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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period
ended March 31, 2004.
 or [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition
period from  to .
 Commission file # 000-28229 CALIPER LIFE SCIENCES, INC.  Delaware
(State of Incorporation)
    
    33-0675808
(I.R.S. Employer Identification Number)
 68 Elm Street
Hopkinton, Massachusetts 01748
(Address and zip code of principal executive offices) Registrants telephone number, including area code: (508) 435-9500 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [   ] NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON APRIL 30, 2004: 29,037,323




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CALIPER LIFE SCIENCES, INC.
TABLE OF CONTENTS PagePART I
    
    
    
    
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of March 31, 2004 and December 31, 2003
    
    
    2Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003
    
    
    3Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    27PART II
    
    
    
    
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    28Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    28Item 3.
    
    Defaults upon Senior Securities
    
    
    28Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28Item 5.
    
    Other Information
    
    
    28Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    28SIGNATURES
    
    
    
    
    
    
    
    
    29EX-2.3 AMEND. NO.2 TO STOCK PURCHASE AGREEMENTEX-3.1 AMENDED CERTIFICATE OF INCORPORATIONEX-31.1 SECT. 302 CERTIFICATION OF C.E.O.EX-31.2 SECT. 302 CERTIFICATION OF C.F.O.EX-32.1 SECT. 906 CERTIFICATION OF C.E.O.EX-32.2 SECT. 906 CERTIFICATION OF C.F.O.
  1




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS CALIPER LIFE SCIENCES, INC. 
 CONSOLIDATED BALANCE SHEETS
 (in thousands)
 (unaudited)
 March 31,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,629
    
    
    $
    8,889Marketable securities
    
    
    50,333
    
    
    
    57,828Accounts receivable, net of allowance for doubtful accounts of $309 at March 31, 2004
and $252 at December 31, 2003
    
    
    12,428
    
    
    
    9,506Inventories
    
    
    11,738
    
    
    
    11,580Prepaid expenses and other current assets
    
    
    4,151
    
    
    
    3,451Total current assets
    
    
    84,279
    
    
    
    91,254Security deposits
    
    
    3,161
    
    
    
    3,161Property and equipment, net
    
    
    8,585
    
    
    
    9,106Notes receivable from employee director
    
    
    139
    
    
    
    178Developed technology, net
    
    
    12,286
    
    
    
    13,002Intangible assets, net
    
    
    3,295
    
    
    
    3,627Goodwill
    
    
    47,262
    
    
    
    47,262Other assets, net
    
    
    468
    
    
    
    446Total assets
    
    $
    159,475
    
    
    $
    168,036LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,212
    
    
    $
    3,212Accrued compensation
    
    
    4,658
    
    
    
    4,148Other accrued liabilities
    
    
    7,359
    
    
    
    8,689Deferred revenue and customer deposits
    
    
    8,057
    
    
    
    7,063Current portion of long-term obligations
    
    
    365
    
    
    
    377Current portion of sale-leaseback arrangements
    
    
    1,192
    
    
    
    1,521Total current liabilities
    
    
    24,843
    
    
    
    25,010Noncurrent portion of sale-leaseback arrangements and other current maturities
    
    
    510
    
    
    
    331Deferred revenue
    
    
    9
    
    
    
    26Other noncurrent liabilities
    
    
    6,747
    
    
    
    7,872Commitments and contingencies (Note 8)Stockholders equity:Common stock
    
    
    29
    
    
    
    28Additional paid-in capital
    
    
    273,539
    
    
    
    271,232Deferred stock compensation
    
    
    (1,488
    )
    
    
    (1,808
    )Accumulated deficit
    
    
    (145,130
    )
    
    
    (135,093
    )Accumulated other comprehensive income
    
    
    416
    
    
    
    438Total stockholders equity
    
    
    127,366
    
    
    
    134,797Total liabilities and stockholders equity
    
    $
    159,475
    
    
    $
    168,036
 See accompanying notes. 2




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CALIPER LIFE SCIENCES, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (unaudited)
 Three Months EndedMarch 31,2004
    
    2003Revenues:Product revenue
    
    $
    12,009
    
    
    $
    2,910Service revenue
    
    
    3,061
    
    
    
    Related party revenue
    
    
    
    
    
    
    586License fees and contract revenue
    
    
    1,863
    
    
    
    2,116Total revenue
    
    
    16,933
    
    
    
    5,612Costs and expenses:Cost of product revenue
    
    
    8,621
    
    
    
    2,220Cost of service revenue
    
    
    1,641
    
    
    
    Cost of product revenue  related party
    
    
    
    
    
    
    78Research and development
    
    
    6,466
    
    
    
    9,411Selling, general and administrative
    
    
    7,699
    
    
    
    4,569Stock-based compensation, net(1)
    
    
    1,695
    
    
    
    188Amortization of intangible assets
    
    
    1,048
    
    
    
    Restructuring charges and credits
    
    
    (134
    )
    
    
    Total costs and expenses
    
    
    27,036
    
    
    
    16,466Operating loss
    
    
    (10,103
    )
    
    
    (10,854
    )Interest income, net
    
    
    199
    
    
    
    921Other expense, net
    
    
    (86
    )
    
    
    (35
    )Loss before income taxes
    
    
    (9,990
    )
    
    
    (9,968
    )Provision for income taxes
    
    
    (46
    )
    
    
    Net loss
    
    $
    (10,036
    )
    
    $
    (9,968
    )Net loss per share, basic and diluted
    
    $
    (0.35
    )
    
    $
    (0.40
    )Shares used in computing net loss per common share, basic and diluted
    
    
    28,589
    
    
    
    24,713
 (1) Stock-based compensation, net, pertains to employees employed in the following areas: Cost of product revenue
    
    $
    82
    
    
    $
    Research and development
    
    
    157
    
    
    
    48Selling, general and administrative
    
    
    1,456
    
    
    
    140Total
    
    $
    1,695
    
    
    $
    188
 See accompanying notes. 3




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CALIPER LIFE SCIENCES, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(unaudited)
 Three Months EndedMarch 31,2004
    
    2003Operating activitiesNet loss
    
    $
    (10,036
    )
    
    $
    (9,968
    )Adjustments to reconcile net loss to net cash from operating activities:Depreciation and amortization
    
    
    2,621
    
    
    
    1,630Stock-based compensation expense, net
    
    
    1,695
    
    
    
    188Stock options issued to non-employees
    
    
    16
    
    
    
    (2
    )Non-cash restructuring charges and credits
    
    
    (134
    )
    
    
    Loss from disposal of fixed assets
    
    
    96
    
    
    
    Changes in operating assets and liabilitiesAccounts receivable
    
    
    (2,922
    )
    
    
    (722
    )Inventories
    
    
    (158
    )
    
    
    1,230Prepaid expenses and other current assets
    
    
    (700
    )
    
    
    (876
    )Security deposits and other assets
    
    
    (22
    )
    
    
    187Notes receivable from employee director
    
    
    39
    
    
    
    37Accounts payable and other accrued liabilities
    
    
    (1,196
    )
    
    
    (381
    )Accrued compensation
    
    
    (73
    )
    
    
    (340
    )Deferred revenue and customer deposits
    
    
    977
    
    
    
    (457
    )Other non-current liabilities
    
    
    (810
    )
    
    
    (50
    )Net cash from operating activities
    
    
    (10,607
    )
    
    
    (9,524
    )Investing activitiesPurchases of marketable securities
    
    
    (12,645
    )
    
    
    (18,759
    )Proceeds from sales of marketable securities
    
    
    14,210
    
    
    
    12,543Proceeds from maturities of marketable securities
    
    
    5,881
    
    
    
    7,203Purchases of property and equipment
    
    
    (1,148
    )
    
    
    (120
    )Net cash from investing activities
    
    
    6,298
    
    
    
    867Financing activitiesPayments of obligations under sale-leaseback arrangements
    
    
    (500
    )
    
    
    (680
    )Proceeds from issuance of common stock
    
    
    1,501
    
    
    
    25Net cash from financing activities
    
    
    1,001
    
    
    
    (655
    )Effect of exchange rates on changes in cash and cash equivalents
    
    
    48
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (3,260
    )
    
    
    (9,312
    )Cash and cash equivalents at beginning of period
    
    
    8,889
    
    
    
    16,184Cash and cash equivalents at end of period
    
    $
    5,629
    
    
    $
    6,872Supplemental disclosure of cash flow informationInterest paid
    
    $
    52
    
    
    $
    126Income taxes paid
    
    $
    
    
    
    $
    
 See accompanying notes. 4




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




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origin with the customer assuming the risks and rewards of product ownership
at the time of shipping from Calipers warehouse with no return rights or
privileges. In accordance with EITF 00-21, Revenue Arrangements with Multiple
Deliverables, Caliper defers the fair value of any elements that remain
undelivered after product shipment and/or acceptance (as applicable).
Undelivered elements may generally consist of annual maintenance agreements,
installation and/or training. In certain cases, customers will be charged on a datapoint pricing basis
for their usage of chips. A datapoint is generated each time a Caliper
instrument system introduces a sample into a chip through a sipper in order to
perform a particular LabChip® technology assay. Datapoints are the test-results
that Calipers customers record when they use Calipers LabChip instruments.
Caliper records datapoint revenues in the period that Calipers customers
attain the datapoints and communicate such use to Caliper. Datapoint rates are
contractually negotiated between Caliper and its customers. Under minimum
datapoint fee arrangements, datapoint revenues are recorded over the period of
which the minimum applies, provided Caliper has no ongoing performance
obligations with respect to the minimum fees. Agilent Product Revenue Under the surviving terms of Calipers terminated agreement with Agilent,
Caliper supplies Agilent with chips and reagents at cost and receives a share
of Agilents gross margin on components of the LabChip systems sold by Agilent.
Revenue related to the reimbursement of costs for the supply of chips and
reagents is recognized as product revenue upon shipment to Agilent, and
Calipers share of gross margin on sales made by Agilent is recognized as
product revenue upon shipment by Agilent to its end users. Caliper has no
continuing obligations at the time these sales are made and Agilent has no
return privileges. Calipers transfer of title on products sold to Agilent is
not contingent on Agilents resale of these products. The instruments, chips
and reagents as sold, are useable by Agilent and their customers without
additional support from Caliper. Service and Annual Maintenance Agreements Service revenue is recognized as services are performed or, as applicable,
ratably over the contract service term in the case of annual maintenance
contracts. Customers may purchase optional warranty coverage during the initial
standard warranty term and annual maintenance contracts beyond the standard
warranty expiration. These optional service offerings are not included in the
price Caliper charges customers for the initial product purchase. Under
Calipers standard warranty, the customer is entitled to repair or replacement
of defective goods. No upgrades are included in the standard warranty. Contract Revenue Revenue from contract research and development services is recognized as
earned based on the performance requirements of the contract. Nonrefundable
contract fees for which no further performance obligations exist, and there is
no continuing involvement by Caliper, are recognized on the earlier of when the
payments are received or when collection is assured. Contract fees received in
advance of work performed are recorded as deferred revenue. These upfront fee
payments are recognized as revenue as the work is performed. Contract fees
received that are related to substantive at-risk milestones are recognized when
Calipers performance of the milestone under the terms of the contract is
achieved and no further performance obligations exist. Licensing and Royalty Revenue from up-front license fees is recognized when the earnings process
is complete and no further obligations exist. If further obligations exist, the
up-front license fee is recognized ratably over the obligation period.
Royalties from licenses are based on third-party sales and recorded as earned
in accordance with contract terms, when third-party results are reliably
measured and collectibility is assured. Software Caliper has developed software that is marketed with its solutions as a
component to operate and run its instruments and systems. Caliper does not sell
or otherwise market the software. Calipers customers are purchasing the
instruments and systems in order to be able to conduct scientific research, and
the software is incidental to the overall cost of the instruments development
and marketing effort. Caliper does not provide post-sale software support,
except for functional defects in the software as contemplated in Calipers
warranty on its instruments. 6




