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 quarterly period ended September 30, 2000 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 Number 333-24001 Packard BioScience Company - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-0676652 - ------------------------------------------ -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 Research Parkway, Meriden, Connecticut 06450 - ------------------------------------------ -------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 203-238-2351 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 [ ] Shares of Common Stock Outstanding at November 13, 2000: 66,729,649 PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 2 Condensed Consolidated Statements of Income (Loss)for the Three and Nine Months ended September 30, 2000 and 1999 3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 6. Exhibits and Reports on Form 8-K 19 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2000 and DECEMBER 31, 1999 (In thousands) ASSETS September 30, 2000 December 31, 1999 - --------------------------------------------------------------- ------------------ ----------------- CURRENT ASSETS: Cash and cash equivalents $ 52,828 $ 4,432 Accounts receivable, net 26,112 34,163 Inventories, net 19,075 18,791 Deferred income taxes 4,160 3,695 Net current assets of discontinued operations (Note 7) 27,756 31,382 Other current assets 3,913 3,558 -------- -------- Total current assets 133,844 96,021 -------- -------- PROPERTY, PLANT AND EQUIPMENT, at cost 27,332 24,804 Less: Accumulated depreciation (12,851) (11,560) -------- -------- 14,481 13,244 -------- -------- OTHER ASSETS: Goodwill, net 20,415 19,855 Deferred financing costs, net 4,538 6,801 Net noncurrent assets of discontinued operations (Note 7) 38,404 36,428 Other 9,390 10,209 -------- -------- 72,747 73,293 -------- -------- TOTAL ASSETS $221,072 $182,558 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) - --------------------------------------------------------------- CURRENT LIABILITIES: Notes payable $ 2,389 $ 2,429 Current portion of long-term obligations 1,302 1,787 Accounts payable and accrued liabilities 17,775 42,579 Deferred income 9,250 10,660 -------- -------- Total current liabilities 30,716 57,455 -------- -------- LONG-TERM OBLIGATIONS, net of current portion 171,397 225,710 -------- -------- DEFERRED INCOME TAXES 4,493 4,471 -------- -------- OTHER NONCURRENT LIABILITIES 2,745 2,812 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) (Note 3): Common stock 164 137 Paid in capital 117,835 1,827 Accumulated deficit (20,579) (12,895) Accumulated other comprehensive income (cumulative translation adjustment) 813 527 -------- -------- 98,233 (10,404) Less: Treasury stock, at cost (86,083) (96,920) Deferred compensation (429) (566) -------- -------- Total stockholders' equity (deficit) 11,721 (107,890) -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $221,072 $182,558 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements. PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (In thousands) Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ------------------------- -------------------------- NET SALES $37,030 $36,871 $115,446 $112,360 COST OF SALES 16,818 18,946 50,770 53,820 ------- ------- -------- -------- GROSS PROFIT 20,212 17,925 64,676 58,540 RESEARCH AND DEVELOPMENT EXPENSES 6,674 5,748 19,950 16,693 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 6) 11,962 9,952 39,328 29,357 ------- ------- -------- -------- INCOME FROM CONTINUING OPERATIONS 1,576 2,225 5,398 12,490 INTEREST EXPENSE, NET (3,410) (5,337) (13,715) (15,692) FOREIGN EXCHANGE TRANSACTION GAINS (LOSSES), NET (72) 136 32 (101) ------- ------- -------- -------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS (1,906) (2,976) (8,285) (3,303) (PROVISION FOR) BENEFIT FROM INCOME TAXES 667 (768) 2,900 (842) ------- ------- -------- -------- LOSS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEMS (1,239) (3,744) (5,385) (4,145) INCOME FROM DISCONTINUED OPERATIONS, NET OF PROVISION FOR INCOME TAXES (Note 7) 1,582 2,970 954 6,655 ------- ------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS 343 (774) (4,431) 2,510 EXTRAORDINARY ITEMS, NET OF INCOME TAXES (Note 8) (615) -- (48) -- ------- ------- -------- -------- NET INCOME (LOSS) $ (272) $ (774) $ (4,479) $ 2,510 ======= ======= ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements. PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (In thousands) For the Nine Months Ended September 30, 2000 1999 ----------------------------------- OPERATING ACTIVITIES OF CONTINUING OPERATIONS: Net income (loss) ($ 4,479) $ 2,510 Adjustments to reconcile net income (loss) to loss from continuing operations: Income from discontinued operations, net 954 6,655 -------- -------- Loss from continuing operations (5,433) (4,145) Adjustments to reconcile loss from continuing operations to net cash provided by (used for) operating activities: Non-cash stock compensation charges (Note 6) 4,724 -- Non-cash deferred financing fees writeoff (Note 8) 2,383 -- Depreciation and amortization of intangibles 5,287 5,045 Amortization of deferred financing costs 1,010 1,159 Other, net (5) (230) Changes in operating assets and liabilities (15,562) (4,920) -------- -------- Net cash used for continuing operations (7,596) (3,091) Net cash provided by (used for) discontinued operations 10,193 (3,749) -------- -------- Net cash provided by (used for) operating activities 2,597 (6,840) -------- -------- INVESTING ACTIVITIES OF CONTINUING OPERATIONS: Acquisitions of businesses, net of cash acquired (6,947) (4,546) Capital expenditures, net (4,555) (4,422) Product lines, patent rights and licenses acquired (794) (290) -------- -------- Net cash used for continuing operations (12,296) (9,258) Net cash used for discontinued operations (3,399) (26,885) -------- -------- Net cash used for investing activities (15,695) (36,143) -------- -------- FINANCING ACTIVITIES: Borrowings under long-term obligations 74,315 52,342 Repayments of long-term obligations (125,856) (9,666) Purchase of treasury stock (124) (120) Proceeds from exercise of stock options 4,969 62 Proceeds from sale of common stock, net of expenses 110,292 42 -------- -------- Net cash provided by financing activities 63,596 42,660 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,047) (1,428) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 48,451 (1,751) CASH AND CASH EQUIVALENTS, beginning of period 7,576 7,929 -------- -------- 56,027 6,178 Cash of discontinued operations (3,199) (2,951) -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 52,828 $ 3,227 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements. PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated financial statements and related notes included herein have been prepared by Packard BioScience Company (the "Company") without audit, except for the December 31, 1999, condensed consolidated balance sheet which was derived from the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the "Company's 1999 Form 10-K"), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures which normally accompany financial statements prepared in accordance with generally accepted accounting principles have been omitted from the accompanying condensed consolidated financial statements, as permitted by the Securities and Exchange Commission's rules and regulations. The Company believes that the accompanying disclosures and notes are adequate to make the financial statements not misleading. Such financial statements reflect all adjustments which are normal and recurring and, in the opinion of management, necessary for a fair presentation of the results of operations and financial position of the Company for the periods reported herein. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1999 Form 10-K. Note 1. Basis of Presentation and Significant Accounting Policies: - -------------------------------------------------------------------- General - The accompanying financial statements have been prepared in accordance with the accounting policies described in Note 1 to the consolidated financial statements included in the Company's 1999 Form 10-K. The Company's practices of recognizing assets, liabilities, revenues, expenses and other transactions which impact the accompanying financial information are consistent with such note. The Company's condensed consolidated financial statements have been restated to reflect the net assets and operating results of the Canberra operating segment as a discontinued operation (see Note 7). The accompanying notes (except for Note 7) relate only to the Company's continuing operations. New Accounting Standards - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which establishes the accounting and reporting standards for derivative instruments and for hedging activities. The Company purchases forward contracts to cover foreign exchange fluctuation risks on intercompany sales to certain of its foreign operations. Such contracts qualify as foreign currency cash flow hedges under SFAS No. 133 and, as such, require that gains and losses on such contracts be presented as a component of comprehensive income. The effective date of SFAS No. 133 (which was deferred through the issuance of SFAS No. 137 and amended through the issuance of SFAS No. 138) is the Company's calendar year commencing January 1, 2001. This statement is not expected to have a material effect on the Company's consolidated operating results or financial position upon adoption. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101, among other things, provides guidance on revenue recognition when customer acceptance and installation provisions exist. The Company is required to adopt SAB No. 101, effective January 1, 2000, by December 31, 2000. The Company has not yet quantified the cumulative effect of adopting SAB No. 101, as of January 1, 2000, which could be material to the Company's consolidated operating results or financial position. Stock Split - On March 20, 2000, the Company's Board of Directors approved a 5-for-1 split of the Company's common stock. All share and per share information included in the accompanying condensed consolidated financial statements and notes hereto have been restated to reflect the effect of the split. Reclassifications - Certain reclassifications have been made to prior period information in order to make it consistent with the current period presentation. Note 2. Inventories: - --------------------- Inventories consisted of the following at September 30, 2000, and December 31, 1999 (in thousands): September 30, December 31, 2000 2000 ------------ ----------- Raw materials and parts $10,717 $12,094 Work in process 796 644 Finished goods 10,201 9,132 ------- ------- 21,714 21,870 Excess and obsolete reserves (2,639) (3,262) ------- ------- $19,075 $18,608 ======= ======= Note 3. Stockholders' Equity (Deficit): - ---------------------------------------- Below is a summary of the changes in selected components of stockholders' equity (deficit) for the nine-month period ended September 30, 2000 (dollars in thousands): Common Paid-In Accumulated Treasury Stock Capital Deficit Stock ------ -------- --------- --------- Balance, December 31, 1999 $ 137 $ 1,827 ($12,895) ($96,920) Net loss -- -- (4,479) -- Sale of stock, net 27 107,781 (3,205) 10,837 Non-cash stock compensation charges -- 8,273 -- -- Restricted stock forfeitures -- (46) -- -- ----- -------- ------- ------- Balance, September 30, 2000 $ 164 $117,835 ($20,579) ($86,083) ===== ======== ======= ======= Sale of stock, net includes proceeds from the exercise of stock options as well as sales and purchases of treasury