-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mjemnu7NbhqmBdHG/nNcmQ339En+mUDPNC18PuIXySiJjKIcandj6YS9U36JHRdZ bLeUpf0ZTUImteYrlut9Rw== 0001095811-01-504236.txt : 20010815 0001095811-01-504236.hdr.sgml : 20010815 ACCESSION NUMBER: 0001095811-01-504236 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIPER TECHNOLOGIES CORP CENTRAL INDEX KEY: 0001014672 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 330675808 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28229 FILM NUMBER: 1710784 BUSINESS ADDRESS: STREET 1: 605 FAIRCHILD DR STREET 2: STE 405 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 6506230700 MAIL ADDRESS: STREET 1: 605 FAIRCHILD DRIVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-Q 1 f74921e10-q.txt FORM 10-Q QUARTER ENDED JUNE 30, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2001 [ ] 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 TECHNOLOGIES CORP. (Exact name of registrant as specified in its charter) Delaware 33-0675808 (State of Incorporation) (I.R.S. Employer Identification Number) 605 FAIRCHILD DRIVE MOUNTAIN VIEW, CA 94043-2234 (Address and zip code of principal executive offices) Registrant's telephone number, including area code: (650) 623-0700 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 --- --- COMMON SHARES OUTSTANDING ON JULY 31, 2001: 24,025,102 2 CALIPER TECHNOLOGIES CORP. TABLE OF CONTENTS
PAGE ---- PART I Financial Information Item 1. Financial Statements (unaudited) Condensed Balance Sheets as of June 30, 2001 and December 31, 2000........................................................... 2 Condensed Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000.................................................... 3 Condensed Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000.................................................... 4 Notes to Unaudited Condensed Financial Statements................................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 18 PART II OTHER INFORMATION Item 1. Legal Proceedings................................................................... 19 Item 2. Changes in Securities and Use of Proceeds........................................... 20 Item 3. Defaults upon Senior Securities..................................................... 21 Item 4. Submission of Matters to a Vote of Security Holders................................. 21 Item 5. Other Information................................................................... 21 Item 6. Exhibits and Reports on Form 8-K.................................................... 21 SIGNATURES............................................................................................. 23
1 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CALIPER TECHNOLOGIES CORP. CONDENSED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents .................. $ 5,889 $ 36,294 Marketable securities ...................... 87,967 106,303 Accounts receivable ........................ 1,353 2,991 Inventories ................................ 4,992 2,206 Other receivable ........................... -- 1,033 Prepaid expenses and other current assets .. 1,791 1,237 --------- --------- Total current assets ......................... 101,992 150,064 Marketable securities ........................ 83,914 49,102 Other receivable ............................. 25,955 -- Investment in common stock .................. 6,984 -- Security deposits ............................ 3,000 3,000 Property and equipment, net .................. 10,303 9,101 Notes receivable from officers ............... 475 615 Other assets, net ............................ 136 632 --------- --------- Total assets ................................. $ 232,759 $ 212,514 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................... $ 2,042 $ 2,960 Accrued compensation ....................... 2,098 1,946 Other accrued liabilities .................. 723 1,351 Deferred revenue ........................... 1,662 3,763 Current portion of equipment financing ..... 1,706 1,671 --------- --------- Total current liabilities .................... 8,231 11,691 Noncurrent portion of equipment financing .... 3,680 3,534 Deferred revenue ............................. 28 194 Other noncurrent liabilities ................. 875 638 Commitments and contingencies Stockholders' equity: Common stock ............................... 24 23 Additional paid-in capital ................. 250,409 249,004 Deferred stock compensation ................ (3,333) (4,772) Accumulated deficit ........................ (28,216) (48,426) Accumulated other comprehensive gain ....... 1,061 628 --------- --------- Total stockholders' equity ................... 219,945 196,457 --------- --------- Total liabilities and stockholders' equity ... $ 232,759 $ 212,514 ========= =========
See accompanying notes. 2 4 CALIPER TECHNOLOGIES CORP. CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2001 2000 2001 2000 ----------- ----------- ---------- -- -------- Revenue: Licensing ........................................... $ -- $ -- $ 5,000 $ -- Other revenue ....................................... 5,287 4,158 10,080 8,069 -------- -------- -------- -------- Total revenue ......................................... 5,287 4,158 15,080 8,069 Costs and expenses: Research and development ............................ 10,506 7,406 20,337 14,496 General and administrative .......................... 3,175 2,123 6,365 4,836 Amortization of deferred stock compensation(1) ...... 672 1,197 1,440 2,643 -------- -------- -------- -------- Total costs and expenses .............................. 14,353 10,726 28,142 21,976 -------- -------- -------- -------- Operating loss ........................................ (9,066) (6,568) (13,062) (13,906) Interest income, net .................................. 2,871 1,320 5,771 2,658 Gain on settlement of litigation ...................... -- -- 27,500 -- -------- -------- -------- -------- Net income(loss) before accounting change ............. (6,195) (5,248) 20,209 (11,248) Cumulative effect of a change in accounting principle . -- -- -- (2,294) -------- -------- -------- -------- Net income (loss) ..................................... $ (6,195) $ (5,248) $ 20,209 $(13,542) ======== ======== ======== ======== Net income (loss) per share, basic: Net income (loss) before accounting change ............ $ (0.26) $ (0.25) $ 0.85 $ (0.54) Cumulative effect of a change in accounting principle ........................................... -- -- -- (0.11) -------- -------- -------- -------- Net income (loss) per share ........................... $ (0.26) $ (0.25) $ 0.85 $ (0.65) ======== ======== ======== ======== Shares used in computing net income (loss) per share, basic ............................................... 23,946 20,980 23,891 20,933 Net income (loss) per share, diluted: Net income (loss) before accounting change ............ $ (0.26) $ (0.25) $ 0.79 $ (0.54) Cumulative effect of a change in accounting principle............................................ -- -- -- 0.11 -------- -------- -------- -------- Net income (loss) ..................................... $ (0.26) $ (0.25) $ 0.79 $ (0.65) ======== ======== ======== ======== Shares used in computing net income (loss) per share, diluted ............................................. 23,946 20,980 25,672 20,933 (1) Amortization of deferred stock compensation relates to the following: Research and development .............................. $ 234 $ 421 $ 502 $ 936 General and administrative ............................ 438 776 938 1,707 -------- -------- -------- -------- Total ................................................. $ 672 $ 1,197 $ 1,440 $ 2,643 ======== ======== ======== ========
See accompanying notes. 3 5 CALIPER TECHNOLOGIES CORP. CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------------- 2001 2000 --------- --------- OPERATING ACTIVITIES Net income(loss) .............................................. $ 20,209 $ (13,542) Adjustments to reconcile net income (loss) to net cash used in operating activities: Gain on settlement of litigation and non-cash license revenue (32,500) -- Cumulative effect of a change in accounting principle ....... -- 2,294 Depreciation and amortization ............................... 1,627 941 Amortization of deferred stock compensation ................. 1,440 2,643 Stock options issued to non-employees ....................... (58) 391 Changes in operating assets and liabilities: Accounts receivable and other receivable .................. 2,671 (183) Inventories ............................................... (2,786) (1,512) Prepaid expenses and other current assets ................. (554) (349) Notes receivable from officers ............................ 140 85 Accounts payable and other accrued liabilities ............ (1,546) 270 Accrued compensation ...................................... 152 130 Deferred revenue .......................................... (2,267) (1,266) Other noncurrent liabilities .............................. 237 138 --------- --------- Net cash used in operating activities ....................... (13,235) (10,142) --------- --------- INVESTING ACTIVITIES Purchases of available-for-sale securities .................... (134,682) (51,983) Proceeds from sales of available-for-sale securities .......... 71,464 12,012 Proceeds from maturities of available-for-sale securities ..... 47,176 30,755 Purchase of property and equipment ............................ (2,772) (910) --------- --------- Net cash used in investing activities ......................... (18,814) (10,126) --------- --------- FINANCING ACTIVITIES Proceeds from equipment financing ............................. 1,318 1,073 Payments of obligations under equipment financing ............. (1,137) (805) Proceeds from issuance of common stock ........................ 1,463 720 --------- --------- Net cash provided by financing activities ..................... 1,644 988 --------- --------- Net decrease in cash and cash equivalents ..................... (30,405) (19,280) Cash and cash equivalents at beginning of period .............. 36,294 44,772 --------- --------- Cash and cash equivalents at end of period .................... $ 5,889 $ 25,492 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid ................................................. $ 320 $ 306 ========= ========= SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NONCASH INVESTING ACTIVITIES Other receivable .............................................. 25,955 -- Investment in common stock .................................... 6,984 -- Other assets .................................................. (439) --