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Goodwill Caliper performs a test for the impairment of goodwill annually in the
fourth quarter of its fiscal year, or more frequently if events or
circumstances indicate that goodwill may be impaired. Because Caliper has a
single operating and reportable business segment, Caliper performs this test by
comparing the fair value of the Company with its book value, including
goodwill. If the fair value exceeds the book value, goodwill is not impaired.
If the book value exceeds the fair value, Caliper would calculate the potential
impairment loss by comparing the implied fair value of goodwill with the book
value. If the implied goodwill is less than the book value, an estimate of the
impairment charge would be determined by performing a detailed assessment of
the fair value of goodwill as compared to its carrying value. Segment Reporting Caliper currently operates in one business segment, the development and
commercialization of life science instruments and related consumables and
services for use in drug discovery and other life sciences research and
development. The entire business is comprehensively managed by an executive
management team that reports to the Chief Executive Officer. Caliper does not
operate separate lines of business or separate business entities with respect
to its products or product candidates. Accordingly, Caliper does not accumulate
discrete financial information with respect to separate product areas and does
not have separately reportable segments as defined by SFAS No. 131, Disclosure
about Segments of an Enterprise and Related Information. Foreign Currency Translation The financial statements of Calipers foreign subsidiaries are translated
in accordance with SFAS No. 52, Foreign Currency Translation. In translating
the accounts of the foreign subsidiaries into U.S. dollars, stockholders
equity is translated at historical rates, while assets and liabilities are
translated at the rate of exchange in effect as of the end of the period.
Revenue and expense transactions are translated using the weighted-average
exchange rate in effect during the period in which they arise. The resulting
foreign currency translation adjustments are reflected as a separate component
of stockholders equity. Foreign currency transaction gains and losses from the settlement of
account balances denominated in another currency are included in current period
other income, net as incurred. Cumulative translation adjustments included in
stockholders equity as of March 31, 2004 and December 31, 2003 were $126,000
and $98,000, respectively. Research and Development Caliper charges research and development costs to expense as incurred.
Research and development costs consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for
chip development, material cost of prototypes and test units, legal expenses
resulting from intellectual property prosecution and litigation, facility and
other research related allocation expenses, and other expenses related to the
design, development, testing and enhancement of Calipers products. Warranty Expense At the time product revenue is recognized, Caliper establishes an accrual
for estimated warranty expenses associated with sales, recorded as a component
of cost of revenue. Caliper offers a one-year limited warranty on
instrumentation products and a 90-day warranty on chips, which is included in
the sales price of many of its products. Calipers standard limited warranty
covers repair or replacement of defective goods, a preventative maintenance
visit on certain products, and telephone based technical support. No upgrades
are included in the standard warranty. In accordance with SFAS No. 5,
Accounting for Contingencies, provision is made for estimated future warranty
costs at the time of sale. Factors that affect Calipers warranty liability
include the number of installed units, historical and anticipated rates of
warranty claims, and cost per claim. Caliper periodically assesses the adequacy
of its recorded warranty liabilities and adjusts amounts as necessary. Changes in Calipers warranty obligation during the three months ended
March 31, 2004 and 2003 are as follows (in thousands): 2004
    
    2003Balance, beginning of period
    
    $
    1,108
    
    
    $
    265Warranties issued during the period
    
    
    220
    
    
    
    49Settlements made during the period
    
    
    (261
    )
    
    
    (27
    )Balance, end of period
    
    $
    1,067
    
    
    $
    287
 7




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Net Income (Loss) Per Share Basic net income (loss) per share is calculated based on the
weighted-average number of common shares outstanding during the period. Diluted
net income (loss) per share would give effect to the dilutive effect of common
stock equivalents consisting of stock options and warrants (calculated using
the treasury stock method). Potentially dilutive securities have been excluded
from the diluted earnings per share computations where they have an
anti-dilutive effect due to Calipers net loss. For the three months ended
March 31, 2004 and 2003, options, unvested restricted stock, and warrants to
purchase 8,315,000 and 4,657,000 shares, respectively, have been excluded from
the calculation of diluted net loss per share because they are anti-dilutive. Stock-Based Compensation Caliper accounts for its stock options and equity awards in accordance
with the provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, and has elected to
follow the disclosure only alternative prescribed by Financial Accounting
Standards Boards SFAS No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation expense is recognized in Calipers financial
statements for stock options granted to employees, which had an exercise price
equal to the fair value of the underlying common stock on date of grant.
Caliper accounts for stock options issued to non-employees in accordance with
the provisions of SFAS No. 123 and EITF No. 96-18, Accounting for Equity
Instruments that are issued to other than Employees for Acquiring, or in
Conjunction with selling Goods or Services. For the three months ended March
31, 2004, and 2003, compensation expense related to stock options issued to
non-employees was not material. The following table illustrates the effect on net income (loss) and net
income (loss) per share if Caliper had applied the fair value recognition
provisions of SFAS No. 123, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  and amendment of FASB
Statement No. 123. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the vesting period of the
options using the straight-line allocation method. Calipers pro forma
information is as follows (in thousands except per share data): Three Months Ended March 31,2004
    
    2003Net income (loss):As reported
    
    $
    (10,036
    )
    
    $
    (9,968
    )Add: Stock-based employee
compensation expense included in
reported net income
    
    
    1,695
    
    
    
    188Deduct: Total stock-based
employee compensation expense
determined under fair value
based methods for all awards
    
    
    (6,891
    )
    
    
    (6,256
    )Pro forma net loss
    
    $
    (15,232
    )
    
    $
    (16,036
    )Net income (loss) per share:As reported:Basic and diluted
    
    $
    (0.35
    )
    
    $
    (0.40
    )Pro forma:Basic and diluted
    
    $
    (0.53
    )
    
    $
    (0.65
    )
 The effects of applying SFAS No. 123 for pro forma disclosures are not
likely to be representative of the effects on reported net loss for future
years. Guarantees and Indemnifications Caliper recognizes liabilities for guarantees in accordance with FASB
Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligations in assumes under
that guarantee. Caliper, as permitted under Delaware law and in accordance with its
Bylaws, indemnifies its officers and directors for certain events or
occurrences, subject to certain limits, while the officer or director is or was
serving at Calipers request in such capacity. The term of the indemnification
period is for the officers or directors lifetime. Caliper may terminate the
indemnification agreements 8




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with its officers and directors upon 90 days written notice, but termination
will not affect claims for indemnification relating to events occurring prior
to the effective date of termination. The maximum amount of potential future
indemnification is unlimited; however, Caliper has a director and officer
insurance policy that limits its exposure and may enable it to recover a
portion of any future amounts paid. Caliper believes the fair value of these
indemnification agreements is minimal. Accordingly, Caliper has not recorded
any liabilities for these agreements as of March 31, 2004. 2. Acquisition of Zymark Corporation On July 14, 2003, Caliper completed the acquisition of 100% of ZYAC
Holding Corporation (ZYAC was the parent holding company of Zymark Corporation
and had no operating activities) from The Berwind Company LLC (Berwind) for
an aggregate purchase price of approximately $72.8 million in the form of $55.7
million in cash, 3.15 million shares of Calipers common stock valued at $14.6
million, and acquisition costs of $2.5 million. The purchase terms also
provided for Caliper to issue Berwind an additional 1.575 million contingent
shares if certain financial targets are met in 2003 and 2004. These targets
were not achieved in 2003 causing the obligation to issue 787,500 contingent
shares to lapse. If the 2004 targets are achieved, the fair value of the
additional shares issued will be added to the purchase price and allocated to
goodwill. Zymarks operations, assumed as of the date of the acquisition, have been
included in the results of operations of Caliper beginning on July 14, 2003
and, as a result, are not reflected in the results of operations for the
quarter ended March 31, 2003. The acquisition was accounted for as a purchase
in accordance with SFAS No. 141, Accounting for Business Combinations, and
Caliper accordingly allocated the purchase price of Zymark based upon the
estimated fair value of net assets acquired and liabilities assumed. The
components and allocation of the purchase price consisted of the following (in
thousands): Cash and cash equivalents
    
    $
    5,803Other current assets
    
    
    17,665Other assets
    
    
    2,838Liabilities assumed
    
    
    (19,903
    )Identifiable intangible assets
    
    
    19,165Goodwill
    
    
    47,262$
    72,830
 Acquired intangible assets consisted of the following as of March 31, 2004
(in thousands): AccumulatedUseful Life
    
    Fair Value
    
    Amortization
    
    Net ValueDeveloped Technology
    
    5 years
    
    $
    14,314
    
    
    $
    2,028
    
    
    $
    12,286Customer List
    
    5 years
    
    
    3,640
    
    
    
    516
    
    
    
    3,124Backlog
    
    0.5 years
    
    
    1,211
    
    
    
    1,211
    
    
    
    $
    19,165
    
    
    $
    3,755
    
    
    $
    15,410
 Fair value was determined by an independent appraisal and was based upon
expected future discounted cash flows taking into account risks related to the
characteristics and application of the technology, existing and future markets
and assessments of the life cycle stage of the technology. Amortization expense
was $1.0 million during the quarter ended March 31, 2004. Scheduled
amortization expense related to the intangible assets in the current and future
fiscal periods is as follows (in thousands): 12-month period ending March 31:
    
    Amount2005
    
    $
    3,5912006
    
    
    3,5912007
    
    
    3,5912008
    
    
    3,5912009
    
    
    1,046$
    15,410
 Unaudited pro forma operating results for Caliper for the three months
ended March 31, 2004 and 2003, assuming the acquisition was completed as of
January 1, 2002, is as follows (in thousands, except per share amounts): 9




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##### Table of Contents



Three Months EndedMarch 31,2004
    
    2003Revenue
    
    $
    16,933
    
    
    $
    18,378Operating loss
    
    
    (10,103
    )
    
    
    (12,492
    )Net loss
    
    
    (10,036
    )
    
    
    (12,034
    )Basic and diluted loss per share
    
    
    (0.35
    )
    
