether the carrying amounts
of these assets are recoverable. Recoverability is
determined by comparing the projected undiscounted net cash
flows of the long-lived assets against their respective
carrying amounts. The amount of impairment, if any, is
measured based on the excess of the carrying value over the
fair value. Management believes that no impairment of the
carrying value of long-lived assets has occurred.
(f) Acquired Technology and Patents
Acquired technology and patents are stated at cost less
accumulated amortization. Amortization is provided using
the straight-line method over the estimated useful lives of
the respective assets, generally five years for technology
and ten years for patents.
(g) Computer Software Costs
The Company capitalizes internally generated software
development costs in compliance with SFAS No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed. Capitalization of software development
costs begins upon the establishment of technological
feasibility for the product. Software development costs
capitalized were $778,000, $456,000 and $514,000 for the
years ended December 31, 1997, 1996 and 1995, respectively,
after considering credits to capitalized software of
$498,000, $337,000 and $134,000 for the years ended December
31, 1997, 1996 and 1995, respectively, representing support
from the NIST grant. (See Note 5.)
The Company amortizes such capitalized amounts upon product
commercial release at the greater of the straight-line basis
using the estimated economic lives of three to four years or
the ratio of actual revenues achieved to total anticipated
revenues over the lives of the products. The realizability
of unamortized capitalized costs is periodically reviewed
relative to the estimated future revenues of the related
products. Capitalized software amortization expense
amounted to $553,000, $586,000 and $510,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
(h) Revenue Recognition
The Company recognizes revenue when title passes to the
customer, which is generally upon shipment of the product to
its customers. Estimated warranty costs are recorded at the
time of sale. Amounts billed for extended service contracts
are deferred and recognized over the term of the contracts.
(i) Advertising Costs
All costs associated with advertising and promoting products
are expensed as incurred.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(j) Income Taxes
The Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires that
deferred tax assets or liabilities at the end of each period
be determined using the tax rate expected to be in effect
when the taxes are actually paid or recovered. The
measurement of deferred tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits which are not
expected to be realized. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
The Company does not provide income taxes on the
undistributed earnings of its foreign subsidiaries as it is
intended that current and future earnings, if any, will be
indefinitely invested in operations outside the United
States.
(k) Foreign Currency Translation
The functional currency for the Company's foreign
subsidiaries is the local currency, except for the
administrative subsidiary established in the Netherlands in
1995, for which the U.S. dollar is the functional currency.
The financial statements of the subsidiaries, other than
those of the Netherlands, are translated into U.S. dollars
in accordance with SFAS No. 52, Foreign Currency
Translation. The resulting translation adjustments are
recorded as a separate component of stockholders' equity.
Realized gains and losses on foreign currency transactions
are included in other income and expenses.
(l) Financial Instruments and Risk Concentration
Foreign Currency Contracts - The Company enters into foreign
exchange contracts to hedge receivables denominated in
foreign currencies. The Company's forward exchange hedge
contracts require the Company to exchange foreign currencies
for U.S. dollars at rates agreed upon at the inception of
the contracts. Although the gross amounts are used to
express the volume of these transactions, the amounts
potentially subject to credit risk are limited to the
difference between the counterparty's obligation and the
obligation of the Company. The contracts do not subject the
Company to significant market risk from exchange rate
movements because the gains and losses related to the
contracts offset the foreign exchange gains and losses on
the settlement of the transactions being hedged. Foreign
currency transaction gains and losses, net of the impact of
hedging, were not significant in 1997, 1996 and 1995.
Realized gains and losses on hedge contracts are included in
other income and expense. As of December 31, 1997, the
Company had approximately $2,592,000 of forward exchange
contracts outstanding, consisting primarily of Japanese yen,
German marks, French francs, and British pounds, to hedge
firm commitments relating to certain of its foreign
receivables. The contracts mature at various dates through
June 1998. The fair value of the contracts is based on the
exchange rate in effect on the last business day of the
year. The carrying amount at December 31, 1997 approximates
the fair value as the majority of the contracts were entered
into shortly before yearend.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Securities Available-for-Sale - In accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity
Securities, investment securities, consisting of U.S.
government securities, corporate securities and certificates
of deposit, are stated at fair market value and are
considered to be available-for-sale. Unrealized gains and
unrealized losses, which are considered to be temporary, are
reported as a separate component of stockholders' equity.
Realized gains and losses and the amortized cost basis of
investments are determined by specific identification. The
fair market values of securities available-for-sale are
based on quoted market prices at the reporting date for
those investments.
Other Financial Instruments - For certain of the Company's
financial instruments, including cash and cash equivalents,
accounts receivable, other assets, accounts payable, accrued
expenses, unearned revenue and customer advances, the
carrying amounts approximate fair value because of the short
maturity of these instruments.
Risk Concentration - Financial instruments, which
potentially subject the Company to concentrations of credit
risk, are primarily securities available-for-sale and
accounts receivable. The Company places its securities
available-for-sale in high-credit quality financial
institutions and invests in high-quality investments,
including U.S. government obligations, corporate securities
and certificates of deposit. The Company believes no
significant concentration of credit risk exists with respect
to these investments.
Accounts receivable include amounts from customers located
in the United States, Europe and the Asia-Pacific region.
The Asia-Pacific region is currently experiencing currency,
economic and political instability. To date, the Company has
not experienced any significant adverse effects from this
instability. Accounts receivable also include amounts from
end users and distributors. Management believes a
significant portion of the Company's revenue is derived from
customers that are research groups which are funded by
government agencies. The Company believes that any credit
risks associated with its accounts receivable are mitigated
by the Company's credit evaluation process and allowance for
doubtful accounts. One customer accounted for 19% of the
trade accounts receivable balance at December 31, 1997.
Certain components used in the Company's products, including
the storage phosphor screens used with the PhosphorImager and
the capillary arrays used with the MegaBACE 1000, are
currently purchased from single sources. The storage phosphor
screens are manufactured by Kodak. Although such screens are
available commercially from Kodak, the Company believes that
the Company and Kodak, which uses the screens for medical
imaging applications, are the only significant customers. Any
disruption or delay in the supply of screens by Kodak would
have a material adverse effect on the Company. The capillary
arrays used by the MegaBACE 1000 are manufactured by Polymicro
Technologies, Inc. (PTI). Should there be a disruption or
delay in the supply of capillary arrays from PTI, Molecular
has sufficient raw materials, engineering and process
documentation to continue manufacturing arrays to forecast for
some time. The Company has qualified a second vendor that can
manufacture arrays, after a setup time. Additional
components, such as computers, lasers, optical elements and
galvanometers are currently
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
purchased in configurations specific to and integrated into
the Company's products. While the Company believes that most
of the components used in its products are available from
alternate sources, any unanticipated interruption of the
supply of these additional components or other supplies could
require the Company to redesign its products.
(m) Earnings (Loss) Per Share
In 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, Earnings per Share, which requires the
presentation of basic and diluted earnings (loss) per share.
Basic earnings (loss) per share is calculated using the
weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share is calculated
using the weighted average number of common share and common
stock equivalents, if dilutive, outstanding during the
period. Common stock equivalents from outstanding stock
options are calculated using the treasury stock method.
Earnings (loss) per share amounts for all periods presented
conform to the requirements of SFAS No. 128, after
restatement where appropriate.
(n) Year End
The Company's fiscal year end is the Sunday nearest December
31, and the Company operates and reports on 13-week
quarterly periods each ending on the Sunday closest to month
end. For clarity of presentation, the Company has indicated
its accounting year as ending on December 31.
(o) Accounting for Stock-Based Compensation
The Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation effective January 1, 1996. This statement
establishes financial accounting and reporting standards for
stock-based compensation, including employee stock purchase
plans and stock option plans. As allowed by SFAS No. 123,
the Company continues to measure compensation expense for
awards granted to employees under the provisions of APB No.
25, Accounting for Stock Issued to Employees.
(p) 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 recorded
amounts of assets and liabilities at the date of the
consolidated financial statements and of revenues and
expenses during the reporting period, as well as the
disclosure of contingent assets and liabilities at the date
of the consolidated financial statements. A change in the
facts and circumstances surrounding these estimates could
result in a change to the estimates and impact future
operating results.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(2) Consolidated Balance Sheet Components
Certain balance sheet components are as follows (in thousands):
December 31,
-----------------------
1997 1996
---------- ----------
(a) Inventories:
Raw material $5,842 $3,045
Work-in-process 2,328 1,786
Finished goods 2,505 2,038
---------- ----------
$10,675 $6,869
========== ==========
(b) Property and Equipment:
Machinery and equipment $7,935 $6,277
Furniture and fixtures 1,030 824
Leasehold improvements 1,913 1,081
---------- ----------
10,878 8,182
Less accumulated depreciation
and amortization 6,156 5,185
---------- ----------
$4,722 $2,997
========== ==========
(c) Other Assets:
Capitalized software $2,299 $2,928
Other 1,739 1,636
---------- ----------
4,038 4,564
Less accumulated amortization 1,193 1,936
---------- ----------
$2,845 $2,628
========== ==========
(d) Accrued Expenses:
Accrued salaries and benefits $2,040 $1,971
Accrued warranty costs 1,194 1,044
Other 2,257 2,058
---------- ----------
$5,491 $5,073
========== ==========
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(3) Securities Available-for-Sale
The following is a summary of the fair market value of securities
available-for-sale (in thousands):
December 31,
-----------------------
1997 1996
---------- ----------
U.S. government securities $8,895 $10,097
Corporate securities 9,442 3,625
Certificates of deposit -- 1,889
---------- ----------
18,337 15,611
Less cash equivalents 9,779 2,994
---------- ----------
$8,558 $12,617
========== ==========
As of December 31, 1997, the Company's investments are scheduled to
mature as follows (in thousands):
Fair
Market
Maturity Value
- ---------------------------------------- ----------
Less than one year $13,648
1-3 years 4,689
----------
$18,337
==========
At December 31, 1997 and 1996 differences between amortized cost and
fair market value due to unrealized gains and losses were not material.
Realized gains and losses in 1997, 1996 and 1995 were not material.
(4) Alliance with Amersham Pharmacia Biotech
On April 6, 1994, the Company entered into an alliance with
Amersham Pharmacia Biotech (Amersham) whereby the companies agreed
to share any net profits or losses on the development and
distribution of certain instruments and reagents included in the
alliance. These include the MegaBACE 1000 products and Microarray
Technology Access Programs. Under the agreement, the companies
have also agreed to collaborate on the development of future
products. Amersham acquired approximately one million shares of
the Company's capital stock on the open market as part of this
agreement.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
The Company and Amersham Pharmacia Biotech are developing systems
for fluorescence analysis of DNA in microarrays. By the end of
1997, the Company had entered into 11 agreements (Technology
Access Agreements) with genomics and pharmaceutical companies and
educational institutions for early access to this technology. One
of these agreements began in November 1996. Under the terms of
these agreements, companies and educational institutions provide
capital and technical feedback in exchange for delivery of various
generations of systems and a period of exclusive access to the
Company's technology. Instrument revenue was recognized upon
shipment of the systems, and represented approximately 9% of
instrument revenue in 1997. Access fees received by the Company
from its customers under its Technology Access Agreements are
deferred and amortized over the period of the agreement. Amounts
amortized are first used to offset the related research and
development expenses in the period of amortization and amounts in
excess of the related research and development expenses are
recognized as revenue. Research and development expenses were
reduced by $1.7 million and an immaterial amount in 1997 and 1996,
respectively, from credits representing amortization of fees from
clients participating in the Technology Access Program.
Under the terms of the agreement between the Company and Amersham,
the Company will retain a certain amount of the Initial Profits,
as defined by the parties, related to certain of the Technology
Access Agreements. All subsequent profits will be shared. As of
December 31, 1997, the Company had realized a portion of the
Initial Profits under this agreement.
(5) Collaborations with Affymetrix, Inc.
NIST Grant: In the fourth quarter of 1994, a consortium led by
Affymetrix, Inc. (Affymetrix) and the Company was awarded funding
from the Advanced Technology Program (ATP) of the National
Institute of Standards and Technology (NIST). The Company and its
partner, Affymetrix, collaborate with researchers at several
academic and research institutions in an effort to develop
miniaturized DNA diagnostic systems. The Company has received
notification from NIST that funding has been authorized for the
remaining term of the grant, which ends in January 2000. The two
companies will receive up to $31 million in matching funds to be
divided 33% to the Company and 67% to Affymetrix over the five
years of the grant period beginning in January 1995, for research
and development in the field of DNA diagnostic devices with a
total shared project cost of $63 million. Approximately $18.3
million of the $31 million was available for the first three years
of the grant period, which ended in January 1998. In 1997, 1996
and 1995, the Company recognized credits to its expenses of
approximately $2.1 million, $1.9 million and $1.5 million, and
reduced its capitalized software by $498,000, $337,000 and
$134,000, respectively, representing support from the grant. Over
the five-year term of the project, the Company will fund $10.7
million and receive matching funds of $10.7 million, for a total
expenditure of $21.4 million. 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.
