**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM10-Q**

 
| ý | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|------------|----------------------------------------------------------------------------------------------|

** **

**for the quarterly period ended March31, 2006.**

 

**or**

 
| o | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|------------|-----------------------------------------------------------------------------------------------|

** **

**for the transition period from                  to                  .**

** **

**Commissionfile # 000-28229**

** **

**CALIPERLIFE SCIENCES, INC.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**              |   | **33-0675808**                           |
|---------------------------|--------|------------------------------------------|
| (State of  Incorporation) |   | (I.R.S. Employer  Identification Number) |

 

**68 Elm Street**

**Hopkinton, Massachusetts 01748**

(Address and zip code ofprincipal executive offices)

 

Registrant’s telephonenumber, 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 (orfor such shorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes  ý  No  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

Large accelerated filer  o  Acceleratedfiler  ý             Non-acceleratedfiler o

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes  oNo  ý

 

**NUMBEROF SHARES OF COMMON STOCK OUTSTANDING ON April 30, 2006: 33,932,069**

** **

** **

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**CALIPERLIFE SCIENCES, INC.**

**TABLE OFCONTENTS**

** **
| ** **                                                                                                            | **Page No.** |
|-----------------------------------------------------------------------------------------------------------------------|--------------|
| PART I   FINANCIAL INFORMATION                                                                                   | 2            |
|                                                                                                                  |         |
| Item 1. Financial Statements                                                                                     | 2            |
| Condensed Consolidated  Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005                    | 2            |
| Condensed Consolidated  Statements of Operations for the Three Months Ended March 31, 2006 and  2005 (unaudited) | 3            |
| Condensed Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005  (unaudited)      | 4            |
| Notes to Unaudited Condensed  Consolidated Financial Statements                                                       | 5            |
|                                                                                                                  |         |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations              | 11           |
|                                                                                                                  |         |
| Item 3. Quantitative  and Qualitative Disclosures About Market Risk                                              | 16           |
|                                                                                                                  |         |
| Item 4. Controls and Procedures                                                                                  | 16           |
|                                                                                                                  |         |
| PART II  OTHER INFORMATION                                                                                       | 17           |
|                                                                                                                  |         |
| Item 1. Legal Proceedings                                                                                             | 17           |
|                                                                                                                  |         |
| Item 1A. Risk Factors                                                                                                 | 17           |
|                                                                                                                  |         |
| Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds                                             | 21           |
|                                                                                                                  |         |
| Item 3. Defaults Upon Senior Securities                                                                          | 21           |
|                                                                                                                  |         |
| Item 4. Submission of  Matters to a Vote of Security Holders                                                     | 21           |
|                                                                                                                  |         |
| Item 5. Other Information                                                                                        | 21           |
|                                                                                                                  |         |
| Item 6. Exhibits                                                                                                 | 22           |
|                                                                                                                  |         |
| SIGNATURES                                                                                                            | 23           |
|                                                                                                                  |         |
| EXHIBIT INDEX                                                                                                         | 24           |
|  Ex-31.1  Section 302 Certification of CEO                                                                       |         |
|  Ex-31.2  Section 302 Certification of CFO                                                                       |         |
|  Ex-32.1  Section 906 Certification of CEO                                                                       |         |
|  Ex-32.2  Section 906 Certification of CFO                                                                       |         |

 

1

----

 

**PARTI. FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS**

 

**CALIPERLIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

**(unaudited)**

** **
| ** **                                       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                       |       |                     |       |                        |       |
| Current assets:                                  |       |                     |       |                        |       |
| Cash and cash  equivalents                       |       | $                        | 7,023      |                        | $          | 8,096 |   |
| Marketable  securities                           |       | 19,817                   |       | 23,129                      |       |
| Restricted cash                                  |       | 667                      |       | 479                         |       |
| Accounts  receivable, net                        |       | 17,341                   |       | 19,532                      |       |
| Inventories                                      |       | 12,260                   |       | 11,061                      |       |
| Prepaid expenses  and other current assets       |       | 3,147                    |       | 2,657                       |       |
|                                             |       |                     |       |                        |       |
| Total current  assets                            |       | 60,255                   |       | 64,954                      |       |
|                                             |       |                     |       |                        |       |
| Restricted cash                                  |       | 2,933                    |       | 3,145                       |       |
| Property and  equipment, net                     |       | 11,739                   |       | 12,019                      |       |
| Intangibles, net                                 |       | 15,569                   |       | 16,822                      |       |
| Goodwill                                         |       | 60,866                   |       | 60,866                      |       |
| Other assets                                     |       | 1,866                    |       | 403                         |       |
|                                             |       |                     |       |                        |       |
| Total assets                                     |       | $                        | 153,228    |                        | $          | 158,209 |   |
|                                             |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    |       |                     |       |                        |       |
| Current  liabilities:                            |       |                     |       |                        |       |
| Accounts payable                                 |       | $                        | 5,336      |                        | $          | 5,318 |   |
| Accrued  compensation                            |       | 5,185                    |       | 6,774                       |       |
| Other accrued  liabilities                       |       | 7,614                    |       | 8,117                       |       |
| Deferred revenue  and customer deposits          |       | 8,312                    |       | 7,990                       |       |
| Current portion  of accrued restructuring        |       | 2,851                    |       | 2,872                       |       |
| Current portion  of long-term obligations        |       | 125                      |       | 133                         |       |
|                                             |       |                     |       |                        |       |
| Total current  liabilities                       |       | 29,423                   |       | 31,204                      |       |
|                                             |       |                     |       |                        |       |
| Noncurrent  portion of long-term obligations     |       | 292                      |       | 320                         |       |
| Noncurrent  portion of accrued restructuring     |       | 3,645                    |       | 4,358                       |       |
| Other noncurrent  liabilities                    |       | 3,866                    |       | 3,503                       |       |
| Deferred tax  liability                          |       | 386                      |       | 386                         |       |
|                                             |       |                     |       |                        |       |
| Stockholders’  equity:                      |       |                     |       |                        |       |
| Preferred stock                                  |       | —                   |       | —                      |       |
| Common stock                                     |       | 34                       |       | 34                          |       |
| Additional  paid-in capital                      |       | 300,963                  |       | 302,412                     |       |
| Deferred stock-based  compensation               |       | —                   |       | (3,003                      | )          |
| Accumulated  deficit                             |       | (185,555                 | )          | (181,106                    | )          |
| Accumulated  other comprehensive income          |       | 174                      |       | 101                         |       |
|                                             |       |                     |       |                        |       |
| Total  stockholders’ equity                 |       | 115,616                  |       | 118,438                     |       |
|                                             |       |                     |       |                        |       |
| Total  liabilities and stockholders’ equity |       | $                        | 153,228    |                        | $          | 158,209 |   |

* *

*Seeaccompanying notes.*

 

2

----

 

**CALIPERLIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands, except per share data)**

**(unaudited)**

** **
| ** **                                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Revenues:                                                              |       |                                             |       |   |   |
| Product revenue                                                        |       | $                                                | 14,698     |   | $ | 13,138 |   |
| Service revenue                                                        |       | 5,043                                            |       | 3,256 |   |
| License fees and  contract revenue                                     |       | 2,558                                            |       | 2,008 |   |
|                                                                   |       |                                             |       |   |   |
| Total revenue                                                          |       | 22,299                                           |       | 18,402 |   |
|                                                                   |       |                                             |       |   |   |
| Costs and  expenses:                                                   |       |                                             |       |   |   |
| Cost of product  revenue                                               |       | 9,789                                            |       | 8,831 |   |
| Cost of service  revenue                                               |       | 2,839                                            |       | 1,661 |   |
| Research and  development                                              |       | 4,458                                            |       | 4,019 |   |
| Selling, general  and administrative                                   |       | 8,476                                            |       | 7,769 |   |
| Amortization of  intangible assets                                     |       | 1,254                                            |       | 898 |   |
| Restructuring  charges, net                                            |       | 42                                               |       | 90 |   |
|                                                                   |       |                                             |       |   |   |
| Total costs and  expenses                                              |       | 26,858                                           |       | 23,268 |   |
|                                                                   |       |                                             |       |   |   |
| Operating loss                                                         |       | (4,559                                           | )          | (4,866 | ) |
| Interest income,  net                                                  |       | 191                                              |       | 232 |   |
| Other income (expense),  net                                           |       | 53                                               |       | (212 | ) |
|                                                                   |       |                                             |       |   |   |
| Loss before  income taxes                                              |       | (4,315                                           | )          | (4,846 | ) |
| Provision for  income taxes                                            |       | (134                                             | )          | (84 | ) |
|                                                                   |       |                                             |       |   |   |
| Net loss                                                               |       | $                                                | (4,449     | ) | $ | (4,930 | ) |
|                                                                   |       |                                             |       |   |   |
| Net loss per  common share, basic and diluted                          |       | $                                                | (0.13      | ) | $ | (0.16 | ) |
| Shares used in computing  net loss per common share, basic and diluted |       | 33,518                                           |       | 30,453 |   |

 

*Seeaccompanying notes.*

 

3

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**CALIPERLIFE SCIENCES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(unaudited)**

