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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].
For the transition period from ______________________ to _______________________
Commission file number 0-27316
Molecular Devices Corporation
(Exact name of Registrant as specified in its charter)
Delaware 94-2914362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1311 Orleans Drive
Sunnyvale, California 94089
(Address of principal executive offices, including zip code)
(408) 747-1700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------------------------
Common Stock, $.001 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 the voting stock held by non-affiliates of the
Registrant as of March 15, 1999, based upon the last sale price reported for
such date on the NASDAQ National Market, was $120,706,491*.
The number of outstanding shares of the Registrant's Common Stock as of March
15, 1999 was 9,542,789.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the Proxy Statement for Registrant's 1998 Annual Meeting
of Stockholders (the "Proxy Statement") are incorporated by reference into Part
III of this Form 10-K Report.
*Excludes approximately 5,518,011 shares of common stock held by Directors,
Officers and holders of 5% or more of the Registrant's outstanding Common Stock
at March 15, 1999. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.
TABLE OF CONTENTS
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Molecular Devices Corporation
PART I Item 1. Business................................................... 3
The Company............................................. 3
Industry Background..................................... 3
The Molecular Devices Solution.......................... 4
Products................................................ 4
Business Risks.......................................... 7
Research and Development................................ 8
Marketing and Customers................................. 9
Manufacturing........................................... 10
Patents and Proprietary Technologies.................... 10
Competition............................................. 11
Government Regulations.................................. 11
Human Resources......................................... 13
Item 2. Properties................................................. 13
Item 3. Legal Proceedings.......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........ 13
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PART II Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................ 14
Item 6. Selected Consolidated Financial Data....................... 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 16
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk................................................ 18
Item 8. Financial Statements and Supplementary Data................ 19
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 19
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PART III Item 10. Directors and Executive Officers of the Registrant......... 20
Item 11. Executive Compensation..................................... 20
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 20
Item 13. Certain Transactions....................................... 20
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PART IV Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................................... 21
(a) Documents Filed with Report
(b) Reports on Form 8-K
(c) Exhibits
(d) Financial Statement Schedules
2
PART 1
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Item 1 - Business
The Company
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section under "Business
Risks" as well as in the section entitled "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Molecular Devices Corporation ("Molecular Devices" or the "Company")
designs, develops, manufactures and markets proprietary, high performance,
bioanalytical measurement systems, including software and consumables, designed
to accelerate and improve the cost-effectiveness of the drug discovery and
development process. The Company integrates its expertise in engineering,
molecular and cell biology and chemistry to develop proprietary core
technologies which it incorporates into its sophisticated bioanalytical systems,
including MAXline Microplate Readers, Cell Analysis Systems and Threshold
System.* As part of its strategy to provide complete customer solutions, the
Company also offers certain dedicated consumables, as well as software upgrades,
and service on a contract basis. The Company's systems have applications in many
aspects of life science including the therapeutic development process, from drug
discovery and clinical research through manufacturing and quality control.
Industry Background
During the past decade, significant advances in life sciences research
and a growing complexity of the biological problems under investigation have
highlighted the limitations of traditional approaches to drug discovery and
development. These limitations, together with heightened competition in the
biotechnology and pharmaceutical industries, have fueled the need for
increasingly advanced bioanalytical tools that enhance productivity and reduce
product development time and costs. To date, traditional instruments and methods
have not fully addressed the complexities of modern drug discovery. However,
advances in biology, chemistry and engineering are providing the technologies
necessary for the development of very sophisticated bioanalytical tools.
Industry sources estimate that approximately 50,000 research groups are
engaged in life sciences research activities worldwide, including academic
institutions, government laboratories and private foundations, as well as
biotechnology, pharmaceutical and chemical companies. The increased emphasis on
reducing costs and optimizing resources in the life sciences is forcing these
organizations to be more selective in the allocation of their research budgets
by embracing new technologies which accelerate and improve the
cost-effectiveness of the drug discovery and development process. As a result,
research groups are increasingly relying on a variety of advanced techniques to
develop novel therapeutics.
There are two converging trends that are significantly impacting the
drug discovery process today. The first is the evolution of genomics and the
understanding of the human genome. The worldwide effort to sequence the human
genome is beginning to identify previously unknown natural molecules that will
likely become targets for new therapeutic products. As this field makes advances
in understanding the structure and function of the approximately 100,000 human
genes and their function in disease, more and more potential disease targets
will be identified. At the same time, the advances in combinatorial chemistry
have provided chemists with techniques that allow them to generate significantly
more potential drug compounds that can be tested against disease targets. Using
combinatorial chemistry techniques, researchers are now able to generate
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* SPECTRAmax(TM), Vmax(R), SOFTmax(R), PathCheck(TM), Threshold(R),
Cytosensor(R), Cytosoft(R), Liveware(TM), FLIPR(TM), ROBOmax(TM) and Molecular
Devices(R) are trademarks of the Company. This Form 10-K also includes
trademarks of companies other than the Company.
3
libraries of hundreds of thousands of compounds to be screened, whereas
previously they could only synthesize dozens in the same period, or use natural
molecule sources.
The volume of new potential drug candidate compounds and disease
targets, the need to analyze more subtle biological events and the enormous
costs involved in the development process have increased the need for a
selection process that effectively eliminates unpromising leads at an early
stage of research. Traditional bioanalytical instruments and methods were not
designed to provide the necessary throughput.
The Molecular Devices Solution
Molecular Devices designs, develops, manufactures and markets
proprietary, high-performance, bioanalytical measurement systems, including
software and consumables, designed to accelerate and improve the
cost-effectiveness of the drug discovery and development process. The Company
has integrated its expertise in engineering, biology and chemistry with advanced
optical technology that permits high-throughput, multisample detection of
biochemical reactions, and object-oriented software applications that rapidly
convert large amounts of complex data into meaningful information. The Company
has incorporated these technologies into sophisticated yet easy-to-use
bioanalytical tools that accurately measure, analyze, quantify and record large
volumes of complex biological data. As a result of the Company's
fully-integrated systems, researchers are able to address increasingly complex
biological problems that could not previously be addressed fully by traditional
technologies.
The Company currently offers three product families that address
different segments of the drug discovery market. The Company's MAXline family of
microplate readers primarily addresses the assay development market and offers
the assay development scientist seven differentiated microplate readers that
include a wide range of innovative and flexible feature sets. The Company is
widely perceived as a leader in microplate reader technology, and believes that
it was the first to offer a number of innovative features into the premium end
of the microplate reader market. The Company's Cell Analysis products, which
include Fluorometric Imaging Plate Reader ("FLIPR") products and the Cytosensor
System, address cellular based research in the high-throughput screening and
lead optimization market segments. The Company believes that both FLIPR and
Cytosensor provide researchers with valuable information content about the
effect of a potential drug compounds on cells. Finally, the Company's Threshold
System is aimed at the biopharmaceutical manufacturing and quality control
process, and the Company believes that the Threshold System is the only
commercially available fully integrated system that rapidly and reproducibly
detects potential contaminants with picogram level sensitivity.
Products
The Company's product lines include the MAXline family of microplate
readers, Cell Analysis systems which include FLIPR and Cytosensor product lines
and Threshold high sensitivity assay system.
MAXline Products
Microplate readers have become one of the most fundamental tools used
in life sciences research by addressing the increasing need for the acquisition
and processing of large quantities of biochemical and biological data.
Microplate readers provide scientists the benefit of high-throughput analysis in
a standardized, multi-sample format. Because of the productivity gains using a
multi-sample format, microplates have largely replaced test tubes and cuvettes
for many life sciences applications.
A microplate is a disposable plastic vessel that is used with a
microplate reader to measure light. The basic principles of microplate readers
are that light from an appropriate source is directed to a wavelength selection
device, such as a monochromator, and its intensity is measured before and after
passing through each of the sample wells of a microplate. Application of a
mathematical formula to the light intensity measurements of each microplate well
provides a measure of the sample present in the well. The measurement, known as
optical density, relative fluorescence, or luminescence, is proportional to the
concentration of the substance that is being measured. Historically, the
standard microplate was comprised of 96 individual wells. As cost and throughput
have become increasingly important, however, the industry has begun to move to
higher density plates including 384 wells and 1536 wells. The Company believes
that this trend towards miniaturization will continue to be a significant factor
affecting the microplate reader market in the future.
4
The Company's MAXline strategy has been to continue to introduce new
products that include first-of-a-kind novel features, as well as to offer
varying feature sets and price points to address different market segments. The
Company has historically focused on the premium end of the microplate reader
market through offering advanced capabilities. Some of the first-of-a-kind
features that the Company has pioneered include: the first reader and software
capable of kinetic analysis, the first monochromator-based reader that enabled
continuous wavelength selection and the first reader capable of performance
comparable to a spectrophotometer. In each case, the Company believes that the
innovation helped expand the utility of readers and more broadly to expand the
available market for microplate readers. Sales of the Company's Maxline products
accounted for 52%, 55%, and 54% of total revenues for the years ended December
31, 1998, 1997 and 1996, respectively. The Company's MAXline family currently
includes the following seven primary products:
Vmax. The Company's first microplate reader which was launched in 1987
and was the first microplate reader with kinetic read capability. This
product is designed to address the needs of biochemists.
Emax. This product is aimed at the market for traditional microplate
readers that do not require kinetic capability. It was introduced by
the Company to provide a reader for customers in academia and other
customers with restricted capital budgets.
SPECTRAmax PLUS. The Company's first microplate reader aimed at the
spectrophotometer market. It was the industry's first microplate reader
that was able to combine the high-throughput of a microplate reader
with the performance of a cuvette based spectrophotometer as a result
of the proprietary PathCheck Sensor technology developed by the
Company. The SPECTRAmax PLUS was also the first microplate reader with
the ability to read wavelengths as short as 190 nanometers and as long
as 1,000 nanometers, the equivalent range to a spectrophotometer.
SPECTRAmax 190. This product replaced the SPECTRAmax 250, which was the
world's first microplate reader that incorporated a monochromator for
continuous wavelength selection. Wavelength selection provides for
enhanced convenience and flexibility in assay design. In addition, the
190 also offers the Company's proprietary PathCheck Sensor technology.
SPECTRAmax 340PC. This product is a visible range microplate
spectrophotomer, offering tunability and the additional capability of
PathCheck Sensor technology.
VERSAmax. The VERSAmax is the Company's low cost variable wavelength
offering that provides kinetic capability and temperature control.
