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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to ___________
Commission File Number 0-19955
MOLECULAR DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3050031
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
928 East Arques Avenue
Sunnyvale, California 94086
(Address of Principal Executive Offices, including Zip Code)
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
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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.
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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
- -----------------------
*/ Trademarks of Molecular Dynamics, Inc. and other companies are included
herein.
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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.
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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 MegaBACE-TM- 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.
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<TABLE>
<CAPTION>
PRODUCTS: VISUALIZATION TECHNIQUE:
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<S> <C>
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
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MegaBACE 1000 Fluorescence
</TABLE>
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.
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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.
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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-TM-
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.
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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
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1000 DNA Sequencing system. ImageQuaNT-Registered Trademark-, ImageQuaNT
Tools, FluorSep-Registered Trademark-, and Fragment Analysis-TM- software
provide cross platform solutions for interactive and semi-automated analysis
of electrophoretic separations, dot blots and slot blots. The Xperiment-TM-
software manages the acquisition and analysis of microassay data on the
BioLumin instrument, while the ImageSpace-Registered Trademark- 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
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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
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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 Consortium-TM- (GATC-TM-), 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
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$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 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.
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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 LifeArray-TM-
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.
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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
14
<PAGE>
companies due to the combination of fluorescence and absorbance detection
methods in one instrument.
The MegaBACE 1000 competes with the Prism-TM- 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 Genechip-Registered Trademark- 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.
15
<PAGE>
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, Research and Scientific Development
Clare L. Bromley III 48 Sr. Vice President, Sales, Marketing and Service
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
16
<PAGE>
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
17
<PAGE>
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.
18
<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.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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
</TABLE>
DIVIDEND POLICY
The Company has not paid any cash dividends since its inception and does
not anticipate paying cash dividends in the foreseeable future.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<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 $.48 $.34 $(.30) $(.47) $.42
Diluted $.43 $.32 $(.30) $(.47) $.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>
20
<PAGE>
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
</TABLE>
(1) The earnings (loss) per share amounts for years prior to 1997 have been
restated as required to comply with Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE. See Note 1 of Notes to Consolidated Financial
Statements.
21
<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>
Year 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
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 & 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 MegaBACE-TM-1000 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
22
<PAGE>
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.
23
<PAGE>
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.
24
<PAGE>
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.
25
<PAGE>
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
26
<PAGE>
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
27
<PAGE>
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
28
<PAGE>
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.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors 31
Consolidated Balance Sheets as of December 31, 1997 and 1996 32
Consolidated Statements of Operations for each of the 34
years in the three-year period ended December 31, 1997
Consolidated Statements of Stockholders' Equity for each of the 36
years in the three-year period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the 37
years in the three-year period ended December 31, 1997
Notes to Consolidated Financial Statements 38
Unaudited Quarterly Financial Data 72
</TABLE>
30
<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
31
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per 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
Retained earnings (accumulated 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)
--------- --------
32
<PAGE>
Total stockholders' equity 41,918 33,514
--------- --------
$59,055 $46,043
--------- --------
--------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
33
<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 profit 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 $.48 $.34 $(.30)
-------- -------- ---------
-------- -------- ---------
Diluted $.43 $.32 $(.30)
-------- -------- ---------
-------- -------- ---------
Shares used to compute earnings (loss) per share:
Basic 10,181 10,058 10,095
-------- -------- ---------
-------- -------- ---------
Diluted 11,368 10,715 10,095
-------- -------- ---------
-------- -------- ---------
</TABLE>
34
<PAGE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Gain
(loss)
Retained on
Additional Earnings Securities
Common stock Paid-in (Accumulated Available-for
Shares Amount Capital Deficit) -Sale
----------- ------ --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994 10,152,344 $102 $40,433 $(2,847) $(497)
Treasury stock acquired -- -- -- -- --
Exercise of stock options 49,488 -- 36 -- --
Treasury stock reissued in connection
with exercise of stock options -- -- (303) -- --
Sale of common stock under
employee stock purchase plan 6,524 -- 35 -- --
Treasury stock reissued in connection
with employee stock purchase plan -- -- (123) -- --
Translation adjustment -- -- -- -- --
Unrealized gain on securities
available-for-sale -- -- -- -- 540
Net loss -- -- -- (2,987) --
----------- ------ --------- ------------ --------------
Balances, December 31, 1995 10,208,356 102 40,078 (5,834) 43
Treasury stock acquired -- -- -- -- --
Treasury stock reissued in connection
with exercise of stock options -- -- (216) -- --
Treasury stock reissued in connection with
employee stock purchase plan -- -- (90) -- --
Tax benefit of employee stock transactions -- -- 90 -- --
Translation adjustment -- -- -- -- --
Unrealized loss on securities
available-for-sale -- -- -- -- (38)
Net income -- -- -- 3,408 --
----------- ------ --------- ------------ --------------
Balances, December 31, 1996 10,208,356 102 39,862 (2,426) 5
Treasury stock reissued in connection -- -- (1,271) -- --
with exercise of stock options
Exercise of stock options 105,111 1 436 -- --
Treasury stock reissued in connection
with employee stock purchase plan -- -- (368) -- --
Sale of common stock under
employee stock purchase plan 53,305 1 566 -- --
Tax benefit of employee stock transactions -- -- 242 -- --
Translation adjustment -- -- -- -- --
Unrealized gain on securities
available-for- sale -- -- -- -- 2
Net income -- -- -- 4,860 --
----------- ------ --------- ------------ --------------
Balances, December 31, 1997 10,366,772 $104 $39,467 $2,434 $7
----------- ------ --------- ------------ --------------
----------- ------ --------- ------------ --------------
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total
Translation Treasury Stock Stockholders'
Adjustment Shares Amount Equity
----------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Balances, December 31, 1994 $1 (115,155) $(738) $36,454
Treasury stock acquired -- (270,000) (1,662) (1,662)
Exercise of stock options -- -- -- 36
Treasury stock reissued in connection
with exercise of stock options -- 121,974 785 482
Sale of common stock under
employee stock purchase plan -- -- -- 35
Treasury stock reissued in connection
with employee stock purchase plan -- 134,581 860 737
Translation adjustment 10 -- -- 10
Unrealized gain on securities
available-for-sale -- -- -- 540
Net loss -- -- -- (2,987)
----------- ---------- -------- ----------
Balances, December 31, 1995 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 -- 109,878 691 475
Treasury stock reissued in connection with
employee stock purchase plan -- 159,422 976 886
Tax benefit of employee stock transactions -- -- -- 90
Translation adjustment (97) -- -- (97)
Unrealized loss on securities
available-for-sale -- -- -- (38)
Net income -- -- -- 3,408
----------- ---------- -------- ----------
Balances, December 31, 1996 (86) (445,800) (3,943) 33,514
Treasury stock reissued in connection -- 355,125 3,093 1,822
with exercise of stock options
Exercise of stock options -- -- -- 437
Treasury stock reissued in connection
with employee stock purchase plan -- 90,675 850 482
Sale of common stock under
employee stock purchase plan -- -- -- 567
Tax benefit of employee stock transactions -- -- -- 242
Translation adjustment (8) -- -- (8)
Unrealized gain on securities
available-for- sale -- -- -- 2
Net income -- -- -- 4,860
----------- ---------- -------- ----------
Balances, December 31, 1997 $(94) -- $ -- $41,918
----------- ---------- -------- ----------
----------- ---------- -------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
36
<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 transactions 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.
37
<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
38
<PAGE>
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.
39
<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.)
40
<PAGE>
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.
41
<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
42
<PAGE>
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.