** **
| ** **                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **Operating  activities**                                                 |       |                                             |       |   |   |
| Net loss                                                                  |       | $                                                | (4,449     | ) | $ | (4,930 | ) |
| Adjustments to  reconcile net loss to net cash from operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization                                            |       | 2,037                                            |       | 1,729 |   |
| Stock-based  compensation expense, net                                    |       | 1,286                                            |       | 415 |   |
| Non-cash  restructuring charge, net                                       |       | 42                                               |       | 90 |   |
| Foreign currency  exchange losses (gains)                                 |       | (62                                              | )          | 197 |   |
| Changes in  operating assets and liabilities:                             |       |                                             |       |   |   |
| Accounts  receivable                                                      |       | 2,271                                            |       | 4,337 |   |
| Inventories                                                               |       | (1,155                                           | )          | (1,036 | ) |
| Prepaid expenses  and other current assets                                |       | (405                                             | )          | (944 | ) |
| Accounts payable  and other accrued liabilities                           |       | (94                                              | )          | 351 |   |
| Accrued  compensation                                                     |       | (1,451                                           | )          | (2,223 | ) |
| Deferred revenue  and customer deposits                                   |       | 294                                              |       | 802 |   |
| Other noncurrent  liabilities                                             |       | 442                                              |       | 1 |   |
| Payments of  accrued restructuring obligations, net                       |       | (776                                             | )          | (868 | ) |
|                                                                      |       |                                             |       |   |   |
| Net cash from  operating activities                                       |       | (2,020                                           | )          | (2,079 | ) |
|                                                                      |       |                                             |       |   |   |
| **Investing  activities**                                                 |       |                                             |       |   |   |
| Purchases of  marketable securities                                       |       | (7,219                                           | )          | (2,972 | ) |
| Proceeds from  sales of marketable securities                             |       | 364                                              |       | 2,959 |   |
| Proceeds from  maturities of marketable securities                        |       | 10,237                                           |       | 2,037 |   |
| Other assets                                                              |       | (408                                             | )          | — |   |
| Restricted cash,  net                                                     |       | 24                                               |       | 483 |   |
| Purchases of  property and equipment                                      |       | (2,145                                           | )          | (801 | ) |
|                                                                      |       |                                             |       |   |   |
| Net cash from  investing activities                                       |       | 853                                              |       | 1,706 |   |
|                                                                      |       |                                             |       |   |   |
| **Financing  activities**                                                 |       |                                             |       |   |   |
| Payments of  obligations under sale-leaseback arrangements                |       | —                                           |       | (169 | ) |
| Payments of  long-term obligations                                        |       | (37                                              | )          | — |   |
| Proceeds from  issuance of common stock                                   |       | 116                                              |       | 621 |   |
|                                                                      |       |                                             |       |   |   |
| Net cash from  financing activities                                       |       | 79                                               |       | 452 |   |
|                                                                      |       |                                             |       |   |   |
| Effect of  exchange rates on changes in cash and cash equivalents         |       | 15                                               |       | (96 | ) |
| Net decrease in  cash and cash equivalents                                |       | (1,073                                           | )          | (17 | ) |
| Cash and cash  equivalents at beginning of period                         |       | 8,096                                            |       | 9,441 |   |
|                                                                      |       |                                             |       |   |   |
| Cash and cash  equivalents at end of period                               |       | $                                                | 7,023      |   | $ | 9,424 |   |

 

*Seeaccompanying notes.*

 

4

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**CALIPERLIFE SCIENCES, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH31, 2006**

**(Unaudited)**

** **

**1.Summary of Significant Accounting Principles**

 

***Basis of Presentation***

 

Caliper Life Sciences, Inc. (“Caliper”) uses its coretechnologies of liquid handling, automation, and LabChip microfluidics tocreate enabling solutions for the life sciences industry. These productsperform laboratory experiments for use in the pharmaceutical and otherindustries. Caliper currently operates in one business segment, the developmentand commercialization of life science instruments and related consumables andservices for use in drug discovery and other life sciences research anddevelopment.

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X of theSecurities and Exchange Commission (“SEC”). Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.Certain prior period amounts have been reclassified to conform to the currentperiod presentation. In the opinion of management, all adjustments (consistingof normal recurring entries) considered necessary for a fair presentation havebeen included. Operating results for the three months ended March 31, 2006are not necessarily indicative of the results that may be expected for the yearending December 31, 2006. For example, Caliper typically experiences higherrevenues in the second half of its fiscal year as a result of capital spendingpatterns of its customers. The consolidated balance sheet as ofDecember 31, 2005, has been derived from audited financial statements asof that date. For further information, refer to the financial statements andnotes thereto included in Caliper’s Annual Report on Form 10-K for the yearended December 31, 2005.

 

***Use of Estimates***

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Actual results could differfrom those estimates.

 

***Revenue Recognition***

 

*General Policy*

 

Caliper recognizes revenue when persuasive evidence ofan arrangement exists, delivery has occurred or services have been rendered,the fee is fixed or determinable, and collectibility is reasonably assured.Revenue is recognized on product sales when goods are shipped under Caliper’sstandard terms of “FOB origin.” Revenues on shipments subject to customeracceptance provisions are recognized only upon customer acceptance, providedall other revenue recognition criteria are met. In general, sales made byCaliper do not include general return rights or privileges.  In the limited circumstance where a right ofreturn exists, Caliper recognizes revenue when the right has lapsed.  Revenue from services offered by Caliper isgenerally recognized as the services are performed (or, as applicable, ratablyover the contract service term in the case of annual maintenance contracts).Based upon Caliper’s prior experience, sales returns are not significant, andtherefore a general provision for sales returns or other allowances is notrecorded at the time of sale. Provision is made at the time of sale forestimated costs related to Caliper’s warranty obligations to customers.

 

Revenue arrangements with multiple contractualelements, which consist primarily of (i) sales of our products and associatedaccessories, (ii) services, including installation, training and annualmaintenance, and (iii) licenses to use our technology, are divided intoseparate units of accounting if the deliverables in the arrangement meetcertain criteria under Emerging Issues Task Force (EITF) Issue 00-21, “RevenueArrangements with Multiple Deliverables” (EITF 00-21). The criteria applied tomultiple element arrangements are whether a) each delivered element hasstandalone value to the customer, b) there is objective and reliable evidenceof fair value of the undelivered elements, and, if applicable, c) delivery orperformance of the undelivered elements is probable and within the control ofCaliper. Arrangement consideration is allocated among the separate units ofaccounting based on their relative fair values. Revenue allocated to each unit of accounting is recognized in accordancewith the requirements of SAB 104, “Revenue Recognition (a replacement of SAB101)” (SAB 104).

 

Cash received from customers as advance deposits forundelivered products and services, including contract research and developmentservices, is recorded within customer deposits until revenue isrecognized.  Revenue related primarily toannual maintenance contracts and remaining undelivered performance obligationsassociated with product sales separately accounted for under EITF 00-21 isdeferred and recognized upon completion of the underlying performance criteria.

 

5

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*Contract Revenue*

 

Revenue from contract research and developmentservices is recognized as earned based on the performance requirements of thecontract. Non-refundable contract fees, which are neither time and materials-or time and expense-based, nor tied to substantive milestones, are recognizedusing the proportional performance method, subject to the consideration of theguidance in SAB 104.

*License and Royalty Fees*

 

Revenue from license fees is recognized when theearnings process is complete and no further obligations exist. If furtherobligations exist, the license fee is recognized ratably over the obligationperiod. Royalties under licenses are recorded as earned in accordance withcontract terms, when third-party results are reliably measured andcollectibility is reasonably assured.

 

***WarrantyObligations***

 

At the time revenue is recognized, Caliper establishesan accrual for estimated warranty expenses associated with sales, recorded as acomponent of cost of revenue. Caliper offers a one-year limited warranty oninstrumentation products and a 90-day warranty on chips, which is included inthe sales price of many of its products. Caliper’s standard limited warrantycovers repair or replacement of defective goods, a preventative maintenancevisit on certain products, and telephone-based technical support. No upgradesare included in the standard warranty. In accordance with FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, including Indirect Guarantees of Indebtedness of Others,” provisionis made for estimated future warranty costs at the time of sale. Factors thataffect 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 liabilitiesand adjusts amounts as necessary.

 

Changes in Caliper’s warranty obligation are asfollows (in thousands):

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Balance, at  beginning of period     |       | $                                                | 1,555      |   | $ | 1,436 |   |
| Warranties  issued during the period |       | 702                                              |       | 359 |   |
| Settlements made  during the period  |       | (555                                             | )          | (343 | ) |
|                                 |       |                                             |       |   |   |
| Balance at end  of period            |       | $                                                | 1,702      |   | $ | 1,452 |   |

*** ***

***Net Loss Per Share***

 

Basic earnings per share is calculated based on theweighted-average number of common shares outstanding during the period. Dilutedearnings per share would give effect to the dilutive effect of common stockequivalents consisting of stock options, unvested restricted stock, unvestedrestricted stock units, warrants and contingently issuable shares (calculatedusing the treasury stock method).

 

Common stock equivalents equal to 7.8 million and 7.3million shares (prior to the application of the treasury stock method) wereexcluded from the computation of net loss per share in each of the three monthsended March 31, 2006 and 2005, respectively, as they would have had anantidilutive effect due to Caliper’s net loss. Common stock equivalents used todetermine net loss per share in 2006 also exclude contingently issuable sharesand shares held in escrow in connection with the NovaScreen acquisition (seeNote 2).

 

***Stock-BasedCompensation***

 

On January 1, 2006, Caliper adopted Statement ofFinancial Accounting Standard No. 123R, “Share-Based Payment” (“SFAS 123R”),which requires all share-based payments to be recognized in the incomestatement as an operating expense, based on their fair values.   Caliper’s share-based payment arrangementswithin the scope of SFAS 123R include options, restricted stock and other formsof stock bonuses, including restricted stock units, awarded under its optionplans, and its Employee Stock Purchase Plan (“ESPP”) which enablesparticipating employees to purchase Caliper’s stock at a discount from fairmarket value.  Caliper has applied the modifiedprospective method in adopting SFAS 123R. For stock option awards and ESPPpurchases, we estimate the fair value of share-based payments using theBlack-Scholes-Merton formula and, for all share-based payments made after theadoption of SFAS 123R, recognize the resulting compensation expense using astraight-line recognition method over the applicable service period of eachaward.  The fair value of restrictedstock awards (including restricted stock units) is determined based upon thefair market value of Caliper’s stock on the date of grant. For restricted stockand restricted stock unit awards granted prior to January 1, 2006, we continuedto recognize the resulting compensation expense under the accelerated expenseattribution method.  Periods prior toadoption have not been restated. However, certain classification changes have been applied (see “*Reclassifications”*below).  Under the modified prospective method,compensation cost recognized in the three-month period ended March 31, 2006includes (a) compensation cost for all share-based payments granted prior to,but not yet vested as of, January 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of Statement of FinancialAccounting Standard No. 123 (“SFAS 123”), “Accounting for Stock-BasedCompensation”, and (b) compensation cost for all share-based payments grantedsubsequent to January 1, 2006, based on the grant date fair value estimated inaccordance with the provisions of SFAS 123R. Prior to the adoption of SFAS123R, forfeitures of unvested awards were accounted for in the period in whichthey occurred.  Effective with theadoption of SFAS 123R, Caliper estimates prospective forfeitures in determiningcompensation cost to be recognized. Caliper applied an expected forfeiture rate of 5% to unvested stockoptions for which expense was recognized during the three months ended March31, 2006.