    
    (0.49
    )
 The unaudited pro forma financial information is presented for
informational purposes only, and is not necessarily indicative of Calipers
operating results had the acquisition been completed on the date for which the
pro forma results give effect. 3. Inventories Inventories for use in the manufacture of Calipers instruments include
electronic components, devices and accessories either produced or purchased
from original equipment manufacturers. Inventories for use in the manufacture
of LabChip technologies consist primarily of glass, quartz and reagents.
Inventories are stated at the lower of standard cost (which approximates actual
cost on a first-in, first-out basis) or market, reflect appropriate reserves
for potential obsolete, slow moving or otherwise impaired material, and include
appropriate elements of material, labor and indirect costs. Inventories
consist of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Raw material
    
    $
    5,531
    
    
    $
    5,929Work-in-process
    
    
    941
    
    
    
    1,087Finished goods
    
    
    5,266
    
    
    
    4,564Total
    
    $
    11,738
    
    
    $
    11,580
 Caliper reserves or writes off 100% of the cost of inventory that it
specifically identifies and considers obsolete or excessive to fulfill future
sales estimates. Caliper defines obsolete inventory as inventory that will no
longer be used in the manufacturing process. Excess inventory is generally
defined as inventory in excess of projected usage, and is determined using
managements best estimate of future demand at the time, based upon information
then available to Caliper. Caliper uses a twelve-month demand forecast and, in
addition to the demand forecast, Caliper also considers: (1) parts and
subassemblies that can be used in alternative finished products; (2) parts and
subassemblies that are unlikely to be engineered out of Calipers products; and
(3) known design changes which would reduce Calipers ability to use the
inventory as planned. During the three months ended March 31, 2004, Caliper
recorded charges of $244,000 to cost of product revenues to reserve for excess
and obsolete inventories. During three months ended March 31, 2003, there were
no charges recorded. 4. Comprehensive Income (Loss) The components of comprehensive loss included within stockholders equity
for the three months ended March 31, 2004 and 2003 are as follows (in
thousands): Three Months EndedMarch 31,2004
    
    2003Net loss
    
    $
    (10,036
    )
    
    $
    (9,968
    )Unrealized loss on marketable securities
    
    
    (49
    )
    
    
    (25
    )Foreign currency translation gain
    
    
    28
    
    
    
    Comprehensive loss
    
    $
    (10,057
    )
    
    $
    (9,993
    )
 5. Related Party The Company holds an investment in a privately-held entity, Amphora
Discovery Corp. As of December 31, 2003, Amphora was no longer considered a
related party as Calipers ownership interest in Amphora declined to a fraction
of 1%. Caliper no longer employs the equity method of accounting for its
investment in Amphora, and fully recognized all previously deferred revenues on
sales to Amphora as of December 31, 2003. For the quarter ended March 31, 2003,
Caliper had recognized $586,000 in related-party revenue consisting of sales of
Caliper 250 drug discovery system products, LabChip devices, and datapoints to
Amphora. 10




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6. Significant Concentrations In the first quarter of 2004, one customer, Agilent, represented
approximately 10% of total revenues. In the first quarter of 2003, Agilent,
Aclara and Amphora represented 46%, 11%, and 10%, respectively, of total
revenues. One customer represented 13% of Calipers outstanding accounts receivable
balance as of March 31, 2004. As of December 31, 2003, no individual customer
accounted for greater than 10% of outstanding accounts receivable. 7. Restructuring Activities On May 6, 2003, due to the continuing broad economic slowdown and reduced
research and development spending by biopharmaceutical companies, Caliper
conducted a reduction in force that resulted in a further downsizing of its
employee work force by 26 people, or approximately 10%. Caliper believed this
planned action, was necessary to better align Calipers organizational
structure with these depressed market conditions and customer demand. The May
2003 downsizing primarily affected Calipers research and development staff
where it continues to change the focus of its product development and
technology research to align more with the changing needs of its customers.
Caliper incurred a charge of $322,000 in the second quarter of 2003 for
severance payments and related benefits, with all employee separations
completed and payments distributed by the end of June 2003. As a result of the acquisition of Zymark, on August 5, 2003, Caliper
conducted a reduction in force that downsized its workforce by 37 positions, or
7% of the total headcount of Caliper and the newly acquired Zymark. The
reduction was the first of two phases of reductions designed to eliminate
redundancies and increase organizational efficiencies within the newly combined
company and primarily affected manufacturing, sales and administration. Of the
37 positions, 33% occurred in August 2003 with the remainder to take place by
the end of June 2004. Caliper incurred a charge of $774,000 in the third
quarter of 2003 for severance payments and related benefits. Of the amount
included in other accrued liabilities as of March 31, 2004, $101,000 is
related to the August 2003 downsizing. All separations and related payments
are expected to be completed in 2004. In November 2003, Caliper closed one of its three facilities in Mountain
View, California that was used primarily for instrument manufacturing and
research and development activities, and recognized a $7.7 million charge for
costs to be incurred over the remainder of the lease for which there is no
expected ongoing economic benefit. In accordance with Statement of Financial
Accounting Standard No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, Caliper recorded a liability equal to the fair value of
the remaining lease payments as of the cease-use date. Fair value was
determined based upon the discounted present value of remaining lease rentals
(5% discount rate used) for the 28,800 square feet previously occupied, reduced
by the discounted present value of future estimated sublease rentals, starting
from January 2005 through the end of the lease, that could be obtained for the
property even if Caliper does not enter into a sublease. On December 3, 2003, in connection with consolidating the previously
separate operations of Caliper and Zymark, Caliper conducted a second reduction
in force that downsized its workforce by 37 positions, or 8% of total
headcount. This second phase primarily affected research and development staff
as a result of strategy and priority decisions finalized during the fourth
quarter of 2003. Caliper incurred a charge of $2.7 million in the fourth
quarter of 2003 for severance payments and related benefits. Of the amount
included in other accrued liabilities at March 31, 2004, $162,000 is
related to the December 2003 downsizing. All separations and related payments
are expected to be completed in 2004. The following table summarizes the restructuring activity (in thousands): Severance
    
    Facilityand
    
    LeaseRelated
    
    Accrual
    
    TotalBalance, December 31, 2003
    
    $
    2,083
    
    
    $
    7,819
    
    
    $
    9,902Restructuring credits
    
    
    (134
    )
    
    
    
    
    
    
    (134
    )Accretion of facility lease accrual
    
    
    
    
    
    
    52
    
    
    
    52Payments
    
    
    (1,686
    )
    
    
    (533
    )
    
    
    (2,219
    )Balance, March 31, 2004
    
    $
    263
    
    
    $
    7,338
    
    
    $
    7,601
 8. Commitments 11




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The following are contractual commitments as of March 31, 2004 associated
with debt and lease obligations: Other Long-termObligationsObligations Under
    
    included in OtherOperating
    
    Sale-Leaseback
    
    Non-currentLeases
    
    Arrangements
    
    Liabilities(In thousands)12-month period ending December 31:2004
    
    $
    5,410
    
    
    $
    1,282
    
    
    $
    3702005
    
    
    7,002
    
    
    
    163
    
    
    
    3702006
    
    
    6,164
    
    
    
    
    
    
    
    2007
    
    
    6,080
    
    
    
    
    
    
    
    2008
    
    
    4,066
    
    
    
    
    
    
    
    Thereafter
    
    
    482
    
    
    
    
    
    
    
    Total minimum lease and principal payments
    
    $
    29,204
    
    
    
    1,445
    
    
    
    740Amount representing interest
    
    
    
    
    
    $
    (93
    )
    
    
    (25
    )Present value of future payments
    
    
    
    
    
    
    1,352
    
    
    
    715Current portion of sale-leaseback arrangements and other obligations
    
    
    
    
    
    
    (1,192
    )
    
    
    (365
    )Noncurrent portion of obligations
    
    
    
    
    
    $
    160
    
    
    $
    350
 Letters of Credit Caliper has pledged a certificate of deposit of $2.5 million as collateral
on outstanding letters of credit related to Calipers Mountain View, California
facility lease agreements. In addition to the outstanding letters-of-credit
related to the Mountain View operating lease agreements described above,
Caliper issued a $663,000 letter-of-credit to secure certain customer deposits
in Germany. These commitments are classified as security deposits in the
accompanying balance sheet. Other Long-Term Obligation In connection with the acquisition of Labotec by Zymark in August 2002,
Caliper is obligated to make non-interest-bearing deferred purchase price
payments of 900,000 Euros to the former owner. As of March 31, 2004, the U.S.
dollar value of the remaining obligation totaled $716,000 and is due in two
remaining installments on August 13, 2004 and 2005. Inventory Purchases As of March 31, 2004, Caliper had a non-cancelable purchase commitment in
the amount of approximately $252,000 with its foreign supplier for the purchase
of proprietary glass stock used in the manufacture of certain types of its
chips. Royalties During the fourth quarter of 2002, Caliper entered into an amendment and
restatement of Calipers existing license agreements with UT-Battelle, LLC
under which Caliper obtained an exclusive license to the patents covering the
inventions of Dr. J. Michael Ramsey. Royalty obligations to UT-Batelle during
the three months ended March 31, 2004 and 2003, were $18,000 and $89,000,
respectively. Caliper also has an exclusive license from the Trustees of the
University of Pennsylvania to certain patents relating to microfluidic
applications and chip structures. The minimum royalty obligations under these
licenses rise over time, but never exceed $213,000 per year. 9. Adopted Pronouncement In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB 51and
in December 2003, the FASB issued FIN No. 46 (revised December 31, 2003),
Consolidation of Variable Interest Entities(FIN 46-R) to address certain
FIN 46 implementation issues. The primary objectives of FIN 46 and FIN 46-R are
to 12




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##### Table of Contents



provide guidance on the identification of entities for which control is
achieved through means other than through voting rights (variable interest
entities) and how to determine when and which business enterprise (the
primary beneficiary) should consolidate the variable interest entity. This
new model for consolidation applies to an entity in which either: (i) the
equity investors (if any) do not have a controlling financial interest; or (ii)
the equity investment at risk is insufficient to finance that entitys
activities without receiving additional subordinated financial support from
other parties. In addition, FIN 46 and FIN 46-R require that the primary
beneficiary, as well as all other enterprises with a variable interest in a
variable interest entity, make additional disclosures. Certain disclosure
requirements of FIN 46 were effective for financial statements issued after
January 31, 2003. The implementation provisions of FIN 46-R became effective
for Caliper during the quarter ended March 31, 2004. The adoption of the provisions of both Fin 46 and Fin 46-R did not impact
Calipers financial statements. 10. Subsequent Event On April 15, 2004, Caliper purchased from Amphora Discovery Corp. certain
technology rights and know-how related to improving the performance of certain
types of cell-based assays on a microfluidic chip. Caliper paid $200,000 in
cash and issued to Amphora $900,000 in credit to purchase products from Caliper
in exchange for the acquired technology and know-how. Caliper will also pay
royalties to Amphora based on future sales of cell-based assays. Caliper
expects to further develop the acquired technology and adapt it for potential
applications and uses on the Caliper 3000 instrument platform. Given that
additional development work is necessary to produce a commercially saleable
product based on this technology, and the absence of material revenue streams
currently derived from the acquired technology, the entire $1.1 million in
consideration will be recorded as research and development expense during the
second quarter of 2004. 13




