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, 1998
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 and 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 6, 1998:
9,159,269
<PAGE>
PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997
Condensed Consolidated Statements of Income (Loss) and Comprehensive
Income (Loss) for the Three and Nine Months Ended September 30, 1998
and 1997
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 and DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1998 DECEMBER 31, 1997
------ ------------------ -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,919 $ 10,575
Accounts receivable, net 39,398 40,688
Inventories, net 34,842 27,538
Other current assets 7,948 6,242
-------- --------
Total current assets 93,107 85,043
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost 39,112 33,160
Less - accumulated depreciation 17,757 15,240
-------- --------
21,355 17,920
-------- --------
OTHER ASSETS:
Goodwill, net 11,055 9,498
Deferred financing costs, net 8,732 9,891
Investments 1,297 8,216
Other 14,358 10,083
-------- --------
35,442 37,688
-------- --------
TOTAL ASSETS $149,904 $140,651
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Notes payable $ 2,134 $ 1,929
Current portion of long-term obligations 1,391 1,794
Accounts payable and accrued liabilities 40,032 37,439
Deferred income 11,768 11,616
-------- --------
Total current liabilities 55,325 52,778
-------- --------
LONG-TERM OBLIGATIONS, net of current portion:
Notes and other long-term obligations 11,557 6,320
Term loan and credit facility 56,100 39,400
Senior subordinated notes 150,000 150,000
-------- --------
Total long-term obligations, net 217,657 195,720
-------- --------
DEFERRED INCOME TAXES 2,252 4,167
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Cumulative translation adjustment 271 (344)
Unrealized investment gains, net of taxes 15 2,885
-------- --------
Accumulated other comprehensive income 286 2,541
Common stock 137 137
Deficit (25,539) (10,220)
-------- --------
(25,116) (7,542)
Less: Treasury stock, at cost 99,336 103,448
Deferred compensation 878 1,024
-------- --------
Total stockholders' deficit (125,330) (112,014)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $149,904 $140,651
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 54,069 $ 42,965 $156,618 $130,667
COST OF SALES 26,447 20,917 76,065 61,786
-------- -------- -------- --------
GROSS PROFIT 27,622 22,048 80,553 68,881
RESEARCH AND DEVELOPMENT EXPENSES 7,480 5,879 20,033 16,252
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 12,929 12,474 37,699 35,434
ACQUIRED IN-PROCESS RESEARCH AND
DEVELOPMENT CHARGES (Note 4) 6,470 0 12,010 0
RECAPITALIZATION CHARGES (Note 3) 0 450 0 18,429
-------- -------- -------- --------
OPERATING PROFIT (LOSS) 743 3,245 10,811 (1,234)
INTEREST EXPENSE, NET (4,929) (4,692) (14,780) (10,609)
LITIGATION SETTLEMENT (Note 8) (10,000) 0 (10,000) 0
REALIZED INVESTMENT GAINS 0 0 3,133 0
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (14,186) (1,447) (10,836) (11,843)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 888 (178) 2,812 (2,385)
-------- -------- -------- --------
NET LOSS (15,074) (1,269) (13,648) (9,458)
-------- -------- -------- --------
Other comprehensive income (loss):
Unrealized investment income (loss) (4) 1,050 (988) 3,201
Reclassification adjustment, net 0 0 (1,880) 0
Foreign currency translation adjustments 508 (483) 615 (2,602)
-------- -------- -------- --------
Other comprehensive income (loss) 504 567 (2,253) 599
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $(14,570) $ (702) $(15,901) $ (8,859)
======== ======== ======== ========
Basic weighted average common shares
outstanding 9,157,478 9,007,451 9,106,408 13,500,612
Basic Loss Per Share $(1.65) $(0.14) $(1.50) $(0.70)
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net loss $(13,648) $ (9,458)
Adjustments to reconcile net loss to net cash
from (used for) operating activities:
Depreciation and amortization of intangibles 5,735 4,734
Amortization of deferred financing costs 1,159 901
Acquired in-process research and development
charges 12,010 0
Amortization of acquired inventory step-up 1,500 0
Realized investment gains (3,133) 0
Other non-cash charges, net 29 3,759
Changes in operating assets and liabilities (5,664) (6,139)
-------- --------
Net cash used for operating activities (2,012) (6,203)
-------- --------
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Purchase of minority interest in subsidiary 0 (7,551)
Acquisitions of businesses, net of cash acquired (11,595) (6,291)
Investments in equity securities and ventures (487) (1,438)
Proceeds from sale of investments 4,137 0
Capital expenditures, net (4,789) (2,799)
Product lines, patent rights and licenses acquired (1,830) (2,036)
-------- --------
Net cash used for investing activities (14,564) (20,115)
-------- --------
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Borrowings under long-term obligations 35,704 201,710
Repayments of long-term obligations (19,878) (3,377)
Purchase of treasury stock (54) (208,848)
Sale of stock 461 21,051
Proceeds from exercise of stock options 40 8,331
Recapitalization costs deferred or charged to
equity 0 (15,295)
-------- --------
Net cash from investing activities 16,273 3,572
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 647 (2,076)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 344 (24,822)
CASH AND CASH EQUIVALENTS, beginning of period 10,575 37,826
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 10,919 $ 13,004
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
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, 1997, condensed consolidated balance sheet
which was derived from the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (the "Company's 1997 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 1997 Form 10-K.
