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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q [X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [  ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from       to Commission File Number: 0-27316 Molecular Devices Corporation  Delaware
    
    94-2914362(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)
 1311 Orleans Drive   (408) 747-1700  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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ] As of August 5, 2004, 14,288,374 shares of the Registrants Common Stock, $.001
par value, were outstanding. 1




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MOLECULAR DEVICES CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004 INDEX PAGENUMBERPART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2004 and December 31, 2003
    
    
    3CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three and Six Months Ended June 30, 2004 and 2003
    
    
    4CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2004 and 2003
    
    
    5NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    
    
    6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    12ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
    
    
    27ITEM 4. CONTROLS AND PROCEDURES
    
    
    28PART II. OTHER INFORMATIONITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    29ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    30SIGNATURE
    
    
    31EXHIBIT 10.25EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS
 MOLECULAR DEVICES CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share amounts, unaudited)
 June 30,
    
    December 31,2004
    
    2003ASSETS:Current assets:Cash and cash equivalents
    
    $
    54,166
    
    
    $
    50,260Short-term investments
    
    
    
    
    
    
    8,114Accounts receivable, net
    
    
    22,085
    
    
    
    26,209Inventories, net
    
    
    15,623
    
    
    
    17,025Deferred tax assets
    
    
    5,214
    
    
    
    5,223Other current assets
    
    
    1,825
    
    
    
    1,849Total current assets
    
    
    98,913
    
    
    
    108,680Long-term investments
    
    
    
    
    
    
    1,736Equipment and leasehold improvements, net
    
    
    9,609
    
    
    
    9,706Goodwill
    
    
    26,013
    
    
    
    26,017Other assets
    
    
    23,343
    
    
    
    20,774Total assets
    
    $
    157,878
    
    
    $
    166,913LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,297
    
    
    $
    4,019Accrued liabilities
    
    
    10,424
    
    
    
    12,237Deferred revenue
    
    
    5,044
    
    
    
    5,119Total current liabilities
    
    
    19,765
    
    
    
    21,375Stockholders equity:Preferred stock, $.001 par value; 3,000,000 shares
authorized, no shares issued or outstanding at
June 30, 2004 and December 31, 2003
    
    
    
    
    
    
    Common stock, $.001 par value; 60,000,000 shares
authorized; 15,758,166 and 15,653,283 shares
issued and 14,253,720 and 14,778,837 shares
outstanding at June 30, 2004 and December 31,
2003, respectively
    
    
    16
    
    
    
    16Additional paid-in capital
    
    
    186,270
    
    
    
    184,956Treasury stock, at cost; 1,504,446 and 874,446 shares
at June 30, 2004 and December 31, 2003, respectively
    
    
    (26,994
    )
    
    
    (14,968
    )Accumulated deficit
    
    
    (22,172
    )
    
    
    (26,106
    )Accumulated other comprehensive loss
    
    
    993
    
    
    
    1,640Total stockholders equity
    
    
    138,113
    
    
    
    145,538Total liabilities and stockholders equity
    
    $
    157,878
    
    
    $
    166,913
 The accompanying notes are an integral part of these statements 3




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MOLECULAR DEVICES CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (in thousands, except per share amounts, unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003REVENUES
    
    $
    32,205
    
    
    $
    28,505
    
    
    $
    59,542
    
    
    $
    53,054COST OF REVENUES
    
    
    12,075
    
    
    
    10,584
    
    
    
    22,318
    
    
    
    20,112GROSS PROFIT
    
    
    20,130
    
    
    
    17,921
    
    
    
    37,224
    
    
    
    32,942OPERATING EXPENSES:Research and development
    
    
    4,709
    
    
    
    4,819
    
    
    
    8,726
    
    
    
    9,478Selling, general and administrative
    
    
    11,616
    
    
    
    10,817
    
    
    
    22,536
    
    
    
    20,455Total operating expenses
    
    
    16,325
    
    
    
    15,636
    
    
    
    31,262
    
    
    
    29,933INCOME FROM OPERATIONS
    
    
    3,805
    
    
    
    2,285
    
    
    
    5,962
    
    
    
    3,009Other income, net
    
    
    49
    
    
    
    260
    
    
    
    85
    
    
    
    566INCOME BEFORE INCOME TAXES
    
    
    3,854
    
    
    
    2,545
    
    
    
    6,047
    
    
    
    3,575Income tax provision
    
    
    (1,349
    )
    
    
    (764
    )
    
    
    (2,113
    )
    
    
    (1,073
    )NET INCOME
    
    $
    2,505
    
    
    $
    1,781
    
    
    $
    3,934
    
    
    $
    2,502BASIC NET INCOME PER SHARE
    
    $
    0.18
    
    
    $
    0.12
    
    
    $
    0.27
    
    
    $
    0.16DILUTED NET INCOME PER SHARE
    
    $
    0.17
    
    
    $
    0.12
    
    
    $
    0.27
    
    
    $
    0.16SHARES USED IN COMPUTING BASIC NET INCOME PER SHARE
    
    
    14,246
    
    
    
    15,153
    
    
    
    14,414
    
    
    
    15,247SHARES USED IN COMPUTING DILUTED NET INCOME PER
SHARE
    
    
    14,394
    
    
    
    15,218
    
    
    
    14,588
    
    
    
    15,314
 The accompanying notes are an integral part of these statements 4




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MOLECULAR DEVICES
CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 Six Months EndedJune 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    3,934
    
    
    $
    2,502Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    2,616
    
    
    
    2,394Amortization of developed technology and patents
    
    
    272
    
    
    
    143Equity investment exchanged for services
    
    
    261
    
    
    
    Income tax benefit realized as a result of employee
exercises of stock options
    
    
    
    
    
    
    1,886(Increase) decrease in assets:Accounts receivable, net
    
    
    4,073
    
    
    
    4,611Inventories
    
    
    702
    
    
    
    338Deferred tax assets
    
    
    2
    
    
    
    989Other current assets
    
    
    23
    
    
    
    (178
    )Increase (decrease) in liabilities:Accounts payable
    
    
    271
    
    
    
    95Accrued liabilities
    
    
    (1,844
    )
    
    
    (4,073
    )Deferred revenue
    
    
    (78
    )
    
    
    111Net cash provided by operating activities
    
    
    10,232
    
    
    
    8,818CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of short-term investments
    
    
    
    
    
    
    (12,018
    )Proceeds from sales and maturities of short-term investments
    
    
    9,850
    
    
    
    8,139Capital expenditures
    
    
    (1,859
    )
    
    
    (1,083
    )Increase (decrease) in other assets
    
    
    (3,103
    )
    
    
    538Net cash provided by (used in) investing activities
    
    
    4,888
    
    
    
    (4,424
    )CASH FLOWS FROM FINANCING ACTIVITIES:Issuance of common stock, net
    
    
    1,314
    
    
    
    618Purchase of treasury stock
    
    
    (12,026
    )
    
    
    (6,571
    )Net cash used in financing activities
    
    
    (10,712
    )
    
    
    (5,953
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (502
    )
    
    
    79Net increase (decrease) in cash and cash equivalents
    
    
    3,906
    
    
    
    (1,480
    )Cash and cash equivalents at beginning of period
    
    
    50,260
    
    
    
    43,733Cash and cash equivalents at end of period
    
    $
    54,166
    
    
    $
    42,253
 The accompanying notes are an integral part of these statements 5




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MOLECULAR DEVICES CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Note 1. Description of Business and Basis of Presentation Molecular Devices Corporation (Molecular Devices, we, or our), a Delaware
corporation, is principally involved in the design, development, manufacture,
sale and service of bioanalytical measurement systems for life sciences and
drug discovery applications. The principal markets for our products include
leading pharmaceutical and biotechnology companies as well as medical centers,
universities, government research laboratories and other institutions
throughout the world. We operate in a single industry segment: the design, development, sale and
service of bioanalytical measurement systems for drug discovery and life
sciences research applications. The unaudited condensed consolidated financial statements included herein have
been prepared in accordance with the published rules and regulations of the
Securities and Exchange Commission (SEC) applicable to interim financial
information. Certain information and footnote disclosures included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted in these interim statements as allowed by such SEC
rules and regulations. However, we believe that the disclosures are adequate to
make the information presented not misleading. The unaudited condensed
consolidated financial statements included in this Form 10-Q should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the fiscal year ended December 31, 2003, included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the
SEC on March 10, 2004. The unaudited condensed consolidated financial statements include the accounts
of Molecular Devices and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. The unaudited condensed
consolidated financial statements contained herein reflect all adjustments
(which include only normal, recurring adjustments), which are, in the opinion
of management, necessary to state fairly the results for the periods presented.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. The results for the six-month period ended June 30, 2004 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 2004. Note 2. Stock Based Compensation As permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, as amended, we apply the intrinsic
value method of accounting as described in APB Opinion 25 and related
interpretations in accounting for our stock option plans and, accordingly,
recognize 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 we
had elected to recognize compensation cost based on the fair value of the
options granted on their grant date and shares issued under stock purchase
plans as prescribed by SFAS 123, net income and net income per share would have
been changed to the pro forma amounts indicated in the table below (in
thousands, except per share amounts): 6




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income  as reported
    
    $
    2,505
    
    
    $
    1,781
    
    
    $
    3,934
    
    
    $
    2,502Stock based compensation expense determined
using the fair value method, net of tax
    
    
    1,489
    
    
    
    1,831
    
    
    
    3,050
    
    
    