Genetic Analysis Technology ConsortiumT: In December of 1997, the
Company and Affymetrix announced the formation of the Genetic
Analysis Technology Consortium (GATCT), which was formed to
provide a unified technology platform to design, process, read and
analyze DNA arrays. In connection with this agreement, the two
companies also signed a non-exclusive, world-wide,
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
royalty-bearing license granting Molecular rights to certain
Affymetrix technology for commercializing low and medium density
DNA arrays. Under the terms of the license agreement, the Company
paid Affymetrix an up-front license fee, and will pay operating
fees for instruments if certain patents issue in the future, as
well as royalties in the future associated with product sales. In
addition, Molecular licensed Affymetrix under certain of its
patents in the array reader field.
(6) Other Government Grants
In June 1997, the Company received a grant from the National
Institutes of Health National Human Genome Research Institute.
Under the terms of the grant, the Company will receive approximately
$2 million over a two-year period to support development of an
integrated system to increase the productivity and speed of DNA
sequencing. In 1997, the Company recorded credits to expense of
approximately $200,000, representing support from this grant.
(7) Factoring Agreement
The Company has established a factoring program in Japan in order to
shorten the time between customer shipments and receipt of payment.
Because the Company retains ultimate responsibility for collection
of its Japan accounts, amounts paid by the factoring entity are
classified as liabilities until the customer pays the factoring
entity. The factoring charge amounts to 1.625 percent per annum, of
the amount factored. There are no collateral requirements and no
financial ratio requirements associated with the agreement.
(8) Acquired In-process Research and Development
In December 1994, the Company entered into an agreement with
BioLumin, Incorporated (BioLumin) in order to allow it to pursue
the development of technology possessed by BioLumin. The Company
determined that the technology purchased from BioLumin in 1995 was
in-process research and development and therefore the amount
allocated to this technology of $2.1 million was expensed as
acquired in-process research and development in the accompanying
consolidated statement of operations for the year ended December
31, 1995. The agreement with BioLumin also provides for royalty
payments to be made by the Company. In 1997 and 1996, the Company
recorded approximately $89,000 and an immaterial amount,
respectively, for these royalties.
(9) Preferred Share Purchase Rights Plan
On November 8, 1994, the Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right (the Rights) on
each outstanding share of its common stock payable to stockholders
of record as of December 2, 1994.
The Rights will be exercisable only if a person or group acquires
20% or more of the Company's common stock or announces a tender
offer, the consummation of which would result in ownership by a
person or group of 20% or more of the Company's common stock.
Each Right will entitle stockholders to buy one one-hundredth of a
share of Series A Junior Participating Preferred Stock at an
exercise price of $30.85 upon certain events.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
If, after the Rights become exercisable, the Company is acquired
in a merger or other business combination transaction, or sells
50% or more of its assets or earnings power, each Right will
entitle its holder to purchase, at a Right's then-current exercise
price, shares of the acquiring company's common stock having a
market value equal to twice a Right's exercise price.
In addition, if a person or group acquires 20% or more of the
Company's outstanding common stock, other than pursuant to a
tender offer for all shares which is determined by the Board of
Directors to be fair and in the best interests of the Company and
its stockholders, each Right will entitle its holder (other than
such person or members of such group) to purchase, at a Right's
exercise price, shares of the Company's common stock (or cash,
other securities or property) having a market value equal to twice
a Right's exercise price.
Following the acquisition by a person or group of beneficial
ownership of 20% or more and prior to an acquisition of 50% or
more of the Company's common stock, the Board of Directors may
exchange the Rights (other than Rights owned by such person or
group), in whole or in part, at an exchange ratio of one share of
common stock (or one one-hundredth of a share of the Series A
Junior Participating Preferred Stock) per Right.
At any time prior to ten days after a person or group has acquired
beneficial ownership of 20% or more of the combined number of the
Company's common stock, the Rights are redeemable for $.005 per
Right at the option of the Board of Directors.
(10) Stockholders' Equity
In May 1994, the Board of Directors approved a Stock Repurchase
Program that authorized the purchase of up to 1,000,000 shares of
the Company's common stock in the open market. In February 1997,
the Board of Directors authorized the repurchase of an additional
500,000 shares of the Company's common stock under this program.
Approximately 1,000,000 shares were purchased by the Company
through December 31, 1997. Of these shares, approximately 413,000
shares were reissued under the Company's Employee Stock Purchase
Plan and approximately 587,000 shares were reissued upon the
exercise of common stock options through December 31,1997.
(11) Benefit Plans
(a) Stock-Based Compensation Plans
Fixed Stock Option Plan
The Company has one fixed stock option plan, the 1997 Stock
Option Plan (the Plan), which provides for the granting of
options to employees, consultants, officers and directors to
purchase common stock at prices not less than 100% and 85%
of the fair market value of the Company's common stock for
incentive and nonqualified options, respectively. The
Company may grant options for up to 4,004,500 shares of
common stock. All options are to have a term not greater
than ten years. Options granted generally vest 25% after one
year and then ratably at 6 1/4 % per quarter over a three-year
period. At December 31, 1997, 464,121 shares were available
for future grant.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
All options granted under this plan through December 31,
1997, have been nonqualified options. The Plan provides for
the acceleration of vesting of outstanding options at the
time of a change in control of the Company as described in
the Plan. All grants are at the current fair market value on
the date of the grant.
Under the Plan there is an Automatic Option Grant Program
that provides for an initial stock option grant to all
nonemployee members of the Board of Directors of 10,000
shares of common stock and subsequent annual grants of 3,500
shares of common stock. Each initial 10,000 share grant
vests 25% on the date of grant and the remaining 75% in
three equal annual installments over the optionee's
continued period of Board service measured from the grant
date. Each subsequent 3,500 share grant vests upon
completion of one year of Board service measured from the
grant date.
The following table summarizes option activity for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
- -------------------------------------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,229,718 $5.22 2,013,006 $5.00 1,792,934 $4.70
Granted 560,575 16.00 420,200 6.42 565,800 6.15
Exercised (460,236) 4.91 (109,878) 4.33 (171,462) 3.02
Forfeited (73,274) 6.59 (78,461) 7.03 (157,978) 7.34
Expired (2,500) 9.00 (15,149) 9.15 (16,288) 9.65
---------- ---------- ----------
Outstanding at end of year 2,254,283 7.90 2,229,718 5.22 2,013,006 5.00
========== ========== ==========
Options exercisable
at end of year 1,278,836 1,323,514 1,063,087
========== ========== ==========
Weighted-average fair value of
options granted during the year $9.27 $3.36 $3.21
========== ========== ==========
</TABLE>
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
The following table summarizes information about stock options
outstanding as of December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices 12/31/97 Life (in yrs Price 12/31/97 Price
- ---------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.25 - 0.67 407,850 2.4 $0.42 407,850 $0.42
2.00 - 5.88 322,906 7.4 5.39 174,364 5.13
6.00 - 9.75 843,782 7.0 6.55 553,664 6.49
11.00 - 15.75 483,695 8.5 13.40 141,646 12.29
16.00 - 19.38 108,100 9.8 17.19 625 17.00
20.38 - 27.00 87,950 9.8 23.19 687 22.45
----------- -----------
$0.25 - 27.00 2,254,283 6.8 $7.91 1,278,836 $5.02
=========== ===========
</TABLE>
Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan (the Purchase Plan),
which began in 1993, employees meeting certain specific employment
qualifications are eligible to participate and are granted rights to
purchase shares of the Company's common stock semiannually through
payroll deductions at the lower of 85% of the fair market value of the
stock at the beginning or end of the purchase period. The Purchase Plan
permits eligible employees to purchase common stock through payroll
deductions, for up to 15% of their salary, subject to certain
limitations. The Company is authorized to issue up to 1,000,000 shares o
common stock under the Purchase Plan and has sold 143,980 shares,
159,422 shares and 141,105 shares to employees in 1997, 1996 and 1995,
respectively. At December 31, 1997, 373,343 shares remain available for
future issuance. The weighted-average fair value of purchase rights
granted under the Purchase Plan in 1997, 1996 and 1995 were $5.10, $1.99
and $2.35, respectively.
Pro Forma Information
The Company continues to apply APB No. 25 in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has
been recognized in the accompanying consolidated statements of
operations for its fixed stock option plan and its stock purchase plan.
Had compensation cost for the Company's stock-based compensation plans
been determined in accordance with the fair value method prescribed in
SFAS No. 123, the Company's net income (loss) and earnings (loss) per
share would have been changed to the pro forma amounts indicated below.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Years Ended December 31,
----------------------------------
1997 1996 1995
---------- ----------- ----------
Net income (loss) (in thousands)
As reported $4,860 $3,408 ($2,987)
Pro forma $3,015 $2,513 ($3,525)
Basic earnings (loss) per share
As reported $0.48 $0.34 ($0.30)
Pro forma $0.30 $0.25 ($0.35)
Diluted earnings (loss) per share
As reported $0.43 $0.32 ($0.30)
Pro forma $0.27 $0.23 ($0.35)
The above pro forma amounts include compensation expense for options
and purchase rights granted since January 1, 1995, and may not be
representative of that to be expected in future years.
The fair value of each option granted under the Plan and purchase
rights granted under the Purchase Plan is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Employee
Employees Officers Stock Purchase Plan
----------------------- ----------------------- -----------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Expected volatility 70% 62% 62% 70% 62% 62% 70% 62% 62%
Expected life (in years) 3.5 3.5 3.5 6.0 5.0 5.0 0.5 0.5 0.5
Risk-free interest rate 6.09% 6.16% 6.21% 6.48% 6.54% 6.35% 5.23% 5.24% 5.96%
</TABLE>
A dividend yield of zero was used for each year.
(b) Savings Plan
The Company sponsors a 401(k) Savings Plan (the 401(k) Plan)
that covers substantially all full-time U.S. employees.
Employees can elect to defer, in the form of contributions
to the 401(k) Plan, up to 20% of their compensation, limited
to $9,500 in 1997. The Company may make discretionary
contributions in the amounts determined by the Board of
Directors. Discretionary contributions of approximately
$34,000 and $193,000 were made in 1997 and 1996,
respectively. There were no such contributions in 1995.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(12) Commitments and Contingencies
(a) Leases
The Company leases its U.S. facility under an operating lease
expiring in 2001 and its European, Japanese, and Australian
facilities under operating leases expiring at various dates
through 2005. The Company also leases certain equipment under
operating leases. The future minimum lease payments under
noncancelable operating leases as of December 31, 1997 are as
follows (in thousands):
Year Amount
------ ---------
1998 $2,025
1999 1,601
2000 1,415
2001 267
2002 70
Thereafter 130
---------
Total future minimum lease payments $5,508
=========
Rent expense approximated $1,704,000, $1,410,000, and $1,219,000
for the years ended December 31, 1997, 1996, and 1995,
respectively, which includes sublease income of approximately
$84,000, $176,000 and $60,000, respectively.
(b) Patent Settlement
In March 1992, the Company reached an agreement with Fuji
Photo Film Co., Ltd. settling certain patent infringement
related claims. Under the agreement, the Company received a
nonexclusive license to the patent rights for the remaining
terms of the patents (currently between 4 and 13 years) and
pays royalties on sales of the underlying products to which
the patents relate. The Company incurred royalties of
approximately $580,000, $575,000 and $479,000 in 1997, 1996
and 1995, respectively, under this arrangement. The terms
of this licensing agreement were renegotiated in 1997,
permitting PhosphorImager products to be sold in Japan.
(c) Compensating Balances
As of December 31, 1997, the Company had a $190,000
certificate of deposit that was held as a compensating
balance for the Company's credit facility. This credit
facility was used to secure letters of credit for its
foreign subsidiaries. This amount is included in cash and
cash equivalents in the accompanying consolidated balance
sheet at December 31, 1997.
(d) Litigation
The Company is subject to various legal proceedings and
claims that arise in the ordinary course of business.