Note 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
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 1997 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.
Note 2. INVENTORIES:
Inventories consisted of the following at September 30, 1998, and December 31,
1997 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials and parts $17,183 $14,908
Work in process 4,554 1,995
Finished goods 16,337 12,556
------- -------
38,074 29,459
Excess and obsolete reserves (3,232) (1,921)
------- -------
$34,842 $27,538
======= =======
</TABLE>
Note 3. 1997 RECAPITALIZATION
Refer to Note 11 to the 1997 consolidated financial statements included in the
Company's 1997 Form 10-K for a detailed description of the recapitalization of
the Company which occurred in March 1997 ("the Recapitalization").
Note 4. ACQUISITIONS:
On September 3, 1997, the Company acquired all of the outstanding common stock
of Aquila Technologies Group, Inc. ("Aquila"), a manufacturer and distributor
of surveillance cameras, electronic seals and other equipment utilized in the
safeguarding of nuclear materials and an OEM manufacturer of process control
equipment. The Company acquired Aquila for approximately $6.7 million in cash
with additional future payments to be made contingent upon post-acquisition
operating results ("Aquila Contingent Payments") through calendar year 2000 up
to a maximum of $10.4 million in additional payments. The acquisition resulted
in a one-time charge of $0.8 million during the four months ended December 31,
1997, associated with the step-up of acquired inventory to fair value at the
acquisition date. An additional $1.7 million was earned as Aquila Contingent
Payments during the period since acquisition through September 30, 1998, and
$8.7 million in additional payments may still be made.
On March 31, 1998, the Company acquired all of the outstanding common stock of
Carl Creative Systems, Inc. (now known as CCS Packard, Inc.) ("CCS"), a
developer, manufacturer and distributor of high throughput liquid handling
systems used in the life science, in-vitro diagnostics and pharmaceutical drug
discovery markets. The Company issued 108,883 common shares of the Company
(valued at $13.96 per share) and paid $6.3 million in cash, including costs
incurred in connection with the acquisition. The acquisition resulted in a
charge of $5.54 million to write-off the appraised value of acquired in-
process research and development which had not reached technological
feasibility and had no probable alternative future uses. In addition, the
acquisition resulted in a one-time charge of $1.0 million during the three
months ended June 30, 1998, associated with the write-off of the step-up in
acquired inventory which was recorded at fair value at the date of acquisition.
Additional contingent payments, up to a maximum of $18.7 million, may be made
through the year 2002, contingent upon CCS achieving certain post-acquisition
operating performance levels through calendar 2001 ("CCS Contingent Payments"
and collectively with the Aquila Contingent Payments, the "Contingent
Payments").
On July 7, 1998, the Company acquired 100% of the outstanding common stock of
BioSignal, Inc. ("BioSignal"), a biotechnology company located in Canada.
Prior to the July acquisition, the Company owned a 19% interest in BioSignal.
The Company acquired the remaining 81% ownership interest for approximately
$8.6 million in cash and 35,817 shares of the Company's common stock valued at
$500,000. In connection with the acquisition, the Company recognized a charge
of $6.47 million associated with the appraised value assigned to acquired in-
process research and development. In addition, the acquisition resulted in the
recognition of a $0.5 million write-up in inventory acquired, which was charged
to operations during the three months ended September 30, 1998.