43
<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.
44
<PAGE>
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
45
<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
46
<PAGE>
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.
47
<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):
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
------- ------
<S> <C> <C>
(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
------- ------
------- ------
</TABLE>
48
<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):
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
------- -------
<S> <C> <C>
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
------- -------
------- -------
</TABLE>
As of December 31, 1997, the Company's investments are scheduled to mature
as follows (in thousands):
<TABLE>
<CAPTION>
Maturity Fair Market Value
-------- -----------------
<S> <C>
Less than one year $13,648
1 to 3 years 4,689
-------
$18,337
-------
-------
</TABLE>
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.
49
<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
50
<PAGE>
$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 CONSORTIUM-TM-: In December of 1997, the
Company and Affymetrix announced the formation of the Genetic Analysis
Technology Consortium (GATC-TM-), 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,
51
<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
52
<PAGE>
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.
53
<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
54
<PAGE>
(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.
55
<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
Shares Exercise Shares Exercise Shares Exercise
-------- ------ --------- ------ --------
Price Price 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) 6.78 (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
--------- --------- ---------
--------- --------- ---------
56
<PAGE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Weighted-average fair value of options
granted during the year $9.27 $3.36 $3.21
--------- --------- ---------
--------- --------- ---------
</TABLE>
57
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ----------------------------
Weighted-Avg.
Remaining Weighted-Avg.
Range of Number Contractual Exercise Number Weighted-Avg.
Exercise Prices Outstanding Life (in years) Price Exercisable Exercise 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 of 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 were 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.
58
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
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 $.48 $.34 $(.30)
Pro forma $.30 $.25 $(.35)
Diluted earnings (loss) per share As reported $.43 $.32 $(.30)
Pro forma $.27 $.23 $(.35)
</TABLE>
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>
1997 Stock Option Plan Employee Stock Purchase Plan
--------------------------------------------------- ----------------------------
Employees Officers
-------------------------- -----------------------
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 3.5 yrs 3.5 yrs 3.5 yrs 6 yrs 5 yrs 5 yrs 6 mos 6 mos 6 mos
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
59
<PAGE>
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.
60
<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):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $2,025
1999 1,601
2000 1,415
2001 267
2002 70
Thereafter 130
------
Total future minimum lease payments $5,508
------
------
</TABLE>
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
61
<PAGE>
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.
62
<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.
63
<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
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $119 $186 $ --
State 137 51 48
Foreign 165 52 (28)
---- ---- ----
421 289 20
---- ---- ----
Deferred:
Federal -- -- --
State -- -- --
---- ---- ----
-- -- --
---- ---- ----
Charge in lieu of taxes attributable
to employee stock plans 242 90 --
---- ---- ----
Total $663 $379 $ 20
---- ---- ----
---- ---- ----
</TABLE>
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):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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
------- ------- --------
64
<PAGE>
$ 663 $ 379 $ 20
------ ------ --------
------ ------ --------
</TABLE>
65
<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):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Reserves and accruals for financial
reporting purposes not available 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 $ -- $ --
------- -------
------- -------
</TABLE>
66
<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
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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
------- ------- -------
------- ------- -------
67
<PAGE>
Basic earnings (loss) per share $0.48 $0.34 $(0.30)
------- ------- -------
------- ------- -------
Diluted earnings (loss) per share $0.43 $0.32 $(0.30)
------- ------- -------
------- ------- -------
</TABLE>
Additional information regarding employee stock options is included in Note
11.
68
<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
outstanding 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):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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)
69
<PAGE>
Asia-Pacific (17) (126) (57)
Intercompany eliminations (579) (258) 86
-------- -------- -------
$ 4,340 $ 2,894 $(3,954)
-------- -------- -------
-------- -------- -------
</TABLE>
70
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<S> <C> <C> <C>
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
------- ------- -------
------- ------- -------
</TABLE>
71
<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
------ ------ ------ ------ ------ ------ ------ ------
(in thousands, except per share data)
<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 .11 .15 .14 .09 .03 .06 .11 .14
Diluted .10 .14 .12 .08 .03 .06 .10 .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.
72
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
73
<PAGE>
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.
74
<PAGE>
PART IV
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.
75
<PAGE>
EXHIBIT LIST
------------
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
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 1997 Stock Option Plan.
10.3(10) 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.
76
<PAGE>
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.
77
<PAGE>
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.
78
<PAGE>
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.
</TABLE>
"*" 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.
79
<PAGE>
(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.
80
<PAGE>
(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.
81
<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 13th day of August 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.
Signature Title Date
--------- ----- ----
/s/ Jay Flatley President, Chief August 13, 1998
- ----------------------- Executive
(Jay Flatley) Officer, Chief
Operating Officer,
Acting Chief Financial
Officer
and Director (Principal
Executive
and Financial Officer)
/s/ Lynne R. Wagoner Director of Finance August 13, 1998
- ----------------------- (Principal Accounting
(Lynne R. Wagoner) Officer)
/s/ James M. Schlater Chairman of the Board August 13, 1998
- ----------------------- of Directors
(James M. Schlater)
/s/ C. Woodrow Rea Director August 13, 1998
- -----------------------
(C. Woodrow Rea)
Director
- -----------------------
(Robert Keeley)
/s/ Janice M. LeCocq Director August 13, 1998
- -----------------------
(Janice M. LeCocq)
/s/ Lester John Lloyd Director August 13, 1998
- -----------------------
(Lester John Lloyd)
82
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Auditors on Consolidated Financial Statement Schedule II-1
Schedule II Valuation and Qualifying Accounts II-2
</TABLE>
83
<PAGE>
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
II-1
<PAGE>
SCHEDULE II
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions End 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>
II-2
<PAGE>
Exhibit 10.2
MOLECULAR DYNAMICS, INC.
RESTATED 1997 STOCK OPTION PLAN
(RESTATED ON APRIL 11, 1997)
ARTICLE ONE
GENERAL
I. PURPOSES OF THE PLAN
This Restated 1997 Stock Option Plan (the "Plan") is intended to promote
the interests of Molecular Dynamics, Inc., a Delaware corporation (the
"Corporation"), by providing incentives to eligible individuals to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation and remain in the employ or service of the Corporation (or its
parent or subsidiary corporations). The Plan amends and restates its
predecessor Restated 1987 Stock Option Plan (the "1987 Plan"). The first
restatement of the 1987 Plan was adopted by the Board on March 12, 1992 and
approved by the Corporation's stockholders in April 1992. The Discretionary
Option Grant Program in effect under Article Two became effective on the first
date on which the shares of the Corporation's common stock were registered under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934
Act"). Such date shall be designated as the Effective Date of the Discretionary
Option Grant Program. The Automatic Option Grant Program in effect under
Article Three became effective immediately upon the execution of the
Underwriters Agreement between the Corporation and the underwriters of the
initial public offering of the Company's common stock. The execution date of
such Underwriters Agreement is hereby designated as the Effective Date of such
Automatic Option Grant Program. The Plan, as amended and restated, was adopted
by the Board on April 11, 1997 and approved by the Corporation's stockholders in
May 1997 to extend the term through April 11, 2007. For purposes of Internal
Revenue Code Section 422 and with respect to any options issuable or issued
after the date of the Board approval of the second restatement of the Plan, the
second restatement of the Plan shall be deemed to constitute adoption of a new
stock option plan.
