UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 5, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER 0-19955
-------
MOLECULAR DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3050031
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
928 EAST ARQUES AVENUE, SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices and zip code)
(408) 773-1222
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
As of April 27, 1998, 10,442,895 shares of Common Stock of the Registrant were
outstanding.
<PAGE>
MOLECULAR DYNAMICS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements Page(s)
Condensed Consolidated Balance Sheets
March 31, 1998 (unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Income
Three months ended March 31, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6-9
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $6,176 $11,571
Securities available-for-sale 14,846 8,558
Accounts receivable, net 15,807 14,403
Other accounts receivable 6,854 5,721
Inventories 10,576 10,675
Prepaids and other current assets 745 560
------------ ------------
Total current assets 55,004 51,488
Property and equipment, net 4,669 4,722
Other assets, net 3,409 2,845
------------ ------------
$63,082 $59,055
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,481 $3,554
Accrued expenses 6,337 5,491
Factoring liability 816 447
Unearned revenue and customer advances 8,998 7,645
------------ ------------
Total current liabilities 19,632 17,137
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock and additional paid-in capital 40,272 39,571
Retained earnings 3,280 2,434
Cumulative translation adjustment (94) (94)
Unrealized (loss) gain on securities-
available-for-sale (8) 7
------------ ------------
Total stockholders' equity 43,450 41,918
------------ ------------
$63,082 $59,055
============ ============
</TABLE>
See accompanying notes.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Sales and other revenue $14,080 $13,006
Cost of sales and other revenue 6,614 5,547
---------- ----------
Gross profit 7,466 7,459
---------- ----------
Operating expenses:
Research and development, net 1,773 2,070
Sales and marketing 3,620 3,244
General and administrative 1,232 1,172
---------- ----------
Total operating expenses 6,625 6,486
---------- ----------
Operating income 841 973
Interest income, net 295 274
Other (expense) income, net (10) (43)
---------- ----------
Income before income taxes 1,126 1,204
Income tax expense 281 144
---------- ----------
Net income $845 $1,060
========== ==========
Earnings per share:
Basic $0.08 $0.11
Diluted $0.08 $0.10
Shares used to compute earnings
per share:
Basic 10,406 9,951
Diluted 11,173 11,068
</TABLE>
See accompanying notes.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $693 ($1,622)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (448) (831)
Proceeds from sale of property and equipment 8 --
Capitalized software development costs (482) (136)
Purchases of securities available-for-sale (13,883) (10,921)
Maturities and sales of securities available-for-sale 7,580 8,876
Other assets (250) 157
--------- ---------
Net cash used in investing activities (7,475) (2,855)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reissuance of treasury stock -- 1,888
Proceeds from stock option exercises 54 --
Proceeds from employee stock purchase plan 648 --
Net increase (decrease) in factoring liability 369 (62)
--------- ---------
Net cash provided by financing activities 1,071 1,826
--------- ---------
Effect of exchange rate changes on cash 316 149
--------- ---------
Net decrease in cash and cash equivalents (5,395) (2,502)
Cash and cash equivalents at beginning of period 11,571 8,024
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $6,176 $5,522
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
MOLECULAR DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Presentation
The accompanying condensed consolidated balance sheets
of Molecular Dynamics, Inc. and subsidiaries (Molecular
Dynamics or the Company) as of March 31, 1998 and December
31, 1997 and the related condensed consolidated statements
of income and cash flows for the three months ended March
31, 1998 and 1997 have been prepared on substantially the
same basis as are the Company's annual consolidated
financial statements. In the opinion of management, the
financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation of the financial position, operating results
and cash flows for those periods presented. The results of
operations for the three months ended March 31, 1998 are not
necessarily indicative of results to be expected for the
entire year. These condensed consolidated financial
statements should be read in conjunction with the
consolidated financial statements, and notes thereto, for
the year ended December 31, 1997 included in the Company's
Annual Report on Form 10-K.
The Company's fiscal year end is the Sunday nearest
December 31, and the Company operates and reports on 13-week
quarterly periods, except in years consisting of 53 weeks,
such as the 1998 fiscal year. In that case, the first
quarter of the fiscal year consists of 14 weeks. For
clarity of presentation the Company has indicated that its
first quarter ended March 31 and its 1997 fiscal year ended
December 31, whereas in fact, the Company's first quarter
for fiscal years 1998 and 1997 ended on April 5, 1998 and
March 30, 1997, respectively, and its fiscal year ended on
December 28, 1997.