Management believes that the ultimate amount of liability,
if any, with respect to any pending actions, either
individually or in the aggregate, will not materially affect
the financial position, results of operations or liquidity
of the Company.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
On March 13, 1998, Molecular Dynamics, Amersham Pharmacia
Biotech UK Limited and Amersham Life Science Inc. were
served with a complaint brought by the Perkin-Elmer
Corporation, PE Applied Biosystems Division ("Applied
Biosystems") alleging willful infringement by the Company of
two United States Patents owned by Perkin-Elmer and seeking
a declaratory judgment that either Applied Biosystems does
not infringe a United States patent exclusively licensed to
Amersham Pharmacia Biotech, or such patent is invalid. This
alleged infringement relates to Molecular Dynamics' MegaBACE
1000 DNA Sequencing Systems and FluorImager 595 Imaging
Systems. Applied Biosystems is seeking injunctive relief as
well as a claim for damages regarding the alleged
infringement, along with attorneys' fees. No trial date has
been set, and no response to the complaint has yet been
filed. The complaint was filed in United States District
Court, Northern District of California. Although Management
believes that the ultimate disposition of this matter will
not materially affect the financial position, results of
operations or liquidity of the Company, significant legal
expenses could be incurred relative to such lawsuit.
(e) License Agreements
The Company has entered into two exclusive license
agreements for two patents with the University of California
at Berkeley, pursuant to which it acquired certain rights to
design, manufacture and sell products based on technology
relating to confocal fluorescence gel scanning. The Company
will pay a royalty under these licenses based on sales of
products incorporating the licensed technology. The first
patent covered by this agreement was issued in February 1992
and the second was issued in December 1993. Because the
technology was developed in part through the use of federal
government funds, the Company's licenses of such patent
rights may be subject to certain rights of the United States
governmental agencies to use the technology. Royalty expense
in 1997 related to sales of MegaBACE 1000 was not material.
In September 1997, the Company entered into a software license
agreement with Incyte Pharmaceuticals, Inc. to secure access
to Incyte's LifeArray gene expression database software.
Amounts will be paid to Incyte under this agreement if certain
milestones are met.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(13) Income Taxes
Income taxes for the years ended December 31, 1997, 1996, and 1995
comprised (in thousands):
1997 1996 1995
--------- --------- ---------
Current:
Federal $119 $186 $ --
Foreign 137 51 48
State 165 52 (28)
--------- --------- ---------
421 289 20
--------- --------- ---------
Deferred:
Federal -- -- --
State -- -- --
--------- --------- ---------
0 0 0
--------- --------- ---------
Charge in lieu of taxes attributable
to employee stock plans 242 90 --
--------- --------- ---------
Total $663 $379 $20
========= ========= =========
The reconciliation between the amount computed by applying the U.S.
federal statutory tax rate of 34% to income (loss) before income taxes
and the actual income taxes follows (in thousands):
1997 1996 1995
--------- --------- ---------
Income taxes expense (benefit) at
statutory rate $1,878 $1,288 ($1,009)
State income taxes, net of federal
income tax benefit 77 33 48
Losses and credits for which no
benefit was recognized -- 277 963
Utilization of NOL (1,536) (1,283) --
Rate differential on foreign taxes 217 142 --
Other 27 (78) 18
--------- --------- ---------
$663 $379 $20
========= ========= =========
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31,
1997 and 1996 are presented below (in thousands):
1997 1996
--------- ---------
Deferred tax assets:
Reserves and accruals for financial reporting
purposes not taken for tax purposes $1,444 $1,372
Net operating loss carryforwards 2,123 2,299
Research and other credit carryforwards 3,240 2,387
Foreign net operating loss carryforwards 281 266
Other 146 67
--------- ---------
Total gross deferred tax assets 7,234 6,391
Valuation allowance (6,471) (5,838)
--------- ---------
Net deferred tax assets 763 553
--------- ---------
Deferred tax liabilities:
Software costs, principally due to
capitalization and amortization for
financial reporting purposes (645) (553)
Property and equipment (118) --
--------- ---------
Total gross deferred tax liabilities (763) (553)
--------- ---------
Net deferred taxes $ -- $ --
========= =========
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
The valuation allowance increased by $633,000, decreased by
$446,000, and increased by $2,440,000 during the years ended
December 31, 1997, 1996 and 1995, respectively. The valuation
allowance as of December 31, 1997 includes a tax effect of
approximately $2,404,000 attributable to employee stock plans, the
benefit of which will be recorded as an increase to paid-in
capital when realized.
As of December 31, 1997, for federal income tax purposes the
Company has a net operating loss carryforward of approximately
$5,943,000 which expires in tax years 2004 through 2010. For
California income tax purposes, as of December 31, 1997, the
Company has a net operating loss carryforward of approximately
$1,645,000 which expires in tax years 1999 through 2000. The
difference between the net operating loss carryforwards for
federal income tax purposes and for California income tax purposes
results primarily from a 50% limitation on the California loss
carryforwards.
As of December 31, 1997, the Company has research and development
tax credit carryforwards of approximately $1,886,000 and
$1,248,000 for federal and state, respectively. The carryforwards
expire in tax years 2003 through 2012.
(14) Earnings (Loss) per Share
The calculation of basic and diluted earnings (loss) per share is as follow
(in thousands, except per share amounts):
1997 1996 1995
--------- --------- ---------
Net income (loss) $4,860 $3,408 ($2,987)
========== ========== ==========
Denominator for basic earnings
(loss) per share--weighted
average shares 10,181 10,058 10,095
Dilutive employee stock options 1,187 657 --
--------- --------- ---------
Denominator for diluted earnings
(loss) per share 11,368 10,715 10,095
========== ========== ==========
Basic earnings (loss) per share $0.48 $0.34 ($0.30)
========== ========== ==========
Diluted earnings (loss) per share $0.43 $0.32 ($0.30)
========== ========== ==========
Additional information regarding employee stock options is included in Note
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
At December 31, 1997 and 1996, options to purchase 90,200 shares and
237,293 shares, respectively, of the Company's common stock were outstandin
at exercise prices greater than the average market prices of $17.35 and
$7.29 for the Company's common stock during 1997 and 1996, respectively.
These options were not included in the calculation of diluted earnings per
share because the effect would have been antidilutive. At December 31, 1995
options to purchase 2,103,006 shares of the Company's common stock were
outstanding. None of these options were included in the calculation of
diluted loss per share because the effect would have been antidilutive.
(15) Related Party Transaction
The Company has entered into a loan agreement dated January 10,
1997, with the President and Chief Executive Officer of the
Company, under which it issued three notes on January 10, 1997,
January 30, 1997, and March 27, 1997, respectively, for an
aggregate principal amount of $350,000. On January 28, 1998, the
Company issued a new note to replace the above notes, for a
principal amount of $330,000. This note, as well as the notes it
replaced, is secured by a second deed of trust on the officer's
residence. The principal and interest accrued on the notes are to
be repaid on December 31, 2000. At the time of the issuance of
the new note, the officer paid the interest accrued to date and
principal of $20,000. Interest accrues on the note at the rate of
5.7% per annum. The maximum amount outstanding under the loan
agreement during 1997 was $350,000.
(16) Segment Information
Summarized data for the Company's operations and export sales are as
follows (in thousands):
1997 1996 1995
--------- --------- ---------
Sales and other revenue:
United States $50,867 $42,517 $32,972
Europe 8,521 9,201 8,462
Asia-Pacific 6,797 7,500 5,620
Intercompany eliminations (10,470) (9,840) (8,116)
--------- --------- ---------
$55,715 $49,378 $38,938
========= ========= =========
Operating income (loss):
United States $4,568 $2,698 ($3,457)
Europe 368 580 (526)
Asia-Pacific (17) (126) (57)
Intercompany eliminations (579) (258) 86
--------- --------- ---------
$4,340 $2,894 ($3,954)
========= ========= =========
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Identifiable assets:
United States $59,678 $45,504 $43,310
Europe 4,151 6,138 4,347
Asia-Pacific 4,026 3,592 3,337
Intercompany eliminations (8,800) (9,191) (8,249)
--------- --------- ---------
$59,055 $46,043 $42,745
========= ========= =========
Export sales $5,643 $4,883 $5,142
========= ========= =========
<PAGE>
UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------------------------------
1997 1996
-------------------------------------- --------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and other revenue $13,006 $13,880 $14,368 $14,461 $10,884 $12,151 $12,910 $13,433
Gross margin 7,459 7,731 7,761 7,308 6,134 6,960 7,110 7,703
Operating income 973 1,450 1,294 623 68 531 1,007 1,288
Net income 1,060 1,532 1,375 892 286 630 1,068 1,424
Earnings per share (1):
Basic $0.11 $0.15 $0.14 $0.09 $0.03 $0.06 $0.11 $0.14
Diluted $0.10 $0.14 $0.12 $0.08 $0.03 $0.06 $0.10 $0.13
</TABLE>
(1) The earnings per share amounts for the first three quarters
of 1997 and all of 1996 have been restated to comply with Statement
of Financial Accounting Standards No. 128, Earnings per Share.
<PAGE>
Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10.Directors and Officers of Registrant
(1) Identification of Directors:
The information concerning the Company's directors and nominees
is incorporated by reference from the section entitled "Proposal No. 1 --
Election of Directors" in the Proxy Statement for the 1998 Annual Meeting
of Stockholders to be held on May 19, 1998 (the Proxy Statement), a copy of
which will be filed with the Securities and Exchange Commission no later
than 120 days from the end of the Company's last fiscal year.
(2) Identification of Executive Officers:
See Part I, "Executive Officers of the Registrant"
The information concerning compliance with Section 16(a) of the
Exchange Act is incorporated by reference from "Additional Information -
Compliance with Section 16 (a) of the Securities Exchange Act of 1934" in
the Proxy Statement.
* * *
Item 11. Executive Compensation
Incorporated by reference from the section entitled "Additional
Information -- Executive Compensation and Other Information" in the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the section entitled "General --
Share Ownership" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the section entitled "Additional
Information - Executive Compensation and Other Information -- Certain
Relationships and Related Transactions" in the Proxy Statement.
PART IV
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of Documents filed as part of this Report
1. Financial Statements The following consolidated
financial statements and supplemental data are filed in Part II, Item 8 of
this Annual Report on Form 10-K:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Unaudited Quarterly Data
2. Financial Statement Schedules The following
consolidated financial statement schedule for each of the years in the
three-year period ended December 31, 1997, is filed in Part IV, Item 14(d)
of this Annual Report on Form 10-K:
Report of Independent Auditors on
Consolidated Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
3. (a) Exhibits See Exhibit List below.
(b) Form 8-K The Company filed no reports on
Form 8-K during the fourth quarter of the fiscal year 1997.
EXHIBIT LIST
Exhibit
Number Description
3.2(1) Bylaws of the Company.
3.3(2) Amended and Restated Certificate of Incorporation of
the Company filed with the Delaware Secretary of
State on August 20, 1992.
3.4(7) Form of Amended and Restated Certificate of
Incorporation of the Company, to be filed with the
Delaware Secretary of State as approved by the
Company's stockholders at the 1995 Annual Meeting of
Stockholders.
4.1(1) Amended and Restated Information and Registration
Rights Agreement, dated November 1, 1990, by and
between the Company and certain investors, including
Amendment No. 1 to Amended and Restated Information
and Registration Rights Agreement, dated March 16,
1992, and Amendment No. 2 to Amended and Restated
Information and Registration Rights Agreement, dated
as of August 24, 1992.
4.2(3) Specimen Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2 Restated 1987 Stock Option Plan.
10.3 1993 Employee Stock Purchase Plan.
10.4(3) Joint Venture Agreement, dated March 31, 1992, by
and between Molecular Dynamics and Junya Tominaga.
10.4A(7) Amendment to Joint Venture Agreement, dated August
18, 1994, by and between Molecular Dynamics, Inc.
and Junya Tominaga.
10.5(1) International Distributor Agreement, dated
October 26, 1988, by and between Molecular Dynamics
Ltd. and Paul Bucher, Analytik and Biotechnologie.
10.6(1) International Distributor Agreement, dated
December 31, 1988, by and between Molecular Dynamics
and Molecular Dynamics, Ltd., including Amendment to
Distributor Agreement, dated May 1, 1990 and Second
Amendment to Distributor Agreement, dated April 21,
1992.
10.6A(7) Third Amendment to Distributor Agreement, dated
April 23, 1993, by and between Molecular Dynamics,
Inc. and Molecular Dynamics, Ltd.
10.7(1) Distributor Agreement, dated December 22, 1989, by
and between Molecular Dynamics and Molecular
Dynamics, GmbH, including Amendment to Distributor
Agreement, dated May 1, 1990.
10.7A(7) Second Amendment to Distributor Agreement, dated
July 30, 1994, between Molecular Dynamics and
Molecular Dynamics, GmbH.
10.9(1) Lease Agreement, dated July 3, 1990, by and between
Molecular Dynamics and Van Arques Investments,
including Amendment No. 1 to Lease Agreement, dated
November 1, 1991, Amendment No. 2 to Lease
Agreement, dated November 5, 1991, and Amendment
No. 3 to Lease Agreement, dated April 20, 1992.