All of 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 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 was approximately $7.6 million
(including the Aquila Contingent Payment referred to above) and has been
reflected as goodwill in the accompanying condensed consolidated balance
sheets. As Contingent Payments are made, the related goodwill will increase.
The goodwill associated with these acquisitions is being amortized on a
straight-line basis over either 10 or 20 years from the initial acquisition
dates.
The operating results of Aquila, CCS and BioSignal have been reflected in the
accompanying condensed consolidated statements of income (loss) since their
dates of acquisition. The following unaudited consolidated information is
presented on a pro forma basis, as if the acquisitions had occurred as of the
beginning of the periods presented. In the opinion of management, the pro
forma information reflects all adjustments necessary for a fair presentation.
The pro forma adjustments primarily consist of: addback of nonrecurring
charges taken in connection with the acquisitions associated with in-process
research and development costs and acquired inventory step-up writeoff,
amortization of goodwill associated with the acquisitions, adjustments to
certain historical Aquila and CCS compensation levels to be more indicative of
post-acquisition levels, adjustments to reflect additional interest expense
relating to the financing of the acquisitions, and adjustments to reflect the
related income tax effects, if any, of the above.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 54,069 $ 46,132 $159,827 $144,380
Operating profit $ 7,547 $ 3,701 $ 24,953 $ 1,043
Net income (loss) $ (8,267) $ (653) $ 19 $ (8,063)
Basic income (loss) per share $ (0.90) $ (0.07) $ 0.00 $ (0.59)
</TABLE>
Note 5. EARNINGS PER SHARE:
In computing diluted earnings per share, outstanding stock options are factored
into the determination of weighted average common shares outstanding to the
extent they have a dilutive effect on earnings per share. For all of the
periods presented in the accompanying condensed consolidated statements of
income (loss), the effect of stock options would be antidilutive in light of
the net losses incurred during such periods. Accordingly, the accompanying
consolidated statements of income (loss) do not reflect diluted earnings per
share.
Note 6. STOCK DIVIDEND:
In May 1997, the Company's Board of Directors declared a one-for-one stock
dividend on all outstanding common shares. All historical share and per share
information, with the exception of treasury shares, have been restated to
reflect the effect of this stock dividend.
Note 7. NEW ACCOUNTING STANDARD:
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. SFAS No. 133 is effective for the Company commencing
January 1, 2000. This statement is not expected to have not have a material
effect on the Company's operating results or financial position.
Note 8. SUBSEQUENT EVENT - LITIGATION SETTLEMENT:
On November 2, 1998, the Company settled the lawsuit brought against it in 1996
by EG&G Instruments, Inc., a subsidiary of EG&G, Inc. In the lawsuit, EG&G
Instruments, Inc. alleged that the Company infringed on a patent surrounding
EG&G's automatic pole-zero cancellation circuit. The settlement calls for the
Company to make payments to EG&G totalling $10 million for a license to the
related technology through the year 2000 and to settle the litigation. The
Company also received a royalty-bearing license for years subsequent to
calendar 2000. Of the total payments of $10 million, $4 million was paid in
November, 1998, and $3 million will be paid in each of 1999 and 2000. The
Company is required to make these payments, regardless of whether the Company
uses, sells or manufactures products which may infringe on the patent referred
to above. The accompanying financial statements reflect the total settlement
as of September 30, 1998.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This report contains statements which constitute "forward-looking" statements
and are prospective. In addition, the Company may occasionally make forward-
looking statements and estimates such as forecasts and projections of the
Company's future performance and statements of managements' plans and
objectives. These forward-looking statements may be contained in, among other
things, filings with the Securities and Exchange Commission and press releases
made by the Company, and oral and written statements made by officers of the
Company. Many factors could cause actual results to differ materially from
these statements. These factors include, but are not limited to, (1) loss of
market share through competition, (2) dependence on customers' capital spending
policies and government funding, (3) limited supply of key raw materials,
(4) reliance on, and ability to protect, key patents and intellectual property,
(5) complexity and technological feasibility of research and development and
new product introductions, (6) decline in utilization of products and
technology, (7) stability of economies overseas and fluctuating foreign
currencies, (8) changes in environmental laws and regulations, (9) loss of key
employees, (10) the factors described in the final paragraph under the
subheading "Year 2000" below, and (11) other factors which might be described
from time to time in the Company's filings with the Securities and Exchange
Commission. As a result, there can be no assurances that the forward-looking
statements will be achieved.