SPECTRAmax GEMINI. SPECTRAmax GEMINI was introduced in late 1998, and
represents the latest innovation in the Company's growing list of
product firsts. It is the world's first dual-scanning microplate
spectrofluorometer. By incorparating two scanning monochromators, the
SPECTRAmax GEMINI allows the user to automatically optimize the
instrument setting for every fluorophore that is in use today. GEMINI
also represents the Company's first microplate reader capable of
multi-mode operation, in that the product is capable of fluorescence,
luminescence and time-resolved fluorescence measurements.
Cell Analysis Systems
Many therapeutic drugs are targeted to cell membrane receptors: special
proteins that function as control switches for cell activity and are triggered
by the specific binding of soluble natural substances to relay messages to the
cell via "signal transduction" mechanisms. Therapeutic drugs which act on
receptors either mimic or block the action of the natural receptor-specific
substance. The therapeutic potential of such drugs is, therefore, most
appropriately studied using live cell systems. These studies are inherently
challenging, but a high value is placed upon them by the pharmaceutical industry
and the research community. A focus of the Company is the provision of tools for
studying the response of live cells to different compounds, both for research
and for drug screening purposes. Examples of these tools are the Company's FLIPR
System Products and Cytosensor Systems. Sales of the Company's Cell Analysis
products accounted for 35%, 33% and 31% of total revenues for the years ended
December 31, 1998, 1997 and 1996, respectively.
5
FLIPR System Products
The Fluorometric Imaging Plate Reader ("FLIPR") products satisfy a key
demand from pharmaceutical companies for live cell analysis at a high-throughput
rate. FLIPR was the first instrument to enable high-throughput screening of live
cells with high information content on cellular activation. The primary
applications for the FLIPR products are the measurement of intracellular calcium
ion flux and membrane potential change, both of which provide critical
information on the activation of cells by test compounds.
In the FLIPR system, cells, along with appropriate fluorescent dyes,
are maintained in microplates in a humidified, thermally-controlled compartment
together with compound-addition plates. A laser light source is then passed
through the wells to provide excitation illumination and fluorescence from cells
on the bottom of the wells. During the reading cycle, a built-in pipettor
transfers compound samples from the compound-addition plate to the cell plate
and the reaction is continuously monitored by a CCD camera at intervals of less
than 1 second. This strategy allows for real-time monitoring of cells before and
after compound addition, thus allowing the measurement of rapid non-linear,
response kinetics. The FLIPR limited depth-of-field fluorometry optical design
is patented. The Company currently offers two products based on the FLIPR
technology platform.
FLIPR. This product was introduced in 1996 and was the Company's first
entry into the high-throughput screening market. FLIPR is capable of
simultaneously analyzing each well of a 96 well plate and has a
throughput of approximately 10,000 samples per day.
FLIPR 384. FLIPR 384, introduced in 1998, is the second generation
FLIPR product, and combines all of the benefits of the original FLIPR
along with new automation capabilities and the ability to analyze
samples in 384 well microplates. FLIPR 384 can screen as many as 50,000
samples daily, and has an optional integrated plate stacker which can
dramatically reduce the need for human intervention during sample
processing. In addition, the instrument also incorporates interfaces
that enable it to integrate into automated screening lines.
Cytosensor Products
The Company developed the Cytosensor System to provide a fast,
reliable, single assay system to investigate multiple cellular functions in
numerous cell types. The Cytosensor System incorporates the Company's core Light
Addressable Potentiometric Sensor ("LAPS") technology, a detection system
capable of measuring a wide variety of chemical reactions as they occur on the
surface of a silicon based sensor, into a patented system that permits
researchers to conduct microphysiometry (the study of cellular metabolism)
without destroying the cells. Cellular metabolism is the most fundamental and
essential of all physiological processes, and allows for the monitoring of cell
activation, stimulation, growth, toxicity and other biochemical events crucial
to the development of new therapeutics. The Company believes that the primary
applications of the Cytosensor system are receptor characterization, orphan
receptor identification, human cell pharmacological profiling and in vitro
toxicology. The Company offers a 4-chamber Cytosensor system targeting customers
with relatively low throughput requirements and an 8-chamber system for
customers who require higher throughput.
Threshold System Products
The Company's Threshold System is a high sensitivity assay system that
incorporates the Company's LAPS technology to quantitate a variety of
biomolecules such as DNA, proteins and mRNA rapidly and accurately. The demand
for systems which can quantitate contaminants in the manufacturing and quality
control of bioengineered products is in response to the growing number of
biopharmaceutical therapeutics both entering clinical trials and receiving
regulatory approval for commercial sale. The Threshold System emerged from a
need by biopharmaceutical companies for more sensitive and reproducible methods
to detect contaminants in biopharmaceuticals during the manufacturing and
quality control process. Traditional detection methods, such as DNA
hybridization, can be slow, difficult to use in a manner that provides
reproducible and transferable results, and often require the use of radioactive
materials for detection. The Threshold family of products includes a
workstation, software and consumable reagent kits. The Company believes that the
Threshold System is the only commercially available, fully-integrated system
capable of rapidly and accurately quantitating DNA with picogram-level
sensitivity.
6
Software Products
All the Company's instrument products are used with internally designed and
developed software, either sold as an integral part of the "package" (FLIPR,
Cytosensor, Threshold, Gemini), or as a separate offering (older Maxline
instruments). The Company believes that software is an important differentiator
for its instrument products relative to the competition.
Business Risks
The Company's business, financial condition and results of operations are
subject to various risk factors, including those described below and elsewhere
in this report.
o Uncertainty of Future Operating Results. Future operating results will
depend on many factors, including demand for the Company's products,
the levels and timing of government and private sector funding of life
sciences research activities, the timing of the introduction of new
products by the Company or by competing companies, the integration of
acquired products and technology into manufacturing and distribution
processes, the Company's ability to control costs and its ability to
attract and retain highly qualified personnel. Furthermore, the
Company's gross margins can be significantly affected by many factors,
including shifts in product mix, the mix of direct sales as compared
with sales through distributors, competitive price pressures and
quarterly fluctuations in sales levels relative to fixed costs.
o Fluctuations in Quarterly Operating Results; Lack of Backlog. The
Company manufactures its products to forecast rather than to
outstanding orders, and products are typically shipped within 30 to 90
days of purchase order receipt. As a result, the Company does not
believe the amount of backlog at any particular date is indicative of
its future level of sales. The Company's manufacturing procedures may
in certain instances create a risk of excess or inadequate inventory
levels if orders do not match forecasts. The Company's expense levels
are based, in part, on expected future sales. However, the timing of
capital equipment purchases by customers is expected to be uneven and
difficult to predict. If sales levels in a particular quarter do not
meet expectations, the Company may not be able to adjust operating
expenses sufficiently quickly to compensate for the shortfall, and the
Company's results of operations for that quarter may be materially
adversely affected. Many of the Company's products are subject to long
customer procurement processes. In addition, a significant portion of
the Company's revenues is typically derived from sales of a small
number of relatively high-priced systems, and sales of such products
may increase as a percentage of revenue in the future. Delays in
receipt of anticipated orders of such products could lead to
substantial variability from quarter to quarter. Furthermore, the
Company has historically received purchase orders and made a
significant portion of each quarter's product shipments near the end of
the quarter. If that pattern continues, even short delays in the
receipt of orders or shipment of products at the end of a quarter could
have a material adverse effect on results of operations for that
quarter. The Company typically experiences a decrease in the level of
sales in the first calendar quarter as compared to the fourth quarter
of the preceding year because of budgetary and capital equipment
purchasing patterns in the life sciences industry. The Company also
typically experiences a decrease in product revenues in the third
quarter compared to the second quarter, related to seasonality
primarily associated with lower European and academic sales during the
summer months. Revenues for the third quarter of 1998 nominally
exceeded second quarter 1998 revenues due to the phasing in of new
products. The Company believes that the third quarter seasonality trend
may recur in the future as the Company increases efforts to further
penetrate European Markets. Operating results in any period should not
be considered indicative of the results to be expected for any future
period.
o Dependency on New Products; Rapid Technological Change. The life
sciences instrumentation market is characterized by rapid technological
change and frequent new product introductions. The Company's future
success will depend on its ability to enhance its current products and
to develop and introduce, on a timely basis, new products that address
the evolving needs of its customers.
o Reliance on Sole Source Suppliers. Certain components used in the
Company's products are currently purchased from single sources. Any
delay in the manufacture of such components could materially adversely
affect the Company's business, financial condition and results of
operations.
o Year 2000 Compliance. The Company has a Year 2000 project in place to
address the potential exposures related to the impact on its computer
systems and scientific and manufacturing equipment containing computer
related components for the Year 2000 and beyond. The Company is
currently assessing its internal and external Year 2000 risks and
continues to monitor, validate and implement the identified corrective
actions. The Company's internal business systems have been
7
reviewed and plans are being defined to achieve Year 2000 compliance.
Testing of the Company's business critical application programs began
in the fourth quarter of 1998 and is scheduled to be complete by the
third quarter of 1999. Any failure on the part of the Company to
identify and correct Year 2000 compliance issues related to the
Company's internal business systems could materially adversely affect
the Company's business, financial condition and results of operation.
All of the Company's products that are currently manufactured and
supported are Year 2000 compliant. There is an installed base of
Company products no longer distributed that are not Year 2000
compliant, all of which have an identified upgrade path which our
customers can purchase to achieve compliance.
In addition to risks associated with the Company's own computer
systems, equipment and products, the Company has relationships with,
and is to varying degrees dependent upon, a large number of third
parties that provide information, goods and services to the Company.
These include financial institutions, suppliers, vendors, governmental
entities, distributors and customers. If significant numbers of these
third parties experience failures in their computer systems or
equipment due to Year 2000 non-compliance, it could affect the
company's ability to process transactions, manufacture products, or
engage in similar normal business activities. While many of these risks
are outside the control of the Company, the Company has instituted
programs, including internal records review and use of external
questionnaires, to identify key third parties, assess their level of
Year 2000 compliance and address any non-compliance issues. Upon
completion of this process, any required contingency plans will be
developed.
