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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 000-30833
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BRUKER DALTONICS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3110160
(State or other jurisdiction of incorporation (IRS Employer Identification Number)
or organization)
15 FORTUNE DRIVE
BILLERICA, MA 01821
(Address of principal executive offices, including zip code)
(978) 663-3660
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 23, 2001 was $102,661,520 (based on the last reported
sale price on the Nasdaq National Market on that date).
The number of shares outstanding of the registrant's Common Stock as of
March 23, 2001 was 54,786,713.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K:
(i) Proxy Statement for the 2001 Annual Meeting of Stockholders-Items 10,
11, 12 and 13.
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BRUKER DALTONICS INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 4A. Executive Officers of the Registrant........................ 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 18
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................. 20
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 37
Item 8. Financial Statements and Supplementary Data................. 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 37
PART III
Item 10. Executive Officers of the Registrant........................ 37
Item 11. Executive Compensation...................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 37
Item 13. Certain Relationships and Related Transactions.............. 37
PART IV
Item 14. Exhibits, Financial Statements and Schedules and Reports on
Form 8-K.................................................. 37
Signatures.......................................................................... S-1
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including without limitation those discussed in
"Factors Affecting Our Business, Operating Results and Financial Condition"
section herein. Such forward-looking statements speak only as of the date on
which they are made, and we caution readers not to place undue reliance on such
statements.
References to "we," "us," "our," the "Company" or "Bruker Daltonics" refer
to Bruker Daltonics Inc. and, in some cases, its subsidiaries, as well as all
predecessor entities.
Our principal executive offices are located at 15 Fortune Drive, Billerica,
Massachusetts 01821, and our telephone number is (978) 663-3660. Information
about Bruker Daltonics is available at www.daltonics.bruker.com. The information
on our website is not incorporated by reference into and does not form a part of
this report. Daltonics and the Daltonics logo are trademarks of Bruker
Daltonics. All other trademarks, tradenames or copyrights referred to in this
report are the property of their respective owners.
PART I
ITEM 1. BUSINESS
OVERVIEW
Bruker Daltonics is a leading developer and provider of innovative life
science tools based on mass spectrometry. Our substantial investment in research
and development allows us to design, manufacture and market a broad array of
products intended to meet the rapidly growing needs of our diverse customer
base. Our customers include pharmaceutical companies, biotechnology companies,
agricultural biotechnology companies, proteomics companies, molecular
diagnostics companies, academic institutions and government agencies.
Mass spectrometers are sophisticated devices that provide highly accurate
molecular information. Our mass spectrometry-based systems often combine
automated sample preparation robots; advanced mass spectrometry instrumentation;
reagent kits and other disposable products used in conducting assays, or
consumables, and bioinformatics software. Our systems offer integrated solutions
for applications in multiple existing and emerging markets including genomics
and proteomics, metabolic and biomarker profiling, drug discovery and
development, molecular assays and diagnostics, molecular and systems biology and
basic medical research.
We market our life science systems both through our direct sales force and
through strategic distribution arrangements with Agilent Technologies,
PerkinElmer, Sequenom, MWG-Biotech and others. We are also a worldwide leader in
supplying mass spectrometry-based systems for substance detection and pathogen
identification in security and defense applications.
Bruker Daltonics was incorporated in Massachusetts, as Bruker Federal
Systems Corporation. In February 2000, we reincorporated in Delaware as Bruker
Daltonics Inc.
INDUSTRY BACKGROUND
We design our products to address the rapidly evolving needs of the life
science industry. Public and private efforts to sequence the entire human genome
have led to advances that are fueling further investment in the discovery and
identification of single nucleotide polymorphisms, or SNPs, and other forms of
genetic variation. These developments, combined with advances in combinatorial
chemistry, which is the creation of libraries of chemical compounds, and in
basic molecular biology and medical research, are spurring growth in the
following rapidly developing and emerging areas:
- PHARMACOGENOMICS, which compares the genetic information of an individual
to the average human genome to predict the response of individual patients
and patient populations to drugs;
- PERSONALIZED MEDICINE, which seeks to apply inexpensive, rapid molecular
diagnostic tests, or assays, to profile a patient's genetic composition
and enable the prescription of individualized drug therapy;
- PROTEOMICS, which involves the large-scale separation, identification and
characterization of proteins in order to understand how proteins are
created based on the information contained in genes;
- NEW METHODS OF DRUG DISCOVERY, which are based on the rapid measurement,
or high-throughput screening, of large numbers of small organic compounds
synthesized through combinatorial chemistry against large numbers of
disease pathways, or targets, identified by genomics and proteomics;
- BIOMARKER DETECTION, OR BIO-BARCODING, which develops rapid and sensitive
assays for a broad range of cell and tissue types for applications
including infectious disease detection, human tissue assessment, the
identification of specific agricultural characteristics and pathogen
identification,
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even when the molecular mechanisms are not understood or the genomic
sequence is not available; and
- METABOLIC PROFILING, OR METABOLOMICS, which analyzes the levels of
substances produced by the metabolism, or metabolites, present in a cell
or in biological fluids to draw correlations between disease states,
genetic modifications and variations in metabolite levels.
In addition, increased levels of funding for basic medical research have
fueled demand by universities, medical schools and government agencies for
sophisticated bioanalytical systems, such as mass spectrometers. Funding has
also increased for substance detection and pathogen identification systems for
security and defense applications.
LIMITATIONS OF ALTERNATIVE LIFE SCIENCE TOOLS
Many of the bioanalytical tools available today based on technologies other
than mass spectrometry, including those described in the next paragraph, have
significant limitations when used for applications including the detection of
genetic variation, pharmacogenomics, proteomics, drug discovery and biomarker
detection. These limitations include lack of throughput to accommodate the
volume of analysis required, lack of automation, time-consuming sample
preparation and insufficient accuracy of the resulting data. For example, the
two leading methods traditionally used for DNA sequencing and expression
profiling are electrophoresis and hybridization. The error rate of these
techniques can increase the cost, complexity and time involved in completing
more demanding analyses.
Traditional protein science tools including Edman sequencing and
two-dimensional gel separations are time consuming, relatively inaccurate and
labor intensive. Additionally, many alternative life sciences tools can only be
utilized by expert scientists. Other, newer bioanalytical tools, like biological
chips that can be read by fluorescence readers, may be highly automated.
However, these instruments are often less flexible or less accurate than mass
spectrometers. For other emerging applications including metabolic profiling and
rapid biomarker detection, we believe there presently are no automated,
sensitive and accurate alternative tools available other than mass
spectrometry-based systems.
Increasingly, life science companies are looking to solutions that address
the limitations inherent in these alternative tools.
MASS SPECTROMETRY
Mass spectrometers are devices for measuring the mass, or weight, of a
molecule. Mass spectrometry systems employ an ionization source which creates
charged molecules and a mass separation/detection component which separates
these charged molecules on the basis of mass to detect their presence and
quantity. Mass spectrometry has been used in physics and chemistry for over
fifty years. Over the past fifteen years, mass spectrometry has emerged as a
powerful research tool in the life sciences. For example, mass spectrometers can
determine the identity, amount, structure, sequence and other biological
properties of small molecules, like drug candidates and metabolites, as well as
large biomolecules, like proteins or DNA.
While highly accurate, mass spectrometers historically have been limited by
the time and skill required to prepare samples, conduct each measurement and
analyze the data.
OUR SOLUTIONS
Our product lines integrate sophisticated mass spectrometers with automated
sample preparation and measurement, and, where appropriate, bioinformatics
software to address many of the bioanalytical
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and bioinformatics needs of the life sciences industry across a broad range of
applications. Our products have particular application to:
- genetic variation analysis, including such evolving areas as
pharmacogenomics and personalized medicine;
- proteomics;
- metabolomics;
- drug discovery based on high-throughput screening and combinatorial
chemistry; and
- drug development.
Automated high-throughput mass spectrometry systems offer significant
advantages over other bioanalytical tools, including Edman sequencing and
two-dimensional gel separations, in these emerging and rapidly changing markets.
Our automated systems allow our customers to generate and evaluate large volumes
of accurate, high-quality data on a cost-effective basis. We believe that this
enhanced throughput and high-quality data improves our customers' ability to
apply bioinformatics to validate lead disease pathways, or targets, understand
disease pathways and analyze lead compounds. Our customers also use our products
in molecular biology and other basic medical research. In addition, our
automated, integrated mass spectrometry technology forms the basis of our
substance detection and pathogen identification products used in security and
defense markets.
Our life science systems are based on four core mass spectrometry
technologies. Building on these core technologies, we offer a wide range of
systems that address key analytical needs in multiple applications across the
life sciences industry. We believe that our products offer the following
advantages to our customers:
HIGH DEGREE OF AUTOMATION. Our automated sample preparation and measurement
technology and sophisticated bioanalytic software allow our customers to process
high sample volumes with reduced reliance on highly-trained scientific
personnel.
INTEGRATED SOLUTIONS. We provide our customers with complete bioanalytical
solutions by integrating our mass spectrometry products with front-end sample
preparation, a sample preparation technology that conditions samples before they
are analyzed, with purification and separation methods that clean and separate
components of sample mixtures, chemicals and other disposable materials used in
conducting assays and with bioinformatics software that interprets and analyzes
data after it has been generated.
ACCURATE RESULTS. Our automated mass spectrometry systems generate large
volumes of highly accurate data with the selectivity and sensitivity our
customers demand. The high sensitivity of our products enables our customers to
pursue miniaturization and analysis of smaller samples. The accuracy of the
results reduces the need for repeat analysis to eliminate errors.
INCREASED PRODUCTIVITY. Our high-throughput products are designed to allow
our life science customers to increase productivity by generating more results
in a shorter time period.
COST EFFICIENCY. We have achieved performance advances with our products
that are designed to result in increased information per analysis at a
significantly lower cost per analysis for our customers.
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OUR STRATEGY
Our strategy is to continue to be a leading provider of mass spectrometry
and related systems for use in life sciences, as well as in substance detection
and pathogen identification. Key elements of our strategy include:
PROVIDE A BROAD ARRAY OF TOOLS FOR A WIDE RANGE OF APPLICATIONS. In life
sciences, our strategy is to offer a broad range of products that provide
integrated solutions including sample preparation, sample analysis and data
interpretation for applications in existing and emerging life science markets.
Our longer term strategy is to expand our enabling life science tools beyond our
current mass spectrometry-based product lines, and to extend our position as a
leading provider of biological mass spectrometers to related bioinformation
business opportunities. We plan to selectively evaluate new life science markets
to which we may apply our core technologies and to continue to develop and
market our mass spectrometry systems for substance detection and pathogen
identification.
DEVELOP NEW PLATFORMS, ENHANCED PRODUCTS AND NEW APPLICATIONS. We plan to
continue our substantial investment in internal research and development. As a
result of this investment, in early 2000 we introduced an entirely new
technology platform, four next generation mass spectrometers, two new consumable
product lines and two bioinformatics software packages. We expect our
collaborations with key industrial and academic customers to continue to play a
strategic role in our research and development efforts and to assist us in
identifying and anticipating opportunities for enhanced products and emerging
applications.