GENERAL
The Company is a leading developer, manufacturer and marketer of analytical
instruments and related products and services for use in the drug discovery and
molecular biology segments of the life sciences industry and in nuclear
research, safeguarding and environmental remediation. Through Packard
Instrument Company, Inc. and several other wholly-owned subsidiaries
(collectively, "Packard"), the Company supplies bioanalytical instruments, and
related biochemical supplies and services, to the drug discovery, genomics and
molecular biology markets, and through certain divisions and wholly-owned
subsidiaries comprising Canberra Industries ("Canberra"), the Company
manufactures analytical instruments used to detect, identify and quantify
radioactive materials for the nuclear industry and related markets.
RESULTS OF OPERATIONS (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
% Inc. % Inc.
1998 1997 (DEC.) 1998 1997 (DEC.)
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Total revenues:
Packard $ 36.5 $ 27.4 33.2% $101.8 $ 88.2 15.4%
Canberra 17.6 15.6 12.8% 54.8 42.4 29.2%
------ ------ ------ ------ ------ ------
54.1 43.0 25.8% 156.6 130.6 19.9%
------ ------ ------ ------ ------ ------
Gross profit:
Packard 19.3 15.0 28.7% 53.8 48.6 10.7%
Canberra 8.3 7.1 16.9% 26.8 20.3 32.0%
------ ------ ------ ------ ------ ------
27.6 22.1 24.9% 80.6 68.9 17.0%
------ ------ ------ ------ ------ ------
Operating expenses:
Research and development 7.5 5.9 27.1% 20.0 16.3 22.7%
Selling, general and
administrative 12.9 12.5 3.2% 37.7 35.4 6.5%
In-process research and
development charges 6.5 0.0 N/A 12.0 0.0 N/A
Recapitalization charges 0.0 0.5 N/A 0.0 18.4 N/A
------ ------ ------ ------ ------ ------
Operating profit (loss) 0.7 3.2 (78.1)% 10.9 (1.2) N/A
Interest expense, net (4.9) (4.7) 4.3% (14.8) (10.6) 39.6%
Litigation settlement (10.0) 0.0 N/A (10.0) 0.0 N/A
Realized investment gains 0.0 0.0 N/A 3.1 0.0 N/A
------ ------ ------ ------ ------ ------
Loss before income taxes (14.2) (1.5) N/A (10.8) (11.8) N/A
Provision for (benefit from)
income taxes 0.9 (0.2) N/A 2.8 (2.3) N/A
------ ------ ------ ------ ------ ------
Net loss $(15.1) $ (1.3) N/A $(13.6) $ (9.5) N/A
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
Excluding the impact of changes in foreign currency exchange rates,
consolidated total revenues would have been $0.2 million and $2.3 million
higher for the three months and nine months ended September 30, 1998,
respectively. The accompanying results of operations reflect the Company's
recent acquisitions since the dates such companies were acquired. The acquired
companies and their acquisition dates are as follows: Aquila Technologies
Group, Inc. ("Aquila") - September 1, 1997; Carl Creative Systems, Inc. ("CCS")
- - March 31, 1998; and BioSignal, Inc. ("BioSignal") - July 1, 1998. Refer to
Note 4 to the accompanying condensed consolidated financial statements included
in Item 1 of this Form 10-Q for pro-forma operating results reflecting the
above-mentioned acquisitions.
Packard's sales increased approximately $9.1 million and $13.6 million in the
three- and nine-month periods ended September 30, 1998, respectively, in
comparison with the prior year periods. The increases were due to the
inclusion of CCS and BioSignal in 1998 and increased third-party shipments from
Packard's Illinois production facility. Since their 1998 acquisition dates,
CCS and BioSignal have generated net third-party sales of $7.3 million and $0.7
million, respectively. The stronger U.S. dollar caused sales during the first
nine months of 1998 to be $1.8 million lower than they would have been had
exchange rates been the same as during the comparable 1997 period. Several of
Packard's overseas distribution operations generated increased sales during the
third quarter of 1998, as compared with 1997, particularly the U.K. and
Germany. This improved performance was partially offset through lower sales
volume at Packard's Japanese subsidiary, Packard Japan KK ("PJKK"), where net
sales decreased $0.5 million and $2.3 million during the three- and nine-month
periods ended September 30, 1998, respectively, as compared with the same
periods in 1997.