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Item 2. Managements Discussion and Analysis of Financial Condition and
Results
of Operations This Managements Discussion and Analysis of Financial Condition and
Results of Operations as of March 31, 2004 and for the three month periods
ended March 31, 2004 and March 31, 2003 should be read in conjunction with our
financial statements included in this Quarterly Report onForm 10-Qand
Managements Discussion and Analysis of Financial Condition and Results of
Operations and our financial statements included in our Annual Report on Form
10-K for the year ended December 31, 2003. The discussion in this report contains forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. Our actual results could differ materially from
those discussed here. Factors that could cause or contribute to these
differences include those discussed under the caption Factors Affecting
Operating Results below as well as those discussed elsewhere. The cautionary
statements made in this report should be read as applying to all related
forward-looking statements wherever they appear in this report. Executive Summary Business Caliper uses its core technologies of liquid handling, automation, and
LabChip microfluidics to create leading edge tools for the life sciences
industry. Within the life sciences industry, Caliper is currently addressing
three major markets: drug discovery and development, genomics and proteomics
and molecular diagnostics. Caliper is well positioned to lead the industry in
these markets by evolving the companys liquid handling, detection, and
integration platforms into technologically advanced LabChip systems that offer
efficiency, versatility, and high quality data. In July 2003, Caliper acquired Zymark Corporation, a pioneer and leader in
the field of laboratory automation, robotics and advanced liquid handling
solutions. Our financial results include the results of the acquired Zymark
business for all periods after July 14, 2003. Zymark, founded in 1981,
manufactured and sold products and services to a multitude of customers in the
pharmaceutical, biotechnology, chemical, agriculture and food industries
worldwide. We substantially completed our integration of the Zymark business by
the end of 2003 and, effective April 2, 2004, we completed a legal merger of
Zymark into Caliper. We no longer actively market our products under the
Zymark trade name, although we will continue to sell products under Zymark
trademarks on a transitional basis. Our strategy is to evolve the companys various product platforms into
technologically advanced liquid handling and LabChip systems that offer
efficiency, versatility, and high quality data to customers for genomics and
proteomics, and drug discovery research applications. In addition, we believe
that our microfluidics technology may be particularly suitable for certain
applications in molecular diagnostics, and we are actively investigating
opportunities in this area. We utilize three distribution channels for our products. In some cases, we
sell instruments and chips directly to end-users. In other instances we sell
products to commercial partners, who in turn sell these products to end-users.
Following the acquisition of Zymark, we also sell our products through a global
network of approximately 30 independent distributors, who in turn sell our
products to end-users. Overview of First Quarter- 2004 Revenue for the first quarter of 2004 was $16.9 million, an increase of
$11.3 million from $5.6 million in the same quarter a year ago. This increase
is principally attributable to sales of the acquired Zymark products and
service revenues associated with the installed base of products of the acquired
Zymark business. As a result of the Zymark acquisition, we have greater
resources dedicated to sales and marketing, including approximately 86
employees as of March 31, 2004 versus 18 employees as of March 31, 2003, and
an expanded global reach through our international subsidiaries and network of
distributors. Our goal is to attain more stable and sustainable revenue growth through
increased sales of our instruments and equipment to a more diversified customer
base and by increasing the percentage of our total revenue that arises from
recurring revenue sources, such as chips, services, annual maintenance
contracts and other consumable products (which we refer to as aftermarket
revenue). Attaining this goal will represent a significant change for Caliper.
Prior to our acquisition of Zymark, our revenues had been derived from a 14




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relatively small number of
customers, which revenues in some cases were expected to
cease or decline substantially as existing contractual commitments were
satisfied. For example, for the quarter ended March 31, 2003 revenue from
Agilent, Aclara Biosciences and Amphora Discovery Corp. in the aggregate
represented approximately 67% of our total revenue, whereas for the quarter
ended March 31, 2004 we had no revenue from either Aclara or Amphora, and
revenue from sales to Agilent only represented approximately 10% of our total
revenue for the quarter. Aftermarket revenue from customers using our liquid
handling, automation and LabChip products, was approximately 40% of our total
revenue during the first quarter of 2004, although this percentage in any given
quarter is not necessarily indicative of the amount of aftermarket revenue that
we will achieve for the entire fiscal year. Our long-term goal is to increase
this percentage to 50% of total revenues by 2008. In addition to our enhanced commercial infrastructure, we are targeting
the development of new and innovative product solutions that combine our
microfluidic technologies and laboratory automation expertise. In the first
quarter of 2004, we announced a multi-year collaboration and supply agreement
to develop and provide automated target sample preparation instruments for
Affymetrix commercialized proprietary microarray system and future GeneChip®
platforms. We expect these new automation systems to substantially reduce array
processing time, reduce variability and labor costs, and enable researchers to
industrialize their genomic research. The two companies are working together to
develop products that leverage Calipers expertise in high-throughput
automation and microfluidics with Affymetrix expertise in microarray
technology and applications. We expect the first products to be launched by
late 2004, which will automate microarray target preparation steps including
hybridization, washing and staining. We are currently in the initial
development phase of this collaboration. Also occurring in the first quarter
was the formation of a drug development consortium between Caliper and three
major pharmaceutical companies to develop upgrades for Calipers broadly
deployed tablet processing workstations. The consortium is another example of
the shared investment model that Caliper uses to ensure the commercial
relevance of products to the customer. We are also seeking to grow our revenue through the commercialization of
new products for drug discovery, drug development, and genomics and proteomics
research. During the first quarter of 2004, we announced several new products,
including: the LabChip 3000 drug discovery system; the LabChip 90 automated
electrophoresis system; the Sciclone inL10 automated liquid handling system;
and the Staccatto iBLOX automated workstation. We have received positive
customer feedback and some initial orders for these new products, but because
these products have only recently been made available to customers, we are
uncertain as to the impact these new products will have on our revenue in
future periods. In addition to our goal of attaining more stable and sustainable revenue
growth, we are continuing to focus on improving our gross margins and
controlling costs in order to be able to achieve operating cash flow break-even
at lower overall revenues. We believe that we are on target to achieve our
objective to end 2004 with at least $40 million in cash, cash equivalents and
marketable securities, and our longer term objective of achieving positive cash
flows from operating activities by the fourth quarter of 2005. Critical Accounting Policies The critical accounting policies used in the preparation of our financial
statements that we believe affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements presented in
this report are described in our Managements Discussion and Analysis of
Financial Condition and Results of Operations and in the Notes to the
Consolidated Financial Statements included in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2003. There have been no material
changes to the critical accounting policies. Results of Operations for the Three Months Ended March 31, 2004 and 2003 Revenue Three Months EndedMarch 31,(In thousands)
    
    2004
    
    2003
    
    $ Chg.
    
    % Chg.Product revenue
    
    $
    12,009
    
    
    $
    2,910
    
    
    $
    9,099
    
    
    
    312.7
    %Service revenue
    
    
    3,061
    
    
    
    
    
    
    
    3,061
    
    
    nmLicense fees and contract revenue
    
    
    1,863
    
    
    
    2,116
    
    
    
    (253
    )
    
    
    (12.0
    )%Related party revenue
    
    
    
    
    
    
    586
    
    
    
    (586
    )
    
    nmTotal Revenues
    
    $
    16,933
    
    
    $
    5,612
    
    
    $
    11,321
    
    
    
    201.7
    %
 The increase in total revenue in 2004 was due principally to the additional
product and service revenues added by the acquired Zymark business, offset in
part by the decrease in license fees and contract revenue, and the decrease in
sales to Amphora, a former related party. During the quarter ended March 31,
2004, we had no datapoint revenue from Amphora in comparison to $450,000 of
minimum datapoint revenue included in related party revenue in the first
quarter of 2003. Amphora is not obligated to make any further datapoint
payments to us until they fully utilize the number of datapoints to which they
are entitled due to a prior $1.8 million required minimum payment to us that
was fully recognized as revenue over the twelve month period ended November 30,
2003. We do not expect to receive any additional datapoint revenues from
Amphora for at least the remainder of 2004. License fees and contract
revenues decreased as a result of the decreases in Aclara license fees in the
amount of $625,000 and Agilent contract revenue in the amount of $737,000,
offset by an increase of $1.1 million consisting primarily of contract revenue
from other collaboration partners. The decrease in contract revenue from
Agilent is the result of there being no current product development activity
with Agilent. However, we anticipate we will receive some level of development
funding from Agilent this year. The increase in contract revenues from our
other collaboration partners is due, in part, to our efforts to develop
applications with new commercial partners. 15




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##### Table of Contents



Costs Three Months EndedMarch 31,(In thousands)
    
    2004
    
    2003
    
    $ Chg.
    
    % Chg.Cost of product revenue
    
    $
    8,621
    
    
    $
    2,220
    
    
    $
    6,401
    
    
    
    288.3
    %Cost of service revenue
    
    
    1,641
    
    
    
    
    
    
    
    1,641
    
    
    nmCost of related party revenue
    
    
    
    
    
    
    78
    
    
    
    (78
    )
    
    
    (100.0
    )%
 The increase in cost of product revenue is due primarily to the increase
in product revenues generated from sales of Zymark products and includes an
approximate $1.0 million increase in the amount of overhead costs reflected in
cost of product revenues in the first quarter of 2004, whereas in the first
quarter of 2003 this approximate $1.0 million of manufacturing overhead was
reflected in research and development expenses. After our acquisition of
Zymark, we undertook an extensive evaluation of our then-ongoing R&D programs and
prioritized our R&D investments on the basis of their commercial attractiveness.
As a result of our new commercial product focus, unabsorbed overhead associated
with chip manufacturing is included in of cost of product revenue whereas prior
to September 2003 we treated these unabsorbed costs as R&D expense. Our gross margin on product revenue increased to 28.2% in the first quarter of
2004 as compared to 23.7% in the first quarter of 2003. This improvement
occurred as a result of the incremental contribution from the additional
product revenue added from the Zymark business. The improvement occurred
despite the reallocation of $1.0 million to manufacturing overhead that was
previously reflected in research and development expenses as described above.
The effect of the reallocation of overhead on gross margin was substantially
offset by $850,000 of revenue as a result of software product upgrades sold to
a customer during the first quarter of 2004 for which there were no associated
product costs. Software sales of this magnitude are infrequent in nature and
are not expected to be a material source of revenues in future periods. On an
overall basis, our total gross margin (total revenues minus total cost of
revenues divided by total revenues) declined, consistent with our expectations,
to 39.3% in the first quarter of 2004 from 59.1% in the first quarter of 2003.
This decrease was the result of the overwhelming decrease in the percentage of
total revenues represented by license fees and contract revenue, with which no
costs are associated. Cost of service revenue in the first quarter of 2004
represents costs incurred in relation to providing billable services and
supporting installed systems under annual maintenance contracts, including
parts replacement and service labor and overhead. Gross margin on service
revenue was 46.4% during the first quarter of 2004. We had no service revenues
in the 2003 period. Expenses Three Months EndedMarch 31,(In thousands)
    
    2004
    
    2003
    
    $ Chg.
    