10.16(1) Distributor Agreement, dated December 4, 1990, by
and between Molecular Dynamics and Molecular
Dynamics S.A.
10.17(1) OEM Agreement and Software License Agreement, dated
January 1, 1991, by and between Molecular Dynamics
and Silicon Graphics, Inc.
10.18(1) Technology License Agreement, dated January 16,
1991, by and between Molecular Dynamics and The
Regents of the University of California.
10.19(1) Technology License Agreement, dated December 19,
1991, by and among Molecular Dynamics, Dr. Bala
Manian, Lumisys, Inc. and Biometric Imaging, Inc.
10.20(1) License Agreement, dated January 1, 1992, by and
between Molecular Dynamics and Fuji Photo Film Co.,
Ltd.
10.22(1) Foreign Trade Commission, Sale, Lease and Services
Agreement, dated January 1, 1991, by and between
Molecular Dynamics and Molecular Dynamics Sales
Corporation.
10.23(1) Export Related Services Agreement, dated January 1,
1991, by and between Molecular Dynamics and
Molecular Dynamics Sales Corporation.
10.24(4) Agreement for Sale of Assets, dated as of
October 30, 1992, by and between the Company and
Newport Corporation.
10.25(4) Credit Agreement, dated December 24, 1992, by and
between the Company and Bank of America National
Trust and Savings Association.
10.26(5) Sublease Agreement, dated April 19, 1993, by and
between Molecular Dynamics, Inc. and Silicon
Graphics, Inc.
10.27*(5) Technology License Agreement, dated October 20,
1993, by and between Molecular Dynamics, Inc. and
The Regents of the University of California.
10.28*(5) Joint Development Agreement, dated December 31,
1993, by and between Molecular Dynamics and Promega
Corporation.
10.29*(6) Warrant Purchase Agreement, dated April 6, 1994, by
and between Molecular Dynamics, Inc. and Amersham
Holdings, Inc.
10.30*(6) Warrant to Purchase 1,002,000 shares dated April 6,
1994, by and between Molecular Dynamics, Inc.,
Amersham Holdings, Inc. and Amersham International
plc.
10.31*(6) Standstill Agreement, dated April 6, 1994, by and
between Molecular Dynamics, Inc., Amersham Holdings,
Inc. and Amersham International plc.
10.32*(6) Collaboration Agreement, dated April 6, 1994, by and
between Molecular Dynamics, Inc. and Amersham
International plc.
10.33*(6) Co-Development and Co-Promotion Agreement for
FluorImager Reagents, dated April 6, 1994, by and
between Amersham International plc and Molecular
Dynamics, Inc.
10.34*(6) Cross Co-Promotion Agreement, dated April 6, 1994,
by and between Amersham International plc and
Molecular Dynamics, Inc.
10.35*(7) Agreement in Respect of Option, Research and
Development and Technology License, dated
December 16, 1994, by and between Molecular
Dynamics, Inc. and BioLumin Corporation.
10.36*(7) Advanced Technology Program Participation Agreement,
dated January 13, 1995, by and between Molecular
Dynamics, Inc. and Affymetrix, Inc.
10.37(8) Second Sublease by and between Molecular Dynamics,
Inc. and Tetherless Access, Ltd. dated as of
September 14, 1995.
10.38(9) Settlement Agreement by and between Molecular
Dynamics, Inc. and Meridian Instruments, Inc. dated
as of March 20, 1996.
10.39*(10) Technology Development and Purchase Agreement
between SmithKline Beecham and Molecular Dynamics
dated as of November 18, 1996.
10.40(10) Home Loan Agreement between Jay Flatley and
Molecular Dynamics, Inc. dated January 10, 1997.
10.41# License Agreement between Molecular Dynamics, Inc.
and Affymetrix, Inc. dated November 28, 1997.
22.1(1) Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
"*" on such exhibits indicates that portions have
been omitted for which confidential treatment has
been granted
"#" on such exhibits indicates that portions have
been omitted for which confidential treatment has
been requested and filed separately with the
Securities and Exchange Commission
(1) Incorporated by reference from an identically
numbered exhibit filed with the Company's Registration
Statement on Form S-1 (File No. 33-46497) declared effective by
the Securities and Exchange Commission on February 5, 1993.
(2) Incorporated by reference from an identically
numbered exhibit filed with Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 33-46497) declared
effective by the Securities and Exchange Commission on February
5, 1993.
(3) Incorporated by reference from an identically
numbered exhibit filed with Amendment No. 2 to the Company's
Registration Statement on Form S-1 (File No. 33-46497) declared
effective by the Securities and Exchange Commission on February
5, 1993.
(4) Incorporated by reference from an identically
numbered exhibit filed with Amendment No. 3 to the Company's
Registration Statement on Form S-1 (File No. 33-46497) declared
effective by the Securities and Exchange Commission on
February 5, 1993.
(5) Incorporated by reference from an identically
numbered exhibit filed with the Company's Annual Report on
Form 10-K (File No. 0-19955) filed with the Securities and
Exchange Commission on April 4, 1994, as amended by the
Company's Amendment to Annual Report on Form 10-K/A, as filed
with the Securities and Exchange Commission on May 12, 1994.
(6) Incorporated by reference from an identically
numbered exhibit filed with the Company's Quarterly Report on
Form 10-Q for the quarterly period ended July 3, 1994 (File No.
0-19955) filed with the Securities and Exchange Commission on
August 17, 1994.
(7) Incorporated by reference from an identically
numbered exhibit filed with the Company's Annual Report on Form
10-K (File No. 0-19955), filed with the Securities and Exchange
Commission on April 3, 1995, as amended by the Company's
Amendment to Annual Report on Form 10-K/A, filed with the
Securities and Exchange Commission on May 5, 1995, as further
amended by the Company's Second Amendment to Annual Report on
Form 10-K/A-2, as filed with the Securities and Exchange
Commission on August 14, 1995.
(8) Incorporated by reference from an identically
numbered exhibit filed with the Company's Annual Report on Form
10-K (File No. 0-19955), filed with the Securities Exchange
Commission on March 29, 1996, as amended by the Company's
Amendment to Annual Report on Form 10-K/A, filed with the
Securities and Exchange commission on April 4, 1996, as further
amended by the Company's Second Amendment to Annual Report on
form 10-K/A-2, as filed with the Securities and Exchange
Commission on January 10, 1997.
(9) Incorporated by reference from an identically
numbered exhibit filed with the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1996 (File
No. 0-19955) filed with the Securities and Exchange Commission
on August 13, 1996, as amended by the Company amendment to
Quarterly Report on From 10-Q/A, filed with the Securities and
Exchange Commission on January 10, 1997.
(10) Incorporated by reference from an identically
numbered exhibit filed with the Company's Annual Report on Form
10-K (File No. 0-19955), filed with the Securities Exchange
Commission on March 28, 1997, as amended by the Company's
Amendment to Annual Report on Form 10-K/A, filed with the
Securities and Exchange commission on March 31, 1997.
<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 to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Sunnyvale, California on this 25th day of March, 1998.
MOLECULAR DYNAMICS, INC.
By: /s/ Jay Flatley
------------------------------------
Jay Flatley
President, Chief Executive Officer,
Chief Operating Officer, Acting
Chief Financial Officer and Member
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------- ------------------------------------ ----------------
<S> <C> <C>
/s/ Jay Flatley President, Chief Executive March 25, 1998
- ----------------------- Officer, Chief Operating Officer,
(Jay Flatley) Acting Chief Financial Officer
and Director (Principal Executive
and Financial Officer)
/s/ Lynne R. Wagoner Director of Finance March 25, 1998
- ----------------------- (Principal Accounting Officer)
(Lynne R. Wagoner)
/s/ James M. Schlater Chairman of the Board of Directors March 25, 1998
- -----------------------
(James M. Schlater)
/s/ C. Woodrow Rea Director March 25, 1998
- -----------------------
(C. Woodrow Rea)
/s/ Robert Keeley Director March 25, 1998
- -----------------------
(Robert Keeley)
/s/ Janice M. LeCocq Director March 25, 1998
- -----------------------
(Janice M. LeCocq)
/s/ Lester John Lloyd Director March 25, 1998
- -----------------------
(Lester John Lloyd)
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULE
Page
Number
Report of Independent Auditors on Consolidated
Financial Statement Schedule II-1
Schedule II Valuation and Qualifying Accounts II-2
Item 14(d). FINANCIAL STATEMENT SCHEDULE
Report of KPMG Peat Marwick LLP, Independent Auditors, on Financial
Statement Schedule
Report of Independent Auditors
The Board of Directors and Stockholders
Molecular Dynamics, Inc.:
Under date of January 28, 1998, we reported on the consolidated balance
sheets of Molecular Dynamics, Inc. and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1997. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule as listed in the
accompanying index. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to
express an opinion on this consolidated financial statement schedule based
on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein.
KPMG Peat Marwick LLP
Mountain View, California
January 28, 1998
<PAGE>
SCHEDULE II
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
For the three years in the period ended December 31, 1997
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions of Year
- -------------------------------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1995:
Allowance for doubtful accounts $251,000 $30,000 $ -- $281,000
Accrued warranty costs $737,000 $859,000 ($929,000) $667,000
Year Ended December 31, 1996:
Allowance for doubtful accounts $281,000 $30,000 ($57,000) $254,000
Accrued warranty costs $667,000 $1,669,000 ($1,292,000) $1,044,000
Year Ended December 31, 1997:
Allowance for doubtful accounts $254,000 $30,000 ($2,000) $282,000
Accrued warranty costs $1,044,000 $2,021,000 ($1,871,000) $1,194,000
</TABLE>
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Molecular Dynamics, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 33-57966, 33-80042, 33-95430, 333-09561, 333-21967, and 333-35145)
on Form S-8 of Molecular Dynamics, Inc. of our reports dated January 28,
1998 relating to the consolidated balance sheets of Molecular Dynamics,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31,
1997, and the related consolidated financial statement schedule, which
reports appear in the December 31, 1997 annual report on Form 10-K of
Molecular Dynamics, Inc.
KMPG Peat Marwick LLP
Mountain View, California
March 25, 1998
Exhibit 10.41
"[**]" INDICATES THAT CONFIDENTIAL MATERIAL HAS BEEN OMITTED AND FILED
SEPARATELY IN A REQUEST FOR CONFIDENTIAL TREATMENT WITH THE SECURITIES
AND EXCHANGE COMMISSION.
LICENSE AGREEMENT
Affymetrix, Inc.
and
Molecular Dynamics, Inc.
Contents
DEFINITIONS 3
RECITALS 6
TECHNICAL INFORMATION 6
GRANTS 7
RECORDS, ACCOUNTS AND PAYMENTS 15
DURATION OF AGREEMENT 16
MISCELLANEOUS 17
Exhibit 1 21
2 22
3 23
4 24
5 27
6 28
THIS AGREEMENT is effective as of ("Effective
Date") between Affymetrix, Inc., a California corporation, hereinafter
referred to as "Affymetrix" and Molecular Dynamics, Inc., a Delaware
corporation, hereinafter referred to as "MD".
1 DEFINITIONS tc \l 1 "DEFINITIONS"
Whenever used in this Agreement, the following terms shall have
the meanings set forth below:
1.1 "Affiliates" as applied to Affymetrix shall mean Affymetrix, Inc.,
a California U.S.A. corporation, and all present and future
companies (other than Affymetrix) whose outstanding stock carrying
the right to vote for or appoint directors thereof is fifty
percent (50%) or more owned or controlled, directly or indirectly,
by Affymetrix. "Affiliates" as applied to MD shall mean Molecular
Dynamics, Inc., a Delaware corporation, and all present and future
companies (other than MD) whose outstanding stock carrying the
right to vote for or appoint directors thereof is eighty percent
(80%) or more owned or controlled, directly or indirectly, by MD,
but only for so long as such ownership or control exists. In the
case of non-corporate entities, "Affiliates" shall refer to
those entities where the power to control and direct management of
the entity is eighty percent (80%) or more owned or controlled,
directly or indirectly, by the referenced entity.
1.2 "Array Maker" shall mean a device designed to fabricate Nucleic
Acid Arrays by Mechanical Fabrication Methods and specifically
configured to fabricate only Nucleic Acid Arrays only by
Mechanical Fabrication Methods, and otherwise subject to the
restrictions herein.
1.3 "Category 1 Patent" shall refer to a United States Patent
issuing on U.S. Ser. No. [**] reciting, inter alia, [**], or a
United States patent claiming substantively the subject matter of
such application.
