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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 for the quarterly period ended June 30, 2004.
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 for the transition period from  to  .
 Commission file # 000-28229 CALIPER LIFE SCIENCES, INC.  Delaware
(State of Incorporation)
    
    33-0675808
(I.R.S. Employer Identification Number)
 68 Elm Street
Hopkinton, Massachusetts 01748
(Address and zip code of principal executive offices) Registrants telephone number, including area code: (508) 435-9500 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING ON AUGUST 2, 2004: 29,526,508




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Caliper Life Sciences, Inc.
Table of Contents PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    
    2Consolidated Balance Sheets as of June 30, 2004
and December 31, 2003Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2004 and 2003Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2004 and 2003Notes to Unaudited Consolidated Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    
    27PART II
    
    OTHER INFORMATION
    
    
    
    27Item 1.
    
    Legal Proceedings
    
    
    
    27Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    
    28Item 3.
    
    Defaults upon Senior Securities
    
    
    
    28Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    
    28Item 5.
    
    Other Information
    
    
    
    29Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    
    29SIGNATURESEX-31.1 CERTIFICATION OF CEOEX-31.2 CERTIFICATION OF CFOEX-32.1 CERTIFICATION OF CEOEX-32.2 CERTIFICATION OF CFO
  1




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS CALIPER LIFE SCIENCES, INC. 
 CONSOLIDATED BALANCE SHEETS
 (in thousands)
 (unaudited)
 June 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,617
    
    
    $
    8,889Marketable securities
    
    
    46,307
    
    
    
    57,828Accounts receivable, net
    
    
    11,556
    
    
    
    9,506Inventories
    
    
    11,934
    
    
    
    11,580Prepaid expenses and other current assets
    
    
    2,969
    
    
    
    3,451Total current assets
    
    
    79,383
    
    
    
    91,254Property and equipment, net
    
    
    7,898
    
    
    
    9,106Notes receivable from employee director
    
    
    142
    
    
    
    178Developed technology, net
    
    
    11,570
    
    
    
    13,002Intangible assets, net
    
    
    3,066
    
    
    
    3,407Goodwill
    
    
    47,215
    
    
    
    47,262Security deposits and other assets, net
    
    
    3,554
    
    
    
    3,827Total assets
    
    $
    152,828
    
    
    $
    168,036LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,544
    
    
    $
    3,212Accrued compensation
    
    
    5,031
    
    
    
    4,148Other accrued liabilities
    
    
    6,852
    
    
    
    8,689Deferred revenue and customer deposits
    
    
    8,827
    
    
    
    7,063Current portion of long-term obligations
    
    
    362
    
    
    
    377Current portion of sale-leaseback arrangements
    
    
    906
    
    
    
    1,521Total current liabilities
    
    
    25,522
    
    
    
    25,010Other noncurrent liabilities
    
    
    8,126
    
    
    
    8,229Stockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    29
    
    
    
    28Additional paid-in capital
    
    
    274,956
    
    
    
    271,232Deferred stock compensation
    
    
    (1,207
    )
    
    
    (1,808
    )Accumulated deficit
    
    
    (154,603
    )
    
    
    (135,093
    )Accumulated other comprehensive income
    
    
    5
    
    
    
    438Total stockholders equity
    
    
    119,180
    
    
    
    134,797Total liabilities and stockholders equity
    
    $
    152,828
    
    
    $
    168,036
 See accompanying notes. 2




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CALIPER LIFE SCIENCES, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Product revenue
    
    $
    12,985
    
    
    $
    3,441
    
    
    $
    24,994
    
    
    $
    6,929Service revenue
    
    
    3,581
    
    
    
    
    
    
    
    6,641
    
    
    
    License fees and contract revenue
    
    
    2,356
    
    
    
    2,437
    
    
    
    4,219
    
    
    
    4,561Total revenue
    
    
    18,922
    
    
    
    5,878
    
    
    
    35,854
    
    
    
    11,490Costs and expenses:Cost of product revenue
    
    
    8,491
    
    
    
    2,462
    
    
    
    17,112
    
    
    
    4,760Cost of service revenue
    
    
    1,643
    
    
    
    
    
    
    
    3,284
    
    
    
    Research and development
    
    
    5,986
    
    
    
    8,822
    
    
    
    12,452
    
    
    
    18,233Acquired research and development
    
    
    1,010
    
    
    
    
    
    
    
    1,010
    
    
    
    Selling, general and administrative
    
    
    7,946
    
    
    
    4,740
    
    
    
    15,646
    
    
    
    9,309Stock-based compensation, net(1)
    
    
    235
    
    
    
    152
    
    
    
    1,930
    
    
    
    340Amortization of intangible assets
    
    
    896
    
    
    
    
    
    
    
    1,943
    
    
    
    Restructuring charges
    
    
    2,352
    
    
    
    322
    
    
    
    2,218
    
    
    
    322Total costs and expenses
    
    
    28,559
    
    
    
    16,498
    
    
    
    55,595
    
    
    
    32,964Operating loss
    
    
    (9,637
    )
    
    
    (10,620
    )
    
    
    (19,741
    )
    
    
    (21,474
    )Interest income, net
    
    
    137
    
    
    
    1,077
    
    
    
    336
    
    
    
    1,998Other income (expense), net
    
    
    43
    
    
    
    1
    
    
    
    (43
    )
    
    
    (34
    )Loss before income taxes
    
    
    (9,457
    )
    
    
    (9,542
    )
    
    
    (19,448
    )
    
    
    (19,510
    )Provision for income taxes
    
    
    (16
    )
    
    
    
    
    
    
    (62
    )
    
    
    Net loss
    
    $
    (9,473
    )
    
    $
    (9,542
    )
    
    $
    (19,510
    )
    
    $
    (19,510
    )Net loss per share, basic and diluted
    
    $
    (0.33
    )
    
    $
    (0.38
    )
    
    $
    (0.68
    )
    
    $
    (0.79
    )Shares used in computing net loss
per common share, basic and diluted
    
    
    29,111
    
    
    
    24,840
    
    
    
    28,850
    
    
    
    24,777(1) Stock-based compensation, net,
pertains to employees employed in the
following areas:Cost of Product Revenue
    
    $
    31
    
    
    $
    
    
    
    $
    112
    
    
    $
    Research and Development
    
    
    140
    
    
    
    40
    
    
    
    297
    
    
    
    88Selling, General and Administrative
    
    
    64
    
    
    
    112
    
    
    
    1,521
    
    
    
    252Total
    
    $
    235
    
    
    $
    152
    
    
    $
    1,930
    
    
    $
    340
 See accompanying notes. 3




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CALIPER LIFE SCIENCES, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (unaudited)
 Six Months EndedJune 30,2004
    
    2003Operating activitiesNet loss
    
    $
    (19,510
    )
    
    $
    (19,510
    )Adjustments to reconcile net loss to net cash from operating activities:Depreciation and amortization
    
    
    5,101
    
    
    
    3,202Acquired research and development
    
    
    1,010
    
    
    
    Stock-based compensation expense, net
    
    
    1,946
    
    
    
    338Non-cash restructuring charges
    
    
    2,218
    
    
    
    322Loss from disposal of fixed assets
    
    
    96
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,860
    )
    
    
    (2,592
    )Inventories
    
    
    (737
    )
    
    
    1,548Prepaid expenses and other current assets
    
    
    482
    
    
    
    (679
    )Security deposits and other assets
    
    
    53
    
    
    
    235Accounts payable and other accrued liabilities
    
    
    (40
    )
    
    
    (150
    )Accrued compensation
    
    
    300
    
    
    
    (327
    )Deferred revenue and customer deposits
    
    
    938
    
    
    
    308Other non-current liabilities
    
    
    (176
    )
    
    
    55Payments of accrued restructuring obligations
    
    
    (3,026
    )
    
    
    (322
    )Net cash from operating activities
    
    
    (13,205
    )
    
    
    (17,572
    )Investing activitiesPurchases of marketable securities
    
    
    (27,197
    )
    
    
    (24,304
    )Proceeds from sales of marketable securities
    
    
    31,418
    
    
    
    75,080Proceeds from maturities of marketable securities
    
    
    6,882
    
    
    
    7,203Purchases of property and equipment
    
    
    (2,061
    )
    
    
    (444
    )Purchase of in-process research and development
    
    
    (200
    )
    
    
    Net cash from investing activities
    
    
    8,842
    
    
    
    57,535Financing activitiesNotes receivable from officers
    
    
    36
    
    
    
    37Payments of obligations under sale-leaseback arrangements
    
    
    (921
    )
    
    
    (1,328
    )Proceeds from issuance of common stock
    
    
    2,963
    
    
    
    756Net cash from financing activities
    
    
    2,078
    
    
    
    (535
    )Effect of exchange rates on changes in cash and cash equivalents
    
    
    13
    
    
    
    27Net increase
(decrease) in cash and cash equivalents
    
    
    (2,272
    )
    
    
    39,455Cash and cash equivalents at beginning of period
    
    
    8,889
    
    
    
    16,184Cash and cash equivalents at end of period
    
    $
    6,617
    
    
    $
    55,639Supplemental disclosure of cash flow informationInterest paid
    
    $
    88
    
    
    $
    233Income taxes paid
    
    $
    
    
    
    $
    Items not affecting cashNon-cash consideration paid for acquired research and development (Note 6)
    
    $
    810
    
    
    $
    
 See accompanying notes. 4




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CALIPER LIFE SCIENCES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2004
 (Unaudited)
 1. Summary of Significant Accounting Principles Basis of Presentation The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC).
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring entries) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
2004, are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004. The consolidated balance sheet as of
December 31, 2003, has been derived from audited financial statements as of
that date. For further information, refer to the financial statements and notes
thereto included in the Annual Report on Form 10-K for the year ended December
31, 2003, filed by Caliper Life Sciences, Inc. Principles of Consolidation Calipers financial statements include the accounts of its wholly owned
subsidiaries Caliper Life Sciences Ltd. (UK), Caliper Life Sciences Ltd.
(Canada), Caliper Life Sciences N.V. (Belgium), Caliper Life Sciences GmbH
(Germany), Caliper Life Sciences S.A. (France), and Caliper Life Sciences AG
(Switzerland). All significant inter-company balances and transactions have
been eliminated in consolidation. Use of Estimates and Reclassifications The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Certain prior period amounts have been reclassified to conform to the
current period presentation. Revenue Recognition General Policy Caliper recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and
collectability is probable. Revenue is recognized on product sales when goods
are shipped under Calipers standard terms of FOB origin. Revenues on
shipments subject to customer acceptance provisions are recognized only upon
customer acceptance, provided all other revenue recognition criteria are met.
Services offered by Caliper are generally recognized as revenue as the services
are performed. Revenue from licensing agreements is deferred and recognized
over the term of the agreement, or in certain circumstances, when milestones
are met. Revenue recognized is not subject to repayment. Cash received that is
related to future performance under such contracts is deferred and recognized
as revenue when earned. No sales made by Caliper include any return rights or
privileges. Based upon Calipers prior experience, sales returns are not
significant, and therefore, Caliper has made no provision for sales returns or
other allowances. Provision is made at the time of sale for estimated costs
related to Calipers warranty obligations to customers. Product Revenue Product revenue is recognized upon the shipment and transfer of title to
customers and is recorded net of discounts and allowances. Revenues on
shipments subject to customer acceptance provisions are recognized only upon
customer acceptance, provided all other revenue recognition criteria are met.
Customer product purchases are delivered under standardized terms of FOB
origin with the customer assuming the risks and rewards of product ownership
at the time of shipping from Calipers warehouse with no return rights or
privileges. In accordance with EITF 00-21, Revenue Arrangements with Multiple
Deliverables, Caliper defers the fair value of any elements that remain
undelivered after product shipment and/or acceptance (as applicable).
Undelivered elements may generally consist of annual maintenance agreements,
installation and/or training. 5