    % Chg.Research and development
    
    $
    6,466
    
    
    $
    9,411
    
    
    $
    (2,945
    )
    
    
    (31.3
    )%Selling, general and administrative
    
    
    7,699
    
    
    
    4,569
    
    
    
    3,130
    
    
    
    68.5
    %Stock-based compensation
    
    
    1,695
    
    
    
    188
    
    
    
    1,507
    
    
    
    801.6
    %Amortization of intangible assets
    
    
    1,048
    
    
    
    
    
    
    
    1,048
    
    
    nmRestructuring charges
    
    
    (134
    )
    
    
    
    
    
    
    (134
    )
    
    nm
 During the first quarter of 2004, research and development and selling,
general and administrative expenses totalled $14.2 million compared to $14.0
million in the comparable quarter of 2003. We achieved this relatively
constant level of such expense due to the realization of operating efficiencies
following our combination with Zymark and our subsequent integration and
restructuring efforts in 2003, which included the elimination of approximately
100 positions, including a number of senior management positions, closure of
one of our Mountain View, California facilities, strategic prioritization of
our R&D investments on the basis of their commercially attractiveness,
favorable resolution of our lawsuit against Molecular Devices Corp., and
continued attention on cost containment. Research and Development Expenses.The decrease in research and
development expenses is primarily due to our evaluation and prioritization of
R&D programs which led to a lower level of R&D activities and associated
employee downsizing actions in 2003 and, as discussed above, the reduced amount
of overhead allocated to R&D as a result of our increased commercial emphasis
since we 16




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acquired Zymark. These decreases to research and development more than
offset the incremental expenses associated with continuing R&D programs assumed
in our acquisition of Zymark. As discussed in Note 10 to the
consolidated financial statements in Item I of this report, we expect to incur an approximate $1.1 million charge to research
and development in the second quarter of 2004 related to our purchase of
certain technology under development which we acquired in April 2004. Selling, General and Administrative Expenses.Our selling, general and
administrative expenses increased primarily due to the additional costs of
Zymark, offset in part by cost synergies realized through our integration
efforts. Stock-based Compensation.The increase in stock based compensation is
primarily due to the option accelerations and other stock-based expenses
incurred in connection with employment and separation agreements with former
executives and other senior employees whose employment was terminated during
the first quarter, and amortization of restricted stock awards granted to
retain certain key executives and employees of Zymark. Assuming no changes to
current outstanding stock awards or changes in personnel, we estimate
stock-based compensation to be approximately $500,000 over the remainder of
2004, including approximately $300,000 during the second fiscal quarter. Amortization of Intangible Assets.Amortization of intangible assets consists
solely of amortization of the intangible assets acquired in the Zymark
acquisition, as more fully described in Note 2 to the consolidated financial
statements in Item 1 of this report. Scheduled amortization is $3.6 million
for the next five years, with the remaining $1.0 million in the sixth year. Interest Income, Net Three MonthsEndedMarch 31,(In thousands)
    
    2004
    
    2003
    
    $ Chg.
    
    % Chg.Interest income, net
    
    $
    199
    
    
    $
    921
    
    
    $
    (722
    )
    
    
    (78.4
    )%
 Interest income, net decreased due to lower cash, cash equivalents and
marketable securities balances over the first quarter of 2004 as compared to
the same quarter in 2003 and, to a lesser extent, the decline in interest rate
yields in the first quarter of 2004 relative to the same period one year ago. Liquidity and Capital Resources Our cash, cash equivalents and marketable securities were $56.0 million at
March 31, 2004 compared to $66.7 million as of December 31, 2003. We have financed our operations from inception primarily through equity
sales, product sales and services, contract and milestone payments and $32.5
million received from the comprehensive settlement agreement with Aclara, and
equipment financing under sale lease-back arrangements. The inclusion of
Zymarks results of operations after July 14, 2003 had a significant impact on
the business and the comparability of cash flows on a period-over-period basis. Cash Flows Three Months EndedMarch 31,Increase(In thousands)
    
    2004
    
    2003
    
    (Decrease)Cash provided by (used in)Operating Activities
    
    $
    (10,607
    )
    
    $
    (9,524
    )
    
    $
    (1,083
    )Investing Activities
    
    
    6,298
    
    
    
    867
    
    
    
    5,431Financing Activities
    
    
    1,001
    
    
    
    (655
    )
    
    
    1,656
 Operating Activities.During the first quarter of 2004, we paid out $1.7
million in severance payments, which is included in the overall net change in
other accrued liabilities for the quarter, as compared to zero in first quarter
of 2003. Accounts receivable used cash of $2.9 million during the first
quarter of 2004, as compared to cash used of $722,000 during the first quarter
of 2003. The increased use of cash was due to slower collections, and was
primarily attributable to delayed payments from three specific large customers,
all of which were fully collected in April 2004. Inventories used cash of
$158,000 during the first quarter of 2004, as compared to cash generated of
$1.2 million during the first quarter of 2003. The increase in use of cash for
inventories during the first quarter of 2004 is primarily related to an
increase in demonstration inventories and the initial build up of inventories
related to the LabChip 3000 system. In 2003, our inventory balances were
generally more reactive to specific product sales due to our overall lower
level of product sales prior to acquiring Zymark. Deferred revenue generated
$977,000 of cash during the first quarter of 2004, as compared to cash used of
$457,000 during the first quarter of 2003. The increase in cash generated from
deferred revenue during the first quarter of 2004 was due to an increase in
advance customer payments and annual maintenance contracts on our products and
an increase in the amount of revenue deferred revenue on product shipments not
yet recognized as revenue in accordance with our revenue recognition policy;
this increase compared to a decrease in deferred revenue in the first quarter
of 2003 caused by the recognition of revenues for which cash had been received
in prior periods. The remainder of cash used in operations was $6.8 million
related to our operations and all other minor non-cash changes in working
capital during the first quarter of 2004, as compared to $9.6 million of cash
used for operations and all other non-cash changes in working capital in the
first quarter of 2003. We expect to utilize less cash to fund our operations
each quarter throughout the remainder of 2004. 17




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Investing Activities.In the first quarter of 2004, we generated $7.4 million
in cash from net sales and maturities of marketable securities and used $1.1
million of cash for property and equipment purchases, including $760,000
invested in the purchase and ongoing implementation of our new ERP system
during the first quarter of 2004. We expect to invest a total of between $3 -
$4 million on property and equipment during 2004 including the investment in
the ERP system. Financing Activities. In the first quarter of 2004, we generated $1.0 million
in cash from financing activities, reflecting $1.5 million from the sale of our
common stock pursuant to exercises of stock options, offset in part by $500,000
of payments under sales-leaseback arrangements. Our commitments under leases and other obligations as of March 31, 2004 were
not materially different from that as of December 31, 2003. As of December 31,
2003, we had commitments under leases and other obligations totaling $34.7
million, payable in varying amounts over five years, as more fully described in
Item 7 of our Annual Report on Form 10-K. Our capital requirements depend on numerous factors including market
acceptance of our products, the resources we devote to developing and
supporting our products, acquisitions and other factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to expand our support and product development activities, and for other general
corporate activities. Based on our long-term strategic plan updated for the
acquisition of Zymark, we believe that our current cash balances, together with
the revenue to be derived from our commercial partners and from commercial
sales of our microfluidic and lab automation products and services will be
sufficient to fund our operations at least through the year 2005. Our future
capital requirements will depend on many factors, including, among others:  
    
    growing market acceptance of our microfluidic and lab automation
products;
    
    continued scientific progress in our microfluidic, lab automation and
robotic research and product development programs;
    
    the magnitude and scope of our research and product development programs;
    
    our ability to maintain existing, and establish additional, corporate partnerships and licensing arrangements;
    
    the time and costs involved in expanding and maintaining our manufacturing facilities;
    
    the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims;
    
    the potential need to develop, acquire or license new technologies and products; and
    
    other factors not within our control. We have provided financial projections that we expect to attain positive
cash flows from operations by the fourth quarter of 2005, and we believe our
current cash balances are more than adequate to satisfy our cash needs at least
through the end of 2005. Our actual cash needs could vary considerably,
however, depending on opportunities that arise over the course of 2004 and
2005. During or after this period, if cash generated by operations is
insufficient to satisfy our liquidity requirements, we may need to reduce our
research and development efforts, or sell additional equity or debt securities
or obtain additional credit arrangements. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders. Additional financing may not be available on terms acceptable to
us or at all. The inability to obtain additional financing may force delays in
research and product development activities and, ultimately, cause us to cease
operations. Financial Projections.We are providing financial projections for the
second quarter of 2004, and reaffirming our projections for full year 2004 and
our longer-range objectives for generating positive cash flows from operations,
as set forth below. The key financial projections we are providing are as
follows:  
    
    We expect full year revenues for 2004 to be approximately $80
million to $85 million, and second quarter 2004 revenues to be
approximately $18 to $19 million.
    
    We expect full year selling, general and administrative, and
research and development expenses to be approximately $59 to $63
million, inclusive of the $1.1 million research and development charge
discussed in Note 10 to the consolidated financial statements in Item 1
of this report. 18




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
    
    We expect our gross profit, calculated by subtracting projected cost
of product and service revenues from our total projected revenues, to be
approximately 40% of total revenues in 2004, depending significantly on
our overall mix of total revenues. We expect to use cash of between $20
million and $25 million during 2004, including an estimated $3.0 million
to $4.0 million to be used for capital expenditures including a new
Enterprise Resource Management System to replace our current systems
which we deem inadequate to support our expected future growth. We
expect cash, cash equivalents and marketable securities to be in excess
of $40 million as of December 31, 2004.
    