 

6

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Prior to adopting SFAS 123R, Caliper accounted for itsstock options and equity awards in accordance with the intrinsic value methodunder the provisions of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations.  Accordingly, prior to January 1, 2006, nocompensation expense is recognized in Caliper’s financial statements forstock-based compensation granted to employees, which had an exercise priceequal to the fair value of the underlying common stock on the date of grant.

 

Caliper accounts for options issued to non-employeesin accordance with the provisions of SFAS 123R and EITF No. 96-18, “Accountingfor Equity Instruments that are issued to other than Employees for Acquiring,or in Conjunction with Selling Goods or Services.” For the three months endedMarch 31, 2006 and 2005, compensation expense related to stock-basedcompensation issued to non-employees was not material.

 

As a result of adopting SFAS 123R on January 1, 2006,Caliper’s operating loss and net loss for the quarter ended March 31, 2006 is$811,000 greater than if it had continued to account for share-basedcompensation under APB No. 25.  Basic anddiluted net loss per share for the quarter ended March 31, 2006 would have been$0.02 lower if Caliper had not adopted SFAS 123R. The adoption of SFAS 123R hadno impact on cash flows.

 

Stock-based compensation expense is included withincosts and expenses as follows (in thousands):

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                 |       |                                                 |       |   |   |
| Cost of product  revenue             |       | $                                                    | 127        |   | $ | 39 |   |
| Cost of service  revenue             |       | 25                                                   |       | 7 |   |
| Research and  development            |       | 240                                                  |       | 82 |   |
| Selling, general  and administrative |       | 894                                                  |       | 287 |   |
|                                 |       |                                                 |       |   |   |
| Total                                |       | $                                                    | 1,286      |   | $ | 415 |   |

 

The following table illustrates the effect on net lossand net loss per share for the quarter ended March 31, 2005 as if Caliper hadapplied the fair value-based method to that period (in thousands, except pershare data):

 
| Net loss:                                                                                |   |   |   |
|------------------------------------------------------------------------------------------|--------|--------|--------|
| As reported                                                                              |   | $      | (4,930 | ) |
| Add: Stock-based  compensation expense included in reported net loss                     |   | 415    |   |
| Deduct: Total stock-based  compensation expense determined under fair value based method |   | (2,613 | )      |
| Pro forma net  loss                                                                      |   | $      | (7,128 | ) |
| Net loss per  share:                                                                     |   |   |   |
| As reported:                                                                             |   |   |   |
| Basic and  diluted                                                                       |   | $      | (0.16  | ) |
| Pro forma:                                                                               |   |   |   |
| Basic and  diluted                                                                       |   | $      | (0.23  | ) |

 

The fair value of each option award issued underCaliper’s equity plans is estimated on the date of grant using a Black-Scholes-Mertonbased option pricing model that uses the assumptions noted in the followingtable.  Expected volatilities are basedon historical volatility of Caliper’s stock. The expected term of the options is based on Caliper’s historical optionexercise data taking into consideration the exercise patterns of the optionholder during the option’s life.  Therisk-free interest rate is based on the U.S. Treasury yield curve in effect onthe date of the grant.

 
| ** **                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                         |       |                                                 |       |   |   |
| Expected  volatility (%)     |       | 45                                                   |       | 63 |   |
| Risk-free  interest rate (%) |       | 4.80                                                 |       | 3.96 |   |
| Expected term  (years)       |       | 4.3                                                  |       | 4.1 |   |
| Expected  dividend yield (%) |       | —                                               |       | — |   |

 

7

----

 

A summary of option activity under the Plans as ofMarch 31, 2006, and changes during the period then ended is as follows:

 
| **Options**                       | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | ** **                             | ** ** | ** **                                          | ** ** | **(in thousands)**             | ** ** |
|                              |       |       |       |                                   |       |                                                |       |                                |       |
| Outstanding at  December 31, 2005 |       | 6,993,421  |       | 5.98                                   |       |                                                |       |                                |       |
| Granted                           |       | 729,000    |       | 4.95                                   |       |                                                |       |                                |       |
| Exercised                         |       | (88,903    | )          | 3.33                                   |       |                                                |       |                                |       |
| Vested                            |       | (18,750    | )          | 0.00                                   |       |                                                |       |                                |       |
| Un-vested repurchases             |       | (6,858     | )          | 0.00                                   |       |                                                |       |                                |       |
| Canceled                          |       | (27,826    | )          | 7.84                                   |       |                                                |       |                                |       |
| Outstanding at  March 31, 2006    |       | 7,580,084  |       | 5.92                                   |       | 5.83                                                |       | $                                   | 14,381     |   |
| Exercisable at  March 31, 2006    |       | 4,722,052  |       | 6.86                                   |       | 5.09                                                |       | $                                   | 8,326      |   |

 

During the quarter ended March 31, 2006, Caliper grantedits employees 564,000 options at a weighted average grant date fair value of$2.73, and 165,000 restricted stock units at a weighted average grant date fairvalue of $6.39. The total intrinsic value of options exercised during the threemonths ended March 31, 2006 was approximately $226,000.

 

As of March 31, 2006, there was $9.8 million of totalunrecognized compensation cost related to nonvested stock-based compensationarrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of2.6 years.

 

***Reclassifications***

 

Amounts in the 2005 financial statements have beenreclassified to conform to the 2006 financial statement presentation.  The 2006 presentation includes thereclassification of restructuring-related accretion charges from interestexpense, as previously reported, to the restructuring line item within theaccompanying consolidated statement of operations.  In addition, foreign currency exchange losses(gains) have been reclassified within the statement of cash flows from effectof exchange rates to cash from operating activities.  Also, the current portion of restricted cashhas been reclassified on a separate line in the consolidated balance sheet,where it had previously been included within cash and cash equivalents.  The adoption of SFAS 123R resulted in thereversal of $3.0 million of deferred stock compensation to additional paid-incapital within stockholders’ equity.  Inaddition, employee stock-based compensation expense, which was previouslydisclosed as a separate income statement line item, has been reflected withincosts and expenses in accordance with SFAS 123R.  These reclassifications had no effect onpreviously reported net loss, total stockholders’ equity or net loss per share.

 

**2. Acquisitions**

 

***NovaScreenBiosciences Corporation***

 

On October 3, 2005, Caliper completed theacquisition of NovaScreen Biosciences Corporation (“NovaScreen”) for$23.3 million, including $17.6 million in Caliper common stock,$4.4 million of cash and $1.3 million of estimated direct acquisitioncosts. The value of the common stock issued was calculated in accordance withthe terms of the merger agreement and EITF No. 99-12, “Determination ofthe Measurement Date for the Market Price of Acquirer Securities Issued in aPurchase Business Combination.” Ten percent (10%) of the consideration payableto the former stockholders of NovaScreen has been placed into escrow for atwelve-month period to cover any potential indemnification claims. NovaScreenshareholders can also earn up to an additional $8.0 million contingent onthe achievement of defined revenue milestones over the 30-month periodimmediately following the closing date of the acquisition. If earned, theadditional consideration will be treated as additional purchase price andrecorded as goodwill. The closing consideration was paid, and future contingentconsideration is payable, at a ratio of 80% Caliper common stock and 20% cash.Caliper issued 2,576,933 shares of common stock for the purchase of NovaScreenand reserved 1,124,450 shares of common stock for future issuance inconnection with the potential achievement of these milestone events.

 

As of March 31, 2006, NovaScreen revenues did not meetthe minimum requirement associated with a $3.0 million contingent milestonepayment (milestone date of April 3, 2006) to the former NovaScreenshareholders, leaving $5.0 million of remaining contingent payments tied tofuture milestones over the next 24-month period.

 

NovaScreen’s operations, assumed as of the date of theacquisition, are included in the results of operations of Caliper beginning onOctober 3, 2005. The acquisition was accounted for as a purchase inaccordance with SFAS No. 141, “Business Combinations,” and Caliperaccordingly allocated the estimated purchase price of NovaScreen based upon thefair value of net assets acquired and liabilities assumed. The components andallocation of the purchase price, which is expected to be finalized withinone-year of the date of the acquisition subject to potential contingentpayments, consisted of the following (in thousands):

 

8

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| Cash and cash  equivalents      |   | $      | 1,015  |   |
|---------------------------------|--------|--------|--------|--------|
| Other current  assets           |   | 1,574  |   |
| Other assets                    |   | 919    |   |
| Liabilities  assumed            |   | (2,057 | )      |
| Identifiable  intangible assets |   | 8,148  |   |
| Goodwill                        |   | 13,651 |   |
|                            |   |   |   |
|                            |   | $      | 23,250 |   |

 

Unaudited pro forma operating results for Caliper forthe three months ended March 31, 2005, assuming the acquisition wascompleted as of January 1, 2005, would be as follows (in thousands, exceptper share amounts):

 
| Revenue                                    |   | $      | 20,786 |   |
|--------------------------------------------|--------|--------|--------|--------|
| Operating loss                             |   | (4,671 | )      |
| Net loss                                   |   | (4,816 | )      |
| Basic and  diluted loss per share          |   | (0.15  | )      |
| Pro forma  weighted average shares assumed |   | 33,030 |   |

 

The unaudited pro forma financial information ispresented for informational purposes only, and is not necessarily indicative ofCaliper’s operating results had the acquisition been completed on the date forwhich the pro forma results give effect. The pro forma results principally reflect the pro forma impact of intangiblesamortization.