    3,962Net income/(loss)  pro forma
    
    $
    1,070
    
    
    $
    (50
    )
    
    $
    884
    
    
    $
    (1,460
    )Net income/(loss) per share:Basic  as reported
    
    $
    0.18
    
    
    $
    0.12
    
    
    $
    0.27
    
    
    $
    0.16Basic  pro forma
    
    $
    0.07
    
    
    $
    
    
    
    $
    0.06
    
    
    $
    (0.10
    )Diluted   as reported
    
    $
    0.17
    
    
    $
    0.12
    
    
    $
    0.27
    
    
    $
    0.16Diluted   pro forma
    
    $
    0.07
    
    
    $
    
    
    
    $
    0.06
    
    
    $
    (0.10
    )
 The fair value of each option is estimated on the date of grant using Black
Scholes option-pricing model with the following assumptions: Three and Six Months EndedJune 30,2004
    
    2003Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    78
    %
    
    
    82
    %Risk-free interest rate
    
    
    3.0-4.5
    %
    
    
    3
    %Expected life of options
    
    6.7 - 7.5 years
    
    6.2 years
 Note 3. Balance Sheet Components (in thousands) June 30,
    
    December 31,2004
    
    2003Inventories:Raw materials
    
    $
    6,128
    
    
    $
    6,213Work-in-process
    
    
    762
    
    
    
    600Finished goods and demonstration equipment
    
    
    8,733
    
    
    
    10,212$
    15,623
    
    
    $
    17,025Accrued liabilities:Accrued income taxes
    
    $
    1,532
    
    
    $
    939Warranty accrual
    
    
    1,582
    
    
    
    1,502Accrued compensation
    
    
    4,318
    
    
    
    6,295Other
    
    
    2,992
    
    
    
    3,501$
    10,424
    
    
    $
    12,237
 Note 4. Goodwill and Purchased Intangible Assets Goodwill was $26.0 million at June 30, 2004 and December 31, 2003. Purchased intangible assets not subject to amortization, consisting of
distribution rights valued at $1.4 million and a trade name valued at $707,000
were $2.1 million at June 30, 2004 and $707,000 at December 31, 2003. 7




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Purchased intangible assets subject to amortization over ten years consist of
patents, developed technology, and license fees. The gross and net carrying
value of these assets at June 30, 2004 and December 31, 2003 were included in
Other assets in the condensed consolidated balance sheet and were as follows
(in thousands): Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    CarryingValue
    
    Amortization
    
    ValuePatents
    
    $
    1,372
    
    
    $
    404
    
    
    $
    968Developed technology
    
    
    1,468
    
    
    
    293
    
    
    
    1,175License fees
    
    
    2,688
    
    
    
    383
    
    
    
    2,305Total at June 30, 2004
    
    $
    5,528
    
    
    $
    1,080
    
    
    $
    4,448Patents
    
    $
    1,372
    
    
    $
    335
    
    
    $
    1,037Developed technology
    
    
    1,468
    
    
    
    220
    
    
    
    1,248License fees
    
    
    2,588
    
    
    
    253
    
    
    
    2,335Total at December 31, 2003
    
    $
    5,428
    
    
    $
    808
    
    
    $
    4,620
 The estimated future amortization expense of purchased intangible assets as of
June 30, 2004 was as follows (in thousands): AmortizationFor the year ending December 31,
    
    Expense2004 (remaining six months)
    
    $
    2802005
    
    
    5522006
    
    
    5522007
    
    
    5522008
    
    
    552Thereafter
    
    
    1,960$
    4,448
 8




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Note 5. Net Income Per Share Basic net income per share is computed using the weighted average number of
shares of common stock outstanding and diluted net income per share is computed
using the weighted average number of shares of common stock outstanding and
common equivalent shares from outstanding stock options (using the treasury
stock method), when dilutive. Computation of earnings per share is as follows
(in thousands, except per share amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    2,505
    
    
    $
    1,781
    
    
    $
    3,934
    
    
    $
    2,502Denominator for basic earnings per share  weighted
average common shares outstanding
    
    
    14,246
    
    
    
    15,153
    
    
    
    14,414
    
    
    
    15,247Effect of dilutive securities  employee stock options
    
    
    148
    
    
    
    65
    
    
    
    174
    
    
    
    67Denominator for diluted earnings per share  weighted
average common shares outstanding plus dilutive
securities
    
    
    14,394
    
    
    
    15,218
    
    
    
    14,588
    
    
    
    15,314Basic net income per share
    
    $
    0.18
    
    
    $
    0.12
    
    
    $
    0.27
    
    
    $
    0.16Diluted net income per share
    
    $
    0.17
    
    
    $
    0.12
    
    
    $
    0.27
    
    
    $
    0.16
 For the three-month periods ended June 30, 2004 and June 30, 2003, the total
number of shares excluded from the calculations of diluted net income per share
was 2,295,232 and 2,619,955, respectively, as the weighted-average exercise
price of these outstanding stock options was greater than the average market
price of the common shares and, therefore, their effect would have been
anti-dilutive. For the six-month periods ended June 30, 2004 and June 30,
2003, the total number of shares excluded from the calculations of diluted net
income per share was 2,113,285 and 2,512,488, respectively, as their effect
would have been anti-dilutive. Note 6. Comprehensive Income Comprehensive income, net of tax, was approximately $2.0 million and $2.1
million for the three-month periods ended June 30, 2004 and 2003, respectively.
Comprehensive income, net of tax, was approximately $3.5 million and $2.8
million for the six-month periods ended June 30, 2004 and 2003, respectively.
The differences between reported net income and comprehensive income are
principally comprised of changes in accumulated foreign currency translation,
which is recorded in stockholders equity. Note 7. Guarantees Under our charter, we have agreed to indemnify any person who is made a party
to any action or threatened with any action as a result of such persons
serving or having served as an officer or director of Molecular Devices or
having served, at our request, as an officer or director of another company.
The indemnification does not apply if the person is determined not to have
acted in good faith in the reasonable belief that his or her actions were in
the best interests of Molecular Devices. The maximum potential amount of
future payments that we could be required to make under the charter provision
and the corresponding indemnification agreements is unlimited; however, we have
Director and Officer insurance policies that, in most cases, would limit our
exposure and enable us to recover a portion of any future amounts paid. The
estimated fair value of these indemnification provisions is minimal. Most of
these indemnification 9




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provisions were grandfathered under the provisions of FASB Interpretation No.
45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, as they were in
effect prior to December 31, 2003. Accordingly, we have no liabilities
recorded for these provisions as of June 30, 2004. We enter into indemnification provisions under our agreements with other
companies in the ordinary course of business, typically with business partners,
contractors, clinical sites and customers. Under these provisions we generally
indemnify and hold harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of our activities. These
indemnification provisions generally survive termination of the underlying
agreement. The maximum potential amount of future payments we could be
required to make under these indemnification provisions is unlimited. We have
not incurred material costs to defend lawsuits or settle claims related to
these indemnification agreements. As a result, the estimated fair value of
these agreements is minimal. Accordingly, we have no liabilities recorded for
these agreements as of June 30, 2004. At the time of sale, we record an estimate for warranty costs that may be
incurred under product warranties. Our standard warranty generally includes
parts and labor for a twelve month period. Warranty expense and activity are
estimated based on historical experience. The warranty accrual is evaluated
periodically and adjusted for changes in experience. Changes in the warranty
liability during the six months ended June 30, 2004 were as follows (in
thousands): December 31, 2003
    
    $
    1,502New warranties issued during the period
    
    
    773Cost of warranties incurred during the period
    
    
    (693
    )Changes in liabilities for pre existing warranties
    
    
    June 30, 2004
    
    $
    1,582
 Note 8. Business Combination We entered into an Agreement and Plan of Merger and Reorganization, dated as of
March 20, 2004, as amended as of May 21, 2004 with Axon Instruments, Inc.
(Axon) and two of our wholly owned subsidiaries, Astros Acquisition Sub I,
Inc., and Astros Acquisition Sub II, LLC, pursuant to which Astros Acquisition
Sub I, Inc. was merged with and into Axon, immediately following which, Axon
was merged with and into Astros Acquisition Sub II, LLC (the Merger
Agreement). On July 1, 2004, after approval from Molecular Devices and Axon
shareholders, the acquisition closed. Axon designs, manufactures and markets electronic instrumentation equipment and
software for cellular neurosciences and biophysical research. This acquisition
expands our product portfolio with systems for cellular neurosciences and
genomics and combines complementary product lines in high throughput imaging
and electrophysiology. We acquired Axon for approximately $66.2 million in cash and approximately
$67.0 million in Molecular Devices common stock. Each share of Axon common
stock outstanding at the effective time of the merger converted into the right
to receive $0.1359 in cash and 0.00734 of a share of Molecular Devices common
stock, and outstanding options to purchase Axon common stock were assumed by us
and converted into the right to receive either cash and Molecular Devices
common stock or Molecular Devices common stock. We estimate that we will incur
$3.2 million for transaction costs directly related to the acquisition, which
will be part of the total purchase price allocated to purchased assets. The
merger transaction will be accounted for under the purchase method of
accounting. We expect to incur a charge in the three months ended September
30, 2004 of approximately $4.7 million to write-off acquired in-process
research and development, as well as $600,000 for restructuring costs. 10