See accompanying notes. 4 6 CALIPER TECHNOLOGIES CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES BASIS OF PRESENTATION The accompanying unaudited condensed 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. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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, 2000 filed by Caliper Technologies Corp. REVENUE RECOGNITION Revenue is earned from Caliper's collaboration agreement, Technology Access Program agreements, Automated Microfluidics Systems 90, Applications Developer Program, licensing and royalty agreements and government grants. COLLABORATION AGREEMENT Revenue from development activities under Caliper's collaboration agreement is recorded in the period in which the costs are incurred. Direct costs associated with this contract are reported as research and development expense. Revenue related to the reimbursement of costs for the supply of chips and reagents to our collaboration partner is recognized upon shipment. Caliper's share of gross margin on components of the LabChip(R) system sold by the collaboration partner is recognized as revenue upon shipment by the collaboration partner to the end user. TECHNOLOGY ACCESS PROGRAM AGREEMENTS Caliper has entered into a number of multi-year Technology Access Program agreements that include: (1) access to existing technology; (2) a multi-year subscription for technology developed during the subscription period; (3) development and support services; and (4) access to prototype LabChip(R) systems developed during the subscription period. Caliper allocates the total arrangement fees to each element based on fair value. Fair value is based on renewal rates for subscriptions, prices established by Caliper's management having the relevant authority for development and support services and the price at which a program participant has the ability to purchase unspecified quantities of a specific prototype product. Prior to January 1, 2000, Caliper recognized non-refundable license fees under its Technology Access Programs as revenue upon transfer of the license to third parties and when no further performance obligations existed. Effective January 1, 2000, Caliper changed its method of accounting for non-refundable license fees to recognize such fees ratably over the term of the committed related Technology Access Program agreement. Caliper believes the change in accounting principle is preferable based on guidance provided in SEC Staff Accounting Bulletin No. 101 -- Revenue Recognition in Financial Statements. Caliper further believes that the change is preferable as it is possible that Technology Access Program participants would not pay the non-refundable license fees without Caliper's continuing involvement in the subscription period, in providing support services, and in making prototype products available for purchase during the subscription period. The $2.3 million cumulative effect of the change in accounting principle was reported as a charge in the period ended March 31, 2000. The cumulative effect was initially recorded as deferred revenue and is being recognized as revenue over the remaining contractual terms of the Technology Access Program agreements. During the quarter ended March 31, 2000, the impact of the change in accounting was to increase net loss by ($1.8 million), or ($0.09 per share), comprised of the $2.3 million cumulative effect of the change in accounting principle ($0.11 per share), net of $450,000 of the related deferred revenue which was recognized as revenue during the quarter ($0.02 per share). During the three and six months ended June 30, 2001, we recorded $200,000 ($0.01 per share) and $400,000 ($0.02 per share) of the related deferred revenue as revenue. The remainder of the related deferred revenue will be recognized as revenue approximately as follows: $400,000 over the remainder of 2001 and $194,000 in 2002. 5 7 Subscription fees are recognized ratably over the subscription period. When payment of the subscription fee is contingent upon reaching a milestone, revenue is deferred until the milestone is met. Support and development services revenue is recognized in the periods the costs are incurred. Product revenue is recognized upon transfer of title to the customer. AUTOMATED MICROFLUIDICS SYSTEMS 90 AND APPLICATIONS DEVELOPER PROGRAM Product revenue is recognized upon the transfer of title to customers and is recorded net of discounts, rebates and allowances. Service revenue is recognized ratably over the service term. LICENSING AND ROYALTY Revenue from Caliper's 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. GOVERNMENT GRANTS Caliper's grant from the National Institute of Standards and Technology provides for the reimbursement of qualified expenses for research and development as defined under the terms of the grant agreement. Revenue under grant agreements is recognized when the related research expenses are incurred. DERIVATIVE AND HEDGING ACTIVITIES ACCOUNTING POLICY FOR DERIVATIVE INSTRUMENTS Effective January 1, 2001, Caliper adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. In connection with the adoption of SFAS 133, Caliper recognizes derivative financial instruments in the financial statements at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders' equity as a component of comprehensive income (loss) depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it is designated as a fair value hedge or cash flow hedge. For derivative instruments that are designated and qualify as fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. Hedge effectiveness is assessed on a quarterly basis. As discussed in Note 4, Caliper has entered into a settlement agreement with Aclara Biosciences. The terms of the agreement provide that if Caliper sells any of the 900,000 shares of Aclara's common stock received in the settlement between 18 and 24 months from the effective date of the settlement agreement, and the then fair value of Aclara's stock is less than $36.11 per share, Aclara will pay Caliper in cash a dollar amount equal to the difference between the aggregate fair value of the Aclara stock at the date the shares are disposed and $32.5 million. If the then fair value of the Aclara stock is greater than $36.11 per share, Caliper will receive no additional consideration from Aclara. Caliper is restricted from selling its shares of Aclara for 18 months following the effective date of the settlement agreement. If Caliper sells its shares of Aclara stock at any time after 24 months from the effective date of the settlement agreement, Aclara will have no obligation to provide any additional consideration to Caliper. As discussed in Note 4, Aclara has executed a fully-funded $32.5 million standby letter of credit in favor of Caliper to secure its performance under this potential obligation. In effect, Aclara has guaranteed the aggregate settlement amount of $32.5 million, so long as Caliper sells its Aclara stock within a specified period of time. Caliper has accounted for this arrangement by recording $4.3 million in Aclara stock at fair market value, with a note face value of $28.2 million including other receivable for the fully funded letter of credit which was reduced by the initial fair value ($2.7 million) of an embedded derivative. The embedded derivative has been designated as a fair value hedge of the Aclara stock. The mark-to- 6 8 market change in the fair value of the Aclara stock is recorded in earnings in the other income or expense line on the statement of operations and is offset by the gains or losses in the fair value of the derivative reported in the same other income or expense line. The ineffective portion of the embedded derivative is also recorded in the other income or expense line on the statement of operations. 