NOTE 2 - INVENTORIES
Inventories consisted of (in thousands):
March 31, December 31,
1998 1997
------------ ------------
Raw materials $5,379 $5,842
Work in process 2,313 2,328
Finished goods 2,884 2,505
------------ ------------
$10,576 $10,675
============ ============
NOTE 3 - EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standard
No. 128, "Earnings Per Share (SFAS No. 128), which requires the presentation
of basic earnings per share (EPS) and, for companies with complex capital
structures, diluted EPS. All prior periods have been restated in accordance
with SFAS No. 128.
The calculation of basic and diluted earnings (loss) per share is as follows
(in thousands, except per share amounts):
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
------------ ------------
Net income $845 $1,060
============= =============
Denominator for basic earnings
per share--weighted
average shares 10,406 9,951
Dilutive employee stock options 766 1,117
------------ ------------
Denominator for diluted earnings
per share 11,172 11,068
============= =============
Basic earnings per share $0.08 $0.11
============= =============
Diluted earnings per share $0.08 $0.10
============= =============
Net income per share amounts are based on the weighted average number of
common shares and common stock equivalents, where dilutive, outstanding during
the period. Common stock equivalents arise from outstanding stock options
and are computed using the treasury stock method. For the quarters ended March
31, 1998 and 1997, options to purchase 522,219 shares and 27,300 shares,
respectively, of the company's common stock were outstanding at exercise prices
greater than the average market prices of $13.04 and $13.36 for the Company's
common stock during those quarters in 1998 and 1997, respectively. These
options were not included in the calculation of diluted earnings per share
because the effect would have been antidilutive.
NOTE 4. - Collaboration with Affymetrix, Inc.
In the third quarter of 1994, a consortium led by
Affymetrix, Inc. and the Company was awarded funding from
the Advanced Technology Program of the National Institute of
Standards and Technology (NIST). The Company and its
partner, Affymetrix, collaborate with researchers at several
academic and research institutions in an effort to develop
miniaturized DNA diagnostic systems. 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 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. The grant funding will allow the Company to work
toward developing new fluorescence detection technologies
and DNA separation devices and apply these to the expanding
field of molecular genetics. In the first quarter of 1998
and 1997, the Company recognized credits to its expenses of
approximately $386,000 and $614,000, respectively, and
reduced its capitalized software by $79,000 and $125,000,
respectively, representing support from the grant.
NOTE 5. - Stock Repurchase Program
In May 1994, the Board of Directors authorized the purchase
of up to 1,000,000 shares of the Company's common stock in
the open market, and in February 1997 the Board increased
this amount by 500,000 shares. The Company has purchased
approximately 1,000,000 shares under this program as of
March 31, 1998. Of these, approximately 1,000,000 shares
were reissued under the Company's Stock Option and Employee
Stock Purchase Plans. None of these shares was reissued
during the first quarter of 1998. The Company had purchased
122,000 additional shares during the period between the end
of the first quarter of 1998 and May 12, 1998.
NOTE 6. - Technology Access Program
The Company and Amersham Life Science Ltd. are developing
systems for fluorescence analysis of DNA in microarrays.
The two companies are pursuing agreements with genomics,
pharmaceutical and biotechnology companies to provide them
with microarray systems prior to their release to the
general market, in exchange for funding and collaborative
expertise. From inception in November, 1996, through March
31, 1998, the Company had entered into 14 such agreements,
including three in the first quarter of 1998. Between April
5, 1998 and May 12, 1998, one additional agreement had been
signed. Research and development expenses for the first
quarter of 1998 and 1997 were reduced by approximately $1.1
million and an immaterial amount, respectively, from credits
representing amortization of fees from clients participating
in the Company's technology access program. In addition,
$375,000 of the amortized fees was recorded as revenue, with
no related cost of revenue, for the three months ended March
31, 1998.
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 March 31, 1998, the Company
had realized a portion of the Initial Profits under this
agreement.
NOTE 7. - Litigation
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") (1) alleging willful infringement by the
Company of two United States Patents assigned to Perkin-
Elmer and (2) seeking a declaratory judgment of non-
infringement or invalidity of a United States patent
exclusively licensed to Amersham Pharmacia Biotech.
According to the complaint, Applied Biosystems' allegations
of purported infringement against the Company relate to
Molecular Dynamics' MegaBACE 1000 DNA sequencing systems and
FluorImagerr 595 imaging systems. Applied Biosystems seeks
injunctive relief, as well as damages regarding the alleged
infringement, along with attorneys' fees.