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Note 9. Revolving Credit Facility In March 2004, as part of the acquisition of Axon described in Note 8 above, we
received a commitment letter from a major financial institution to provide
financing of $35.0 million in connection with the Axon transaction and for
general corporate purposes. Simultaneously with the closing of the transaction
on July 1, 2004, we entered into a new senior unsecured credit facility, which
provides for a revolving credit facility in the amount of up to $35.0 million,
reducing to $30.0 million 60 days after initial drawdown. The revolving credit
facility is guaranteed by our domestic subsidiaries. All loans outstanding
under senior unsecured credit facility will bear interest at a rate per annum
equal to, at our option, either the base rate plus .50% or LIBOR plus 1.25%.
As of August 6, 2004, $15.0 million was outstanding on the credit facility. 11




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ITEM 2. 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. For this purpose, any
statements that are not statements of historical fact may be deemed to be
forward-looking statements. Words such as believes, anticipates, plans,
predicts, expects, estimates, intends, will, continue, may,
potential, should and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause our results to differ materially from those indicated by these
forward-looking statements, including, among others, those discussed in this
section as well as under Factors That May Affect Future Results, and Item 3
 Quantitative and Qualitative Disclosures about Market Risk and the risks
detailed from time to time in the Companys future SEC reports. We are a leading supplier of high-performance bioanalytical measurement systems
which accelerate and improve drug discovery and other life sciences research.
Our systems and consumables enable pharmaceutical and biotechnology companies
to leverage advances in genomics, proteomics and combinatorial chemistry by
facilitating the high-throughput and cost-effective identification and
evaluation of drug candidates. Our solutions are based on advanced core
technologies that integrate our expertise in engineering, molecular and cell
biology, and chemistry. We enable our customers to improve research
productivity and effectiveness, which ultimately accelerates the complex
process of discovering and developing new drugs. Our customers include small and large pharmaceutical, biotechnology and
industrial companies as well as medical centers, universities, government
research laboratories and other institutions throughout the world. The success
of our business is impacted by research and development spending trends of
these customers, which has been unpredictable over the last three years and
remains unpredictable in the near term. We focus on generating revenue growth
through the development of innovative products for these customers. In each of
the last three years, our internal research and development efforts have
enabled us to exceed our goal of generating over 50% of annual revenues from
products that are introduced in the last three years. We divide our revenues into two product families based primarily on the
customers to which they are sold into. The Drug Discovery product family
includes systems that integrate detection, liquid handling and automation, have
price points in excess of $100,000, and are primarily sold to large
pharmaceutical and biotechnology companies. Product lines included in the Drug
Discovery family are IonWorks, FLIPR, Analyst and Discovery-1 systems. The Life
Sciences product family, which includes bench-top detection and liquid handling
products, consists of Maxline, MetaMorph, Skatron and Threshold product lines.
These single-purpose instruments generally cost less than $50,000 and are sold
throughout our entire customer base. We recognize revenue on the sale of these
products, when collectibility is reasonably assured, at the time of shipment
and transfer of title to customers and distributors. There are no significant
customer acceptance requirements or post shipment obligations on our part. We entered into an Agreement and Plan of Merger and Reorganization, dated as of
March 20, 2004, as amended as of May 21, 2004 with Axon Instruments, Inc.
(Axon) and two of our wholly owned subsidiaries, Astros Acquisition Sub I,
Inc., and Astros Acquisition Sub II, LLC, pursuant to which Astros Acquisition
Sub I, Inc. was merged with and into Axon, immediately following which, Axon
was merged with and into Astros Acquisition Sub II, LLC (the Merger
Agreement). On July 1, 2004, after approval from Molecular Devices and Axon
shareholders, the acquisition closed. Axon designs, manufactures and markets electronic instrumentation equipment and
software for cellular neurosciences and biophysical research. This acquisition
expands our product portfolio with systems for cellular neurosciences and
genomics and combines complementary product lines in high throughput imaging
and electrophysiology. 12




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CRITICAL ACCOUNTING ESTIMATES Managements discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates, including those related to revenue
recognition, bad debts, inventories, intangible assets, equity investments,
income taxes and warranty obligations. Management bases its estimates on
historical experience and on various assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. RESULTS OF OPERATIONS  THREE AND SIX MONTHS ENDED JUNE 30, 2004 and 2003 REVENUES. Revenues increased by 13% to $32.2 million in the second quarter of
2004 from $28.5 million in second quarter of 2003. Drug Discovery product
family revenues in the second quarter of 2004 increased by 12% compared to the
second quarter of 2003, and represented 48% of total revenues during the
quarter. The growth in Drug Discovery was primarily driven by our FLIPR and
Discovery-1 product lines. Life Sciences Research revenues increased by 14%
compared to the second quarter of 2003, and represented 52% of total revenues
during the quarter. The growth in Life Sciences Research was primarilydriven
by strong sales of our SpectraMax M2, which was launched in the third quarter
of 2003, and strong growth in our MetaMorph product line. Revenues increased by 12% to $59.5 million in the first six months of 2004 from
$53.1 million in the first six months of 2003. Drug Discovery product family
revenues in the first six months of 2004 increased by 7% compared to the first
six months of 2003, and represented 44% of total revenues during the period.
The growth in Drug Discovery was primarily driven by our FLIPR, IonWorks and
Discovery-1 product lines, partially offset by sales declines in the Analyst
family of products. Life Sciences Research revenues increased by 17% compared
to the first six months of 2003, and represented 56% of total revenues during
the period. The growth in Life Sciences Research was primarily driven by
strong sales of our SpectraMax M2 and strong growth in our MetaMorph product
line. GROSS MARGIN. Gross margin remained largely unchanged at 62.5% in the second
quarter of 2004 compared to 62.9% in the same period of the prior year. Gross margin increased to 62.5% for the first six months of 2004 from 62.1% for
the first six months of 2003. This slight increase was driven by strong sales
of our SpectraMax M2 and strong growth in our MetaMorph product line. RESEARCH AND DEVELOPMENT. Research and development expenses decreased in the
second quarter of 2004 by 2% to $4.7 million from $4.8 million in the second
quarter of 2003. Research and development expenses for the first six months of
2004 decreased by 8% to $8.7 million from $9.5 million for the same period of
2003. These decreases resulted from the settlement of a patent infringement
lawsuit late in 2003 and the closure of Cytion, our Switzerland based research
organization, in the first quarter of 2003. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses in the second quarter of 2004 increased by 7% to $11.6 million, from
$10.8 million in the second quarter of 2003. Selling, general and
administrative expenses for the first six months of 2004 increased by 10% to
$22.5 million, from $20.5 million in the same period of 2003. These increases
were due to the expansion of our sales and support staff within our
international operations, as well as increased selling costs associated with
higher revenues. OTHER INCOME (NET). Other income (net) was $49,000 in the second quarter of
2004, compared to $260,000 in the second quarter of 2003. Other income (net)
was $85,000 in the first six months of 2004, compared to $566,000 in the same
period of 2003. These decreases were largely due to foreign currency 13




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losses in our European businesses and lower average cash and investment
balances during the first quarter and six months of 2004. INCOME TAX PROVISION. We recorded a tax provision of $1.3 million for the
second quarter of 2004 compared to $764,000 in the second quarter of 2003. The
income tax provision for the first six months of 2004 was $2.1 million as
compared to $1.1 million in the first six months of 2003. The income tax
provision for the second quarter and first six months of 2004 was based on an
estimated effective income tax rate of 35%, up from 30% in the second quarter
and first six months of 2003. This increase in our estimated effective income
tax rate was due to the full utilization in 2003 of the net loss carryforward
amounts relating to certain of our foreign operations. Liquidity and Capital Resources We had cash, cash equivalents and short and long-term investments of
approximately $54.2 million at June 30, 2004 compared to $60.1 million at
December 31, 2003. Operating activities in the first six months of 2004
provided approximately $10.2 million of cash primarily due to net income and
decreases in accounts receivable and inventories, partially offset by a
decrease in accrued liabilities. We generated approximately $4.9 million of cash from investing activities in
the first six months of 2004, primarily due to $9.9 million in proceeds
received from the sale and maturity of short and long-term investments, which
were offset by a $3.1 million increase in other assets related to the
acquisition of distribution rights in Belgium and capitalized costs associated
with the Axon acquisition, as well as $1.9 million in capital expenditures. In the first six months of 2004, cash used in financing activities was $10.7
million. We repurchased 630,000 shares of our common stock for $12.0 million
and raised $1.3 million from the issuance of common stock associated with stock
option exercises and shares issued under our employee stock purchase plan. The
timing of and amounts received under our employee stock option and purchase
plans are determined by the decisions of the respective option or rights
holders, and are not controlled by us. Therefore, funds raised from the
issuance of common stock under our employee stock option and purchase plans
should not be considered an indication of additional funds to be raised in
future periods. On March 20, 2004, we entered into a merger agreement, as amended as of May 21,
2004, with Axon Instruments, Inc. and two of our wholly owned subsidiaries,
pursuant to which, subject to certain closing conditions, we agreed to pay an
aggregate of approximately $66.2 million in cash to the shareholders and
optionholders of Axon and to issue approximately $67.0 million in Molecular
Devices common stock to Axon shareholders and optionholders. On July 1, 2004,
after the approval of the transaction from Molecular Devices and Axon
shareholders, the acquisition closed. As part of the merger transaction, we
received a commitment letter from a major financial institution to provide
financing of $35.0 million in connection with the transaction contemplated by
the merger agreement and for general corporate purposes. Simultaneously with
the closing of the acquisition, we entered into a new senior unsecured credit
facility, which provides for a revolving credit facility in the amount of up to
$35.0 million (reducing to $30.0 million 60 days after initial drawdown). The
revolving credit facility will expire and become repayable in full on June 1,
2007 and will be secured in the event that the revolving credit facility is not
reduced to the required $30 million level. All loans outstanding under the new
senior unsecured credit facility will bear interest at a rate per annum equal
to, at our option, either the base rate plus .50% or LIBOR plus 1.25%. The
revolving credit facility may be drawn, paid and reborrowed at our option. We
anticipate using this credit facility initially to finance the cash portion of
the merger consideration to be paid to Axon shareholders and certain
optionholders. During the six months ended June 30, 2004, we engaged several professional
service firms to perform certain accounting, legal and financial advisory
services in conjunction with the acquisition of Axon. We expect to pay the
remainder of these fees during the last six months of 2004 with our existing
cash reserves and anticipated future cash generated from operations. The fees
will be capitalized as part of the purchase price for the acquisition. 14