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 has elected to follow the "disclosure only" alternative prescribed by Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Caliper accounts for stock options issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force 96-18. For the three and six months ended June 30, 2001, compensation expense related to stock options issued to non-employees was $328 and ($58,000), respectively, compared to ($119,000) and $391,000 for the three and six months ended June 30, 2000. NET INCOME (LOSS) PER SHARE Basic earnings per share is calculated based on the weighted-average number of common shares outstanding during the period. Diluted earnings 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 as they have an antidilutive effect due to Caliper's net loss. A reconciliation of shares used in the calculations is as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2001 2000 2001 2000 ------------ ----------- --------- --------- Basic: Weighted-average shares of common stock outstanding ... 23,960 21,069 23,907 21,044 Less: weighted-average shares subject to repurchase ... (14) (89) (16) (111) ------- ------- ------- ------- Weighted-average shares used in basic net income(loss) per share ............................................. 23,946 20,980 23,891 20,933 ======= ======= ======= ======= Diluted: Weighted average shares of common stock outstanding ... 23,960 21,069 23,907 21,044 Plus: weighted average shares of common stock equivalents ........................................... -- -- 1,781 -- Less: weighted average shares subject to repurchase ... (14) (89) (16) (111) ------- ------- ------- ------- Weighted average shares used in diluted net income (loss) per share ...................................... 23,946 20,980 25,672 20,933 ======= ======= ======= =======
7 9 NOTE 2 - INVENTORIES Inventories consist of the following (in thousands):
June 30, December 31, 2001 2000 -------- ------------ Raw material .............................. $4,155 $2,018 Work in process............................ 232 151 Finished goods............................. 605 37 ------ ------ Total ................................... $4,992 $2,206 ====== ======
NOTE 3 -- COMPREHENSIVE INCOME (LOSS) The components of comprehensive income(loss) for the three and six months ended June 30, 2001 and 2000 are as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ----------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net income (loss) .................. $ (6,195) $ (5,248) $ 20,209 $(13,542) Unrealized gain (loss) on securities (464) 8 433 (73) -------- -------- -------- -------- Comprehensive income(loss) ......... $ (6,659) $ (5,240) $ 20,642 $(13,615) ======== ======== ======== ========
NOTE 4 -- LITIGATION On March 22, 1999, Caliper filed a lawsuit in California Superior Court for the County of Santa Clara against Aclara and others alleging that all the defendants misappropriated certain of Caliper's trade secrets relating to Caliper business plans, patents and intellectual property strategy. On September 14, 2000, Caliper reached a settlement agreement with the defendants other than Aclara. On October 27, 2000, the jury returned a verdict in favor of Caliper and against Aclara on Caliper's claims for misappropriation of trade secrets and conversion of property. The jury awarded Caliper $52.6 million for damages to Caliper and unjust enrichment to Aclara, which the court reduced to $35.6 million. On April 23, 1999, Aclara filed a lawsuit in United States District Court for the Northern District of California alleging that Caliper was making, using, selling or offering for sale microfluidic devices in willful disregard of Aclara's patent rights. The Aclara action sought damages for past and future reduced sales or lost profits based upon Caliper's alleged fabrication, use, sale or offer for sale of allegedly infringing products and processes, and sought to enjoin Caliper's continued activities relating to these products. Caliper counterclaimed for a declaratory judgment of noninfringement, invalidity and unenforceability of all claims of the Aclara patent. On January 12, 2000, Caliper filed a lawsuit in United States District Court for the Northern District of California alleging that Aclara was infringing four U.S. patents licensed to Caliper by Lockheed Martin Energy Research Corporation. These patents cover technology for controlling the flow of materials in microfluidic chips, as well as devices, systems and applications that make use of this technology. Caliper subsequently amended this complaint to add a fifth, related patent. Aclara counterclaimed for a declaratory judgment that the patents in this suit were invalid, unenforceable and were not infringed by Aclara. On January 7, 2001, Caliper announced a comprehensive settlement agreement with Aclara on all pending litigation between the two companies. Under the terms of the settlement both companies agreed to dismiss all suits and countersuits in the federal and state court actions and to cross-license selected patents. The settlement provides Caliper with freedom to operate under Aclara's `022 family of patents, which includes the `015 and other patents, for its glass chips and related instruments through a fully paid, royalty-free license. Under the terms of the agreement, Aclara will also pay Caliper $37.5 million over the next three years in a combination of stock, cash, and committed minimum royalties. Caliper has agreed to license to Aclara the "Ramsey" family of patents for use with 8 10 Aclara's polymer chips and related instruments in exchange for license fees and royalties. The two companies have also agreed to an alternative dispute resolution procedure for handling potential future patent disagreements out of court. On March 22, 2001, in connection with the settlement agreement mentioned above, Caliper received 900,000 shares of Aclara's common stock with a then current fair value of $4.3 million. The common stock is restricted from sale for a period of 18 months from the date of the settlement agreement. As a component of the settlement agreement, Aclara has effectively guaranteed the value of the Aclara common stock to be $32.5 million at the time of Caliper's sale of the stock, provided that such sale occurs in the period from 18 months to 24 months from the effective date of the settlement agreement. Aclara entered into a fully-funded $32.5 million standby letter of credit in favor of Caliper to secure its performance under this potential obligation. Accordingly, Caliper has recognized the entire $32.5 million settlement in the quarter ended March 31, 2001. Caliper has recognized $5.0 million of license fee revenue and $27.5 million of litigation settlement in the income statement pursuant to the terms contained in the settlement agreement. Caliper does not have any further obligations under the agreement. Caliper has accounted for this arrangement by recording $4.3 million in Aclara stock at fair market value, with a note face value of $28.2 million including other receivable for the fully funded letter of credit which was reduced by the initial fair value ($2.7 million) of an embedded derivative. The latter two elements in combination represent the guarantee. The receivable will be accreted to its face value of $28.2 million over the life of the receivable using the level-yield method. The embedded derivative will be accounted for as discussed in Note 1. Commencing on June 7, 2001, Caliper and three of its officers and directors (David V. Milligan, Daniel L. Kisner and James L. Knighton) have been named as defendants in three securities class action lawsuits filed in the United States District Court for the Southern District of New York. The first such suit is captioned Colbert Birnet, L.P v. Caliper Technologies Corp., et al.., No. 01-CV-5072. The other two suits are captioned Kovel v. Caliper Technologies Corp., et al., No. 01-CV-5964 and Leach v. Caliper Technologies Corp., et al., 01-CV-6537. Caliper believes that the cases will be consolidated and that a single consolidated complaint will be filed after the court appoints a lead plaintiff. The Kovel and Leach complaints allege claims against Caliper and certain individual officers or directors of Caliper under Sections 11 and 15 of the Securities Act of 1933. The Birnet and Kovel complaints allege claims against Caliper and certain individual officers and directors of Caliper under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 of the Securities Exchange Act. Each of the complaints also names as a defendant one or more of the underwriters of Caliper's December 1999 initial public offering of common stock. Each of the complaints alleges that one or more of these underwriters charged excessive, undisclosed commissions to investors and entered into improper agreements with investors relating to aftermarket transactions. The complaints seek rescission or rescissionary damages on the Section 11 claims and an unspecified amount of money damages on the Rule 10b-5 claims. Based on information currently available to Caliper, Caliper believes that the claims alleged against Caliper and its officers and directors are without merit. Caliper intends to defend these cases vigorously. 