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In certain cases, customers will be charged on a datapoint pricing basis
for their usage of chips. A datapoint is generated each time a Caliper
instrument system introduces a sample into a chip through a sipper in order to
perform a particular LabChip® technology assay. Datapoints are the test-results
that Calipers customers record when they use Calipers LabChip instruments.
Caliper records datapoint revenues in the period that Calipers customers
attain the datapoints and communicate such use to Caliper. Datapoint rates are
contractually negotiated between Caliper and its customers. Under minimum
datapoint fee arrangements, datapoint revenues are recorded over the period of
which the minimum applies, provided Caliper has no ongoing performance
obligations with respect to the minimum fees. Agilent Product Revenue Caliper supplies Agilent Technologies, Inc., (Agilent), with chips and
reagents at cost and receives a share of Agilents gross margin on components
of the LabChip systems sold by Agilent. Revenue related to the reimbursement of
costs for the supply of chips and reagents is recognized as product revenue
upon shipment to Agilent, and Calipers share of gross margin on sales made by
Agilent is recognized as product revenue upon shipment by Agilent to its end
users. Caliper has no continuing obligations at the time these sales are made
and Agilent has no return privileges. Calipers transfer of title on products
sold to Agilent is not contingent on Agilents resale of these products. The
instruments, chips and reagents as sold, are useable by Agilent and their
customers without additional support from Caliper. Service and Annual Maintenance Agreements Service revenue is recognized as services are performed or, as applicable,
ratably over the contract service term in the case of annual maintenance
contracts. Customers may purchase optional warranty coverage during the initial
standard warranty term and annual maintenance contracts beyond the standard
warranty expiration. These optional service offerings are not included in the
price Caliper charges customers for the initial product purchase. Under
Calipers standard warranty, the customer is entitled to repair or replacement
of defective goods. No upgrades are included in the standard warranty. Contract Revenue Revenue from contract research and development services is recognized as
earned based on the performance requirements of the contract. Nonrefundable
contract fees for which no further performance obligations exist, and there is
no continuing involvement by Caliper, are recognized on the earlier of when the
payments are received or when collection is assured. Contract fees received in
advance of work performed are recorded as deferred revenue. These upfront fee
payments are recognized as revenue as the work is performed. Contract fees
received that are related to substantive at-risk milestones are recognized when
Calipers performance of the milestone under the terms of the contract is
achieved and no further performance obligations exist. Licensing and Royalty Revenue from up-front license fees is recognized when the earnings process
is complete and no further obligations exist. If further obligations exist, the
up-front license fee is recognized ratably over the obligation period.
Royalties from licenses are based on third-party sales and recorded as earned
in accordance with contract terms, when third-party results are reliably
measured and collectibility is assured. Software Caliper has developed software that is marketed with its solutions as a
component to operate and run its instruments and systems. Caliper does not sell
or otherwise market the software. Calipers customers purchase the instruments
and systems in order to conduct scientific research, and the software is
incidental to the overall cost of the instruments development and marketing
effort. Caliper does not provide post-sale software support, except for
functional defects in the software as contemplated in Calipers warranty on its
instruments. Goodwill Caliper performs a test for the impairment of goodwill annually in the
fourth quarter of its fiscal year, or more frequently if events or
circumstances indicate that goodwill may be impaired. Because Caliper has a
single operating and reportable business segment, Caliper performs this test by
comparing the fair value of the Company with its book value, including
goodwill. If the fair value exceeds the book value, goodwill is not impaired.
If the book value exceeds the fair value, Caliper would calculate the potential
impairment loss by comparing the implied fair value of goodwill with the book
value. If the implied goodwill is less than the book value, an estimate of the
impairment charge would be determined by performing a detailed assessment of
the fair value of goodwill as compared to its carrying value. 6




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Foreign Currency Translation Foreign currency transaction gains and losses from the settlement of
account balances denominated in another currency are included in current period
other income, net as incurred. Cumulative translation adjustments included in
stockholders equity as of June 30, 2004, and December 31, 2003, were $78,000
and $98,000, respectively. Warranty Expense At the time product revenue is recognized, Caliper establishes an accrual
for estimated warranty expenses associated with sales, recorded as a component
of cost of revenue. Caliper offers a one-year limited warranty on
instrumentation products and a 90-day warranty on chips, which is included in
the sales price of many of its products. Calipers standard limited warranty
covers repair or replacement of defective goods, a preventative maintenance
visit on certain products, and telephone based technical support. No upgrades
are included in the standard warranty. In accordance with SFAS No. 5,
Accounting for Contingencies, provision is made for estimated future warranty
costs at the time of sale. Factors that affect Calipers warranty liability
include the number of installed units, historical and anticipated rates of
warranty claims, and cost per claim. Caliper periodically assesses the adequacy
of its recorded warranty liabilities and adjusts amounts as necessary. Changes in Calipers warranty obligation during the six months ended June
30, 2004, and 2003 are as follows (in thousands): 2004
    
    2003Balance, at December 31, 2003, and 2002
    
    $
    1,108
    
    
    $
    265Accruals for warranties issued during
the period
    
    
    478
    
    
    
    102Settlements made during the period
    
    
    (489
    )
    
    
    (146
    )Balance at June 30, 2004, and 2003
    
    $
    1,097
    
    
    $
    221
 Net Loss Per Share Basic net income (loss) per share is calculated based on the
weighted-average number of common shares outstanding during the period. Diluted
net income (loss) per share would give effect to the dilutive effect of common
stock equivalents consisting of stock options and warrants (calculated using
the treasury stock method). Potentially dilutive securities have been excluded
from the diluted earnings per share computations where they have an
anti-dilutive effect due to Calipers net loss. Potentially dilutive common
stock equivalents excluded from the calculation of diluted net loss
are approximately 7.7 million and 6.7 million shares for the three
and six months ended June 30, 2004 and 2003, respectively. Stock-Based Compensation Caliper accounts for its stock options and equity awards under the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, and has elected to follow the disclosure only
alternative prescribed by Financial Accounting Standards Boards SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation expense
is recognized in Calipers financial statements for stock options granted to
employees, which had an exercise price equal to the fair value of the
underlying common stock on date of grant. Caliper accounts for stock options
issued to non-employees in accordance with the provisions of SFAS No. 123 and
EITF No. 96-18, Accounting for Equity Instruments that are issued to other
than Employees for Acquiring, or in Conjunction with selling Goods or
Services. For the three and six months ended June 30, 2004 and 2003,
compensation expense related to stock options issued to non-employees was not
material. The following table illustrates the effect on net loss and net loss per
share if Caliper had applied the fair value recognition provisions of SFAS No.
123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure  and amendment of FASB Statement No. 123. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the vesting period of the options using the
straight-line allocation method. Calipers pro forma information is as follows
(in thousands except per share data): 7




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Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net loss:As reported
    
    $
    (9,473
    )
    
    $
    (9,542
    )
    
    $
    (19,510
    )
    
    $
    (19,510
    )Add: Stock-based employee compensation expense
included in reported net income
    
    
    235
    
    
    
    152
    
    
    
    1,930
    
    
    
    340Deduct: Total stock-based employee compensation
expense determined under fair value based methods
for all awards
    
    
    (2,451
    )
    
    
    (3,179
    )
    
    
    (9,342
    )
    
    
    (9,435
    )Pro forma net loss
    
    $
    (11,689
    )
    
    $
    (12,569
    )
    
    $
    (26,922
    )
    
    $
    (28,605
    )Net loss per share:As reported:Basic and diluted
    
    $
    (0.33
    )
    
    $
    (0.38
    )
    
    $
    (0.68
    )
    
    $
    (0.79
    )Pro forma:Basic and diluted
    
    $
    (0.40
    )
    
    $
    (0.51
    )
    
    $
    (0.93
    )
    
    $
    (1.15
    )
 The effects of applying SFAS No. 123 for pro forma disclosures are not
likely to be representative of the effects on reported net loss for future
years. 2. Acquisition of Zymark Corporation On July 14, 2003, Caliper completed the acquisition of 100% of ZYAC
Holding Corporation (ZYAC was the parent holding company of Zymark Corporation
and had no operating activities) from The Berwind Company LLC (Berwind) for
an aggregate purchase price of approximately $72.8 million in the form of $55.7
million in cash, 3.15 million shares of Calipers common stock valued at $14.6
million, and acquisition costs of $2.5 million. The purchase terms also
provided for Caliper to issue Berwind an additional 1.575 million contingent
shares if certain financial targets are met in 2003 and 2004. These targets
were not achieved in 2003 resulting in the obligation to issue 787,500
contingent shares to lapse. If the 2004 targets are achieved, the fair value of
the additional shares issued will be added to the purchase price and allocated
to goodwill. Zymarks operations, assumed as of the date of the acquisition, have been
included in the results of operations of Caliper beginning on July 14, 2003
and, as a result, are not reflected in the results of operations for the three
and six months ended June 30, 2003. The acquisition was accounted for as a
purchase in accordance with SFAS No. 141, Accounting for Business
Combinations, and Caliper accordingly allocated the purchase price of Zymark
based upon the estimated fair value of net assets acquired and liabilities
assumed. During the quarter ended June 30, 2004, Caliper finalized the
components and allocation of the purchase price as follows (in thousands): Cash and cash equivalents
    
    $
    5,803Other current assets
    
    
    17,472Other assets
    
    
    2,838Liabilities assumed
    
    
    (19,663
    )Identifiable intangible assets
    
    
    19,165Goodwill
    
    
    47,215$
    72,830
 Acquired intangible assets consisted of the following as of June 30, 2004
(in thousands): AccumulatedUseful Life
    
    Fair Value
    
    Amortization
    
    Net ValueDeveloped Technology
    
    5 years
    
    $
    14,314
    
    
    $
    2,744
    
    
    $
    11,570Customer List
    
    5 years
    
    
    3,640
    
    
    
    697
    
    
    
    2,943Backlog
    
    0.5 years
    
    
    1,211
    
    
    
    1,211
    
    
    
    $
    19,165
    
    
    $
    4,652
    
    
    $
    14,513
 Fair value was determined by an independent appraisal and was based upon
expected future discounted cash flows taking into account risks related to the
characteristics and application of the technology, existing and future markets
and assessments of the life cycle stage of the technology. Amortization for
purchased intangible assets was approximately $900,000 and $1.9 million for the three and
six month period ended June 30, 2004, respectively. Scheduled amortization expense related to
the intangible assets is $1.8 million for the remainder of 2004, and for future
fiscal periods is as follows (in thousands): 8




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##### Table of Contents



12-month period ending December 31:
    
    Amount2005
    
    
    3,5912006
    
    
    3,5912007
    
    
    3,5912008
    
    
    1,945$
    12,718
 Unaudited pro forma operating results for Caliper for the three and six
months ended June 30, 2004 and 2003, assuming the acquisition
was completed prior to 2003, is as follows (in thousands, except per share amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004(as reported)
    
    2003
    
    2004(as reported)
    
    2003RevenueProduct
    
    $
    12,985
    
    
    $
    11,415
    
    
    $
    24,994
    
    
    $
    24,827Service
    
    
    3,581
    
    
    
    2,722
    
    
    
    6,641
    
    
    
    5,561License fee and contract revenue
    
    
    2,356
    
    
    
    2,436
    
    
    
    4,219
    
    
    
    4,561Total Revenue
    
    
    18,922
    
    
    
    16,572
    
    
    
    35,854
    
    
    
    34,949Operating loss
    
    
    (9,637
    )
    
    
    (13,877
    )
    
    
    (19,741
    )
    
    
    (26,369
    )Net loss
    
    
    (9,473
    )
    
    
    (13,152
    )
    
    
    (19,510
    )
    
    
    (25,185
    )Basic and diluted loss per share
    
    
    (0.33
    )
    
    
    (0.53
    )
    
    
    (0.68
    )
    
    
    (1.02
    )
 The unaudited pro forma financial information is presented for
informational purposes only, and is not necessarily indicative of Calipers
operating results had the acquisition been completed prior to all
periods for which the
pro forma results give effect. 3. Inventories Inventories for use in the manufacture of Calipers instruments include
electronic components, devices, and accessories either produced or purchased
from original equipment manufacturers. Inventories for use in the manufacture
of LabChip technologies consist primarily of glass, quartz, and reagents.
Inventories are stated at the lower of standard cost (which approximates actual
cost on a first-in, first-out basis) or market, reflect appropriate reserves
for potential obsolete, slow moving or otherwise impaired material, and include
appropriate elements of material, labor, and indirect costs. Inventories
consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Raw material
    
    $
    5,450
    
    
    $
    5,929Work-in-process
    
    
    1,245
    
    
    
    1,087Finished goods
    
    
    5,239
    
    
    
    4,564Inventories
    
    $
    11,934
    
    
    $
    11,580
 Caliper reserves or writes off 100% of the cost of inventory that it
specifically identifies and considers obsolete or excessive to fulfill future
sales estimates. Caliper defines obsolete inventory as inventory that will no
longer be used in the manufacturing process. Excess inventory is generally
defined as inventory in excess of projected usage, and is determined using
managements best estimate of future demand at the time, based upon information
then available to Caliper. Caliper uses a twelve-month demand forecast and, in
addition to the demand forecast, Caliper also considers: (1) parts and
subassemblies that can be used in alternative finished products; (2) parts and
subassemblies that are unlikely to be engineered out of Calipers products; and
(3) known design changes which would reduce Calipers ability to use the
inventory as planned. During the three and six months ended June 30, 2004,
Caliper recorded charges of $30,000 and $274,000, respectively, to cost of
product revenues to reserve for excess and obsolete inventories. During the six
months ended June 30, 2003, Caliper recorded a charge of $205,000 in the second
quarter to reserve for excess and obsolete inventories. 9




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4. Comprehensive Loss The components of comprehensive loss included within stockholders equity
for the three and six months ended June 30, 2004, and 2003 are as follows (in
thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (9,473
    )
    