stock. In addition, the effect of the Company's initial public offering (refer to the following paragraph) is reflected in these amounts. On April 19, 2000, the Company completed the registration for public sale of the Company's common stock (the "Offering"). The Offering raised approximately $110 million, including the over-allotment option, after consideration of expenses of $12 million associated with the Offering. Note 4. Acquisitions: - ---------------------- In March 2000, the Company acquired a 51% equity interest in Carl Consumable Products, LLC ("CCP") for an initial cash payment of $510,000, with an option to acquire the remaining 49% equity interest for (a) a cash payment of $490,000, plus (b) earn-out payments equal to 25% of the operating profit (as defined in the purchase agreement) of CCP in excess of $530,000 which is generated in each calendar year occurring during the four-year period following exercise of the option (unless the option is exercised prior to March 6, 2001, in which case the applicable earn-out percentage will be increased from 25% to 35%). CCP is a new company formed to design and manufacture sophisticated pipettes used in the liquid dispensing process of drug discovery and genomic research. In April 2000, the Company acquired certain net operating assets, primarily intangibles, of Cambridge Imaging Limited ("CIL"), effective March 31, 2000. The Company paid $1.25 million initially with additional contingent payments, up to $4.0 million, that may be made through April 2005, subject to the operations achieving certain post-acquisition performance levels through calendar year 2004. The assets and technology acquired will be used to develop and manufacture biomedical imaging technology and devices. The above acquisitions have been accounted for using the purchase method of accounting and, accordingly, the purchase prices have been allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the dates of acquisition. The excess of the purchase prices, in the aggregate, over the fair values of the net assets acquired has been reflected as goodwill in the accompanying condensed consolidated balance sheets. Net goodwill totals approximately $20.4 million as of September 30, 2000. The goodwill amount includes contingent payments earned through September 30, 2000, and will increase to the extent future contingent payments are earned. The goodwill is being amortized on a straight-line basis over 20 to 40 years from the initial acquisition dates. The pro forma impact of the CCP and CIL acquisitions is immaterial to the Company's historical actual results of operations. Accordingly, no pro forma information is presented. Note 5. Earnings Per Share: - ---------------------------- Basic earnings per share is computed based upon the weighted average shares outstanding during each of the periods presented. Diluted earnings per share is computed based upon the weighted average shares outstanding during each of the periods presented, including the impact of outstanding options, determined under the treasury stock method, to the extent their inclusion is dilutive. Basic weighted average shares outstanding during the three and nine months ended September 30, 2000 and 1999 are as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ------ ------ ------ ------ Basic weighted average shares outstanding 62,118 45,762 55,785 45,754 ====== ====== ====== ====== For all periods presented in the accompanying condensed consolidated statements of income (loss), common stock equivalents were excluded from diluted weighted average shares outstanding as their effect was anti-dilutive in light of the loss from continuing operations. The dilutive effect of outstanding stock options would have been 4,140 and 2,095 during the three-month periods ended September 30, 2000 and 1999, respectively, and 4,405 and 2,116 during the nine-month periods ended September 30, 2000 and 1999, respectively. Basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2000 and 1999, are as follows: Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ------ ------ ------ ------ Loss from continuing operations before extraordinary items ($0.02) ($0.08) ($0.10) ($0.09) Income from discontinued operations, net 0.03 0.06 0.02 0.15 Extraordinary items, net (0.01) -- -- -- ----- ----- ----- ----- Net income (loss) $0.00 ($0.02) ($0.08) $0.06 ===== ===== ===== ===== Note 6. Stock Compensation Charges: - ------------------------------------ In December 1999, the Company granted certain options to employees which, in accordance with financial reporting guidelines, required the Company to recognize compensation expense over the vesting period of such options. On March 20, 2000, the Company's Board of Directors approved the acceleration of the vesting of all outstanding unvested stock options, making them 100% vested, effective March 17, 2000. This resulted in the recognition of a non-cash compensation charge of $4.1 million during the three months ended March 31, 2000, associated with the options granted in December 1999. In March 2000, certain members of the Company's management gifted shares of their own Company common stock to substantially all of the Company's employees who did not own shares or options to purchase shares of the Company's common stock on the date of the gifting. This resulted in a non-cash compensation charge of $0.6 million during the three months ended March 31, 2000. Both of the charges discussed above are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income (loss). Note 7. Discontinued Operations: - --------------------------------- On October 25, 2000, the Company's Board of Directors approved a formal plan to dispose of the Canberra operating segment ("Canberra"). Potential acquirers and bids are currently being evaluated by the Company. The Company expects to complete the sale by the end