    We expect to attain positive cash flows from operations by the fourth
quarter of 2005. We have incurred operating losses since our inception and expect to incur
losses for the foreseeable future. While we have significantly reduced our
research and development expenses, we will continue to make significant
investments in R&D over the next several years. We believe that our acquisition
of Zymark will have the effect of increasing revenues and decreasing our
overall net loss in the near term. The financial projections that we have
provided above forward-looking statements that are subject to risks and
uncertainties, and are only made as of the date of the filing of this Form
10-Q. These projections are based upon assumptions that we have made and
believe to be reasonable. However, actual results may vary significantly from
these projections due to the risks and uncertainties inherent in our business
as described in the section entitled Factors Affecting Operating Results
below. Factors Affecting Operating Results Risks Related To Our Business Our LabChip products may not achieve market acceptance, which could cause our
revenue to grow slowly or decline. Many of our microfluidic technologies, which we developed prior to our
acquisition of Zymark on July 14, 2003, are still in the early stages of
development, and our drug discovery and automated electrophoresis systems
incorporating these technologies have only recently begun to be used
commercially. If these systems do not gain further market acceptance, we will
be unable to generate significant sales of these products and our revenue may
grow more slowly than expected or decline. The commercial success of our
LabChip products will depend upon capital spending by our potential customers,
and market acceptance of the merits of our drug discovery and automated
electrophoresis systems by pharmaceutical and biotechnology companies, academic
research centers and other companies that rely upon laboratory experimentation.
Market acceptance will depend on many factors, including:  
    
    our ability to demonstrate the advantages and potential economic
value of our LabChip drug discovery systems over alternative
well-established technologies;
    
    our ability to develop novel functionalities for our LabChip products
and instrument systems that enable customers and potential customers to
perform functions that are not possible with traditional lab research
technologies;
    
    capital spending by our customers and potential customers, which has
been sluggish as a result of current economic conditions and other
industry-specific factors; and
    
    our ability to market our drug discovery systems. Because the LabChip products and automated electrophoresis systems have
been in operation for only a limited period of time, their accuracy,
reliability, ease of use and commercial value have not been fully established.
If the first customers do not endorse our initial drug discovery systems
because these systems fail to generate the quantities and quality of data they
expect, are too difficult or costly to use, or are otherwise deficient, market
acceptance of these drug discovery systems would suffer and further sales may
be limited. We cannot assure you that these customers efforts to put our high
throughput systems into use will continue or will be expeditious or effective.
Potential customers for our drug discovery systems may also wait for
indications from our initial drug discovery system customers that our drug
discovery systems work effectively and generate substantial benefits. Further,
non-acceptance by the market of our initial drug discovery systems could
undermine not only those systems but subsequent drug discovery systems as well.
Our microfluidic-based drug discovery systems are now being marketed and sold
principally by the sales and
marketing organization we acquired with our acquisition of Zymark. These
systems and the technologies on which they are based are new to this sales and
marketing organization, which may limit our ability to effectively market and
sell these systems. If we are not successful in developing new and enhanced liquid handling and
other life sciences products, our products may not gain market acceptance and
we may lose market share to our competitors. 19




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The life sciences productivity tools equipment market, the principal
market for the traditional products of Zymark, is very competitive and is
characterized by rapid technological change and frequent new product
introductions. The commercial success of our liquid handling systems and other
products depends upon continued and expanding market acceptance of our systems
and products by pharmaceutical and biotechnology companies and genomics
research organizations, and upon availability to address quickly any
performance problems that our customers encounter. We anticipate that our
competitors will introduce new, enhanced products in this market in the near
future. Our future success will depend on our ability to offer new products and
technologies that researchers believe are an attractive alternative to current
products and technologies, that address the evolving needs of our customers and
that are technologically superior to new products that may be offered by our
competitors. We may experience difficulties or delays in our development
efforts for new products, and we may not ultimately be successful in developing
them. Any significant delay in releasing new products in this market could
adversely affect our reputation, give a competitor a first-to-market advantage
or cause a competitor to achieve greater market share. If we do not successfully introduce newer, lower cost versions of our drug
discovery systems, and expand the range of applications for these systems, we
may experience a decline in revenue or slow revenue growth and may not achieve
or maintain profitability. We intend to continue developing new, lower cost versions of our
microfluidic-based drug discovery systems with enhanced features that address
existing or emerging customer needs, such as novel assay functionalities. If we
are unable to do so, our drug discovery systems may not become more widely used
and we may experience a decline in revenue or slow revenue growth and may not
achieve or maintain profitability. We currently have several assays in
development including assays that measure many important activities of cells
and proteins. We are developing line extensions that are particularly well
suited for the evaluation of kinases, one of the largest focus areas of drug
discovery efforts today. We are creating new tools to make it easier for our
customers to develop their own custom assays in a microfluidic format. We are
also developing kinase profiling and selectivity screening kits. If we are not
able to complete the development of any of these applications and tools, or if
we experience difficulties or delays, we may lose our current customers and may
not be able to obtain new customers. We are subject to the capital spending patterns of the pharmaceutical industry,
which over the past several years have been adversely impacted by general
economic conditions, industry consolidation and increased competition. Many of our instrument products represent relatively large capital
expenditures by our customers. During the past several years, many of our
customers and potential customers, particularly in the pharmaceutical industry,
have reduced their capital spending budgets because of generally adverse
prevailing economic conditions, consolidation in the industry and increased
pressure on the profitability of pharmaceutical companies, due in part to more
competition from generic drugs. If our customers and potential customers do not
increase their capital spending budgets, because of continuing adverse economic
conditions or further consolidation in the industry, we could face weak demand
for our products, in particular our products used for high-throughput
screening. If the demand for our instrument products is weak because of
constrained capital spending by our pharmaceutical industry customers and
potential customers, we may not achieve our targets for revenue and cash flow
from operations. Our acquisition of Zymark and other potential acquisitions may have unexpected
consequences or impose additional costs on us. Our business is highly competitive and our growth is dependent upon market
growth and our ability to enhance our existing products and introduce new
products on a timely basis. One of the ways we may address the need to develop
new products is through acquisitions of complementary businesses and
technologies, such as our acquisition of Zymark. From time to time, we consider
and evaluate potential business combinations both involving our acquisition of
another company and transactions involving the sale of Caliper through, among
other things, a possible merger or consolidation of our business into that of
another entity. Acquisitions involve numerous risks, including the following:  
    
    difficulties in integration of the operations, technologies, and products of the acquired companies;
    
    the risk of diverting managements attention from normal daily operations of the business;
    
    potential cost and disruptions caused by the integration of financial
reporting systems and development of uniform standards, controls,
procedures and policies;
    
    accounting consequences, including amortization of acquired
intangible assets or other required purchase accounting adjustments,
resulting in variability or reductions of our reported earnings;
    
    potential difficulties in completing projects associated with
purchased in-process research and development; 20




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
    
    risks of entering markets in which we have no or limited direct prior
experience and where competitors in these markets have stronger market
positions;
    
    the potential loss of key employees of Caliper or the acquired
company due to the employment uncertainties inherent in the acquisition
process;
    
    the assumption of known and potentially unknown liabilities of the
acquired company;
    
    we may find that the acquired company or assets do not further our
business strategy or that we paid more than what the company or assets
are worth;
    
    our relationship with current and new employees and customers could
be impaired;
    
    the acquisition may result in litigation from terminated employees or
third parties who believe a claim against us would be valuable to
pursue;
    
    our due diligence process may fail to identify significant issues
with product quality, product architecture and legal contingencies,
among other matters; and
    
    insufficient revenues to offset increased expenses associated with acquisitions. Acquisitions may also cause us to:  
    
    issue common stock that would dilute our current stockholders percentage ownership;
    
    record goodwill and non-amortizable intangible assets that will be
subject to impairment testing and potential periodic impairment charges;
    
    incur amortization expenses related to certain intangible assets;
    
    incur reductions in deferred revenue of the acquired company, resulting in lower future revenues; or
    
    incur other large and immediate write-offs. We cannot assure you that our acquisition of Zymark and any future
acquisitions will be successful and will not adversely affect our business. We
must also maintain our ability to manage any growth effectively. Failure to
manage growth effectively and successfully integrate acquisitions we make could
harm our business. We expect to incur future operating losses and may not achieve profitability. We have experienced significant operating losses each year since our
inception and expect to incur substantial additional operating losses for the
years 2004 and 2005, primarily as a result of a current sluggish economic
climate, dampened life sciences research spending by many of our customers and
expected continuing expenses for manufacturing capabilities, research and
product development costs and general and administrative costs. We may never
achieve profitability. As of March 31, 2004, we had an accumulated deficit of
approximately $145.1 million. Our losses have resulted principally from costs
incurred in research and development, product marketing and from general and
administrative costs associated with our operations. These costs have exceeded
our interest income and revenue which, to date, have been generated principally
from product sales, collaborative research and development agreements,
technology access fees, cash and investment balances. Our operating results fluctuate significantly and any failure to meet financial
expectations may disappoint securities analysts or investors and result in a
decline in our stock price. Our quarterly operating results have fluctuated significantly in the past,
and we expect they will continue to fluctuate in the future, even with our
combination with Zymark, as a result of many factors, some of which are outside
of our control. For example, many of our products represent relatively large
capital expenditures for our customers, which leads to variations in the amount
of time it takes for us to sell our products because customers may take several
months or longer to evaluate and obtain the necessary internal approvals for
the purchase of our products. In addition, a significant portion of our
revenues is derived from sales of relatively high-priced products, and these
sales are generally made by purchase orders and not long-term contracts. Delays
in receipt of anticipated orders for higher-priced products could lead to
substantial variability of revenue from quarter to quarter. Furthermore, Zymark
historically received purchase orders and shipped a significant portion of each
quarters product orders near the end of the quarter. If 21




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that pattern
continues, even short delays in the receipt of orders or shipment of products
at the end of a quarter could result in shipment during the next quarter, which
could have a material adverse effect on results of operations for the quarter
in which the shipment did not occur. In addition, Zymarks business was
historically affected by capital spending patterns of its customers with a
greater percentage of purchases, and therefore higher revenues, occurring in
the second half of the year. There can be no assurance that this trend will
continue. For all of these and other reasons, it is possible that in some
future quarter or quarters, our operating results will be below the
expectations of securities analysts or investors. In this event, the market
price of our common stock may fall abruptly and significantly. Because our
revenue and operating results are difficult to predict, we believe that
period-to-period comparisons of our results of operations are not a good
indication of our future performance. If revenue declines in a quarter, whether due to a delay in recognizing
expected revenue or otherwise, our earnings will decline because many of our
expenses are relatively fixed. In particular, research and development and
general and administrative expenses and amortization of deferred stock
compensation and intangible assets are not affected directly by variations in
revenue. We have limited experience in manufacturing our products and may encounter
manufacturing problems or delays, which could result in lost revenue. Although Agilent manufactures the Agilent 2100 Bioanalyzer, we manufacture
the chips used in this instrument and also currently manufacture instruments
and sipper chips for our drug discovery systems. We currently have limited
manufacturing capacity for our LabChip products and automated drug discovery
system products and experience variability in manufacturing yields for chips
and automated drug discovery products. If we fail to deliver chips and
automated drug discovery products in a timely manner, our relationships with
our customers could be seriously harmed, and revenue would decline. We
currently have one manufacturing location for LabChip products in Mountain
View, California, and one manufacturing location for instruments and other
products located in Hopkinton, Massachusetts. The actual number of chips we are
able to sell or use depends in part upon the manufacturing yields for these
chips. We have only recently begun to manufacture significant numbers of sipper
chips and are continuing to develop our manufacturing procedures for these
chips. In order to offer sipper chips with more than four capillaries for drug
discovery applications, we will need to continue to achieve consistently high
yields in this process. We have experienced difficulties in manufacturing both
our chips and instruments. We cannot assure you that manufacturing or quality
problems will not continue or arise as we attempt to scale-up our production of
chips or that we can scale-up manufacturing in a timely manner or at
commercially reasonable costs. If we are unable to consistently manufacture
sipper chips or chips for the Agilent 2100 Bioanalyzer on a timely basis
because of these or other factors, our product sales will decline. We are
currently manufacturing drug discovery instruments in-house and in limited
volumes. If demand for our drug discovery instruments increases significantly,
we will either need to expand our in-house manufacturing capabilities or
outsource to other manufacturers, which could result in a decrease in yields,
and therefore an increase in manufacturing costs and a decrease in net income
from sales. Our ability to scale-up chip manufacturing may be compromised by
uncertainty regarding the volume of chips for the Agilent 2100 Bioanalyzer that
we will need to supply to Agilent in the future. As our exclusive collaboration
with Agilent terminated in May 2003 pursuant to the notice we delivered to
Agilent, Agilent now has the option to manufacture chips itself rather than
continue to receive its supply of chips from Caliper. Accordingly, we face
uncertainty regarding future demand for these chips from our manufacturing
operations. Because a small number of customers and Agilent have accounted for, and may
continue to account for, a substantial portion of our revenue, our revenue
could decline due to the loss of one of these customers or the termination of
our agreement with Agilent. Historically, we have had very few customers and one commercial partner,
Agilent, from which we have derived the majority of our revenue, although our
acquisition of Zymark in July 2003 greatly expanded our customer base. During
the period ended March 31, 2004, Agilent accounted for 10% of total revenues.
If we were to lose any one or more of our significant customers, our revenue
could decrease significantly. Our revenue could decline due to the termination of our agreement with Agilent
because of a number of different factors, including a reduction in our gross
margin share of Agilent 2100 Bioanalyzer and LabChip products sold by Agilent
or reduced sales of such products by Agilent due to competition from us or our
other commercial partners. Our commercial relationship with Agilent is currently in a state of
transition due to our termination of the collaboration agreement with Agilent,
effective in May 2003. We are now operating under the surviving provisions of
that agreement. We will continue to receive revenue from Agilent based on a
formula for gross margin sharing on sales by Agilent of instruments and chips
developed under our collaboration agreement. 22