9 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2001 and for the three and six month periods ended June 30, 2001 and June 30, 2000 should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2000. Except for historical information, the discussion in this report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in "--Factors Affecting Operating Results" below as well as those discussed elsewhere. OVERVIEW We are a leader in lab-on-a-chip technologies that miniaturize, integrate and automate many laboratory processes. We develop, manufacture and sell our proprietary LabChip(R) systems to pharmaceutical and other companies. We believe our LabChip(R) systems have the potential to assemble the power and reduce the scale of entire laboratories full of equipment and people. From inception in July 1995 through June 2001, our operating activities were primarily devoted to research, development and commercialization of technologies involving the manipulation of very small amounts of fluid, which are referred to as "microfluidic technologies," and first-generation products such as the Agilent 2100 Bioanalyzer, LabChip(R) kits and our high throughput systems, recruiting personnel, business development, raising capital and acquiring assets. In 1999, we recognized revenue from our first product sales when we sold initial versions of our high throughput system for drug screening to three of our Technology Access Program customers, Amgen, Eli Lilly and Roche. In addition, in September 1999, Agilent Technologies, Inc., our commercial partner, introduced our first LabChip(R) system for use by individual researchers. In March 2000, we recognized revenue from our first multi-capillary sipper chip system and Millennium Pharmaceuticals joined our Technology Access Program, becoming our fourth Technology Access Program customer, and also joined our joint applications development program, which was formalized later in the year as our Applications Developer Program. In May 2000, we introduced the DNA 500 LabChip(R) kit for the automated analysis of small DNA fragments to determine their size and concentration. In August 2000, we introduced the Protein 200 LabChip(R) kit for the automated sizing and analysis of protein samples. In September 2000, we introduced the Automated Microfluidics System 90 to perform automated high throughput nucleic acid analysis. In December 2000, GlaxoSmithKline became our second Applications Developer Program customer, with the goal of developing new applications in synthetic chemistry using our LabChip(R) technology. On January 7, 2001, we announced a comprehensive settlement agreement with Aclara Biosciences on all pending litigation between the two companies. As a result, Aclara will pay us $37.5 million over the next three years in a combination of stock, cash, and committed minimum royalties. We shipped our first Automated Microfluidics System 90 and our first microfluidics development workstation, the Caliper 42, in March 2001. In April 2001, we introduced the DNA 1000 LabChip(R) kit for the automated analysis of DNA fragments to determine their size and concentration. Since our inception, we have incurred significant losses and, as of June 30, 2001, we had an accumulated deficit of $28.2 million. Our losses have resulted principally from costs incurred in research and development, manufacturing scale-up, and from general and administrative costs associated with our operations. We expect to continue to incur substantial research and development, manufacturing scale-up, and general and administrative costs. As a result, we will need to generate significantly higher revenue to achieve profitability. Our revenue has been derived principally from contract revenue earned under our collaboration agreement with Agilent and from our Technology Access Program customers. To a lesser extent, we have derived revenue from the sale of products and government grants. In addition, during the quarter ended March 31, 2001, we derived revenue of $5.0 million from our initial licensing of the Ramsey family of patents to Aclara. This licensing revenue will not recur in year 2001. Although we are developing and plan to introduce future products, we cannot provide assurance that we will be successful in these efforts. To date, we have generated a substantial portion of our revenue from a limited number of sources. During the six months ended June 30, 2001, our licensing of the Ramsey family of patents to Aclara accounted for 33% of our revenue, Agilent alone accounted for 32% of our revenue and our Technology Access Program customers collectively accounted for 24% of our revenue. During the six months ended June 30, 2000 10 12 Agilent alone accounted for 40% of our revenue in this period and four Technology Access Program customers collectively accounted for 53% of our revenue in this period. In the second half of 2001, we plan to convert this Technology Access Program to a commercial products business offering customers a range of LabChip(R) Products, Services and Solutions for high throughput screening. Customers will be able to purchase high throughput screening instruments and chips, choose from among a broad range of support services and elect to engage Caliper in custom chip design projects to solve their individual research challenges. This commercial structure is designed to replace the subscription/access fee structure characteristic of the Technology Access Program. We believe this transition to a more flexible commercial program will allow Technology Access Program revenues to be replaced with revenues from the sale of LabChip(R) products and services, and enable our sales volume to grow over time. Under our collaboration agreement, Agilent funds our research and development expenditures related to the collaboration, reimburses us for our costs of supplying chips and reagents to Agilent and pays us a share of the gross margin earned on all components of LabChip(R) systems they sell. We record revenue from development and support activities under our collaboration agreement in the period in which the costs are incurred. We report direct costs associated with this contract as research and development expense. We recognize revenue related to the reimbursement of costs for the supply of chips and reagents to Agilent upon shipment. We recognize as revenue our share of gross margin on components of the LabChip(R) system sold by Agilent upon shipment to the end user. Agilent only began marketing and sales efforts for the Agilent 2100 Bioanalyzer in late 1999. Sales of new and innovative instrumentation such as the Agilent 2100 Bioanalyzer involve a long sales cycle, requiring customer training and demonstration periods. Sales of the Agilent 2100 Bioanalyzer increased during the course of 2000 and the six months of 2001 indicating, we believe, a growing market acceptance of this technology. Under our Technology Access Program agreements, we recognize as revenue non-refundable license fees over the contract period, product sales upon the transfer of title to the customer, and development and support fees in the period in which the costs are incurred. Subscription fees and development and support fees may be received annually or quarterly in advance depending upon the terms of the agreement. We record payments received in advance under all of these agreements as deferred revenue until earned. RESULTS OF OPERATIONS Three and Six Months Ended June 30, 2001 and 2000 Revenue. Revenue was $5.3 million and $15.1 million for the three and six months ended June 30, 2001, respectively, compared to $4.2 million and $8.1 million for the three and six months ended June 30, 2000. The increase of $1.1 million during the three months ended June 30, 2001 compared to the same period in 2000 resulted from increased product sales under our commercial collaboration with Agilent as well as sales of our Automated Microfluidics Systems 90 and Applications Developer Program. Technology Access Program revenue declined 14% for the quarter ended June 30, 2001 compared to the prior year quarter. The increase of $7.0 million during the six months ended June 30, 2001 compared to the same period in 2000 resulted from the $5.0 million licensing fee for the Ramsey family of patents to Aclara, from increased product sales derived primarily from our commercial collaboration with Agilent, and from sales of our Automated Microfluidics Systems 90 and Applications Developer Program. Technology Access Program revenue declined 17% for the six months ended June 30, 2001 compared to the same period in 2000. Research and Development Expenses. Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for chip development, material costs for prototype and test units, legal expenses resulting from intellectual property prosecution and litigation, and other expenses related to the design, development, testing and enhancement of our products. Research and development expenses were $10.5 million and $20.3 million for the three and six months ended June 30, 2001, respectively, compared to $7.4 million and $14.5 million for the three and six months ended June 30, 2000. The increase of $3.1 million during the three months ended June 30, 2001 compared to the same period in 2000 was attributed to continued growth of research and development activities, including $1.9 million related to growth in personnel and services to support our Technology Access Program, partner collaboration and initial product launches and the remainder of $1.2 million for the expansion in our research and development activities. The increase of $5.8 million during the six months ended June 30, 2001 compared to the same period in 2000 resulted from $4.0 million related to growth in personnel and services to support our Technology Access Program, partner collaboration and product launches as a result of a 50% increase in headcount from June 30, 2000 and the remainder of $1.8 million for the expansion in our research and development activities. We expect research and development spending to increase over the next several years as we expand our research and product development efforts. 