BUILD ALLIANCES AND PURSUE ACQUISITIONS. We plan to continue to co-develop
selected products with strategic partners, especially when these alliances
expand our product lines and extend our marketing reach. As an example, our
collaboration with Agilent resulted, in early 2000, in the introduction of two
ion trap instruments designed to be installed on top of a laboratory bench. We
also intend to pursue strategic acquisitions to extend our technology base. For
example, at the end of 1999, we acquired ProteiGene and Viking to expand our
biomarker and substance detection technologies, respectively. Similarly, in
2000, we entered into a strategic alliance with Geneva Proteomics whereby it
will purchase 51 of our systems as well as consummables and support over time
for use in industrial-scale proteomics research.
GENERATE RECURRING REVENUE. Our consumables and product service and support
provide an opportunity to generate recurring revenue. We seek to develop
additional consumables which enhance the ease of use and productivity of our
tools. For example, our reagents and assay kits make sample preparation easier
for our customers. We seek to increase recurring revenue from post-warranty
service to our growing industrial customer base as well as from training and
applications support.
DEVELOP AND EXPAND OUR BIOINFORMATION BUSINESS. We intend to expand our
presence in the bioinformation field. We expect to create proprietary databases
which our customers can access by paying subscription fees, to collaborate in
drug discovery with customers in return for milestone and product royalty
payments, and to offer paid-for technology access partnerships to life science
companies. We intend to deploy our automated high-throughput mass
spectrometry-based discovery tools in an industrial-biology information
production operation.
LEVERAGE OUR INTELLECTUAL PROPERTY. We expect to continue to pursue an
intellectual property strategy of obtaining extensive patent protection. We have
a substantial patent portfolio, and it is our strategy to build and protect our
patent portfolio. We believe that maintaining extensive intellectual property
rights allows us to maintain a competitive advantage through protecting access
to key technologies. Where appropriate, we may pursue an active licensing
program to generate recurring revenue.
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OUR PRODUCTS
MASS SPECTROMETRY
We base our life science solutions on four core mass spectrometry technology
platforms which include:
- matrix-assisted laser desorption ionization, or MALDI, time-of-flight mass
spectrometry;
- electrospray ionization, or ESI, time-of-flight mass spectrometry;
- Fourier transform mass spectrometry; and
- ion trap mass spectrometry.
Time-of-flight mass spectrometers measure mass based on the time it takes
for charged molecules to travel from the ionization source to the detection
component. With the ability to analyze as many as 30,000 samples per day, these
mass spectrometers currently have the highest sample throughput and can analyze
the broadest range of masses of any mass spectrometer for use in the fields of
genomics and proteomics. Our time-of-flight mass spectrometry solutions make
full use of this potential for increased speed by automating various steps of
the analysis. Our time-of-flight solutions combine high sensitivity, accuracy
and throughput to generate large volumes of accurate raw data for SNP detection
and proteomics.
Our life science tools include both MALDI and ESI time-of-flight
instruments.
MALDI TIME-OF-FLIGHT MASS SPECTROMETERS utilize an ionization process to
analyze solid samples using a laser that combines large volume sample throughput
with high mass range and significant sensitivity. Our MALDI time-of-flight mass
spectrometers are useful for (a) SNP analysis; (b) genotyping; (c) personalized
medicine; (d) forensics; (e) proteomics and protein function analysis; (f) drug
discovery and development; and (g) fast cell and tissue biomarker detection. We
offer four MALDI time-of-flight instruments:
REFLEX III-TM-. Our top-of-the-line MALDI time-of-flight instrument offers
modular flexibility that allows various configurations in the research
laboratory and automated sampling combined with high sensitivity, resolution and
accuracy.
BIFLEX III-TM-. The BIFLEX III provides high-end performance with
high-throughput for industrial biology and drug discovery applications. Sequenom
uses this system in its industrial genomics MassArray system, and MWG-Biotech is
integrating it into a medium-throughput SNP detection system.
OMNIFLEX-TM-. Our first MALDI time-of-flight instrument which can be
installed on a laboratory bench can be used in general-purpose mass spectrometry
laboratories. We introduced this product in March 2000. The OmniFLEX combines
sensitivity, resolution and accuracy, for a wide variety of routine and
higher-end applications, with a lower price than our other two products
described above. We co-market this product with PerkinElmer.
AUTOFLEX-TM-. Our first MALDI time-of-flight instrument specifically
designed for industrial biology. We introduced this product in August 2000. The
autoflex can be used in SNP analysis and proteomics.
These products utilize our proprietary AnchorChip microarrays which prepare
samples for analysis. These microarrays employ patented microfluidics technology
that improves sensitivity and reduces analysis time per sample by concentrating
the sample in a defined location.
ESI TIME-OF-FLIGHT MASS SPECTROMETERS utilize an ionization process to
analyze liquid samples. This process, which does not destroy the sample, allows
for rapid data acquisition and analysis of large biological molecules. ESI
time-of-flight mass spectrometers are useful for (a) identification, protein
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analysis and functional complex analysis in proteomics and protein function;
(b) molecular identification in metabolomics and drug metabolite analysis;
(c) combinatorial chemistry high-throughput screening, or HTS; and (d) fast
liquid chromatography mass spectrometry, or LC/MS, in drug discovery and
development.
BIOTOF II-TM-. We introduced our BioTOF II in March 2000. Our system offers
higher mass resolution and improved mass accuracy than we believe is currently
achievable with other commercial ESI time-of-flight systems.
FOURIER TRANSFORM MASS SPECTROMETERS utilize high-field superconducting
magnets to offer the highest resolution, selectivity and accuracy currently
achievable in mass spectrometry. Our systems based on this technology often
eliminate the need for time-consuming separation techniques in complex mixture
analyses. In addition, our systems can fragment molecular ions to perform exact
mass analysis on all fragments to determine molecular structure. Fourier
transform mass spectrometers are useful for (a) the study of the structure and
function of biomolecules including proteins, DNA and natural products;
(b) complex mixture analysis including combinatorial libraries;
(c) high-throughput proteomics and metabolomics; and (d) high-throughput drug
screening.
APEX III-TM-. Our APEX III product line offers a choice of four magnetic
field strengths. An increase in field strength improves resolution, selectivity
and accuracy. In the third quarter of fiscal 2000, we introduced a new product
in our APEX III line which is our first compact commercial fourier transform
mass spectrometer. These products allow a wide range of research capabilities
while maintaining simplicity of operation. Our software and automation
developments allow us to offer high-throughput, easy-to-use systems.
ION TRAP MASS SPECTROMETERS measure all ions simultaneously which improves
sensitivity relative to older quadrupole mass spectrometers. Ion trap mass
spectrometers are useful for (a) sequencing and identification based on
structural analysis; (b) quantitative liquid chromatography mass spectrometry;
(c) identification of combinatorial libraries; and (d) generally enhancing the
speed and efficiency of the drug discovery and development process.
ESQUIRE3000-TM-. Our esquire3000 ion trap mass spectrometer combines our
patented ion trap technology with ion source and liquid chromatography
technology from Agilent. It offers performance benefits over other ion trap
systems, including software integration with Agilent separation systems, faster
scan rates, higher sensitivity, a wider mass range and a simple Windows NT user
interface. We also manufacture a related product, the LC/MSD-trap, which is
distributed by Agilent.
CONSUMABLES
We sell consumables for processing, purifying and preparing samples prior to
mass spectrometric analyses. Additionally, our systems for substance detection
and pathogen identification use consumables for sample collection. Consumables
will provide an increasing recurring revenue stream as our installed systems
base grows. Our consumables include:
PRODUCT DESCRIPTION
- ------- -----------
AnchorChips Microarrays that prepare samples and increase the
sensitivity of MALDI analysis, improve automation and
minimize reagent consumption
GenoPureDS kit Purifies DNA prior to mass spectrometric analysis
GenoPureOligo kit Purifies oligonucleotides, or DNA fragments, prior to
analysis
Silicon wheels Sample collection device for substance detection
Quartz tubes Sample processing device for pathogen identification
Dryers and filters Air dryers and filters for our ion mobility spectrometers
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AUTOMATION AND SEPARATION PRODUCTS, TRAINING AND SERVICES
We sell a broad array of related products and services with our initial
system sales and during a product's lifetime. For substance detection and
pathogen identification systems, we have developed training products, including
complete system simulator installations. We offer post-warranty service on
either a pre-paid or per-call basis and sell repair and replacement parts for
our growing installed systems base. Our related products include:
PRODUCT DESCRIPTION
- ------- -----------
Reconnaissance Training system that instructs users how to identify areas
Simulator contaminated with toxic substances
MM-1 Trainer Training product for the operation of our mass spectrometer
HP1100 and 3D-CE Products that condition samples for mass spectrometric
analysis that are produced by Agilent Technologies, Inc. and
sold by us
MAP II and II/8 Robots based on technology owned by Gilson Inc. that prepare
samples for analysis by our MALDI instruments
AutoXecute Automation software that allows our time-of-flight systems
to analyze samples automatically
BIOINFORMATICS AND SOFTWARE
We have introduced automated control software to integrate separation
devices and robotics into our solutions. In addition, we provide bioinformatics
software to generate useable information from large volumes of raw data.
Finally, we offer intuitive data acquisition and analysis software on a Windows
NT platform to make our systems accessible to non-experts. Our related products
include:
PRODUCT DESCRIPTION
- ------- -----------
HyStar NT Liquid chromatography mass spectrometry software to control
Agilent and Waters liquid chromatography systems, Gilson
robots and the operation of an integrated liquid
chromatography/nuclear magnetic resonance/mass spectrometry
system
BioTools For biomolecule identification and sequencing
Mascot Fast, automated web-enabled protein identification from
protein databases--purchased from Matrix Science
Genotools Interpretation software for DNA mass spectra for SNPs or
other genetic variation
PolymerTools Interpretation software for mass spectra for synthetic
polymer parameters
QuantAnalysis Software for quantification of metabolites and substances
SUBSTANCE DETECTION AND PATHOGEN IDENTIFICATION
We sell a wide range of portable analytical and bioanalytical detection
systems and related products. Our customers use these devices for nuclear,
biological pathogen and chemical defense applications, anti-terrorism, law
enforcement and process and facilities monitoring. Our substance detection and
pathogen identification products use many of the same technology platforms as
our life sciences products. For example, we developed our esquire products using
the same ion trap technology used in our chemical and biological mass
spectrometers. We also provide integrated, comprehensive
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detection suites which include our multiple detection systems, consumables,
training and simulators. Our related products include:
PRODUCT DESCRIPTION
- ------- -----------
MM-1 Mobile mass spectrometer for automatic detection of chemical
substances
CBMS Mobile ion trap mass spectrometers for automated
classification of biological pathogens and identification of
chemical agents
RAID-16 and RAID-S Portable and stationary automated ion mobility detectors for
chemical agents detection
SPME-RAID Trace detector for explosives
EM640 Series Transportable mass spectrometers for emergency response
Viking 573 Portable gas chromatography mass spectrometer for law
enforcement
RAPID II Long-range infrared detector for chemical substance clouds
SVG-2 Solid-state radiation detector
NIGAS Non-intrusive neutron activation detector for chemical
component analysis in closed containers
RESEARCH AND DEVELOPMENT
PRODUCT AND APPLICATIONS DEVELOPMENT. We commit substantial capital and
resources to internal and collaborative research and development in order to
provide innovative life science solutions to our customers. In 1998, 1999 and
2000, we spent $13.0 million, $15.1 million and $20.0 million, respectively, for
research and development purposes. The following are a few examples of our
recent research and development accomplishments:
- After a four-year development effort, we created a new technology platform
for orthogonal time-of-flight mass spectrometry. In January 1998, we
introduced our first commercial system using this technology platform, the
BioTOF. In March 2000, we offered our second generation product derived
from this ESI time-of-flight platform, the BioTOF II;
- In March 2000, we introduced various next-generation systems based on our
existing mass spectrometry technology platforms including the Apex III
Series Fourier transform mass spectrometer, the esquire3000 ion trap mass
spectrometer, the OmniFLEX MALDI time-of-flight mass spectrometer and the
MAP II/8 sample preparation robot. These new systems typically had
two-year development and engineering cycles.