On April 16, 1998, Molecular Dynamics filed an answer to the complaint,
seeking a declaratory judgment of non-infringement and/or
invalidity of the alleged Applied Biosystems patents. At
that time, the Company filed a counterclaim alleging that
it owns rights under two patents which are infringed by certain Applied
Biosystems sequencing systems. The counterclaim alleges that Applied
Biosystems is making, using, offering for sale or selling DNA sequencers,
including the ABI Prism 377, that infringe the Company's patents. The Company
seeks injunctive relief, as well as damages regarding the alleged infringement,
along with attorneys' fees. The action is currently pending in the Northern
District of California. Discovery has not begun. No trial date has been set.
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.
NOTE 8. - New Accounting Standard
In June 1997, the Financial Accounting Standards Board
issued SFAS No.130 "Reporting Comprehensive Income" which
is 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. The Company will make the required reporting of
comprehensive income in its consolidated financial
statements for the fiscal year ending December 31, 1998 or,
if material, in its Quarterly Reports. Comprehensive income
for the three months ended March 31, 1998 and 1997 was
$830,000 and $973,000, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction
with the attached condensed consolidated financial
statements and notes thereto, and with the Company's audited
financial statements and notes thereto for the fiscal year
ended December 31, 1997.
Except for the historical information contained
herein, the matters discussed in this document are forward-
looking statements that involve certain risks and
uncertainties, including the risks and uncertainties set
forth below under "Factors That May Affect Future
Results".
Results of Operations
Sales and other revenue. The Company's sales and other
revenue of $14.1 million in the first quarter of 1998
represented an increase of 8% from $13.0 million in the
first quarter of the prior year. This increase resulted
primarily from increased sales of the Company's MegaBACE?
DNA sequencing products and Microarray systems, which were
introduced in 1997, partially offset by decreases in sales
of the Company's gel and blot scanning products. The Company
sells its products in North America, Europe, Japan and
Australia. Changes in foreign currency exchange rates had
the effect of decreasing the Company's sales by $293,000
between the 1998 and 1997 periods.
Gross margin. Gross margin for the first quarter of 1998
was 53.0% compared to 57.4% for the same period in the prior
year. The decrease in gross margin was primarily due to
sales mix, primarily relating to sales of lower-margin
MegaBACE instruments, which were not introduced until mid-
1997, and pre-production microarray systems.
Research and development. Research and development expenses
for the first quarter of 1998 were $1.8 million, which
represented a 14% decrease from expenses of $2.1 million for
the first quarter of 1997. This resulted from the increased
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
(MTAP), partially offset by a decrease in support recorded
from the Company's NIST grant. This decrease, and the
increase in revenue, resulted in research and development
expenses decreasing as a percentage of revenue to 12.6% in
the first quarter of 1998, from 15.9% in the first quarter
of 1997. Research and development expenses for the first
quarter of 1998 and 1997 were reduced by $1.1 million and an
immaterial amount, respectively, in recognition of fees from
MTAP clients. In the first quarter of 1998 and 1997, the
Company recognized credits to Research and Development
expenses of approximately $386,000 and $614,000,
respectively, and reduced its capitalized software by
$79,000 and $125,000, respectively, representing support
from the NIST grant.
Sales and marketing. Sales and marketing expenses for the
first quarter of 1998 were $3.6 million as compared to $3.2
million in the first quarter of 1997. This increase was due
to increases in headcount within the Company's sales and
marketing departments, primarily in support of the MegaBACE
product. This increase resulted in sales and marketing
expenses growing as a percentage of revenue to 25.7% in the
first quarter of 1998 from 24.9% in the first quarter of
1997.
General and administrative. General and administrative
expenses for the first quarter of 1998 were $1.2 million,
approximately equal to the first quarter of 1997. Since
sales and other revenue increased, general and
administrative expenses decreased as a percentage of
revenue, to 8.8% in the first quarter of 1998 from 9.0% in
the first quarter of 1997.
Provision for income taxes. During the first quarter of
1998, the Company recorded a tax provision utilizing an
effective tax rate of 25%, as compared to a rate of 12% for
the first quarter of 1997. The increased tax rate is due 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) in 1997.
Earnings per share. Basic earnings per share were $0.08
in the first quarter of 1998, compared to $0.11 in the first
quarter of 1997. Diluted earnings per share were $0.08 in
the first quarter of 1998, compared to $0.10 in the first
quarter of 1997. This decrease in the current year is
primarily due to the lower gross margin percentages
discussed above.
Factors That May Affect Future Results
The Company believes that results of operations in any
quarterly period may be impacted by factors that have
occurred in the past, and may occur in the future, such as
the effect of delays in the shipment of new products,
increased competition, legal expenses, order deferrals in
anticipation of new product releases, decisions to invest in
research and development programs, difficulty in acquiring
critical product components of acceptable quality and in
required quantity, Year 2000 issues, a slower growth rate in
the Company's target markets, or lack of market acceptance
of new products, the Company's profit-sharing agreements
with Amersham Pharmacia Biotech, reduction or delay of
government and private sector funding of research
activities, or adverse changes in economic conditions in any
of the countries in which the Company does business. Also,
with a significant portion of net sales and net income
contributed by international operations, fluctuations of the
U.S. dollar against foreign currencies such as those that
occurred in the first quarter of 1998 could affect the
Company's 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 continue
profitability on a quarterly basis.