11 13 General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, recruiting expenses, professional fees, and other corporate expenses including business development and general legal activities. General and administrative expenses were $3.2 million and $6.4 million for the three and six months ended June 30, 2001, respectively, compared to $2.1 million and $4.8 million for the three and six months ended June 30, 2000. The increase of $1.1 million during the three months ended June 30, 2001 compared to the same period in 2000 resulted from $217,000 related to compensation for general and administrative personnel, $632,000 in expanded marketing research efforts, and the remaining balance due to overall expansion in our operations. The increase of $1.6 million during the six months ended June 30, 2001 compared to the same period in 2000 resulted from $696,000 related to compensation for general and administrative personnel as a result of a 15% increase in headcount from June 30, 2000. The remaining $904,000 increase consisted of $632,000 for expanded market research efforts with remainder due to overall expansion in our operations. We expect general and administrative expenses to continue to increase over the next several years to support our growing business activities, the commercialization of our products, and due to the costs associated with operating as a public company. Amortization of Deferred Stock Compensation. Deferred stock compensation represents the difference between the deemed fair value of our common stock for accounting purposes and the exercise price of options at the date of grant. During 1998 and 1999, we recorded deferred stock compensation totaling $13.2 million. This amount is being amortized over the respective vesting periods of the individual stock options using the graded vesting method. We recorded amortization of deferred compensation of $672,000 and $1.4 million, respectively, for the three and six months ended June 30, 2001, compared to $1.2 million and $2.6 million for the three and six months ended June 30, 2000. We expect to record amortization expense for deferred compensation as follows: $1.1 million for the remainder of 2001, $1.4 million during 2002, $670,000 during 2003 and $122,000 during 2004. The amount of deferred compensation expense to be recorded in future periods may decrease if unvested options for which deferred compensation has been recorded are subsequently canceled. Interest Income, Net. Net interest income consists of income from our cash and investments offset by expenses related to our financing obligations. Net interest income was $2.9 million and $5.8 million for the three and six months ended June 30, 2001, respectively, compared to $1.3 million and $2.7 million for the three and six months ended June 30, 2000. The increase primarily resulted from proceeds of $104.9 million raised in August 2000 from the sale of 2,300,000 shares of common stock in a private placement. Gain on Settlement of Litigation. The litigation settlement was $27.5 million for the six months ended June 30, 2001, resulting from the comprehensive settlement agreement with Aclara for the dismissal of all suits and countersuits between the two companies, which occurred in January 2001. LIQUIDITY AND CAPITAL RESOURCES Our cash, cash equivalents and marketable securities were $177.8 million at June 30, 2001 compared to $191.7 million at December 31, 2000. We used cash of $13.3 million for operations for the six-month period ended June 30, 2001 as compared to $10.1 for the comparable period in 2000. Cash used in the six months ended June 30, 2001 consisted primarily of the net income of $20.2 million offset by non-cash charges of $27.5 million related to gain on litigation settlement, $5.0 million non-cash revenue, ($3.0) million from amortization of deferred stock compensation, stock options issued to non-employees and depreciation and amortization expense and $4.0 million from changes in operating assets and liabilities. As of June 30, 2001, we have a committed capital resource of $32.5 million as a result of a litigation settlement. As a component of the settlement agreement, Aclara has effectively guaranteed the value of the Aclara common stock to be $32.5 million at the time of our sale of the stock, provided that the sale occurs in the period from 18 months to 24 months from the effective date of the settlement agreement. Aclara has entered into a fully-funded $32.5 million standby letter of credit in favor of us to secure its performance under this potential obligation. Net cash used in investing activities was $18.8 million for the six months ended June 30, 2001 as compared to $10.1 million for the comparable period in 2000. Net cash used in investing consists primarily of purchases of available-for-sale investments as well as capital expenditures offset by proceeds from sales and maturities of available-for-sale investments. 12 14 Net cash provided by financing activities was $1.6 million for the six months ended June 30, 2001 as compared to $988,000 for the comparable period in 2000. Net proceeds from financing activities consisted principally of $1.3 million from equipment financing and $1.5 million from employee stock option exercises offset in part by repayments of equipment financing arrangements of $1.1 million. Our capital requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing and supporting our products, 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. We believe that our current cash balances, together with the revenue to be derived from our collaboration with Agilent and our Technology Access Program agreements and our licensing initiatives will be sufficient to fund our operations at least through the year 2002. During or after this period, if cash generated by operations is insufficient to satisfy our liquidity requirements, we may need to sell additional equity or debt securities or obtain additional credit arrangements. Additional financing may not be available on terms acceptable to us or at all. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. FACTORS AFFECTING OPERATING RESULTS OUR LABCHIP(R) SYSTEMS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD CAUSE OUR REVENUE TO GROW SLOWLY OR DECLINE. Our technologies are still in the early stages of development, and our LabChip(R) systems incorporating these technologies have only recently been made commercially available. If our LabChip(R) systems do not gain market acceptance, we will be unable to generate sales and our revenue will decline. The commercial success of our LabChip(R) systems will depend upon market acceptance of the merits of our LabChip(R) systems by pharmaceutical and biotechnology companies, academic research centers and other companies that rely upon laboratory experimentation. We have not yet demonstrated these benefits. Market acceptance will depend on many factors, including: o our ability to demonstrate the advantages and potential economic value of our LabChip(R) systems over alternative well-established technologies and products o the extent of Agilent's efforts to market the Agilent 2100 Bioanalyzer o our ability to market our high throughput systems through our Technology Access Program or other commercial programs Because the products comprising our LabChip(R) systems have been in operation for a limited period of time, their accuracy, reliability, ease of use and commercial value have not been fully established. If the Agilent 2100 Bioanalyzer customers or our Technology Access Program customers do not approve of our LabChip(R) 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 LabChip(R) systems would suffer and further sales may be limited. We cannot provide assurance that these customers' efforts to put our LabChip(R) systems into use will continue or will be expeditious or effective. Potential customers for our high throughput systems may also wait for indications from our four initial Technology Access Program customers that our high throughput systems work effectively and generate substantial benefits. Further, non-acceptance by the market of our LabChip(R) systems could undermine not only those systems but subsequent LabChip(R) systems as well. WE EXPECT TO INCUR FUTURE OPERATING LOSSES AND MAY NOT ACHIEVE PROFITABILITY. We have experienced significant operating losses each year since our inception and may incur additional operating losses this year, primarily as a result of expected increases in expenses for manufacturing capabilities, research and product development costs and general and administrative costs. We may not achieve profitability. For example, we experienced net losses of approximately $3.0 million in 1998, $14.4 million in 1999 and $13.3 million in 2000. As of June 30, 2001, we had an accumulated deficit of approximately $28.2 million. Our losses have resulted principally from costs incurred in research and development and from general and administrative costs associated with our operations. These costs have exceeded our litigation settlement and reimbursement, interest income and revenue which, to date, have been generated principally from collaborative research and development agreements, technology access fees, cash and investment balances and, to a lesser extent, product sales and government grants. 