    $
    (9,542
    )
    
    $
    (19,510
    )
    
    $
    (19,510
    )Unrealized loss on marketable securities
    
    
    (369
    )
    
    
    (295
    )
    
    
    (418
    )
    
    
    (320
    )Foreign currency translation gain
    
    
    (42
    )
    
    
    27
    
    
    
    (15
    )
    
    
    27Comprehensive loss
    
    $
    (9,884
    )
    
    $
    (9,810
    )
    
    $
    (19,943
    )
    
    $
    (19,803
    )
 5. Related Party Sales For the three and six months ended June 30, 2003, Caliper had recognized
$551,000 and $1.1 million in related-party revenue consisting of sales of
Caliper 250 drug discovery system products, LabChip devices, and datapoints to
Amphora Discovery Corporation. As of December 31, 2003, Amphora was no longer
considered a related party as Calipers ownership interest in Amphora declined
to a fraction of 1%; as a result Caliper no longer separately reports sales to
Amphora. 6. Acquired Research and Development On April 15, 2004, Caliper purchased from Amphora certain technology
rights and know-how related to improving the performance of certain types of
cell-based assays on a microfluidic chip. Caliper paid $200,000 in cash and
issued to Amphora credits to purchase $900,000 worth of products from Caliper
in exchange for the acquired technology and know-how. Through April 15, 2009,
Caliper will also pay royalties to Amphora based on datapoint revenue received
by Caliper from end-users as a result of datapoint revenue derived using the
acquired technology. Caliper expects to further develop the acquired technology
and adapt it for potential applications and uses on the LabChip 3000 instrument
platform. Given that additional development work is necessary to produce a
commercially saleable product based on this technology, and the absence of
material revenue streams currently derived from the acquired technology, the
entire consideration has been expensed as research and development expense
during the second quarter of 2004. The transaction has been accounted for in
accordance with APB No. 29, Accounting for Non-Monetary Transactions, pursuant
to which Caliper valued the acquired research and development based on the fair
value of the product credits and established a deferred liability for the
future product credits owed to Amphora. The recorded deferred liability is
subject to adjustment based upon the fair value of products and services
purchased by Amphora, or in the event that any portion of the credit expires
unutilized. Any adjustments to the deferred liability will have a
corresponding credit offset to research and development expense. Through June
30, 2004, Amphora utilized $647,000 of the product credit, valued at $557,000. 7. Significant Concentrations In the three months ended June 30, 2004, one customer, Agilent,
represented approximately 15% of total revenues. In the three months ended June
30, 2003, three customers including Agilent, a collaborative research partner,
and Aclara Biosciences, Inc., (Aclara), represented 42%, 12% and 11%,
respectively, of total revenues. For the six months ended June 30, 2004, one
customer, Agilent, represented approximately 13% of total revenues. For the
six months ended June 30, 2003, Agilent and Aclara represented 44% and 11%,
respectively, of total revenues. One customer represented 11% of Calipers outstanding accounts receivable
balance as of June 30, 2004. As of December 31, 2003, no individual customer
accounted for greater than 10% of outstanding accounts receivable. 8. Restructuring Activities Employment Downsizing On May 6, 2003, Caliper conducted a reduction in force that downsized its
employee work force by 26 people, or approximately 10%. Caliper incurred a
charge of $322,000 in the second quarter of 2003 for severance payments and
related benefits, with all employee separations completed and payments
distributed by the end of June 2003. Following its acquisition of Zymark in July 2003, Caliper conducted a
series of downsizings to promote its new commercial strategies and increase
organizational efficiencies within the newly combined company: 10




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
    
    On August 5, 2003, 37 positions were identified to be eliminated by
June 30, 2004. A charge of $774,000 was recorded in
the third quarter of 2003 for severance and related benefits. All
separations and payments had been completed as of June 30, 2004.
    
    On December 3, 2003, 37 positions were identified to be eliminated by
June 30, 2004. A charge of $2.7 million was recorded in the fourth
quarter of 2003 for severance and related benefits. All separations and
related payments are expected to be completed in 2004.
    
    On June 15, 2004, 14 positions were identified to be eliminated by
September 30, 2004. A charge of $180,000 was recorded in the second
quarter of 2004 for severance and related benefits. All separations and
related payments are expected to be completed in 2004. Facility Closures In November 2003, Caliper closed one of its three facilities in Mountain
View, California, that was used primarily for instrument manufacturing and
research and development activities, and recognized a $7.7 million charge for
costs to be incurred over the remainder of the lease for which there is no
expected ongoing economic benefit. In June 2004, in connection with the
finalization of restructuring activities associated with the combination with
Zymark, Caliper vacated and shut down approximately one half of one of its two
currently occupied Mountain View facilities that was primarily used for
research and development activities and recognized an additional $2.2 million
charge, including leasehold improvements having a carrying value of $67,000
that had no further use. In accordance with Statement of Financial Accounting
Standard No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, Caliper recorded a liability equal to the fair value of the
remaining lease payments as of the cease-use date for each of the closed
facilities. Fair value was determined based upon the discounted present value
of remaining lease rentals (5% discount rate used) for the space no longer
occupied, reduced by the discounted present value of future estimated sublease
rentals, through the end of the lease, that could be obtained for the property
even if Caliper does not enter into a sublease. The following table summarizes the restructuring activity (in thousands): Severance
    
    Facilityand
    
    LeaseRelated
    
    Accrual
    
    Leaseholds
    
    TotalBalance, December 31, 2003
    
    $
    2,083
    
    
    $
    7,819
    
    
    $
    
    
    
    $
    9,902Restructuring charges
    
    
    180
    
    
    
    2,105
    
    
    
    67
    
    
    
    2,352Non-cash restructuring charges
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    (67
    )Restructuring credits
    
    
    (134
    )
    
    
    
    
    
    
    
    
    
    
    (134
    )Reclassification of deferred rent liability
    
    
    
    
    
    
    220
    
    
    
    
    
    
    
    220Accretion of facility lease accrual
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    110Payments
    
    
    (1,951
    )
    
    
    (1,075
    )
    
    
    
    
    
    
    (3,026
    )Balance, June 30, 2004
    
    $
    178
    
    
    $
    9,179
    
    
    $
    
    
    
    $
    9,357
 As
of June 30, 2004, $2.7 million of the accrued restructuring
liability was included within other accrued liabilities and $6.7
million was included within other noncurrent liabilities in the
consolidated balance sheet. 11




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9. Commitments The following are contractual commitments as of June 30, 2004, associated
with debt and lease obligations: Other Long-termObligationsObligations Under
    
    included in OtherOperating
    
    Sale-Leaseback
    
    Non-currentLeases
    
    Arrangements
    
    Liabilities(In thousands)12-month period ending December 31:2004
    
    $
    3,801
    
    
    $
    639
    
    
    $
    3622005
    
    
    7,408
    
    
    
    340
    
    
    
    3622006
    
    
    6,169
    
    
    
    
    
    
    
    2007
    
    
    6,078
    
    
    
    
    
    
    
    2008
    
    
    4,064
    
    
    
    
    
    
    
    Thereafter
    
    
    476
    
    
    
    
    
    
    
    Total minimum lease and principal payments
    
    $
    27,996
    
    
    $
    979
    
    
    $
    724Amount representing interest
    
    
    
    
    
    $
    (47
    )
    
    
    (5
    )Present value of future payments
    
    
    
    
    
    
    932
    
    
    
    719Current portion of sale-leaseback arrangements and other obligations
    
    
    
    
    
    
    (906
    )
    
    
    (362
    )Noncurrent portion of obligations
    
    
    
    
    
    $
    26
    
    
    $
    357
 Letters of Credit Caliper has pledged a certificate of deposit of $2.5 million as collateral
on outstanding letters of credit related to Calipers Mountain View,
California, facility lease agreements. In addition to the outstanding
letters-of-credit related to the Mountain View operating lease agreements
described above, Caliper issued a $663,000 letter-of-credit to secure certain
customer deposits in Germany. These commitments are classified as security
deposits in the accompanying balance sheet. Other Long-Term Obligation In connection with the acquisition of Labotec by Zymark in August 2002,
Caliper is obligated to make non-interest-bearing deferred purchase price
payments of 900,000 Euros to the former owner. As of June 30, 2004, the U.S.
dollar value of the remaining obligation totaled $719,000 and is due in two
remaining installments on August 13, 2004, and 2005. Inventory Purchases As of June 30, 2004, Caliper had a non-cancelable purchase commitment in
the amount of approximately $224,000 with its foreign supplier for the purchase
of proprietary glass stock used in the manufacture of certain types of its
chips. Royalties Caliper has an exclusive license from UT-Batelle, LLC to the patents
covering the inventions of Dr. J. Michael Ramsey. Royalty expense related to
the UT-Batelle patents during the three and six months ended June 30, 2004 were
$18,000 and $36,000, respectively, and for the three and six months ended June
30, 2003 were, $25,000 and $114,000, respectively. Caliper also has an
exclusive license from the Trustees of the University of Pennsylvania to
certain patents relating to microfluidic applications and chip structures. The
minimum royalty obligations under these licenses rise over time, but never
exceed $213,000 per year. 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations This Managements Discussion and Analysis of Financial Condition and
Results of Operations as of June 30, 2004, and for the three and six month
periods ended June 30, 2004, and June 30, 2003, should be read in conjunction
with our financial statements included in this Quarterly Report on Form 10-Q
and Managements Discussion and Analysis of Financial Condition and Results of
Operations and our financial statements included in our Annual Report on Form
10-K for the year ended December 31, 2003. The discussion in this report contains forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations, and intentions, especially under the Executive Summary caption,
Second Quarter Overview  Continuing Goals below. Our actual results could
differ materially from those discussed here. Factors that could cause or
contribute to these differences include those discussed under the caption,
Factors Affecting Operating Results, below as well as those discussed
elsewhere. The cautionary statements made in this report should be read as
applying to all related forward-looking statements wherever they appear in this
report. Executive Summary Business Caliper uses its core technologies of liquid handling, automation, and
LabChip microfluidics to create leading edge tools for the life sciences
industry. Within the life sciences industry, Caliper is currently addressing
three major markets: drug discovery and development, genomics and proteomics,
and molecular diagnostics. Caliper is well positioned to lead the industry in
these markets by evolving the companys liquid handling, detection, and
integration platforms into technologically advanced LabChip systems that offer
efficiency, versatility, and high quality data. In July 2003 Caliper acquired Zymark Corporation, a pioneer and leader in
the field of laboratory automation, robotics and advanced liquid handling
solutions. Our financial results include the results of the acquired Zymark
business for all periods after July 14, 2003. Zymark, founded in 1981,
manufactured and sold products and services to a multitude of customers in the
pharmaceutical, biotechnology, chemical, agriculture and food industries
worldwide. We substantially completed our integration of the Zymark business by
the end of 2003 and, effective April 2, 2004, we completed a legal merger of
Zymark into Caliper. We no longer actively market our products under the Zymark
trade name, although we will continue to sell products under Zymark trademarks
on a transitional basis. Our strategy is to evolve the companys various product platforms into
technologically advanced liquid handling and LabChip systems that offer
efficiency, versatility, and high quality data to customers for genomics and
proteomics, and drug discovery research applications. In addition, we believe
that our microfluidics technology may be particularly suitable for certain
applications in molecular diagnostics, and we are actively investigating
opportunities in this area. Our customers include leading pharmaceutical and biotechnology customers,
universities, governmental research laboratories, and other research
organizations throughout the world. We utilize three distribution channels for
our products. In some cases, we sell instruments and chips directly to
end-users. In other instances we sell products to commercial partners, who in
turn sell these products to end-users. Following the acquisition of Zymark, we
also sell our products through a global network of approximately 30 independent
distributors, who in turn sell our products to end-users. Second Quarter Overview Effect of the Zymark Acquisition.During the
second quarter of 2004, we achieved several significant financial milestones.
As reflected in the table shown in Note 2 to the Consolidated Financials
Statements in Item 1 of this report, on a pro forma basis our revenues
increased $2.3 million, or 14.2% from pro forma revenue of $16.6 million in the
second quarter of 2003, representing our first quarter of pro forma revenue
growth since our acquisition of Zymark in July of 2003. On a GAAP
basis, product revenues during the three and six months ended June 30,
2004 represented 69% and 70%,
respectively, of our total revenue as compared to 59% and 60%,
respectively, in the same period during 2003. In addition, approximately 19%
of our revenue during the second quarter of 2004, and on a year to date basis,
was derived from service revenue that was added through our acquisition of
Zymark compared to no service revenue prior to the Zymark acquisition. We believe
that the increases in product and services revenues and reduced percentage of
our total revenue represented by license and contract revenue (12% over the
first six months of 2004 versus 40% over the same period in 2003) is an
improvement in the balance of our revenue sources and provides us with greater
potential to achieve more stable growth in the future. In
addition, we have expanded our customer base, especially as a result of the
Zymark acquisition in 2003, creating less reliance on customers who had
previously represented a greater percentage of our overall revenues. The
combination of our higher revenues and impact of cost reduction measures
implemented over the year since our combination with Zymark have resulted in
reduced operating losses and improved operating cash flows on both a quarter
and year-to-date basis. Continuing Goals.Our continuing goal is to attain more stable and
sustainable revenue growth through increased sales of our instruments and
equipment to a more diversified customer base and by increasing the percentage
of our total revenue that arises from recurring revenue sources such as chips,
services, annual maintenance contracts, and other consumable products (which we
refer to as aftermarket revenue). In the second quarter of 2004, we saw our
service revenues increase to $3.6 million, an approximate increase 13