For purposes of the Plan, the following provisions shall be applicable in
determining the parent and subsidiary corporations of the Corporation:
(i) Any corporation (other than the Corporation) in an unbroken
chain of corporations ending with the Corporation shall be considered to be a
PARENT corporation of the Corporation, provided each such corporation in the
unbroken chain (other than the Corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
(ii) Each corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation shall be considered to be a
SUBSIDIARY, of the Corporation, provided each such corporation (other than the
last corporation) in the unbroken chain owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
<PAGE>
II. ADMINISTRATION OF THE PLAN
A. The Plan shall be comprised of two separate programs: (i) the
Discretionary Option Grant Program under Article Two pursuant to which option
grants may be made to key employees and consultants at the discretion of the
Plan Administrator and (ii) the Automatic Option Grant Program under Article
Three pursuant to which option grants will automatically be made to non-employee
members of the Board of Directors at periodic intervals upon the express terms
and provisions of the Article Three program.
B. The Discretionary Option Grant Program shall be administered by one or
more committees comprised of members of the Corporation's Board of Directors
(the "Board"). The primary committee (the "Primary Committee") shall be
comprised of two or more non-employee Board members and shall have sole and
exclusive authority to grant stock options and stock appreciation rights under
the Discretionary Option Grant Program to officers and employee-directors of the
Company subject to the short-swing profit restrictions of the Federal securities
laws. Stock options may be granted under the Discretionary Option Grant Program
to all other eligible employees and consultants by either the Primary Committee
or a second committee comprised of one or more Board members (the "Secondary
Committee"). No Board member shall be eligible to serve on the Primary
Committee if such individual has, within the relevant period designated below,
received an option grant or stock issuance under this Plan (other than pursuant
to the Automatic Option Grant Program in effect under Article Three) or under
any other stock plan of the Corporation (or any parent or subsidiary
corporation):
(i) for each of the initial members of the Primary Committee, the
period commencing with the Effective Date of the Discretionary Option Grant
Program and ending with the date of his or her appointment to the Primary
Committee, or
(ii) for any successor or substitute member, the twelve (12)-month
period immediately preceding the date of his or her appointment to the Primary
Committee or (if shorter) the period commencing with the Effective Date of the
Discretionary Option Grant Program and ending with the date of his or her
appointment to the Primary Committee.
Members of the Primary Committee and the Secondary Committee shall serve
for such period of time as the Board may determine and shall be subject to
removal by the Board at any time.
C. Subject to the limited authority provided the Secondary Committee to
effect option grants in accordance with the provisions of Section II.B of this
Article One, the Primary Committee shall serve as the Plan Administrator and
shall have full power and authority (subject to the express provisions of the
Plan) to establish such rules and regulations as it may deem appropriate for the
proper administration of the Discretionary Option Grant Program and to make such
determinations under, and issue such interpretations of, such program and any
outstanding option thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator shall be final and binding on all parties who have an
interest in the Discretionary Option Grant Program or any outstanding option.
-2-
<PAGE>
D. Service on the Primary or Secondary Committee shall constitute service
as a Board member, and members of either committee shall accordingly be entitled
to full indemnification and reimbursement as Board members for their service on
the committee. No member of either committee shall be liable for any act or
omission made in good faith with respect to the Plan or any option granted under
the Plan.
E. Administration of the Automatic Option Grant Program shall be
self-executing, and the Plan Administrator shall not exercise any
discretionary functions under such program.
III. ELIGIBILITY FOR OPTION GRANTS
A. The persons eligible to receive option grants under the Plan shall be
limited to the following individuals:
(i) key employees (including officers and directors) of the
Corporation (or its parent or subsidiary corporations) who render services which
contribute to the success and growth of the Corporation (or its parent or
subsidiary corporations) or which may reasonably be anticipated to contribute to
the future success and growth of the Corporation (or its parent or subsidiary
corporations);
(ii) the non-employee members of the board of directors of any
subsidiary corporations; and
(iii) those consultants or independent contractors who provide
valuable services to the Corporation (or its parent or subsidiary corporations).
From and after the Effective Date of the Automatic Option Grant Program,
the non-employee members of the Board shall not be eligible to receive grants
under the Discretionary Option Grant Program but shall be eligible to receive
automatic option grants pursuant to Article Three of the Plan.
B. The Plan Administrator shall have full authority to determine which
eligible individuals are to receive option grants under the Discretionary Option
Grant Program, the number of shares subject to each such grant, the status of
the granted option as either an incentive stock option ("Incentive Option")
designed to satisfy the requirements of Internal Revenue Code Section 422 or a
non-statutory option not intended to meet such requirements, the time or times
at which the option is to become exercisable, and the maximum term for which the
option is to remain outstanding.
IV. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of the Corporation's
authorized but unissued or reacquired Common Stock. The aggregate number of
shares which may be
-3-
<PAGE>
issued over the term of the Plan shall not exceed 4,504,500 shares.(1) The
total number of shares issuable under the Plan shall be subject to adjustment
from time to time in accordance with the provisions of this Section IV.
B. In no event may the maximum number of shares of Common Stock for which
any one individual participating in the Plan may be granted stock options and
separately exercisable stock appreciation rights exceed 1,500,000 shares in the
aggregate over the remaining term of the Plan. For purposes of this limitation,
no stock options or stock appreciation rights granted prior to January 1, 1994
shall be taken into account. Such limitation shall be subject to periodic
adjustment in accordance with the provisions of this Section IV.
C. Should an option expire or terminate for any reason prior to exercise
or surrender in full (including options canceled in accordance with the
cancellation-regrant provisions of Section IV of Article Two of the Plan), the
shares subject to the portion of the option not so exercised or surrendered
shall be available for subsequent option grants under the Plan. Shares subject
to any option or portion thereof surrendered in accordance with Section V of
Article Two of the Plan and Section III of Article Three of the Plan and all
share issuances under the Plan, whether or not the shares are subsequently
repurchased by the Corporation pursuant to its repurchase rights under the Plan,
shall reduce on a share-for-share basis the number of shares of Common Stock
available for subsequent option grants under the Plan. In addition, should the
exercise price of an outstanding option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an outstanding option under the Plan, then
the number of shares of Common Stock available for issuance under the Plan shall
be reduced by the gross number of shares for which the option is exercised, and
not by the net number of shares of Common Stock actually issued to the option
holder.
D. In the event any change is made to the Common Stock issuable under the
Plan by reason of any stock split, stock dividend, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (I) the maximum number and/or class of securities
issuable under the Plan, (II) the maximum number and/or class of securities for
which any one individual participating in the Plan may be granted stock options
and separately exercisable stock appreciation rights after December 31, 1993,
(III) the number and/or class of securities and the price per share in effect
under each outstanding option under the Discretionary Option Grant Program, (IV)
the number and/or class of securities per non-employee Board member for which
automatic option grants are subsequently to be made under the Automatic Option
Grant Program, and (V) the number and/or class of securities and the price per
share in
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(1) Includes (i) the 500,000 share increase authorized by the Board on February
18, 1998 and approved at the 1998 Annual Stockholders Meeting , (ii) the 500,000
share increase authorized by the Board on February 13, 1997 and approved at the
1997 Annual Stockholders Meeting and (iii) the 250,000 share increase
authorized by the Board on February 7, 1996 and approved at the 1996 Annual
Stockholders Meeting. All of the references to the number of shares issuable
under the Plan have been adjusted to reflect the 3-for-5 reverse stock split
effected March 12, 1992.
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effect under each automatic grant outstanding under the Automatic Option
Grant Program. Such adjustments to the outstanding options are to be
effected in a manner which shall preclude the enlargement or dilution of
rights and benefits under such options. The adjustments determined by the
Plan Administrator shall be final, binding and conclusive.