of the first quarter of 2001. Amounts previously reported for Canberra have been reclassified and presented as discontinued operations in the accompanying condensed consolidated financial statements. Summary information of the discontinued operations is as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ------- ------- ------- ------- Net sales $23,278 $27,146 $67,817 $72,838 Total costs and expenses (20,758) (24,299) (66,227) (64,554) (Provision for) benefit from income taxes (938) 123 (636) (1,629) ------- ------- ------- ------- Income from discontinued operations $ 1,582 $ 2,970 $ 954 $ 6,655 ======= ======= ======= ======= For purposes of presenting operating results of the Company's continuing operations, all corporate interest expense and interest income has been charged or credited to continuing operations. Corporate interest expense consists of all interest associated with the subordinated notes, term loan facility and revolving credit facility. Corporate interest income represents income earned on corporate invested funds. None of this interest expense or income has been allocated to discontinued operations. Discontinued operations includes interest expense on local borrowings related to the applicable foreign subsidiaries. Results of discontinued operations for the nine-month period ended September 30, 2000, include charges associated with accelerated option vesting and gifted shares of Company's common stock (see Note 6) totaling $3.5 million, and results of discontinued operations for the nine-month period ended September 30, 1999, include a $1.0 million charge associated with writing off the step-up in inventory acquired in connection with Canberra's April 1, 1999, acquisition of the net operating assets of Tennelec, Inc. Net assets of the discontinued operations consisted of the following (in thousands): September 30, 2000 December 31, 1999 ------------------ ----------------- Total current assets $46,024 $51,543 Total current liabilities 18,268 20,161 ------- ------- Net current assets $27,756 $31,382 ======= ======= Total noncurrent assets $41,839 $39,703 Total noncurrent liabilities 3,435 3,275 ------- ------- Net noncurrent liabilities $38,404 $36,428 ======= ======= Note 8. Extraordinary Items: - ----------------------------- In April 2000, the Company utilized $68.2 million of the proceeds from the Offering (see Note 3) to pay off its remaining term facility ($37.3 million) and the U.S. dollar denominated balance of its revolving credit facility ($30.9 million). In May 2000, the Company repurchased approximately $22.5 million of its senior subordinated notes in the open market at a discount; and in August 2000, the Company amended and restated its revolving credit agreement. Due to the substantial changes to the facility, the amendment was accounted for as an extinquishment. The senior subordinated notes were repurchased at a discount resulting in a gain of $2.3 million. The Company expensed the remaining unamortized balance of deferred financing fees (totaling $2.4 million) associated with the term loan and original revolving credit agreement, as well as that portion applicable to the senior subordinated notes that were repurchased. The gain, net of the deferred fees write-off, is presented as extraordinary items, net of income taxes, in the accompanying financial statements. Note 9. Amended and Restated Credit Agreement: - ----------------------------------------------- In August 2000, the Company amended and restated its revolving credit facility (the "Amended Agreement"). The Amended Agreement increased the amount available under the facility from $75 million to $100 million. In addition, some of the financial covenants were made less restrictive than those of the previous facility. The Amended Agreement resulted in an extraordinary charge (see Note 8). Note 10. Subsequent Events: - ---------------------------- On October 2, 2000, the Company acquired the net operating assets of GSLI Life Sciences ("GSLI"), a division of GSI Lumonics, Inc. The total amount paid consisted of $40 million in cash and 4.6 million shares of Company common stock valued at $66.2 million. GSLI is a leading provider of imaging equipment for biochip and microarray applications. The GSLI acquisition will be accounted for using the purchase method. The acquisition will result in a charge in October 2000 totaling $12.1 million to write off the value assigned to acquired in-process research and development which had not yet reached technological feasibility. Goodwill of approximately $90.5 million will be amortized over a 20-year period. In October 2000, the Company acquired an 8% equity interest in Agencourt Bioscience Corporation, a biotech company focused on providing nucleic acid purification kits and other assays for the genomics and proteomics marketplaces. The Company paid $1.25 million for this equity interest. Agencourt is controlled by three sons of one of the Packard officers. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and accompanying notes included elsewhere in this Form 10-Q. This report contains statements which, to the extent they are not recitations of historical facts, constitute "forward-looking" statements. Many factors could cause actual results to differ materially from these estimates. These factors include, but are not limited to, the following: - - intense competition in the markets we target; - - our ability to successfully introduce new products and platforms, and expand the range of applications for our current products; - - our ability to effectively protect our intellectual property from infringement; - - potential infringement of intellectual property rights of others; - - our customers are primarily from the pharmaceutical and biotechnology industries and are subject to risks faced by those industries; - - decline in the use of processes