- In the second quarter of 2000, we commercialized our AnchorChip
microarrays. These products incorporate our patented microfluidics
technology which achieves greater sensitivity in MALDI analyses; and
- We developed our ion source, known as ZeroAdjust Nanospray-TM-, to solve
ease of use and throughput constraints associated with traditional ESI
sources at low flow rates. This development increases throughput for
proteomic applications.
- In the second half of 2000, we introduced the autoflex, the first MALDI
time-of-flight system designed to analyze over 30,000 samples without
operator intervention. The autoflex is the first MALDI time-of-flight
system designed for high sample through put including fast, automatic
analysis and maximum reliability for millions of sample analysis without
service.
- In the second half of 2000, we introduced our genopure DNA purification
system developed in collaboration with the Max-Planck Institute for
Molecular Genetics. In addition, we introduced Version 1.0 of our
genotools software for MALDI time-of-flight SNP genotyping.
GRANTS. Historically, we have been the recipient of various government
grants. In early 2000, we completed a five-year Advanced Technology Program
grant from the National Institute of Standards
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and Technology for the development of a Mass Tag DNA Diagnostic Mass
Spectrometer. We also currently have six ongoing, multi-year research grants
from the German Federal Government for the development of new spectrometers and
new applications for analysis. We have generally retained at least non-exclusive
rights to any items or improvements we develop under these grants. The U.S.
government generally retains the right to use technology developed under grants.
The German government requires that we use and market technology developed under
grants in order to retain our rights to the technology. In 1998, 1999 and 2000,
we received research and development grants in the aggregate amounts of
$2.1 million, $4.1 million and $1.8 million, respectively. We expect grant
revenue to represent a decreasing portion of our revenue.
CUSTOMERS
We have a broad and diversified global life science customer base that
includes over 1,700 customers with our installed products. Our life science
system sales accounted for approximately 66% of our net product revenue for the
year ended December 31, 2000. Our life science customer base is composed
primarily of end-users and includes pharmaceutical, biotechnology, proteomics,
agricultural biotechnology, molecular diagnostics and fine chemical companies,
as well as commercial laboratories, university laboratories, medical schools and
other not-for-profit research institutes and government laboratories. Our
customers generally do not have a need to buy numerous systems at one time, and
historically we have not depended on any single customer in the sale of our life
science systems. In 2000, no single customer accounted for more than 10% of our
revenue.
We sell our substance detection and pathogen identification products and
services to defense departments and law enforcement and emergency response
professionals. For the year ended December 31, 2000, our substance detection and
pathogen identification system sales represented approximately 22% of our net
product revenue. Our substance detection and pathogen identification customers
are primarily military and government end-users. Our after-market products,
including consumables, software and services, accounted for the remaining 12% of
our net product revenue for the year ended December 31, 2000.
During 1998 and 1999, the U.S. Department of Defense Edgewood Chemical
Biological Center accounted for 12% and 13%, respectively, of our net revenue,
and the South Korean government (through its prime contractor Daewoo Heavy
Industries) accounted for 18% and 15%, respectively, of our net revenue. Our
production contract with the U.S. Department of Defense Edgewood Chemical
Biological Center ended on March 31, 2000, and our contract with Daewoo Heavy
Industries will continue until July 2001. Our net revenue attributable to Daewoo
accounted for approximately 10% of our net revenue in 2000. No other customer
accounted for 10% or more of our net revenue in 2000.
Financial Information about our geographic areas required by Item 1 of
Form 10-K may be found in Footnote 9 to our Financial Statements included in
this report. Financial information about our revenues from external customers,
measure of profit and total assets required by Item 1 of Form 10-K is included
in our Financial Statements included in this report.
STRATEGIC COLLABORATIONS
We have several key technical collaborations and alliances for the
development and distribution of new or existing products. These collaborations
include:
AGILENT TECHNOLOGIES, INC. In 1996, we commenced a collaboration with
Agilent Technologies (formerly an operating unit of Hewlett Packard) to develop
and distribute ion trap liquid chromatography mass spectrometry instrumentation.
We jointly manufacture two different models of ion trap mass spectrometers. One
model is branded and distributed by Agilent, and the other model, the
esquire3000, is branded and distributed by us. As a part of our agreement with
Agilent, we have agreed to assume the complete defense of the existing Finnigan
lawsuit and any new lawsuits brought
9
by Finnigan against Agilent with respect to our jointly produced ion trap mass
spectrometers. We will also pay any settlement and any final adverse judgment.
Under our agreement with Agilent, neither party can conduct joint ion trap
development with any other party, and each party has agreed not to develop
products that would compete with the products of the other party that are the
subject of this agreement.
PERKINELMER, INC. In March 2000, we began our alliance with PerkinElmer to
leverage PerkinElmer's global distribution capability to co-market our OmniFLEX
time-of-flight products. Pursuant to this agreement, PerkinElmer distributes
OmniFLEX products through its international distribution system and has
committed to purchase a minimum number of our products. We believe this alliance
will advance expansion into new markets, including pharmaceutical drug
development, protein, peptide and oligonucleotide product quality control,
synthetic polymer manufacturing, and quality testing in the food and beverage
industries. PerkinElmer has agreed not to develop or sell any other benchtop
MALDI time-of-flight mass spectrometers for the term of our agreement and for
one year thereafter.
SEQUENOM INSTRUMENTS GMBH. In 1997, we began an alliance with Sequenom
Instruments GmbH, a subsidiary of Sequenom Inc., to develop industrial genomics
tools for high-throughput SNP analysis. Under this agreement, Sequenom purchases
MALDI time-of-flight mass spectrometers from us, and they include these
spectrometers in their products. Our BIFLEX III is the basis for a co-labeled
system called SpectroScan-TM- which is an important component of the Sequenom
MassARRAY system.
MWG-BIOTECH AG. In 1999, we began our alliance with MWG-Biotech to
co-develop an integrated system for SNP analysis, including reagent kits,
high-volume sample preparation systems and our BIFLEX III, MALDI time-of-flight
system. The National Institute of Standards has selected this system to help
establish a standard SNP database laboratory. Each party owns any developments
it makes under this collaboration, and neither party participates in the sales
proceeds of the other party.
GENEVA PROTEOMICS, INC. In September 2000, we entered into a strategic
alliance with Geneva Proteomics pursuant to which we will collaborate with
Geneva Proteomics and share technologies for industrial-scale proteomics. As a
part of this alliance, Geneva Proteomics will purchase, over the course of time,
51 of our mass spectrometry systems. Additionally, in November 2000, we made a
strategic equity investment, in both cash and stock, in Geneva Proteomics. We
financed this equity investment with cash and newly issued shares of our common
stock. Each party owns any development it makes as a part of this agreement, and
any developments made jointly shall be owned jointly by the parties.
We have a number of other collaborations, including collaborations with
Matrix Sciences and Variagenics for technology enhancements. In early 2000, we
expanded our collaboration with Variagenics to combine our technologies into an
integrated system used by Variagenics and its pharmaceutical partners to
identify genetic variances. We own all developments we make under these
collaborations.
SALES AND MARKETING
MARKETING ACTIVITIES. Our primary marketing theme is "Enabling Life Science
Tools Based on Mass Spectrometry." We emphasize our solutions and technology
platforms rather than simply the provision of instruments. We pursue an active
marketing program through a large number of activities throughout the year. Our
key marketing vehicles include trade shows, advertising, our websites,
newsletters and related activities.
DIRECT SALES CHANNELS. During the last three years, we have committed
significant resources to upgrade and expand our direct sales force and our
distribution channels worldwide. We have direct sales coverage throughout most
of the European Union, North America and much of the Pacific Rim.
10
During the three years ending December 31, 2000, we more than doubled our sales
and marketing staff.
We have well-equipped application and demonstration facilities and qualified
application personnel who assist customers and provide product demonstrations in
specific application areas. We maintain our primary demonstration facilities in
the United States (Massachusetts and California), Germany (Bremen and Leipzig),
the United Kingdom (Coventry) and Japan (Tsukuba). Demonstration systems and
applications scientists are also available in Australia, France, Italy and
Switzerland.
INDIRECT SALES CHANNELS. We have various international distributors and
independent sales representatives, including affiliated companies and various
representatives in the countries of South Korea, Portugal and Israel and in the
regions of Latin America and Eastern Europe. We have adopted a distribution
business model where we engage in strategic distribution alliances with other
companies to address certain market segments. Our primary distribution alliances
are:
- We manufacture for Agilent an ion trap mass spectrometer, which they
incorporate into their liquid chromatography mass spectrometry systems for
distribution into various industrial markets;
- We sell high-throughput MALDI time-of-flight mass spectrometers through
Sequenom into emerging industrial genomics markets for high-throughput SNP
analysis;
- We sell BIFLEX MALDI time-of-flight mass spectrometry systems through
MWG-Biotech for DNA/RNA applications, including SNP detection; and
- In early 2000, we began co-marketing our OmniFLEX MALDI time-of-flight
mass spectrometers with PerkinElmer in a variety of industrial market
segments.
SALES CYCLE AND BACKLOG
The typical time between our first customer contact and our receipt of a
customer's order for our life science systems is three to six months for most
product lines. However, this sales cycle can be in excess of a year when a
customer must budget the product into an upcoming fiscal year. Substance
detection and pathogen identification products can have multi-year sales cycles
for large production contracts.
We typically ship ordered products within twelve months after receipt of the
order. At December 31, 1999 and 2000, we had approximately $30.1 million and
$38.0 million, respectively, in orders which had not yet been shipped to and
accepted by the customer.