13 15 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 fluctuate in the future as a result of many factors, some of which are outside of our control. For example, our revenues have varied dramatically as a result of new customers joining our Technology Access Program and product shipments. 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 are not affected directly by variations in revenue. 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, such as the Aclara litigation that was recently settled and is described under "Part II -- Item 1. Legal Proceedings." 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 third parties have 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. We recently 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. If we are found to be infringing any valid patent claims asserted by Aclara in alternative dispute resolution proceedings, 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. WE MAY NEED TO INITIATE LAWSUITS TO PROTECT OR ENFORCE OUR PATENTS, WHICH WOULD BE EXPENSIVE AND, IF WE LOSE, MAY CAUSE US TO LOSE SOME OF OUR INTELLECTUAL PROPERTY RIGHTS, WHICH WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET. We rely on patents to protect a large part of our intellectual property and our competitive position. In order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as the patent infringement suit against Aclara that was recently settled and is described under "Part II -- Item 1. Legal Proceedings." 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 provide assurance that we will prevail in any of these suits or that the damages or other remedies awarded, if any, will be commercially valuable. During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive any of these results to be negative, it could cause our stock price to decline. 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. 14 16 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. IF WE DO NOT SUCCESSFULLY INTRODUCE NEW PRODUCTS AND EXPAND THE RANGE OF APPLICATIONS FOR OUR LABCHIP(R) SYSTEMS, WE MAY EXPERIENCE A DECLINE IN REVENUE OR SLOW REVENUE GROWTH AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY. We intend to develop LabChip(R) systems with increasingly high throughput capabilities and develop a broad range of applications for our LabChip(R) technology. If we are unable to do so, our LabChip(R) systems may not become widely used and we may experience a decline in revenue or slow revenue growth and may not achieve or maintain profitability. In order for our high throughput systems to achieve the levels of throughput necessary to meet customers' demands, we may need to develop and manufacture sipper chips with more than four capillaries. Our current high throughput systems operate with sipper chips with either one or four capillaries, small glass tubes used to draw compounds into the chip. In order to achieve the levels of throughput that our customers desire, we may need to develop a LabChip(R) system accommodating more than four capillaries, which we may not be able to do. If we cannot cost-effectively deliver chips with more than four capillaries, we may not be able to attract new customers to purchase our high throughput systems, which would seriously harm our future prospects. Further, our existing Technology Access Program customers may decide not to renew their annual access subscriptions, which would seriously reduce our revenue. We must develop new applications for existing LabChip(R) instruments, which we may not be able to do. The Agilent 2100 Bioanalyzer uses LabChip(R) kits that we specifically design for each application. We currently have LabChip(R) kits commercially available for six applications relating to DNA, RNA and protein sizing and quantification. DNA and RNA are commonly used acronyms for chemicals that contain, or transmit, genetic information in living things. We currently are developing LabChip(R) kits for other applications. If we are unable to develop LabChip(R) kits for specific applications required by potential customers, those customers may not purchase the Agilent 2100 Bioanalyzer. We must also continue to develop applications for our high throughput systems. If we are not able to complete the development of these applications, or if we experience difficulties or delays, we may lose our current Technology Access Program customers and may not be able to obtain new customers. WE RELY HEAVILY ON AGILENT TO MANUFACTURE, MARKET AND DISTRIBUTE THE AGILENT 2100 BIOANALYZER. IF AGILENT FAILS TO PERFORM UNDER OUR AGREEMENT OR SUCCESSFULLY COMMERCIALIZE OUR COLLABORATIVE PRODUCTS, OUR REVENUE FROM THE AGILENT 2100 BIOANALYZER MAY NOT BE MATERIAL AND WE MAY LOSE THE DEVELOPMENT FUNDING WE CURRENTLY RECEIVE FROM AGILENT. Agilent manufactures, markets and distributes the Agilent 2100 Bioanalyzer under an agreement we entered into in May 1998. We also rely on Agilent for significant financial and technical contributions in the development of products covered by the agreement. Our ability to develop, manufacture and market these products successfully depends significantly on Agilent's performance under this agreement. Sales of new and innovative instrumentation such as the Agilent 2100 Bioanalyzer involve a long sales cycle, requiring customer training and demonstration periods. Although sales of the Agilent 2100 Bioanalyzer increased in 2000 and the first quarter of 2001, we cannot predict whether this trend will continue at its current pace, if at all. If Agilent experiences manufacturing or distribution difficulties, does not actively market the Agilent 2100 Bioanalyzer, or does not otherwise perform under this agreement, our revenue from the Agilent 2100 Bioanalyzer may not be material. In addition, Agilent may terminate the agreement at their discretion at any time. If Agilent terminates this agreement, we would need to obtain development funding from other sources, and we may be required to find one or more other collaborators for the development and commercialization of our products. Our inability to enter into agreements with commercialization partners or develop our own marketing, sales, and distribution capabilities would increase costs and impede the commercialization of our products. AGILENT MAY COMPETE WITH US IF OUR COLLABORATION TERMINATES AFTER MAY 2003, WHICH COULD REDUCE THE POTENTIAL REVENUE FROM OUR INDEPENDENT PRODUCT SALES. Under the terms of our agreement with Agilent, if they, or we, terminate our agreement after May 2003, we will grant to Agilent a non-exclusive license to our LabChip(R) technologies as then developed for use in the research products field. Consequently, there is 15 17 the possibility that we may experience competition from Agilent after May 2003, which would reduce our ability to sell products independently or through other commercial partners. IF AGILENT DETERMINES THAT WE MAY BE VIOLATING A THIRD-PARTY PATENT, IT MAY TERMINATE SALES OF THE AGILENT 2100 BIOANALYZER, WHICH WILL DECREASE OUR REVENUE. Under our collaboration agreement with Agilent, Agilent may elect at any time to stop developing, manufacturing or distributing any product that it reasonably determines, on the advice of counsel, poses a substantial risk of infringing a third-party patent. For example, if a third-party claims that we are violating their patent, then Agilent may terminate marketing and selling of the Agilent 2100 Bioanalyzer system, which Agilent began marketing in September 1999, which will decrease our future 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 high throughput systems. We currently have limited manufacturing capacity for our LabChip(R) system products and experience variability in manufacturing yields for chips. If we fail to deliver chips and high throughput screening products in a timely manner, our relationships with our customers could be seriously harmed, and revenue would decline. We currently have one manufacturing location in Mountain View, California. 