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##### Table of Contents



of 17% over service revenues of $3.1 million in the first quarter of 2004, and
an approximate increase of 32% over pro forma service revenues of $2.7 million
in the second quarter of 2003 (see the table shown in Note 2 to the Consolidate
Statements in Item 1 of this report). In addition to our goal of attaining more stable and sustainable revenue
growth, we are continuing to focus on improving our gross margins and
controlling costs in order to achieve operating cash flow break-even at lower
overall revenues. In the second quarter, we completed what we believe to be
our final restructuring efforts in connection with our combination with Zymark.
These activities included a 14 person reduction in force during the month of
June and also the vacating and shutting down approximately one-half of a
building at our Mountain View, California, site that was principally used for
research and development. We believe our latest employee reduction will result
in $1.1 million of annualized savings once fully implemented by the end of
September of this year. The shut down of the portion of the building will not
help us to realize any additional material cash savings, but will reduce our
ongoing rent expense, mainly within research and development expenses, by
approximately $600,000 on an annualized basis beginning in the third quarter of
this year. We believe that we are on target to achieve our objective to end
2004 with at least $40 million in cash, cash equivalents and marketable
securities, and our longer-term objective of achieving positive cash flows from
operating activities by the fourth quarter of 2005. During the second quarter of 2004, we enhanced our product position with
the introduction of four new products: the LabChip 3000 drug discovery system,
the Sciclone inL10 liquid handler, Staccato iBLOX automated workstations, and a
protein analysis capability for the LabChip 90 automated electrophoresis
system. In addition, we acquired technology from Amphora to improve the
performance of certain types of cell-based assays in our high throughput
microfluidic screening system. Over the next several quarters, we intend to
incorporate the acquired technology into a new calcium-flux assay that will
provide versatility, ease-of-use and high-quality, single-cell data for
scientists studying G-protein-coupled receptor (GPCR) targets. While we are
unable to project future sales from the introduction of this capability to our
LabChip 3000 platform, we believe that the expanded ability to perform
cell-based assays on our LabChip 3000 platform will greatly enhance the
positioning of this system by: 1) allowing scientists to study cell lines that
were previously not well-suited to microfluidic-based assays, 2) eliminating
the requirement for extensive cell culture facilities and 3) enabling screeners
to study cells that are in short supply (e.g., blood platelets, neurons and
other primary cells), thereby opening up an area of study that is largely
inaccessible to standard microplate-based technologies. We also continue to aggressively pursue our microfluidics adoption
strategy and promote our enhanced product position to our expanded customer
base. An example of these activities during the second quarter was our six
city customer seminar series during which we presented our newest solutions to
over 300 existing and prospective customers. In addition, we have engaged our
top customers in senior level meetings to validate our strategic direction and
test the viability of new product solutions that combine our microfluidics
technologies with our laboratory automation expertise. A number of these
meetings have generated new sales and leads that we believe will result in
incremental product sales for the second half of 2004. In our partnership channel, Molecular Devices Corporation announced and
launched a new product, the SynchroMax  ET Plate Handling Robot, which uses
our Twister® II robot as a key component, and we are moving forward on projects
that stem from our January partnership agreement with Affymetrix and last
years agreement with Bio-Rad. We expect new partnership products to be
introduced to the market starting in the fourth quarter of this year. Critical Accounting Policies The critical accounting policies used in the preparation of our financial
statements that we believe affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements presented in
this report are described in our Managements Discussion and Analysis of
Financial Condition and Results of Operations and in the Notes to the
Consolidated Financial Statements included in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2003. There have been no material
changes to the critical accounting policies. Results of Operations Revenue Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In thousands)
    
    2004
    
    2003
    
    $ Change
    
    % Change
    
    2004
    
    2003
    
    $ Change
    
    % ChangeProduct revenue
    
    $
    12,985
    
    
    $
    3,441
    
    
    $
    9,544
    
    
    
    277
    %
    
    $
    24,994
    
    
    $
    6,929
    
    
    $
    18,065
    
    
    
    261
    %Service revenue
    
    
    3,581
    
    
    
    
    
    
    
    3,581
    
    
    nm
    
    
    6,641
    
    
    
    
    
    
    
    6,641
    
    
    nmLicense fees and contract revenue
    
    
    2,356
    
    
    
    2,437
    
    
    
    (81
    )
    
    
    (3
    )
    
    
    4,219
    
    
    
    4,561
    
    
    
    (342
    )
    
    
    (8
    )Total Revenues
    
    $
    18,922
    
    
    $
    5,878
    
    
    $
    13,044
    
    
    
    222
    %
    
    $
    35,854
    
    
    $
    11,490
    
    
    $
    24,364
    
    
    
    212
    %
 14




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Total revenue increased for the three and six months ended June 30, 2004,
as compared to the same periods in 2003 as a result of the additional product
and service revenues added by the acquired Zymark business and increased
Agilent product revenue, offset in part by the decrease in license fees and
contract revenue, and a decrease in datapoint revenue from Amphora, a former
related party. We had no service revenues prior to our acquisition of Zymark. Product Revenue.The overall net increases in product revenue from the
comparative periods in 2003 included increases in LabChip product revenue from
Agilent of $1.3 million and $1.1 million, respectively, due to a combination of
transfer price increases and increased volumes of LabChip products sold to
Agilent. The three months ended June 30, 2004 included a cumulative transfer
price adjustment of $787,000 related to the twelve months ended April 30, 2004.
The net increases in product revenue from the comparative periods in 2003 also
reflected the fact that we had no datapoint revenue from Amphora, a former
related party, in 2004 compared to $450,000 and $900,000, in the comparative
periods of 2003. We have had no datapoint revenue from Amphora in 2004 because
under the terms of the Modification Agreement entered into with Amphora in
December 2002, Amphora is not obligated to make any further datapoint payments
to us until they fully utilize the number of datapoints to which they are
entitled due to a prior $1.8 million required minimum payment to us that was
fully recognized as revenue over the twelve month period ended November 30,
2003. We believe that Amphora may begin to owe us additional datapoint payments
during the second half of 2004; however, we are unable to currently estimate
the amount, if any, that may be owed to us during the second half of 2004 if
Amphora exceeds the number of datapoints to which it is entitled based on the
earlier $1.8 million minimum payment. License Fees and Contract Revenue.We have had no royalty revenue from Aclara
in 2004, as compared to royalty revenue of $625,000 and $1.3 million,
respectively, in the comparative periods in 2003 stemming from our
comprehensive settlement agreement with Aclara in 2001, under which we received
minimum annual royalty payments from Aclara in each of the years 2002 and 2003.
In addition, we have had no research funding from Agilent in 2004, as compared
to contract revenue of $887,000 and $1.6 million, respectively, in the
comparative periods in 2003 under our collaborative agreement with Agilent
which we terminated effective as of May 8, 2003. Despite these revenue
declines, we have experienced an overall increase in license fees and contract
revenue as a result of contract revenue from other collaboration partners of
$1.4 million and $2.5 million for the three and six months ended June 30, 2004,
respectively. The increase in contract revenues from our other collaboration
partners is due, in part, to our efforts to develop applications with new
commercial partners. The decrease in contract revenue from Agilent is the
result of there being no current product development activity with Agilent. We
are not anticipating development funding from Agilent or royalty revenue from
Aclara in the second half of 2004. Costs Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In thousands)
    
    2004
    
    2003
    
    $ Change
    
    % Change
    
    2004
    
    2003
    
    $ Change
    
    % ChangeProduct revenue
    
    $
    8,491
    
    
    $
    2,462
    
    
    $
    6,029
    
    
    
    245
    %
    
    $
    17,112
    
    
    $
    4,760
    
    
    $
    12,352
    
    
    
    259
    %Service revenue
    
    
    1,643
    
    
    
    
    
    
    
    1,643
    
    
    nm
    
    
    3,284
    
    
    
    
    
    
    
    3,284
    
    
    nmTotal Costs
    
    $
    10,134
    
    
    $
    2,462
    
    
    $
    7,672
    
    
    
    312
    %
    
    $
    20,396
    
    
    $
    4,760
    
    
    $
    15,636
    
    
    
    329
    %
 Costs of Product Revenue.The increase in cost of product revenue is due
primarily to the increase in product revenues generated from sales of Zymark
products and includes the effects of the organizational realignment completed
during 2003 that resulted in a greater proportion of unabsorbed labor and
overhead costs of our Mountain View, California, chip manufacturing operation
being allocated to product manufacturing as opposed to research and development
expenses. This realignment increased our cost of product revenues by
approximately $755,000 and $1,357,000 for the three and six months ended June
30, 2004, as compared to the same periods in 2003, or 5.8 and 5.4 percentage
points, respectively, as a percentage of product revenues. As discussed in
Note 8 of the Notes to Consolidated Financial Statements, we completed an
employee downsizing in June 2004 to reduce our underutilized labor and
overhead, which we believe will result in an annualized reduction to cost of
product revenues of approximately $1.1 million starting in the fourth quarter
of 2004. Gross Margins.Our gross margin on product revenue was 35% and 32% for the
three and six months ended June 30, 2004, as compared to 28% and 31%,
respectively, for the same periods in 2003. The improvement during the three
month period ended June 30, 2004 as compared to the same period in 2003
occurred as a result of the substantial increase in product revenue, especially
from the acquired Zymark business, and the effects of cost reductions
implemented across the combined businesses. During the three month period
ended June 30, 2004, the positive gross margin impact of the Agilent cumulative
price adjustment discussed above was essentially offset by negative effects of
the chip manufacturing cost realignment also discussed above. Gross margin on
service revenue was 54% and 51% for the three and six months ended June 30,
2004, respectively. We had no service revenues in the comparable 2003 periods.
We expect that service gross margins will be approximately 50% on a continuing basis,
depending upon the level of billable services in relation to non-billable
services, such as warranty repair work, occurring in any given period. 15




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##### Table of Contents



Expenses Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In thousands)
    
    2004
    
    2003
    
    $ Change
    
    % Change
    
    2004
    
    2003
    
    $ Change
    
    % ChangeResearch and development
    
    $
    5,986
    
    
    $
    8,822
    
    
    $
    (2,836
    )
    
    
    (32
    )%
    
    $
    12,452
    
    
    $
    18,233
    
    
    $
    (5,781
    )
    
    
    (32
    )%Acquired research & development
    
    
    1,010
    
    
    
    
    
    
    
    1,010
    
    
    nm
    
    
    1,010
    
    
    
    
    
    
    
    1,010
    
    
    nmSelling, general and administrative
    
    
    7,946
    
    
    
    4,740
    
    
    
    3,206
    
    
    
    68
    %
    
    
    15,646
    
    
    
    9,309
    
    
    
    6,337
    
    
    
    68
    %Stock-based compensation
    
    
    235
    
    
    
    152
    
    
    
    83
    
    
    
    55
    %
    
    
    1,930
    
    
    
    340
    
    
    
    1,590
    
    
    
    468
    %Amortization of intangible assets
    
    
    896
    
    
    
    
    
    
    
    896
    
    
    nm
    
    
    1,943
    
    
    
    
    
    
    
    1,943
    
    
    nmRestructuring charges
    
    
    2,352
    
    
    
    322
    
    
    
    2,030
    
    
    
    630
    %
    
    
    2,218
    
    
    
    322
    
    
    
    1,896
    
    
    