and instruments that represent a significant portion of our revenues; - - our ability to maintain and enhance existing collaborative and academic arrangements and to establish additional relationships; - - our ability to pursue and consummate strategic acquisitions; - - our dependence on capital spending policies of our customers; - - economic, political and other risks associated with international sales and operations; - - our ability to complete the sale of our Canberra operation in a timely and orderly fashion; - - our ability to attract and retain key employees; and - - our ability to meet financial expectations of securities analysts and investors. Overview - -------- Packard BioScience Company ("Packard" or the "Company") and it subsidiaries are leading global developers, manufacturers and marketers of instruments and related consumables and services for use in drug discovery and other life sciences research. The Company is a leader in laboratory automation and has developed scalable platforms built on its worldwide leadership in the manufacturing and marketing of bioanalytical instruments for use in the life sciences research industry. Packard's revenues are derived primarily from sales of instruments and consumables with additional sales from service. The Company is moving towards marketing Packard's instruments as parts of integrated platforms, which the Company expects will generate increasing instrument and consumable sales at higher gross margins than our service business. The Company is in the process of disposing of its Canberra operating segment which supplies analytical instruments and services to detect, identify and quantify radioactive materials for the nuclear industry and related markets. Refer to discussion on page 14. Unless otherwise indicated, the amounts below relate to the Company's continuing operations and exclude the effect of discontinued operations. Results of Operations (dollars in millions) - --------------------- Three Months Ended Nine Months Ended September 30, September 30, % Inc. % Inc. 2000 1999 (Dec.) 2000 1999 (Dec.) ------ ------ ------- ------ ------ ------- Total net sales $ 37.0 $ 36.9 0.3% $115.4 $112.4 2.7% Gross profit 20.2 17.9 12.8% 64.7 58.5 10.6% Operating expenses: Research and development 6.7 5.7 17.5% 20.0 16.7 19.8% Selling, general and administrative 11.9 10.0 19.0% 39.3 29.3 34.1% ------ ------ ------ ------ ------ ------ Income from continuing operations 1.6 2.2 (27.3%) 5.4 12.5 (56.8%) Interest expense, net (3.4) (5.3) (35.8%) (13.7) (15.7) (12.7%) Foreign exchange transaction gains (losses), net (0.1) 0.1 N/A 0.0 (0.1) N/A ------ ------ ------ ------ ------ ------ Loss from continuing operations before income taxes and extraordinary items (1.9) (3.0) N/A (8.3) (3.3) N/A (Provision for) benefit from income taxes 0.7 (0.8) N/A 2.9 (0.8) N/A ------ ------ ------ ------ ------ ------ Loss from continuing operations before extraordinary items (1.2) (3.8) (60.5%) (5.4) (4.1) 31.7% Discontinued operations, net 1.5 3.0 (50.0%) 0.9 6.6 (86.4%) Extraordinary items, nets (0.6) -- N/A 0.0 -- N/A ------ ------ ------ ------ ------ ------ Net income (loss) $ (0.3) $ (0.8) N/A $ (4.5) $ 2.5 N/A ====== ====== ====== ====== ====== ====== Initial Public Offering - ----------------------- On April 19, 2000, the Company completed the registration of the Company's common stock for public sale (the "Offering"). The Offering raised approximately $110 million, after consideration of the expenses associated with the Offering and the exercise of the underwriters' over-allotment option. The following management's discussion and analysis of the Company's results of operations and financial condition includes a historical discussion covering the reporting periods included within this Form 10-Q as well as a discussion of the use of the proceeds of the Offering and how this is expected to effect the Company's future operating results and financial condition. Revenues - -------- Consolidated net sales were relatively flat ($37.0 million versus $36.9 million) and increased 2.7% ($115.4 million versus $112.4 million) during the three months and nine months ended September 30, 2000, respectively, as compared to the prior year periods. Major factors causing the fluctuations between the periods were: a) the nine month period of 1999 includes approximately $3.9 million of revenues associated with certain Packard product lines that were either sold or terminated in 1999 and, therefore, did not contribute to revenues in the 2000 period; and b) foreign currency exchange rate fluctuations had an unfavorable effect on 2000 consolidated revenues. Had exchange rates remained the same during the three and nine months ended September 30, 2000, as in the comparable 1999 periods, consolidated net sales would have been $1.4 million and $3.0 million higher, respectively. Excluding the above-mentioned items, consolidated net sales during the three and nine months ended September 30, 2000, would have increased 4.2% and 9.2%, respectively, over the comparable 1999 periods. Packard has experienced strong instrumentation sales growth in some of its major product lines including sample preparation and automation where revenues have increased from $24.4 million during the nine months ended September 30, 1999, to $33.0 million during the nine months ended September 30, 2000, representing a 35.1% increase. This growth has been substantially offset by a decline in revenues related to the Company's radioactive-based or legacy products. A portion of the Offering proceeds is being used to increase Packard's spending associated with research and development, new product development, enhancement of existing products and strategic collaborations and acquisitions. The Company has identified several key areas of focus where it has begun to increase spending in order to accelerate new