 

***Xenogen Corporation***

 

On February 13, 2006, Caliper announced adefinitive agreement to merge with Xenogen Corporation (“Xenogen”). Under theagreement, Caliper will issue up to approximately 13.2 million commonshares of common stock and warrants to purchase approximately 5.125 millionshares of common stock, currently valued at approximately $81.0 million,in exchange for all of Xenogen’s equity securities outstanding at the closing.The warrants will have a term of five years from the closing and an exerciseprice of $6.79 per share. The final exchange ratios for the issuance ofcommon shares and warrants will be based on the capitalization of Xenogen atthe closing of the proposed transaction.

 

**3. Inventories**

 

 Inventories are stated at the lower of cost(determined on a first-in, first-out basis, or “FIFO”) or market. Amounts areremoved from inventory and recognized as a component of cost of sales on a FIFObasis. Inventories consist of the following (in thousands):

 
| ** **      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Raw material    |       | $                  | 5,822      |                  | $          | 5,075 |   |
| Work-in-process |       | 963                |       | 762                   |       |
| Finished goods  |       | 5,475              |       | 5,224                 |       |
|            |       |               |       |                  |       |
| Inventories     |       | $                  | 12,260     |                  | $          | 11,061 |   |

** **

**4. Comprehensive Loss**

 

Comprehensive loss is as follows (in thousands):

 
| ** **                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Net loss                                         |       | $                                                    | (4,449     | ) | $ | (4,930 | ) |
| Unrealized gain  (loss) on marketable securities |       | 65                                                   |       | (76 | ) |
| Foreign currency  translation gain (loss)        |       | 8                                                    |       | (108 | ) |
|                                             |       |                                                 |       |   |   |
| Comprehensive  loss                              |       | $                                                    | (4,376     | ) | $ | (5,114 | ) |

** **

**5. Restructuring Activities**

 

The accrued restructuring obligation as of March 31,2006 includes remaining liabilities related to two facilities in Mountain View,California as a result of the following restructuring activities:

 

9

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•      In November 2003,Caliper consolidated instrument manufacturing and research and developmentfacilities, and recognized a $7.4 million charge for estimated remaininglease costs through June 2008.

 

•      In June 2004, Caliperpartially consolidated research and development facilities, and recognized a$2.1 million charge for estimated remaining lease costs through June 2008.

 

•      In December 2004, as aresult of identifying additional efficiencies, Caliper was able to achievefurther consolidation of its research and development facilities.  In addition, Caliper revised its estimate ofthe sublease income potential of its idle facilities.  Caliper recognized an additional $3.6 millioncharge as a result of these activities. 

 

•      In December 2005, Caliperrecognized a $1.4 million restructuring credit to reflect the net present valueof future sublease rental income based upon subleases entered into for portionsof its two idle facilities.

 

The following table summarizes the restructuringaccrual activity during the three months ended March 31, 2006 (in thousands):

 
| ** **                       | ** ** | **Facility  Lease  Accrual** | ** ** |
|----------------------------------|------------|------------------------------|------------|
| Balance,  December 31, 2005 |       | $                            | 7,230      |   |
| Interest  accretion              |       | 73                           |       |
| Payments                         |       | (807                         | )          |
|                             |       |                         |       |
| Balance, March  31, 2006         |       | $                            | 6,496      |   |

 

Minimum monthly lease and operating expense paymentsunder the two idle facility leases are currently $300,000, subject toescalation through expiration of the leases in June 2008 at an average rate of3.6%. The restructuring liability as of March 31, 2006 reflects the minimumfuture payment obligations related to base lease rentals and operating chargesover the remaining lease lives through June 30, 2008, net of anticipatedsublease income, discounted at 5%, as follows (in thousands):

 
| Years ending  December 31:             |   |   |   |
|---------------------------------------------|--------|--------|--------|
| 2006  (9 months)                       |   | $      | 2,359  |   |
| 2007                                        |   | 3,200  |   |
| 2008                                        |   | 1,604  |   |
|                                        |   |   |   |
| Total minimum  lease and principal payments |   | 7,163  |   |
| Less: Amount  representing interest         |   | 667    |   |
|                                        |   |   |   |
| Present value of  future payments           |   | 6,496  |   |
| Less: Current  portion of obligations       |   | 2,851  |   |
|                                        |   |   |   |
| Non-current  portion of obligations         |   | $      | 3,645  |   |

 

The facility closures were accounted for in accordancewith SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities,” pursuant to which Caliper recorded a liability equal to the fairvalue of the remaining lease payments as of the cease-use date for each of theclosed facilities. Fair value was determined based upon the discounted presentvalue of remaining lease rentals (5% discount rate used) for the space nolonger occupied, considering sub lease income at each point in time.

 

**6. Stockholders’Equity**

 

During 2006, Caliper issued 102,909 shares of commonstock, increasing the total shares outstanding as of March 31, 2006 to33,888,701. The increase in shares relates to shares issued as a result of theexercise of stock options and vesting of restricted stock units.

 

10

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

*ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations as of March 31, 2006 and for the three-month periods ended March 31,2006 and March 31, 2005 should be read in conjunction with our financialstatements included in this Quarterly Report on Form 10-Q and Management’sDiscussion and Analysis of Financial Condition and Results of Operations andour financial statements included in our Annual Report on Form 10-K for theyear ended December 31, 2005.*

 

*Thediscussion in this report contains forward-looking statements that involverisks and uncertainties, such as statements of our plans, objectives,expectations and intentions. Our actual results could differ materially fromthose discussed here. Factors that could cause or contribute to thesedifferences include those discussed under the caption “Risk Factors” below, aswell as those discussed elsewhere. The cautionary statements made in thisreport should be read as applying to all related forward-looking statementswherever they appear in this report.*

 

**Executive Summary**

 

***Business***

 

Caliper uses its core technologies of liquid handling,automation, LabChip microfluidics and drug discovery services to createenabling solutions for the life sciences industry.

 

Within the life sciences industry, we are currentlypursuing two major markets: drug discovery and development, and diagnostics. Inthe drug discovery and development market, our products address many newchallenges faced by pharmaceutical and biotechnology companies. Thesechallenges include late-stage drug failures, increased research and developmentspending yielding fewer new drugs and, more recently, drugs being removed fromthe market due to unforeseen side effects that were not discovered inpre-launch research and development or clinical trials. Our products helpresearchers make better choices earlier in their drug discovery process,increase the speed and efficiency of their high-throughput screening efforts,and enable profiling experiments that can identify drug side effects earlier inthe drug discovery process. With the acquisition of NovaScreen in October 2005,we have the capability to perform high-throughput screening and compoundprofiling services where our customers face internal capacity or instrumentlimitations. With respect to diagnostics markets, we believe that our LabChiptechnologies may help reduce the high cost of many diagnostic tests, andparticularly molecular diagnostic tests, through integration andminiaturization of the various steps required to carry out these tests. We arepresently primarily working with collaboration partners in this area, althoughthese projects are still in the feasibility or early development stages.

 

We have three channels of distribution for ourproducts: direct to customers, indirect through our international network ofdistributors, and through partnership channels under our “Caliper Driven”program. Through our direct and indirect channels, we sell complete systemsolutions developed by us to end customers. Our Caliper Driven program is coreto our business strategy and complementary to our direct sales and distributionnetwork activities, as it enables us to extend the commercial potential of ourLabChip and advanced liquid handling technologies into new industries and newapplications with experienced commercial partners. Under this program, wesupply liquid handling products, microfluidics chips, and other products on anOEM basis, and when requested provide product development expertise to ourcommercial partners, who then typically integrate an application solution andmarket it to their end customers. In addition, as part of our Caliper Drivenprogram we also provide licenses to our extensive microfluidic patent estate toother companies. We view out-licensing under our Caliper Driven program as away for us to extend our microfluidics technology into certain applicationareas that we do not have a present strategic intent to address directly, orthat may require the greater technical, marketing or financial resources of ourlicensing partner in order to obtain a more a rapid adoption of our technologyin the particular application area. By using direct and indirect distribution,and out-licensing our technology under our Caliper Driven program, we seek tomaximize penetration of our products and technologies into the marketplace andposition Caliper as a leader in the life sciences tools market.

 

On February 13, 2006, we announced that we had enteredinto a definitive merger agreement on February 10, 2006 to acquire XenogenCorporation, a maker of advanced imaging systems including instruments,biological solutions and software designed to accelerate drug discovery anddevelopment. Under the agreement, we will issue up to approximately 13.2million common shares and approximately 5.125 million warrants to purchaseCaliper common shares in exchange for all of Xenogen’s equity securitiesoutstanding at the closing. As of February 10, 2006, the aggregate value of theCaliper shares and warrants to be issued in connection with the merger wasapproximately $81 million. The acquisition is expected to significantly advanceour capabilities as a leading provider of tools and services that increase theproductivity and clinical relevance of life sciences research, and is expectedto accelerate our revenue growth and profitability. The integration ofmolecular tool technologies presents a key opportunity to improve drugdiscovery research. As highlighted in the FDA Critical Path Initiative,biomarker research and better experimentation models are essential to improvepredictability and efficiency along the critical path from laboratory tocommercial drug. The combination of our proprietary microfluidic technology andautomation expertise with Xenogen’s proprietary imaging technology addressesthese key research needs by creating molecular level solutions that encompass *in vitro*(test tube) to *in vivo*(living organism) research. These

 

11

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technologies offerexceptional data quality and productivity advantages, and combining them tooffer a highly correlated suite of products and services should result inearlier, clinically relevant insights in the drug discovery process. Thetransaction is subject to customary conditions, including the approval ofXenogen and our stockholders, as well as standard regulatory approvals, and isexpected to close in the third quarter of 2006.