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ARTICLE TWO
DISCRETIONARY OPTION GRANTS
I. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to this Article Two shall be authorized by action
of the Plan Administrator and may, at the Plan Administrator's discretion, be
either Incentive Options or non-statutory options. Individuals who are not
employees of the Corporation or its parent or subsidiary corporations may only
be granted non-statutory options. Each granted option shall be evidenced by one
or more instruments in the form approved by the Plan Administrator. Each such
instrument, however, shall comply with the terms and conditions specified below,
and each instrument evidencing an Incentive Option shall, in addition, be
subject to the applicable provisions of Section II of this Article Two.
A. OPTION PRICE.
1. The option price per share shall be fixed by the Plan
Administrator. In no event, however, shall the option price per share be less
than eighty-five percent (85%) of the fair market value per share of Common
Stock on the date of the option grant.
2. The option price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section VI of Article Two and
the instrument evidencing the grant, be payable in one of the alternative forms
specified below:
(i) full payment in cash or check payable to the Corporation;
or
(ii) full payment in shares of Common Stock held by the
optionee for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and valued at fair
market value on the Exercise Date (as such term is defined below); or
(iii) full payment in a combination of shares of Common Stock
held by the optionee for the requisite period necessary to avoid a charge to
the Corporation's earnings for financial reporting purposes and valued at
fair market value on the Exercise Date and cash or check drawn to the
Corporation's order; or
(iv) full payment through a broker-dealer sale and
remittance procedure pursuant to which the optionee shall provide irrevocable
written instructions (I) to a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the Corporation, out
of the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate option price payable for the purchased shares plus all
applicable Federal and State income and employment taxes required to be
withheld by the Corporation in connection with such purchase and (II) to the
Corporation to deliver the certificates for the purchased shares directly to
such brokerage firm in order to complete the sale.
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For purposes of this subparagraph 2, the Exercise Date shall be
the date on which written notice of the option exercise is delivered to the
Corporation. Except to the extent the sale and remittance procedure is
utilized in connection with the exercise of the option, payment of the option
price for the purchased shares must accompany such notice.
3. The fair market value per share of Common Stock on any relevant
date under subparagraph 1 or 2 above (and for all other valuation purposes under
the Plan) shall be determined in accordance with the following provisions:
(i) If the Common Stock is traded on the Nasdaq National
Market, the fair market value shall be the closing selling price per share of
Common Stock on the date in question, as such price is reported by the
National Association of Securities Dealers through the Nasdaq National Market
or any successor system. If there is no closing selling price for the Common
Stock on the date in question, the closing selling price on the last
preceding date for which such quotation exists shall be determinative of fair
market value.
(ii) If the Common Stock is at the time listed or admitted to
trading on any stock exchange, then the fair market value shall be the
closing selling price per share of Common Stock on the date in question on
the stock exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted on such
exchange. If there is no reported sale of Common Stock on such exchange on
the date in question, then the fair market value shall be the closing selling
price on the exchange on the last preceding date for which such quotation
exists.
B. TERM AND EXERCISE OF OPTIONS.
Each option granted under this Article Two shall be exercisable at
such time or times, during such period, and for such number of shares as shall
be determined by the Plan Administrator and set forth in the stock option
agreement evidencing such option. However, no such option shall have a maximum
term in excess of ten (10) years measured from the grant date. During the
lifetime of the optionee, the option, together with any stock appreciation
rights pertaining to such option, shall be exercisable only by the optionee and
shall not be assignable or transferable by the optionee except for a transfer of
the option effected by will or by the laws of descent and distribution following
the optionee's death.
C. EFFECT OF TERMINATION OF SERVICE.
1. Should the optionee cease Service for any reason other than
death (including permanent disability as defined in Internal Revenue Code
Section 22(e)(3)) while holding one or more outstanding options under this
Article Two, then such option or options shall not (except to the extent
otherwise provided pursuant to subparagraph 4 below) remain exercisable for more
than a twelve (12) month period (or such shorter period determined by the Plan
Administrator and set forth in the instrument evidencing the grant) following
the date of such cessation of Service. In no event, however, shall any such
option be exercisable after the specified expiration date of the option term.
Each such option shall, during such twelve (12) month or shorter period, be
exercisable only to the extent of the number of vested shares of
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Common Stock (if any) for which the option is exercisable on the date of the
optionee's cessation of Service. Upon the expiration of such twelve (12)
month or shorter period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be exercisable. Each such
option, however, shall immediately terminate and cease to be outstanding, at
the time of the optionee's cessation of Service, with respect to any shares
of Common Stock for which such option is not otherwise at that time
exercisable or in which the optionee is not otherwise at that time vested.
2. Any option under the Plan held by the optionee at the time of
death may be subsequently exercised, but only to the extent of the number of
vested shares of Common Stock (if any) for which the option is exercisable on
the date of the optionee's cessation of Service (less any option shares
subsequently purchased by the optionee prior to death), by the personal
representative of the optionee's estate or by the person or persons to whom the
option is transferred pursuant to the optionee's will or in accordance with the
laws of descent and distribution. Any such exercise must, however, be effected
prior to the EARLIER of (i) the third anniversary of the date of the optionee's
cessation of Service (or such shorter period determined by the Plan
Administrator and specified in the instrument evidencing the grant) or (ii) the
specified expiration date of the option term. Upon the occurrence of the
earlier event, the option shall terminate and cease to be outstanding.
3. The Plan Administrator shall have complete discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to permit one or more outstanding options under this
Article Two to be exercised, during the limited post-Service exercise period
applicable under subparagraph 1 or 2 above, not only with respect to the number
of vested shares of Common Stock for which each such option is exercisable at
the time of the optionee's cessation of Service but also with respect to one or
more subsequent installments of vested shares for which the option would
otherwise have become exercisable had such cessation of Service not occurred.
4. The Plan Administrator shall also have full power and authority
to extend the period of time for which the option is to remain exercisable
following the optionee's cessation of Service or death from the limited period
in effect under subparagraph 1 or 2 above to such greater period of time as the
Plan Administrator shall deem appropriate. In no event, however, shall such
option be exercisable after the specified expiration date of the option term.
5. For purposes of the foregoing provisions of this Section I of
Article Two (and all other provisions of the Plan), unless it is specifically
provided otherwise in the option agreement evidencing the option grant and/or
the purchase agreement evidencing the shares purchased under such option, the
optionee shall be deemed to remain in SERVICE for so long as such individual
renders services on a periodic basis to the Corporation or any parent or
subsidiary corporation in the capacity of an Employee, a non-employee member of
the board of directors or an independent consultant or advisor. The optionee
shall be considered to be an EMPLOYEE for so long as such individual remains in
the employ of the Corporation or one or more of its parent or subsidiary
corporations subject to the control and direction of the employer
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entity not only as to the work to be performed but also as to the manner and
method of performance.
D. SHAREHOLDER RIGHTS.
An optionee shall have not have any stockholder rights with respect to
any shares subject to the option until such individual shall have exercised the
option and paid the option price for the purchased shares.
E. REPURCHASE RIGHTS.
The shares of Common Stock acquired upon the exercise of options
granted under this Article Two may be subject to repurchase by the Corporation
in accordance with the following provisions:
1. The Plan Administrator shall have the discretion to authorize
the issuance of unvested shares of Common Stock under this Article Two. Should
the optionee cease Service while holding such unvested shares, the Corporation
shall have the right to repurchase any or all of those unvested shares at the
option price paid per share. The terms and conditions upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the instrument evidencing
such repurchase right.