1.4 "Category 2 Patent" shall refer to a) a United States Patent
issuing on U.S. Ser. No. [**] reciting, inter alia, [**], or a
United States patent claiming substantively the subject matter of
such application; or b) a United States Patent issuing on U.S.
Ser. No. [**] reciting, inter alia, [**]; or c) a United States
Patent issuing on U.S. Ser. No. [**] reciting, inter alia, [**],
or a United States patent claiming substantively the subject
matter of such application; or d) a United States Patent issuing
on U.S. Ser. No. [**] reciting, inter alia, [**], or a United
States patent claiming substantively the subject matter of such
application.
1.5 "Expression Analysis" means the measurement of the presence,
absence, or level of an expressed messenger RNA in cells.
1.6 "GATC Compliant" shall refer to Nucleic Acid Arrays, software,
or Systems meeting the standards set forth in the GATC Agreement
executed on a substantially even date herewith, provided that
Nucleic Acid Arrays or Systems need not meet such standards when
delivered before [**]. In the event that one or both Parties cease
to be a party to such GATC Agreement , the Parties will negotiate
in good faith to provide substitute specifications for
interoperability of their respective Systems, Nucleic Acid Arrays,
and associated software. In the event that the GATC Agreement is
not executed by the Parties on a substantially even date, the
Parties will agree upon specifications for interoperability
substantially based on the draft of the GATC Agreement in place on
the Effective Date, such agreement to be reached in good faith by
the Parties by [**].
1.7 "Gene" shall refer to a nucleic acid sequence encoding a
distinct messenger RNA and protein as well as polymorphic variants
of such sequence, provided that such polymorphic variants must
have at least 99.9% homology with the underlying gene.
1.8 "Initial Period" shall mean, with respect to a particular Array
Maker, the time period beginning upon the contractual commitment
of MD to transfer such Array Maker to a third party (provided that
such time must begin before [**]), and a) ending [**] from the
date of such commitment, when such commitment is made between [**]
and [**], or b) ending [**] for those Array Makers for which
contractual commitments of MD are made before [**]. For those
Array Makers for which MD contractually commits on or after [**],
there shall be no Initial Period.
1.9 "Mechanical Fabrication Methods" shall mean any method for the
fabrication of Nucleic Acid Arrays on a solid support by placement
of fully synthesized nucleic acids (clonal polynucleotides or
other presynthesized polynucleotides) having more than [**] bases
each, solely through mechanically isolated deposition of such
fully synthesized nucleic acids at specific locations on the
array. Without limiting the above, it is understood that the
synthesis of an array in which regions of an array are activated
or prepared for placement of materials by means of controlled
direction of electromagnetic energy at a portion of a support is
not a Mechanical Fabrication Method.
1.10 "Metered Period" shall mean any period other than the Initial
Period.
1.11 "Nucleic Acid Array" shall mean an array of diverse nucleic acids,
each having at least [**], at defined locations on a solid support
and fabricated by Mechanical Fabrication Methods, provided that in
no part of such solid support may such diverse nucleic acids be
arranged at a density of more than [**] locations per square
centimeter, and all of the nucleic acids in any one Nucleic Acid
Array may represent no more than [**] Genes.
1.12 "Party(ies)" shall refer to Affymetrix and/or MD.
1.13 "Patent Rights" shall mean claims, or the equivalent of claims of
"Affymetrix' Patent Rights" or "MD's Patent Rights," as
appropriate, directed to and/or primarily useful in connection
with Nucleic Acid Arrays. "Affymetrix' Patent Rights" shall be
those arising from, and only those arising from, the patents and
applications listed in Exhibit 1, as well as the inventions
disclosed and claimed therein, and all continuations,
continuations-in-part, divisions, reexaminations, and reissues
thereof, and any corresponding foreign patent applications that
may be filed in the future claiming priority thereto and any
patents, patents of addition, or other equivalent foreign patent
rights issuing, granted or registered thereon that are based on
one or more of the patents or applications in Exhibit 1, including
the patent rights of third parties for which Affymetrix obtains
the right to grant sublicenses pursuant to sublicensing rights in
connection with and obtained as part of a license grant of the
Affymetrix Patent Rights to such third party pursuant to terms
equivalent to Section 4. "MD's Patent Rights" shall be those
arising from, and only those arising from, the patents and
applications listed in Exhibit 2, as well as and the inventions
disclosed and claimed therein, and all continuations,
continuations-in-part, divisions, and reissues thereof, and any
corresponding foreign patent applications that may be filed in the
future claiming priority thereto and any patents, patents of
addition, or other equivalent foreign patent rights issuing,
granted or registered thereon. The term "Patent Rights" as
defined above includes only said claims under which the herein-
designated company has the right at any time during the life of
this Agreement to make the herein-contained grants, in each
instance to the extent, and subject to the terms and conditions,
including the obligation to account to or make payments to others,
under which the herein-designated company shall have such right.
1.14 "Research Market Array Maker" shall mean an Array Maker designed,
manufactured, or sold to (and only to) not-for-profit research
institutions, specifically including university and government
research institutions, (without right of subsequent transfer) for
lower-throughput and lower density research purposes than Array
Makers otherwise licensed hereunder. Research Market Array Makers
shall not be available for sale or transfer to third parties
before [**]. Research Market Array Makers shall be subject to the
terms and conditions herein relating to Array Makers except that
a) such Research Market Array Makers shall be adapted to make
Nucleic Acid Arrays not be configured to fabricate Nucleic Acid
Arrays having more than [**] genes per array and not more than
[**] array elements per square centimeter, and b) shall be subject
to the lower royalty provisions of Section 5.9 herein.
1.15 "System" shall mean one or more readers, hybridization devices,
computer work stations, and/or single copies of software
associated therewith specifically configured (but not necessarily
exclusively configured) for use with Nucleic Acid Arrays and to be
used for extraction and processing of data from such Nucleic Acid
Arrays (and not including, for example, Array Makers).
1.16 "Technical Information" shall mean: (a) the software identified
in Exhibit 3 in object code form; (b) associated documentation
related to such software directed to and/or primarily useful in
connection with Nucleic Acid Arrays; and (c) reasonable
enhancements thereto heretofore or hereafter acquired by the
designated party prior to [**] after the Effective Date of the
Agreement, as well as the copyright and trade secret rights
therein. Notwithstanding the above, "Technical Information"
includes only such software, associated documentation, and
enhancements as the herein-designated party has the right at any
time during the life of this Agreement to disclose, and in each
instance only to the extent that and subject to the terms and
conditions, including the obligation to account to or make
payments to others, under which the herein-designated party shall
have the right to disclose such information to others.
2 RECITALS tc \l 1 "RECITALS"
2.1 MD has requested that Affymetrix grant MD a license under
Affymetrix's Patent Rights and Technical Information to make, use,
import, lease, distribute, and sell Nucleic Acid Arrays, as well
as associated Systems and Array Makers. Affymetrix is willing to
grant such a license to MD on the provisions herein set forth.
3 TECHNICAL INFORMATION tc \l 1 "TECHNICAL INFORMATION"
3.1 Affymetrix has developed Affymetrix' Technical Information which
includes a software suite for data extraction and image
processing. Affymetrix shall, promptly following execution of
this Agreement and in accordance herewith, permit MD to utilize
Affymetrix' Technical Information for the purpose of the
commercial development of Nucleic Acid Arrays and associated
Systems. Affymetrix shall thereafter, from time to time and upon
MD's request, make available to MD any additional Technical
Information developed by or on behalf of Affymetrix. Affymetrix
will deliver object code versions of the software associated with
the Technical Information to MD. MD will license software only in
object code form.
3.2 Affymetrix and MD agree: (a) to use reasonable efforts to protect
the confidential nature of the other Party's Technical
Information; (b) not to disclose the same to others, except to the
extent reasonably necessary to carry out operations licensed
hereunder; and (c) to use the same only pursuant to the terms of
this Agreement. However, the foregoing commitments shall not
extend to any portion of Technical Information (i) which was in
the possession of the receiving Party prior to receipt of same
without an obligation of confidentiality; (ii) which is now, or
hereafter becomes through no act or failure to act on the part of
the receiving Party, generally known to the nucleic acid array
industry on a non-confidential basis; or (iii) which is hereafter
disclosed to the disclosing Party by others if said others have
imposed no restriction on disclosure by the disclosing Party; or
(iv) is independently developed by the Party; or (v) is required
to be disclosed pursuant to court or agency order.
3.3 From time to time during the life of this Agreement, at
Affymetrix' request, MD shall make MD's Technical Information
available to Affymetrix.
3.4 Affymetrix and MD will advise the other with reasonable promptness
and detail of Technical Information developed after the Effective
Date.
4 GRANTS tc \l 1 "GRANTS"
4.1 Subject to the terms and conditions of this Agreement, Affymetrix
grants to MD a nontransferable, nonexclusive, worldwide, royalty
bearing license under Affymetrix' Patent Rights and Technical
Information to make, (but not have made), use for internal array
development programs and pharmaceutical or diagnostic research
(such use rights not including the right to license or distribute
expression databases, or perform therapeutic or pharmaceutical
development on a service or similar basis), import, lease,
distribute, offer for sale, and sell (in the case of products
other than software) a) GATC Compliant Nucleic Acid Arrays, and b)
GATC Compliant Systems for use with and only for use with GATC
Compliant Nucleic Acid Arrays licensed hereunder, all to the
extent that such Nucleic Acid Arrays or Systems are covered by
Affymetrix' Patent Rights and/or Affymetrix's Technical
Information. Such license shall not include the right to
sublicense, except that MD shall have the right to sublicense
single copies of Affymetrix' Technical Information (without the
right to further sublicense) for use with GATC Compliant Systems
leased, sold, or transferred by MD pursuant to this Agreement.
It is understood that the rights conveyed herein do not include
the right for MD to use, have used, or license or otherwise permit
any third party to use the Nucleic Acid Arrays (including those
made by Array Makers) for database development for external
distribution, service based target or drug discovery, or product
development of other nucleic acid analysis technologies. It is
further understood that while the sale of Systems or licensing of
Technical Information to third parties is permitted even though
such Systems are or may be useful to read, prepare, or process
data from nucleic acid arrays having a density greater than the
density of Nucleic Acid Arrays licensed herein or in applications
other than the Nucleic Acid Arrays licensed herein (such as those
made by Affymetrix), no express or implied license to make, have
made, use, import, lease, distribute, offer for sale, sell or
transfer such higher density nucleic acid arrays or nucleic acid
arrays for other applications is granted or is to be inferred or
implied hereunder except as to those nucleic acid arrays made by
Affymetrix or licensed by Affymetrix. Notwithstanding anything to
the contrary in this Section 4.1, Nucleic Acid Arrays are licensed
hereunder only to the extent that such Nucleic Acid Arrays are a)
used, leased, distributed, or sold only for research use only; and
b) designed and marketed only for use and used in Expression
Analysis studies; and c) are for single use only, and d) are sold,
leased, or otherwise transferred with contractual and label
restrictions on use consistent with this agreement, which
provisions may be reasonably reviewed by Affymetrix. It is
understood that MD may have subassemblies made under this license
that would not, but for this license, infringe the intellectual
property rights granted herein. The Parties will agree to
appropriate royalty and support terms for additional copies of the
Technical Information to be used in the Systems.
4.2 Subject to the terms and conditions of this Agreement, Affymetrix
grants to MD a nontransferable, nonexclusive, worldwide, royalty-
free license under Affymetrix' Patent Rights to make (but not have
made), and use Array Makers for internal array development and
manufacturing development programs. It is understood that MD may
have subassemblies made under this license that would not, but for
this license, infringe the intellectual property rights granted
herein.