At this time, the Company believes there are no significant incremental
costs anticipated to achieve both internal and external Year 2000
compliance. The total cost of the Year 2000 systems assessments and
conversions is being funded through operating cash flows and the
Company is expensing these costs as they are incurred. However, there
can be no assurances that the third parties of the Company will be in
compliance and the Company has no control over whether such third
parties will be in compliance with Year 2000 requirements. Any failure
on the part of the Company's third parties, which could include
inability to deliver or purchase product, could materially adversely
affect the Company's business, financial condition and results of
operations.
o Other Factors. The Company's business is affected by other factors,
including: (i) the possibility that the introduction or announcement of
new products would render existing products obsolete or result in a
delay or decrease in purchase orders for existing products; (ii) the
extent to which and the timing in which the Company's products achieve
market acceptance; (iii) the capital spending policies of the Company's
customers (which depend on various factors, including the resources
available to such customers, the spending priorities among various
types of research equipment and the policies regarding capital
expenditures during recessionary periods), including those policies of
universities, government research laboratories and other institutions
whose funding is dependent on grants from government agencies; (iv)
competition in the life sciences instrumentation market which is highly
competitive and expected by the Company to increase; (v) the Company's
ability to obtain and maintain patent and other intellectual property
protection for its products and technology; (vi) compliance with
governmental regulations, including those promulgated by the United
Sates Food and Drug Administration and similar state and foreign
agencies; and (vii) the extent of the Company's sales outside the
United States, which involve certain specific risks, including risks
related to currency fluctuations, imposition of government controls,
export license requirements, restrictions on export of critical
technology, political and economic instability or conflicts, trade
restrictions, changes in tariffs and taxes and difficulties in staffing
and managing international operations and international distributor
relationships.
Research and Development
The Company's research and development activities are focused on (i)
providing more sensitive quantitative evaluation of biological events; (ii)
providing greater throughput capability, especially with smaller sample volumes;
(iii) developing biological and chemistry capability to broaden its technology
solution; and (iv) developing increasingly sophisticated data management and
analysis capability.
There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new products or product enhancements. The Company
has experienced, and may in the future experience, delays in the development and
introduction of new products and product enhancements, and there can be no
assurance that the Company will not experience additional delays in the future.
In addition, there can be no assurance that
8
new products will adequately meet the requirements of the marketplace and
achieve market acceptance. If the Company is unable, for technological or other
reasons, to develop and introduce products in a timely manner in response to
changing market environments or customer requirements, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's future success will depend on its ability to enhance its
current products and to develop and introduce, on a timely basis, new products
that keep pace with technological developments and address the evolving needs of
its customers. The Company pursues active development programs in the areas of
spectroscopy, molecular and cell biology, chemistry, electronic systems and
computer software. Company-funded research and development expenditures were
approximately $5,686,000, $4,721,000 and $4,581,000 during 1998, 1997 and 1996,
respectively. The Company expects to continue to increase its Company-funded
research and development expenditures as new products are developed to address
the evolving needs of its customers. See Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Marketing and Customers
The Company markets and sells high performance bioanalytical systems to
technically sophisticated customers. To access and support this market
appropriately, the Company is continuing to make a significant investment in
building a direct sales, service and technical support organization worldwide.
The Company believes that providing high quality technical assistance to
customers is critical to its long-term success.
The Company distributes its products primarily through direct sales
representatives in the United States. The sales effort in the United States is
supported by a team of service, technical and applications specialists employed
by the Company. The Company has subsidiaries in the United Kingdom and Germany
responsible for selling and servicing the Company's products. The Company's
products are also sold through international distributors, most of which enter
into distribution agreements with the Company that provide for exclusive
distribution arrangements and minimum purchase targets. Such agreements also
generally prohibit the distributors from designing, manufacturing, promoting or
selling any products that are competitive with the Company's products. The use
of distributors involves certain risks, including the risks that distributors
will be unable to satisfy financial obligations to the Company or will cease
operations. The Company also does not currently have distributors in a number of
significant international markets that it has targeted and will need to
establish additional international distribution relationships. There can be no
assurance that the Company will engage qualified distributors in a timely
manner, and the failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
Product sales to customers outside of the United States accounted for
approximately 40%, 38% and 40% of the Company's product revenues in 1998, 1997
and 1996, respectively. International sales are anticipated to account for an
increasing percentage of revenues in the future. The Company expects to continue
expanding its international operations in order to take advantage of increasing
international market opportunities resulting from worldwide growth in the life
sciences industry. The Company faces a number of risks in its international
sales and operations. Although currently a majority of the Company's
international export sales are denominated in U.S. dollars, as the Company
expands its international operations it may be required to invoice a greater
proportion of its sales in local currencies. Consequently, fluctuations in the
value of foreign currencies relative to the U.S. dollar may adversely affect the
Company's results of operations because of currency translation adjustments or
adversely impact sales and profitability if the value of foreign currencies
declines relative to the U.S. dollar. International sales and operations may
also be materially adversely affected by the imposition of government controls,
export license requirements, restrictions of the export of critical technology,
political and economic instability or conflicts, trade restrictions, changes in
tariffs and taxes, difficulties in staffing and managing international
operations, problems in establishing or managing distributor relationships and
general economic conditions. See Note 7 to Notes to the Financial Statements on
pages F-14 and F-15 of this report for more information on foreign and domestic
operations and export sales.
The Company believes that, to a significant extent, its growth
prospects depend on capital spending policies of its customers, levels of
government research funding, and the Company's ability to gain acceptance by a
broader group of customers of the efficiency and efficacy of the Company's
innovative technologies, including the Cell Analysis Systems.
9
Manufacturing
Molecular Devices manufactures its products at its facility in
Sunnyvale, California. The Company manufactures its own components where it
believes it adds significant value, but relies on suppliers for the manufacture
of selected components and subassemblies, which are manufactured to the
Company's specifications. The Company conducts all final testing and inspection
of its products. The Company has established a quality control program,
including a set of standard manufacturing and documentation procedures intended
to ensure that, where required, the Company's instruments are manufactured in
accordance with Good Manufacturing Practices ("GMP").
Certain components used in the Company's products are currently
purchased from single sources. Any delay in the manufacture of such components
could materially adversely affect the Company's business, financial condition
and results of operations. Additional components, such as optical, electronic
and pneumatic devices, are currently purchased in configurations specific to the
Company's requirements and, together with certain other components, such as
computers, are integrated into the Company's products. Although the Company
believes that most of the components used in its products are available from
alternate sources, any unanticipated interruption in the supply of these
components or other supplies, or changes to the specifications or interface of
standard components or supplies adopted unilaterally by their manufacturers,
could require the Company to redesign its products to utilize alternative or
modified components or supplies. The Company's reliance on sole-source vendors
involves several risks in addition to potential shortages of supply, including
reduced control over delivery schedules, and risks of adverse manufacturing
yields, reduced quality and higher costs. In the event of yield, quality,
delivery or supply problems, the Company could be forced to delay shipment of
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company manufactures its products to forecast rather than to
outstanding orders, and products are typically shipped within 30 to 90 days of
purchase order receipt. As a result, the Company typically does not have
substantial backlog, and the amount of backlog at any particular date is
generally not indicative of its future level of sales.
The Company typically warrants its products for one year. Historically,
the Company's warranty repairs and returns have been immaterial.
Patents and Proprietary Technologies
The Company relies on patents and other proprietary rights, including
trade secrets, to protect its competitive position. There can be no assurance
that any applications will result in the issuance of a patent or that any issued
patent will afford the Company any significant protection from competition.
The patent positions of life sciences instrumentation firms, including
that of the Company, are uncertain and involve complex legal and factual
questions. In addition, the coverage claimed in a patent application can be
significantly reduced before the patent is issued. Consequently, the Company
does not know whether any of its applications will result in the issuance of
patents or, if any patents are issued, whether they will provide significant
proprietary protection or will be challenged, circumvented or invalidated. Since
patent applications in the United States are maintained in secrecy until patents
issue, and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first creator of inventions covered by its pending patent
applications or that it was the first to file patent applications for such
inventions. Moreover, the Company may have to participate in interference
proceedings declared by the U.S. Patent and Trademark Office to determine
priority of invention, which could result in substantial cost to the Company,
even if the eventual outcome is favorable to the Company. There can be no
assurance that the Company's patents, if issued, would be held valid. Because
many holders of patents in the field of life sciences instrumentation have
substantially greater resources than the Company and because patent litigation
is very expensive, Molecular Devices may not have the resources necessary to
successfully challenge the validity of such patents or withstand claims of
infringement in cases where the Company's position has merit. Even if the
Company is successful in prevailing in such actions, the cost of such litigation
could have a material adverse effect on the Company's financial condition and
results of operations. An adverse outcome in any future patent dispute could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using the infringed technology. No assurance can be given that the Company
would be able to obtain licenses to these patents on commercially reasonable
terms, if at all, or develop or obtain alternative technology.
10
The Company also relies on trade secret and copyright law, employee and
third-party nondisclosure agreements and other protective measures to protect
its intellectual property rights pertaining to its products and technology.
There can be no assurance that these agreements and measures will provide
meaningful protection of the Company's trade secrets, know-how, or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure or that others will not independently develop substantially
equivalent proprietary technologies. In addition, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States. There can be no assurance that the
Company will be able to protect its intellectual property successfully.
Competition
The market for life sciences instrumentation is highly competitive, and
the Company expects competition to increase. There are three principal sources
of competition for the Company's products. First, the Company competes for the
allocation of customer capital funds with many other companies marketing capital
equipment, including those not directly competitive with any of the Company's
products.
Second, some of the Company's products compete directly with similar
products from other companies. Since their introduction in 1987, the MAXline
microplate readers have consistently accounted for over 50% of the Company's
total revenues. The microplate reader market is characterized by intense
competition from a number of companies including Bio-Rad Laboratories, Inc.,
Thermo Bioanalysis Corporation, Bio-Tek Instruments, Inc., and Perkin-Elmer
Corporation that offer, or may in the future offer, products with performance
capabilities generally similar to those offered by the Company's products. The
Company expects that competition is likely to increase in the future, as several
current and potential competitors have the technological and financial ability
to enter the microplate reader market. Some of the Company's competitors have
substantially greater financial, technical, marketing, sales and other resources
than the Company, and certain of these companies have a larger market share
worldwide. The Company's MAXline products are generally priced at a premium to
other microplate readers. The Company competes in the microplate reader market
primarily on the basis of performance and productivity, and there can be no
assurance that the Company can continue to compete successfully in this market.
Third, many companies, research institutions and government
organizations that might otherwise be customers for the Company's products
employ methods for bioanalytical analysis that are internally developed. Many of
these companies also have significantly greater financial, technical, marketing,
sales and other resources than does the Company. In addition, these companies
and institutions compete with the Company in recruiting and retaining highly
qualified scientific and management personnel.
Although the Company is not aware of fully-integrated systems on the
market that compete directly with its Threshold or Cell Analysis products,
competitive products using new technologies may be introduced. While the Company
believes that most methods developed internally are manual, there can be no
assurance that other organizations will not succeed in developing technologies
and products that are more effective than those of the Company or that would
render the Company's products obsolete or noncompetitive. The Company believes
that the primary competitive factors in the market for the Company's products
are breadth of applications, ease-of-use, productivity enhancement, quantitative
accuracy, quality, support and price/performance. The Company believes that it
competes favorably with respect to these factors.