MANUFACTURING
We manufacture and test the majority of our products in our three principal
ISO 9001 registered manufacturing facilities located in the United States and
Germany. We have considerable manufacturing flexibility at our various
facilities, and each facility can manufacture multiple products at the same
time. We maintain in-house key manufacturing know-how, technologies and
resources. Our facilities incorporate environmental chambers, CE mark compliance
test centers, clean room manufacturing for vacuum components, licensed
facilities for handling closed radioactive sources, computer-aided laser cutting
and vacuum welding. We maintain multiple suppliers for key components that are
not manufactured in-house.
INTELLECTUAL PROPERTY
Our intellectual property consists of patents, copyrights, trade secrets,
know-how and trademarks. Protection of our intellectual property is a strategic
priority for our business. We have a substantial patent portfolio, and it is our
strategy to build and protect our patents. We believe our owned and licensed
patent portfolio provides us with a competitive advantage. This portfolio
permits us to
11
maintain access to a number of key technologies. We license our owned patent
rights where appropriate. We will enforce our patent rights against infringers
if necessary.
The patent positions of life science tool companies involve complex legal
and factual questions. As a result, we cannot predict the enforceability of our
patents with certainty. In addition, we are aware of the existence from time to
time of patents in certain countries which, if valid, could impair our ability
to manufacture and sell our products in these countries.
We are party to an agreement dated as of August 10, 1998 with Indiana
University's Advanced Research and Technology Institute pursuant to which we
have been granted an exclusive license to specified patent rights and products
including three patents that relate to time-of-flight mass spectrometry. We pay
the Institute royalties under this agreement and have agreed to allow the
Institute to utilize any improvements that we make to the licensed products for
research and educational purposes on a non-exclusive, royalty-free basis. The
Institute may terminate the agreement if we default on our obligations or become
bankrupt. We may terminate the agreement with six months notice. The license
granted by the agreement expires at the later of August 10, 2008 or expiration
of the licensed patent rights. Additionally, we have entered into a
collaboration agreement with the Institute that extends until 2002 under which
the Institute will continue to perform experiments that are useful to us in
exchange for a flat fee and a percentage fee of any sales of products developed
for us by the Institute.
We also rely upon trade secrets, know-how, trademarks, copyright protection
and licensing to develop and maintain our competitive position. We generally
require the execution of confidentiality agreements by our employees,
consultants and other scientific advisors. These agreements provide that all
confidential information made known during the course of a relationship with us
will be held in confidence and used only for our benefit. In addition, these
agreements provide that we own all inventions generated during the course of the
relationship.
Our management considers Daltonics and the Bruker Daltonics logo to be our
material trademarks, both of which are registered in the United States.
We are a party to various government contracts. Under some of these
government contracts, the government may receive license or similar rights to
intellectual property developed under the contract. However, under government
contracts we enter we receive no less than non-exclusive rights to any items or
technologies we develop.
SCIENTIFIC ADVISORY BOARD
We have established an international Scientific Advisory Board to advise us
on strategic research and development and strategic marketing issues. The
members of the Board include:
- Jean Futrell, Ph.D., Director of the Department of Energy's Environmental
Molecular Sciences Laboratory in Richmond, Washington; former Chairman of
Chemistry and Biochemistry at the University of Delaware;
- Steven A. Hofstadtler, Ph.D., Director of Drug Discovery Technology, ISIS
Pharmaceuticals, Inc., Carlsbad, California;
- Joachim R. Wesener, Ph.D., Head of Mass Spectrometry at Bayer Central
Research, Leverkusen, Germany; Board Member of German Society for Mass
Spectrometry;
- Professor Helmut Meyer, University of Bochum, Germany; President of
Protagen AG, Bochum, Germany;
12
- Professor Peter Derrick, University of Warwick, United Kingdom; Director
of University of Warwick's Institute for Mass Spectrometry; Professor and
Chairman of the Department of Chemistry; and
- Gunther Heinrich, Ph.D., CEO and President of EPIDAUROS AG, Bernried,
Germany.
We provide members of our Scientific Advisory Board a fee of $6,000 per year
and options at fair market value for 1,500 shares of our common stock. These
options vest in equal annual increments over the course of their three-year
tenure. We also reimburse Scientific Advisory Board members for expenses
reasonably incurred related to the services they provide us.
COMPETITION
Our markets are highly competitive, and we expect the competition to
increase. Currently, we compete with a variety of companies that offer mass
spectrometry-based systems along each of our product lines. Our competitors in
the life sciences include Applied Biosystems, Amersham Pharmacia Biotech, Inc.,
Waters Corporation, ThermoElectron Corporation (which includes Finnigan) and
Hitachi, Ltd. Our substance detection and pathogen identification markets are
highly fragmented, and we compete with a number of companies in this area. Each
of these competitors produces products based on several of the technology
platforms that we utilize; however, none of them produces products utilizing all
of our major technology platforms. Some of them have a greater market share than
we have in particular technology platform areas. We also compete with other
companies that provide analytical tools based on other technologies. These
technologies may prove to be more successful in meeting demands in the markets
that our products serve. In addition, other companies may choose to enter our
field in the future. We believe that the principal competitive factors in our
markets are technological applications expertise, product functionality,
marketing expertise, distribution capability, proprietary patent portfolios,
cost and cost effectiveness.
Our existing products and any products that we develop may compete in
multiple, highly competitive markets. Many of our potential competitors in these
markets have substantially greater financial, technical and marketing resources
than we do. They may offer or succeed in developing products that would render
our products or those of our strategic partners obsolete or noncompetitive. In
addition, many of these competitors have significantly greater experience in the
life sciences market. Our ability to compete successfully will depend on our
ability to develop proprietary products that reach the market in a timely manner
and are technologically superior to and/or are less expensive, or more cost
effective, than other currently marketed products. Current competitors or other
companies may possess or develop technologies and products that are more
effective than ours. Our technologies and products may be rendered obsolete or
uneconomical by technological advances or entirely different approaches
developed by one or more of our competitors.
EMPLOYEES
As of March 23, 2001, we employed over 500 full-time employees, with
approximately 90 employees in the United States and more than 400 employees
located primarily in Europe. Over 100 of these employees hold doctorates in
biology, chemistry or physics.
GOVERNMENT REGULATION
We possess low-level radiation licenses for our facilities in Billerica,
Massachusetts and Leipzig, Germany. Some of our products, particularly in the
detection area, are subject to enhanced levels of export controls from the
United States and Germany. Apart from these two areas, we are not subject to
direct governmental regulation other than the laws and regulations generally
applicable to businesses in the jurisdictions in which we operate.
13
ITEM 2. PROPERTIES
Our three principal facilities located in Billerica, Massachusetts; Bremen,
Germany; and Leipzig, Germany incorporate manufacturing, research and
development, application and demonstration, marketing and sales and
administration functions.
- We lease a 25,000 square foot facility in Billerica, Massachusetts from a
related entity. The initial term of this lease expired October 31, 1999,
and it now renews annually for one year periods. The lease can be
terminated by either party on 90 days written notice.
- On December 1, 2000, we purchased a 202,888 square foot parcel of property
in Billerica, Massachusetts adjacent to our existing leased property for a
purchase price of $742,000 from a related party.
- We own a 50,000 square foot facility in Bremen, Germany.
- We own a 50,000 square foot facility in Leipzig, Germany.
We lease additional centers for sales, applications and service support in
Fremont, California; Coventry, United Kingdom (Bruker Daltonics Ltd.);
Wissembourg, France (Bruker Daltonique S.A.); Stockholm, Sweden (Bruker
Daltonics Scandinavia A.B.); Faellanden, Switzerland (Bruker Daltonics AG);
Tsukuba, Japan (Nihon Bruker Daltonics K.K.); Beijing, People's Republic of
China, Taipei, Taiwan; Ontario, Canada (Bruker Canada, Ltd.); Milan, Italy
(Bruker Italiana SRL); Bangkok, Thailand (Bruker South East Asia) and
Alexandria, Australia (Bruker Australia Party Ltd.).
ITEM 3. LEGAL PROCEEDINGS
FINNIGAN LITIGATION
Since December 31, 1996, we have been involved in patent litigation with a
competitor, Finnigan, a subsidiary of Thermo Electron Corporation.
INTERNATIONAL TRADE COMMISSION INVESTIGATION AND APPEAL. In January 1997,
Finnigan filed a complaint with the United States International Trade Commission
alleging that our esquire mass spectrometer products which are based on our ion
trap technology and a related product sold by our strategic partner, Agilent
(formerly a division of Hewlett Packard), infringe Finnigan's U.S. Patent
No. 4,540,884, or the '884 patent, and U.S. Patent Reissue No. 34,000, or the
'000 patent. In February 1998, an administrative law judge initially found that
some claims of the '884 patent were not infringed, some claims of the '884
patent were invalid, and that the '000 patent was invalid. In April 1998, the
Commission issued a final determination confirming, in most respects, the
initial determination. Finnigan appealed the determination for the '884 patent
only to the Court of Appeals for the Federal Circuit. In June 1999, this appeals
court reversed the finding of invalidity of some claims of the '884 patent, but
affirmed that our products did not infringe the '884 patent. The impact of this
decision was to leave in effect the order of the Commission denying Finnigan the
relief it sought.
PATENT INFRINGEMENT ACTION BY FINNIGAN IN UNITED STATES DISTRICT COURT. In
December 1996, Finnigan brought suit in the United States District Court for the
District of Massachusetts alleging that our esquire series of mass spectrometer
products and a related product marketed by Agilent infringe the '000 and the
'884 patents. At present, Finnigan is only asserting two claims of the '000
patent and one claim of the '884 patent. The '000 patent expires in April 2005,
and the '884 patent expires in September 2002. We have filed two motions for
summary judgment. One motion seeks a ruling that the claim of the '884 patent is
not infringed. The other seeks a ruling that the '000 patent is invalid.
Finnigan has opposed these motions for summary judgment and cross-moved for
summary judgment that the claim of the '884 patent covers the method of
operation of our esquire mass spectrometers and the related Agilent product. A
hearing on our summary judgment motion concerning the '884 patent was held on
November 9, 2000, but the Court has not ruled on this motion as of March 14,
2001. No hearing on the motion concerning the '000 patent has been scheduled as
of March 14, 2001.
14
OUR ANTITRUST ACTION AGAINST FINNIGAN AND OTHERS IN UNITED STATES DISTRICT
COURT. In May 1997, we filed a complaint in the United States District Court
for the District of Massachusetts alleging antitrust violations against
Finnigan, ThermoQuest and Thermo Instruments, another subsidiary of
ThermoElectron, based on Finnigan's actions in connection with several of its
patents. In January 2000, Finnigan filed a motion to dismiss. In November 2000,
the District Court denied Finnigan's motion to dismiss with respect to all
counts of our complaint except one which the District Court dismissed. Finnigan
subsequently filed a motion for reconsideration which was denied by the court in
December 2000. In January 2001, Finnigan filed a motion to stay all discovery in
this matter pending the outcome of their infringement suit against us in the
United States District Court for the District of Massachusetts. In
February 2001, the motion was denied, and the District Court allowed written
discovery to commence immediately. Depositions may be scheduled after the
rulings on the summary judgement motions pending in the patent infringement
action.