2. All of the Corporation's outstanding repurchase rights shall
automatically terminate, and all shares subject to such terminated rights shall
immediately vest in full, upon the occurrence of any Corporate Transaction under
Section III of this Article Two, except to the extent: (i) any such repurchase
right is expressly assigned to the successor corporation (or parent thereof) in
connection with the Corporate Transaction or (ii) such termination is precluded
by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.
3. The Plan Administrator shall have the discretionary authority,
exercisable either before or after the optionee's cessation of Service, to
cancel the Company's outstanding repurchase rights with respect to one or more
shares purchased or purchasable by the optionee under this Article Two and
thereby accelerate the vesting of such shares in whole or in part at any time.
II. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable to all
Incentive Options granted under this Article Two. Incentive Options may only be
granted to individuals who are Employees. Options which are specifically
designated as "non-statutory" options when issued under the Plan shall NOT be
subject to such terms and conditions.
A. OPTION PRICE. The option price per share of the Common Stock subject
to an Incentive Option shall in no event be less than one hundred percent (100%)
of the fair market value per share of Common Stock on the grant date.
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B. DOLLAR LIMITATION. The aggregate fair market value (determined as of
the respective date or dates of grant) of the Common Stock for which one or more
options granted to any Employee under this Article Two (or under any other
option plan of the Corporation or its parent or subsidiary corporations) may for
the first time become exercisable as incentive stock options under the Federal
tax laws during any one calendar year shall not exceed the sum of One Hundred
Thousand Dollars ($100,000). To the extent the Employee holds two or more such
options which become exercisable for the first time in the same calendar year,
the foregoing limitation on the exercisability thereof as incentive stock
options under the Federal tax laws shall be applied on the basis of the order in
which such options are granted. Should any option under this Article Two become
first exercisable in any calendar year for shares of Common Stock in excess of
such One Hundred Thousand Dollar ($100,000) limitation, then that option may
nevertheless be exercised in that calendar year for the excess number of shares
as a non-statutory option under the Federal tax laws.
C. 10% STOCKHOLDER. If any individual to whom an option is to be granted
pursuant to the provisions of the Plan is on the date of grant the owner of
stock (as determined under Section 424(d) of the Internal Revenue Code)
possessing 10% or more of the total combined voting power of all classes of
stock of the Corporation or any one of its parent or subsidiary corporations
(such person to be herein referred to as a 10% Stockholder), then the option
price per share shall not be less than one hundred and ten percent (110%) of the
fair market value per share of Common Stock on the grant date, and the option
term shall not exceed five (5) years measured from the grant date.
Except as modified by the preceding provisions of this Section II, all the
provisions of the Plan shall be applicable to the Incentive Options granted
hereunder.
III. CORPORATE TRANSACTIONS/CHANGES IN CONTROL
A. In the event of any of the following stockholder-approved transactions
to which the Corporation is a party (a "Corporate Transaction"):
(i) a merger or consolidation in which the Corporation is not the
surviving entity, except for a transaction the principal purpose of which is to
change the State of the Corporation's incorporation,
(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Corporation in liquidation or dissolution of the
Corporation, or
(iii) any reverse merger in which the Corporation is the surviving
entity but in which fifty percent (50%) or more of the Corporation's outstanding
voting stock is transferred to persons different from those who held the stock
immediately prior to such merger,
each option at the time outstanding under this Article Two but
otherwise not fully exercisable shall automatically accelerate so that such
option shall, immediately prior to the specified effective date for such
Corporate Transaction, become fully exercisable for all the shares of Common
Stock at the time subject to such option and may be exercised for all or any
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portion of such shares. However, an outstanding option shall not so accelerate
if and to the extent (i) such option is to be assumed by the successor
corporation or parent thereof or replaced with a comparable option to purchase
shares of the capital stock of such successor corporation or parent, (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the option spread existing at the time of the
Corporate Transaction and provides for subsequent payout in accordance with the
same vesting schedule applicable to such option, or (iii) such acceleration is
subject to other limitations imposed by the Plan Administrator in the relevant
option agreement. Option comparability under clause (i) shall be determined by
the Plan Administrator, and its determination shall be final, binding and
conclusive.
B. Upon the consummation of the Corporate Transaction, all outstanding
options under this Article Two shall terminate and cease to be outstanding,
except to the extent assumed by the successor corporation or its parent company.
C. Each outstanding option under this Article Two which is assumed in
connection with the Corporate Transaction or is otherwise to continue in effect
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply and pertain to the number and class of securities which would have been
issued to the option holder, in consummation of such Corporate Transaction, had
such person exercised the option immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to the option price
payable per share, provided the aggregate option price payable for such
securities shall remain the same. In addition, the class and number of
securities available for issuance under the Plan on both an aggregate and per
participant basis following the consummation of the Corporate Transaction shall
be appropriately adjusted.
D. The grant of options under this Plan shall in no way affect the right
of the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
E. The Plan Administrator shall have the discretionary authority,
exercisable either in advance of any actually-anticipated Change in Control or
at the time of an actual Change in Control, to provide for the automatic
acceleration of one or more outstanding options under this Article Two (and the
termination of one or more of the Corporation's outstanding repurchase rights
under this Article Two) upon the occurrence of the Change in Control. The Plan
Administrator shall also have full power and authority to condition any such
option acceleration (and the termination of any outstanding repurchase rights)
upon the subsequent termination of the optionee's Service within a specified
period following the Change in Control.
F. For purposes of this Section III, a Change in Control shall be deemed
to occur in the event:
(i) any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) directly or indirectly
acquires beneficial ownership (within the meaning of
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Rule 13d-3 of the 1934 Act) of securities possessing fifty percent (50%) or
more of the total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation's stockholders which the Board does not recommend such
stockholders to accept; or
(ii) there is a change in the composition of the Board over a period
of twenty-four (24) consecutive months or less such that a majority of the Board
members (rounded up to the next whole number) ceases, by reason of one or more
proxy contests for the election of Board members, to be comprised of individuals
who either (A) have been Board members continuously since the beginning of such
period or (B) have been elected or nominated for election as Board members
during such period by at least a majority of the Board members described in
clause (A) who were still in office at the time such election or nomination was
approved by the Board.
G. Any options accelerated in connection with the Change in Control shall
remain fully exercisable until the expiration or sooner termination of the
option term.
H. The exercisability as incentive stock options under the Federal tax
laws of any options accelerated under this Section III in connection with a
Corporate Transaction or Change in Control shall remain subject to the dollar
limitation of Section II of this Article Two.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, the cancellation
of any or all outstanding options under this Article Two and to grant in
substitution therefor new options under this Article Two covering the same or
different numbers of shares of Common Stock but having an option price per share
not less than (i) eighty-five percent (85%) of the fair market value of the
Common Stock on the new grant date or (ii) one hundred percent (100%) of such
fair market value in the case of an Incentive Option or (iii) one hundred and
ten percent (110%) of such fair market value in the case of an Incentive Option
granted to a 10% Stockholder.
V. SURRENDER OF OPTIONS
A. Provided and only if the Plan Administrator determines in its
discretion to implement the stock appreciation right provisions of this Section
V, one or more optionees may be granted the right, exercisable upon such terms
and conditions as the Plan Administrator may establish, to surrender all or part
of an unexercised option under this Article Two in exchange for a distribution
from the Corporation equal in amount to the excess of (i) the fair market value
(on the option surrender date) of the shares of Common Stock in which the
optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (ii) the aggregate option price payable for such vested
shares.