 

The acquisition of Xenogen remains subject to substantialrisks and uncertainties, as follows:

 

•    Xenogen’sstockholders or Caliper’s stockholders may not approve the transaction, thenecessary regulatory approval may not be obtained or the companies may berequired to modify aspects of the transaction to achieve regulatory approval,or the transaction otherwise may not close; prior to the closing of the proposedacquisition, the businesses of the companies may suffer due to uncertainty;

 

•    theexpected benefits, including revenue growth, from combining the two companiesmay not be realized;

 

•    integrationof the companies and their product portfolios following closing could provemore difficult and costly than expected, and planned synergies may nottranspire;

 

•    Xenogenemployees who are key to maintaining the revenue growth of Xenogen’s productsmay leave Xenogen due to the uncertainties created by the merger;

 

•    thehistoric growth rate of Xenogen’s products may not continue as expected due tomarket saturation or to the failure to convince large pharmaceutical companiesas to the value of Xenogen’s imaging technology;

 

•    unanticipateddifficulties may be encountered in connection with consolidating the operationsof the two companies; and

 

•    otherfactors that involve known and unknown risks and uncertainties may cause actualfinancial results, performance or achievements to differ materially fromanticipated results.

 

***Overview of First Quarter 2006***

 

During the first quarter of 2006, we achieved totalrevenue of $22.3 million which was within the range of our projection of$21.0 to $23.0 million. Our total revenues grew by 21%, or 24%, excludingunfavorable foreign exchange movements, compared to the first quarter of2005.  Our microfluidics products,including the LabChip 3000 and LabChip 90 instruments, were significantcontributors to this increase.  We placed13 LabChip instrument systems with customers during the first quarter of 2006compared to four systems in the first quarter of 2005.  On a cumulative basis, our installed base ofLabChip instrument systems now exceeds 130 units. The increase in total revenuealso reflects our NovaScreen drug discovery screening operation which weacquired during the fourth quarter of 2005.

 

Our liquid handling and lab automation revenues wererelatively flat during the first quarter of 2006 compared to the first quarterof 2005.   This is due mainly to weaknessin our direct channel sales in North America as a result of constrained capitalspending and increased competition, offset by strength in our internationaloperations.  The North America conditionsmay continue to have an impact in subsequent quarters. In addition, we had noadditional sales to Affymetrix during the first quarter of 2006 of the GeneChipÒ Array Station (“GCAS”) system, which wemanufacture and supply to Affymetrix on an OEM basis.  In 2005, Affymetrix announced that itwas working to resolve low production yields and other technical issuesassociated with its Mapping 500K Set Array product. We believe these issueshave indirectly impacted GCAS end-user purchases, since the users of thisproduct are also expected to be users of the GCAS systems. We anticipate thatthese conditions may continue in the second quarter, although we expect to seeimprovement and further GCAS placements in the second half of 2006. We arecontinuing to develop our indirect channel opportunities under our CaliperDriven program of partnering and out-licensing our intellectual property toexpand adoption of microfluidics technology.

 

Recently acquired NovaScreen accounted forapproximately 13 percentage points of our total revenue growth of 21% in thefirst quarter of 2006.  During the firstquarter we released the first assay panel developed at NovaScreen, for theLabChip 3000, which is being marketed under the name Kinase AdvisorÔ.  We are continuing to expand our inventory ofkinase assays for the LabChip 3000.  Weanticipate continued growth in our drug discovery screening and profilingservices over the remainder of 2006.

 

12

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**Critical Accounting Estimates**

 

The critical accounting policies used in thepreparation of our financial statements that we believe affect our moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements presented in this report are described in our Management’sDiscussion and Analysis of Financial Condition and Results of Operations, andin the Notes to the Consolidated Financial Statements included in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2005. Therehave been no material changes to the critical accounting policies, other thanthe adoption of Statement of Financial Accounting Standard No. 123R, “Share-BasedPayment” (“SFAS 123R”).

 

On January 1, 2006, the Company adopted SFAS 123R,which requires all share-based payments, including grants of stock options, tobe recognized in the income statement as an operating expense, based on theirfair values.

 

The Company estimates the fair value of each optionaward on the date of grant using a Black-Scholes-Merton based option-pricingmodel.  Various assumptions are used inthese estimations, including:

 

•                  Expectedvolatility, which is based on historical volatility of the Company’s stock

•                  Expectedoption term, which is based on the Company’s historical option exercise datataking into consideration the exercise patterns of the option holders duringthe option’s life

•                  Risk-freeinterest rate, based on the U.S. Treasury yield curve in effect at the time ofthe grant

•                  Forfeiturerate

 

A 10% unfavorable change in expected volatility andoption term, which represent the most sensitive and judgmental assumptions,would not have a material effect on our financial statements.  In addition, the Company applied an expectedforfeiture rate of 5% to unvested awards in comparison to a historicalforfeiture rate of 12%.  Use of thehistorical forfeiture percentage would not have a material effect on ourfinancial statements.

 

Prior to adopting SFAS 123R, the Company accounted forstock-based compensation under APB No. 25, as permitted by SFAS 123.  The Company has applied the modifiedprospective method in adopting SFAS 123R. Accordingly, periods prior to adoption have not been restated.

 

The implementation of SFAS 123R has had no adverseaffect on our balance sheet or total cash flows, but it does impact ouroperating expenses, net loss and net loss per share.  Because we are not restating periods prior toadoption, comparability between periods has been affected.  Additionally, management uses estimates ofand assumptions about forfeiture rates, volatility and interest rates tocalculate stock-based compensation. Changing these estimates could materially affect our operating results.

 

**Resultsof Operations for the Three Months Ended March 31, 2006 and 2005**

 

***Revenue***

*** ***
| ** **                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**            | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Product revenue                    |       | $                                                    | 14,698     |   | $ | 13,138 |   | 1,560 |   | 12 | % |
|                               |       |                                                 |       |   |   |   |   |   |   |
| Service revenue                    |       | 5,043                                                |       | 3,256 |   | 1,787 |   | 55 | % |
|                               |       |                                                 |       |   |   |   |   |   |   |
| License fees and  contract revenue |       | 2,558                                                |       | 2,008 |   | 550 |   | 27 | % |
|                               |       |                                                 |       |   |   |   |   |   |   |
| Total revenue                      |       | $                                                    | 22,299     |   | $ | 18,402 |   | $ | 3,897 |   | 21 | % |
|                                    |            |                                                      |            |  |  |  |  |  |  |  |  |  |

 

*TotalRevenue.* Our total revenue increase during the first quarterof 2006 compared to the first quarter of 2005 resulted primarily from increasedLabChip instrument sales and increased service revenue from screening andprofiling services provided by NovaScreen, which we acquired in October 2005. Foreigncurrency exchange rate movements had a $566,000, or 3 percentage point,unfavorable impact on total revenue in the first quarter of 2006 in comparisonto first quarter of 2005.

 

*Product Revenue*.  Product revenue increased during the firstquarter of 2006 compared to the first quarter of 2005 primarily due toincreased sales of LabChip 3000 and LabChip 90 drug discovery instruments.  During the first quarter of 2006, we placed atotal of 13 LabChip systems with customers, in comparison to a total of 4systems during the first quarter of 2005. Sales of other drug discovery products during the first quarter of 2006were flat on an overall net basis in comparison to the first quarter of2005.  Sales of Twister instruments andthe purchase, by Affymetrix, of a software upgrade for the GCAS system offsetthe decline in Caliper Sciclone instrument sales. We had no additional sales toAffymetrix during the first quarter of 2006 of the GeneChip® ArrayStation (“GCAS”) system, which we manufacture and supply to Affymetrix on anOEM basis.  In 2005, Affymetrix announcedthat it was working to resolve low production yields and other technical issuesassociated with its Mapping 500K Set Array product.  We believe these issues have indirectlyimpacted GCAS end-user purchases, since the users of this product are alsoexpected to be users of the GCAS systems. We anticipate that these conditionsmay continue in the second quarter, although we expect to see improvement andfurther GCAS placements in the second half of 2006.  Overall, we experienced 14% growth in ourdrug discovery product line, which represented 74% of total productrevenue.    Drug development andspecialty products, which represented 25% of product revenue in the firstquarter of 2006, grew by approximately 10% in comparison to the first quarterof 2005 due to sales of our MultiDose and TurboVap products.  In April 2006, we announced the launch of ournew TPW3 tablet processing workstation, which is expected to favorably impactdrug development instrument sales over the remainder of 2006.  Revenue performance in our non-microfluidicproduct reflects

 

13

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weakness in our direct channel sales in North America offset bystrength in Europe.  The North Americaconditions may continue to have an impact in subsequent quarters.  We continue to develop our indirect channelopportunities under our Caliper Driven program of partnering and out licensingour intellectual property to expand adoption of our microfluidics technology.

 

*Service Revenue*.Drug discovery screening, profiling services and assay development servicesprovided by NovaScreen accounted for the majority of the increase in servicerevenue during the first quarter of 2006 in comparison to the first quarter of2005.

 

*License Fees and Contract Revenue.*Total license fees and contract revenue increased during the first quarter of2006 in comparison to the first quarter of 2005 primarily as a result of SBIRgrant research projects that are being conducted by NovaScreen.  Collaborative funding and license revenueswere relatively unchanged from 2005.

 

***Costs of Revenue***

*** ***
| ** **              | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)** | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Product                 |       | $                                                    | 9,789      |   | $ | 8,831 |   | $ | 958 |   | 11 | % |
|                    |       |                                                 |       |   |   |   |   |   |   |
| Service                 |       | 2,839                                                |       | 1,661 |   | 1,178 |   | 71 | % |
|                    |       |                                                 |       |   |   |   |   |   |   |
| Total cost of  revenue  |       | $                                                    | 12,628     |   | $ | 10,492 |   | $ | 2,136 |   | 20 | % |
|                    |       |                                                 |       |   |   |   |   |   |   |

* *

*Cost ofProduct Revenue.*  Costof product revenue increased during the first quarter of 2006 in comparison tothe first quarter of 2005, primarily as a result of increased product sales,including the effects of LabChip instruments which have a proportionatelyhigher finished goods material cost.  Inaddition to higher material costs, cost of product revenue increased $88,000due to the adoption of SFAS 123R.