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We believe that our existing cash and cash equivalents, anticipated cash flows
from our operations and funds available under the unsecured credit facility
described above, will be sufficient to support our current operating plan for
the foreseeable future. Our forecast of the period of time through which our financial resources will
be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary as a result of
a number of factors. We have based this estimate on our current plans, which
may change, and assumptions that may prove to be wrong. Our ability to generate
our anticipated cash flow from operations is subject to the risks and
uncertainties discussed below under Factors That May Affect Future Results,
including in particular variations in the amount of time it takes for us to
sell our products and collect accounts receivable and the timing of customer
orders, competition, risks associated with the pharmaceutical and biotechnology
industries, supplier or manufacturing problems or delays, the cost of
integrating Axon, and risks associated with past and potential future
acquisitions, including risks related to potential difficulties in the
integration of operations, strategies, technologies and products of the
acquired company. Our future capital requirements will depend on many factors,
including:  
    
    the progress of our research and development;
    
    the number and scope of our research programs;
    
    market acceptance and demand for our products;
    
    the costs that may be involved in enforcing our patent claims and other intellectual property rights;
    
    potential acquisition and technology licensing opportunities;
    
    the costs associated with repurchasing shares of our common stock;
    
    manufacturing capacity requirements; and
    
    the costs of expanding our sales, marketing and distribution capabilities both in the United States
and abroad. We have generated sufficient cash flow to fund our capital requirements
primarily though operating and financing activities over the last three years.
However, we cannot assure you that we will not require additional financing in
the future to support our existing operations or potential acquisition and
technology licensing opportunities that may arise. Therefore, we may in the
future seek to raise additional funds through bank facilities, debt or equity
offerings or other sources of capital. Additional financing may not be
available on favorable terms or at all and may be dilutive to our then-current
stockholders. Our cash and investments policy emphasizes liquidity and preservation of
principal over other portfolio considerations. We select investments that
maximize interest income to the extent possible given these two constraints. We
satisfy liquidity requirements by investing excess cash in securities with
different maturities to match projected cash needs and limit concentration of
credit risk by diversifying our investments among a variety of high
credit-quality issuers. Factors That May Affect Future Results Our business faces significant risks and the risks described below may not be
the only risks we face. Additional risks that we do not know of or that we
currently think are immaterial may also impair our business operations. If any
of the events or circumstances described in the following risks actually
occurs, our business, financial condition or results of operations could be
harmed and the trading price of our common stock could decline. VARIATIONS IN THE AMOUNT OF TIME IT TAKES FOR US TO SELL OUR PRODUCTS AND
COLLECT ACCOUNTS RECEIVABLE AND THE TIMING OF CUSTOMER ORDERS MAY CAUSE
FLUCTUATIONS IN OUR OPERATING RESULTS, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE. The timing of capital equipment purchases by customers has been and is expected
to continue to be uneven and difficult to predict. Our products represent major
capital purchases for our customers. The list prices for our instruments range
from $5,000 to $419,500. Accordingly, our customers generally take a relatively
long time to evaluate our products, and a significant portion of our revenues
is typically derived from sales of a small number of relatively high-priced
products. Purchases are generally made by purchase orders and not long-term
contracts. Delays in receipt of anticipated orders for our relatively high
priced products could 15




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lead to substantial variability from quarter to quarter. Furthermore, we have
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 affect on results of
operations for that quarter. We expend significant resources educating and providing information to our
prospective customers regarding the uses and benefits of our products. Because
of the number of factors influencing the sales process, the period between our
initial contact with a customer and the time when we recognize revenues from
that customer, if ever, varies widely. Our sales cycles typically range from
three to six months, but can be much longer. During these cycles, we commit
substantial resources to our sales efforts in advance of receiving any
revenues, and we may never receive any revenues from a customer despite our
sales efforts. The relatively high purchase price for a customer order contributes to
collection delays that result in working capital volatility. While the terms of
our sales orders generally require payment within 30 days of product shipment
and do not provide return rights, in the past we have experienced significant
collection delays. We cannot predict whether we will continue to experience
similar or more severe delays. The capital spending policies of our customers have a significant effect on the
demand for our products. Those policies are based on a wide variety of factors,
including resources available to make purchases, spending priorities, and
policies regarding capital expenditures during industry downturns or
recessionary periods. Any decrease in capital spending by our customers
resulting from any of these factors could harm our business. WE DEPEND ON ORDERS THAT ARE RECEIVED AND SHIPPED IN THE SAME QUARTER AND
THEREFORE HAVE LIMITED VISIBILITY OF FUTURE PRODUCT SHIPMENTS. Our net sales in any given quarter depend upon a combination of orders received
in that quarter for shipment in that quarter and shipments from backlog. Our
products are typically shipped within ninety days of purchase order receipt. As
a result, we do not believe that the amount of backlog at any particular date
is indicative of our future level of sales. Our backlog at the beginning of
each quarter does not include all product sales needed to achieve expected
revenues for that quarter. Consequently, we are dependent on obtaining orders
for products to be shipped in the same quarter that the order is received.
Moreover, customers may reschedule shipments, and production difficulties could
delay shipments. Accordingly, we have limited visibility of future product
shipments, and our results of operations are subject to significant variability
from quarter to quarter. MANY OF OUR CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATER
RESOURCES THAN WE DO, AND INCREASED COMPETITION COULD IMPAIR SALES OF OUR
PRODUCTS. We operate in a highly competitive industry and face competition from companies
that design, manufacture and market instruments for use in the life sciences
research industry, from genomic, pharmaceutical, biotechnology and diagnostic
companies and from academic and research institutions and government or other
publicly-funded agencies, both in the United States and abroad. We may not be
able to compete effectively with all of these competitors. Many of these
companies and institutions have greater financial, engineering, manufacturing,
marketing and customer support resources than we do. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
or market developments by devoting greater resources to the development,
promotion and sale of products, which could impair sales of our products.
Moreover, there has been significant merger and acquisition activity among our
competitors and potential competitors. These transactions by our competitors
and potential competitors may provide them with a competitive advantage over us
by enabling them to rapidly expand their product offerings and service
capabilities to meet a broader range of customer needs. Many of our customers
and potential customers are large companies that require global support and
service, which may be easier for our larger competitors to provide. 16




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We believe that competition within the markets we serve is primarily driven by
the need for innovative products that address the needs of customers. We
attempt to counter competition by seeking to develop new products and provide
quality products and services that meet customers needs. We cannot assure you,
however, that we will be able to successfully develop new products or that our
existing or new products and services will adequately meet our customers
needs. Rapidly changing technology, evolving industry standards, changes in customer
needs, emerging competition and frequent new product and service introductions
characterize the markets for our products. To remain competitive, we will be
required to develop new products and periodically enhance our existing products
in a timely manner. We are facing increased competition as new companies
entering the market with new technologies compete, or will compete, with our
products and future products. We cannot assure you that one or more of our
competitors will not succeed in developing or marketing technologies or
products that are more effective or commercially attractive than our products
or future products, or that would render our technologies and products obsolete
or uneconomical. Our future success will depend in large part on our ability to
maintain a competitive position with respect to our current and future
technologies, which we may not be able to do. In addition, delays in the launch
of our new products may result in loss of market share due to our customers
purchases of competitors products during any delay. IF WE ARE NOT SUCCESSFUL IN DEVELOPING NEW AND ENHANCED PRODUCTS, WE MAY LOSE
MARKET SHARE TO OUR COMPETITORS. The life sciences instrumentation market is characterized by rapid
technological change and frequent new product introductions. In the twelve
months ended June 30, 2004, 64% of our revenues were derived from the sale of
products that were introduced in the last three years, and our future success
will depend on our ability to enhance our current products and to develop and
introduce, on a timely basis, new products that address the evolving needs of
our customers. We may experience difficulties or delays in our development
efforts with respect to new products, and we may not ultimately be successful
in developing or commercializing them, which would harm our business. Any
significant delay in releasing new systems could cause our revenues to suffer,
adversely affect our reputation, give a competitor a first-to-market advantage
or cause a competitor to achieve greater market share. In addition, our future
success depends on our continued ability to develop new applications for our
existing products. If we are not able to complete the development of these
applications, or if we experience difficulties or delays, we may lose our
current customers and may not be able to attract new customers, which could
seriously harm our business and our future growth prospects. WE MUST EXPEND A SIGNIFICANT AMOUNT OF TIME AND RESOURCES TO DEVELOP NEW
PRODUCTS, AND IF THESE PRODUCTS DO NOT ACHIEVE COMMERCIAL ACCEPTANCE, OUR
OPERATING RESULTS MAY SUFFER. We expect to spend a significant amount of time and resources to develop new
products and refine existing products. In light of the long product development
cycles inherent in our industry, these expenditures will be made well in
advance of the prospect of deriving revenues from the sale of new products. Our
ability to commercially introduce and successfully market new products is
subject to a wide variety of challenges during this development cycle that
could delay introduction of these products. In addition, since our customers
are not obligated by long-term contracts to purchase our products, our
anticipated product orders may not materialize, or orders that do materialize
may be canceled. As a result, if we do not achieve market acceptance of new
products, our operating results will suffer. Our products are also generally
priced higher than competitive products, which may impair commercial
acceptance. We cannot predict whether new products that we expect to introduce
will achieve commercial acceptance. We currently anticipate that our IonWorks product family will include in the
near term our recently launched IonWorks HT system and, potentially, an
additional IonWorks system based on technology acquired through the acquisition
of Cytion S.A. in 2001. Our IonWorks product family may not achieve significant
commercial acceptance or generate significant revenues within the time frame
that we have anticipated, or at all. Any such failure would adversely affect
our financial performance. In particular, we recently launched our IonWorks HT
system. This system has not achieved, and may not achieve or 17