B. No surrender of an option shall be effective hereunder unless it is
approved by the Plan Administrator. If the surrender is so approved, then the
distribution to which the optionee shall accordingly become entitled under this
Section V may be made in shares of Common Stock
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valued at fair market value on the option surrender date, in cash, or partly
in shares and partly in cash, as the Plan Administrator shall in its sole
discretion deem appropriate.
C. If the surrender of an option is rejected by the Plan Administrator,
then the optionee shall retain whatever rights the optionee had under the
surrendered option (or surrendered portion thereof) on the date of surrender and
may exercise such rights at any time prior to the LATER of (i) five (5) business
days after the receipt of the rejection notice or (ii) the last day on which the
option is otherwise exercisable in accordance with the terms of the instrument
evidencing such option, but in no event may such rights be exercised more than
ten (10) years (or five (5) years in the case of a 10% Stockholder) after the
date of the option grant.
D. One or more officers of the Corporation subject to the short-swing
profit restrictions of the Federal securities laws may, in the Plan
Administrator's sole discretion, be granted limited stock appreciation rights in
tandem with their outstanding options under this Article Two. Upon the
occurrence of a Hostile Take-Over effected at any time when the Corporation's
outstanding Common Stock is registered under Section 12(g) of the 1934 Act, each
outstanding option with such a limited stock appreciation right in effect for at
least six (6) months shall automatically be canceled, to the extent such option
is at the time exercisable for fully-vested shares of Common Stock. The
optionee shall in return be entitled to a cash distribution from the Corporation
in an amount equal to the excess of (i) the Take-Over Price of the vested shares
of Common Stock at the time subject to the canceled option (or canceled portion
of such option) over (ii) the aggregate exercise price payable for such shares.
The cash distribution payable upon such cancellation shall be made within five
(5) days following the consummation of the Hostile Take-Over. Neither the
approval of the Plan Administrator nor the consent of the Board shall be
required in connection with such option cancellation and cash distribution. The
balance of the option (if any) shall continue to remain outstanding and become
exercisable in accordance with the terms of the instrument evidencing such
grant.
E. For purposes of Section V.D, the following definitions shall be in
effect:
A HOSTILE TAKE-OVER shall be deemed to occur in the event (i) any
person or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common control
with, the Corporation) directly or indirectly acquires beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing
fifty percent (50%) or more of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange offer made
directly to the Corporation's stockholders which the Board does not recommend
such stockholders to accept AND (ii) more than fifty percent (50%) of the
securities so acquired in such tender or exchange offer are accepted from
holders other than the officers and directors of the Corporation subject to the
short-swing profit restrictions of Section 16 of the 1934 Act.
THE TAKE-OVER PRICE per share shall be deemed to be equal to the
GREATER of (a) the fair market value per share of Common Stock on the option
cancellation date, as determined pursuant to the valuation provisions of Section
I.A.3 of this Article Two, or (b) the highest reported price per share of Common
Stock paid by the tender offeror in effecting such
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Hostile Take-Over. However, if the canceled option is an Incentive Option,
the Take-Over Price shall not exceed the clause (a) price per share.
F. The shares of Common Stock subject to any option surrendered or
canceled for an appreciation distribution pursuant to this Section V shall NOT
be available for subsequent option grant under the Plan.
VI. LOANS OR INSTALLMENT PAYMENTS
A. The Plan Administrator may assist any optionee in the exercise of one
or more options under this Article Two by (i) authorizing the extension of a
loan to such optionee from the Corporation or (ii) permitting the optionee to
pay the option price for the purchased Common Stock in installments over a
period of years. The terms of any loan or installment method of payment
(including the interest rate and terms of repayment) shall be established by the
Plan Administrator in its sole discretion. Loans and installment payments may
be granted without security or collateral, but the maximum credit available to
the optionee shall not exceed the SUM of (i) the aggregate option price payable
for the purchased shares (less the par value thereof) plus (ii) any Federal and
State income and employment tax liability incurred by the optionee in connection
with the exercise of the option.
B. The Plan Administrator may, in its absolute discretion, determine that
one or more loans extended under subsection A above shall be subject to
forgiveness by the Corporation in whole or in part upon such terms and
conditions as the Plan Administrator in its discretion deems appropriate.
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ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. ELIGIBILITY
A. ELIGIBLE OPTIONEES. The individuals eligible to receive automatic
option grants pursuant to the provisions of this Article Three shall be limited
to the following:
(1) each individual who is serving as a non-employee member of the
Board on the Effective Date of the Automatic Option Grant Program, and
(2) each individual who is first appointed or elected as a
non-employee Board member at any time after such Effective Date.
B. LIMITATION. Except for the option grants to be made pursuant to the
provisions of this Article Three, non-employee Board members shall NOT be
eligible to receive any additional option grants under this Plan or any other
stock plan of the Corporation (or its subsidiary corporations).
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. GRANT DATES. Option grants will be made under this Article Three on
the dates specified below:
(i) Each individual who first becomes a non-employee Board member
at any time on or after the 1994 Annual Stockholders Meeting, whether through
election at an Annual Stockholders Meeting or through appointment by the Board,
shall automatically be granted, at the time of such initial election or
appointment, a non-statutory stock option to purchase 10,000 shares of Common
Stock upon the terms and conditions of this Article Three.
(ii) On the date of each Annual Stockholders Meeting, beginning
with the 1994 Annual Meeting, each individual who is at the time re-elected
as a non-employee Board shall automatically be granted a nonstatutory option
under this Article Three to purchase an additional 3,500 shares of the Common
Stock, provided such individual has served as a Board member for at least six
(6) months prior to such automatic grant date.
The 10,000-share limitation and the 3,500-share limitation on the automatic
option grants to be made to each non-employee Board member shall be subject to
periodic adjustment pursuant to the applicable provisions of paragraph IV.C of
Article One. There shall be no limit on the number of 3,500-share option grants
any one non-employee Board member may receive under this Article Three during
his or her period of Board service.
B. EXERCISE PRICE. The exercise price per share of Common Stock
subject to each automatic option grant made under this Article Three after the
Effective Date shall be equal to one hundred percent (100%) of the fair market
value per share of Common Stock on the
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automatic grant date, as determined in accordance with the valuation
provisions of Section I.A.3 of Article Two.
C. PAYMENT.
The exercise price shall be payable in one of the alternative forms
specified below:
(i) full payment in cash or check made payable to the Corporation's
order; or
(ii) full payment in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's reported earnings and
valued at fair market value on the Exercise Date (as such term is defined
below); or
(iii) full payment in a combination of shares of Common Stock held
for the requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at fair market value on the
Exercise Date and cash or check drawn to the Corporation's order; or
(iv) full payment through a broker-dealer sale and remittance
procedure pursuant to which the optionee shall provide irrevocable written
instructions (A) to a Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Corporation, out of the
sale proceeds available on the settlement date, sufficient funds to cover the
aggregate option price payable for the purchased shares and (B) to the
Corporation to deliver the certificates for the purchased shares directly to
such brokerage firm in order to complete the sale.
For purposes of this subparagraph, the Exercise Date shall be the date on
which written notice of the option exercise is delivered to the Corporation, and
the fair market value per share of Common Stock on any relevant date shall be
determined in accordance with the provisions of paragraph I.A.3 of Article Two.
Except to the extent the sale and remittance procedure specified above is
utilized for the exercise of the option, payment of the exercise price for the
purchased shares must accompany such notice.
D. OPTION TERM. Each automatic grant under this Article Three shall have
a maximum term of ten (10) years.
E. EXERCISABILITY.
1. The initial 10,000-share automatic grants shall each become
exercisable for the option shares in four (4) installments as follows:
(i) The option shall immediately upon grant be exercisable
for twenty-five percent (25%) of the option shares.