Government Regulations
Government regulations play a significant role in the research,
development, production and commercialization of health care products, such as
pharmaceuticals, diagnostics and certain instrumentation. None of the Company's
products currently require FDA approval except for certain of the Company's
MAXline Microplate Readers that are used in clinical or diagnostic applications.
FDA regulations apply not only to therapeutics and other health care products,
but also to the processes and production facilities used to produce such
products.
Clinical diagnostic applications of the Company's products are and will
continue to be subject to FDA device and reagent approval and regulations.
Before a medical device can be commercially distributed, the manufacturer must
submit to the FDA either a 510(k) or a PMA application. A 510(k) notification
can be submitted when the device is substantially equivalent to another device
currently being marketed in the classes of devices eligible for marketing
pursuant to 510(k) notifications. Receipt of 510(k) clearance takes at least
three months, but may take much longer and may require the submission of
clinical
11
safety and efficacy data to the FDA. There can be no assurance that the use of a
510(k) notification will be available for any clinical application of the
Company's products or for any of the Company's potential diagnostic products.
A PMA, which is required for medical devices not eligible to be
marketed under a 510(k) notification, must demonstrate that the product is safe
and effective and thus requires more time to prepare and a more complex
submission to the FDA. Following completion of laboratory evaluations and
adequate controlled clinical trials to establish safety and efficacy of the
product for its intended use, the Company would be required to file a PMA
application, which includes the results of all research and product development,
clinical studies and related information. Among the conditions for FDA approval
is the requirement that the prospective manufacturer's quality control and
manufacturing and documentation procedures conform to GMP. Domestic
manufacturing facilities are subject to biennial FDA inspections and foreign
manufacturing facilities are subject to periodic FDA inspections, or inspections
by the foreign regulatory authorities with reciprocal inspection agreements with
the FDA. FDA review and approval of a PMA application often requires 12 to 18
months, or even longer, and must be completed before the product may be sold for
clinical diagnostic use in the United States. The process of obtaining PMAs from
the FDA and other regulatory authorities can be costly, time consuming and
subject to unanticipated delays.
The Company has limited experience in obtaining regulatory approvals.
The Company has, to date, been required to obtain 510(k) clearance with respect
to certain clinical applications of its MAXline Microplate Readers. There can be
no assurance that 510(k) clearance for any future product or modification of an
existing product will be granted by the FDA within a reasonable time frame, or
at all, or that in the future the FDA will not require manufacturers of certain
medical devices to engage in a more thorough and time consuming approval process
than the 510(k) process, or that the FDA or certain corresponding government
agencies will permit marketing of the Company's systems in their respective
jurisdictions. There can be no assurance that the approvals of the Company's or
its customers' products, processes or facilities will be granted. Any failure to
obtain, or delay in obtaining, any such required approval could adversely affect
the Company's marketing efforts.
As a result of the clinical applications of certain of the Company's
MAXline Microplate Readers, the Company is registered with the FDA as a medical
device manufacturer. As such, the Company may be inspected on a routine basis by
the FDA for compliance with the FDA's GMP and other applicable regulations.
These regulations require that the Company manufacture its products and maintain
related documentation in a prescribed manner with respect to manufacturing,
testing and quality control activities. Further, the Company is required to
comply with various FDA requirements for reporting of product malfunctions and
other matters. The regulatory standards for manufacturing are currently being
applied stringently by the FDA and state regulatory agencies. Noncompliance with
FDA or applicable state agency regulations or discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions on
such product or manufacturer, including fines, costly recalls, injunction or
seizure of products, refusal of the government to approve or clear product
approval applications or to allow the Company to enter into government supply
contracts or even withdrawal of the product from the market or criminal
prosecution, all of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
A significant percentage of the Company's product revenues are derived
from sales outside of the United States. International regulatory bodies often
establish varying regulations governing product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. As a result of the Company's sales in Europe, the
Company may be required to obtain ISO 9000 certification and has had to obtain a
"CE" mark certification for its products, an international symbol of quality and
compliance with applicable European medical device and instrument manufacturing
directives. While the Company expects to institute an ISO 9000 compliance
program once regulations are finalized, there can be no assurance that the
Company will be successful in meeting certification requirements.
The Company is also subject to numerous environmental and safety laws
and regulations, including those governing use of hazardous materials. Any
violation of, and the cost of compliance with, these regulations could adversely
impact the Company's operations.
12
Human Resources
As of December 31, 1998, Molecular Devices employed 164 persons full
time, including 43 in research and development, 46 in manufacturing, 59 in
marketing and sales and 16 in general administration and finance. Of these
employees, 37 hold Ph.D. or other advanced degrees. None of the Company's
employees is covered by collective bargaining agreements, and the Company
considers relations with its employees to be good.
Item 2 - Properties
Molecular Devices leases approximately 60,000 square feet of
laboratory, manufacturing and administrative space in Sunnyvale, California. The
Company's lease expires in November, 2001. The Company believes that its
facilities will be sufficient for its operations through at least 1999. The
Company also maintains a sales and service office in the United Kingdom and a
sales and technical office in Germany.
Item 3 - Legal Proceedings
The Company is not currently a party to any material legal proceedings.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
13
PART II
- --------------------------------------------------------------------------------
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the Nasdaq National Market
under the symbol "MDCC."
The prices per share reflected on the table below represent the range
of high and low closing prices of the common stock on the Nasdaq National
Market, for the period indicated.
- -------------------------- ------------------------------ -------- ------------------------------
1998 1997
- -------------------------- ------------------------------ -------- ------------------------------
High Low High Low
- -------------------------- -------------- --------------- -------- --------------- --------------
First Quarter 22 3/8 15 1/4 16 3/4 13 3/8
- -------------------------- -------------- --------------- -------- --------------- --------------
Second Quarter 19 3/8 14 3/8 17 5/8 12 1/2
- -------------------------- -------------- --------------- -------- --------------- --------------
Third Quarter 18 1/2 12 1/8 21 7/8 16 1/2
- -------------------------- -------------- --------------- -------- --------------- --------------
Fourth Quarter 21 3/4 16 23 3/4 14 7/8
- -------------------------- -------------- --------------- -------- --------------- --------------
Historically, the Company has not paid cash dividends on its common
stock and does not intend to pay any cash dividends in the foreseeable future.
Any future cash dividends will be determined by the Board of Directors. As of
March 15, 1999, there were approximately 113 stockholders of record of the
Company. On March 15, 1999, the last sale price reported on the Nasdaq National
Market for the Company's common stock was $21.875 per share.
The Company entered into employment arrangements with each of Mr.
Joseph D. Keegan, Mr. Timothy A. Harkness and Mr. John S. Senaldi pursuant to
which the Company is obligated to issue to each such officer shares of its
Common Stock in exchange for services rendered. As a result of these
arrangements, the Company issued shares of its Common Stock to these officers on
the dates and amounts indicated below in reliance on the exemption from
registration afforded by Section 4(2) of the Securities act of 1933, as amended.
Number of Shares Date of Issue
---------------- -------------
Mr. Keegan 3,750 06/30/98
3,750 09/30/98
3,750 12/30/98
Mr. Harkness 1,250 10/09/98
Mr. Senaldi 312 11/06/98
14
Item 6 - Selected Consolidated Financial Data
The following table sets forth selected historical financial
information for the Company certain portions of which are based on, and should
be read in conjunction with, the Company's audited financial statements that are
being filed as a part of this report.
Years Ended December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share data)
Consolidated Statements of Income Data:
Revenues $ 47,798 $ 38,286 $ 30,926 $ 25,615 $ 22,460
-------- -------- -------- -------- --------
Income from operations 9,442 7,256 47 3,011 1,763
Other income (expense), net 1,584 1,220 1,079 (33) (201)
-------- -------- -------- -------- --------
Income before income taxes 11,026 8,476 1,126 2,978 1,562
Income tax provision (benefit) 4,245 3,174 (1,126) (1,081) 43
-------- -------- -------- -------- --------
Net income $ 6,781 $ 5,302 $ 2,252 $ 4,059 $ 1,519
======== ======== ======== ======== ========
Basic net income per share $ 0.72 $ 0.58 $ 0.26 $ 0.58 $ 0.22
======== ======== ======== ======== ========
Diluted net income per share $ 0.70 $ 0.55 $ 0.24 $ 0.53 $ 0.21
======== ======== ======== ======== ========
Shares used in computing basic net
income per share 9,411 9,137 8,828 7,031 6,920
======== ======== ======== ======== ========
Shares used in computing diluted net
income per share 9,738 9,721 9,524 7,644 7,310
======== ======== ======== ======== ========
Pro-Forma Consolidated Statements of Income Data:
Pro-forma diluted net income per share $ 0.75 $ 0.55 $ 0.37 $ 0.24 $ 0.13
======== ======== ======== ======== ========
This information has been provided to report the Company's pro-forma
diluted net income per share data and is calculated excluding the impacts of the
write-offs of acquired in-process research and development in 1998 and 1996 and
assuming a tax provision rate of 38.5% (37.5% in 1997).
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 32,689 $ 26,773 $ 23,727 $ 20,379 $ 2,201
Working capital 43,438 35,752 27,395 22,786 3,681
Total assets 54,405 42,791 36,833 28,800 9,020
Long-term obligations, less current portion -- -- -- -- 1,582
Retained earnings (accumulated deficit) 4,235 (2,546) (7,848) (10,100) (14,159)
Total stockholders' equity 45,823 37,417 29,277 24,525 3,757
Note that income from operations for the fiscal year ended December 31,
1998 includes a $876,000 (or $0.05 per share) charge for the acquisition of
in-process technology and acquisition costs related to the Company's acquisition
of certain technology rights from Affymax Research Institute, a subsidiary of
Glaxo-Wellcome. In addition, the income from operations for the fiscal year
ended December 31, 1996 includes a $4.6 million (or $0.13 per share) charge for
the acquisition of in-process technology and acquisition costs related to the
Company's acquisition of NovelTech Systems, Inc.
15
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section as well as
under "Item I. Business - Business Risks."
Molecular Devices Corporation ("Molecular Devices" or the "Company")
designs, develops, manufactures and markets proprietary, high performance,
bioanalytical measurement systems, including software and consumables, designed
to accelerate and improve the cost-effectiveness of the drug discovery and
development process. The Company integrates its expertise in engineering,
molecular and cell biology and chemistry to develop proprietary core
technologies which it incorporates into its sophisticated bioanalytical systems,
including MAXline Microplate Readers, Cell Analysis Systems and Threshold
System. As part of its strategy to provide complete customer solutions, the
Company also offers certain dedicated consumables, as well as software upgrades,
and service on a contract basis. The Company's systems have applications in many
aspects of life science including the therapeutic development process, from drug
discovery and clinical research through manufacturing and quality control.