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 high throughput applications, we will need to continue to achieve consistently high yields in this process. We cannot provide assurance that manufacturing or quality problems will not 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 high throughput instruments in-house and in limited volumes. If demand for our high throughput instruments increases, we will either need to expand our in-house manufacturing capabilities or outsource to Agilent or other manufacturers. WE ARE DEPENDENT ON A SOLE-SOURCE SUPPLIER FOR OUR GLASS AND IF WE ARE UNABLE TO BUY THIS COMPONENT ON A TIMELY BASIS, WE WILL NOT BE ABLE TO DELIVER OUR PRODUCTS TO CUSTOMERS. We currently purchase a key component for our chips from a sole-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. OUR BUSINESS OPERATIONS MAY BE ADVERSELY AFFECTED BY THE CALIFORNIA ENERGY CRISIS. Our principal facilities are located in the Silicon Valley in Northern California. California has been experiencing an energy crisis that has resulted in disruptions in power supply and increases in utility costs to consumers and business throughout the State. Should the energy crisis continue, together with many other Silicon Valley companies, we may experience power interruptions and shortages and be subject to significantly higher costs of energy. Although, we have not experienced any material disruption to our business to date, if the energy crisis continues and power interruptions or shortages occur in the future, they may adversely affect our business. Any material increase in energy costs may also adversely affect our financial results. IF A NATURAL DISASTER STRIKES OUR MANUFACTURING FACILITY WE WOULD BE UNABLE TO MANUFACTURE OUR PRODUCTS FOR A SUBSTANTIAL AMOUNT OF TIME AND WE WOULD EXPERIENCE LOST REVENUE. We rely on a single manufacturing location to produce our chips and high throughput systems, and have no alternative facilities. The facility and some pieces of manufacturing equipment are difficult to replace and could require substantial replacement lead-time. Our manufacturing facility may be affected by natural disasters such as earthquakes and floods. Earthquakes are of particular significance since the manufacturing facility is located in Mountain View, California, an earthquake-prone area. In the event our existing manufacturing facility 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. 16 18 BECAUSE A SMALL NUMBER OF CUSTOMERS AND AGILENT HAVE ACCOUNTED FOR, AND ARE LIKELY TO 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 and, if we were to lose any one of these, our revenue would decrease substantially. For the six months ended June 30, 2001, Agilent, our Technology Access Program customers, and our initial licensing of the Ramsey family of patents to Aclara in connection with our litigation settlement with them, accounted for 89% of our total revenue. Agilent and three customers accounted for 90% of total revenue for the year ended December 31, 2000. Agilent and four customers accounted for 88% of total revenue in 1999. We and Agilent introduced the Agilent 2100 Bioanalyzer system in September 1999 and have received only modest revenue from the sale of this product on a commercial scale. Although we anticipate that future sales of the Agilent 2100 Bioanalyzer system will further expand our revenue base, we expect that we will continue to rely on our large customers and on Agilent for the majority of our revenue. WE HAVE REACHED THE FINAL CONTRACT YEAR FOR SOME OF OUR TECHNOLOGY ACCESS PROGRAM AGREEMENTS. The third and final year of our Technology Access Program agreement with Amgen began on January 1, 2001. In addition, the third and final year of our Technology Access Program agreement with Eli Lilly will begin on August 12, 2001. Although we believe that these customers will continue to use LabChip(R) products and services, we may not derive significant revenue from them in the future. 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 and 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, where demand for personnel with these skills is extremely high and is likely to remain high. As a result, competition for and retention of personnel, particularly for employees with technical expertise, is intense and the turnover rate for 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 the planned expansion of our business. POTENTIAL ACQUISITIONS MAY HAVE UNEXPECTED CONSEQUENCES OR IMPOSE ADDITIONAL COSTS ON US. Our business is dependent upon growth in the market for microfluidic products 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. From time to time, we may consider and evaluate potential acquisitions or business combinations, which may include a possible merger or consolidation of our business with another entity. We may engage in discussions relating to these types of transactions in the future. Acquisitions involve numerous risks, including the following: o difficulties in integration of the operations, technologies, and products of the acquired companies o the risk of diverting management's attention from normal daily operations of the business o accounting consequences, including charges for in-process research and development expenses, resulting in variability in our quarterly earnings o potential difficulties in completing projects associated with purchased in-process research and development o risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions o the potential loss of key employees of the acquired company o the assumption of unforeseen liabilities of the acquired company 17 19 We cannot provide assurance that future acquisitions or business combinations in which we are involved, if any, will be successful and will not adversely affect our financial condition or results of operations. Failure to manage growth effectively and successfully integrate acquisitions we make could harm our business and operating results. RISKS RELATED TO OWNING OUR COMMON STOCK OUR STOCK PRICE IS EXTREMELY VOLATILE, AND INVESTORS COULD LOSE A SUBSTANTIAL PORTION OF THEIR 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 July 31, 2001, from a high of approximately $202.00 per share on March 2, 2000 to a low of $12.00 per share on March 22, 2001. 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: o announcements by analysts regarding their assessment of Caliper and its prospects o announcements of our financial results or other corporate developments, particularly if they differ from investors' expectations o general market volatility for technology stocks WE HAVE BEEN SUED, AND ARE AT RISK OF FUTURE SECURITIES CLASS ACTION LITIGATION In the Spring and Summer of 2001, class action lawsuits against certain leading investment banks and over 100 companies that did public offerings during the prior several years were filed, including lawsuits against Caliper and certain of its officers and directors. See "Part II - Item 1. - Legal Proceedings" for a description of these lawsuits. 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 The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. Declines of interest rates over time will reduce our interest income from our investments. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities. 18 20 The table below presents our investment portfolio by expected maturity and related weighted average interest rates at June 30, 2001:
FAIR 2001 2002 2003 2004 TOTAL VALUE ------- ------- ------- ------- -------- -------- Money market fund.......................... $ 5,889 -- -- -- $ 5,889 $ 5,889 Average interest rate...................... 4.41% -- -- -- 4.41% Available for sale marketable securities... $59,368 $59,470 $27,768 $26,917 $173,523 $174,881 Average interest rate...................... 5.30% 6.25% 5.95% 5.38% 5.74% Total securities........................... $65,256 $59,470 $27,768 $26,917 $179,412 $180,770 Average interest rate...................... 5.21% 6.25% 5.95% 5.38% 5.69%
Our equipment financings, amounting to $5.4 million as of June 30, 2001, are all at fixed rates and therefore, have minimal exposure to changes in interest rates. We have operated primarily in the United States and all sales to date have been made in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate fluctuations. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On March 22, 1999, we filed a lawsuit in California Superior Court for the County of Santa Clara (Case No. CV 780743), against Aclara Biosciences Inc. and others alleging that all defendants misappropriated our trade secrets relating to our business plans, patents and intellectual property strategy. The suit sought damages and equitable remedies to prevent Aclara and the other defendants from benefiting from the alleged misappropriation and breach of duties. On September 14, 2000, we reached a settlement agreement with the defendants other than Aclara. On October 27, 2000, the jury returned a verdict in favor of Caliper and against Aclara on Caliper's claims for misappropriation of trade secrets and conversion of property. The jury awarded Caliper $52.6 million for damages to Caliper and unjust enrichment to Aclara, which the court reduced to $35.6 million. On April 23, 1999, Aclara filed a lawsuit in United States District Court for the Northern District of California (Case No. C-99-1968BZ) alleging that we were making, using, selling or offering for sale microfluidic devices that infringed United States Patent Number 5,750,015 in willful disregard of Aclara's patent rights. The Aclara action sought damages for past and future reduced sales or lost profits based upon our alleged fabrication, use, sale or offer for sale of allegedly infringing products and processes, and sought to enjoin our continued activities relating to these products. We counterclaimed for a declaratory judgment of noninfringement, invalidity and unenforceability of all claims of the Aclara patent. On January 12, 2000, we filed a lawsuit in the United States District Court for the Northern District of California against Aclara (Case No. C-00-0145CRB(JCS)) alleging that Aclara was