product development and market introduction. Assuming that Packard is successful in these areas, it is expected that incremental revenues from instruments and consumables will be generated, however, there can be no guarantee that such success and resulting increased revenues will be achieved. Gross Profit - ------------ Consolidated gross profit was $20.2 million and $64.7 million during the three and nine months ended September 30, 2000, respectively, compared to $17.9 million and $58.5 million during the comparable 1999 periods. Excluding the effect of the sold and terminated product lines, the Company's consolidated gross profit increased 12.7% during the 2000 year-to-date period as compared to the 1999 period. As a percentage of revenues, the year-to-date 2000 gross profit was 56.0% versus 52.9% in the 1999 period, excluding the effect of the item mentioned above. The improvement was primarily attributable to increased, high margin sales by Packard Japan KK ("PJKK") and a higher mix of CCS Packard, Inc. ("CCS") product sales. Service margins increased during the current year period also, increasing from 22.1% during the 1999 year-to-date period to 24.6% in the 2000 period. Operating Expenses - ------------------ Research and Development - Consolidated research and development expenses were $6.7 million and $20.0 million during the three and nine months ended September 30, 2000, respectively, as compared to $5.7 million and $16.7 million during the comparable 1999 periods. These represent 17.5% and 19.8% increases over the prior year three and nine month periods, respectively. The majority of research and development spending, as well as the current year increase, was in the areas of new product development and enhancement. The Company is utilizing a portion of the Offering proceeds to increase funding of Packard's research and development programs in order to accelerate the development and market introduction of key products and platforms. The increased spending during the 2000 periods was a reflection of this strategic initiative in the area of research and development. Selling, General and Administrative - Consolidated selling, general and administrative expenses totaled $11.9 million and $39.3 million for the three and nine month periods ended September 30, 2000, respectively. This compares to $10.0 million and $29.3 million for the three and nine months ended September 30, 1999, respectively. The year-to-date 2000 increase over the comparable 1999 period (33.7%) was primarily due to a $4.1 million compensation charge recorded in the first quarter of 2000 associated with certain stock options granted to employees in December 1999, and a $0.6 million compensation charge associated with stock that Company senior management gifted to certain employees in March 2000. Both of these charges represent non-cash, non-recurring charges to the Company. Excluding these non-recurring charges, selling, general and administrative expenses increased 17.7% during the nine months ended September 30, 2000, versus the prior-year period, due primarily to additional corporate expenses incurred as a result of the Offering as well as higher goodwill amortization expense resulting from contingent earnout payments made in the first quarter of 2000. In addition, the increase is a result of additional spending for applications specialists and strengthening of the sales and marketing organization. Continuing operations for all periods presented includes the costs Packard will incur as a result of Canberra no longer absorbing certain corporate overhead costs. Interest Expense, Net - --------------------- Interest expense, net was $3.4 million and $13.7 million during the three and nine months ended September 30, 2000, respectively, compared to $5.3 million and $15.7 million during the comparable 1999 periods. The decreased interest expense, net was attributable to lower average borrowings outstanding during each of the 2000 periods, as compared to the 1999 periods, as a result of the Company's repayment of the term loan facility balance ($37.3 million) and a portion of the revolving credit facility ($30.9 million) in April 2000 and the repurchase of $22.5 million of senior subordinated notes in May 2000. In addition, the Company had a higher average invested cash balance during the 2000 periods, generating a higher level of interest income. The debt repayments and invested cash balances were a direct result of the Offering. The above factors, which resulted in reducing interest expense, net, were partially offset by higher average interest rates (approximately 100 to 150 basis points higher) on the Company's variable rate indebtedness during the 2000 periods. For purposes of presenting operating results of the Company's continuing operations, all corporate interest expense and interest income has been charged or credited to continuing operations. Corporate interest expense consists of all interest associated with the subordinated notes, term loan facility and revolving credit facility. Corporate interest income represents income earned on corporate invested funds. None of this interest expense or income has been allocated to discontinued operations. Foreign Currency Transaction Gains (Losses), Net - ------------------------------------------------ During the nine months ended September 30, 2000, foreign currency transaction losses, net was $0.1 million. Such gains and losses are primarily the result of transactions conducted by the Company's foreign subsidiaries that are denominated in currencies other than the subsidiaries' respective functional currencies. Effective Tax Rates - ------------------- The Company's effective tax rate was 35.0% during the nine months ended September 30, 2000, compared to 25.5% (representing a provision on a pre-tax loss) during the comparable 1999 period. Both periods reflect