 

*Cost of Service Revenue.*  Cost of service revenue increased during thefirst quarter of 2006 primarily as a result of costs associated with NovaScreenservice revenues, which were new to Caliper in 2006 in comparison to the firstquarter of 2005.

 

*Gross Margins.*  Our gross margin on product revenue was 33.4%in the first quarter of 2006, as compared to 32.8% in the first quarter of2005. The improvement over 2005 was due primarily to greater absorption ofmanufacturing costs on top of modestly reduced labor and overhead spendingrelated to chip manufacturing.  Inaddition, the adoption of SFAS 123R had a 0.6 percentage point unfavorableimpact on product gross margin during the first quarter of 2006 in comparisonto the first quarter of 2005.  Grossmargin on service revenue was 43.7% for the three months ended March 31, 2006,as compared to 49.0% in 2005.  The decreasefrom 2005 reflects the combination of a higher level of costs spread acrossCaliper’s instrument service revenues, which were unchanged overall, and theeffects of NovaScreen.  As servicerevenues increase, we expect to see increased gross margin on service revenues.

 

***Expenses***

*** ***
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**              | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Research and  development            |       | $                                                    | 4,458      |   | $ | 4,019 |   | $ | 439 |   | 11 | % |
|                                 |       |                                                 |       |   |   |   |   |   |   |
| Selling, general  and administrative |       | 8,476                                                |       | 7,769 |   | 707 |   | 9 | % |
|                                 |       |                                                 |       |   |   |   |   |   |   |
| Amortization of  intangible assets   |       | 1,254                                                |       | 898 |   | 356 |   | 40 | % |
|                                 |       |                                                 |       |   |   |   |   |   |   |
| Restructuring  charges, net          |       | 42                                                   |       | 90 |   | (48 | ) | (53 | )% |
|                                      |            |                                                      |            |  |  |  |  |  |  |  |  |  |

 

*Research and Development Expenses.*In 2006, the net increase in research and development expenses was comprised of$0.2 million in stock-based compensation expense related to the adoption of SFAS123R and $0.5 million of incremental costs stemming from our purchase ofNovaScreen, offset by a $0.3 million decrease in staff-related costs, primarilyrelated to reduced headcount within the instrumentation group to alignresources with current projects.  As partof our Caliper Driven program, we may undertake yet-to-be identified projectsthat could cause our R&D costs to increase as a percentage of revenue,although such increased spending may be fully or partially funded by ourcommercial partners.

 

*Selling, General and AdministrativeExpenses.*  In 2006, thenet increase in selling, general and administrative expenses was comprised of$0.6 million in stock-based compensation related to the adoption of SFAS 123Rand $0.4 million of incremental costs stemming from our purchase of NovaScreen,offset by a $0.3 million decrease primarily related to reduced selling andmarketing cost for tradeshow, advertising and depreciation charges ondemonstration equipment.

 

*Amortization of Intangible Assets.*Amortization of intangible assets relates to the intangible assets acquired inthe NovaScreen acquisition in October 2005 and the Zymark acquisition in 2003.The expense increase during the first quarter of 2006 resulted from theNovaScreen acquisition.

 

14

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*Restructuring Charges.*We incurred restructuring charges in 2006 and 2005 related to accretion chargesfrom the facility closures in Mountain View. During 2006, these charges were offset by sub-lease income that we recognizedon a cash basis.

 

***Interest and OtherExpense, Net***

*** ***
| ** **                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**      | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Interest income,  net        |       | $                                                    | 191        |   | $ | 232 |   | $ | (41 | ) | (18 | )% |
| Other income  (expense), net |       | 53                                                   |       | (212 | ) | 265 |   | 125 | % |
|                              |            |                                                      |            |  |  |  |  |  |  |  |  |  |

 

*Interest Income, Net.*  Interest income decreased in 2006 primarilydue to lower cash, cash equivalents and marketable securities balances, onaverage, over the previous period due to cash used in operating and investingactivities.

 

*Other Income, Net.*  Other income, net in 2006 and 2005 resultedprimarily from gains and losses associated with marking-to-market  account balances denominated in non-U.S.currencies. During 2006, we incurred foreign currency transaction gains ofapproximately $62,000 compared to transaction losses of $197,000 in 2005.

 

**Liquidity and Capital Resources**

 

As of March 31, 2006, we had $27.5 million in cash,cash equivalents, marketable securities and short-term restricted cash, ascompared to $31.7 million as of December 31, 2005.

 

***Cash Flows***

*** ***
| ** **                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**     | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **$** | ** Change** | ** ** |
| Cash provided by  (used in) |       |                                                 |       |   |   |   |   |
| Operating  Activities       |       | $                                                    | (2,020     | ) | $ | (2,079 | ) | $ | 59 |   |
| Investing  Activities       |       | 853                                                  |       | 1,706 |   | (853 | ) |
| Financing  Activities       |       | 79                                                   |       | 452 |   | (373 | ) |
|                             |            |                                                      |            |  |  |  |  |  |  |  |

 

*Operating Activities.*  In the first quarter of 2006, cash used inoperations was relatively unchanged from the first quarter of 2005. During thethree months ended March 31, 2006, we used $2.0 million of cash for operatingactivities, which included lease payments of approximately $0.8 million relatedto our idled facilities in Mountain View, California.  Changes in working capital and othernoncurrent liabilities used $0.1 million of cash, which includes $1.5 millionof cash provided by tenant reimbursement funding from our Hopkinton,Massachusetts landlord.  Our loss fromoperations accounted for the remaining $1.1 million use of cash during theperiod.

 

*Investing Activities.*  In the first quarter of 2006, net proceedsfrom sales and maturities of marketable securities generated $3.4 million ofcash which we used for operations and property and equipment purchases.  Our primary investing activities includedpurchases of property and equipment of $2.1 million, of which the majorityrelated to facility improvements made to our Hopkinton, Massachusettsheadquarters. We received offsetting funding of $1.5 million from our landlordin the first quarter of 2006, as noted within Operating Activities above.

 

*Financing Activities.*  In the first quarter of 2006, cash providedby financing activities decreased as a result of a $0.5 million reduction ofproceeds from option exercises and other issuances of common stock and $0.1million reduction in payments made under sale-leaseback and other obligations.

 

**Contractual Obligations**

 

The commitments under leases and other obligations aredescribed in our Management’s Discussion and Analysis of Financial Conditionand Results of Operations and in the Notes to the Consolidated FinancialStatements included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005. There have been no material changes to our commitmentsas of March 31, 2006.

 

Our capital requirements depend on numerous factors,including market acceptance of our products, the resources we devote todeveloping and supporting our products, and acquisitions. We expect to devotesubstantial capital resources to continuing our research and developmentefforts, expanding our support and product development activities, and forother general corporate activities. Our future capital requirements will dependon many factors, including:

 

•      continuedmarket acceptance of our microfluidic and lab automation products;

 

15

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•      themagnitude and scope of our research and product development programs;

•      ourability to maintain existing, and establish additional, corporate partnershipsand licensing arrangements;

•      thetime and costs involved in expanding and maintaining our manufacturingfacilities;

•      thepotential need to develop, acquire or license new technologies and products;and

•      otherfactors not within our control.

 

Based on current plans, we believe that our currentcash balances will be sufficient to fund our operations at least through theend of 2007.

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

 

***Interest RateSensitivity***

 

Our primary market risk exposures are foreign currencyfluctuation and interest rate sensitivity. There have been no material changesto the information included under Item 7A in our Annual Report on Form10-K for the fiscal year ended December 31, 2005.

 

**Item 4.Controls and Procedures**

 

We evaluated our “disclosure controls and procedures”as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), as of March 31, 2006.This evaluation was done under the supervision and with the participation ofCaliper’s management, including our chief executive officer and our chieffinancial officer.

 

**Evaluation of Disclosure Controls andProcedures.** We have established disclosure controls andprocedures that are designed to provide reasonable assurance that informationrequired to be disclosed in our reports filed under the Securities Exchange Actof 1934, such as this Quarterly Report on Form 10-Q, is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s (“SEC”) rules and forms. Disclosure controls are alsodesigned to provide reasonable assurance that such information is accumulatedand communicated to our management, including the chief executive officer andchief financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

Based on their evaluation as of March 31, 2006, the chief executiveofficer and the chief financial officer have concluded that our disclosurecontrols and procedures are effective to provide reasonable assurance thatinformation we are required to disclose in reports that we file or submit underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in SEC rules and forms.

 

**Limitations on the Effectiveness ofDisclosure Controls and Procedures.** Our management, includingour chief executive officer and chief financial officer, does not expect thatour disclosure controls and procedures will prevent all error and all fraud. Acontrol system can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within Caliper have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Additionally, controls can be circumventedby the individual acts of some persons, by collusion of two or more people orby management override of the controls. Because of the inherent limitations ina cost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

**Changes in internal controls.**   No changes in our internal control overfinancial reporting identified in connection with the evaluation of suchinternal control occurred during the first quarter of 2006, that materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting. 