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(ii) The option shall become exercisable for an additional
twenty-five percent (25%) of the option shares upon the optionee's completion
of twelve (12) months of continuous Board service measured from the automatic
grant date.
(iii) The option shall become exercisable for an additional
twenty-five percent (25%) of the option shares upon the optionee's completion
of twenty-four (24) months of continuous Board service measured from the
automatic grant date.
(iv) The option shall become exercisable for the final
twenty-five percent (25%) of the option shares upon the optionee's completion
of thirty-six (36) months of continuous Board service measured from the
automatic grant date.
As the option becomes exercisable for one or more installments of the
option shares, the installments shall accumulate, and the option shall remain
exercisable for the accumulated installments until the expiration or sooner
termination of the option term. The option, however, shall not become
exercisable for any additional option shares following the optionee's cessation
of Board service for any reason.
2. Each 3,500-share automatic grant shall become exercisable upon
the optionee's completion of twelve (12) months of continuous Board service
measured from the automatic grant date. The option, however, shall not become
exercisable for any additional option shares following the optionee's cessation
of Board service.
F. NON-TRANSFERABILITY. During the lifetime of the optionee, the option,
together with the limited stock appreciation right pertaining to such option,
shall be exercisable only by the optionee and shall not be assignable or
transferable by the optionee except for a transfer of the option effected by
will or by the laws of descent and distribution following the optionee's death.
G. EFFECT OF TERMINATION OF BOARD MEMBERSHIP.
1. Should the optionee cease to be a Board member for any reason
(other than death) while holding one or more automatic option grants under this
Article Three, then such optionee shall have a six (6)-month period following
the date of such cessation of Board membership in which to exercise each such
option for any or all of the shares of Common Stock for which the option is
exercisable at the time of the optionee's cessation of service as a Board
member.
2. Should the optionee die while serving as a Board member or
during the six (6)-month period following his or her cessation of Board service,
then each automatic option grant held by such optionee at the time of his or her
death may subsequently be exercised, for any or all of the shares of Common
Stock for which the option was exercisable at the time of the optionee's
cessation of Board membership (less any option shares subsequently purchased by
the optionee prior to death), by the personal representative of the optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the optionee's will or in accordance with the laws of descent and distribution.
Any such exercise must, however, occur within twelve (12) months after the date
of the optionee's death.
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<PAGE>
3. In no event shall any automatic grant under this Article Three
remain exercisable after the specified expiration date of the ten (10)-year
option term. Upon the expiration of the limited post-service exercise period
under subparagraph 1 or 2 above or (if earlier) upon the expiration of the ten
(10)-year option term, the automatic grant shall terminate and cease to be
outstanding. However, each automatic option grant held by the optionee at the
time of his or her cessation of Board service shall immediately terminate and
cease to be outstanding with respect to any option shares for which such option
is not otherwise at that time exercisable.
H. STOCKHOLDER RIGHTS. The holder of an automatic option grant under
this Article Three shall have no stockholder rights with respect to any shares
subject to such option until such individual shall have exercised the option and
paid the exercise price for the purchased shares.
I. REMAINING TERMS. The remaining terms and conditions of each automatic
option grant shall be as set forth in the prototype Non-Employee Director
Automatic Grant Agreement attached as Exhibit A to the Plan.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction (as such term is defined in
Section III of Article Two), each automatic option grant at the time outstanding
under this Article Three but not otherwise fully exercisable shall automatically
accelerate so that such option shall, immediately prior to the specified
effective date for the Corporate Transaction, become fully exercisable for all
of the shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of such shares. Upon the consummation of the
Corporate Transaction, all automatic option grants under this Article Three
shall terminate and cease to be outstanding.
B. In the event of any Change in Control (as such term is defined in
Section III of Article Two), each automatic option grant at the time outstanding
under this Article Three but not otherwise fully exercisable shall automatically
accelerate so that such option shall, immediately prior to the specified
effective date for the Change in Control, become fully exercisable for all of
the shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of those shares. Each such automatic grant
accelerated in connection with the Change in Control shall remain fully
exercisable until the expiration or sooner termination of the option term.
C. Upon the occurrence of a Hostile Take-Over (as such term is defined in
Section V of Article Two), each automatic option grant which has been
outstanding under this Article Three for a period of at least six (6) months
shall automatically be canceled in return for a cash distribution from the
Corporation in an amount equal to the excess of (i) the Take-Over Price of the
shares of Common Stock at the time subject to the canceled option (whether or
not the option is otherwise at the time exercisable for such shares) over (ii)
the aggregate exercise price payable for such shares. The cash distribution
payable upon such option cancellation shall be made
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within five (5) days following the consummation of the Hostile Take-Over.
Neither the approval of the Plan Administrator nor the consent of the Board
shall be required in connection with such option cancellation and cash
distribution.
D. For purposes of this Article Three, the Take-Over Price per share
shall be deemed to be equal to the GREATER of (i) the fair market value per
share of Common Stock on the option cancellation date, as determined pursuant to
the valuation provisions of paragraph I.A.3 of Article Two, or (ii) the highest
reported price per share of Common Stock paid by the tender offeror in effecting
such Hostile Take-Over.
E. The shares of Common Stock subject to each option canceled in
connection with the Hostile Take-Over shall NOT be available for subsequent
issuance under this Plan.
F. The automatic option grants outstanding under this Article Three shall
in no way affect the right of the Corporation to adjust, reclassify, reorganize
or otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
IV. AMENDMENT OF THE AUTOMATIC GRANT PROVISIONS
The provisions of this Automatic Option Grant Program, including any
automatic option grants outstanding under this Article Three, may not be amended
at intervals more frequently than once every six (6) months, other than to the
extent necessary to comply with applicable Federal income tax laws and
regulations.
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ARTICLE FOUR
MISCELLANEOUS
1. AMENDMENT OF THE PLAN
The Board shall have complete and exclusive power and authority to amend or
modify the Plan in any or all respects whatsoever. However, (i) no such
amendment or modification shall, without the consent of the holders, adversely
affect rights and obligations with respect to options at the time outstanding
under the Plan and (ii) any amendment to the Automatic Option Grant Program (or
any options outstanding thereunder) shall be made in compliance with the
limitation of Section IV of Article Three. In addition, the Board shall not,
without the approval of the Corporation's stockholders, (i) increase the maximum
number of shares issuable under the Plan or the maximum number of shares for
which any one participant may be granted stock options and separately
exercisable stock appreciation rights after December 31, 1993, except for
permissible adjustments under Section IV of Article One, (ii) materially modify
the eligibility requirements for the grant of options under the Plan or (iii)
otherwise materially increase the benefits accruing to participants under the
Plan.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The 1987 Plan was initially adopted by the Board on December 16, 1987,
and approved by the Corporation's stockholders on December 14, 1988. The 1987
Plan was subsequently amended by the Board in May 1990 and in April 1991 to
increase the total number of shares issuable under the 1987 Plan by 300,000
shares and 450,000 shares (adjusted to reflect the 3-for-5 reverse stock split
effected March 12, 1992), respectively, and such amendments were approved by the
stockholders in May 1990 and August 1991, respectively. The Board restated the
1987 Plan on March 12, 1992 to increase the number of shares of Common Stock
issuable under the 1987 Plan by 500,000 shares with such increase to become
effective upon the Effective Date of the Discretionary Option Grant Program.
The stockholders approved such restatement in April 1992. Article One, Section
II of the 1987 Plan was subsequently amended to permit the establishment of a
secondary committee to administer the 1987 Plan. Such amendment became
effective on the February 17, 1993 date of its approval by the Board.