    589
    %
 Research and Development Expenses.The decreases in research and
development expenses are primarily due to our evaluation and prioritization of
research and development programs which led to a lower level of research and
development activities and associated employee downsizing actions in 2003 and,
as discussed above, the reduced amount of labor and overhead allocated to
research and development as a result of our increased commercial emphasis since
we acquired Zymark. These decreases to research and development more than
offset the incremental expenses associated with continuing research and
development programs assumed in our acquisition of Zymark. We expect to incur
a similar to slightly higher level of research and development expenses over the remainder of 2004
as compared to expenses incurred during the first six months of 2004. The
level of ongoing research and development expense is highly dependent upon the
number and significance of ongoing projects at any particular time. We
currently expect research and development expenses to continue to increase in
future periods as we develop new product solutions and enhancements, including
our plans to improve the performance of certain cell-based assays in our high
throughput microfluidic screening system. Acquired Research and Development Charge.Acquired research and
development during the second quarter of 2004 arises from our purchase of
certain in-process research and development from Amphora as more fully
discussed in Note 6 to the consolidated financial statements in Item 1 of this
report. We expect to incur up to $1.0 million in additional research and
development expenses over the next six to nine months to complete the
development of the technology for use in our LabChip 3000 product line. Selling, General and Administrative Expenses.Our selling, general and
administrative expenses increased primarily due to the additional costs of
Zymark, offset in part by cost synergies realized through our integration
efforts. Stock-based Compensation.The increase in stock based compensation during
the three months ended June 30, 2004, as compared to the same period in 2003,
is primarily due to the amortization of deferred compensation recorded on
restricted stock awards that were granted during the third fiscal quarter of
2003. The increase in stock-based compensation during the six months ended
June 30, 2004, as compared to the same period in 2003, is due primarily to
option accelerations and other stock-based expenses incurred in connection with
employment and separation agreements with former executives and other senior
employees whose employment was terminated during the first quarter of 2004, and
to a lesser extent the amortization of deferred compensation recorded on
restricted stock awards granted in 2003. Assuming no changes to current
outstanding stock awards or changes in personnel, we estimate stock-based
compensation to be approximately $200,000 over the remainder of 2004, including
approximately $125,000 during the third fiscal quarter. Amortization of Intangible Assets.Amortization of intangible assets
consists solely of amortization of the intangible assets acquired in the Zymark
acquisition, as more fully described in Note 2 to the consolidated financial
statements in Item 1 of this report. Scheduled amortization is $1.8 million in
the second half of 2004, $3.6 million for each of the years 2005 through 2007,
and the remaining $1.9 million in 2008. Restructuring Charges.We recognized restructuring charges (credits) in 2004
as follows:  
    
    A $2.2 million charge was recognized in June 2004, based
upon the estimated net present value of our future lease payments
related to the vacating and shutting down approximately one-half
of one of the three facilities we lease in Mountain View, net of
anticipated sublease rentals, including leasehold improvement
write-offs of $67,000 related to the shut-down. The facility
lease accrual charge involved certain key assumptions including
the amount, if any, of future sublease rentals. Our current
assumptions take into consideration the going market rate for
leases of similar properties, which is 80-90% below our current
lease. As such, a decrease in anticipate sublease rentals would
not materially affect our estimated liability.
    
    A $180,000 charge was recognized in June 2004 related to
severance and benefits associated with the downsizing of 14
positions, primarily affecting manufacturing operations in our
Mountain View location. We expect that the 16




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##### Table of Contents



annualized savings of this downsizing action will be approximately
$1.1 million starting in the fourth quarter of 2004.
    
    A $134,000 credit adjustment was made to adjust the
estimated restructuring liability related to severance and
benefits associated with the December 2003 reduction in force. During the three month period ended June 30, 2003, we incurred a charge of
$322,000 for severance and related benefits related to the May 2003 reduction
in force, in which all employee separations and related payments were completed
by June 30, 2003. Interest Income, Net Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands)
    
    2004
    
    2003
    
    $ Change
    
    % Change
    
    2004
    
    2003
    
    $ Change
    
    % ChangeInterest income, net
    
    $
    137
    
    
    $
    1,077
    
    
    $
    (940
    )
    
    
    (87
    )%
    
    $
    336
    
    
    $
    1,998
    
    
    $
    (1,662
    )
    
    
    (83
    )%
 Interest income, net decreased due to lower cash, cash equivalents and
marketable securities balances over both the three and six months ended June
30, 2004 as compared to the same periods in 2003 and, to a lesser extent,
declines in interest rate yields over the comparable periods. Liquidity and Capital Resources Our cash, cash equivalents and marketable securities were $52.9 million at
June 30, 2004, compared to $66.7 million as of December 31, 2003. We have financed our operations from inception primarily through equity
sales, product sales and services, contract and milestone payments and $32.5
million received from the comprehensive settlement agreement with Aclara, and
equipment financing under sale lease back arrangements. The inclusion of
Zymarks results of operations after July 14, 2003, had a significant impact on
the business and the comparability of cash flows on a period-over-period basis. Cash Flows Six Months EndedJune 30,
    
    Increase(In thousands)
    
    2004
    
    2003
    
    (Decrease)Cash provided by (used in)Operating Activities
    
    $
    (13,205
    )
    
    $
    (17,572
    )
    
    $
    4,367Investing Activities
    
    
    8,842
    
    
    
    57,535
    
    
    
    (48,693
    )Financing Activities
    
    
    2,078
    
    
    
    (535
    )
    
    
    2,613
 Operating Activities.During the six months ended June 30, 2004 we used
$13.2 million of cash for operating activities as compared to $17.6 million of
cash used in the same period of 2003. We paid out $2.0 million in severance
payments during the six months ended June 30, 2004, as compared to $322,000 in
the same period of 2003. Accounts receivable used cash of $1.9 million during
six months ended June 30, 2004, as compared to cash used of $2.6 million during
the six months ended June 30, 2003. The decreased use of cash for accounts
receivable was due, in general, to more standardized commercial terms employed
by Caliper as a result of the our broader revenue base. With license and
contact revenue representing a lesser percentage of total revenue, accounts
receivable collections are influenced to a lesser extent by the timing of
significant contract milestone payments. Inventories used cash of $737,000
during the six months ended June 30, 2004, as compared to cash generated of
$1.5 million during the same period of 2003. The increase in use of cash for
inventories during the six months ended June 30, 2004 is primarily related to
an increase in finished goods related to product delivered on sales remaining
in deferred revenue, and an increase in demonstration inventories. In 2003,
prior to our acquisition of Zymark, we had lower inventory levels overall as
product sales were not significant. As such, changes in our inventory balances
were generally more reactive to specific product sales. Deferred revenue
generated $938,000 million of cash during the six months ended June 30, 2004,
as compared to cash generated of $308,000 during the same period of 2003. This
increase in cash generated from deferred revenue was due to an increase in
advance customer payments and annual maintenance contracts on our products and
an increase in the amount of deferred revenue on product shipments not yet
recognized as revenue in accordance with our revenue recognition policy. The
remainder of cash used in operations was $9.6 million related to our operations
and all other changes in working capital during the six months ended June 30,
2004, as compared to $16.5 million of cash used for operations and all other
changes in working capital during the same period of 2003. This decrease is
due to a combination of the effects of our overall higher revenues and cost
reduction measures implemented over the past year. 17




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Investing Activities.During the six months ended June 30, 2004, we generated
$11.1 million in cash from net sales and maturities of marketable securities
and used $2.1 million of cash for property and equipment purchases, including
$1.2 invested in the purchase and ongoing implementation of our new ERP system
during the first six months of 2004. We expect to invest a total of between $3
- $4 million on property and equipment during 2004, including the investment in
the ERP system. During the six months ended June 30, 2003, we generated $58.0
million in cash from net sales and maturities of marketable securities which
was used for the purchase of Zymark, and used $444,000 for property and
equipment purchases. Financing Activities. During the six months ended June 30, 2004, we generated
$2.1 million in cash from financing activities, reflecting $3.0 million from
the sale of our common stock pursuant to exercises of stock options and
investments in the employee stock purchase plan, offset in part by $921,000 of
payments under sales-leaseback arrangements. As of June 30, 2004, we had commitments under leases and other obligations
totaling $29.7 million, as reflected in the table below, as compared to $34.7
million as of December 31, 2003. The decrease is primarily the result of
payments under operating lease and sale-leaseback arrangements. OtherLong-termObligationsObligations
    
    included inUnder
    
    OtherOperating
    
    Sale-Leaseback
    
    Non-currentLeases
    
    Arrangements
    
    Liabilities(In thousands)12-month period ending December 31:2004
    
    $
    3,801
    
    
    $
    639
    
    
    $
    3622005
    
    
    7,408
    
    
    
    340
    
    
    
    3622006
    
    
    6,169
    
    
    
    
    
    
    
    2007
    
    
    6,078
    
    
    
    
    
    
    
    2008
    
    
    4,064
    
    
    
    
    
    
    
    Thereafter
    
    
    476
    
    
    
    
    
    
    
    Total minimum lease and other payments
    
    $
    27,996
    
    
    $
    979
    
    
    $
    724
 Our capital requirements depend on numerous factors including market
acceptance of our products, the resources we devote to developing and
supporting our products, acquisitions, and other factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to expand our support and product development activities, and for other general
corporate activities. Based on our long-term strategic plan, we believe that
our current cash balances, together with the revenue to be derived from our
commercial partners and from commercial sales of our microfluidic and lab
automation products and services, will be sufficient to fund our operations at
least through the year 2005. Our future capital requirements will depend on
many factors, including, among others:  
    
    growing market acceptance of our microfluidic and lab automation products;
    
    continued scientific progress in our microfluidic, lab automation and robotic research and product development programs;
    
    the magnitude and scope of our research and product development programs;
    
    our ability to maintain existing, and establish additional, corporate partnerships and licensing arrangements;
    
    the time and costs involved in expanding and maintaining our manufacturing facilities;
    
    the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims;
    
    the potential need to develop, acquire or license new technologies and products; and
    
    other factors not within our control. We have provided financial projections that we expect to attain positive
cash flows from operations by the fourth quarter of 2005, and we believe our
current cash balances are more than adequate to satisfy our cash needs at least
through the end of 2005. Our actual cash needs could vary considerably,
however, depending on opportunities that arise over the course of 2004 and
2005. During or after this period, if cash generated by operations is
insufficient to satisfy our liquidity requirements, we may need to reduce our
research and development efforts, or sell additional equity or debt securities
or obtain additional credit arrangements. The sale of additional 18




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equity or convertible debt securities may result in additional dilution to our
stockholders. Additional financing may not be available on terms acceptable to
us or at all. The inability to obtain additional financing may force delays in
research and product development activities and, ultimately, cause us to cease
operations. Financial Projections.We are providing financial projections for the
third quarter of 2004, and reaffirming our projections for full year 2004 and
our longer-range objectives for generating positive cash flows from operations,
as set forth below. The key financial projections we are providing are as
follows:  
    
    We expect full year revenues for 2004 to be approximately $80 million to $85 million,
and third quarter 2004 revenues to be approximately $19 to $21 million.
    
    We expect full year selling, general and administrative, and research and development
expenses to be approximately $57 to $60 million, inclusive of the $1.0 million research
and development charge discussed in Note 6 to the consolidated financial statements
in Item 1 of this report.
    
    We expect our product gross margins to be in the range of
35-38%, and our service
gross margins to be in the range of 50-54% over the remainder of 2004. We expect to
use cash of between $20 million and $25 million during 2004, including an estimated
$3.0 million to $4.0 million to be used for capital expenditures including our new
Enterprise Resource Management System. We expect cash, cash equivalents and
marketable securities to be in excess of $40 million as of December 31, 2004.
    
    We expect to attain positive cash flows from operations by the fourth quarter of 2005. We have incurred operating losses since our inception and expect to incur
losses for the foreseeable future. While we have significantly reduced our
research and development expenses, we will continue to make significant
investments in research and development over the next several years. The
financial projections that we have provided above are forward-looking
statements that are subject to risks and uncertainties, and are only made as of
the date of the filing of this Form 10-Q. These projections are based upon
assumptions that we have made and believe to be reasonable. However, actual
results may vary significantly from these projections due to the risks and
uncertainties inherent in our business as described in the section entitled,
Factors Affecting Operating Results, immediately below. Factors Affecting Operating Results Risks Related To Our Business Our LabChip products may not achieve market acceptance, which could cause our
revenue to grow slowly or decline. Many of our microfluidic technologies, which we developed prior to our
acquisition of Zymark on July 14, 2003, are still in the process of development
and in the early stages of commercial adoption, and our drug discovery and
automated electrophoresis systems incorporating these technologies have only
recently begun to be used commercially. If these systems do not gain further
market acceptance, we will be unable to generate significant sales of these
products and our revenue may grow more slowly than expected or decline. The
commercial success of our LabChip products will depend upon capital spending by
our potential customers, and market acceptance of the merits of our drug
discovery and automated electrophoresis systems by pharmaceutical and
biotechnology companies, academic research centers, and other companies that
rely upon laboratory experimentation. Market acceptance will depend on many
factors, including:  
    
    our ability to demonstrate the advantages and potential economic value
of our LabChip drug discovery systems over alternative
well-established technologies;
    
    our ability to develop novel functionalities for our LabChip products
and instrument systems that enable customers and potential customers
to perform functions that are not possible with traditional lab
research technologies;
    
    capital spending by our customers and potential customers, which has
been sluggish over the past several years as a result of prevailing
economic conditions and other industry-specific factors; and
    
    our ability to market our drug discovery systems. Because the LabChip products and automated electrophoresis systems have
been in operation for only a limited period of time, their accuracy,
reliability, ease of use and commercial value have not been fully established.
If the early users of our microfluidic products do not endorse our initial drug
discovery systems because these systems fail to generate the quantities and
quality of data they expect, are too difficult or costly to use, or are
otherwise deficient, market acceptance of these drug discovery systems would
suffer and further sales may be limited. We cannot assure you that these
customers efforts to put our high throughput systems into use will continue or
will be expeditious or effective. Potential customers for our drug discovery
systems may also wait for indications from our initial drug discovery system
customers that our drug discovery systems work effectively and generate
substantial benefits. Further, non-acceptance by the market of our initial drug
discovery systems could undermine not only those systems but subsequent 19