infringing four U.S. patents that have been licensed to us by Lockheed Martin Energy Research Corporation, which operates the Department of Energy's Oak Ridge National Laboratory where the inventions were made. These patents cover technology for controlling the flow of materials in microfluidic chips, as well as devices, systems and applications that make use of this technology. We subsequently amended this complaint to add a fifth, related patent. Aclara counterclaimed for a declaratory judgment that the patents in this suit were invalid, unenforceable and were not infringed by Aclara. On January 7, 2001, we announced that we had reached a comprehensive settlement agreement with Aclara on all pending litigation between the two companies. Under the terms of the settlement both companies agreed to dismiss all suits and countersuits in the federal and state court actions and to cross-license selected patents. The settlement provides us with freedom to operate under Aclara's `022 family of patents, which includes the `015 and other patents, for our glass chips and related instruments through a fully paid, royalty-free license. Under the terms of the agreement, Aclara will also pay us $37.5 million over the next three years in a combination of stock, cash, and committed minimum royalties. We have agreed to license to Aclara the Ramsey family of patents for use with Aclara's polymer chips and related instruments in exchange for license fees and royalties. The two companies have also agreed to an alternative dispute resolution procedure for handling potential future patent disagreements out of court. 19 21 On March 22, 2001, in connection with the settlement agreement mentioned above, we received 900,000 shares of Aclara's common stock with a then current fair value of $4.3 million. The common stock is restricted from sale for a period of 18 months from the date of the settlement agreement. As a component of the settlement agreement, Aclara has effectively guaranteed the value of the Aclara common stock to be $32.5 million at the time of our sale of the stock, provided that such sale occurs in the period from 18 months to 24 months from the effective date of the settlement agreement. Aclara entered into a fully-funded $32.5 million standby letter of credit in favor of us to secure its performance under this potential obligation. Accordingly, we have recognized the entire $32.5 million settlement in the quarter ended March 31, 2001. We have recognized $5.0 million of license fee revenue and $27.5 million of litigation settlement in the income statement pursuant to the terms contained in the settlement agreement. We do not have further obligations under the agreement. We have accounted for this arrangement by recording $4.3 million in Aclara stock at fair market value, with a note face value of $28.2 million including other receivable for the fully funded letter of credit which was reduced by the initial fair value ($2.7 million) of an embedded derivative. The latter two elements in combination represent the guarantee. The receivable will be accreted to its face value of $28.2 million over the life of the receivable using the level-yield method. The embedded derivative will be accounted for as discussed in Note 1. We and three of our officers and directors (David V. Milligan, Daniel L. Kisner and James L. Knighton) have been named as defendants in three securities class action lawsuits filed in the United States District Court for the Southern District of New York. The first such suit is captioned Colbert Birnet, L.P v. Caliper Technologies Corp., et al.., No. 01-CV-5072, filed on June 7, 2001. The other two suits are captioned Kovel v. Caliper Technologies Corp., et al., No. 01-CV-5964 and Leach v. Caliper Technologies Corp., et al., 01-CV-6537, filed on June 29 and July 17, 2001, respectively. We believe that the cases will be consolidated and that a single consolidated complaint will be filed after the court appoints a lead plaintiff. The Kovel and Leach complaints allege claims against us and certain of our individual officers or directors under Sections 11 and 15 of the Securities Act of 1933. The Birnet and Kovel complaints allege claims against us and certain of our individual officers and directors under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 of the Securities Exchange Act. Each of the complaints also names as a defendant one or more of the underwriters of our December 1999 initial public offering of common stock. Each of the complaints alleges that one or more of these underwriters charged excessive, undisclosed commissions to investors and entered into improper agreements with investors relating to aftermarket transactions. The complaints seek rescission or rescissionary damages on the Section 11 claims and an unspecified amount of money damages on the Rule 10b-5 claims. Based on information currently available to us, we believe that the claims alleged against us and our officers and directors are without merit. We intend to defend these cases vigorously. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File No. 333-88827) that was declared effective by the SEC on December 14, 1999 and pursuant to which we sold all 5,175,000 shares of our common stock registered. The aggregate offering price of the 5,175,000 shares registered and sold was $82.8 million. Of this amount, $5.8 million was paid in underwriting discounts and commissions, and an additional $1.1 million of expenses was incurred through December 31, 1999. None of the expenses were paid, directly or indirectly, to directors, officers or persons owning 10 percent or more of our common stock, or to our affiliates. As of June 30, 2001, we had applied the estimated aggregated net proceeds of $75.9 million from our initial public offering as follows: Working capital $ 64.4 million Capital expenditures $ 8.6 million Repayment of indebtedness $ 2.9 million The foregoing amounts represent our best estimate of our use of proceeds for the period indicated. No such payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to our affiliates, other than payments to officers for salaries in the ordinary course of business. 20 22 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS Our Annual Meeting of Stockholders was held on June 26, 2001. Proxies for the meeting were solicited pursuant to Regulation 14A. At the meeting, management's nominee for director was submitted to our stockholders for election, and a proposal to ratify the selection of Ernst & Young LLP as independent auditors of Caliper for its fiscal year ending December 31, 2001 was submitted to our stockholders. Management's nominee for director, David V. Milligan, Ph.D., was elected by the following vote: For: 17,119,001 Withhold: 575,530 Daniel L. Kisner, M.D., Anthony B. Evnin, Ph.D., Regis P. McKenna and Robert T. Nelsen also continued to serve as directors after the annual meeting. Daniel L. Kisner, M.D., and Regis P. McKenna will continue to serve as directors until the Annual Meeting of Stockholders to be held in 2002. Anthony Evnin, Ph.D., and Robert T. Nelsen will continue to serve as directors until the Annual Meeting of Stockholders to be held in 2003. David V. Milligan, Ph.D., will continue to serve as a director until the Annual Meeting of Stockholders to be held in 2004. The proposal to ratify the selection of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2001 was approved by the following vote: For: 17,655,669 Against: 13,153 Abstain: 25,709 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 3.1(1) Amended and Restated Certificate of Incorporation of Caliper. 3.2(2) Bylaws of Caliper. 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2(3) Specimen Stock Certificate.
(1) Previously filed as Exhibit 3.3 to our Registration Statement on Form S-1, Registration No. 333-88827. (2) Previously filed as Exhibit 3.4 to our Registration Statement on Form S-1, Registration No. 333-88827. (3) Previously filed as the like-numbered Exhibit to our Registration Statement on Form S-1, Registration No. 333-88827. 21 23 (b) Reports on Form 8-K We filed a Current Report on Form 8-K on June 8, 2001, which announced that the law firm of Bernstein Liebhard & Lifshitz, LLP had filed a securities class action lawsuit on behalf of all persons who acquired Caliper Technologies Corp. securities between December 15, 1999 and December 6, 2000. 22 24 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 TECHNOLOGIES CORP. August 14, 2001 By: /s/ JAMES L. KNIGHTON ---------------------------------- James L. Knighton Executive Vice President and Chief Financial Officer By: /s/ ANTHONY T. HENDRICKSON ----------------------------------- Anthony T. Hendrickson Corporate Controller and Principal Accounting Officer 23 25 EXHIBIT INDEX 3.1(1) Amended and Restated Certificate of Incorporation of Caliper. 3.2(2) Bylaws of Caliper. 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2(3) Specimen Stock Certificate. (1) Previously filed as Exhibit 3.3 to our Registration Statement on Form S-1, Registration No. 333-88827. (2) Previously filed as Exhibit 3.4 to our Registration Statement on Form S-1, Registration No. 333-88827. (3) Previously filed as the like-numbered Exhibit to our Registration Statement on Form S-1, Registration No. 333-88827. 24 -----END PRIVACY-ENHANCED MESSAGE-----