B. On February 8, 1994, the Board amended the 1987 Plan to (i) increase
the number of shares available for issuance pursuant to the 1987 Plan by 500,000
shares, (ii) impose a limitation on the maximum number of shares of Common Stock
for which any one participant in the 1987 Plan may be granted stock options and
separately exercisable stock appreciation rights after December 31, 1993 and
(iii) increase the number of shares of Common Stock for which option grants are
to be made under the Automatic Grant Program to each newly elected or re-elected
non-employee Board member. The amendment was approved by the stockholders at
the 1994 Annual Stockholders Meeting. On February 8, 1995, the Board approved
an amendment to the 1987 Plan to increase the total number of shares issuable
thereunder by 750,000 shares. The amendment was approved at the 1995 Annual
Stockholders Meeting. On February 7, 1996, the Board approved an amendment to
the 1987 Plan to increase the total number of shares issuable
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<PAGE>
thereunder by 500,000. The amendment was approved at the 1996 Annual
Shareholders Meeting. On February 13, 1997 the Board approved an amendment to
the 1987 Plan to increase the total number of shares issuable thereunder by
500,000 and on April 11, 1997 the Board approved the Plan which amends and
restates the predecessor 1987 Plan to extend the term through April 11, 2007
and to rename the 1987 Plan as the "Restated 1997 Stock Option Plan." The
stockholders approved the Plan, including the 500,000 share increase in the
number of shares of Common Stock reserved for issuance thereunder, at the
1997 Annual Stockholders Meeting.
C. Except as provided in paragraph D below, the provisions of the
Discretionary Option Grant Program shall apply only to options granted under the
Plan from and after the Effective Date of that program. All options issued and
outstanding under the Plan immediately prior to such Effective Date shall
continue to be governed by the terms and conditions of the Plan (and the
respective instruments evidencing each such option) as in effect on the date
each such option was previously granted, and nothing in this restatement shall
be deemed to affect or otherwise modify the rights or obligations of the holders
of such options with respect to their acquisition of shares of Common Stock
thereunder.
D. The option acceleration provisions of Section III of Article Two
relating to Corporate Transactions and Changes in Control may, in the Plan
Administrator's discretion, be extended to one or more outstanding stock options
under the Plan which were granted prior to the Effective Date of the
Discretionary Option Grant Program and which do not otherwise provide for such
acceleration.
E. The sale and remittance procedure authorized for the exercise of
outstanding options under this Plan shall be available for all options granted
under the Discretionary Option Grant Program on or after the Effective Date of
that program and all non-statutory options outstanding under the Plan on such
Effective Date. The Plan Administrator may also allow such procedure to be
utilized in connection with one or more disqualifying dispositions of Incentive
Option shares effected after the Effective Date, whether such Incentive Options
were granted on or before such Effective Date.
F. Unless sooner terminated in accordance with Section III of Article Two
or Section III of Article Three, the Plan shall terminate upon the earlier of
(i) April 11, 2007, or (ii) the date on which all shares available for issuance
under the Plan shall have been issued or canceled pursuant to the exercise,
surrender or cash-out of options granted hereunder. If the date of termination
is determined under clause (i) above, then each option outstanding on such date
shall thereafter continue to have force and effect in accordance with the
provisions of the instrument evidencing such option.
G. Options to purchase shares of Common Stock may be granted under the
Plan which are in excess of the number of shares then available for issuance
under the Plan, PROVIDED each option granted is not to become exercisable, in
whole or in part, at any time prior to stockholder approval of an amendment
authorizing a sufficient increase in the number of shares available for issuance
under the Plan.
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III. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
pursuant to options granted under the Plan shall be used for general corporate
purposes.
IV. WITHHOLDING
The Corporation's obligation to deliver shares upon the exercise or surrender of
any options granted under Article Two or Article Three shall be subject to the
satisfaction of all applicable federal, state and local income and employment
tax withholding requirements.
V. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option or
surrender right hereunder, and the issuance of stock upon the exercise or
surrender of any such option shall be subject to the procurement by the
Corporation of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the options granted under it and the stock
issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or delivered
under the Plan, unless and until, in the opinion of counsel for the Corporation
(or its successor in the event of any Corporate Transaction), there shall have
been compliance with all applicable requirements of the federal and state
securities laws and the applicable regulations of any securities exchange on
which stock of the same class is then listed, and all other requirements of law
or of any regulatory bodies having jurisdiction over such issuance and delivery.
VI. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Corporation in establishing this Plan, nor any
action taken by the Board or the Plan Administrator hereunder, nor any provision
of this Plan shall be construed so as to grant any individual the right to
remain in the employ or Service of the Corporation (or any parent or subsidiary
corporation) for any period of specific duration, and the Corporation (or any
parent or subsidiary corporation retaining the services of such individual) may
terminate such individual's employment or Sentence at any time and for any
reason, with or without cause.
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EXHIBIT A
NON-EMPLOYEE DIRECTOR AUTOMATIC OPTION GRANT AGREEMENT
<PAGE>
"[**]" INDICATES THAT CONFIDENTIAL MATERIAL HAS BEEN OMITTED AND FILED
SEPARATELY IN A REQUEST FOR CONFIDENTIAL TREATMENT WITH THE SECURITIES AND
EXCHANGE COMMISSION.
EXHIBIT 10.41
LICENSE AGREEMENT
Affymetrix, Inc.
and
Molecular Dynamics, Inc.
1
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<TABLE>
<CAPTION>
CONTENTS
- --------
<S> <C>
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
</TABLE>
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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
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.
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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
4
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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
5
<PAGE>
[**] 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
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
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.
6
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3.4 Affymetrix and MD will advise the other with reasonable promptness and
detail of Technical Information developed after the Effective Date.
4 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.
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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.
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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
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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
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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
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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
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 [**].
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Royalty [**]
- ---------------------------------------------------------------
[**] [**]
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
[**] [**] [**] [**]
- ---------------------------------------------------------------
[**] [**] [**] [**] [**]
- ---------------------------------------------------------------
[**] [**] [**] [**] [**]
- ---------------------------------------------------------------
[**] [**] [**] [**] [**]
- ---------------------------------------------------------------
[**] [**] [**] [**] [**]
- ---------------------------------------------------------------
[**] [**] [**] [**] [**]
- ---------------------------------------------------------------
[**] [**] [**] [**] [**]
- ---------------------------------------------------------------
[**] [**] [**] [**] [**]
- ---------------------------------------------------------------
[**] [**] [**] [**] [**]
- ---------------------------------------------------------------
[**] [**] [**] [**] [**]
- ---------------------------------------------------------------
[**] [**] [**] [**] [**]
- ---------------------------------------------------------------
</TABLE>
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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
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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,
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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
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
15
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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
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.
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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
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
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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
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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
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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:
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Title:
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Molecular Dynamics, Inc.
By:
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Title:
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Date:
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EXHIBIT 1
AFFYMETRIX PATENT LISTING (BY AFFYMETRIX FILE NO.)
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EXHIBIT 2
MD PATENT LISTING (BY PATENT NO. OR MD FILE NO.)
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EXHIBIT 3
LICENSED SOFTWARE PACKAGES
GeneChip-Registered Trademark- System Software (current version)
GeneChip Expression Analysis Software (Cat No. 900136)
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EXHIBIT 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
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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
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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.
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EXHIBIT 5
EXCUSED FABRICATION SYSTEMS
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EXHIBIT 6
DISCOUNTED ORGANISMS
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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
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