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drug discovery systems as well. Our microfluidic-based drug discovery systems
are now being marketed and sold principally by the sales and marketing
organization we acquired with our acquisition of Zymark. These systems and the
technologies on which they are based are still relatively new to this sales and
marketing organization, which may limit our ability to effectively market and
sell these systems. If we are not successful in developing new and enhanced liquid handling and
other life sciences products, our products may not gain market acceptance and
we may lose market share to our competitors. The life sciences productivity tools equipment market, the principal
market for the traditional Zymark laboratory automation products, is very
competitive and is characterized by rapid technological change and frequent new
product introductions. The commercial success of our liquid handling systems
and other products depends upon continued and expanding market acceptance of
our systems and products by pharmaceutical and biotechnology companies and
genomics research organizations, and upon availability to address quickly any
performance problems that our customers encounter. We anticipate that our
competitors will introduce new, enhanced products in this market in the near
future. Our future success will depend on our ability to offer new products and
technologies that researchers believe are an attractive alternative to current
products and technologies, that address the evolving needs of our customers and
that are technologically superior to new products that may be offered by our
competitors. We may experience difficulties or delays in our development
efforts for new products, and we may not ultimately be successful in developing
them. Any significant delay in releasing new products in this market could
adversely affect our reputation, give a competitor a first-to-market advantage
or cause a competitor to achieve greater market share. If we do not successfully introduce newer, lower cost versions of our drug
discovery systems, and expand the range of applications for these systems, we
may experience a decline in revenue or slow revenue growth and may not achieve
or maintain profitability. We intend to continue developing new, lower cost versions of our
microfluidic-based drug discovery systems with enhanced features that address
existing or emerging customer needs, such as novel assay functionalities. If we
are unable to do so, our drug discovery systems may not become more widely used
and we may experience a decline in revenue or slow revenue growth and may not
achieve or maintain profitability. We currently have several assays in
development including assays that measure many important activities of cells
and proteins. We are developing line extensions that are particularly well
suited for the evaluation of kinases, one of the largest focus areas of drug
discovery efforts today. We are creating new tools to make it easier for our
customers to develop their own custom assays in a microfluidic format. We are
also developing kinase profiling and selectivity screening kits. If we are not
able to complete the development of any of these applications and tools, or if
we experience difficulties or delays, we may lose our current customers and may
not be able to obtain new customers. We are subject to the capital spending patterns of the pharmaceutical industry,
which over the past several years have been adversely impacted by general
economic conditions, industry consolidation and increased competition. Many of our instrument products represent relatively large capital
expenditures by our customers. During the past several years, many of our
customers and potential customers, particularly in the pharmaceutical industry,
have reduced their capital spending budgets because of generally adverse
prevailing economic conditions, consolidation in the industry, and increased
pressure on the profitability of pharmaceutical companies, due in part to more
competition from generic drugs. If our customers and potential customers do not
increase their capital spending budgets, because of continuing adverse economic
conditions or further consolidation in the industry, we could face weak demand
for our products, in particular our products used for high-throughput
screening. If the demand for our instrument products is weak because of
constrained capital spending by our pharmaceutical industry customers and
potential customers, we may not achieve our targets for revenue and cash flow
from operations. A portion of our business depends upon collaborations with OEM business
partners, and our financial success depends upon our ability to manage our
existing OEM relationships and to identify new OEM partners. Historically, an important part of our business strategy has been to
collaborate with OEM business partners in the development of new applications
for our microfluidic and liquid handling products and the subsequent
commercialization of the developed products. These collaboration arrangements
can be difficult to manage, and disagreements with our OEM business partners
may adversely impact our ability to complete development programs, and
therefore to realize increased product sales through these product development
and commercialization collaborations. In addition, our ability to grow our
business depends in part on our ability to identify new collaboration partners
or new applications for our technologies to develop with our existing
collaboration partners. If we are unable to identify new collaboration
partners or to agree on the terms of a collaboration, or if we are unable to
identify new applications for our technologies to develop and commercialize
with an existing collaboration partner, the growth of our business could be
adversely affected. Our acquisition of Zymark and other potential acquisitions may have unexpected
consequences or impose additional costs on us. Our business is highly competitive and our growth is dependent upon market
growth and our ability to enhance our existing products and introduce new
products on a timely basis. One of the ways we may address the need to develop
new products is through acquisitions of complementary businesses and
technologies, such as our acquisition of Zymark. From time to time, we consider
and evaluate potential business combinations both involving our acquisition of
another company and transactions involving the sale of 20




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Caliper through, among other things, a possible merger or consolidation of our
business into that of another entity. Acquisitions involve numerous risks,
including the following:  
    
    difficulties in integration of the operations, technologies, and products of the acquired companies;
    
    the risk of diverting managements attention from normal daily operations of the business;
    
    potential cost and disruptions caused by the integration of financial reporting systems and development of
uniform standards, controls, procedures and policies;
    
    accounting consequences, including amortization of acquired intangible assets or other required purchase
accounting adjustments, resulting in variability or reductions of our reported earnings;
    
    potential difficulties in completing projects associated with purchased in-process research and development;
    
    risks of entering markets in which we have no or limited direct prior experience and where competitors in
these markets have stronger market positions;
    
    the potential loss of key employees of Caliper or the acquired company due to the employment uncertainties
inherent in the acquisition process;
    
    the assumption of known and potentially unknown liabilities of the acquired company;
    
    we may find that the acquired company or assets do not further our business strategy or that we paid more
than what the company or assets are worth;
    
    our relationship with current and new employees and customers could be impaired;
    
    the acquisition may result in litigation from terminated employees or third parties who believe a claim
against us would be valuable to pursue;
    
    our due diligence process may fail to identify significant issues with product quality, product
architecture and legal contingencies, among other matters; and
    
    insufficient revenues to offset increased expenses associated with acquisitions. Acquisitions may also cause us to:  
    
    issue common stock that would dilute our current stockholders percentage ownership;
    
    record goodwill and non-amortizable intangible assets that will be subject to impairment testing
and potential periodic impairment charges;
    
    incur amortization expenses related to certain intangible assets;
    
    incur reductions in deferred revenue of the acquired company, resulting in lower future revenues; or
    
    incur other large and immediate write-offs. We cannot assure you that our acquisition of Zymark and any future
acquisitions will be successful and will not adversely affect our business. We
must also maintain our ability to manage any growth effectively. Failure to
manage growth effectively and successfully integrate acquisitions we make could
harm our business. We expect to incur future operating losses and may not achieve profitability. We have experienced significant operating losses each year since our
inception and expect to incur substantial additional operating losses for the
years 2004 and 2005, primarily as a result of a current sluggish economic
climate, dampened life sciences research spending by many of our customers and
expected continuing expenses for manufacturing capabilities, research and
product development costs and general and administrative costs. We may never
achieve profitability. As of June 30, 2004, we had an accumulated deficit of
approximately $154.6 million. Our losses have resulted principally from costs
incurred in research and development, product marketing and from general and
administrative costs associated with our operations. These costs have exceeded
our interest income and revenue which, to date, have been generated principally
from product sales, collaborative research and development agreements,
technology access fees, cash and investment balances. 21




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Our operating results fluctuate significantly and any failure to meet financial
expectations may disappoint securities analysts or investors and result in a
decline in our stock price. Our quarterly operating results have fluctuated significantly in the past,
and we expect they will continue to fluctuate in the future, even with our
combination with Zymark, as a result of many factors, some of which are outside
of our control. For example, many of our products represent relatively large
capital expenditures for our customers, which leads to variations in the amount
of time it takes for us to sell our products because customers may take several
months or longer to evaluate and obtain the necessary internal approvals for
the purchase of our products. In addition, a significant portion of our
revenues is derived from sales of relatively high-priced products, and these
sales are generally made by purchase orders and not long-term contracts. Delays
in receipt of anticipated orders for higher-priced products could lead to
substantial variability of revenue from quarter to quarter. Furthermore, Zymark
historically received purchase orders and shipped a significant portion of each
quarters product orders near the end of the quarter. If
that pattern continues, even short delays in the receipt of orders or shipment
of products at the end of a quarter could result in shipment during the next
quarter, which could have a material adverse effect on results of operations
for the quarter in which the shipment did not occur. In addition, Zymarks
business was historically affected by capital spending patterns of its
customers with a greater percentage of purchases, and therefore higher
revenues, occurring in the second half of the year. There can be no assurance
that this trend will continue. For all of these and other reasons, it is
possible that in some future quarter or quarters, our operating results will be
below the expectations of securities analysts or investors. In this event, the
market price of our common stock may fall abruptly and significantly. Because
our revenue and operating results are difficult to predict, we believe that
period-to-period comparisons of our results of operations are not a good
indication of our future performance. If revenue declines in a quarter, whether due to a delay in recognizing
expected revenue or otherwise, our earnings will decline because many of our
expenses are relatively fixed. In particular, research and development and
general and administrative expenses and amortization of deferred stock
compensation and intangible assets are not affected directly by variations in
revenue. We have limited experience in manufacturing our products and may encounter
manufacturing problems or delays, which could result in lost revenue. Although Agilent manufactures the Agilent 2100 Bioanalyzer, we manufacture
the chips used in this instrument and also currently manufacture instruments
and sipper chips for our drug discovery systems. We currently have limited
manufacturing capacity for our LabChip products and automated drug discovery
system products and experience variability in manufacturing yields for chips
and automated drug discovery products. If we fail to deliver chips and
automated drug discovery products in a timely manner, our relationships with
our customers could be seriously harmed, and revenue would decline. We
currently have one manufacturing location for LabChip products in Mountain
View, California, and one manufacturing location for instruments and other
products located in Hopkinton, Massachusetts. The actual number of chips we are
able to sell or use depends in part upon the manufacturing yields for these
chips. We have only recently begun to manufacture significant numbers of sipper
chips and are continuing to develop our manufacturing procedures for these
chips. In order to offer sipper chips with more than four capillaries for drug
discovery applications, we will need to continue to achieve consistently high
yields in this process. We have experienced difficulties in manufacturing both
our chips and instruments. We cannot assure you that manufacturing or quality
problems will not continue or arise as we attempt to scale-up our production of
chips or that we can scale-up manufacturing in a timely manner or at
commercially reasonable costs. If we are unable to consistently manufacture
sipper chips or chips for the Agilent 2100 Bioanalyzer on a timely basis
because of these or other factors, our product sales will decline. We are
currently manufacturing drug discovery instruments in-house and in limited
volumes. If demand for our drug discovery instruments increases significantly,
we will either need to expand our in-house manufacturing capabilities or
outsource to other manufacturers, which could result in a decrease in yields,
and therefore an increase in manufacturing costs and a decrease in net income
from sales. Our ability to scale-up chip manufacturing may be compromised by
uncertainty regarding the volume of chips for the Agilent 2100 Bioanalyzer that
we will need to supply to Agilent in the future. As our exclusive collaboration
with Agilent terminated in May 2003 pursuant to the notice we delivered to
Agilent, Agilent now has the option to manufacture chips itself rather than
continue to receive its supply of chips from Caliper. Accordingly, we face
uncertainty regarding future demand for these chips from our manufacturing
operations. Because a small number of customers and Agilent have accounted for, and may
continue to account for, a substantial portion of our revenue, our revenue
could decline due to the loss of one of these customers or the termination of
our agreement with Agilent. Historically, we have had very few customers and one commercial partner,
Agilent, from which we have derived the majority of our revenue, although our
acquisition of Zymark in July 2003 greatly expanded our customer base. During
the three and six month periods ended June 30, 2004, Agilent accounted for 15%
and 13%, respectively, of total revenues. If we were to lose Agilent and one or
more of our other significant customers, our revenue could decrease
significantly. Our revenue could decline due to the termination of our agreement with Agilent
because of a number of different factors, including a reduction in our gross
margin share of Agilent 2100 Bioanalyzer and LabChip products sold by Agilent
or reduced sales of such products by Agilent due to competition from us or our
other commercial partners. Our commercial relationship with Agilent is currently in a state of
transition due to our termination of the collaboration agreement 22