4.3 During the term and subject to the terms and conditions of this
Agreement and during the Initial Period or the Metered Period as
applicable (if any), Affymetrix grants to MD a nontransferable,
nonexclusive, worldwide, royalty bearing license under Affymetrix'
Patent Rights and Technical Information to make, (but not have
made), use for internal array development programs and
pharmaceutical or diagnostic research (such use rights not
including the right to license or distribute expression databases,
or perform therapeutic or pharmaceutical development on a service
or similar basis), import, lease, distribute, offer for sale, and
sell (in the case of licensed products other than software) Array
Makers for the manufacture of GATC Compliant Nucleic Acid Arrays
to the extent that such Array Makers or the use of such Arrays
Makers or Nucleic Acid Arrays made therewith (or use thereof) are
covered by Affymetrix' Patent Rights and/or Affymetrix' Technical
Information. Such license shall not include the right to
sublicense. Such license shall be considered to include a license
for the Array Makers sold prior to the date of this Agreement only
to the entities in Exhibit 5. It is understood that the rights
conveyed herein do not include the right for MD or those acquiring
Array Makers pursuant to this Agreement to use, have used, or
license or otherwise permit any third party to use the Nucleic
Acid Arrays made with such Array Makers for database development
for external distribution, for service based target or drug
discovery, or manufacture Nucleic Acid Arrays for resale or other
transfer to third parties. Nucleic Acid Arrays made with the
Array Makers licensed hereunder will be licensed only to the
extent that such Nucleic Acid Arrays are a) used, leased,
distributed, or sold for research use only; and b) designed,
marketed and used only in Expression Analysis studies; and c) are
for single use only, and d) are sold or otherwise transferred with
contractual and label restrictions on use consistent with this
agreement, which provisions may be reasonably reviewed by
Affymetrix. In no event may MD transfer more than [**] Array
Makers pursuant to the license hereunder to a single third party
or its Affiliates, except as to [**], to which MD will not
transfer more than [**] Array Makers pursuant to the license
hereunder when such Array Makers are to be licensed in an Initial
Period. During the Metered Period, MD may provide additional
Array Makers to its customers. It is understood that a particular
customer of MD may wish to order more than the above recited [**]
or [**] Array Makers, and when MD is contractually obligated to
provide such Array Makers they may be provided by MD, provided
that any such Array Makers in excess of the above limits will be
considered as being in the Metered Period upon their delivery to
the customer of MD. In the event that MD is committed to deliver
more than the above numbers of Array Makers before the Effective
Date to the customers in Exhibit 5, MD and Affymetrix will
negotiate for appropriate metering rates for such Array Makers
pursuant to Section 5, upon which such Array Makers will be
licensed hereunder. It is understood that MD may have
subassemblies made under this license that would not, but for this
license, infringe the intellectual property rights granted herein.
4.4 Research Market Array Makers will be subject to the provisions of
this Agreement related to Arrays Makers. In addition, Research
Market Array Makers may be used and are licensed only to the
extent they are used in the generation of scientific information
for general publication, and without pursuit of intellectual
property rights thereon. Any further uses, including the
patenting of information or discoveries created with the Research
Market Array Maker, the creation of arrays for sale to third
parties, the performance of services or tests on a paid basis for
third parties, and the creation of database or informatics
products for sale to third parties will not be licensed hereunder
except to the extent that any such purchaser agrees to abide by
the terms of Affymetrix' then current Academic User Center (or
then equivalent) agreement providing for Affymetrix rights to
either a) have access to such intellectual property, or b) share
in royalties generated by such intellectual property. Each
Research Market Array Maker sold, leased, or otherwise transferred
by MD will be sold with written consent to and conditioned upon
such terms.
4.5 It is understood that MD may wish to perform a service business
using Nucleic Acid Arrays during the Term of this Agreement.
Affymetrix will negotiate in good faith to license such service
business at rates otherwise consistent with its then current
pricing models.
4.6 MD may grant sublicenses (without the right to further sublicense)
to the Technical Information in association with the bona fide
sale, lease, or transfer of Systems or Nucleic Acid Arrays,
provided that any such license of the Technical Information: a)
will allow any sublicensee access only to object code versions of
any software included within such grant; and b) any such grant
includes provisions the same as or substantially identical to
those in Exhibit 4. MD will maintain all trademark and copyright
notices of Affymetrix in such Technical Information sublicensed to
a third party.
4.7 Affymetrix shall provide support for the Technical Information
commensurate with standard industry practices (under standard
terms and conditions) to MD, its Affiliates, and their customers
who have received Technical Information in connection with the
bona fide sale, lease, or transfer of Systems or Nucleic Acid
Arrays by MD or its Affiliates pursuant to the licenses granted
hereunder. In addition, upon MD's request, Affymetrix shall
escrow a source code version of the Technical information with an
escrow agent mutually agreeable to the parties, which escrowed
source code shall be accessible to MD in the event that Affymetrix
shall default on or be unable to perform its support obligations,
or as a result of insolvency, bankruptcy, or if Affymetrix
otherwise ceases in the relevant business.
4.8 MD and Affymetrix will reasonably meet and confer to determine if
it is reasonably feasible to retrofit Systems that are not GATC
Compliant, but which are licensed hereunder, to permit such
Systems to utilize probe arrays of low and/or high density made by
Affymetrix.
4.9 In the event that a third party brings a lawsuit or is otherwise
involved in administrative or other similar disputes with a Party
regarding intellectual property rights, the Party that is subject
to such action may provide written notification of such action,
along with notification that it wishes to discontinue sales, if
any, of products that would otherwise have been licensed hereunder
to such third party, and terminating the licenses herein with
respect to such third party. The Party receiving such notice
will, subject to prior contractual commitments, use reasonable
efforts to discontinue sales of products licensed hereunder to
such third party or, if no such sales have occurred, to prevent
such sales in the future. MD acknowledges that Affymetrix has
provided notice of two such third parties, and MD understands that
any products transferred to such third parties are not licensed
hereunder.
4.10 Subject to the terms and conditions of this Agreement, MD grants
to Affymetrix, which grant is extendible by Affymetrix to its
Affiliates without accounting therefor to MD, a worldwide,
nonexclusive license under MD's Patent Rights to make, have made,
use, import, lease, distribute, offer for sale, and sell high
density arrays of nucleic acids and systems for use therewith to
the extent used to analyze such high density arrays of nucleic
acids.
4.11 It is recognized that up to [**] may be sold by MD to [**]
pursuant to an existing contract between MD and [**] and in
accordance with the rights and obligations of this Agreement. The
Parties recognize, however, that [**] may not agree to be bound
by all of the the terms of this license relating to database
distribution in Section 4.3. To the extent that [**] does not
comply with the database distribution restrictions in Section 4.3
and to the extent that such [**] are otherwise sold by MD in
accordance with this Agreement, Affymetrix, on behalf of itself,
and its Affiliates, heirs, executors, assigns, agents and
representatives hereby fully and forever releases MD and its
heirs, executors, assigns, agents, and representatives from any
claim or cause of action, under any thery of liability, known or
unknown, fixed or contingent, that any of them may have arising
from or relating to Affymetrix Patent Rights and/or Technical
Information from the beginning of time up to the Effective Date
on account of [**] lack of non-compliance, performance, or lack of
agreement to comply with such database distribution restrictions
with respect to such three instruments. Such release shall in no
manner be construed to extend to [**] whether by implication,
license, or otherwise and, further, shall not extend to future
acts of MD beyond the supply of such [**] to [**].
4.12 MD, on behalf of itself, and its Affiliates, heirs, executors,
assigns, agents and representatives hereby fully and forever
releases Affymetrix and its heirs, executors, assigns, agents and
representatives from any claim or cause of action, under any
theory of liability, known or unknown, fixed or contingent, that
any of them may have arising from or relating to MD Patent Rights
from the beginning of time up to the Effective Date on account of
the manufacture, use, or sale of high density nucleic acid arrays
and systems to analyze such high density nucleic acid arrays.
4.13 Subject to the terms and conditions of this Agreement, MD grants
to Affymetrix the royalty-free right to grant nonexclusive
licenses under MD's Patent Rights to others licensed by Affymetrix
under Affymetrix' Patent Rights for use with Nucleic Acid Arrays
and Systems; provided, however, that Affymetrix may grant such
licenses under MD's Patent Rights only to others whose Patent
Rights are included within the Affymetrix Patent Rights.
4.14 Nothing in this Agreement shall be construed to obligate either
party to sue alleged infringers under such party's Patent Rights
and Technical Information. Any determination to take any action
against such alleged infringers shall be in such party's sole
discretion.
4.15 MD shall include with all Nucleic Acid Arrays (including Nucleic
Acid Arrays made with Array Makers) and Systems leased,
distributed, sold, or otherwise transferred hereunder reasonable
package markings, product markings, contractual restrictions,
and/or user manual instructions indicating that such products are
licensed: (a) for research purposes only; (b) only for Expression
Analysis studies or studies otherwise licensed by Affymetrix (it
being understood that the Parties may chooses upon mutual written
consent to modify this limitation); and (c) for single use only,
and (d) with restrictions on the distribution of databases or
services based on the use of arrays herein, and (e) only
consistent with the licenses herein. MD shall diligently police
and enforce such restrictions.
4.16 MD shall attach a label on each Nucleic Acid Array, System and/or
associated documentation sold, leased, or otherwise transferred
hereunder reasonably reflecting patent numbers of a) issued US
device patents covering such product, and b) other appropriate
intellectual property rights notices, and will reasonably modify
such label periodically at the direction of Affymetrix. Affymetrix
shall attach a label on each Nucleic Acid Array, System and/or
associated documentation reasonably reflecting patent numbers of
a) issued US device patents covering such product, and b) other
appropriate intellectual property rights notices, and will
reasonably modify such label periodically at the direction of MD.
4.17 The licenses granted herein are granted on the understanding that
MD will use commercially reasonable efforts to develop,
manufacture, and market Nucleic Acid Arrays and Systems, and MD
agrees to use such commercially reasonable efforts to develop,
manufacture, and market Nucleic Acid Arrays, and Systems. If
during the term of this Agreement Affymetrix reasonably believes
that MD has discontinued commercially reasonable efforts to
develop, manufacture, and market Nucleic Acid Arrays and/or
Systems, Affymetrix may provide written notice to MD of such
reasonable belief, along with notification that it intends to
terminate the licenses herein In the event that MD disagrees with
such assertions by Affymetrix, MD may provide reasonable evidence
of its continued reasonable commercial efforts under suitable
terms of confidentiality. In the absence of such reasonable
evidence, Affymetrix may, thereafter, on 6 months written notice,
terminate this Agreement.
4.18 MD may extend the licenses granted herein to its Affiliates
provided such Affiliates agree in writing to be bound by the terms
and conditions of this Agreement, and further provided that MD
agrees to be liable and indemnify Affymetrix for the activities of
such Affiliates.
5 FEES tc \l 1 "FEES"
5.1 At the time and in the manner hereinafter provided, MD shall pay
to Affymetrix for each Nucleic Acid Array a) leased, sold, or
otherwise transferred pursuant to the license granted under
Section 4 hereof, or b) used for internal pharmaceutical research
and development purposes (but not used solely for development of
Arrays Makers, Systems or Nucleic Acid Arrays), a royalty pursuant
to Table 1. The royalty shall be payable based on [**] prices in
Table 1 are the number of dollars to be paid to Affymetrix [**].
Royalty [**]
[**] [**]
[**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
[**] [**] [**] [**] [**]
5.2 The royalties and operating fees, and the licenses herein, cover
arrays made with up to [**]. In the event that MD reasonably
believes at a future date that [**] are reasonably required to
competitively market Nucleic Acid Arrays or Array Makers, MD and
Affymetrix will reasonably confer and agree upon appropriate
royalty levels for such Nucleic Acid Arrays and/or Array Makers
using the royalty and operating fee structures set forth herein as
guiding factors, provided that in no event will the licenses
granted herein cover Nucleic Acid Arrays representing more than
[**] unless agreed to in writing by Affymetrix. In addition, if
MD is required to license probe array based intellectual property
from third parties that make the above royalty rates
unsupportable, MD and Affymetrix will negotiate in good faith with
each other to modify the above royalty structure and/or the third
party royalty rates that should be paid.
5.3 In the event that a) MD reasonably believes that it cannot support
the above royalty rates and operating fees under a reasonable
business model for the sale, lease, or transfer of Nucleic Acid
Arrays sold pursuant to this Agreement after commercial efforts to
implement such business model as a result of such royalty rates,
and b) Affymetrix is not taking reasonable efforts to mitigate
infringement of its intellectual property rights, MD will provide
written notification to Affymetrix, along with reasonable
documentation of the basis of such assertion. MD and Affymetrix
will reasonably confer and identify alternative license fees and
or structures to support a reasonable business model for the sale
of Nucleic Acid Arrays licensed pursuant to this Agreement.
5.4 If in any calendar year following the [**] anniversary of this
Agreement the royalties and operating fees generated by MD's
licensed operations hereunder are less than [**], then Affymetrix
shall have the right, exercisable within the period of ninety (90)
days following the end of the said year, to terminate this
Agreement on sixty (60) days' written notice to MD; provided,
however, that MD shall have the right but not the obligation,
before the expiration of the said sixty (60) days following the
date of said notice of termination, to pay any differences between
the royalties and operating fees so accruing and the foregoing
amount and maintain this Agreement and the license granted to MD
in full force and effect, subject to Affymetrix' rights to
terminate this Agreement pursuant to any of Sections 7.3 through
7.5 hereunder.
5.5 In partial consideration of the rights and waivers herein MD shall
pay to Affymetrix [**] upon MD's execution of this Agreement.