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maintain, significant commercial acceptance. The system could fail to obtain
significant commercial acceptance due to general economic conditions,
competitive conditions, customer concerns related to the price or performance
of the IonWorks HT system or other factors. It is likely that any failure of
the IonWorks HT system to achieve commercial acceptance within the time frame
that we have anticipated would cause us to fail to meet our 2004 revenue
expectations, which would likely cause our stock price to decline. Failure to develop new IonWorks products in a timely and efficient manner, or
at all, may prevent us from offering first-to-market products in segments of
the electrophysiology market. As a result, we may lose customers, and our
business and results of operations may be harmed. While we believe that the
technology acquired through the acquisition of Cytion complements our IonWorks
HT system, we may not be able to develop and commercialize any new products
that include technology acquired through the acquisition of Cytion and are
complementary to the IonWorks HT system. Further, successful product
development may place a significant burden on our existing management and our
internal resources, which could have a material adverse effect on our business.
Any failure to develop new products in a timely and efficient manner, or at
all, or any failure of such products to achieve commercial acceptance within
the time frame that we anticipate would adversely affect our business. WE OBTAIN SOME OF THE COMPONENTS AND SUBASSEMBLIES INCLUDED IN OUR SYSTEMS FROM
A SINGLE SOURCE OR A LIMITED GROUP OF SUPPLIERS, AND THE PARTIAL OR COMPLETE
LOSS OF ONE OF THESE SUPPLIERS COULD CAUSE PRODUCTION DELAYS AND A SUBSTANTIAL
LOSS OF REVENUES. We rely on outside vendors to manufacture many components and subassemblies.
Certain components, subassemblies and services necessary for the manufacture of
our systems are obtained from a sole supplier or limited group of suppliers,
some of which are our competitors. Additional components, such as optical,
electronic and pneumatic devices, are currently purchased in configurations
specific to our requirements and, together with certain other components, such
as computers, are integrated into our products. We maintain only a limited
number of long-term supply agreements with our suppliers. Our reliance on a sole or a limited group of suppliers involves several risks,
including the following:  
    
    we may be unable to obtain an adequate supply of required components;
    
    we have reduced control over pricing and the timely delivery of components and subassemblies; and
    
    our suppliers may be unable to develop technologically advanced products to support our
growth and development of new systems. Because the manufacturing of certain of these components and subassemblies
involves extremely complex processes and requires long lead times, we may
experience delays or shortages caused by suppliers. We believe that alternative
sources could be obtained and qualified, if necessary, for most sole and
limited source parts. However, if we were forced to seek alternative sources of
supply or to manufacture such components or subassemblies internally, we may be
forced to redesign our systems, which could prevent us from shipping our
systems to customers on a timely basis. Some of our suppliers have relatively
limited financial and other resources. Any inability to obtain adequate
deliveries, or any other circumstance that would restrict our ability to ship
our products, could damage relationships with current and prospective customers
and could harm our business. For example, we rely upon a single supplier for a component of the PatchPlate
consumable that is part of the IonWorks HT system. This supplier might not be
able to fulfill our commercial needs, which would require us to seek new
manufacturing arrangements for this component, either by bringing production of
this component in-house or by seeking an alternative supplier. We currently do
not have the capability to manufacture this component on a commercial scale,
and are not aware of any other supplier that currently has the capability to
supply us with commercial quantities of this component. Any failure or delay in
obtaining sufficient quantities of this component could adversely affect the
ability of the IonWorks HT system to achieve or maintain significant commercial
acceptance, which would harm our business. 18




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WE MAY ENCOUNTER MANUFACTURING AND ASSEMBLY PROBLEMS OR DELAYS, WHICH COULD
RESULT IN LOST REVENUES. We assemble our systems in our manufacturing facilities located in Sunnyvale,
California, Downingtown, Pennsylvania, and Norway. Our manufacturing and
assembly processes are highly complex and require sophisticated, costly
equipment and specially designed facilities. As a result, any prolonged
disruption in the operations of our manufacturing facilities could seriously
harm our ability to satisfy our customer order deadlines. If we cannot deliver
our systems in a timely manner, our revenues will likely suffer. Our product sales depend in part upon manufacturing yields. We currently have
limited manufacturing capacity and experience variability in manufacturing
yields. We are currently manufacturing high-throughput instruments in-house, in
limited volumes and with largely manual assembly. If demand for our
high-throughput instruments increases, we will either need to expand our
in-house manufacturing capabilities or outsource to other manufacturers. If we
fail to deliver our products in a timely manner, our relationships with our
customers could be seriously harmed, and our revenues could decline. As we develop new products, we must transition the manufacture of a new product
from the development stage to commercial manufacturing. We cannot predict
whether we will be able to complete these transitions on a timely basis and
with commercially reasonable costs. We cannot assure you that manufacturing or
quality control problems will not arise as we attempt to scale-up our
production for any future new products or that we can scale-up manufacturing
and quality control in a timely manner or at commercially reasonable costs. If
we are unable to consistently manufacture our products on a timely basis
because of these or other factors, our product sales will decline. IF WE DELIVER PRODUCTS WITH DEFECTS, OUR CREDIBILITY WILL BE HARMED AND THE
SALES AND MARKET ACCEPTANCE OF OUR PRODUCTS WILL DECREASE. Our products are complex and have at times contained errors, defects and bugs
when introduced. If we deliver products with errors, defects or bugs, our
credibility and the market acceptance and sales of our products would be
harmed. Further, if our products contain errors, defects or bugs, we may be
required to expend significant capital and resources to alleviate such
problems. Defects could also lead to product liability as a result of product
liability lawsuits against us or against our customers. We have agreed to
indemnify our customers in some circumstances against liability arising from
defects in our products. In the event of a successful product liability claim,
we could be obligated to pay damages significantly in excess of our product
liability insurance limits. MOST OF OUR CURRENT AND POTENTIAL CUSTOMERS ARE FROM THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES AND ARE SUBJECT TO RISKS FACED BY THOSE INDUSTRIES. We derive a significant portion of our revenues from sales to pharmaceutical
and biotechnology companies. We expect that sales to pharmaceutical and
biotechnology companies will continue to be a primary source of revenues for
the foreseeable future. As a result, we are subject to risks and uncertainties
that affect the pharmaceutical and biotechnology industries, such as
availability of capital and reduction and delays in research and development
expenditures by companies in these industries, pricing pressures as third-party
payers continue challenging the pricing of medical products and services,
government regulation, and the uncertainty resulting from technological change. In addition, our future revenues may be adversely affected by the ongoing
consolidation in the pharmaceutical and biotechnology industries, which would
reduce the number of our potential customers. Furthermore, we cannot assure you
that the pharmaceutical and biotechnology companies that are our customers will
not develop their own competing products or in-house capabilities. 19




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OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
WHICH MAY CAUSE US TO ENGAGE IN COSTLY LITIGATION AND, IF WE ARE NOT
SUCCESSFUL, COULD ALSO CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM
SELLING OUR PRODUCTS. Third parties may assert infringement or other intellectual property claims
against us. We may have to pay substantial damages for infringement if it is
ultimately determined that our products infringe a third partys proprietary
rights. Further, any legal action against us could, in addition to subjecting
us to potential liability for damages, prohibit us from selling our products
before we obtain a license to do so from the party owning the intellectual
property, which, if available at all, may require us to pay substantial
royalties. Even if these claims are without merit, defending a lawsuit takes
significant time, may be expensive and may divert management attention from
other business concerns. There may be third-party patents that may relate to
our technology or potential products. Any public announcements related to
litigation or interference proceedings initiated or threatened against us could
cause our stock price to decline. We believe that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. If we become involved in litigation, it could consume a substantial
portion of our managerial and financial resources. WE MAY NEED TO INITIATE LAWSUITS TO PROTECT OR ENFORCE OUR PATENTS, WHICH WOULD
BE EXPENSIVE AND, IF WE LOSE, MAY CAUSE US TO LOSE SOME OF OUR INTELLECTUAL
PROPERTY RIGHTS, WHICH WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET. We rely on patents to protect a large part of our intellectual property and our
competitive position. In order to protect or enforce our patent rights, we may
initiate patent litigation against third parties, such as infringement suits or
interference proceedings. Litigation may be necessary to:  
    