PATENT INFRINGEMENT ACTION BY FINNIGAN IN THE DISTRICT COURT IN DUSSELDORF,
GERMANY. In March 1999, Finnigan brought suit in a District Court in
Dusseldorf, Germany alleging that our esquire series of mass spectrometer
products and the related Agilent product infringe three Finnigan European
patents. The court retained the claims alleging infringement in Germany but, on
jurisdictional grounds, transferred the claims alleging infringement in the
United Kingdom, France, Sweden and Switzerland to the District Court in Hamburg.
In March 2000, the court issued rulings that distribution and delivery of our
esquire series of products and of the related Agilent product for use in Germany
infringe two Finnigan patents, and we were enjoined from offering or delivering
our ion trap devices to customers domiciled in Germany. The court ordered us and
Agilent to pay damages in an amount to be determined and stayed its
consideration of the third patent pending the court's opportunity to hear
witness testimony with respect to our claim regarding this patent. The hearing
on this third patent and witness testimony is scheduled for November 2001 in
Dusseldorf. On December 22, 2000, Finnigan filed a request for damages from lost
sales in the amount of DM 6,374,366 with the District Court; however, we
estimate that the damages for our past sales of ion trap products in Germany to
be determined by the Dusseldorf court will be approximately $240,000, and that
the attorneys' fees and costs that we may be required to pay will be
approximately $105,000. The damages and costs that the Dusseldorf Court actually
assesses may be more or less than the amounts estimated here. We have filed an
appeal of the decision of the Dusseldorf court at the Higher District Court in
Duesseldorf (Oberlandesgericht) for which a hearing is scheduled preliminarily
for August 2001. In late October 2000, the Dusseldorf court found that our
subsidiary had delivered three instruments in summer 2000 in violation of its
order and imposed a fine of DM 130,000 on us. We have appealed this decision as
we believe that no instruments were delivered in violation of the order. In
connection with our nullity action in the German Patent Court in Munich which is
described below, the German Patent Court in Munich limited the scope of one of
Finnigan's patents which the Dusseldorf court found we had infringed; and,
therefore, we believe that this patent is no longer the subject of this action.
PATENT INFRINGEMENT ACTION BY FINNIGAN IN THE DISTRICT COURT IN HAMBURG,
GERMANY. As noted above, the Dusseldorf Court transferred to the District Court
in Hamburg the claims alleging infringement in the United Kingdom, France,
Sweden and Switzerland. In these proceedings the substantive patent law of each
country will apply to the determination of the claims and defenses relating to
infringement in each country, respectively. A hearing was held on September 13,
2000 regarding the identity of the plaintiff and its basis for claims. The
decision from this hearing, issued in December 2000, confirmed Finnigan-Delaware
as the plaintiff. We do not expect a ruling on the infringement case in 2001.
PATENT INFRINGEMENT ACTION BY THERMOFINNIGAN IN THE DISTRICT COURT IN PARIS,
FRANCE. On December 22, 2000, ThermoFinnigan Corporation sued Bruker
Daltonique, Bruker SA, France and Bruker Daltonics, as well as Agilent
Technologies Holding SA and Agilent Technologies SA, France, alleging that our
esquire mass spectrometers and the corresponding Agilent products infringe the
French portions of ThermoFinnigan's European Patents 0 113 207 and 0 202 943. As
of March 14,
15
2001, ThermoFinnigan had not yet filed the necessary documents to support their
law suit. If they make these filings, then we will be required to file a
response which will primarily address formal questions. A first instance
decision on this matter is not expected during 2001.
OUR NULLITY ACTIONS AGAINST THE FINNIGAN PATENTS IN GERMANY. In July 1999,
we filed nullity actions in the German Patent Court in Munich regarding the same
three Finnigan patents involved in the Dusseldorf actions. In these nullity
actions the Munich Court is being asked to determine the validity of the three
Finnigan patents as they apply in Germany. The Munich Court will not determine
the validity of the patents as the patents apply in France, the United Kingdom,
Switzerland or Sweden. Hearings in the Munich nullity actions occurred in
July 2000. The court limited the scope of one of the patents and deferred a
ruling on the other two patents pending a further hearing. If we prevail in the
nullity actions finally and absolutely, the rulings of the Dusseldorf Court will
be withdrawn. A hearing on both remaining patents with witness testimony on
prior public use is scheduled for May 2001.
OUR PATENT INFRINGEMENT ACTION AGAINST FINNIGAN (THERMOQUEST) IN THE
DISTRICT COURT IN DUSSELDORF, GERMANY. In late 1999, we filed a complaint in
the Federal Court in Dusseldorf alleging that Finnigan's ion trap products
infringe two of our European patents, EP 0 321 819 and EP 0 236 990. In a final
hearing on May 9, 2000, the European Patent Office limited the scope of our
European Patent EP 0 321 819. Therefore, we have withdrawn our complaint with
respect to this patent. The court rendered a decision in our favor on March 22,
2001; however, because the written decision will not be released for several
weeks, we are unable to assess the impact of this decision on our situation.
NULLITY ACTIONS AGAINST OUR PATENTS IN MUNICH, GERMANY. Finnigan has filed
a nullity action in the German Patent Court in Munich against one of our
patents. In a ruling issued in January 2001, the German Patent Court in Munich
upheld the validity of our patent but slightly narrowed its scope. This decision
has been appealed by Finnigan and by us at the German Federal Court
(Bundesgerichtshof) in Karlsruhe, Germany. We maintain our Dusseldorf complaint
against Finnigan with respect to this patent.
OUR DECLARATORY JUDGEMENT SUIT AGAINST THE FINNIGAN PATENTS IN ITALY. In
August 2000, Bruker Daltonik GmbH filed a declaratory judgement suit in Milan
Italy requesting that the Italian Court declare that Finnigan's European Patent
0113207 is invalid throughout Europe and is not infringed by our products.
While we believe that our ion trap mass spectrometry products, including our
Esquire series and the product sold by Agilent, should ultimately be held not to
infringe any claim of any valid Finnigan patent, we cannot predict the outcome
of the Finnigan litigation. As of December 31, 2000 and 1999, the Company
accrued $4.1 million and $5.8 million, respectively, for future estimated legal
defense fees and anticipated assessments associated with this litigation. In
1998, 1999 and 2000, our sales of ion trap mass spectrometry products in Germany
totaled $810,767, $2.0 million and $2.4 million, respectively. In 1998, 1999 and
2000, our sales of these products in other European countries totaled
$1.8 million, $2.6 million and $6.3 million, respectively. In 1998, 1999 and
2000, our sales of ion trap mass spectrometry products in the U.S. totaled
$2.1 million, $3.6 million and $3.9 million, respectively. In 1998, 1999 and
2000, total worldwide sales of our ion trap mass spectrometry products totaled
$5.0 million, $8.2 million and $12.6 million, respectively. Also, under our
agreement with Agilent, we may be required to indemnify Agilent from any damages
and expenses resulting from the Finnigan litigation. See "Risk Factors--Our
success depends on our ability to operate without infringing or misappropriating
the proprietary rights of others; and we are currently involved in several legal
actions concerning technology for ion trap spectrometry with a competitor and
various affiliates of the competitor, and a German court has decided that we
have infringed two European patents of the competitor."
16
INTERFERENCE PROCEEDINGS.
We are involved in interference proceedings in the United States Patent and
Trademark Office regarding our MALDI time-of-flight mass spectrometry
patents/applications and patents/applications owned by Applied Biosystems. An
interference is a proceeding to determine priority among two or more
applications or between a patent and an application that claim the same or
similar inventions and were filed within one year of each other. The
interference proceedings are ongoing and have a number of potential outcomes.
Should the United States Patent and Trademark Office award priority to either of
the parties, that party could then file a patent infringement action in a
district court.
GENERAL
We may, from time to time, be involved in other legal proceedings in the
ordinary course of business. We are not currently involved in any other pending
legal proceedings that, either individually or taken as a whole, could
materially harm our business, prospects, results of operations or financial
condition. With the exception of the litigation described above, in the last two
fiscal years, neither we nor our subsidiaries have been involved in any lawsuits
or arbitrations that could have or have had a material adverse effect on our
financial position, operating results and cash flows. No such arbitrations or
lawsuits have been threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 of Form 10-K with respect to our executive
officers is set forth below. Our executive officers are elected by the Board of
Directors on an annual basis and serve until their successors have been duly
elected and qualified. There are no family relationships among any of our
executive officers or directors.
Our executive officers of as of March 23, 2001 are:
NAME AGE POSITION
- ---- -------- --------
Frank H. Laukien, Ph.D. (1)............ 41 Chairman, President and Chief Executive Officer
John J. Hulburt, C.P.A................. 34 Corporate Controller and Treasurer
Dieter Koch, Ph.D. (1)................. 60 Managing Director of Bruker Daltonik GmbH*; Managing
Director of Bruker Saxonia Analytik GmbH* and
Director of Bruker Daltonics Inc.
Jochen Franzen, Ph.D................... 70 Managing Director, Bruker Daltonik GmbH*
Hans-Jakob Baum........................ 48 Vice General Manager of Bruker Daltonik GmbH*;
Managing Director of Bruker Saxonia Analytik GmbH*
John Wronka, Ph.D...................... 45 Vice President
Gary Kruppa, Ph.D...................... 39 Vice President
- ------------------------
(1) Member of our Board of Directors.
* Bruker Daltonik GmbH is a subsidiary of Bruker Daltonics Inc. and Bruker
Saxonia Analytik GmbH is a subsidiary of Bruker Daltonik GmbH.
FRANK H. LAUKIEN, PH.D. Dr. Laukien has been the Chairman, President and
Chief Executive Officer of Bruker Daltonics since the inception of our
predecessor company in February 1991. He has been a Managing Director of Bruker
Daltonik GmbH, a wholly-owned subsidiary of Bruker Daltonics,
17
since August 1997. He has also served as Chairman of Bruker AXS Inc., an
affiliate of Bruker Daltonics, since October 1997 and as President of Bruker
Instruments, Inc., an affiliate of Bruker Daltonics, since June 1997. He is a
Professor of Mass Spectrometry at the University of Amsterdam. Dr. Laukien holds
a B.S. degree from the Massachusetts Institute of Technology, as well as a M.A.
and a Ph.D. in chemical physics from Harvard University.
JOHN J. HULBURT, C.P.A. Mr. Hulburt has been our Corporate Controller since
April 2000 and our Treasurer since June 2000. From December 1996 until
April 2000, he was a manager at Ernst & Young LLP. Prior to that time,
Mr. Hulburt was a senior accountant at Arthur Andersen LLP. Mr. Hulburt is a
Certified Public Accountant. He holds a B.S. in accounting from Merrimack
College.