 

16

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**Part II — OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

Commencing on June 7, 2001, Caliper and three ofits officers and directors (David V. Milligan, Daniel L. Kisner and JamesL. Knighton) were named as defendants in three securities class action lawsuitsfiled in the United States District Court for the Southern District of NewYork. The cases have been consolidated under the caption*In re Caliper Technologies Corp. Initial PublicOffering Securities Litigation,* 01 Civ. 5072 (SAS) (GBD).Similar complaints were filed against approximately 300 other public companiesthat conducted IPO’s of their common stock during the late 1990s (the “IPOLawsuits”). On August 8, 2001, the IPO Lawsuits were consolidated forpretrial purposes before United States Judge Shira Scheindlin of the SouthernDistrict 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 wasfiled alleging claims against Caliper and the individual defendants underSections 11 and 15 of the Securities Act of 1933, and underSections 10(b) and 20(a) of the Securities Exchange Act of 1934, as wellas Rule 10b-5 promulgated thereunder. The Consolidated Amended Complaintalso names certain underwriters of Caliper’s December 1999 initial publicoffering of common stock. The Complaint alleges that these underwriters chargedexcessive, undisclosed commissions to investors and entered into improperagreements with investors relating to aftermarket transactions. The Complaintseeks an unspecified amount of money damages. Caliper and the other issuersnamed as defendants in the IPO Lawsuits moved on July 15, 2002, to dismissall claims on multiple grounds. By Stipulation and Order dated October 9,2002, the claims against Messrs. Milligan, Kisner and Knighton weredismissed without prejudice. On February 19, 2003, the Court grantedCaliper’s motion to dismiss all claims against it. Plaintiffs were not giventhe right to replead the claims against Caliper. The time to appeal thedismissal has not yet expired. In May 2003, a Memorandum of Understanding wasexecuted by counsel for plaintiffs, issuers and their insurers setting forththe terms of a settlement that would result in the termination of all claimsbrought by plaintiffs against the issuers and individual defendants named inthe IPO Lawsuits. On July 7, 2003, a Special Litigation Committee of theCaliper Board of Directors approved the settlement terms described in thatMemorandum of Understanding, which was subsequently set forth in definitiveSettlement Agreement among the settling parties. On February 15, 2005,Judge Scheindlin issued an order granting preliminary approval of thesettlement, subject to certain modifications. The parties agreed to thosemodifications and on August 31, 2005, Judge Scheindlin issued an ordergranting preliminary approval of the settlement as modified and certifyingsettlement classes. The fairness hearing for final approval of the settlementwas held on April 24, 2006. As of May 9, 2006, Judge Scheindlin had notissued any order regarding the Court’s decision with respect to the finalapproval of the settlement. The final resolution of this litigation is notexpected to have a material impact on Caliper.

 

**Item 1A.Risk Factors**

 

***Risks Related To Our Business***

 

*OurLabChip products may not achieve widespread market acceptance, which couldcause our revenue to grow slowly or decline and make it more difficult for usto achieve or maintain profitability.*

 

The commercial success of our LabChip products dependsupon market acceptance of the merits of our drug discovery and automated electrophoresisseparations systems by pharmaceutical and biotechnology companies, academicresearch centers and other companies that rely upon laboratory experimentation.However, because our microfluidic drug discovery and automated electrophoresissystems have been in operation for only a limited period of time, theiraccuracy, reliability, ease-of-use and commercial value have not yet gainedwidespread commercial acceptance. If these systems do not continue to gainfurther market acceptance, our revenue may grow more slowly than expected ordecline.

 

In addition, our strategy for the LabChip 3000 system,our microfluidic-based high throughput screening product, depends upon theearly users of these systems buying additional units as they spread theadoption of this technology throughout their organizations worldwide. Newcustomers for our drug discovery systems may wait for indications from ourinitial drug discovery system customers that our drug discovery systems workeffectively and generate substantial benefits. If the early users of ourLabChip 3000 systems do not endorse the further adoption of these systemsbecause they fail to generate the expected quantities and quality of data, aretoo difficult or costly to use, or are otherwise deficient in meeting thescreening needs of these customers, further sales of these systems to theseearly users may be limited, and sales to new users will be more difficult.

 

Because drug screening systems represent substantialcapital expenditures, it is important that these systems be capable ofperforming a wide variety of different types of assays and experiments in orderto justify the cost of the systems. We intend to continue developing newversions of our microfluidic-based drug discovery systems with enhanced featuresthat address existing and emerging customer needs, such as offering a broadrange of standardized, easy-to-use assays. If we are unable to do so, our drugdiscovery systems may not become more widely used and we may experience adecline in revenue or slow revenue growth and may not achieve or maintainprofitability. We currently have several assays in development, includingassays that measure many important activities of cells and proteins. We arealso developing product extensions that are particularly well suited for theevaluation of kinases, one of the largest focus areas of drug discovery effortstoday. We are also developing kinase profiling and selectivity screening kits.If we are not able to complete the development of any of these expanded applicationsand tools, or if we experience

 

17

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difficulties or delays,we may lose revenues from our current customers and may not be able to obtainnew customers.

 

To date, a large portion of our microfluidic-baseddrug discovery systems have been sold as a result of senior-level relationshipselling and we have not yet achieved broad-based sales of our LabChipmicrofluidic instruments through our sales and marketing organization. Inaddition, these systems and their underlying technologies are still relativelynew to our sales and marketing organization, which may limit our ability toeffectively market and sell these systems. If we cannot market and sell thesesystems effectively, market acceptance of these products may be limited.

 

For all of the foregoing reasons, we cannot assure youthat our efforts to increase the adoption of our LabChip-based high-throughputdrug screening and automated electrophoresis systems, by both existing and newusers, will be expeditious or effective.

 

In summary, market acceptance of our LabChip systemswill depend on many factors, including:

 

•      ourability to demonstrate the advantages and potential economic value of ourLabChip drug discovery systems over alternative, well-established technologies;

 

•      ourability to develop a broader range of standard assays and applications thatenable customers and potential customers to perform many different types ofexperiments on a single LabChip instrument system; and

 

•      ourability to market and sell our drug discovery systems and related consumableproducts through our marketing and sales organization without the involvementof our senior management.

 

*Caliper’s future revenue growthdepends to a significant extent on sales by Affymetrix of the GCAS automatedtarget preparation system, which is based on the Caliper Sciclone liquidhandling instrument. If end-user demand for this product is not as strong asanticipated by Affymetrix, Caliper’s revenue targets may not be achieved.*

 

In collaboration with Affymetrix,we have developed a new automated system for the preparation of nucleic acidtarget material to be applied to Affymetrix’s GeneChip® devices, which systemis based on our Sciclone liquid handling instrument. Affymetrix began to shipthe commercial version of the GCAS system during the third quarter of 2005.Under the terms of the collaboration agreement, Affymetrix will market and sellthe GCAS system. Affymetrix announced in 2005 that low initial-productionyields of its commercial Mapping 500K Set Array had constrained shipmentvolumes for this product. Because users of Affymetrix’s Mapping 500K Set Arrayproduct are also expected to be users of the GCAS systems, if Affymetrixcontinues to have low production volumes for this product or experiencesdifficulties in launching other GeneChip® applications, the demand for GCASsystems will be adversely affected. In addition, Affymetrix may experienceother difficulties in the marketing, sale, and support of the GCAS system. Forall of these reasons, our revenues from the sale of GCAS systems could be lessthan anticipated. In addition, because the GCAS system is a relatively newproduct for which there is limited commercial experience, there can be noassurance that the demand for this product will materialize as expected.

 

*Ourfuture revenue growth depends to a significant extent on the revenue growth ofNovaScreen, which we recently acquired. If NovaScreen’s revenue does not growas we anticipate, our future revenue targets may not be achieved.*

 

In October 2005 we acquired NovaScreen Biosciences, aprivately held business which provides high throughput screening and compoundprofiling services. We completed this acquisition, in part, because we believethat the market for these services will grow at a relatively high rate as morepharmaceutical and biotech companies increase their outsourcing of theseservices. There can be no assurance, however, that pharmaceutical and biotechcompanies will continue to increase their demand for these services. If thetrend toward more outsourcing of these services does not continue to grow, ourrevenues from the NovaScreen business may not increase as anticipated, makingit more difficult for us to achieve our future revenue growth targets.

 

*Acquisitionsmay have unexpected consequences or impose additional costs on us.*

 

Our business is highly competitive and our growth isdependent upon market growth and our ability to enhance our existing products,introduce new products on a timely basis and offer our customers products thatprovide a more complete solution. One of the ways we may address the need todevelop new products is through acquisitions of complementary businesses andtechnologies, such as our acquisition of Zymark in July 2003, our acquisition ofNovaScreen in October 2005, and our anticipated acquisition of Xenogen. Fromtime to time, we consider and evaluate potential business combinationsinvolving our acquisition of another company and transactions involving thesale of our company through, among other things, a possible merger orconsolidation of our business into that of another entity.

 

Acquisitions involve numerous risks, including thefollowing:

 

18

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•      difficultiesin integration of the operations, technologies and products and services of theacquired companies;

 

•      therisk of diverting management’s attention from normal daily operations of thebusiness;

 

•      potentialcost and disruptions caused by the integration of financial reporting systemsand development of uniform standards, controls, procedures and policies;

 

•      accountingconsequences, including amortization of acquired intangible assets or otherrequired purchase accounting adjustments, resulting in variability orreductions of our reported earnings;

 

•      potentialdifficulties in completing projects associated with purchased in-processresearch and development;

 

•      risksof entering markets in which we have no or limited direct prior experience andwhere competitors in these markets have stronger market positions;

 

•      thepotential loss of our key employees or those of the acquired company due to theemployment uncertainties inherent in the acquisition process;

 

•      theassumption of known and potentially unknown liabilities of the acquired company;

 

•      therisk that we may find that the acquired company or business does not furtherour business strategy or that we paid more than what the company or businesswas worth;

 

•      wemay disagree with the former management of businesses that we acquire withrespect to the interpretation of provisions in the acquisition agreementrelating to earn out provisions or other provisions that have ongoing effectafter the completion of the acquisition, which could result in disputes orlitigation with current employees who joined us as part of the acquisition;

 

•      ourrelationship with current and new employees and customers could be impaired;

 

•      theacquisition may result in litigation from terminated employees or third partieswho believe a claim against us would be valuable to pursue;

 

•      ourdue diligence process may fail to identify significant issues with productquality, product architecture and legal contingencies, among other matters; and

 

•      theremay be insufficient revenues to offset increased expenses associated withacquisitions.

 

Acquisitions may also cause us to issue common stockthat would dilute our current stockholders’ percentage ownership; recordgoodwill and non-amortizable intangible assets that will be subject toimpairment testing and potential periodic impairment charges; incuramortization expenses related to certain intangible assets; or incur otherlarge and immediate write-offs.

 

We cannot assure you that future acquisitions will besuccessful and will not adversely affect our business. We must also maintainour ability to manage growth effectively. Failure to manage growth effectivelyand successfully integrate acquisitions that we make could harm our business.