Results of Operations
Years ended December 31, 1998, 1997 and 1996
Revenues. Revenues for 1998 increased by 25% to approximately $47.8
million from approximately $38.2 million in 1997. All three product families
showed increased levels of revenue. MAXline revenues increased due to both
greater sales of the new SPECTRAmax products addressing both the absorbance and
fluorescence markets and increased penetration of MAXline products into our
European distribution channels. Cell Analysis revenues increased due to both the
introduction of new FLIPR products and increased FLIPR demand worldwide.
Threshold revenues increased due to greater volume shipments to military
customers worldwide.
Revenues for 1997 increased by 24% to approximately $38.2 million from
approximately $30.9 million in 1996. The MAXline and Cell Analysis product
families showed increased levels of revenue. MAXline revenues increased
primarily due to greater sales of new SPECTRAmax products and increased
penetration of MAXline products into international distribution channels. Cell
Analysis revenues increased primarily due to greater sales of new FLIPR products
worldwide. Threshold revenues decreased primarily due to lower shipments to the
U.S. Army and decreased shipments of commercial Threshold products
internationally.
Gross margin. Gross margin increased to 62.9% in 1998 from 62.3% in
1997. This increase relates primarily to increased sales of new higher margin
MAXline and FLIPR products.
In 1997, gross margin increased nominally to 62.3% from 62.0% in 1996.
This increase relates primarily to increased sales of new higher margin MAXline
products and improved margins on sales of Cell Analysis products.
Research and development. Research and development expenses for 1998
increased by 20% to approximately $5.7 million from approximately $4.7 million
in 1997. This increased spending relates primarily to additional development
expenses required to support the introduction of new MAXline and FLIPR products
(including additional personnel).
Research and development expenses for 1997 increased nominally by 3% to
approximately $4.7 million from approximately $4.6 million in 1996. The
relatively flat spending in 1997 was due to increased spending on personnel,
partially offset by decreased external product development costs.
Research and development expenses as a percentage of revenues were
11.9%, 12.3% and 14.8% in 1998, 1997 and 1996, respectively.
16
Write-off of acquired in-process research and development. The Company
recorded an $876,000 charge during the third quarter of 1998 due to the
write-off of acquired in-process research and development related to the
Company's acquisition of technology rights from Affymax Research Institute, a
subsidiary of Glaxo Wellcome (see Note 4 of "Notes to Consolidated Financial
Statements" included in Part IV). The $876,000 represents the entire amount of
up-front consideration that has, or will be, paid to Affymax as well as all
related transaction costs associated with this technology license agreement.
Based on the stage of development of this technology and the assessment of the
time and resources needed to complete product development based on this
technology, the Company believed that the acquired technology had not reached
economic or technological feasibility at the time of the acquisition.
The Company recorded a charge of approximately $4.6 million during the
second quarter of 1996 due to the write-off of acquired in-process research and
development and acquisition related costs related to the Company's acquisition
of NovelTech Systems, Inc. in 1996. The acquired in-process technology
represented the appraised value of technology in the development stage that had
not yet reached economic and technological feasibility and did not have
alternative future uses at the time of the acquisition. The Company determined
this amount to be in-process research and development and recorded the charge
based on, among other factors, the stage of development of each product
acquired, the time and resources needed to complete product development,
expected income and associated risks. See Note 4 of "Notes to Consolidated
Financial Statements" included in Part IV.
Selling, general and administrative. Selling, general and
administrative expenses for 1998 increased by 18% to approximately $14.1 million
from approximately $11.9 million in 1997 and by 20% in 1997 compared to
approximately $9.9 million in 1996. The increased spending for both periods is
primarily the result of additional spending on marketing, sales and service
related activities (including increased personnel) as the Company continued its
efforts to expand worldwide market coverage and introduce new products. Selling,
general and administrative expenses as a percentage of revenues were 29.5%,
31.0% and 32.1% in 1998, 1997 and 1996, respectively.
Other income (net). Net other income, consisting primarily of interest
income, increased by 30% in 1998 to approximately $1.6 million from
approximately $1.2 million in 1997 and by 13% in 1997 from approximately $1.1
million in 1996. Both increases are due to greater interest income earned
resulting from higher cash balances (provided primarily from operations) period
to period.
Income tax provision. Income tax provisions of approximately $4.2
million (38.5% effective rate) and approximately $3.2 million (37.5% effective
rate) were recorded in 1998 and 1997, respectively. The increased effective rate
period to period is due primarily to anticipated decreased tax benefits from the
Company's Foreign Sales Corporation.
An income tax benefit of $1.1 million was recorded in 1996. The benefit
recorded in 1996, which had the effect of increasing net income, related
primarily to a reduced valuation allowance on the Company's deferred tax asset.
As of December 31, 1996, management concluded that no valuation allowance was
required on the net deferred tax asset based on its assessment that current
levels of income would be sufficient to realize the tax benefit.
Liquidity and Capital Resources
Since 1993, the Company has financed its operations primarily from cash
flows provided by operations, which contributed approximately $6.9 million, $4.4
million and $4.6 million in 1998, 1997 and 1996, respectively. Net cash used in
investing activities was approximately $1.5 million, $543,000 and $1.9 million
in 1998, 1997 and 1996, respectively, and was used primarily for capital
expenditures, except for 1996 when approximately $1.2 million of cash was used
for the acquisition of NovelTech. Net cash provided by financing activities was
approximately $521,000 and $534,000, respectively, for 1998 and 1996, while net
cash used in financing activities was approximately $567,000 for 1997. The 1998
and 1996 proceeds relate primarily to stock option exercises. The 1997 use of
funds reflects repayment of the $1.5 million promissory note related to the 1996
acquisition of NovelTech as partially offset by proceeds from stock option
exercises.
The Company believes that existing capital resources will be sufficient
to fund its operations for the foreseeable future. However, the Company's future
liquidity and capital requirements will depend upon numerous factors, including
the resources the Company devotes to developing, manufacturing and marketing its
products, the extent to which the Company's products generate market acceptance
and demand, potential acquisition opportunities that may arise and other
factors. As such, there can be no assurance that the Company will not require
additional financing and, therefore, the Company may in the future seek to
17
raise additional funds through bank facilities, debt or equity offerings or
other sources of capital. There can be no assurance that additional funding will
be available when needed or on terms acceptable to the Company, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Year 2000 Compliance
The Company has a Year 2000 project in place to address the potential
exposures related to the impact on its computer systems and scientific and
manufacturing equipment containing computer related components for the Year 2000
and beyond. The Company is currently assessing its internal and external Year
2000 risks and continues to monitor, validate and implement the identified
corrective actions. The Company's internal business systems have been reviewed
and plans are being defined to achieve Year 2000 compliance. Testing of the
Company's business critical application programs began in the fourth quarter of
1998 and is scheduled to be complete by the third quarter of 1999. Any failure
on the part of the Company to identify and correct Year 2000 compliance issues
related to the Company's internal business systems could materially adversely
affect the Company's business, financial condition and results of operation.
All of the Company's products that are currently manufactured and
supported are Year 2000 compliant. There is an installed base of Company
products no longer distributed that are not Year 2000 compliant, all of which
have an identified upgrade path which our customers can purchase to achieve
compliance.
In addition to risks associated with the Company's own computer
systems, equipment and products, the Company has relationships with, and is to
varying degrees dependent upon, a large number of third parties that provide
information, goods and services to the Company. These include financial
institutions, suppliers, vendors, governmental entities, distributors and
customers. If significant numbers of these third parties experience failures in
their computer systems or equipment due to Year 2000 non-compliance, it could
affect the company's ability to process transactions, manufacture products, or
engage in similar normal business activities. While many of these risks are
outside the control of the Company, the Company has instituted programs,
including internal records review and use of external questionnaires, to
identify key third parties, assess their level of Year 2000 compliance and
address any non-compliance issues. Upon completion of this process, any required
contingency plans will be developed.
At this time, the Company believes there are no significant incremental
costs anticipated to achieve both internal and external Year 2000 compliance.
The total cost of the Year 2000 systems assessments and conversions is being
funded through operating cash flows and the Company is expensing these costs as
they are incurred. However, there can be no assurances that the third parties of
the Company will be in compliance and the Company has no control over whether
such third parties will be in compliance with Year 2000 requirements. Any
failure on the part of the Company's third parties, which could include
inability to deliver or purchase product, could materially adversely affect the
Company's business, financial condition and results of operations.
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk, including changes in interest
rates and foreign currency exchange rates. The primary objective of the
Company's investment activities is to preserve principal while at the same time
maximizing the income we receive from our investments without significantly
increasing risk. A discussion of the Company's accounting policies for financial
instruments and further disclosures relating to financial institutions is
included in the Summary of Significant Accounting Policies note in the Notes to
Consolidated Financial Statements.
The Company's interest income is sensitive to changes in the general
level of interest rates, primarily U.S. interest rates. In this regard, changes
in U.S. interest rates affect the interest earned on the Company's cash
equivalents. The Company invests its excess cash primarily in demand deposits
with United States banks and money market accounts and short-term securities.
These securities, consisting of commercial paper and U.S. government agency
securities, are carried at market value (which approximate cost), typically
mature or are redeemable within 90 days, and bear minimal risk. The Company has
not experienced any significant losses on the investments.
The Company is exposed to changes in exchange rates in Europe
(primarily the United Kingdom and Germany) and Canada. All export sales, with
the exception of sales into Canada, are denominated in U.S. dollars and bear no
exchange rate risk. Gains and losses resulting from foreign currency
transactions in Canada have been immaterial. Translation gains and
18
losses related to our foreign subsidiaries in the United Kingdom and Germany are
accumulated as a separate component of Stockholders' equity. Those gains and
losses have been immaterial.
Item 8 - Financial Statements and Supplementary Data
The following consolidated financial statements of the Company and
financial statement schedules are attached to this report as pages F-1 through
F-16.
Financial Statements:
o Report of Ernst & Young LLP, Independent Auditors
o Consolidated Balance Sheets at December 31, 1998 and 1997
o Consolidated Statements of Income for each of the three years
in the period ended December 31, 1998
o Consolidated Statement of Stockholders' Equity for the three
years in the period ended December 31, 1998
o Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998
o Notes to Consolidated Financial Statements
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
Item 9 - Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
19
PART III
- --------------------------------------------------------------------------------
Item 10 - Directors and Executive Officers of the Registrant
Information with respect to Directors and Executive Officers may be
found in the sections entitled "Proposal 1-Election of Directors," and
"Executive Officers of the Company," respectively, appearing in the definitive
Proxy Statement to be delivered to stockholders in connection with the
solicitation of proxies for the Company's Annual Meeting of Stockholders to be
held on May 20, 1999 (the "Proxy Statement"). Such information is incorporated
herein by reference.