DIETER KOCH, PH.D. Dr. Koch has been a Director of Bruker Daltonics since
August 1997. He is a Managing Director of Bruker Daltonik GmbH, now a
wholly-owned subsidiary of Bruker Daltonics, since June 1980. Dr. Koch has also
been the Managing Director of Bruker Saxonia Analytik GmbH, now a subsidiary of
Bruker Daltonik GmbH, since founding it in 1990. He is responsible for our
substance detection and pathogen identification product lines. He holds M.S. and
Ph.D. degrees in chemistry from the University of Cologne.
JOCHEN FRANZEN, PH.D. Dr. Franzen is a Managing Director of Bruker Daltonik
GmbH and has held this position since June 1980. He is responsible for
intellectual property and research activities at Bruker Daltonik GmbH. Prior to
1980 he served as Managing Director of Franzen Analysentechnik GmbH, a mass
spectrometry manufacturing company. Dr. Franzen served as President of the
German Society for Mass Spectrometry during 1997 and 1998. He holds an M.S.
degree from the University of Mainz and a Ph.D. in physics from the Max-Planck
Institute.
HANS-JAKOB BAUM. Mr. Baum has been a Vice General Manager of Bruker
Daltonik GmbH since August 1999. He is responsible for sales and product
applications. Mr. Baum joined Bruker Daltonik GmbH in June 1988 as a Product
Manager. From January 1991 until August 1997, he was Sales Director of Bruker
Daltonik. Before joining us, Mr. Baum was a Chemical Defense Officer in the
German Army.
JOHN WRONKA, PH.D. Dr. Wronka has been our Vice President since June 1996.
He is responsible for the general management of operations in the U.S.
Dr. Wronka joined Bruker Instruments, an affiliate of Bruker Daltonics, in
May 1989 as Mass Spectrometry Product Manager. He joined Bruker Daltonics as the
Mass Spectrometry Division Manager in July 1995 and served as a Division Manager
until June 1996. Prior to joining Bruker Instruments, Dr. Wronka was a Professor
and Instrumentation Manager for Northeastern University. He holds a B.S. from
St. Joseph's College and a Ph.D. in chemistry from the University of Delaware.
GARY KRUPPA, PH.D. Dr. Kruppa has served as our Vice President of the
Fourier Transform Mass Spectrometry Division since October 1998. He joined
Bruker Instruments, an affiliate of Bruker Daltonics, in November 1990 as an
applications scientist. He joined Bruker Daltonics in December 1994, and from
December 1994 until September 1998, he was a Product Manager. Before joining
Bruker Instruments, he was a research scientist at Ciba-Geigy, now Novartis, a
pharmaceutical and drug discovery company. Dr. Kruppa holds a B.S. degree from
the University of Delaware and a Ph.D. in chemical physics from the California
Institute of Technology.
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
Our common stock has been quoted on the Nasdaq National Market since
August 4, 2000. Prior to that time, there was no public market for the common
stock. The following table sets forth, for the
18
period indicated, the high and low sale prices for the common stock as reported
on the Nasdaq National Market.
HIGH LOW
-------- --------
Third Quarter 2000 (from August 4, 2000).................... $51.375 $19.188
Fourth Quarter 2000......................................... $47.313 $15.063
First Quarter 2001 (through March 23, 2001)................. $27.250 $ 8.313
On March 23, 2001, the last sale price of the common stock on the Nasdaq
National Market was $11.063. As of March 23, 2001, we had approximately 713
holders of security positions.
We have never declared or paid cash dividends on our capital stock. We
currently anticipate that we will retain all available funds for use in our
business and do not anticipate paying any cash dividends in the foreseeable
future.
On November 22, 2000, we issued 79,218 shares of our common stock, par value
$.01 per share, to Geneva Proteomics, Inc. in exchange for shares of Geneva
Proteomics, Inc. valued at a total of approximately $2.2 million. The shares of
our common stock were issued pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended, afforded by
Section 4(2) of this act.
ITEM 6. SELECTED FINANCIAL DATA
The consolidated/combined statements of operations data for each of the
years ended December 31, 1998, 1999 and 2000 and the consolidated balance sheet
data as of December 31, 1999 and 2000 have been derived from our audited
financial statements included elsewhere in this report. The consolidated and
combined statement of operations data for the year ended December 31, 1997 and
the consolidated and combined balance sheet data as at December 31, 1997 and
1998 have been derived from our audited financial statements not included in
this report. The combined statements of operations data for the year ended
December 31, 1996 and the combined balance sheet data as of December 31, 1996
have been derived from unaudited financial statements not included in this
report. The financial statements for 1996 through 1998 are presented on a
combined basis due to the common ownership of the Company and its affiliated
company in Germany, which was formally acquired in December 1998. Historical
results are not necessarily indicative of future results. The data presented
below have been derived from financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States
and should be read with the consolidated
19
and combined financial statements, including the notes, and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS DATA:
Product revenue...................................... $ 43,942 $49,247 $40,157 $60,620 $ 74,772
Other revenue........................................ 2,130 1,878 2,050 4,070 1,830
-------- ------- ------- ------- --------
Net revenue...................................... 46,072 51,125 42,207 64,690 76,602
Total costs and operating expenses................... 38,882 48,527 42,368 62,050 75,868
Operating income (loss) from continuing operations... 7,190 2,598 (161) 2,640 734
Income (loss) from continuing operations............. 3,895 355 (888) 876 2,066
Income (loss) per share from continuing operations... $0.08 $0.01 $(0.02) $0.02 $0.04
AS OF DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
CONSOLIDATED/COMBINED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.... $ 3,766 $ 2,021 $ 1,135 $ 2,443 $ 94,629
Working capital (deficit)............................ (14,759) (8,845) 6,338 12,080 111,054
Total assets......................................... 62,105 52,249 63,841 67,309 184,554
Total debt........................................... 19,033 8,496 17,924 15,340 12,037
Total stockholders' equity........................... 9,996 9,870 10,340 10,058 124,172
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS TOGETHER WITH "SELECTED FINANCIAL DATA" AND
OUR FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS REPORT.
THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY
FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "FACTORS AFFECTING
OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION" AND ELSEWHERE IN THIS
REPORT.
OVERVIEW
We are a leading developer and provider of innovative life science tools
based on mass spectrometry. We are also a worldwide leader in supplying mass
spectrometry-based systems for substance detection and pathogen identification
in security and defense applications. We maintain technical centers in Europe,
North America and Japan, as well as customer support facilities in many
industrialized and developing countries. We allocate substantial capital and
resources to research and development and are party to various collaborations
and strategic alliances. Our diverse customer base includes pharmaceutical
companies, biotechnology companies, proteomic companies, academic institutions
and government agencies.
Effective December 21, 1998, Bruker Daltonics Inc. acquired all of the
shares of Bruker Daltonik GmbH for $5.4 million. The transaction represented an
exchange between entities under common control and, accordingly, the assets
acquired and liabilities assumed have been accounted for at historical cost in a
manner similar to that of pooling-of-interests accounting. In addition, all
periods presented have been restated to reflect the businesses on a combined
basis.
20
ACQUISITIONS
In December 1999, we acquired a 49% interest in ProteiGene, Inc., a Delaware
corporation, from a related party. ProteiGene is a biomarker research and
development company specializing in the application of mass spectrometry and
bioinformatics for medical and microbiology cell and tissue analysis. The
acquisition cost was $50,000 in cash, the estimated fair market value, and was
accounted for as a purchase. In March 2000, we acquired the remaining 51%
interest in ProteiGene for $26,000 from an unrelated party.
In June 1999, we purchased the assets of Viking Instruments Corporation, a
developer and manufacturer of transportable gas chromatrograph mass
spectrometers. These instruments are used for laboratory and field analysis of
soil, air and water for the identification and quantification of a wide variety
of organic compounds and pollutants. The acquisition cost was $150,000, and the
results of operations are included in the accompanying consolidated financial
statements from the date of acquisition. In connection with the acquisition,
$100,000 was expensed as purchased in-process research and development, $25,000
was allocated to core technology and classified as an intangible, $20,000 was
allocated to inventory and $5,000 was allocated to fixed assets. The
amortization period is five years for the intangibles and three to five years
for the fixed assets.
The $100,000 in-process research and development was attributed to the
Viking 573, a transportable gas chromatrograph mass spectrometer, and supported
by a discounted probable cash flow analysis on a project-by-project basis
modified to reflect the stage of completion of the in-process research and
development expenditures. As of June 22, 1999, the feasibility of the acquired
technology had not been established, and the acquired technology had no future
alternative uses.
In connection with the Viking 573 project, we invested an additional
$313,000 out of operational cash flows through December 31, 1999. We shipped our
first unit in December 1999 which was accepted by the customer in January 2000.
DISCONTINUED OPERATIONS
In 1999, we decided to dispose of our analytical infrared sales group. In
March 2000, we completed the divestiture to a related party, Bruker Optik GmbH,
without a gain or loss. Our former analytical infrared sales group sold and
serviced instruments, not manufactured by us, in Germany only. The infrared
sales group generated revenues of $2.7 million in fiscal 1999. Amounts
previously reported have been reclassified as discontinued operations and are
not included in this discussion.
SIGNIFICANT ACCOUNTING POLICIES
CUSTOMER DEPOSITS. Under the terms and conditions of contracts with many of
our customers, we require a portion of the purchase price in the form of an
advance deposit. We record these deposit amounts as a liability until the
associated revenue is recognized at the time of acceptance of the system.
REVENUE RECOGNITION. We recognize revenue from system sales, including
hardware with embedded software, when a product is accepted by the customer,
except when sold through an independent distributor, a strategic distribution
partner or an unconsolidated Bruker affiliated distributor which assumes
responsibility for installation, in which case the system sale is recognized
when the products are shipped to the distributor and title has transferred to
the distributor. Our distributors do not have price protection rights or rights
to return; however our products are warranted to be free from defect for a
period of, typically, one year. Revenue from accessories and parts is recognized
upon shipment, and revenue from services when performed.
COST OF PRODUCT REVENUE. Cost of product revenue includes all direct
materials, direct labor, benefits and indirect costs related to generating
revenue. These indirect costs include indirect labor,
21
materials and supplies, equipment rental and depreciation of production
equipment, test equipment and facilities as related to production space revenue.
SALES AND MARKETING. Sales and marketing expenses include salaries, sales
commissions, benefits, travel, occupancy costs and related expenses for our
direct sales force, sales support and marketing functions. We have expanded our
sales and marketing organization substantially since 1997, adding subsidiaries
and sales representatives in China, France, Japan, Scandinavia, Switzerland, the
United Kingdom, Canada, Italy and Taiwan. Sales and marketing expenses also
include costs associated with supporting our distribution channel partners for
our time-of-flight and ion trap mass spectrometry products. We expect that sales
and marketing expenses will continue to increase in the future as we further
expand our global distribution capabilities and introduce new products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
salaries, benefits and expenses for our executive, finance, legal, human
resources and internal systems support personnel. In addition, general and
administrative expenses include occupancy costs, fees for professional services
and depreciation of office equipment. We expect general and administrative
expenses to increase as we continue to expand our administrative infrastructure
to support the anticipated growth of our business, including the costs
associated with being a public company.