Due to the factors noted above, the Company's future
earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Any
shortfall in revenues or earnings from levels expected by
securities analysts could have an immediate and significant
adverse effect on the trading price of the Company's common
stock. The Company typically recognizes a substantial
portion of sales near the end of a quarter. Therefore, as
has happened in the past, the Company may not become aware
of such shortfalls until late in a quarter, which may result
in an adverse effect on the trading price of the Company's
common stock.
Liquidity and Capital Resources
Working capital increased to $35.4 million as of March 31,
1998, from $34.4 million at December 31, 1997, primarily due
to the Company's profitable operations. The issuance of
stock for employee stock option and purchase plans was the
source of approximately $650,000 of working capital, and
approximately $930,000 of working capital was used to fund
development of capitalized software and to purchase fixed
assets to expand the Company's facilities.
The Company's principal commitments at March 31, 1998
consisted of obligations under operating leases for
facilities and equipment. Long-term cash requirements,
other than normal operating expenses, are anticipated for
development of new products, enhancement of existing
products, financing continued growth, and possible
acquisition of products, technologies or businesses
complementary to the Company's business. The Company
believes its cash, securities available-for-sale, and cash
flows from operating activities will be sufficient to
satisfy its working capital requirements for the foreseeable
future.
Year 2000
The Company is reviewing its internal computer systems and
product offerings to ensure these systems and offerings are
adequately able to address the issues expected to arise in
connection with the Year 2000. These issues include the
possibility that software which does not have the capacity
to recognize four digits in a date field may no longer
function properly when use of that date becomes necessary.
The Company expects to implement the systems and programming
changes necessary to address Year 2000 issues on an
enterprise-wide basis and is currently reviewing the cost of
such actions. A significant proportion of these costs are
not expected to be incremental costs to the Company, but
will represent redeployment of existing Company resources.
The Company expects such modifications to its products and
internal systems will be made on a timely basis, and
presently believes that, with modifications to existing
software or converting to new software, the Year 2000 issue
will not pose significant operational problems for the
Company's computer systems; however, there can be no
assurance there will not be a delay in, or increased costs
associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an
adverse effect on future results of operations.
The Company has not fully determined the extent to which it
may be impacted by third parties' systems, which may not be
Year 2000-compliant. The Year 2000 computer issue creates
risk for the Company from third parties with whom the
Company deals on financial transactions worldwide. While
the Company has begun efforts to seek reassurance from its
suppliers and service providers, there can be no assurance
that the systems of other companies that the Company deals
with or on which the Company's systems rely will be timely
converted, or that any such failure to convert by another
company could not have an adverse effect on the Company.
<PAGE>
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) There were no reports on Form 8-K during
the quarter ended March 31, 1998.
<PAGE>
MOLECULAR DYNAMICS, INC.
SIGNATURES
Pursuant to the Requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
MOLECULAR DYNAMICS, INC.
(Registrant)
Date: May 19, 1998 By: /s/ Jay Flatley
Jay Flatley
President, Chief
Executive Officer &
Acting Chief
Financial Officer
Date: May 19, 1998 By: /s/Lynne R. Wagoner
Lynne R. Wagoner
Director of
Finance (Principal
Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND
STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 6,176 11,571
<SECURITIES> 14,846 8,558
<RECEIVABLES> 22,661 20,124
<ALLOWANCES> 0 0
<INVENTORY> 10,576 10,675
<CURRENT-ASSETS> 55,004 51,488
<PP&E> 4,669 4,722
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 63,082 59,055
<CURRENT-LIABILITIES> 19,632 17,137
<BONDS> 0 0
0 0
0 0
<COMMON> 40,272 39,571
<OTHER-SE> 3,178 2,347
<TOTAL-LIABILITY-AND-EQUITY> 63,082 59,055
<SALES> 14,080 13,006
<TOTAL-REVENUES> 14,080 13,006
<CGS> 6,614 5,547
<TOTAL-COSTS> 6,614 5,547
<OTHER-EXPENSES> 6,625 6,486
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,126 1,204
<INCOME-TAX> 281 144
<INCOME-CONTINUING> 845 1,060
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 845 1,060
<EPS-PRIMARY> $0.08 $0.11
<EPS-DILUTED> $0.08 $0.10
</TABLE>