Item 11 - Executive Compensation
The information required by this item is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth in the Proxy
Statement under the heading "Security Ownership of Certain Beneficial Owners and
Management," which information is incorporated herein by reference.
Item 13 - Certain Transactions
The information required by this item is set forth in the Proxy
Statement under the heading "Certain Transactions," which information is
incorporated herein by reference.
20
PART IV
- --------------------------------------------------------------------------------
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements - See Index to Consolidated Financial
Statements as Item 8 on page 19 of this report.
2. Financial Statement Schedules - See Index to Consolidated Financial
Statements as Item 8 on page 19 of this report.
3. Exhibits
Exhibit
Number Description of Document
------ -----------------------
2.1(1) Form of Agreement and Plan of Merger between the Registrant and
Molecular Devices Corporation, a California Corporation
3.1(1) Amended and Restated Certificate of Incorporation of Registrant
3.2(1) Bylaws of the Registrant
4.1(1) Specimen Certificate of Common Stock of Registrant
4.2(1) Reference is made to Exhibits 3.1 through 3.2
10.1(1)* 1988 Stock Option Plan
10.2(1)* Form of Incentive Stock Option under the 1988 Stock Option Plan
10.3(1)* Form of Supplemental Stock Option under the 1988 Stock Option
Plan
10.4(1)* 1995 Employee Stock Purchase Plan
10.5(1) 1995 Non-Employee Directors' Stock Option Plan
10.6(1) Form of Nonstatutory Stock Option under the 1995 Non-Employee
Directors' Stock Option Plan
10.7(1)* 1995 Stock Option Plan
10.8(1)* Form of Incentive Stock Option under the 1995 Stock Option Plan
10.9(1)* Form of Nonstatutory Stock Option under the 1995 Stock Option
Plan
10.10(1)* Form of Early Exercise Stock Purchase Agreement under the 1995
Stock Option Plan
10.11(1)* Form of Indemnity Agreement between the Registrant and its
Directors and Executive Officers
10.12(1)* Consulting Agreement dated July 20, 1988 by and between the
Registrant and Harden M. McConnell, Ph.D
10.13(1) Lease Agreement dated January 17, 1994 by and between Aetna Life
Insurance Company and the Registrant
10.18(3)* Chief Financial Officer Employment Agreement
10.19(4)* Key Employee Agreement for Joseph D. Keegan dated March 11, 1998
(as amended)
10.20(5) "Exclusive License and Technical Support Agreement" with Affymax
10.21(5)* Employee Offer Letter for Tim Harkness
10.22(5)* Employee Offer Letter for Tony Lima
10.23(5)* Employee Offer Letter for John Senaldi
21.1(1) Subsidiaries of the Registrant
23.1 Consent of Independent Auditors, Ernst & Young LLP
27 Financial Data Schedule
- ----------------
(1) Incorporated by reference to the similarly described exhibit in the
Company's Registration statement on Form S-1 (File No. 33-98926), as
amended.
(2) Incorporated by reference to the similarly described exhibit in the
Company's Form 8-K Current Report dated June 7, 1996, and filed June 21,
1996 (as amended August 31, 1996).
(3) Incorporated by reference to the similarly described exhibit in the
Company's Form 10-K Annual Reported dated December 31, 1997 and filed March
26, 1998.
(4) Incorporated by reference to the similarly described exhibit in the
Company's Form 10-Q Quarterly Report dated June 30, 1998, and filed August
13, 1998.
(5) Incorporated by reference to the similarly described exhibit in the
Company's Form 10-Q Quarterly Report dated September 30, 1998, and filed
November 13, 1998.
* Management contract or arrangement.
21
(b) Reports on Form 8-K
None.
(c) Exhibits
See Item 14(a) above.
(d) Financial Statement Schedule
See Item 14(a) above.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized on March
26, 1998.
MOLECULAR DEVICES CORPORATION
By: /s/ Joseph D. Keegan, Ph.D.
----------------------------------------
Joseph D. Keegan, Ph.D.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Joseph D. Keegan, Ph.D. President, Chief Executive Officer March 26, 1999
----------------------------- and Director (Principal Executive Officer)
Joseph D. Keegan, Ph.D.
/s/ Timothy A. Harkness Vice President, Finance and Chief March 26, 1999
----------------------------- Financial Officer (Principal
Timothy A. Harkness Financial and Accounting Officer)
/s/ Moshe H. Alafi Director March 26, 1999
-----------------------------
Moshe H. Alafi
/s/ David L. Anderson Director March 26, 1999
-----------------------------
David L. Anderson
/s/ A. Blaine Bowman Director March 26, 1999
-----------------------------
A. Blaine Bowman
/s/ Paul Goddard, Ph.D. Director March 26, 1999
-----------------------------
Paul Goddard, Ph.D.
/s/ Andre F. Marion Director March 26, 1999
-----------------------------
Andre F. Marion
/s/ Harden M. McConnell, Ph.D. Director March 26, 1999
-----------------------------
Harden M. McConnell, Ph.D.
/s/ J. Allan Waitz, Ph.D. Director March 26, 1999
-----------------------------
J. Allan Waitz, Ph.D.
23
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Molecular Devices Corporation
We have audited the accompanying consolidated balance sheets of
Molecular Devices Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. Our audit also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Molecular Devices Corporation at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
January 18, 1999
F-1
MOLECULAR DEVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
-------------------------------
1998 1997
-------- --------
Assets:
Current assets:
Cash and cash equivalents $ 32,689 $ 26,773
Accounts receivable net of allowance for doubtful
accounts of $325 and $180 at
December 31, 1998 and 1997, respectively 12,958 8,899
Inventories 4,055 3,465
Deferred tax asset 1,630 1,867
Other current assets 688 122
-------- --------
Total current assets 52,020 41,126
Equipment and leasehold improvements, net 2,115 1,497
Other assets 270 168
-------- --------
$ 54,405 $ 42,791
======== ========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 2,135 $ 1,316
Accrued compensation 1,728 1,252
Other accrued liabilities 3,217 1,798
Deferred revenue 1,502 1,008
-------- --------
Total current liabilities 8,582 5,374
Commitments
Stockholders' equity:
Preferred stock, no par value, issuable in series;
3,000,000 shares authorized, no shares issued and
outstanding at December 31, 1998 and 1997,
respectively -- --
Common stock, $.001 par value; 30,000,000
shares authorized; 9,476,062 and
9,331,599 shares issued and outstanding
at December 31, 1998 and 1997, respectively 9 9
Additional paid-in capital 42,391 40,302
Retained earnings (accumulated deficit) 4,235 (2,546)
Deferred compensation (586) (148)
Accumulated other comprehensive income (226) (200)
-------- --------
Total stockholders' equity 45,823 37,417
-------- --------
$ 54,405 $ 42,791
======== ========
See accompanying notes.
F-2
MOLECULAR DEVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years ended December 31,
--------------------------------------------------
1998 1997 1996
-------- -------- --------
Revenues $ 47,798 $ 38,286 $ 30,926
Cost of revenues 17,716 14,426 11,741
-------- -------- --------
Gross Margin 30,082 23,860 19,185
-------- -------- --------
Operating expenses:
Research and development 5,686 4,721 4,581
Write-off of acquired in-process research
and development 876 -- 4,637
Selling, general and administrative 14,078 11,883 9,920
-------- -------- --------
Total operating expenses 20,640 16,604 19,138
-------- -------- --------
Income from operations 9,442 7,256 47
Other income, net 1,584 1,220 1,079
-------- -------- --------
Income before income taxes 11,026 8,476 1,126
Income tax provision (benefit) 4,245 3,174 (1,126)
-------- -------- --------
Net income $ 6,781 $ 5,302 $ 2,252
======== ======== ========
Basic net income per share $ 0.72 $ 0.58 $ 0.26
======== ======== ========
Diluted net income per share $ 0.70 $ 0.55 $ 0.24
======== ======== ========
See accompanying notes.
F-3
MOLECULAR DEVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Retained Accumulated
Additional Earnings Other Total
Preferred Common Paid-In Deferred (Accumulated Comprehensive Stockholders'
Stock Stock Capital Compensation Deficit) Income Equity
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1995 $ -- $ 8 $ 35,159 $ (537) $(10,100) $ (5) $ 24,525
Comprehensive income
Net income -- -- -- -- 2,252 -- 2,252
Currency translation -- -- -- -- -- 60 60
--------
Total comprehensive income 2,312
--------
Issuance of 112,864 shares of
common stock for options
exercised -- -- 273 -- -- -- 273
Issuance of 41,097 shares of
common stock under employee
stock purchase plan -- -- 337 -- -- -- 337
Issuance of 146,342 shares of
common stock in connection
with acquisition -- 1 1,482 -- -- -- 1,483
Tax benefits from employee stock
transactions -- -- 211 -- -- -- 211
Amortization of deferred
compensation -- -- -- 136 -- -- 136
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 -- 9 37,462 (401) (7,848) 55 29,277
Comprehensive income
Net income -- -- -- 5,302 -- 5,302
Currency translation -- -- -- -- -- (255) (255)
--------
Total comprehensive income 5,047
--------
Issuance of 318,370 shares of
common stock for options
exercised -- -- 933 -- -- -- 933
Issuance of 25,135 shares of common
stock under Employee Stock
Purchase Plan -- -- 332 -- -- -- 332
Tax benefits from employee stock
transactions -- -- 1,706 -- -- -- 1,706
Amortization of deferred
compensation -- -- -- 122 -- -- 122
Reversal of deferred compensation
for terminated employees -- -- (131) 131 -- -- --
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 -- 9 40,302 (148) (2,546) (200) 37,417
Comprehensive income
Net income -- -- -- -- 6,781 -- 6,781
Currency translation -- -- -- -- -- (26) (26)
--------
Total comprehensive income 6,755
--------
Issuance of 111,666 shares of
common stock for options
exercised -- -- 521 -- -- -- 521
Issuance of 19,984 shares of common
stock under Employee Stock
Purchase Plan -- -- 309 -- -- -- 309
Tax benefits from employee stock
transactions -- -- 477 -- -- -- 477
Deferred Compensation -- -- 782 (782) -- -- --
Amortization of deferred
compensation -- -- -- 344 -- -- 344
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 $ -- $ 9 $ 42,391 $ (586) $ 4,235 $ (226) $ 45,823
======== ======== ======== ======== ======== ======== ========
See accompanying notes.