the effect of nondeductible goodwill. The 1999 effective tax rate reflects the provision of additional valuation reserves on foreign tax credit carryforwards in light of the uncertainty as to their ultimate realizability. Discontinued Operations, Net of Income Taxes - -------------------------------------------- On October 25, 2000, the Company's Board of Directors approved a formal plan to dispose of the Canberra operating segment ("Canberra") by way of a sale. Potential acquirers and bids are currently being evaluated by the Company. The Company expects to complete the sale by the end of the first quarter of 2001. Amounts previously reported for Canberra have been reclassified and presented as discontinued operations in the accompanying condensed consolidated financial statements. Summary information of the discontinued operations is as follows: Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ------- ------- ------- ------- Net Sales $23,278 $27,146 $67,817 $72,838 Total costs and expenses 20,758 24,299 66,227 64,554 (Provision for) benefit from income taxes (938) 123 (636) (1,629) ------- ------- ------- ------- Income from discontinued operations $ 1,582 $ 2,970 $ 954 $ 6,655 ======= ======= ======= ======= Discontinued operations for the nine-month period ended September 30, 2000, include charges associated with accelerated option vesting and gifted shares of Company's common stock (see Note 6 to the accompanying condensed consolidated financial statements) totaling $3.5 million. The nine-month period ended September 30, 1999, included a $1.0 million charge associated with the write-off of the step-up in inventory acquired in connection with the Company's April 1, 1999, acquisition of the net operating assets of Tennelec, Inc. Extraordinary Items, Net of Income Taxes - ---------------------------------------- During 2000, the Company repaid the outstanding balance on its term loan facility ($37.3 million) and a portion of its revolving credit facility indebtedness ($30.9 million). In addition, the Company repurchased $22.5 million of senior subordinated notes, at a discount from par, during May 2000 and amended and restated its revolving credit facility in August 2000. The senior subordinated notes repurchase resulted in a pre-tax gain of approximately $2.3 million. This gain was offset by the writeoff of unamortized deferred financing costs associated with the repayment of the term loan and the portion of the senior subordinated notes that were repurchased and the original revolving credit facility. The gain, net of the deferred financing fees writeoff and income taxes, is reflected as extraordinary items, net in the accompanying condensed consolidated financial statements. Net Income (Loss) - ----------------- The Company incurred a net loss of $4.5 million during the nine months ended September 30, 2000, compared to net income of $2.5 million in the comparable 1999 period. The 2000 period loss was attributable primarily to the nonrecurring compensation charges discussed above and the fact that all corporate interest expense is allocated to continuing operations, as discussed above. Liquidity and Financial Resources - --------------------------------- The Company's liquidity requirements arise from cash used for operations, including research and development expenditures, payments on outstanding indebtedness and funding of acquisitions and other collaborations. The Company's 2000 and 1999 cash requirements have been met primarily through cash generated from operations and borrowings through the Company's revolving credit facility and overseas bank facilities. In addition, the 2000 period reflects the Company's receipt of net proceeds totaling approximately $110 million from the Offering. Approximately $90.7 million of such proceeds was used to repay the Company's outstanding term loan indebtedness and a portion of the revolving credit facility balance as well as to repurchase a portion of the outstanding senior subordinated notes. The remaining cash is available for the Company's general corporate requirements. Approximately half of the Company's revenues are generated from foreign sources, most of which are denominated in currencies other than the U.S. dollar. As such, the Company's reported earnings and financial position are affected by changes in foreign currency exchange rates. A strengthening U.S. dollar against the currencies through which the Company conducts its business has had, and may continue to have, a negative impact on U.S. dollar denominated operating results. To manage the exposure of foreign currency exchange rates, the Company employs hedging strategies. The Company purchases various foreign currency forward contracts, at specified levels of coverage, generally for the purpose of hedging firm intercompany inventory purchase commitments. Net cash used by continuing operating activities was $7.7 million during the first nine months of 2000 as compared to $3.6 million of net cash used during the comparable 1999 period. The increase in cash used by operating activities between the periods presented is primarily the result of a greater reduction in trade accounts payable and accruals during the current year period. Net cash used for continuing investing purposes during the nine months ended September 30, 2000, consisted primarily of amounts paid to acquire a 51% interest in Carl Consumable Products, LLC ($0.5 million) and certain net operating assets of Cambridge Imaging Limited ($1.5 million), as well as the payment of contingent earnouts earned for the period ended December 31, 1999, associated with the CCS acquisition (totaling $5.0 million). In addition, approximately $4.6 million was expended on capital equipment and improvements. During the nine months ended September 30, 1999, investing activities consisted primarily of payment of earnouts associated