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Although we anticipate that future sales of the Agilent 2100 Bioanalyzer
system will further expand our revenue base, under the surviving provisions of
our agreement with Agilent, our gross margin share of collaboration products
sold by Agilent will begin to decline at the end of 2004. If sales of these
products do not increase fast enough to offset the decline in our gross margin
share, the amount of revenue we receive from Agilent will decline. In addition, under the surviving terms of our agreement with Agilent, we
granted to Agilent a non-exclusive, royalty-bearing license to certain of our
LabChip technologies existing as of the termination date for Agilent to
develop, make and sell products in the field of the collaboration.
Consequently, there is the possibility that Agilent may manufacture its own
supply of LabChip products, rather than purchasing them from us, or that we may
experience competition from Agilent in the future, which would reduce our
ability to sell products independently or through other commercial partners. Now that our agreement with Agilent is terminated, Agilents sales of
collaboration products could be reduced due to competition from us or our other
commercial partners. In such event, the revenue we would receive from Agilent
could be reduced by more than the revenue we receive from other commercial
partners. Further, Agilent may decide for reasons wholly independent of
competition to reduce its sales efforts and/or pricing for these products. If
Agilent does so, our revenue may decline. Finally, if we do not enter into a new research and development funding
agreement with Agilent, we anticipate that research and development funding
from Agilent for existing collaboration products will continue to decline in
2004, and we could cease to receive development funding from Agilent for new
products. We depend on our key personnel, the loss of whom would impair our ability to
compete. We are highly dependent on the principal members of our management,
especially our Chief Executive Officer, and certain of our scientific staff.
The loss of services of any of these persons could seriously harm our product
development and commercialization efforts. In addition, research, product
development and commercialization will require additional skilled personnel in
areas such as chemistry and biology, software engineering and electronic
engineering. Our business is located in Silicon Valley, California, and, with
the acquisition of Zymark, in the Boston metropolitan area, where demand for
personnel with these skills remains high, and may increase further as the
economic outlook in these areas improves. As a result, competition for and
retention of personnel, particularly for employees with technical expertise, is
intense and the turnover rate for these people is high. If we are unable to
hire, train and retain a sufficient number of qualified employees, our ability
to conduct and expand our business could be seriously reduced. The inability to
retain and hire qualified personnel could also hinder any planned expansion of
our business. Our products could infringe on the intellectual property rights of others,
which may cause us to engage in costly litigation and, if we are not
successful, could also cause us to pay substantial damages and prohibit us from
selling our products. Third parties may assert infringement or other intellectual property
claims against us. We may have to pay substantial damages, including treble
damages, for past infringement if it is ultimately determined that our products
infringe a third partys proprietary rights. Further, we may be prohibited from
selling our products before we obtain a license, which, if available at all,
may require us to pay substantial royalties. Even if these claims are without
merit, defending a lawsuit takes significant time, may be expensive and may
divert management attention from other business concerns. We are aware of
third-party patents that may relate to our technology or potential products. We
have also been notified that a third party has attempted to provoke an
interference with one issued U.S. patent that we have exclusively licensed to
determine the priority of inventions. Any public announcements related to
litigation or interference proceedings initiated or threatened against us could
cause our stock price to decline. In 2001, we settled intellectual property
litigation with Aclara concerning one family of Aclara patents. However, Aclara
could assert other patent infringement claims against us in the future in
alternative dispute resolution proceedings established under our settlement
agreement. We may need to initiate lawsuits to protect or enforce our patents, which would
be expensive and, if we lose, may cause us to lose some of our intellectual
property rights, which would reduce our ability to compete in the market. We rely on patents to protect a large part of our intellectual property
and our competitive position, especially in our microfluidics business. In
order to protect or enforce our patent rights, we may initiate patent
litigation against third parties, such as the patent infringement suit against
Molecular Devices we settled in November 2003. These lawsuits could be
expensive, take significant time, and could divert managements attention from
other business concerns. They would put our patents at risk of being
invalidated or interpreted narrowly and our patent applications at risk of not
issuing. We may also provoke these third parties to assert claims against us.
Patent law relating to the scope of claims in the technology fields in which we
operate is still evolving and, consequently, patent positions in our industry
are generally uncertain. We cannot assure you that we will prevail in any of
these suits or that the damages or 23




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other remedies awarded, if any, will be
commercially valuable. During the course of these suits, there may be public
announcements of the results of hearings, motions and other interim proceedings
or developments in the litigation. If securities analysts or investors perceive
any of these results to be negative, it could cause our stock price to decline. The rights we rely upon to protect our intellectual property underlying our
products may not be adequate, which could enable third parties to use our
technology and would reduce our ability to compete in the market. In addition to patents, we rely on a combination of trade secrets,
copyright and trademark laws, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
Nevertheless, these measures may not be adequate to safeguard the technology
underlying our products. If they do not protect our rights, third parties could
use our technology, and our ability to compete in the market would be reduced.
In addition, employees, consultants and others who participate in the
development of our products may breach their agreements with us regarding our
intellectual property, and we may not have adequate remedies for the breach. We
also may not be able to effectively protect our intellectual property rights in
some foreign countries. For a variety of reasons, we may decide not to file for
patent, copyright or trademark protection outside of the United States. We also
realize that our trade secrets may become known through other means not
currently foreseen by us. Notwithstanding our efforts to protect our
intellectual property, our competitors may independently develop similar or
alternative technologies or products that are equal or superior to our
technology and products without infringing on any of our intellectual property
rights or design around our proprietary technologies. We are dependent on a single-source supplier for the glass used in our LabChip
products and if we are unable to buy this glass on a timely basis, we will not
be able to deliver our LabChip products to customers. We currently purchase a key component for our chips from a single-source
supplier located in Germany. Although we keep surplus inventory in our Mountain
View manufacturing facility, if we are unable to replenish this component on a
timely basis, we will not be able to deliver our chips to our customers, which
would harm our business. We obtain some of the components and subassemblies included in our systems from
a single source or a limited group of suppliers, and the partial or complete
loss of one of these suppliers could cause production delays and a substantial
loss of revenue. We rely on outside vendors to manufacture many components and
subassemblies for our products. Certain components, subassemblies and services
necessary for the manufacture of our products are provided by a sole supplier
or limited group of suppliers, some of which are our competitors. We currently
purchase additional components, such as optical, electronic and pneumatic
devices, in configurations specific to our requirements that, together with
certain other components, such as computers, are integrated into our products.
We maintain only a limited number of long-term supply agreements with our
suppliers. Our reliance on a sole or a limited group of suppliers involves several
risks, including the following:  
    
    we may be unable to obtain an adequate supply of required components;
    
    we have reduced control over pricing and the timely delivery of components and subassemblies; and
    
    our suppliers may be unable to develop technologically advanced
products to support our growth and development of new systems. Because the manufacturing of certain of these components and subassemblies
involves complex processes and requires long lead times, we may experience
delays or shortages caused by suppliers. We believe that alternative sources
could be obtained at the same prices and on substantially the same terms and
conditions, if necessary, for most sole and limited source parts. However, if
we were forced to seek alternative sources of supply or to manufacture such
components or subassemblies internally, we might be forced to redesign our
systems, which could prevent us from shipping our systems to customers on a
timely basis. Some of our suppliers have
relatively limited financial and other resources, and, therefore, their
businesses could fail. Any inability to obtain sufficient quantities of
components and subassemblies, or any other circumstance that would restrict our
ability to ship our products, could damage relationships with current and
prospective customers and could harm our business. If a natural disaster strikes our manufacturing facility we would be unable to
manufacture our products for a substantial amount of time and we would
experience lost revenue. 24




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We rely on a single manufacturing location to produce our chips and drug
discovery systems, and a single location to produce Zymarks laboratory
automation and robotics systems, with no alternative facilities. These
facilities and some pieces of manufacturing equipment are difficult to replace
and could require substantial replacement lead-time. Our manufacturing
facilities may be affected by natural disasters such as earthquakes and floods.
Earthquakes are of particular significance since the microfluidic manufacturing
facility is located in Mountain View, California, an earthquake-prone area. In
the event that our existing manufacturing facilities or equipment is affected
by man-made or natural disasters, we would be unable to manufacture products
for sale, meet customer demands or sales projections. If our manufacturing
operations were curtailed or ceased, it would harm our business. Failure to raise additional capital or generate the significant capital
necessary to expand our operations and invest in new products could reduce our
ability to compete and result in lower revenue. We anticipate that our existing capital resources will enable us to
maintain currently planned operations at least through the year 2004. However,
we premise this expectation on our current operating plan, which may change as
a result of many factors. Consequently, we may need additional funding sooner
than anticipated. Our inability to raise needed capital would seriously harm
our business and product development efforts. In addition, we may choose to
raise additional capital due to market conditions or strategic considerations
even if we believe we have sufficient funds for our current or future operating
plans. To the extent that additional capital is raised through the sale of
equity or convertible debt securities, the issuance of these securities could
result in dilution to our stockholders. We currently have no credit facility or committed sources of capital. To
the extent operating and capital resources are insufficient to meet future
requirements, we will have to raise additional funds to continue the
development and commercialization of our technologies. These funds may not be
available on favorable terms, or at all. If adequate funds are not available on
attractive terms, we may be required to curtail operations significantly or to
obtain funds by entering into financing, supply or collaboration agreements on
unattractive terms. Our net operating loss and tax credit carryforwards may expire if we do not
achieve or maintain profitability. As of December 31, 2003, we had federal and state net operating loss
carryforwards of approximately $101.5 million and $26.7 million. We also had
federal and state research and development tax credit carryforwards of
approximately $3.1 million and $3.1 million, respectively. The federal net
operating loss and credit carryforwards will expire at various dates beginning
in the year 2009 through 2023 if not utilized. The state net operating losses
will begin to expire in year 2004, if not utilized. Utilization of the federal and state net operating losses and credits may
be subject to a substantial limitation due to the change in ownership
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization. Because of our lack of earnings history and the uncertainty of realizing
these net operating losses, the deferred tax assets have been fully offset by a
valuation allowance. Risks Related to Owning Our Common Stock Our stock price is extremely volatile, and you could lose a substantial portion
of your investment. Our stock has been trading on the Nasdaq National Market only since
mid-December 1999. We initially offered our common stock to the public at
$16.00 per share. Since then our stock price has been extremely volatile and
has ranged, through May 7, 2004, from a high of approximately $202.00 per share
on March 2, 2000 to a low of $2.71 per share both on January 28, 2003 and
February 6, 2003. Our stock price may drop substantially following an
investment in our common stock. We expect that our stock price will remain
volatile as a result of a number of factors, including:  
    