    assert claims of infringement;
    
    enforce our patents;
    
    protect our trade secrets or know-how; or
    
    determine the enforceability, scope and validity of the proprietary rights of others. Lawsuits could be expensive, take significant time and divert managements
attention from other business concerns. They would put our patents at risk of
being invalidated or interpreted narrowly and our patent applications at risk
of not issuing. We may also provoke third parties to assert claims against us.
Patent law relating to the scope of claims in the technology fields in which we
operate is still evolving and, consequently, patent positions in our industry
are generally uncertain. If initiated, we cannot assure you that we would
prevail in any of these suits or that the damages or other remedies awarded, if
any, would be commercially valuable. During the course of these suits, there
could be public announcements of the results of hearings, motions and other
interim proceedings or developments in the litigation. If securities analysts
or investors were to perceive any of these results to be negative, our stock
price could decline. THE RIGHTS WE RELY UPON TO PROTECT OUR INTELLECTUAL PROPERTY UNDERLYING OUR
PRODUCTS MAY NOT BE ADEQUATE, WHICH COULD ENABLE THIRD PARTIES TO USE OUR
TECHNOLOGY AND WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET. Our success will depend in part on our ability to obtain commercially valuable
patent claims and to protect our intellectual property. Our patent position is
generally uncertain and involves complex legal and factual questions. Legal
standards relating to the validity and scope of claims in our technology field
are still evolving. Therefore, the degree of future protection for our
proprietary rights is uncertain. 20




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The risks and uncertainties that we face with respect to our patents and other
proprietary rights include the following:  
    
    the pending patent applications we have filed or to which we have exclusive rights may not result
in issued patents or may take longer than we expect to result in issued patents;
    
    the claims of any patents which are issued may not provide meaningful protection;
    
    we may not be able to develop additional proprietary technologies that are patentable;
    
    the patents licensed or issued to us or our customers may not provide a competitive advantage;
    
    other companies may challenge patents licensed or issued to us or our customers;
    
    patents issued to other companies may harm our ability to do business;
    
    other companies may independently develop similar or alternative technologies or duplicate our
technologies; and
    
    other companies may design around technologies we have licensed or developed. In addition to patents, we rely on a combination of trade secrets,
nondisclosure agreements and other contractual provisions and technical
measures to protect our intellectual property rights. Nevertheless, these
measures may not be adequate to safeguard the proprietary technology underlying
our products. If these measures do not protect our rights, third parties could
use our technology, and our ability to compete in the market would be reduced.
In addition, employees, consultants and others who participate in the
development of our products may breach their agreements with us regarding our
intellectual property, and we may not have adequate remedies for the breach. We
also may not be able to effectively protect our intellectual property rights in
some foreign countries. For a variety of reasons, we may decide not to file for
patent, copyright or trademark protection or prosecute potential infringements
of our patents. We also realize that our trade secrets may become known through
other means not currently foreseen by us. Notwithstanding our efforts to
protect our intellectual property, our competitors may design around our
proprietary technologies or may independently develop similar or alternative
technologies or products that are equal or superior to our technology and
products without infringing on any of our intellectual property rights. WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH. We expect to experience significant growth in the number of our employees and
customers and the scope of our operations, including as a result of potential
acquisitions. This growth may continue to place a significant strain on our
management and operations. Our ability to manage this growth will depend upon
our ability to broaden our management team and our ability to attract, hire and
retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational
and other systems, to manage multiple, concurrent customer relationships and to
hire, train and manage our employees. Our future success is heavily dependent
upon growth and acceptance of new products. If we cannot scale our business
appropriately or otherwise adapt to anticipated growth and new product
introductions, a key part of our strategy may not be successful. WE RELY UPON DISTRIBUTORS FOR PRODUCT SALES AND SUPPORT OUTSIDE NORTH AMERICA. In the first six months of 2004, approximately 7% of our sales were made
through distributors. We often rely upon distributors to provide customer
support to the ultimate end users of our products. As a result, our success
depends on the continued sales and customer support efforts of our network of
distributors. The use of distributors involves certain risks, including risks
that distributors will not effectively sell or support our products, that they
will be unable to satisfy financial obligations to us and that they will cease
operations. Any reduction, delay or loss of orders from our significant
distributors could harm our revenues. We also do not currently have
distributors in a number of significant international markets that we have
targeted and will need to establish additional international distribution
relationships. There can be no assurance that we 21




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will engage qualified distributors in a timely manner, and the failure to do so
could have a material adverse affect on our business, financial condition and
results of operations. IF WE CHOOSE TO ACQUIRE NEW AND COMPLEMENTARY BUSINESSES, PRODUCTS OR
TECHNOLOGIES INSTEAD OF DEVELOPING THEM OURSELVES, WE MAY BE UNABLE TO COMPLETE
THESE ACQUISITIONS OR MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE AN ACQUIRED
BUSINESS OR TECHNOLOGY IN A COST-EFFECTIVE AND NON-DISRUPTIVE MANNER. Our success depends on our ability to continually enhance and broaden our
product offerings in response to changing technologies, customer demands and
competitive pressures. To this end, from time to time we have acquired
complementary businesses, products or technologies instead of developing them
ourselves, and we may choose to do so in the future. For example, we recently
acquired Axon Instruments, Inc., acquired Universal Imaging Corporation in June
2002 and acquired Cytion S.A. in 2001. We do not know if we will be able to
complete any future acquisitions or whether we will be able to successfully
integrate any acquired business, operate it profitably or retain its key
employees. Integrating any business, product or technology we acquire, both in
connection with the acquisition of Axon and other potential future
acquisitions, involves considerable operational and financial risks and
strains, including:  
    
    the potential disruption of our ongoing business and distraction of our management;
    
    the potential strain on our financial and managerial controls and reporting systems and procedures;
    
    unanticipated expenses and potential delays related to integration of the operations, technology
and other resources of acquired businesses;
    
    the impairment of relationships with employees, suppliers and customers as a result of any
integration of new management personnel;
    
    greater than anticipated costs and expenses related to restructuring, including employee severance
or relocation costs and costs related to vacating leased facilities; and
    
    potential unknown liabilities associated with any acquisition, including higher than expected
acquisition costs, which may cause our quarterly and annual operating results to fluctuate. We may not succeed in addressing these risks or any other problems encountered
in connection with the acquisition of Axon or other potential future
acquisitions. If we are unable to successfully integrate the operations,
products, technology and personnel of acquired businesses in a timely manner or
at all, or if we do achieve the perceived benefits of any acquisition as
rapidly or to the extent anticipated by financial analysts or investors, the
market price of our common stock could decline. In addition, in order to finance any acquisitions, we might need to raise
additional funds through public or private equity or debt financings. In that
event, we could be forced to obtain financing on terms that are not favorable
to us and, in the case of equity financing, that may result in dilution to our
stockholders. In connection with the acquisition of Axon, we borrowed $35
million in order to pay the cash portion of the merger consideration to be paid
to Axon shareholders and optionholders. Incurrence of this new debt will
significantly increase the combined companys leverage. While management
believes that our cash flows will be more than adequate to service this new
debt, there may be circumstances in which required payments of principal and/or
interest on this new debt could adversely affect our cash flows and operating
results, and therefore the market price of our common stock. In addition, any
impairment of goodwill and amortization of other intangible assets or charges
resulting from the costs of acquisitions could harm our business and operating
results. DUE TO THE AXON ACQUISITION, MOLECULAR DEVICES IS A SUBSTANTIALLY LARGER AND
MORE COMPLEX ORGANIZATION, AND IF MOLECULAR DEVICES MANAGEMENT IS UNABLE TO
SUFFICIENTLY MANAGE THE COMBINED COMPANY, ITS OPERATING RESULTS WILL SUFFER. On July 1, 2004 Molecular Devices acquired approximately 128 employees based at
Axons office in Union City, California and at its facilities in Melbourne,
Australia and San Luis Obispo, California. The combined company will face
challenges inherent in efficiently managing an increased number of 22