with the CCS acquisition. In addition, during this period, capital expenditures totaled $4.4 million. The Company expects to generate a significant amount of cash in connection with the sale of the Canberra operating segment. The Company is considering its options as to the use of the expected proceeds. The Company will repay the amounts outstanding under its amended and restated credit agreement or will be restricted as to the use of the that same level of funds. Financing activities during the first nine months of 2000 consisted primarily of receipt of the net proceeds from the Offering and a use of a substantial portion of such proceeds, combined with available invested cash, to paydown $101 million of indebtedness. Additional borrowings under the Company's revolving credit facility were used to fund the payment of the contingent earnout payments referred to above and the March 2000 semi-annual interest payment ($7.0 million) associated with the Company's outstanding subordinated notes. The borrowings were also utilized to fund operating requirements, as needed. In addition, proceeds from the exercise of stock options totaled $5.0 million during the first nine months of 2000. During the comparable prior year period, financing activities consisted primarily of borrowings under the revolving credit facility to fund contingent earnout payments associated with the CCS acquisition. In addition, borrowings during this period were utilized to make the semi-annual subordinated notes interest payment and to fund operating requirements, as needed. The Amended and Restated Credit Agreement (the "Agreement") increases the Company's revolver from $75 million to $100 million. The Agreement provides for a reduction in the revolver in the event of a sale of Canberra based upon a stipulated formula. Backlog - ------- As of September 30, 2000 and 1999, the Company's net third-party order backlog was approximately $29.9 million and $22.2 million, respectively. The Company includes in backlog only those orders for which it has received purchase orders and does not include in backlog orders for service. The Company's backlog as of any particular date may not be representative of actual sales for any succeeding period. New Accounting Standards - ------------------------ In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which establishes the accounting and reporting standards for derivative instruments and for hedging activities. The Company purchases forward contracts to cover foreign exchange fluctuation risks on intercompany sales to certain of its foreign operations. Such contracts qualify as foreign currency cash flow hedges under SFAS No. 133 and, as such, require that gains and losses on such contracts be presented as a component of comprehensive income. The effective date of SFAS No. 133 (which was deferred through the issuance of SFAS No. 137 and amended through the issuance of SFAS No. 138) is the Company's calendar year commencing January 1, 2001. This statement is not expected to have a material effect on the Company's consolidated operating results or financial position upon adoption. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101, among other things, provides guidance on revenue recognition when customer acceptance and installation provisions exist. The Company is required to adopt SAB No. 101, effective January 1, 2000, by December 31, 2000. The Company has not yet quantified the cumulative effect of adopting SAB No. 101, as of January 1, 2000, which could be material to the Company's consolidated operating results or financial position. Subsequent Events - ----------------- Effective October 1, 2000, the Company acquired the net operating assets of GSLI Life Sciences ("GSLI"), a division of GSI Lumonics, Inc. The total amount paid consisted of $40 million in cash and 4.6 million shares of Company common stock. GSLI is a leading provider of imaging equipment for biochip and microarray applications. The GSLI acquisition will be accounted for using the purchase method. The acquisition will result in a charge in October 2000 totaling $12.1 million (before the related income tax benefit) to write off the value assigned to acquired in-process research and development which had not yet reached technological feasibility. In October 2000, the Company acquired an 8% equity stake in Agencourt Bioscience Corporation, a biotech company focused on providing nucleic acid purification kits and other assays for the genomics and proteomics marketplaces. The Company paid $1.25 million for this equity stake. The Company paid $1.25 million for this equity interest. Agencourt is controlled by three sons of one of the Packard officers. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no significant change in this area since the filing of the Company's 1999 Form 10-K. PART II. OTHER INFORMATION PACKARD BIOSCIENCE COMPANY Item 1. Legal Proceedings There has been no significant change in this area since the filing of the Company's Form 10-Q for the quarter ended June 30, 2000. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit No. Description ----------- ----------- 27 Financial data schedule pursuant to Article 5 of Regulation S-X (b) Reports on Form 8-K: A report on Form 8-K dated October 13, 2000 was filed on October 13, 2000. A report on Form 8-K/A dated October 13, 2000 was filed on November 13, 2000. 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, in the City of Meriden, State of Connecticut, on November 14, 2000. PACKARD BIOSCIENCE COMPANY By: /s/ Emery G. Olcott ------------------------------------ Emery G. Olcott Chairman of the Board and Chief Executive Officer By: /s/ Ben D. Kaplan ------------------------------------ Ben D. Kaplan Vice President and Chief Financial Officer By: /s/ David M. Dean ------------------------------------ David M. Dean Corporate Controller