Such payment shall be subject to refund as follows: a) if a
Category 1 patent has not issued by [**] shall be refunded, and b)
if a Category 2 patent has not issued by [**] shall be refunded.
5.6 During the Initial Period, and as to Array Makers (excluding
Research Array Makers) transferred to third parties under
contracts in which MD has committed to transfer such Array Makers
pursuant to agreements effective before [**] MD will pay to
Affymetrix an operating license fee for the usage of the Array
Makers during the period beginning when the Category 1 and/or 2
Patents, as applicable, are issued: a) [**] per calendar year for
each calendar year in which a Category 1 Patent is issued, pro-
rated for the number of months in such calendar year in which such
Category 1 Patent is issued, and provided that this payment shall
not be payable with respect to Array Makers specifically
configured to make Nucleic Acid Arrays at a density of less than
[**], and b) [**] per calendar year for each calendar year in
which a Category 2 Patent is issued, pro-rated for the number of
months in such calendar year in which such Category 2 Patent is
issued. The foregoing operating license fees are a proxy for
usage fees for the Array Makers. The fees recited in this Section
may be made in equal quarterly installments during the applicable
calendar year in which such payments are due.
5.7 MD will reasonably gather data regarding the Array Makers
(excluding Research Array Makers) sold pursuant to this Agreement
to determine the approximate use rate and type of use (density of
arrays, etc.) by users of such Array Makers. Before [**] the
Parties will meet and confer regarding an appropriate and
reasonable metering system (such as, for example, monitoring of
reagent usage, software usage monitoring, etc.) that may be used
to apply reasonable royalties and operating fees to the use of
such Array Makers reflective of the rates recited herein for Array
Makers and Nucleic Acid Arrays. During the Metering Period, the
royalties and operating fees payable on any such Array Makers will
be based upon such agreed metering mechanism.
5.8 Until such time as Affymetrix provides MD written notification of
the issuance of a Category 1 Patent, MD may discount the royalties
and operating fees payable on Nucleic Acid Arrays pursuant to
Sections 5.1 and 5.6 herein by [**]. Until such time as
Affymetrix provides MD written notification of the issuance of a
Category 2 Patent, MD may discount the royalties and operating
fees payable on Nucleic Acid Arrays pursuant to Sections 5.1 and
5.6 herein by [**]. It is understood during such time as neither
a Category 1 Patent or a Category 2 Patent is issued, MD may
discount the royalties and operating fees payable on Nucleic Acid
Arrays pursuant to Sections 5.1 and 5.6 herein by [**].
5.9 Molecular Dynamics shall pay to Affymetrix a one-time royalty on
each Research Market Array Maker and reagents sold therefor equal
to [**] of the net sales revenue (F.O.B. Sunnyvale) of such
Research Market Array Makers and reagents sold therefor.
5.10 MD may discount the royalties/operating fees payable pursuant to
Section 5.1 herein on the sale of Nucleic Acid Arrays by [**] in
those cases where the Genes represented on the Nucleic Acid Arrays
are from an organism listed in Exhibit 6.
5.11 If, under similar conditions and on substantially the same terms
as this Agreement, other than royalty terms, Affymetrix shall
hereafter enter into another agreement making available to any
person, firm or company (other than any national government or
branches or agencies of any national government, or any
Affiliate(s) of Affymetrix) a license or immunity from suit for
any country or countries, otherwise of the same scope as the
licenses and immunities granted MD under this Agreement, wherein
the terms taken as a whole are more favorable than those granted
in this Agreement, then MD shall, at MD's election to be exercised
within ninety (90) days from the date of Affymetrix' notification,
be entitled to the benefit of such more favorable terms in such
country or countries as of and subsequent to the effective date of
the grant by Affymetrix of such more favorable terms, so long as
such more favorable terms shall be available to such other
licensee, provided that in any such event MD shall at the same
time accept any and all other terms, conditions and limitations
imposed on such other licensee, whether or not they are directly
related to such more favorable terms. Affymetrix shall reasonably
notify MD of any agreement which provides Affymetrix of the
benefits of this paragraph.
6 RECORDS, ACCOUNTS AND PAYMENTS tc \l 1 "RECORDS, ACCOUNTS AND
PAYMENTS"
6.1 The royalties and operating fees payable by MD to Affymetrix as
provided in Article 5 shall be paid on or before the last day of
February, May, August and November in each calendar year for MD's
operations hereunder during the respective immediately preceding
calendar quarter. MD will at the same time deliver to Affymetrix
a certified statement of one of MD's officers, on forms which may
be provided or prescribed therefor by Affymetrix, accounting for
royalties and operating fees payable hereunder, or showing that no
royalty is payable.
6.2 In keeping with established bookkeeping and accounting practices,
MD shall maintain, for a period of two (2) years following the end
of the calendar year in which any royalties and operating fees are
payable, appropriate books and records fully adequate to show the
full amount of royalty payable under this Agreement, including,
but not limited to, books and records showing each sale, lease, or
other transfer of Nucleic Acid Arrays or Systems, the net invoice
price for said sale, lease, other transfer, and sublicense, the
name and address of the purchaser, lessee, transferee and/or
sublicensee, as appropriate. Affymetrix shall have the right, at
any time during regular business hours and upon 10 days notice, to
make such examination as Affymetrix deems necessary to verify said
records and books of account. In the event that such examination
reveals a discrepancy between the royalties and operating fees
payable hereunder and the royalties and operating fees actually
paid, all such additional royalties and operating fees, together
with interest from the date when such additional royalties and
operating fees would have been due, shall be paid to Affymetrix
within thirty (30) days of written notice from Affymetrix of such
discrepancy. Such notice shall be deemed to be notice of default
under Section 7.5 hereunder. Any such audit shall be at
Affymetrix sole expense and performed by a nationally recognized
accounting firm under reasonable obligations of confidentiality.
In the event that a deficiency of more than [**] is discovered,
the audit shall be at MD expense.
6.3 All payments provided for in this Agreement refer to lawful money
of the United States of America. All payments shall be made by MD
to Affymetrix at the office of Affymetrix designated in Section 8
and shall be made in the full amounts as herein specified;
provided, however, that deduction may be made from such payments
by MD for amounts lawfully required to be withheld and paid by MD
in respect of any income tax levied or assessed upon such payments
by, and in accordance with the laws of, any foreign government but
only in respect to sales and leases by MD in the foreign country
imposing such income tax. Affymetrix shall have the right at any
time or from time-to-time to contest by appropriate proceedings
the validity or amount of any such income tax withheld. If so
requested by Affymetrix, MD will make such payments under protest,
and, on behalf and at the expense of Affymetrix, take such other
action and render all reasonable assistance that may be required
by Affymetrix in the prosecution of any such proceedings. MD will
obtain and forward to Affymetrix tax credit receipts or vouchers
for all income taxes thus withheld and paid by MD. As used
herein, "income tax" shall mean a tax on income imposed by a
country other than the United States of America or by any
possession or territory of the United States of America, for which
a foreign tax credit is allowed by the Government of the United
States of America. All late payments shall bear interest at the
rate of 1.5% per month, unless the maximum amount allowed by law
is lower, in which case all late payments shall bear interest at
the maximum permitted rate.
6.4 If one or more of the payments required to be made herein is not
made by its due date, and if such payment or payments, plus
interest, is not made prior to forty five (45) days after notice
from Affymetrix of such delinquency, then Affymetrix may, at its
sole option, terminate this Agreement on the fifteenth day after
written notice is given to MD that it intends to terminate this
Agreement.
6.5 All payments herein shall be made in United States of America
dollars in the form of a check drawn on a United States bank.
7 DURATION OF AGREEMENT tc \l 1 "DURATION OF AGREEMENT"
7.1 Unless earlier terminated as provided below, this Agreement shall
remain in full force and effect until January 1, 2008.
7.2 At any time after one (1) year following the Effective Date of
this Agreement, MD may terminate this Agreement upon sixty (60)
days' prior written notice to Affymetrix.
7.3 In the event that MD intends to file any petition, answer, or
other proceeding in bankruptcy, MD will use reasonable efforts to
give Affymetrix reasonable advance written notice prior to filing
such petition and provide Affymetrix reasonable adequate
opportunity to review and oversee any reorganization or disposal
of MD's relevant assets (to the extent applicable to the
intellectual property rights herein granted) to ensure strict
compliance with this Agreement. Failure to comply with this
Section shall be considered a material breach which may not be
remedied.
7.4 In the event that MD files, or intends to file any petition,
answer, or other proceeding in bankruptcy, Affymetrix will have
the right, but not the obligation, to terminate this Agreement by
providing written notice.
7.5 If either party should fail to perform any obligations under this
Agreement, the other party may give written notice to the
defaulting party calling attention to the default. In the event of
a material breach or default, unless said breach or default is
corrected within thirty (30) days after such notice, said other
party shall thereafter have the right to terminate this Agreement
upon thirty (30) days' prior written notice to said defaulting
party. Said right to terminate for default shall be in addition
to, and without prejudice to the exercise of, any other remedies
available in law or equity.
7.6 No termination of this Agreement shall in any way affect MD's
obligations pursuant to Articles 5 and 6 to pay royalties and
operating fees, deliver statements, and maintain books and records
under this Agreement accrued prior to such termination, or MD's or
Affymetrix's obligations pursuant to Section 3.2. Furthermore, no
termination of this Agreement shall in any way affect Affymetrix's
rights under Sections 4 above.
8 MISCELLANEOUS tc \l 1 "MISCELLANEOUS"
8.1 MD and Affymetrix will appropriately mark all licensed products
hereunder with applicable intellectual property rights notices as
may be reasonably be provided from time to time by the other
Party. In addition, all product manuals and instruments to be
sold as or in conjunction with Nucleic Acid Arrays, Systems, or
Array Makers shall include the following notice, such notice to be
reasonably modified upon notice from Affymetrix provided that any
such modification is consistent with the terms and conditions of
this Agreement:
LIMITED LICENSE: NUCLEIC ACID ARRAYS, ARRAY MAKERS, SYSTEMS
(INSTRUMENTS, SOFTWARE, AND REAGENTS) ARE LICENSED FOR
RESEARCH USE ONLY. NO IMPLIED RIGHT TO MAKE, USE, HAVE
MADE, OFFER TO SELL, LEASE, DISTRIBUTE, SELL, OR IMPORT
NUCLEIC ACID PROBE ARRAYS OR ANY OTHER PRODUCT IN WHICH
AFFYMETRIX OR MOLECULAR DYNAMICS HAS PATENT RIGHTS IS
CONVEYED BY THE SALE OF PROBE ARRAYS, INSTRUMENTS,
SOFTWARE, OR REAGENTS HEREUNDER. THIS LIMITED LICENSE
PERMITS ONLY THE USE OF THE PARTICULAR PRODUCT(S) THAT THE
USER HAS PURCHASED FROM AFFYMETRIX OR LICENSED AND SOLD BY
MOLECULAR DYNAMICS, OR PERMITTED LICENSEES, AND MAY NOT BE
USED IN DATABASE GENERATION FOR EXTERNAL LICENSE OR SALE, OR
FOR SERVICE BASED PHARMACEUTICAL RESEARCH.
8.2 Affymetrix warrants that the Technical Information does not
infringe the copyrights or trade secret rights of a third party,
and will indemnify MD against any claims based on the infringement
of third party copyrights or trade secret rights. THIS WARRANTY
STATES THE ENTIRE LIABILITY FOR INFRINGEMENT OF THIRD PARTY
INTELLECTUAL RIGHTS ARISING FROM THE SALE OF PRODUCTS UNDER THIS
AGREEMENT.
8.3 Nothing in this Agreement shall be construed as conferring any
right to use in advertising, publicity, or other promotional
activities any name, trade name, trademark, or other designation
of either party hereto without the express written approval of the
other party.
8.4 Each of Affymetrix and MD represents and warrants that it neither
owns or controls any patent or patent application which would be
necessary for the other party to exercise the rights granted
herein and which is not licensed hereunder. MD and Affymetrix
warrant that they each have the full right to enter into this
Agreement. Nothing in this Agreement shall be construed as a
warranty or representation by Affymetrix or MD as to the validity
or scope of any of the Patent Rights, a warranty or representation
by either party that any manufacture, sale, use, or other
disposition of the products licensed hereunder will be free from
infringement of patents, utility models, and/or design patents
other than those Patent Rights for which licenses are extended
hereunder. Nothing in this Agreement shall be considered as
conferring any warranty or representation as to the usefulness,
marketability, or merchantability of any products sold within the
scope of the licenses hereunder. Affymetrix and MD agree to hold
the other harmless from any personal injury or products liability
claims made as a result of the sale of products licensed
hereunder.