Canberra's increased sales in 1998 are due to the acquisition of Aquila in
September 1997 and growth in the instruments and detectors businesses. Aquila
generated $11.5 million in net sales during the nine months ended September 30,
1998. During the comparable 1997 period, Aquila generated net sales of $2.1
million representing one month's activity since its September 1, 1997,
acquisition date. The stronger U.S. dollar unfavorably impacted Canberra's
sales by approximately $0.5 million during the nine months ended September 30,
1998, when compared to results calculated by applying exchange rates in effect
during the comparable 1997 period.
The Company's gross profit increased 24.9% and 17.0% during the three months
and nine months ended
September 30, 1998, respectively, as compared to the corresponding 1997
periods. These increases are attributable primarily to the acquisitions
discussed above and growth in the Company's U.S. sales. These increases were
partially offset by lower margins generated at certain overseas locations as
well as the unfavorable impact of the stronger U.S. dollar. In addition, gross
profit during the three months and nine months ended September 30, 1998,
reflect charges of $0.5 million and $1.5 million, respectively, associated with
the write-off of the step-up in acquired CCS and BioSignal inventory which was
recorded at fair value at the dates of acquisition as required under purchase
accounting. Both of the 1997 periods reflect a similar charge of $0.2 million
associated with the Aquila acquisition.
Research and development spending, as a percentage of net sales, was relatively
consistent between 1998 and 1997. Research and development spending, in terms
of total dollars, has increased in 1998 in comparison with 1997, reflecting
the Company's continued commitment to new product development and enhancement
of its existing product lines. In addition, the 1998 year-to-date amount
reflects the recognition of approximately $2.3 million of costs related to
canceling certain projects and collaborative arrangements during 1998.
Selling, general and administrative expenses were up slightly during 1998, as
compared to 1997, due primarily to the inclusion of the above-mentioned
acquisitions, partially offset by the effect of the stronger U.S. dollar. As a
percentage of net sales, such expenses are down in 1998 compared with 1997, as
much of the Company's sales growth has been generated without a proportionate
increase in operating costs.
During the first quarter of 1998, the Company recorded a $5.5 million charge
associated with the writeoff of in-process research and development ("R&D")
acquired in connection with the Company's purchase of CCS. In the third
quarter of 1998, the Company recognized a similar charge amounting to $6.5
million associated with the acquisition of BioSignal. The charges represent
that portion of the purchase price which was assigned to the acquired R&D
through purchase accounting as determined by an independent appraisal.
During 1997, the Company recorded $18.4 million of charges associated with the
Recapitalization, which is described in the Company's 1997 Form 10-K.
Consolidated operating profit (loss) of $ $0.7 million and $10.9 million for
the three months and nine months ended September 30, 1998, compares with $3.2
million and ($1.2) million during the corresponding 1997 periods. Excluding
the effects of the one-time charges associated with acquisitions discussed
above, and the 1997 Recapitalization charge, operating profit increased to
$24.4 million during the nine months ended September 30, 1998, compared to
$17.4 million during the comparable 1997 period, due primarily to the
acquisitions of Aquila, CCS and BioSignal and growth in the Company's U.S.
businesses. Such increases were partially offset by the unfavorable effect of
the stronger U.S. dollar during 1998, as well as increased research and
development spending.
The increase in interest expense, net during 1998 is a direct result of the
funds used in connection with the Recapitalization effective March 4, 1997, as
described in the 1997 Form 10-K, and increased indebtedness associated with the
acquisitions of Aquila, CCS and BioSignal.
In September 1998, the Company recorded the cost of settling an outstanding
lawsuit. Refer to Subsequent Event - Litigation Settlement below for a
description of such settlement.
During the nine months ended September 30, 1998, the Company sold substantially
all of the marketable equity investment it has held in a publicly-traded
company. In connection with such sales, the Company has realized gains
aggregating $3.1 million.
The Company's 1998 effective income tax rate reflects:
a) income taxes provided on taxable income generated overseas;
b) no tax benefit on the writeoff of acquired in-process R&D and
inventory step-up amortization; and
c) no provision for federal income taxes being provided on domestically
generated taxable income in light of the Company's net operating loss
carryforward position generated in 1997.