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employees over large geographic distances, including the need to implement
appropriate systems, policies, benefits and compliance programs. The inability
to successfully manage the substantially larger and internationally diverse
organization, or any significant delay in achieving successful management,
could have a material adverse effect on the combined company and, as a result,
on the market price of Molecular Devices common stock. THE ACQUISITION OF AXON COULD CAUSE US TO LOSE KEY PERSONNEL, WHICH COULD
MATERIALLY AFFECT THE COMBINED COMPANYS BUSINESS AND REQUIRE US TO INCUR
SUBSTANTIAL COSTS TO RECRUIT REPLACEMENTS FOR LOST PERSONNEL. As a result of the merger transaction, our current and prospective employees
could experience uncertainty about their future roles within Molecular Devices.
This uncertainty may adversely affect our ability to attract and retain key
management, sales, marketing and technical personnel. Any failure to attract
and retain key personnel could have a material adverse effect on our business. GENERAL UNCERTAINTY RELATED TO THE ACQUISITION OF AXON COULD HARM MOLECULAR
DEVICES. Our customers may, in response to the announcement of the acquisition of Axon,
delay or defer purchasing decisions. If our customers delay or defer purchasing
decisions,our revenues could materially decline or any anticipated increases in
revenue could be lower than expected. CHARGES TO EARNINGS RESULTING FROM THE APPLICATION OF THE PURCHASE METHOD OF
ACCOUNTING MAY ADVERSELY AFFECT THE MARKET VALUE OF MOLECULAR DEVICES COMMON
STOCK FOLLOWING THE ACQUISITION OF AXON. If the benefits of the acquisition of Axon are not achieved, Molecular Devices
financial results, including earnings per share, could be adversely affected.
In accordance with United States generally accepted accounting principles, we
will account for the merger transaction using the purchase method of
accounting. We will allocate the total estimated purchase price to Axons net
tangible assets, amortizable intangible assets, and in-process research and
development based on their fair values as of July 1, 2004, the date of
completion of acquisition of Axon, and record the excess of the purchase price
over those fair values as goodwill. We will incur additional amortization
expense over the estimated useful lives of certain of the intangible assets
acquired in connection with the merger transaction, which is expected to be
approximately $1.6 million on an annual basis. In addition, to the extent the
value of goodwill or intangible assets with indefinite lives becomes impaired,
we may be required to incur material charges relating to the impairment of
those assets. WE DEPEND ON OUR KEY PERSONNEL, THE LOSS OF WHOM WOULD IMPAIR OUR ABILITY TO
COMPETE. We are highly dependent on the principal members of our management, engineering
and scientific staff. The loss of the service of any of these persons could
seriously harm our product development and commercialization efforts. In
addition, research, product development and commercialization will require
additional skilled personnel in areas such as chemistry and biology, and
software and electronic engineering. Our corporate headquarters are located in
Sunnyvale, California, where demand for personnel with these skills is
extremely high and is likely to remain high. As a result, competition for and
retention of personnel, particularly for employees with technical expertise, is
intense and the turnover rate for qualified personnel is high. If we are unable
to hire, train and retain a sufficient number of qualified employees, our
ability to conduct and expand our business could be seriously reduced. The
inability to retain and hire qualified personnel could also hinder the planned
expansion of our business. 23




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WE ARE DEPENDENT ON INTERNATIONAL SALES AND OPERATIONS, WHICH EXPOSES US TO
FOREIGN CURRENCY EXCHANGE RATE, POLITICAL AND ECONOMIC RISKS. We maintain facilities in Norway, the United Kingdom, Germany, Japan and
Australia, and sales to customers outside the United States accounted for
approximately 44% our revenues in the first six months of 2004. We anticipate
that international sales will continue to account for a significant portion of
our revenues. All of our sales to international distributors are denominated in U.S. dollars.
Most of our direct sales in the United Kingdom, Germany, France, Belgium,
Canada and Japan are denominated in local currencies and totaled $21.9 million
(37% of total revenues) in the first six months of 2004. To the extent that our
sales and operating expenses are denominated in foreign currencies, our
operating results may be adversely affected by changes in exchange rates.
Historically, foreign exchange gains and losses have been immaterial to our
results of operations. However, we cannot predict whether these gains and
losses will continue to be immaterial, particularly as we increase our direct
sales outside North America. For example, we cannot predict whether other
foreign exchange gains or losses in the future would have a material effect on
our income. Owing to the number of currencies involved, the substantial
volatility of currency exchange rates, and our constantly changing currency
exposures, we cannot predict the effect of exchange rate fluctuations on our
future operating results. We do not currently engage in foreign currency
hedging transactions, but may do so in the future. Our reliance on international sales and operations exposes us to foreign
political and economic risks, including:  
    
    political, social and economic instability;
    
    trade restrictions and changes in tariffs;
    
    import and export license requirements and restrictions;
    
    difficulties in staffing and managing international operations;
    
    disruptions in international transport or delivery;
    
    difficulties in collecting receivables; and
    
    potentially adverse tax consequences. If any of these risks materialize, our international sales could decrease and
our foreign operations could suffer. OUR OPERATING RESULTS FLUCTUATE AND ANY FAILURE TO MEET FINANCIAL EXPECTATIONS
MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A DECLINE IN OUR
STOCK PRICE. We have experienced and in the future may experience a shortfall in revenues or
earnings or otherwise fail to meet public market expectations, which could
materially and adversely affect our business and the market price of our common
stock. Our total revenues and operating results may fluctuate significantly
because of a number of factors, many of which are outside of our control. These
factors include:  
    
    customer confidence in the economy, evidenced, in part, by stock market levels;
    
    changes in the domestic and international economic, business and political conditions;
    
    economic conditions within the pharmaceutical and biotechnology industries;
    
    levels of product and price competition;
    
    the length of our sales cycle and customer buying patterns;
    
    the size and timing of individual transactions;
    
    the timing of new product introductions and product enhancements;
    
    the mix of products sold;
    
    levels of international transactions;
    
    activities of and acquisitions by competitors; 24




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
    
    the timing of new hires and the allocation of our resources;
    
    changes in foreign currency exchange rates; and
    
    our ability to develop and market new products and control costs. One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our revenues and
operating results to fluctuate significantly. In particular, we typically
experience 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. Our
quarterly operating results have fluctuated in the past, and we expect they
will fluctuate in the future as a result of many factors, some of which are
outside of our control. In addition, we manufacture our products based on forecasted orders rather than
on outstanding orders. Accordingly, our expense levels are based, in part, on
expected future sales, and we generally cannot quickly adjust operating
expenses. For example, research and development and general and administrative
expenses are not directly affected by variations in revenues. As a result, if
sales levels in a particular quarter do not meet expectations, we may not be
able to adjust operating expenses in a sufficient timeframe to compensate for
the shortfall, and our results of operations for that quarter may be seriously
harmed. Likewise, our manufacturing procedures may in certain instances create
a risk of excess or inadequate inventory levels if orders do not match
forecasts. Based upon the preceding factors, we may experience a shortfall in revenues or
earnings or otherwise fail to meet public market expectations, which could
materially and adversely affect our business, financial condition, results of
operations and the market price of our common stock. Because our revenues and
operating results are difficult to predict, we believe that period-to-period
comparisons of our results of operations are not a good indication of our
future performance. OUR STOCK PRICE IS VOLATILE, WHICH COULD CAUSE STOCKHOLDERS TO LOSE A
SUBSTANTIAL PART OF THEIR INVESTMENT IN OUR STOCK. The stock market in general, and the stock prices of technology companies in
particular, have recently experienced volatility which has often been unrelated
to the operating performance of any particular company or companies. In the
twelve months ended June 30, 2004, the closing sales price of our common stock
ranged from $15.51 to $22.32. Our stock price could decline regardless of our
actual operating performance, and stockholders could lose a substantial part of
their investment as a result of industry or market-based fluctuations. In the
past, our stock has traded relatively thinly. If a more active public market
for our stock is not sustained, it may be difficult for stockholders to resell
shares of our common stock. Because we do not anticipate paying cash dividends
on our common stock for the foreseeable future, stockholders will not be able
to receive a return on their shares unless they sell them. The market price of our common stock will likely fluctuate in response to a
number of factors, including the following:  
    
    domestic and international economic, business and political conditions;
    
    economic conditions within the pharmaceutical and biotechnology industries;
    
    our failure to meet our performance estimates or the performance estimates of securities analysts;
    
    changes in financial estimates of our revenues and operating results by us or securities analysts;
    
    changes in buy/sell recommendations by securities analysts; and
    
    the timing of announcements by us or our competitors of significant products, contracts or
acquisitions or publicity regarding actual or potential results or performance thereof. 25




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PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER,
WHICH COULD LIMIT THE PRICE INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR
OUR COMMON STOCK. Provisions in our certificate of incorporation and bylaws may have the effect
of delaying or preventing an acquisition, or merger in which we are not the
surviving company or which results in changes in our management. For example,
our certificate of incorporation gives our board of directors the authority to
issue shares of preferred stock and to determine the price, rights, preferences
and privileges and restrictions, including voting rights, of those shares
without any further vote or action by our stockholders. The rights of the
holders of common stock will be subject to, and may harmed by, the rights of
the holders of any shares of preferred stock that may be issued in the future.
The issuance of preferred stock may delay, defer or prevent a change in
control, as the terms of the preferred stock that might be issued could
potentially prohibit our consummation of any merger, reorganization, sale of
substantially all of our assets, liquidation or other extraordinary corporate
transaction without the approval of the holders of the outstanding shares of
preferred stock. The issuance of preferred stock could also have a dilutive
effect on our stockholders. In addition, because we are incorporated in
Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law. These provisions may prohibit large stockholders, in
particular those owning 15% or more of the outstanding voting stock, from
consummating a merger or combination involving us. Further, in October 2001,
our Board of Directors adopted a stockholder rights plan, commonly known as a
poison pill. These provisions described above and our poison pill could limit
the price that investors might be willing to pay in the future for our common
stock. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR
FORWARD-LOOKING STATEMENTS. This report contains forward-looking statements within the meaning of the
federal securities laws that relate to future events or our future financial
performance. When used in this report, you can identify forward-looking
statements by terminology such as anticipates, plans, predicts,
expects, estimates, intends, will, continue, may, potential,
should and the negative of these terms or other comparable terminology. These
statements are only predictions. Our actual results could differ materially
from those anticipated in our forward-looking statements as a result of many
factors, including those set forth above and elsewhere in this report. Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Neither we nor any other person assumes
responsibility for the accuracy and completeness of these statements. We assume
no duty to update any of the forward-looking statements after the date of this
report or to conform these statements to actual results. Accordingly, we
caution readers not to place undue reliance on these statements. 26