RESEARCH AND DEVELOPMENT. Research and development expenses include costs
for the development of new technologies and products. These expenses include
materials, salaries, benefits, occupancy costs and related expenses for
development personnel. We expense research and development costs as incurred. We
expect to increase spending on research and development in order to develop new
products and applications.
PATENT LITIGATION COSTS. Patent litigation costs include actual and
estimated legal fees and anticipated assessments associated with litigation in
connection with our intellectual property, particularly the Finnigan litigation.
These costs may increase depending upon the outcome of the current legal
proceedings.
22
RESULTS OF OPERATIONS
The following table sets forth certain items included in our results of
operations for the three years ended December 31, 1998, 1999 and 2000, expressed
as a percentage of our net revenue for these periods.
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- -------- --------
Revenue:
Product revenue........................................... 95.1% 93.7% 97.6%
Other revenue............................................. 4.9 6.3 2.4
----- ----- -----
Net revenue........................................... 100.0 100.0 100.0
Costs and operating expenses:
Cost of product revenue................................... 46.6 48.9 46.4
Provision for loss on contract............................ -- -- 1.4
Sales and marketing....................................... 17.6 17.5 18.0
General and administrative................................ 5.3 5.3 6.6
Research and development.................................. 30.9 23.4 26.2
Patent litigation costs................................... 0.0 0.8 0.4
----- ----- -----
Total costs and operating expenses.................... 100.4 95.9 99.0
----- ----- -----
Operating income (loss) from continuing operations.......... (0.4) 4.1 1.0
Other income (expense)...................................... 0.4 0.2 (0.3)
Interest income (expense), net.............................. (2.1) (1.4) 2.3
----- ----- -----
Income (loss) from continuing operations, before income
taxes..................................................... (2.1) 2.9 3.0
Provision for income taxes.................................. 0.0 1.5 0.3
----- ----- -----
Income (loss) from continuing operations.................... (2.1) 1.4 2.7
Income from discontinued operations, net of income taxes.... 0.9 0.5 0.2
----- ----- -----
Net income (loss)........................................... (1.2)% 1.9% 2.9%
===== ===== =====
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Product Revenue. Total product revenue increased $14.2 million, or 23.3%,
to $74.8 million in 2000 compared to $60.6 million in 1999. Our top-line product
revenue growth rate for the year was approximately 39% before unfavorable
currency effects due to the particular weakness of the European currencies
throughout the year. Life science product revenue and substance detection and
pathogen identification product revenue as a percentage of product revenue was
approximately 66% and 22%, respectively, in 2000 compared to 54% and 46%,
respectively, in 1999. The increase in product revenue in 2000 was fueled by a
continuing strong demand for our life science products in all various product
lines by new and existing customers.
Other Revenue. Other revenue decreased $2.2 million, or 55.1%, to
$1.8 million in 2000 compared to $4.1 million in 1999. This decrease was due to
the completion of certain projects for early-stage research and development
which were funded by grants from the German government and the Advanced
Technology Program of the National Institute of Standards and Technologies in
the United States. While we historically have obtained significant funding under
grant awards for early-stage research and development activity, we anticipate
this funding will be significantly reduced in the future.
Cost of Product Revenue (including provision for loss on contract). Cost of
product revenue increased $4.0 million, or 12.6%, to $35.6 million in 2000
compared to $31.6 million in 1999. The cost of product revenue as a percentage
of product revenue was 47.6% in 2000 compared to 52.2% in 1999.
23
This decrease is due to a combination of greater revenues from new life science
products which have a lower cost, increased efficiencies in the manufacturing
operations and lower material costs driven by an increase in volume discounts.
During fourth quarter 2000, we took a $1.1 million special charge against an
unprofitable contract within our substance detection and pathogen identification
business. We made considerable design changes to the systems to be delivered
under this contract which increased the cost. The contract is expected to be
completed near the end of 2001.
Sales and Marketing. Sales and marketing expenses increased $2.5, or 21.7%,
to $13.8 million in 2000 compared to $11.3 million in 1999. The dollar increase
was due to higher sales commissions earned by our direct sales force as a result
of an increase in the number of units sold and the addition of new distribution
subsidiaries not in operation during 1999. Sales and marketing expenses as a
percentage of product revenues were 18.5% in 2000 and 18.7% in 1999.
General and Administrative. General and administrative expenses increased
$1.6 million, or 48.3%, to $5.1 million in 2000 compared to $3.4 million in
1999. As a percentage of product revenues, general and administrative expenses
were 6.8% in 2000 and 5.6% in 1999. The increase relates to certain non-cash
charges to compensation expense related to our stock option grants as well as
other various costs related to being a public company.
Research and Development. Research and development expenses increased
$4.9 million, or 32.3%, to $20.0 million in 2000 compared to $15.1 million in
1999. As a percentage of product revenues, research and development expenses
increased to 26.8% in 2000 from 25.0% in 1999. The dollar increase in 2000 was
due to increased staffing and the related personnel costs as well as late stage
testing costs incurred for our new products scheduled for introduction in early
2001. We are investing heavily in proteomics and life-science systems
integration in general and expect to introduce several new products in early
March 2001, as well as in the second half of the year.
Patent Litigation Costs. Patent litigation costs were $303,000 in 2000.
This increase reflects a revised estimate of our legal costs associated with our
intellectual property litigation and reflects estimated assessments related to
the ongoing litigation.
Interest and Other Income (Expenses), Net. Interest and other income, net
was $1.6 million in 2000 compared to an interest and other expense, net of
$(777,000) in 1999. The difference is due to interest income earned on the
additional funding raised in our equity offering during third quarter 2000 and
the payoff of our outstanding short-term lines of credit both in the United
States and Germany.
Income From Discontinued Operations, Net of Income Taxes. Income from
discontinued operations net of income taxes decreased $189,000, or 50.8%, to
$184,000 in 2000 compared to $373,000 in 1999. Income from discontinued
operations is related to the disposal of our infrared sales group in early 2000.
Provision for Income Taxes. Provision for income taxes was $254,000 in 2000
compared to $987,000 in 1999. The effective tax rate in 2000 was 10.9% which
reflected a blended tax rate from the various countries in which we operate, a
reduction in the valuation allowance in the United States as a result of future
anticipated earnings, and a benefit on the revaluation of net deferred tax
liabilities as a result of a reduction in enacted tax rates in Germany. The
effective tax rate in 1999 was 52.9% which reflected a blended tax rate from the
various countries in which we operate, benefits from the utilization of tax loss
carryforwards in Germany, and an increase in the valuation allowance in the
United States associated with tax loss carryforwards.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Product Revenue. Total product revenue increased $20.5 million, or 51.0%,
to $60.6 million in 1999 compared to $40.2 million in 1998. Product revenue via
affiliated distributors increased $503,000,
24
or 5.1%, to $10.3 million in 1999 compared to $9.8 million in 1998. Life science
product revenue and substance detection and pathogen identification product
revenue as a percentage of net revenue was 50.6% and 43.1%, respectively, in
1999 compared to 42.1% and 53.0%, respectively, in 1998. The increase in product
revenue in 1999 was fueled by strong demand for our life science products by new
and existing customers, led by our Fourier transform mass spectrometry, MALDI
time-of-flight and esquire product lines. Additionally, $8.1 million of our 1999
substance detection and pathogen identification product revenue was due to the
completion of a large non-recurring contract.
Other Revenue. Other revenue increased $2.0 million, or 98.6%, to
$4.1 million in 1999 compared to $2.0 million in 1998. This increase was due to
additional grant funding for early stage research and development from the
German government and from the Advanced Technology Program of the National
Institute of Standards and Technologies in the United States.
Cost of Product Revenue. Cost of product revenue increased $11.9 million,
or 60.7%, to $31.6 million in 1999 compared to $19.7 million in 1998. The cost
of product revenue as a percentage of product revenue was 52.2% in 1999 compared
to 49.0% in 1998. The increase as a percentage of product revenue was due to
lower revenue from our substance detection and pathogen identification product,
which historically has a lower cost of product revenue than our life science
products. Additionally, we have increased manufacturing capacity to meet future
projected product sales growth. This increased capacity had an adverse effect on
cost of product. We anticipate improved leverage of our fixed manufacturing
costs, and declines in cost of product revenue as a percentage of sales, as our
product revenue increases. We are also seeking to improve our gross margin by
developing new, more integrated systems and higher margin consumables for the
life science market.
Sales and Marketing. Sales and marketing expenses increased $3.9 million,
or 52.6%, to $11.3 million in 1999 compared to $7.4 million in 1998. As a
percentage of net revenues, sales and marketing expenses remained relatively
consistent. The dollar increase was due to sales commissions and bonuses earned
by our direct sales force as a result of an increase in the number of units sold
and the expansion of our global distribution capabilities. The dollar increase
was also due to an increase in sales personnel and the associated recruiting,
training, travel, commissions and office space costs necessary to support a
larger sales organization.
General and Administrative. General and administrative expenses increased
$1.2 million, or 54.2%, to $3.4 million in 1999 compared to $2.2 million in
1998. The dollar increases were due to increased staffing and personnel related
costs incurred to manage and support our growth and the costs associated with
the incorporation of our foreign subsidiary offices. As a percentage of net
revenues, general and administrative expenses remained relatively consistent.
Research and Development. Research and development expenses increased
$2.1 million, or 16.0%, to $15.1 million in 1999 compared to $13.0 million in
1998. As a percentage of net revenues, research and development decreased to
23.4% compared to 30.9%. The dollar increase in 1999 was due to increased
staffing and the related personnel costs incurred for late stage testing of our
new product introductions, including APEX III, BioTOF II, esquire3000, MAP II/8
and OmniFLEX, in March 2000. These increased expenses represented a lower
percentage of revenue due to the significant increase in revenues during fiscal
1999.
Patent Litigation Costs. Patent litigation costs were $538,000 in 1999.
This increase reflects a revised estimate of our legal costs associated with our
intellectual property litigation.
Interest Expense, Net. Interest expense increased $6,000, or 0.7%, to
$907,000 in 1999 compared to $901,000 in 1998. The interest expense is the
result of our long and short-term borrowings from banks in the United States and
Germany.
25
Income from Discontinued Operations, Net of Income Taxes. Income from
discontinued operations net of income taxes decreased $10,000, or 2.6%, to
$373,000 in 1999 compared to $383,000 in 1998. Income from discontinued
operations is related to the disposal of our infrared sales group in
March 2000.