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with Agilent, effective in May 2003. We are now operating under the surviving
provisions of that agreement. We will continue to receive revenue from Agilent
based on a formula for gross margin sharing on sales by Agilent of instruments
and chips developed under our collaboration agreement. Although we anticipate that future sales of the Agilent 2100 Bioanalyzer
system will further expand our revenue base, under the surviving provisions of
our agreement with Agilent, our gross margin share of collaboration products
sold by Agilent will begin to decline at the end of 2004. If sales of these
products do not increase fast enough to offset the decline in our gross margin
share, the amount of revenue we receive from Agilent will decline. In addition, under the surviving terms of our agreement with Agilent, we
granted to Agilent a non-exclusive, royalty-bearing license to certain of our
LabChip technologies existing as of the termination date for Agilent to
develop, make and sell products in the field of the collaboration.
Consequently, there is the possibility that Agilent may manufacture its own
supply of LabChip products, rather than purchasing them from us, or that we may
experience competition from Agilent in the future, which would reduce our
ability to sell products independently or through other commercial partners. Now that our agreement with Agilent is terminated, Agilents sales of
collaboration products could be reduced due to competition from us or our other
commercial partners. In such event, the revenue we would receive from Agilent
could be reduced by more than the revenue we receive from other commercial
partners. Further, Agilent may decide for reasons wholly independent of
competition to reduce its sales efforts and/or pricing for these products. If
Agilent does so, our revenue may decline. Finally, we have not entered into a new research and development funding
agreement with Agilent as of June 30, 2004. While we anticipate that we will
collaborate with Agilent at some point either related to existing collaboration
products or for new products, there is no assurance that will receive
development funding over the remainder of 2004. We depend on our key personnel, the loss of whom would impair our ability to
compete. We are highly dependent on the principal members of our management,
especially our Chief Executive Officer, and certain of our scientific staff.
The loss of services of any of these persons could seriously harm our product
development and commercialization efforts. In addition, research, product
development, and commercialization will require additional skilled personnel in
areas such as chemistry and biology, software engineering and electronic
engineering. Our business is located in Silicon Valley, California, and, with
the acquisition of Zymark, in the Boston metropolitan area, where demand for
personnel with these skills remains high, and may increase further as the
economic outlook in these areas improves. As a result, competition for and
retention of personnel, particularly for employees with technical expertise, is
intense and the turnover rate for these people is high. If we are unable to
hire, train and retain a sufficient number of qualified employees, our ability
to conduct and expand our business could be seriously reduced. The inability to
retain and hire qualified personnel could also hinder any planned expansion of
our business. Our products could infringe on the intellectual property rights of others,
which may cause us to engage in costly litigation and, if we are not
successful, could also cause us to pay substantial damages and prohibit us from
selling our products. Third parties may assert infringement or other intellectual property
claims against us. We may have to pay substantial damages, including treble
damages, for past infringement if it is ultimately determined that our products
infringe a third partys proprietary rights. Further, we may be prohibited from
selling our products before we obtain a license, which, if available at all,
may require us to pay substantial royalties. Even if these claims are without
merit, defending a lawsuit takes significant time, may be expensive and may
divert management attention from other business concerns. We are aware of
third-party patents that may relate to our technology or potential products. We
have also been notified that a third party has attempted to provoke an
interference with one issued U.S. patent that we have exclusively licensed to
determine the priority of inventions. Any public announcements related to
litigation or interference proceedings initiated or threatened against us could
cause our stock price to decline. In 2001, we settled intellectual property
litigation with Aclara concerning one family of Aclara patents. However, Aclara
could assert other patent infringement claims against us in the future in
alternative dispute resolution proceedings established under our settlement
agreement. We may need to initiate lawsuits to protect or enforce our patents, which would
be expensive and, if we lose, may cause us to lose some of our intellectual
property rights, which would reduce our ability to compete in the market. We rely on patents to protect a large part of our intellectual property and our
competitive position, especially in our microfluidics business. In order to
protect or enforce our patent rights, we may initiate patent litigation against
third parties, such as the patent infringement suit against Molecular Devices
we settled in November 2003. These lawsuits could be expensive, take
significant time, and could divert managements attention from other business
concerns. They would put our patents at risk of being invalidated or
interpreted narrowly and our patent applications at risk of not issuing. We may
also provoke these third parties to assert claims against us. Patent law
relating to the scope of claims in the technology fields in which we operate is
still evolving and, consequently, patent positions in our industry are
generally uncertain. We cannot assure you that we will prevail in any of these
suits or that the damages or
other remedies awarded, if any, will be commercially valuable. During the
course of these suits, there may be public announcements of the results of
hearings, motions and other interim proceedings or developments in the
litigation. If securities analysts or investors perceive any of these results
to be negative, it could cause our stock price to decline. 23




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The rights we rely upon to protect our intellectual property underlying our
products may not be adequate, which could enable third parties to use our
technology and would reduce our ability to compete in the market. In addition to patents, we rely on a combination of trade secrets,
copyright and trademark laws, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
Nevertheless, these measures may not be adequate to safeguard the technology
underlying our products. If they do not protect our rights, third parties could
use our technology, and our ability to compete in the market would be reduced.
In addition, employees, consultants and others who participate in the
development of our products may breach their agreements with us regarding our
intellectual property, and we may not have adequate remedies for the breach. We
also may not be able to effectively protect our intellectual property rights in
some foreign countries. For a variety of reasons, we may decide not to file for
patent, copyright or trademark protection outside of the United States. We also
realize that our trade secrets may become known through other means not
currently foreseen by us. Notwithstanding our efforts to protect our
intellectual property, our competitors may independently develop similar or
alternative technologies or products that are equal or superior to our
technology and products without infringing on any of our intellectual property
rights or design around our proprietary technologies. We are dependent on a single-source supplier for the glass used in our LabChip
products and if we are unable to buy this glass on a timely basis, we will not
be able to deliver our LabChip products to customers. We currently purchase a key component for our chips from a single-source
supplier located in Germany. Although we keep surplus inventory in our Mountain
View manufacturing facility, if we are unable to replenish this component on a
timely basis, we will not be able to deliver our chips to our customers, which
would harm our business. We obtain some of the components and subassemblies included in our systems from
a single source or a limited group of suppliers, and the partial or complete
loss of one of these suppliers could cause production delays and a substantial
loss of revenue. We rely on outside vendors to manufacture many components and
subassemblies for our products. Certain components, subassemblies and services
necessary for the manufacture of our products are provided by a sole supplier
or limited group of suppliers, some of which are our competitors. We currently
purchase additional components, such as optical, electronic, and pneumatic
devices, in configurations specific to our requirements that, together with
certain other components, such as computers, are integrated into our products.
We maintain only a limited number of long-term supply agreements with our
suppliers. Our reliance on a sole or a limited group of suppliers involves several
risks, including the following:  
    
    we may be unable to obtain an adequate supply of required components;
    
    we have reduced control over pricing and the timely delivery of components and subassemblies; and
    
    our suppliers may be unable to develop technologically advanced products to support our growth
and development of new systems. Because the manufacturing of certain of these components and subassemblies
involves complex processes and requires long lead times, we may experience
delays or shortages caused by suppliers. We believe that alternative sources
could be obtained at the same prices and on substantially the same terms and
conditions, if necessary, for most sole and limited source parts. However, if
we were forced to seek alternative sources of supply or to manufacture such
components or subassemblies internally, we might be forced to redesign our
systems, which could prevent us from shipping our systems to customers on a
timely basis. Some of our suppliers have relatively limited financial and other
resources, and, therefore, their businesses could fail. Any inability to obtain
sufficient quantities of components and subassemblies, or any other
circumstance that would restrict our ability to ship our products, could damage
relationships with current and prospective customers and could harm our
business. If a natural disaster strikes our manufacturing facility we would be unable to
manufacture our products for a substantial amount of time and we would
experience lost revenue. We rely on a single manufacturing location to produce our chips and drug
discovery systems, and a single location to produce Zymarks laboratory
automation and robotics systems, with no alternative facilities. These
facilities and some pieces of manufacturing equipment are difficult to replace
and could require substantial replacement lead-time. Our manufacturing
facilities may be affected by natural disasters such as earthquakes and floods.
Earthquakes are of particular significance since the microfluidic manufacturing
facility is located in Mountain View, California, an earthquake-prone area. In
the event that our existing manufacturing facilities or equipment is affected
by man-made or natural disasters, we would be unable to manufacture products
for sale, meet customer demands or sales projections. If our manufacturing
operations were curtailed or ceased, it would harm our business. Failure to raise additional capital or generate the significant capital
necessary to expand our operations and invest in new products could reduce our
ability to compete and result in lower revenue. We anticipate that our existing capital resources will enable us to
maintain currently planned operations at least through the year 24




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2004. However, we premise this expectation on our current operating plan, which
may change as a result of many factors. Consequently, we may need additional
funding sooner than anticipated. Our inability to raise needed capital would
seriously harm our business and product development efforts. In addition, we
may choose to raise additional capital due to market conditions or strategic
considerations even if we believe we have sufficient funds for our current or
future operating plans. To the extent that additional capital is raised through
the sale of equity or convertible debt securities, the issuance of these
securities could result in dilution to our stockholders. We currently have no credit facility or committed sources of capital. To
the extent operating and capital resources are insufficient to meet future
requirements, we will have to raise additional funds to continue the
development and commercialization of our technologies. These funds may not be
available on favorable terms, or at all. If adequate funds are not available on
attractive terms, we may be required to curtail operations significantly or to
obtain funds by entering into financing, supply or collaboration agreements on
unattractive terms. Our net operating loss and tax credit carryforwards may expire if we do not
achieve or maintain profitability. As of December 31, 2003, we had federal and state net operating loss
carryforwards of approximately $101.5 million and $26.7 million. We also had
federal and state research and development tax credit carryforwards of
approximately $3.1 million and $3.1 million, respectively. The federal net
operating loss and credit carryforwards will expire at various dates beginning
in the year 2009 through 2023 if not utilized. The state net operating losses
will begin to expire in year 2004, if not utilized. Utilization of the federal and state net operating losses and credits may
be subject to a substantial limitation due to the change in ownership
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization. Because of our lack of earnings history and the uncertainty of realizing
these net operating losses, the deferred tax assets have been fully offset by a
valuation allowance. Risks Related to Owning Our Common Stock Our stock price is extremely volatile, and you could lose a substantial portion
of your investment. Our stock has been trading on the Nasdaq National Market only since
mid-December 1999. We initially offered our common stock to the public at
$16.00 per share. Since then our stock price has been extremely volatile and
has ranged, through August 6, 2004, from a high of approximately $202.00 per
share on March 2, 2000, to a low of $2.71 per share both on January 28, 2003,
and February 6, 2003. Our stock price may drop substantially following an
investment in our common stock. We expect that our stock price will remain
volatile as a result of a number of factors, including:  
    
    announcements by analysts regarding their assessment of Caliper and its prospects;
    
    announcements by our competitors of complementary or competing products and technologies;
    
    announcements of our financial results, particularly if they differ from investors expectations; and
    
    general market volatility for technology stocks. These factors and fluctuations, as well as general economic, political and
market conditions, may materially adversely affect the market price of our
common stock. We are at risk of future securities class action litigation. Given the volatility of our stock, we are at risk of having securities
class action lawsuits filed against us and our officers and directors. Such
securities litigation could result in potential liability, cause us to incur
litigation costs and divert managements attention and resources, any of which
could harm our business. In addition, announcements of lawsuits of this or some
other nature, and announcements of events occurring during the course of the
lawsuits, could cause our stock price to drop. Provisions of our charter documents and Delaware law may inhibit a takeover,
which could limit the price investors might be willing to pay in the future for
our common stock. Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing an acquisition, merger in which we are not the
surviving company or changes in our management. In addition, because we are
incorporated in Delaware, we are governed by the provisions of Section 203 of
the Delaware General Corporation Law. These provisions may prohibit large
stockholders, in particular those owning 15% or more of the outstanding voting
stock, from consummating a merger or combination including us. These provisions
could limit the price that investors might be willing to pay in the future for
our common stock. 25




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Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Sensitivity Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio. Fixed rate securities may have their
fair market value adversely impacted due to fluctuations in interest rates,
while floating rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates or we may
suffer losses in principal if forced to sell securities that have declined in
market value due to changes in interest rates. The potential change in fair value for interest rate sensitive instruments
has been assessed on a hypothetical 100 basis point adverse movement across all
maturities. We estimate that such hypothetical adverse 100 basis point movement
would not have materially impacted net income or materially affected the fair
value of interest rate sensitive instruments as of December 31, 2003, and June
30, 2004. Our equipment sale-leaseback financings, amounting to $0.9 million as of
June 30, 2004, are all at fixed rates and, therefore, have minimal exposure to
changes in interest rates. Our primary investment objective is to preserve principal while at the
same time maximizing yields without significantly increasing risk. Our
portfolio includes money markets funds, commercial paper, medium-term notes,
corporate notes, government securities, asset-backed securities, and corporate
bonds. The diversity of our portfolio helps us to achieve our investment
objective. As of June 30, 2004, and December 31, 2003, the average remaining
maturity of our investment portfolio was approximately 12 months. All of our
instruments are held other than for trading purposes. The following table presents by year of maturity the amounts of our cash
equivalents and investments, and related weighted average interest rates, that
may be subject to interest rate risk as of June 30, 2004 (dollars in
thousands): Fair ValueJune 30,2004
    