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, including changes in foreign currency
rates, interest rates, as well as debt and interest expense. Foreign Currency Exchange We are exposed to changes in foreign currency exchange rates primarily in the
United Kingdom, Germany, France, Belgium, Canada and Japan, where we sell
direct in local currencies. All other foreign sales are denominated in U.S.
dollars and bear no exchange rate risk. However, a strengthening of the U.S.
dollar could make our products less competitive in overseas markets. Gains and
losses resulting from foreign currency transactions have historically been
immaterial. Translation gains and losses related to our foreign subsidiaries
in the United Kingdom, Japan, Germany, Switzerland and Norway are accumulated
as a separate component of stockholders equity. We do not currently engage in
foreign currency hedging transactions, but may do so in the future. Interest and Investment Income Our interest and investment income is subject to changes in the general level
of interest rates. Changes in interest rates affect the interest earned on our
cash equivalents and short-term investments. A sensitivity analysis assuming a
hypothetical 10% movement in interest rates applied to the Companys investment
balances at June 30, 2004 indicated that such market movement would not have a
material effect on the business, operating results or financial condition.
Actual gains or losses in the future may differ materially from this analysis,
depending upon actual balances and changes in the timing and amount of interest
rate movements. Debt and Interest Expense In connection with the acquisition of Axon, we entered into a new senior
unsecured credit facility, which provides for a revolving credit facility in
the amount of up to $35.0 million (reducing to $30.0 million 60 days after
initial drawdown). All loans outstanding under the credit facility will bear
interest at a rate per annum equal to, at our option, either the base rate plus .50% or LIBOR plus 1.25%. A sensitivity analysis assuming a hypothetical 10%
movement in interest rates applied to our projected debt balances for the
remainder of 2004, indicated that such market movement would not have a
material effect on our business, operating results or financial condition.
Actual gains or losses in the future may differ materially from this analysis,
depending on the level of our outstanding debt and changes in the timing and
amount of interest rate movements. 27




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ITEM 4. CONTROLS AND PROCEDURES. Evaluation of disclosure controls and procedures.Based on our managements
evaluation (with the participation of our chief executive officer and chief
financial officer), as of the end of the period covered by this report, our
chief executive officer and chief financial officer have concluded that,
subject to limitations described below, our disclosure controls and procedures
(as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) are
effective to ensure that the information required to be disclosed by us in
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. Changes in internal controls.There were no changes in our internal controls
over financial reporting during the quarter ended June 30, 2004 that have
materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting. Limitations on the effectiveness of controls.Our management, including our
chief executive officer and chief financial officer, does not expect that our
control systems will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Molecular Devices Corporation have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. Accordingly, our disclosure controls and procedures
are designed to provide reasonable, not absolute, assurance that the objectives
of our disclosure control system are met and, as set forth above, our chief
executive officer and chief financial officer have concluded, based on their
evaluation as of the end of the period covered by this report, that our
disclosure controls and procedures were sufficiently effective to provide
reasonable assurance that the objectives of our disclosure control system were
met. 28




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PART II. OTHER INFORMATION 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 30, 2004, the 2004 Annual Meeting of Stockholders was held at our
corporate offices in Sunnyvale, California. During this meeting, our
stockholders voted on the following four proposals:  (a)
    
    Proposal to approve the issuance of Molecular Devices common stock
in the first merger pursuant to the Agreement and Plan of Merger and
Reorganization, dated as of March 20, 2004, as amended as of May 21,
2004, among Molecular Devices Corporation, Astros Acquisition Sub I,
Inc., a wholly-owned subsidiary of Molecular Devices, Astros
Acquisition Sub II, LLC, a wholly-owned subsidiary of Molecular
Devices, and Axon Instruments, Inc., under which Astros Acquisition Sub
I, Inc. was merged with and into Axon, immediately following which,
Axon was merged with and into Astros Acquisition Sub II, LLC. BrokerFor
    
    Against
    
    Abstain
    
    Non-Vote9,831,476
    
    
    61,116
    
    
    
    4,681
    
    
    
    3,545,880
  (b)
    
    Proposal to elect directors to hold office until the next annual
meeting of stockholders and until their successors are elected: For
    
    Authority WithheldJoseph D. Keegan, Ph.D.
    
    
    12,984,638
    
    
    
    458,515Moshe H. Alafi
    
    
    13,080,342
    
    
    
    362,811David L. Anderson
    
    
    12,908,676
    
    
    
    534,477A. Blaine Bowman
    
    
    13,081,069
    
    
    
    362,084Paul Goddard, Ph.D.
    
    
    11,013,062
    
    
    
    2,430,091Andre F. Marion
    
    
    10,735,433
    
    
    
    2,707,720Harden M. McConnell, Ph.D.
    
    
    13,083,071
    
    
    
    360,082J. Allan Waitz, Ph.D.
    
    
    12,908,376
    
    
    
    534,777
  (c)
    
    Proposal to approve our 1995 Stock Option Plan, as amended, to
increase the aggregate number of shares of common stock authorized for
issuance under the plan by 300,000 shares: BrokerFor
    
    Against
    
    Abstain
    
    Non-Vote5,229,387
    
    
    4,626,033
    
    
    
    41,853
    
    
    
    3,545,880
  (d)
    
    Proposal to ratify the appointment of Ernst & Young LLP as our
independent auditors for the fiscal year ending December 31, 2004: For
    
    Against
    
    Abstain13,220,868
    
    
    216,713
    
    
    
    5,572
 29




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits ExhibitNumber
    
    Description of Exhibit2.1(1)
    
    Agreement and Plan of Merger and Reorganization, dated as of March
20, 2004, by and among Molecular Devices Corporation, Astros
Acquisition Sub I, Inc., Astros Acquisition Sub II, LLC and Axon
Instruments, Inc.2.2(2)
    
    Amendment to Agreement and Plan of Merger and Reorganization, dated
as of May 21, 2004, by and among Molecular Devices Corporation,
Astros Acquisition Sub I, Inc., Astros Acquisition Sub II, LLC and
Axon Instruments, Inc.3.1(3)
    
    Amended and Restated Certificate of Incorporation of the Registrant.3.2(3)
    
    Bylaws of the Registrant.3.3(4)
    
    Certificate of Amendment to Certificate of Incorporation.4.1(3)
    
    Specimen Certificate of Common Stock of the Registrant.10.25
    
    1995 Stock Option Plan, as amended31.1
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).31.2
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).32.1*
    
    Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code
(18 U.S.C 1350).
  (1)
    
    Incorporated by reference to the similarly described exhibit in our
Current Report on Form 8-K filed on March 22, 2004.(2)
    
    Incorporated by reference to the similarly described exhibit in our
Registration Statement on Form S-4 (File No. 333-114934), as amended.(3)
    
    Incorporated by reference to the similarly described exhibit in our
Registration Statement on Form S-1 (File No. 33-98926), as amended.(4)
    
    Incorporated by reference to the similarly described exhibit in our
Annual Report on Form 10-K for the year ended December 31, 2001 and
filed on April 1, 2002. *     The certification attached as Exhibit 32.1 accompanies the Quarterly Report
on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
shall not be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.  (b)
    
    Reports on Form 8-K  (1)
    
    We filed a current report on Form 8-K, dated April
22, 2004, describing and furnishing the press release announcing
our first quarter results for the period ended March 31, 2004,
which press release included our condensed consolidated balance
sheet and statements of income for the periods presented.(2)
    
    We filed a current report on Form 8-K, dated June 29,
2004, describing and filing the letter to Institutional
Shareholder Services in which Molecular Devices agreed that,
without the prior approval of the companys stockholders, options
issued under any of Molecular Devices existing stock option plans
will not be repriced, replaced or regranted through cancellation,
or by lowering the option exercise price of a previously granted
award. 30




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Molecular Devices Corporation By:
    /s/ TIMOTHY A. HARKNESSTimothy A. HarknessSenior Vice President, Finance and Chief
Financial Officer
(Duly Authorized and Principal
Financial and
 Accounting Officer) Date: August 9, 2004 31




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Description of Exhibit2.1(1)
    
    Agreement and Plan of Merger and Reorganization, dated as of March
20, 2004, by and among Molecular Devices Corporation, Astros
Acquisition Sub I, Inc., Astros Acquisition Sub II, LLC and Axon
Instruments, Inc.2.2(2)
    
    Amendment to Agreement and Plan of Merger and Reorganization, dated
as of May 21, 2004, by and among Molecular Devices Corporation,
Astros Acquisition Sub I, Inc., Astros Acquisition Sub II, LLC and
Axon Instruments, Inc.3.1(3)
    
    Amended and Restated Certificate of Incorporation of the Registrant.3.2(3)
    
    Bylaws of the Registrant.3.3(4)
    
    Certificate of Amendment to Certificate of Incorporation.4.1(3)
    
    Specimen Certificate of Common Stock of the Registrant.10.25
    
    1995 Stock Option Plan, as amended31.1
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).31.2
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).32.1*
    
    Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code
(18 U.S.C 1350).
  (1)
    
    Incorporated by reference to the similarly described exhibit in our
Current Report on Form 8-K filed on March 22, 2004.(2)
    
    Incorporated by reference to the similarly described exhibit in our
Registration Statement on Form S-4 (File No. 333-114934), as amended.(3)
    
    Incorporated by reference to the similarly described exhibit in our
Registration Statement on Form S-1 (File No. 33-98926), as amended.(4)
    
    Incorporated by reference to the similarly described exhibit in our
Annual Report on Form 10-K for the year ended December 31, 2001 and
filed on April 1, 2002. *     The certification attached as Exhibit 32.1 accompanies the Quarterly Report
on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
shall not be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.