For information concerning the provision for income taxes as well as
information regarding differences between effective tax rates and statutory
rates, see Note 6, of the Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Presently, we anticipate that our existing capital resources, including the
approximately $110 million net proceeds received from our equity offering,
during third quarter 2000, will meet our operating and investing needs through
at least the end of 2001. Historically, we have financed our growth through a
combination of cash provided from operations, debt financing and issuance of
common stock. We utilized the proceeds of our initial public offering to repay
short-term debt in the amount of approximately $5 million and for general
working capital. During 2000, net cash used in operating activities was
$202,000. Net cash provided by operating activities in 1999 was $5.8 million and
net cash used was $6.4 million in 1998.
We used $5.3 million of cash during the year for capital expenditures, $4.4
in 1999 and $2.9 in 1998. Such capital expenditures were made to improve
productivity and expand manufacturing capacity. We expect to continue to make
capital investments focused on enhancing the efficiency of our operations and
supporting our growth. Also during 2001, we are planning on expanding our
research and development and manufacturing facilities and infrastructure both in
Massachusetts and Bremen, Germany.
As of December 31, 2000, we have available up to $2.5 million under a
revolving line of credit with a bank in the United States. As of December 31,
2000, there were no amounts outstanding. This line, which is secured by portions
of our inventory, receivables and equipment in the United States, was used to
provide working capital and expires July 31, 2001. We also maintain revolving
lines of credit of approximately $7.7 million with German banks. As of
December 31, 2000, there were no amounts outstanding. Our German lines of credit
are unsecured.
Our future capital uses and requirements depend on numerous factors,
including our success in selling our existing products, our progress in research
and development, our ability to introduce and sell new products, our sales and
marketing expenses, our need to expand production capacity, costs associated
with possible acquisitions, expenses associated with unforeseen litigation,
regulatory changes and competition and technological developments in the market.
INFLATION
We do not believe inflation has had a material impact on our business or
operating results during the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments, embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In July 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 Accounting for Derivative Instruments and Hedging
26
Activities--Deferral of the Effective Date of FASB Statement No. 133
("SFAS 137"). SFAS 137 deferred the effective date of SFAS 133 until the first
fiscal year beginning after June 15, 2000. We will adopt the standard during
January 2001. Management believes that SFAS 133 will not have a material effect
on the financial position or results of operations of the Company.
IMPACT OF FOREIGN CURRENCIES
We sell our products in many countries and a substantial portion of our
sales and a portion of our costs and expenses are denominated in foreign
currencies, especially in Euro. Historically, our realized foreign exchange
gains and losses have not been material. Accordingly, we have not hedged our
foreign currency position in the past. However, as we expand our sales
internationally, we plan to evaluate our currency risks, and we may enter into
foreign exchange contracts from time to time to mitigate foreign currency
exposure.
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Part of the information called for by this item is provided under the
caption "Liquidity and Capital Resources" and "Impact of Foreign Currencies"
under Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company does not use derivative financial instruments for trading or
speculative purposes. However, the Company regularly invests excess cash in
overnight repurchase agreements, interest-bearing investment-grade securities
and short-term partnership funds all of which are subject to changes in
short-term interest rates. The Company believes that the market risk arising
from holding these financial instruments is minimal.
The Company's exposure to market risks associated with changes in interest
rates relates primarily to the increase or decrease in the amount of interest
income earned on its investment portfolio since the Company's long-term debt has
a fixed rate. The Company ensures the safety and preservation of invested funds
by limiting default risks, market risk and reinvestment risk. The Company
mitigates default risk by investing in investment grade securities. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair value of the
Company's interest sensitive financial instruments at December 31, 2000.
Declines in interest rates over time will, however, reduce the Company's
interest income.
FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED IN CONJUNCTION WITH THE
OTHER INFORMATION INCLUDED IN THIS REPORT. THIS REPORT MAY INCLUDE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION TO
THOSE RISK FACTORS DISCUSSED ELSEWHERE IN THIS REPORT, WE IDENTIFY THE FOLLOWING
RISK FACTORS WHICH COULD AFFECT OUR ACTUAL RESULTS AND CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.
27
IF OUR PRODUCTS FAIL TO ACHIEVE AND SUSTAIN SUFFICIENT MARKET ACCEPTANCE ACROSS
THEIR BROAD INTENDED RANGE OF APPLICATIONS IN THE LIFE SCIENCES, WE WILL NOT
GENERATE EXPECTED REVENUE.
Our business strategy depends on our ability to successfully commercialize a
broad range of products based on mass spectrometry for use in a variety of life
science applications. We have only recently commercially launched many of our
current products for sale to these markets, and many of our products have
achieved only limited sales. The commercial success of our life science products
depends on our obtaining continued and expanding market acceptance of our mass
spectrometry tools by pharmaceutical and biotechnology companies and academic
and government research laboratories across the wide range of applications
covered by our product offerings. We may fail to achieve or sustain substantial
market acceptance for our products across the full range of our intended life
science applications or in one or more of our principal intended life science
applications. Any such failure could decrease our sales and revenue. To succeed,
we must convince substantial numbers of pharmaceutical and biotechnology
companies and other laboratories to replace their existing techniques with mass
spectrometry techniques employing our systems. Limited funding available for
capital acquisitions by our customers, as well as our customers' own internal
purchasing approval policies, could hinder market acceptance of our products.
Our intended life science customers may be reluctant to make the substantial
capital investment generally needed to acquire our products or to incur the
training and other costs involved with replacing their existing systems with our
products. We also may not be able to convince our intended life science
customers that our systems are an attractive and cost-effective alternative to
other technologies and systems for the acquisition, analysis and management of
molecular information. Because of these and other factors, our products may fail
to gain or sustain market acceptance.
OUR PRODUCTS COMPETE IN MARKETS THAT ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE,
AND MOST OF OUR PRODUCTS ARE BASED ON A RANGE OF MASS SPECTROMETRY TECHNOLOGIES
ONE OR MORE OF WHICH COULD BE MADE OBSOLETE BY NEW TECHNOLOGY.
The market for life science discovery tools is characterized by rapid
technological change and frequent new product introductions. Rapidly changing
technology could make some or all of our life science product lines obsolete
unless we are able to continually improve our existing products and develop new
products. Because substantially all of our life science products are based on
mass spectrometry, we are particularly vulnerable to any technological advances
that would make mass spectrometry obsolete as the basis for bioanalytical
systems in any of our life science markets. To meet the evolving needs of our
customers, we must rapidly and continually enhance our current and planned
products and services and develop and introduce new products and services. Our
business model calls for us to derive a significant portion of our revenues each
year from products that did not exist in the previous year. However, we may
experience difficulties which may delay or prevent the successful development,
introduction and marketing of new products or product enhancements. In addition,
our product lines are based on complex technologies which are subject to rapid
change as new technologies are developed and introduced in the marketplace. We
may have difficulty in keeping abreast of the rapid changes affecting each of
the different markets we serve or intend to serve. If we fail to develop and
introduce products in a timely manner in response to changing technology, market
demands or the requirements of our customers, our product sales may decline, and
we could experience significant losses. We offer and plan to offer a broad
product line and have incurred and expect to continue to incur substantial
expenses for development of new products and enhanced versions of our existing
products. The speed of technological change in our life science markets may
prevent us from being able to successfully market some or all of our products
for the length of time required to recover their often significant development
costs. Failure to recover the development costs of one or more products or
product lines could decrease our profitability or cause us to experience
significant losses. Furthermore, failure to develop successful products and
capitalize on our research and development investment would negatively influence
our profits and financial position.
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WE FACE SUBSTANTIAL COMPETITION.
In each market, for each of our life science products, we face substantial
competition from major competitors, including competitors who offer mass
spectrometry-based systems along each of our product lines and competitors who
offer technology alternatives to mass spectrometry. We expect that competition
in our life science markets will increase significantly as more biotechnology
and pharmaceutical companies adopt automated high-throughput bioanalytical
instruments as tools for drug discovery, drug development, proteomics, genomics
and metabolomics. Currently, our principal competition comes from established
companies providing products using existing technologies, including mass
spectrometry and other technologies, which perform many of the same functions
for which we market our products. In addition, other companies may choose to
enter our field in the future. Our competitors may develop or market products
that are more effective or commercially attractive than our current or future
products or that may render our products obsolete. Many of our competitors have
more experience in the life sciences market and substantially greater financial,
operational, marketing and technical resources than we do which could give them
a competitive edge in areas such as research and development, production,
marketing and distribution. Our ability to compete successfully will depend, in
part, on our ability to develop proprietary products that reach the market in a
timely manner and are technologically superior to, less expensive than, or more
cost-effective than, other currently marketed products.
OUR SUCCESS DEPENDS ON OUR ABILITY TO OPERATE WITHOUT INFRINGING OR
MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
Our commercial success depends on avoiding the infringement of other
parties' valid patents and proprietary rights as well as the breach of any
licenses relating to our technologies and products. There are various
third-party patents which may relate to our technology. We may be found in the
future to infringe these or other patents or proprietary rights of third
parties, either with products we are currently marketing or developing or with
new products which we may develop in the future. As described below, a German
court has found that sales of our ion trap mass spectrometers in Germany
infringe the European patents held by a competitor. If a third party holding
rights under a patent successfully asserts an infringement claim with respect to
any of our current or future products, we may be prevented from manufacturing or
marketing our infringing product in the country or countries covered by the
patent we infringe, unless we can obtain a license from the patent holder. We
may not be able to obtain such a license on commercially reasonable terms, if at
all, especially if the patent holder is a competitor. In addition, even if we
can obtain such a license, it may be non-exclusive, which will permit others to
practice the same technology licensed to us. We may also be required to pay
substantial damages to the patent holder. Under certain circumstances in the
United States, these damages may include damages equal to triple the actual
damages experienced by the patent holder. If we have supplied infringing
products to third parties for marketing by them or licensed third parties to
manufacture, use or market infringing products, we may be obligated to indemnify
these third parties for any damages they are required to pay to the patent
holder and for any losses the third parties may sustain themselves as the result
of lost sales or license payments they are required to make to the patent
holder. Any successful infringement action brought against us may also adversely
affect marketing of the infringing product in other markets not covered by the
infringement action, as well as our marketing of other products based on similar
technology. Furthermore, we will suffer adverse consequences of a successful
infringement action against us even if the action is subsequently reversed on
appeal, nullified through another action, or resolved by settlement with the
patent holder. The damages or other remedies awarded, if any, may be
significant. As a result, any successful infringement action against us could
prevent us from selling some or all of our products or cause us to experience
significant losses or both.
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WE ARE CURRENTLY INVOLVED IN SEVERAL LEGAL ACTIONS CONCERNING TECHNOLOGY FOR ION
TRAP MASS SPECTROMETRY WITH A COMPETITOR AND VARIOUS AFFILIATES OF THE
COMPETITOR, AND A GERMAN COURT HAS DECIDED THAT WE HAVE INFRINGED TWO EUROPEAN
PATENTS OF THE COMPETITOR.
We have been involved for several years in various litigation proceedings
with a competitor, Finnigan Corp