F-4
MOLECULAR DEVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share amounts)
Years Ended December 31,
--------------------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income $ 6,781 $ 5,302 $ 2,252
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 753 729 636
Loss on disposal of fixed assets -- 31 40
Charge for acquired in-process research and development -- -- 4,425
Amortization of deferred compensation 344 122 136
(Increase) decrease in assets:
Accounts receivable (4,059) (3,503) (1,160)
Inventories (590) (995) (817)
Deferred tax asset 237 1,349 (2,055)
Other current assets (566) 20 (1)
Increase (decrease) in liabilities:
Accounts payable 819 (617) 916
Accrued compensation 476 225 151
Other accrued liabilities 2,205 1,336 (31)
Deferred revenue 494 412 120
-------- -------- --------
Net cash provided by operating activities 6,894 4,411 4,612
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (1,371) (625) (711)
Acquisition of NovelTech Systems, Inc. net of cash on hand -- -- (1,198)
Other assets (102) 82 51
-------- -------- --------
Net cash used in investing activities (1,473) (543) (1,858)
-------- -------- --------
Cash flows from financing activities:
Repayments on credit arrangements -- -- (76)
Repayment of promissory notes -- (1,500) --
Issuance of common stock, net 521 933 610
-------- -------- --------
Net cash provided by (used in) financing activities 521 (567) 534
-------- -------- --------
Effect of exchange rate changes on cash (26) (255) 60
-------- -------- --------
Net increase in cash and cash equivalents 5,916 3,046 3,348
Cash and cash equivalents at beginning of year 26,773 23,727 20,379
-------- -------- --------
Cash and cash equivalents at end of year 32,689 26,773 23,727
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ -- $ -- $ 6
======== ======== ========
Income taxes $ 2,932 $ 472 $ 360
======== ======== ========
Supplemental schedule of noncash
investing and financing activities:
Disposals of fully depreciated equipment
and leasehold improvements $ -- $ 85 $ 465
======== ======== ========
Issuance of 146,342 shares of common stock
in connection with acquisition $ -- $ -- $ 1,483
======== ======== ========
Issuance of promissory notes in connection
with acquisition $ -- $ -- $ 1,500
======== ======== ========
See accompanying notes.
F-5
MOLECULAR DEVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
Molecular Devices Corporation (the "Company"), a Delaware corporation,
is principally involved in the design, development, manufacture, sale and
service of bioanalytical measurement systems for life sciences applications. The
principal markets for the Company's products include pharmaceutical,
biotechnology and industrial companies, as well as universities, government
research laboratories and other institutions.
The consolidated financial statements include the accounts of the
Company and its wholly-owned foreign subsidiaries in Germany and the United
Kingdom. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company invests its excess cash primarily in demand deposits with
United States banks and money market accounts and short-term securities. These
securities, consisting of commercial paper and U.S. government agency
securities, are carried at market value (which approximates cost), typically
mature or are redeemable within 90 days, and bear minimal risk. The Company has
not experienced any significant losses on the investments.
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents. All such
investments are classified as available for sale.
The Company's investments at December 31, 1998 are comprised of
short-term corporate and government and non-government debt instruments that are
classified as cash equivalents. Due to the highly liquid nature of the Company's
investments, the adjusted cost basis of the investments approximates fair value
at December 31, 1998, and therefore unrealized gains or losses at this date are
immaterial.
Concentration of Credit Risk
The Company sells its products primarily to corporations, academic
institutions, government entities and distributors within the life sciences
research market. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and such losses have been within
management's expectations.
Inventories
Inventories are stated on a first-in, first-out basis at the lower of
cost or market. Demonstration equipment, included in inventories, is amortized
over two years.
Equipment and Leasehold Improvements
Equipment is recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets (ranging from three to five
years). Leasehold improvements are amortized over the remaining term of the
lease.
F-6
Note 1. Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation
The Company translates the assets and liabilities of its foreign
subsidiaries into dollars at the rates of exchange in effect at the end of the
period and translates revenues and expenses using rates in effect during the
period. Gains and losses from these translations are accumulated as a separate
component of stockholders' equity. Gains and losses resulting from foreign
currency transactions are immaterial and are included in the statements of
income.
Revenue Recognition and Warranty
The Company recognizes product revenue at the time of product shipment
directly either to a customer or to a distributor and provides for estimated
warranty expense at the time of sale. There are no significant customer
acceptance requirements or post shipment obligations on the part of the Company.
Service contract revenue is deferred at the time of sale and recognized ratably
over the period of performance.
Advertising Costs
The Company expenses the cost of advertising as incurred. The Company
incurred advertising costs of approximately $766,000, $641,000 and $680,000 for
1998, 1997, and 1996, respectively.
Per Share Data
Basic net income per share is computed based on the weighted average
number of shares of the Company's common stock outstanding. Dilutive net income
per share is computed based on the weighted average number of shares of the
Company's common stock and other dilutive securities.
F-7
Note 1. Summary of Significant Accounting Policies (Continued)
Computation of earnings per share is as follows:
Years Ended December 31,
--------------------------
1998 1997 1996
------- ------- ------
BASIC
Weighted average common shares outstanding for
the period 9,411 9,137 8,828
======= ======= ======
Net Income $ 6,781 $ 5,302 $2,252
======= ======= ======
Net income per share $ 0.72 $ 0.58 $ 0.26
======= ======= ======
Years Ended December 31,
------------------------
1998 1997 1996
------ ------ ------
DILUTED
Weighted average common shares outstanding for
the period 9,411 9,137 8,828
Common equivalent shares assuming exercise of
stock options under the treasury stock method 327 584 696
------ ------ ------
Shares used in per share calculation 9,738 9,721 9,524
====== ====== ======
Net income $6,781 $5,302 $2,252
====== ====== ======
Net income per share $ 0.70 $ 0.55 $ 0.24
====== ====== ======
Options to purchase 344,700 shares of common stock at a weighted
average per share price of $18.89 were outstanding during 1998, but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
Stock Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," the Company applies APB
Opinion 25 and related Interpretations in accounting for its Stock Option Plans
and, accordingly, recognizes no compensation expense for stock option grants
with an exercise price equal to the fair market value of the shares at the date
of grant. Note 5 to the Consolidated Financial Statements contains a summary of
the pro forma effects to reported net income and earnings per share for each of
the three years in the period ended December 31, 1998, if the Company had
elected to recognize compensation cost based on the fair value of the options
granted as prescribed by SFAS 123.
F-8
Note 1. Summary of Significant Accounting Policies (Continued)
401(K) Plan
The Company's 401(k) Plan ("Plan") covers substantially all of its U.S.
based employees. Under the Plan, eligible employees may contribute up to 25% of
their eligible compensation, subject to certain internal Revenue Service
restrictions. The Company began matching a portion of employee contributions in
1997, up to a maximum of 3% of each employee's eligible compensation. The match
is effective December 31 of each year and vests over a period of five years of
service. For the years ended December 31, 1998 and 1997, the Company provided
approximately $126,000 and $110,000, respectively, for the Company match under
the Plan.
Comprehensive Income.
The Company adopted Statement of Financial Accounting Standards ("FAS")
130, "Reporting Comprehensive Income" at December 31, 1998. Under FAS 130, the
Company is required to display comprehensive income and its components as part
of the Company's full set of financial statements. The measurement and
presentation of net income did not change. Comprehensive income is comprised of
net income and other comprehensive income. Other comprehensive income includes
certain changes in equity of the Company that are excluded from net income.
Specifically, FAS 130 requires unrealized gains or losses from the translation
of the Company's foreign subsidiaries' financial statements, which are reported
separately in Stockholders' Equity, to be included in other comprehensive
income.
Reclassifications
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform with the 1998 presentation.
Note 2. Balance Sheet Amounts
December 31,
------------------
1998 1997
------ ------
(In thousands)
Inventories:
Raw materials $1,793 $ 849
Work-in-process 602 565
Finished goods and demonstration equipment 1,660 2,051
------ ------
$4,055 $3,465
====== ======
Equipment and leasehold improvements:
Machinery and equipment $6,124 $4,815
Furniture and fixtures 708 701
Leasehold improvements 566 509
------ ------
7,398 6,025
Less accumulated depreciation and amortization 5,283 4,528
------ ------
Net equipment and leasehold improvements $2,115 $1,497
====== ======
Other accrued liabilities:
Accrued income tax $ 867 $ 213
Sales tax payable 308 352
License fees payable 500 --
Other 1,542 1,233
------ ------
$3,217 $1,798
====== ======
F-9
Note 3. Commitments
Net rental expense under operating leases related to the Company's
facilities was approximately $612,000 for each of the three years in the period
ended December 31, 1998.
Annual future minimum lease payments under operating leases as of
December 31, 1998 are as follows: 1999 - $612,000; 2000 - $595,000; 2001 -
$405,000.
Note 4. Write-off of Acquired In-Process Research & Development
On August 28, 1998, the Company acquired license rights to a
Telecentric Lens Luminometer technology from Affymax Research Institute, a
subsidiary of Glaxo Wellcome. Under the agreement, the Company received the
rights to develop, manufacture, market and distribute commercial systems based
on this technology in exchange for payment of up-front consideration and
continuing royalties to Affymax based on future product sales.
The $876,000 write-off of acquired in-process research and development
during the year represents the entire amount of up-front consideration that has
been, or will be, paid to Affymax as well as all related transaction costs
associated with this technology license agreement. Based on the stage of
development of this technology and the assessment of the time and resources
needed to complete product development, the Company believed that the acquired
technology had not yet reached economic or technological feasibility at the time
of the agreement.
On June 7, 1996, the Company acquired all of the outstanding stock of
NovelTech Systems, Inc. ("NovelTech") for a cash payment at closing of
$1,500,000, issuance of two promissory notes valued at $750,000 each and
issuance of 146,342 shares of the Company's common stock valued at $1,482,444 as
of the closing date. The notes were repaid in full on January 2, 1997. The
acquisition was accounted for as a purchase and the purchase price allocation
resulted in a $4,636,780 charge to acquired in-process technology and
acquisition related costs in the second quarter of 1996. This charge is not
deductible for federal or state tax purposes. The acquired in-process technology
represents the appraised value of technology in the development stage that had
not yet reached technological feasibility and does not have alternative future
uses. In reaching this determination, the Company considered, among other
factors, the stage of development of each product, the time and resources needed
to complete each product, and expected income and associated risks.