    2005
    
    2006
    
    Total
    
    2004Cash and money market funds:Fixed rate
    
    $
    6,617
    
    
    
    
    
    
    
    
    
    
    $
    6,617
    
    
    $
    6,617Average interest rate
    
    
    0.17
    %
    
    
    
    
    
    
    
    
    
    
    0.17
    %Available for sale marketable securities:Fixed rate
    
    $
    642
    
    
    $
    32,061
    
    
    $
    6,841
    
    
    $
    40,563
    
    
    $
    40,500Average interest rate
    
    
    6.65
    %
    
    
    3.43
    %
    
    
    2.39
    %
    
    
    3.32
    %Variable rate
    
    $
    950
    
    
    $
    2,857
    
    
    $
    2,001
    
    
    $
    5,809
    
    
    $
    5,807Average interest rate
    
    
    1.71
    %
    
    
    1.94
    %
    
    
    1.44
    
    
    
    1.73
    %Total securities
    
    $
    8,209
    
    
    $
    34,918
    
    
    $
    8,843
    
    
    $
    52,989
    
    
    $
    52,924Average interest rate
    
    
    0.84
    %
    
    
    3.30
    %
    
    
    2.18
    %
    
    
    2.74
    %
 This differs from our position as of December 31, 2003, which the
following table presents (dollars in thousands): Fair ValueDecember 31,2004
    
    2005
    
    2006
    
    Total
    
    2003Cash and money market funds:Fixed rate
    
    $
    8,889
    
    
    
    
    
    
    
    
    
    
    $
    8,889
    
    
    $
    8,889Average interest rate
    
    
    0.07
    %
    
    
    
    
    
    
    
    
    
    
    0.07
    %Available for sale marketable securities:Fixed rate
    
    $
    12,391
    
    
    $
    28,723
    
    
    $
    11,268
    
    
    $
    52,382
    
    
    $
    52,710Average interest rate
    
    
    5.23
    %
    
    
    4.07
    %
    
    
    2.75
    %
    
    
    4.05
    %Variable rate
    
    $
    3,253
    
    
    $
    1,853
    
    
    
    
    
    
    $
    5,106
    
    
    $
    5,118Average interest rate
    
    
    1.45
    %
    
    
    1.36
    %
    
    
    
    
    
    
    1.42
    %Total securities
    
    $
    24,533
    
    
    $
    30,576
    
    
    $
    11,268
    
    
    $
    66,377
    
    
    $
    66,717Average interest rate
    
    
    2.85
    %
    
    
    3.90
    %
    
    
    2.75
    %
    
    
    3.30
    %
 26




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Item 4. Controls and Procedures We evaluated our disclosure controls and procedures and our internal
controls and procedures for financial reporting as of June 30, 2004. This
evaluation was done under the supervision and with the participation of
management, including our chief executive officer and our principal financial
officer. Evaluation of disclosure controls and procedures. Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934, such as this Quarterly Report on Form
10-Q, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions (SEC) rules and forms.
Disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the
chief executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure. Subject to the limitations set forth below, based on their evaluation, as
of the end of this reporting period, the chief executive officer and the
principal financial officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in SEC rules and forms. Changes in internal controls. Internal controls over financial reporting are procedures which are
designed with the objective of providing reasonable assurance that: (1) our
transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded
and reported, all to permit the preparation of our financial statements in
conformity with accounting principles generally accepted in the United States.
Among other matters, we evaluated our internal controls over financial
reporting to determine whether there were any significant deficiencies or
material weaknesses, and sought to determine whether Caliper has identified
any acts of fraud involving personnel who have a significant role in Calipers
internal controls. In the professional auditing literature, significant
deficiencies may be interpreted as being comparable as reportable
conditions; these are control issues that could have a significant adverse
effect on the ability to record, process, summarize, and report financial data
in the financial statements. A material weakness is defined in the auditing
literature as a particularly serious reportable condition where the internal
control does not reduce to a relatively low level the risk that misstatements
caused by error or fraud may occur in amounts that would be material in
relation to the financial statements and would not be detected within a timely
period by employees in the normal course of performing their assigned
functions. There were no changes in our internal controls over financial reporting
during the quarter ended June 30, 2004, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934,
as added by Section 202 of the Sarbanes-Oxley Act of 2003, we are responsible
for listing the non-audit services approved by our Audit Committee to be
performed by Ernst & Young LLP, our independent auditor. Non-audit services are
defined as services other than those provided in connection with an audit or a
review of our financial statements. Limitations on the Effectiveness of Controls. Our management, including our chief executive and principal financial
officer, does not expect that our disclosure controls or our internal controls
will prevent all error and all fraud. A control system can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within Caliper have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected. 
 Part II  Other Information 
 Item 1. Legal Proceedings Commencing on June 7, 2001, Caliper and three of its officers and
directors (David V. Milligan, Daniel L. Kisner and James L. Knighton) were
named as defendants in three securities class action lawsuits filed in the
United States District Court for the Southern District of New York. The cases
have been consolidated under the caption In re Caliper Technologies Corp.
Initial Public Offering Securities Litigation, 01 Civ. 5072 (SAS) (GBD).
Similar complaints were filed in the same Court against hundreds of other
public companies that conducted IPOs of their common stock since the late 1990s
(the IPO Lawsuits). On August 8, 2001, the IPO 27




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Lawsuits were consolidated for pretrial purposes before United States Judge
Shira Scheindlin of the Southern District of New York. Together, those cases
are denominated In re Initial Public Offering Securities Litigation, 21 MC
92(SAS). On April 19, 2002, a Consolidated Amended Complaint was filed
alleging claims against Caliper and the individual defendants under Sections 11
and 15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder.
The Consolidated Amended Complaint also names certain underwriters of Calipers
December 1999 initial public offering of common stock. The Complaint alleges
that these underwriters charged excessive, undisclosed commissions to investors
and entered into improper agreements with investors relating to aftermarket
transactions. The Complaint seeks an unspecified amount of money damages.
Caliper and the other issuers named as defendants in the IPO Lawsuits moved on
July 15, 2002 to dismiss all claims on multiple grounds. By Stipulation and
Order dated October 9, 2002, the claims against Messrs. Milligan, Kisner and
Knighton were dismissed without prejudice. On February 19, 2003, the Court
granted Calipers motion to dismiss all claims against it. Plaintiffs were not
given the right to replead the claims against Caliper; the time to appeal the
dismissal has not yet expired. In May 2003, a Memorandum of Understanding was
executed by counsel for plaintiffs, issuers and their insurers setting forth
the terms of a settlement that would result in the termination of all claims
brought by plaintiffs against the issuers and individual defendants named in
the IPO Lawsuits. On July 7, 2003, a Special Litigation Committee of the
Caliper Board of Directors approved the settlement terms described in that
Memorandum of Understanding. Final documentation has been negotiated and
executed by counsel for Caliper, but not yet by counsel for plaintiffs or
Calipers insurers. The settlement will be subject to numerous conditions,
including approval by Judge Scheindlin. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Caliper granted restricted stock to a number of its employees in
connection with its acquisition of Zymark in July 2003, which restricted stock
grants were subject to a right of repurchase by the Caliper in the event that
the grantees left the employment of Caliper. A number of these employees did
leave the employment of Caliper prior to the actual issuance of this stock to
these employees. Consequently, Caliper only issued the vested shares to these
employees, as the remaining unvested shares continued to be subject to this
repurchase right and would have been repurchased by Caliper. The table below
reflects the stock not issued to the employees as if these shares had been
issued and subsequently repurchased during the three months ended June 30,
2004. Maximum DollarTotal
    
    Average
    
    Total Number of
    
    Value of SharesNumber of
    
    Price
    
    Shares Purchased as
    
    that May Yet BeShares
    
    Paid
    
    Part of Publicly
    
    Purchased Under thePeriod
    
    Purchased
    
    Per Share
    
    Announced Programs
    
    ProgramsApril 1, 2004 through April 30, 2004
    
    
    
    
    
    $
    .001
    
    
    
    
    
    
    
    May 1, 2004 through May 31, 2004
    
    
    
    
    
    $
    .001
    
    
    
    
    
    
    
    June 1, 2004 through June 30, 2004
    
    
    6,750
    
    
    $
    .001
    
    
    
    
    
    
    
    Total
    
    
    6,750
    
    
    $
    .001
    
    
    
    
    
    
    
    
 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders Our 2004 Annual Meeting of Stockholders was held on June 3, 2004, at 2:00
p.m. local time at Calipers facilities at 68 Elm Street, Hopkinton,
Massachusetts. There were present at the meeting, in person or represented by
proxy, the holders of 22,701,254 shares of Common Stock. The matters voted on
at the meeting and the votes cast are as follows:  (a)
    
    As listed below, all of the nominees for Class I Directors were
elected at the meeting. NO. OF
    
    NO. OF
    
    NO. OFCOMMON
    
    COMMON
    
    COMMONVOTES
    
    VOTES
    
    VOTESNAME OF NOMINEE
    
    IN FAVOR
    
    WITHHELD
    
    ABSTAININGVan Billet
    
    
    21,950,923
    
    
    
    750,331
    
    
    
    Robert C. Bishop, Ph.D.
    
    
    21,951,253
    
    
    
    750,001
    
    
    
    David Milligan, Ph.D.
    
    
    22,460,262
    
    
    
    240,992
    
    
    
    
  (b)
    
    The appointment of Ernst & Young LLP as our independent auditors for
the fiscal year ending December 31, 2004 was ratified. There were
22,498,983 share of Common Stock voting in favor, 132,542 shares of
Common Stock voting against, 69,729 share of Common Stock abstaining
with 0 Broker non-votes. 28




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##### Table of Contents



Item 5. Other Information Calipers Audit Committee pre-approves all audit and permissible non-audit
services provided by its independent auditors. For 2004, the Audit Committee
has pre-approved $115,000 for tax compliance and consulting services provided
by its independent auditors. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits ExhibitNumber
    
    Description of document3.1(1)
    
    Restated Certificate of Incorporation of Caliper.3.2(2)
    
    Restated Bylaws of Caliper.31.1
    
    Certification of Chief Executive Officer
Required Under Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as
amended.31.2
    
    Certification of Principal Financial Officer
Required Under Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as
amended.32.1*
    
    Certification of Chief Executive Officer
Required Under Rule 13a-14(b) or Rule 15d-14(b)
of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350.32.2*
    
    Certification of Principal Financial Officer
Required Under Rule 13a-14(b) or Rule 15d-14(b)
of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350.
   (1)
    
    Previously filed as Exhibit 3.1 to Calipers Quarterly Report on
Form 10-Q for the Quarter ended March 31, 2004, filed May 10,
2004, and incorporated by reference herein.(2)
    
    Previously filed as Exhibit 3.3 to Calipers Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2003, filed August 14,
2003, and incorporated by reference herein.*
    
    The certifications attached as Exhibits 32.1 and 32.2 accompanies this
Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and shall not be deemed filed by Caliper for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.  (b)
    
    Reports on Form 8-KOn May 7, 2004, Caliper Life Sciences, Inc. furnished a Current Report on
Form 8-K furnishing under Item 12 its financial results for the quarter ended
March 31, 2004. 29




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. CALIPER LIFE SCIENCES, INC.August 9, 2004
    
    By: /s/ E. Kevin HrusovskyE. Kevin HrusovskyChief Executive Officer and PresidentBy: /s/ Peter F. McAreePeter F. McAreeVice President, Finance andPrincipal Financial Officer
 30




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ExhibitNumber
    
    Description of document3.1(1)
    
    Restated Certificate of Incorporation of Caliper.3.2(2)
    
    Restated Bylaws of Caliper.31.1
    
    Certification of Chief Executive Officer
Required Under Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as
amended.31.2
    
    Certification of Principal Financial Officer
Required Under Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as
amended.32.1*
    
    Certification of Chief Executive Officer
Required Under Rule 13a-14(b) or Rule 15d-14(b)
of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350.32.2*
    
    Certification of Principal Financial Officer
Required Under Rule 13a-14(b) or Rule 15d-14(b)
of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350.
   (1)
    
    Previously filed as Exhibit 3.1 to Calipers Quarterly Report on
Form 10-Q for the Quarter ended March 31, 2004, filed May 10,
2004, and incorporated by reference herein.(2)
    
    Previously filed as Exhibit 3.3 to Calipers Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2003, filed August 14,
2003, and incorporated by reference herein.*
    
    The certifications attached as Exhibits 32.1 and 32.2 accompanies this
Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and shall not be deemed filed by Caliper for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended. 31