    announcements by analysts regarding their assessment of Caliper and its prospects;
    
    announcements by our competitors of complementary or competing products and technologies;
    
    announcements of our financial results, particularly if they differ from investors expectations;
    
    our ability to successfully integrate Zymarks and Calipers operations; and 25




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
    
    general market volatility for technology stocks. These factors and fluctuations, as well as general economic, political and
market conditions, may materially adversely affect the market price of our
common stock. We have been sued, and are at risk of future securities class action
litigation. In the Spring and Summer of 2001, class action lawsuits were filed against
certain leading investment banks and over 300 companies that did public
offerings during the prior several years, including lawsuits against Caliper
and certain of its officers and directors. This and other securities
litigation could result in potential liability, cause us to incur litigation
costs and divert managements attention and resources, any of which could harm
our business. In addition, announcements of future lawsuits of this or some
other nature, and announcements of events occurring during the course of the
current and any future lawsuits, could cause our stock price to drop. Provisions of our charter documents and Delaware law may inhibit a takeover,
which could limit the price investors might be willing to pay in the future for
our common stock. Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing an acquisition, merger in which we are not the
surviving company or changes in our management. In addition, because we are
incorporated in Delaware, we are governed by the provisions of Section 203 of
the Delaware General Corporation Law. These provisions may prohibit large
stockholders, in particular those owning 15% or more of the outstanding voting
stock, from consummating a merger or combination including us. These provisions
could limit the price that investors might be willing to pay in the future for
our common stock. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Sensitivity Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio. Fixed rate securities may have their
fair market value adversely impacted due to fluctuations in interest rates,
while floating rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates or we may
suffer losses in principal if forced to sell securities that have declined in
market value due to changes in interest rates. The potential change in fair value for interest rate sensitive instruments
has been assessed on a hypothetical 100 basis point adverse movement across all
maturities. We estimate that such hypothetical adverse 100 basis point movement
would not have materially impacted net income or materially affected the fair
value of interest rate sensitive instruments as of December 31, 2003 and March
31, 2004. Our equipment sale-leaseback financings, amounting to $1.4 million as of
March 31, 2004, are all at fixed rates and, therefore, have minimal exposure to
changes in interest rates. Our primary investment objective is to preserve principal while at the
same time maximizing yields without significantly increasing risk. Our
portfolio includes money markets funds, commercial paper, medium-term notes,
corporate notes, government securities, asset-backed securities, and corporate
bonds. The diversity of our portfolio helps us to achieve our investment
objective. As of March 31, 2004 and December 31, 2003, the average remaining
maturity of our investment portfolio was approximately 14 months and 1 year,
respectively. All of our instruments are held other than for trading purposes. 26




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The following table presents by year of maturity the amounts of our cash
equivalents and investments, and related weighted average interest rates, that
may be subject to interest rate risk as of March 31, 2004 (dollars in
thousands): Fair ValueMarch 31,2004
    
    2005
    
    2006
    
    Total
    
    2004Cash and money market funds:Fixed rate
    
    $
    5,629
    
    
    
    
    
    
    
    
    
    
    $
    5,629
    
    
    $
    5,629Average interest rate
    
    
    0.03
    %
    
    
    
    
    
    
    
    
    
    
    0.03
    %Available for sale marketable securities:Fixed rate
    
    $
    3,084
    
    
    $
    28,512
    
    
    $
    11,334
    
    
    $
    42,930
    
    
    $
    43,217Average interest rate
    
    
    5.61
    %
    
    
    4.11
    %
    
    
    2.65
    %
    
    
    3.82
    %Variable rate
    
    $
    3,253
    
    
    $
    1,853
    
    
    $
    2,001
    
    
    $
    7,107
    
    
    $
    7,116Average interest rate
    
    
    1.41
    %
    
    
    1.32
    %
    
    
    1.12
    
    
    
    1.30
    %Total securities
    
    $
    11,966
    
    
    $
    30,365
    
    
    $
    13,335
    
    
    $
    55,666
    
    
    $
    55,962Average interest rate
    
    
    1.94
    %
    
    
    3.94
    %
    
    
    2.42
    %
    
    
    3.13
    %
 This differs from our position as of December 31, 2003, which the
following table presents (dollars in thousands): Fair ValueDecember 31,2004
    
    2005
    
    2006
    
    Total
    
    2003Cash and money market funds:Fixed rate
    
    $
    8,889
    
    
    
    
    
    
    
    
    
    
    $
    8,889
    
    
    $
    8,889Average interest rate
    
    
    0.07
    %
    
    
    
    
    
    
    
    
    
    
    0.07
    %Available for sale marketable securities:Fixed rate
    
    $
    12,391
    
    
    $
    28,723
    
    
    $
    11,268
    
    
    $
    52,382
    
    
    $
    52,710Average interest rate
    
    
    5.23
    %
    
    
    4.07
    %
    
    
    2.75
    %
    
    
    4.05
    %Variable rate
    
    $
    3,253
    
    
    $
    1,853
    
    
    
    
    
    
    $
    5,106
    
    
    $
    5,118Average interest rate
    
    
    1.45
    %
    
    
    1.36
    %
    
    
    
    
    
    
    1.42
    %Total securities
    
    $
    24,533
    
    
    $
    30,576
    
    
    $
    11,268
    
    
    $
    66,377
    
    
    $
    66,717Average interest rate
    
    
    2.85
    %
    
    
    3.90
    %
    
    
    2.75
    %
    
    
    3.30
    %
 
 Item 4. Controls and Procedures We evaluated our disclosure controls and procedures and our internal
controls and procedures for financial reporting as of March 31, 2004. This
evaluation was done under the supervision and with the participation of
management, including our chief executive officer and our principal financial
officer. Evaluation of disclosure controls and procedures. Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934, such as this Quarterly Report on Form
10-Q, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions (SEC) rules and forms.
Disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the
chief executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure. Subject to the limitations set forth below, based on their evaluation, as
of the end of this reporting period, the chief executive officer and the
principal financial officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms. Changes in internal controls. Internal controls over financial reporting are procedures which are
designed with the objective of providing reasonable assurance that: (1) our
transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded
and reported, all to permit the preparation of our financial statements in
conformity with accounting principles generally accepted in the United States.
Among other matters, we evaluated our internal controls over financial
reporting to determine whether there were any significant deficiencies or
material weaknesses, and sought to determine whether Caliper has
identified any acts of fraud involving personnel who have a significant
role in Calipers internal controls. In the professional auditing literature,
significant deficiencies may be interpreted as being comparable as
reportable conditions; these are control issues that could have a significant
adverse effect on the ability to record, process, summarize and report
financial data in the financial statements. A material weakness is defined in
the auditing literature as a particularly serious reportable condition where
the internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and would not be detected
within a timely period by employees in the normal course of performing their
assigned functions. 27




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There were no changes in our internal controls over financial reporting
during the quarter ended March 31, 2004 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934,
as added by Section 202 of the Sarbanes-Oxley Act of 2003, we are responsible
for listing the non-audit services approved by our Audit Committee to be
performed by Ernst & Young LLP, our independent auditor. Non-audit services are
defined as services other than those provided in connection with an audit or a
review of our financial statements. Limitations on the Effectiveness of Controls. Our management, including our chief executive and principal financial
officer, does not expect that our disclosure controls or our internal controls
will prevent all error and all fraud. A control system can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within Caliper have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected. 
 Part II  Other Information 
 Item 1. Legal Proceedings None. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. 
 Item 5. Other Information Calipers Audit Committee pre-approves all audit and permissible non-audit
services provided by its independent auditors. For 2004, the Audit Committee
has pre-approved $115,000 for tax compliance and consulting services. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit
Number
    
    Description of document2.3
    
    Amendment No. 2 to Stock Purchase Agreement.3.1
    
    Amended and Restated Certificate of Incorporation of Caliper.3.2(1)
    
    Restated Bylaws of Caliper.
 28




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##### Table of Contents



Exhibit
Number
    
    Description of document31.1
    
    Certification of Chief Executive Officer Required Under Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.31.2
    
    Certification of Principal Financial Officer Required Under Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.32.1*
    
    Certification of Chief Executive Officer Required Under Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of
1934, as amended, and 18 U.S.C. Section 1350.32.2*
    
    Certification of Principal Financial Officer Required Under Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of
1934, as amended, and 18 U.S.C. Section 1350.
  (1)
    
    Previously filed as Exhibit 3.3 to Calipers Quarterly Report on Form 10-Q for the
Quarter ended June 30, 2003, filed August 14, 2003, and incorporated by
reference herein.  *
    
    The certifications attached as Exhibits 32.1 and 32.2 accompanies this
Quarterly Report on Form 10-Q pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Caliper for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.  (b)
    
    Reports on Form 8-K On February 26, 2004, Caliper Life Sciences, Inc. filed a Current Report
on Form 8-K furnishing under Item 12 its financial results for the quarter
and year ended December 31, 2003. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. CALIPER LIFE SCIENCES, INC.May 10, 2004
    
    By: /s/ E. Kevin HrusovskyE. Kevin HrusovskyChief Executive Officer and PresidentBy: /s/ Peter F. McAreePeter F. McAreeVice President, Finance andPrincipal Financial Officer
 29




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##### Table of Contents



Exhibit
Number
    
    Description of document2.3
    
    Amendment No. 2 to Stock Purchase Agreement.3.1
    
    Amended and Restated Certificate of Incorporation of Caliper.3.2(1)
    
    Restated Bylaws of Caliper.31.1
    
    Certification of Chief Executive Officer Required Under Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.31.2
    
    Certification of Principal Financial Officer Required Under Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.32.1*
    
    Certification of Chief Executive Officer Required Under Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of
1934, as amended, and 18 U.S.C. Section 1350.32.2*
    
    Certification of Principal Financial Officer Required Under Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of
1934, as amended, and 18 U.S.C. Section 1350.
  (1)
    
    Previously filed as Exhibit 3.3 to Calipers Quarterly Report on Form 10-Q for the
Quarter ended June 30, 2003, filed August 14, 2003, and incorporated by
reference herein.  *
    
    The certifications attached as Exhibits 32.1 and 32.2 accompanies this
Quarterly Report on Form 10-Q pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Caliper for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.