Note 5. Stockholders' Equity
Stock Options
Under the Company's 1995 Stock Option Plan ("1995 Plan"), a total of
750,000 shares of the Company's common stock have been reserved for issuance as
either incentive or nonqualified stock options to officers, directors, employees
and consultants of the Company. Option grants expire in ten years and generally
become exercisable in increments over a period of five years from the date of
grant. Options may be granted with different vesting terms from time to time.
Under the Company's 1988 Stock Option Plan ("1988 Plan"), the Company
was authorized to grant stock options for up to 1,000,000 shares with terms
similar to those of the 1995 Plan. The 1988 Plan was terminated subsequent to
the establishment of the 1995 Plan. Options that are not exercised which were
outstanding under the 1988 Plan are reserved for future issuance under the 1995
Plan.
In September 1995, the Company established the 1995 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). Under the Directors' Plan,
the Company is authorized to grant nonqualified stock options to purchase up to
247,500 shares of common stock at the fair market value of the common shares at
the date of grant. Options granted under the Directors' Plan vest and become
exercisable in three equal annual installments commencing one year from the date
of the grant.
As permitted by Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation," the Company applies APB
Opinion 25 and related Interpretations in accounting for its stock option plans
and, accordingly, recognizes no compensation expense for stock option grants
with an exercise price equal to the fair market value of the shares at the date
of grant. If the Company had elected to recognize compensation cost based on the
fair value of the
F-10
options granted at grant date as prescribed by SFAS 123, net income and earnings
per share would have been reduced to the pro forma amounts indicated in the
table below (in thousands, except per share amounts):
1998 1997 1996
------- ------- -------
Net income as reported $ 6,781 $ 5,302 $ 2,252
Pro forma $ 5,939 $ 4,887 $ 1,901
Basic net income per share as reported $ 0.72 $ 0.58 $ 0.26
Pro forma $ 0.66 $ 0.53 $ 0.22
Diluted net income per share as reported $ 0.70 $ 0.55 $ 0.24
Pro forma $ 0.64 $ 0.51 $ 0.20
The pro forma net income and net income per share disclosed above is
not likely to be representative of the effects on net income and net income per
share on a pro forma basis in future years, due to subsequent years including
additional grants and years of vesting.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 0%
Expected stock price volatility 50.68-61.7%
Risk-free interest rate 5.38%- 7.56%
Expected life of options 3-5 years
Stock activity under the 1988 and 1995 Stock Option Plans and the
Directors' Plan was as follows:
Shares Weighted
Available for Options Average
Future Grant Outstanding Exercise Price
------------ ----------- --------------
Balance December 31, 1995 891,412 1,011,339 3.39
Granted (74,000) 74,000 10.62
Exercised -- (112,864) 2.41
Cancelled 40,647 (40,647) 3.66
---------- ---------- -----
Balance December 31, 1996 858,059 931,828 4.14
Granted (323,250) 323,250 14.68
Exercised -- (295,554) 2.94
Cancelled 165,790 (165,790) 7.55
---------- ---------- -----
Balance December 31, 1997 700,599 793,734 8.08
Granted (562,700) 562,700 17.16
Exercised -- (111,666) 4.67
Cancelled 127,611 (127,611) 10.63
---------- ---------- -----
Balance December 31, 1998 265,510 1,117,157 12.68
========== ========== =====
F-11
Note 5. Stockholders' Equity (Continued)
The following table summarizes information concerning currently
outstanding and exercisable options at December 31, 1998:
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Remaining Average Number Average
Range of Number Contractual Exercise Exercisable Exercise
Exercise Price Outstanding Life Price at 12/31/98 Price
- -------------------- -------------- -------------- -------------- -------------- -------------
$1.73 57,420 2.8 $ 1.73 57,420 $ 1.73
$3.00 89,106 5.7 $ 3.00 74,569 $ 3.00
$5.25 188,081 6.7 $ 5.25 155,875 $ 5.25
$8.00 - 12.00 31,850 7.6 $ 8.13 11,737 $ 8.19
$13.38 - 19.50 750,700 9.3 $ 16.73 38,050 $ 15.54
- -------------------- ------------- -------------- -------------- -------------- -------------
$1.73 - $19.50 1,117,157 8.2 $ 12.68 337,651 $ 5.42
==================== ============== ============== ============== ============== =============
Deferred Compensation
For options granted in September 1995, the Company recognized $578,000
as deferred compensation for the excess of the deemed value for accounting
purposes of the common stock issuable on exercise of such options over the
aggregate exercise price of such options. The deferred compensation expense is
being amortized ratably over the vesting period of the options. Additionally,
$131,000 of unvested deferred compensation was reversed in 1997 due to employee
termination.
During 1998 the Company granted 42,500 shares of restricted stock to
certain employees. These restricted shares vest in quarterly increments from the
date of grant over two years. The Company recognized $782,000 of deferred
compensation for the total value of these shares on their respective dates of
grant. The deferred compensation expense is being recognized ratably over the
two-year vesting period.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (the "Purchase Plan") 200,000
shares of common stock have been authorized for issuance. Shares may be
purchased under the Purchase Plan at 85% of the lesser of the fair market value
of the common stock on the grant or purchase date. As of December 31, 1998,
113,784 shares remained available for purchase.
F-12
Note 6. Income Taxes
The components of the provisions (benefits) for income taxes consist of
the following:
Years ended December 31,
-----------------------------------------
1998 1997 1996
------- ------- -------
(In thousands)
Current:
Federal $ 2,671 $ 1,227 $ 524
State 756 350 340
Foreign 581 248 65
------- ------- -------
$ 4,008 $ 1,825 $ 929
Deferred:
Federal $ 401 $ 969 $(1,645)
State (164) 380 (410)
Foreign -- -- --
------- ------- -------
$ 237 $ 1,349 $(2,055)
------- ------- -------
$ 4,245 $ 3,174 $(1,126)
======= ======= =======
The provisions (benefits) for income taxes differ from the amounts
computed by applying the statutory federal income tax rate to income before
income taxes. The source and tax effects of the differences are as follows:
Years ended December 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
Income before provisions (benefits) for income taxes $ 11,026 $ 8,476 $ 1,126
Income tax at statutory federal rate (35%) $ 3,859 2,967 $ 394
State income tax, net of federal benefit 391 360 (46)
Net operating loss carry forwards -- -- (1,748)
Foreign income taxes -- -- 65
Foreign losses not currently benefitted 90 152 44
Change in valuation allowance -- -- (1,333)
Foreign sales corp (173) (168) (136)
Charge for acquired in-process research and development -- -- 1,623
Other 78 (137) 11
-------- -------- --------
$ 4,245 $ 3,174 $ (1,126)
======== ======== ========
Foreign pretax income was $1,470,000, $360,000 and $72,000 in 1998,
1997 and 1996, respectively.
F-13
Note 6. Income Taxes (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting and the amount used for income tax purposes.
Year ended December 31,
--------------------
1998 1997
------- -------
(In thousands)
Deferred tax assets:
Research and development credit carryforwards $ -- $ 660
Non-deductible reserves 657 356
Warranty and accrued expenses 589 568
Net undistributed profits of foreign subsidiaries 141 182
Foreign loss carryforwards 530 440
Other 243 101
Valuation allowance (530) (440)
------- -------
Total deferred tax assets $ 1,630 $ 1,867
======= =======
The net valuation allowance decreased by $3,600,000 for the year ended
December 31, 1996.
As of December 31, 1998, the Company has fully utilized federal
research and development tax credit carryforwards.
Note 7. Industry Segment, Geographic and Customer Information
The Company operates in a single industry segment; the design,
development, manufacture, sale and service of bioanalytical measurement systems
for life sciences applications.
Foreign operations of European subsidiaries consist of sales, service
and distribution. Intercompany transfers between geographic areas are accounted
for at prices that approximate arm's-length transactions. Summarized data for
the Company's domestic and international operations are as follows:
United Adjustments and
States Europe Eliminations Totals
------- ------- --------------- -------
(In thousands)
Year Ended
December 31, 1998
Revenues 43,564 10,540 (6,306) 47,798
Income from operations 7,965 1,429 48 9,442
Identifiable assets 53,187 5,567 (4,349) 54,405
Year Ended
December 31, 1997
Revenues 35,640 6,752 (4,106) 38,286
Income from operations 7,047 374 (165) 7,256
Identifiable assets 42,939 4,318 (4,466) 42,791
Year Ended
December 31, 1996
Revenues 29,102 4,494 (2,670) 30,926
Income from operations (38) 56 29 47
Identifiable assets 37,291 2,359 (2,817) 36,833
F-14
Note 7. Industry Segment, Geographic and Customer Information (Continued)
Consolidated revenue from the Company's product lines was as follows:
Years ended December 31,
---------------------------------------
1998 1997 1996
------- ------- -------
Maxline $25,028 $21,108 $16,571
Cell Analysis 16,498 12,790 9,572
Threshold 6,272 4,388 4,783
------- ------- -------
Total Revenue $47,798 $38,286 $30,926
======= ======= =======
Sources of consolidated revenue from significant geographic regions
were as follows:
Years ended December 31,
---------------------------------------
1998 1997 1996
------- ------- -------
North America $29,363 $24,671 $18,942
Europe 13,821 9,206 7,888
Rest of World 4,614 4,409 4,096
------- ------- -------
Total Revenue $47,798 $38,286 $30,926
======= ======= =======
Note 8. Comparative Quarterly Financial Data (unaudited)
Summarized quarterly financial data is as follows:
First Second Third Fourth
------- ------- ------- -------
(In thousands, except per share amounts)
Fiscal 1998
Revenues $10,346 $11,867 $11,901 $13,684
Gross margin 6,633 7,357 7,477 8,615
Net income 1,414 1,898 1,355 2,114
Basic net income per share 0.15 0.20 0.14 0.22
Diluted net income per share $ 0.15 $ 0.20 $ 0.14 $ 0.22
Fiscal 1997
Revenues $ 8,306 $ 9,818 $ 9,527 $10,635
Gross margin 5,115 5,943 6,046 6,756
Net income 1,027 1,315 1,370 1,590
Basic net income per share 0.11 0.14 0.15 0.17
Diluted net income per share $ 0.11 $ 0.14 $ 0.14 $ 0.16
F-15
SCHEDULE II
MOLECULAR DEVICES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Balance at
Beginning of Charged to End
Description Period Costs Deductions of Period
----------- ------ ----- ---------- ---------
Balance for the year ended December 31, 1996:
Allowance for doubtful accounts receivable 168 35 (7) 196
Balance for the year ended December 31, 1997:
Allowance for doubtful accounts receivable 196 -- (16) 180
Balance for the year ended December 31, 1998:
Allowance for doubtful accounts receivable 180 155 (10) 325
F-16