 

*Ourbusiness and stock price may be adversely affected if the acquisition ofXenogen is not completed.*

 

Our acquisition of Xenogen is subject to severalcustomary conditions, including obtaining clearance from governmental entitiesand the approvals of the transaction by the stockholders of Xenogen andCaliper. If our acquisition of Xenogen is not completed, we could be subject toa number of risks that may adversely affect our business and stock price,including:

 

•      thediversion of our management’s attention from our day-to-day business as aresult of efforts relating to the acquisition;

 

•      themarket price of shares of our stock may decline to the extent that the currentmarket price reflects a market assumption that the acquisition will becompleted;

 

•      undercertain circumstances, we could be required to pay Xenogen a $2 milliontermination fee;

 

•      wemust pay costs related to the merger, such as legal and accounting fees and aportion of the investment banking fees; and

 

•      wewould not realize the benefits we expect from acquiring Xenogen.

 

*Wemay not realize all of the anticipated benefits of the Xenogen acquisition.*

 

19

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The success of the merger will depend, in part, on ourability to realize the anticipated synergies, cost savings, and growthopportunities from integrating the businesses of Xenogen with our business. Oursuccess in realizing these benefits and the timing of this realization dependupon the successful integration of the operations of Xenogen. The integrationof two independent companies is a complex, costly, and time-consuming process.The difficulties of combining the operations of the companies include, amongothers:

 

•      consolidatingresearch and development and manufacturing operations;

 

•       retainingkey employees;

 

•       consolidatingcorporate and administrative infrastructures;

 

•       coordinatingsales and marketing functions;

 

•       preservingour and Xenogen’s research and development, distribution, marketing, promotion,and other important relationships;

 

•       minimizingthe diversion of management’s attention from ongoing business concerns; and

 

•       coordinatinggeographically separate organizations.

 

We cannot assure you that the integration of Xenogenwith us will result in the realization of the full benefits anticipated by usto result from the merger.

 

*Weexpect to incur future operating losses and may not achieve profitability.*

 

We have experienced significant operating losses eachyear since our inception and we expect to incur an operating loss in 2006. Wemay never achieve profitability. As of March 31, 2006, Caliper had anaccumulated deficit of approximately $185.6 million. Our losses have resultedprincipally from costs incurred in research and development and productmarketing and from general and administrative costs associated with ouroperations. These costs have exceeded our cumulative cash proceeds which, todate, have been generated principally from product sales, collaborativeresearch and development agreements, technology access fees, license fees,litigation settlement proceeds and interest income on cash and investmentbalances.

 

*Failureto raise additional capital or generate the significant capital necessary toexpand our operations and invest in new products could reduce our ability tocompete and result in lower revenue.*

 

We anticipate that our existing capital resources,together with the revenue to be derived from our commercial partners and fromcommercial sales of our microfluidic and lab automation products and services,will enable us to maintain currently planned operations at least through theyear 2007. However, we premise this expectation on our current operating plan,which may change as a result of many factors, including our acquisition ofNovaScreen and our anticipated acquisition of Xenogen, or of another company orbusiness. Consequently, we may need additional funding sooner than anticipated.Our inability to raise needed capital would seriously harm our business andproduct development efforts. In addition, we may choose to raise additionalcapital due to market conditions or strategic considerations even if we believethat we have sufficient funds for our current or future operating plans. To theextent that additional capital is raised through the sale of equity orconvertible debt securities, the issuance of these securities could result indilution to our stockholders.

 

We currently have a nominal credit facility with anunused balance of $300,000 and we currently have no committed sources of capital.To the extent that operating and capital resources are insufficient to meetfuture requirements, we will have to raise additional funds to continue thedevelopment and commercialization of our technologies. These funds may not beavailable on favorable terms, or at all. If adequate funds are not available onattractive terms, we may be required to curtail operations significantly or toobtain funds by entering into financing, supply or collaboration agreements onunattractive terms.

 

*Our taxnet operating losses and credit carryforwards may expire if we do not achieveor maintain profitability.*

 

As of December 31, 2005, we had federal and state netoperating loss carryforwards of approximately $148.1 million and $44.6 million,respectively. We also had federal and state research and development tax creditcarryforwards of approximately $4.7 million and $2.8 million, respectively. Thefederal net operating loss and credit carryforwards will expire at variousdates through 2025 beginning in the year 2009 if not utilized. State netoperating losses of approximately $5,000 expired in 2005. The current remainingstate net operating losses have varying expiration dates through 2015.

 

Utilization of the federal and state net operatinglosses and credits may be subject to a substantial limitation due to the changein ownership provisions of the Internal Revenue Code of 1986 and similar stateprovisions. The annual limitation may result in the expiration of net operatinglosses and credits before utilization. As described in Note 1, on February 13,2006 Caliper announced a definitive agreement to acquire Xenogen Corporation (“Xenogen”,NASDAQ: XGEN) This acquisition will ultimately result in Xenogen shareholders’owning approximately one-third of Caliper and will likely result in a change ofownership that will cause pre-merger losses to be subject to limitation. Theamount of limitation has not yet been determined. Because of our lack ofearnings history and the uncertainty of realizing these net operating losses,the deferred tax assets have been fully offset by a valuation allowance.

 

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**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

**Item 3.Defaults Upon Senior Securities**

 

None.

 

**Item 4.Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item 5.Other Information**

 

None.

 

21

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**EXHIBITINDEX**

**Item 6.Exhibits**

** **
| **Exhibit  Number** | ** ** | **Description of document**                                                                                                                                                                                         |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(1)              |       | Amended and Restated Certificate of Incorporation of  Caliper.                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                          |
| 3.2(2)              |       | Certificate of Designation Of Series A Junior  Participating Preferred Stock.                                                                                                                                            |
|                |       |                                                                                                                                                                                                                          |
| 3.3(3)              |       | Restated Bylaws of Caliper.                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                          |
| 3.4(4)              |       | Amendment No. 1 to Bylaws of Caliper.                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                          |
| 4.2(5)              |       | Specimen Stock Certificate.                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                          |
| 4.3(6)              |       | Rights Agreement, dated as of December 18,  2001, between Caliper and Wells Fargo Bank Minnesota, N.A., as Rights Agent.                                                                                                 |
|                |       |                                                                                                                                                                                                                          |
| 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, and pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                                                                                          |
| 31.2                |       | Certification of Chief Financial Officer Required  Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange  Act of 1934, as amended, and pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                                                                                          |
| 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 Chief 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 the like-numbered Exhibit to  Form 10-Q for the quarterly period ended March 31, 2004 and incorporated  by reference herein.                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                             |
| (2)    |   | Previously filed as Exhibit 4.1 to Current  Report on Form 8-K filed December 19, 2001 and incorporated by reference  herein.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                             |
| (3)    |   | Previously filed as Exhibit 3.4 to our  Registration Statement on Form S-1, as amended, File No. 333-88827,  filed on October 12, 1999 and incorporated by reference herein.                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                             |
| (4)    |   | Previously filed as the like-numbered Exhibit to  Form 10-K for the year ended December 31, 2002 and incorporated by  reference herein.                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                             |
| (5)    |   | Previously filed as the like-numbered Exhibit to  Annual Report on Form 10-K for the annual period ended December 31, 2004 and  incorporated by reference herein.                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                             |
| (6)    |   | Previously filed as Exhibit  99.2 to Current Report on Form 8-K filed December 19, 2001 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. |

 

22

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                          | ** ** | **CALIPER LIFE SCIENCES, INC.**                      |
|-------------------------------|------------|------------------------------------------------------|
|                          |       |                                                 |
| Date:  May 10, 2006 |       | By:                                                  | /s/ E. Kevin Hrusovsky |   |
|                          |       | E. Kevin Hrusovsky                                   |
|                          |       | Chief Executive Officer and President                |
|                          |       |                                                 |
|                          |       | By:                                                  | /s/ Thomas T. Higgins |   |
|                          |       | Thomas T. Higgins                                    |
|                          |       | Executive Vice President and Chief Financial Officer |
|                               |            |                                                      |  |  |  |

 

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**EXHIBIT INDEX**

** **
| **Exhibit  Number** | ** ** | **Description of document**                                                                                                                                                                                         |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(1)              |       | Amended and Restated Certificate of Incorporation of  Caliper.                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                          |
| 3.2(2)              |       | Certificate of Designation Of Series A Junior  Participating Preferred Stock.                                                                                                                                            |
|                |       |                                                                                                                                                                                                                          |
| 3.3(3)              |       | Restated Bylaws of Caliper.                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                          |
| 3.4(4)              |       | Amendment No. 1 to Bylaws of Caliper.                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                          |
| 4.2(5)              |       | Specimen Stock Certificate.                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                          |
| 4.3(6)              |       | Rights Agreement, dated as of December 18,  2001, between Caliper and Wells Fargo Bank Minnesota, N.A., as Rights Agent.                                                                                                 |
|                |       |                                                                                                                                                                                                                          |
| 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, and pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                                                                                          |
| 31.2                |       | Certification of Chief Financial Officer Required  Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange  Act of 1934, as amended, and pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                                                                                          |
| 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 Chief 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 the like-numbered Exhibit to  Form 10-Q for the quarterly period ended March 31, 2004 and incorporated  by reference herein.                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                             |
| (2)    |   | Previously filed as Exhibit 4.1 to Current  Report on Form 8-K filed December 19, 2001 and incorporated by reference  herein.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                             |
| (3)    |   | Previously filed as Exhibit 3.4 to our  Registration Statement on Form S-1, as amended, File No. 333-88827,  filed on October 12, 1999 and incorporated by reference herein.                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                             |
| (4)    |   | Previously filed as the like-numbered Exhibit to  Form 10-K for the year ended December 31, 2002 and incorporated by  reference herein.                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                             |
| (5)    |   | Previously filed as the like-numbered Exhibit to  Annual Report on Form 10-K for the annual period ended December 31, 2004 and  incorporated by reference herein.                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                             |
| (6)    |   | Previously filed as Exhibit  99.2 to Current Report on Form 8-K filed December 19, 2001 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. |

 

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