8.5 The Parties will retain the terms of this Agreement in strict
confidence, except as may be required by regulatory agencies or
courts, and will then use all reasonable precautions to maintain
the terms of this Agreement confidential.
8.6 This Agreement is not assignable by MD by operation of law or
otherwise without the prior written consent of Affymetrix
including in the event of acquisition of the assets or stock of MD
without the consent of Affymetrix, which will not be unreasonably
withheld, except in the case of companies directly competitive
with Affymetrix. Affymetrix may assign this Agreement, without
the prior written consent of MD, to any entity acquiring all or
substantially all of Affymetrix' Nucleic Acid Array licensing
business. No assignment of this Agreement shall be valid until
all obligations under this Agreement shall have been assumed in
writing by the assignee.
8.7 This Agreement is executed by the parties with the understanding
that it embodies the entire agreement between the parties
pertaining to the subject matter of this Agreement and there are
no representations, warranties or other commitments, written or
oral, pertaining to the subject matter of this Agreement which are
not embodied in this Agreement.
8.8 MD and Affymetrix represents that they are familiar with the
Export Administration Regulations comprising the compilation of
official regulations and policies governing the export licensing
of commodities and technical data promulgated by the United States
Department of Commerce, Bureau of International Commerce, Office
of Export Administration. Notwithstanding any other provisions of
this Agreement, and each assures the other that with respect to
all information and licenses furnished by or under this
Agreement, that it will comply with such official regulations.
8.9 It is understood and agreed between the parties that the Technical
Information made available to each Party shall all be provided "as
is" without any warranties, express or implied. THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE
ARE EXPRESSLY EXCLUDED FROM THIS WARRANTY AND FROM THE TERMS OF
THIS CONTRACT BY AGREEMENT OF THE PARTIES. In no event will
Affymetrix or MD be liable for lost or prospective profits or
indirect or consequential damages even if Affymetrix or MD has
been advised of the possibility of such damages.
8.10 The addresses of the parties hereto for all purposes of this
Agreement shall be as follows:
Affymetrix:
Affymetrix, Inc.
3380 Central Expressway
Santa Clara, CA 95051
Attn: President
MD:
Molecular Dynamics, Inc.
928 East Arques Avenue
Sunnyvale, CA 94086
Attn: President
All correspondence relating to this Agreement shall be deemed to
have been duly communicated to the addressee upon the confirmed
facsimile transmission or prepaid express mailing to the party
entitled thereto at its above address or at such address as it may
from time-to-time designate in writing to the other party.
8.11 In the event that any provision of this Agreement is held invalid
or unenforceable for any reason, such unenforeceability shall not
affect the enforceability of the remaining provisions of this
Agreement, and all provisions of this Agreement shall be construed
so as to preserve the enforceability hereof.
8.12 The waiver by either Party of a breach or a default of any
provision of this Agreement by the other Party shall not be
construed as a waiver of any succeeding breach of the same or any
other provision, nor shall any delay or omission on the part of
either Party to exercise or avail itself of any right, power or
privilege that it has or may have hereunder operate as a waiver of
any right, power or privilege by such Party.
8.13 This Agreement is made and shall be construed in accordance with
the local laws of the State of California, U.S.A. without regard
to the doctrine of conflict of laws.
8.14 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original but all of which together
shall constitute one and the same instrument
IN WITNESS WHEREOF, the parties have respectively caused this Agreement
to be executed on the dates hereinafter indicated.
Affymetrix, Inc.
By:
Title:
Date:
Molecular Dynamics, Inc.
By:
Title:
Date:
Exhibit 1 tc \l 1 "1"
Affymetrix Patent Listing (by Affymetrix file no.)
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Exhibit 2 tc \l 1 "Exhibit 2"
MD Patent Listing (by patent no. or MD file no.)
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Exhibit 3 tc \l 1 "3"
Licensed Software Packages
GeneChipr System Software (current version)
GeneChip Expression Analysis Software (Cat No. 900136)
Exhibit 4 tc \l 1 "4"
Software License Provision
END-USER LICENSE AGREEMENT
IMPORTANT-READ CAREFULLY: This End-User License Agreement ("Agreement")
is a legal agreement between you and Affymetrix, Inc. ("Licensor"), the
licensor of the software products ("Software Products") accompanying the
diagnostic or analytical system ("System") you have acquired from
Affymetrix or a distributor of the System ("Distributor"). The Software
Products include computer programs, associated storage media, associated
documentation, and any other information regarding the software products
listed below. If the Software Products are not accompanied with a
System, you may not use, copy or read the Software Products. By
installing, copying, reading, or otherwise using the Software Products,
you agree to be bound by the terms of this Agreement. If you do not
agree to the terms of this Agreement, Licensor is unwilling to license
the Software Products to you. In such event, you may not use, copy or
Distributor for instructions on return of the Software Products. This
Agreement represents the entire agreement concerning the Software
Products between you and Licensor, and it supersedes any prior proposal,
representation, or understanding between the parties.
The Software Products are protected by copyright laws and international
copyright treaties, as well as other intellectual property laws and
treaties. The Software Products are licensed, not sold, to you by
Licensor for use only under the terms of this Agreement, and Licensor
reserves any rights not expressly granted to you.
1. License Grant. This Agreement grants to you, and you accept, a
nonexclusive license to use the Software Products. The computer
programs of the Software Products ("Computer Programs") may only be used
on the System. Further, the Computer Programs may only be used in their
machine-readable, object code form. You agree that you will not assign,
sublicense, transfer, pledge, lease, rent, or share your rights under
this Agreement. You agree that you may not modify or prepare derivative
works of the Software Products. You agree that you may not reverse
engineer, decompile, disassemble, or otherwise translate the Computer
Programs. The Software Products are for RESEARCH USE ONLY. You agree
not to use the Software Products in any setting requiring FDA or other
regulatory approval.
The Computer Programs may be loaded on the System in both
temporary and
permanent storage, and the associated storage media may be utilized for
backup purposes. In addition, you may make one copy of the Computer
Programs on a backup storage media for the purpose of backup. Except as
authorized under this paragraph, no copies of the Software Products or
any portions thereof may be made by you or any person under your
authority or control.
2. Licensor's Rights. You acknowledge and agree that the Software
Products are proprietary products of Licensor protected under copyright
and other intellectual property laws. You further acknowledge and agree
that all right, title, and interest in and to the Software Products,
including associated intellectual property rights, are and shall remain
with Licensor. This Agreement does not convey to you an interest in or
to the Software Products, but only a limited right of use revocable in
accordance with the terms of this Agreement. You agree to keep
confidential and use your reasonable efforts to prevent and protect the
Software Products from unauthorized disclosure or use. LIMITED LICENSE:
PROBE ARRAYS, INSTRUMENTS, SOFTWARE, AND REAGENTS ARE LICENSED FOR
RESEARCH USE ONLY. NO IMPLIED RIGHT TO MAKE, HAVE MADE, USE, LEASE,
DISTRIBUTE, OFFER TO SELL, SELL, OR IMPORT OLIGONUCLEOTIDE PROBE ARRAYS
OR ANY OTHER PRODUCT IN WHICH AFFYMETRIX HAS PATENT RIGHTS IS CONVEYED
BY THE SOFTWARE. THIS LIMITED LICENSE PERMITS ONLY THE USE OF THE
PARTICULAR PRODUCT(S) THAT THE USER HAS PURCHASED FROM AFFYMETRIX OR ITS
LICENSEES OF PARTICULAR PATENT RIGHTS.
3. Software Products. The Affymetrix software products covered by this
Agreement include, but are not limited to, the following:
[to be added]
4. Term. This Agreement shall continue until terminated. You may
terminate this Agreement at any time by destroying all copies of the
Software Products, including the associated storage media and
documentation, and erasing all copies of the Software Products in both
temporary and permanent storage on the System. Licensor may terminate
this Agreement upon the breach by you of any term hereof.
5. Limited Warranty. Licensor or its distributor warrants, for your
benefit alone, for a period of ninety (90) days from the date of
commencement of this Agreement ("Warranty Period") that the associated
storage media on which the Computer Programs reside will be free from
defects in material and workmanship. Licensor further warrants, for
your benefit alone, that during the Warranty Period the Computer
Programs shall operate substantially in accordance with the associated
documentation. If during the Warranty Period, a defect in the
Computer Programs appears, you may return the Software Products to
Licensor for either replacement or, if so elected by Licensor, refund of
license fees paid by you to Distributor for use of the Software
Products. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, AFFYMETRIX
AND ITS LICENSORS EXPRESSLY DISCLAIM ALL OTHER WARRANTIES, EITHER
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH REGARD TO THE
SOFTWARE PRODUCTS. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR
LIMITATION OF IMPLIED WARRANTIES SO THE ABOVE LIMITATION MAY NOT APPLY
TO YOU.
6. Limitation of Liability. To the maximum extent permitted by
applicable law, Licensor's cumulative liability to you or any other
party for any loss or damages resulting from any claims, demands, or
actions arising out of or relating to this Agreement shall not exceed
the license fees paid to Distributor for the use of the Software
Products. In no event shall Licensor be liable for any incidental,
consequential, special, or exemplary damages, or indirect damages for
personal injury or lost profits, even if Licensor has been advised of
the possibility of such damages. SOME JURISDICTIONS DO NOT ALLOW THE
LIMITATION OR EXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL
DAMAGES SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLY TO YOU.
7. Governing Law. This Agreement shall be governed by and interpreted
under the laws of California, without regard to conflict of law
provisions.
8. Severability. Should any term of this Agreement be declared void or
unenforceable by any court of competent jurisdiction, such declaration
shall have no effect on the remaining terms hereof.
9. U.S. Government Restricted Rights. The Software Products and
documentation are provided with RESTRICTED RIGHTS as follows:
a. Department of Defense LicenseesThe Government's right to
use, modify, reproduce, release, perform, display, or disclose the
Software Products are restricted by paragraph (b)(3) of the Rights in
Noncommercial Computer Software and Noncommercial Computer Software
Documentation clause contained in the relevant contract between the
Government and Affymetrix, Inc, 3380 Central Expressway, Santa Clara,
California 95051. Any reproduction of the Software Products or portions
thereof marked with this legend must also reproduce the markings. Any
person, other than the Government, who has been provided access to the
Software Products must promptly notify Affymetrix.
b. Civilian Government Agency LicenseesUse, reproduction, or
disclosure is subject to restrictions set forth in the relevant contract
between the Government and Affymetrix, Inc, 3380 Central Expressway,
Santa Clara, California 95051.
Exhibit 5 tc \l 1 "5"
Excused Fabrication Systems
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Exhibit 6 tc \l 1 "6"
Discounted Organisms
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Confidential
Affymetrix/MD
24
March 24, 1998 (12:53pm)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in
the Company's Form 10-K for the years ended December 31, 1997,
1996 and 1995 and is qualified in its entirety by reference
to such Financial Statements. The information for the years
ended December 31, 1996 and 1995 has been restated to reflect
the effect of SFAS No. 128, "Earnings per Share."
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<FISCAL-YEAR-END> Dec-31-1997 Dec-31-1996 Dec-31-1995
<PERIOD-START> Jan-01-1997 Jan-01-1996 Jan-01-1995
<PERIOD-END> Dec-31-1997 Dec-31-1996 Dec-31-1995
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<CASH> 11,571 8,024 2,727
<SECURITIES> 8,558 12,617 14,895
<RECEIVABLES> 14,685 12,815 12,454
<ALLOWANCES> 282 254 281
<INVENTORY> 10,675 6,869 7,470
<CURRENT-ASSETS> 51,488 40,148 37,668
<PP&E> 10,878 8,182 6,923
<DEPRECIATION> 6,156 5,185 4,135
<TOTAL-ASSETS> 59,055 46,043 42,745
<CURRENT-LIABILITIES> 17,137 12,529 9,100
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 104 102 102
<OTHER-SE> 41,814 33,412 33,543
<TOTAL-LIABILITY-AND-EQUITY> 59,055 46,043 42,745
<SALES> 55,715 49,378 38,938
<TOTAL-REVENUES> 55,715 49,378 38,938
<CGS> 25,456 21,471 17,532
<TOTAL-COSTS> 25,456 21,471 17,532
<OTHER-EXPENSES> 25,889 24,983 25,330
<LOSS-PROVISION> 30 30 30
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 5,523 3,787 (2,967)
<INCOME-TAX> 663 379 20
<INCOME-CONTINUING> 4,860 3,408 (2,987)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,860 3,408 (2,987)
<EPS-PRIMARY> 0.48 0.34 (0.30)
<EPS-DILUTED> 0.43 0.32 (0.30)
</TABLE>