The 1997 income tax benefit reflected the tax benefit provided on a portion of
the Recapitalization charges offset by taxes provided on income generated in
high tax countries such as Japan.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated sufficient cash flow from operations to
meet its working capital requirements as well as to fund capital expenditures,
debt service and equity transactions such as dividend payments and stock
repurchases. In connection with the Recapitalization, the Company increased
its long-term indebtedness by $190.0 million and, as a result, debt service
requirements have increased significantly as compared to historical levels.
The Company has, as of November 6, 1998, $52 million of funds available under a
revolving credit facility secured as part of the Recapitalization. Monies
available under this credit facility are subject to certain restrictions and
provisions contained therein. Refer to the Company's 1997 Form 10-K for a
detailed description of the Recapitalization including the related indebtedness
and repayment terms and conditions.
The Company expects to generate adequate cash from operations to meet most of
its working capital needs as well as to provide for necessary debt service
requirements during the next several years. The Company can and will borrow
monies from the revolving credit facility in order to meet temporary or
seasonal shortfalls which may arise in the level of cash generated from
operations and to fund the Contingent Payments. The Company expects that,
should the generation of excess available operating cash flow be insufficient,
it will also utilize the revolving credit facility to fund a significant
portion of its strategic acquisition program and new product development
initiatives, as well as a portion of capital expenditures for machinery,
equipment and facility expansions, and the litigation settlement discussed
below.
Operating activities used $2.0 million of cash during the nine months ended
September 30, 1998, compared to $6.2 million of cash used in the comparable
1997 period. The improvement is due primarily to the cash portion of the
Recapitalization charge which was paid during the 1997 period. During the
third quarter of 1998, the Company's operating activities used $7.9 million of
cash primarily related to the semi-annual interest payment made on the senior
subordinated notes in September 1998.
In May 1997, PJKK entered into an agreement to acquire the 40% interest held by
its minority stockholder for approximately $7.5 million (refer to the Company's
1997 Form 10-K). The acquisition has been funded through a combination of cash
on hand and notes payable issued to the former minority stockholder.
In September 1997, the Company acquired Aquila (refer to the Company's 1997
Form 10-K). The Company financed the initial purchase price of approximately
$6.7 million, including costs incurred in connection with the acquisition,
through the revolving credit facility. The Company will make additional Aquila
Contingent Payments based upon post-acquisition operating performance through
calendar year 2000. An additional $1.7 million was earned and paid as
Contingent Payments during the period of September 4, 1997, to September 30,
1998.
On March 31, 1998, the Company acquired all of the outstanding common stock of
CCS. The Company issued 108,883 common shares of the Company and paid $6.3
million in cash, including costs incurred in connection with the acquisition.
The acquisition was funded through available cash and the revolving credit
facility. Additional CCS Contingent Payments, up to a maximum of $18.7
million, may be made through the year 2002, contingent upon CCS achieving
certain post-acquisition operating performance levels.
On July 1, 1998, the Company acquired 100% of the outstanding common stock of
BioSignal. Prior to the July 1, 1998, transaction, the Company owned a 19%
equity interest in BioSignal. The July acquisition of the remaining 81%
interest resulted in the Company's payment of approximately $8.6 million in
cash and the issuance of Company common stock with an aggregate value of
$500,000. The acquisition was financed through use of the revolving credit
facility.
As of September 30, 1998 and 1997, the Company's gross order backlog was
approximately $45.3 million and $38.9 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.
YEAR 2000
The Company is currently in the process of assessing the implications and
implementing changes relating to the year 2000 ("Y2K") issue as it affects the
Company's business operations. The term "Y2K issue" is used to refer to all
difficulties the turn of the century may bring to users of computers and other
electronic equipment. In general terms, the Y2K issue arises from the fact
that many existing computer systems and other equipment containing date-
sensitive embedded technology (including non-information technology equipment
and systems) use only two digits to identify a year in the date field, with the
assumption that the first two digits of the year are always "19." This, as
well as certain other common date-related programming errors, may result in
miscalculations, other malfunctions or the total failure of such systems. Some
of the Company's products contain date-sensitive technology, and the Company's
business operations are dependent upon the proper functioning of computer
systems and other equipment containing date-sensitive technology. A failure of
such products, systems or equipment to be Y2K compliant could have a material
adverse effect on the Company. If not remedied, potential risks include
business interruption or shutdown, loss of customers, harm to the Company's
reputation, financial loss and legal liability.
The Company's assessment of the Y2K issue is organized to address the three
major affected areas: 1) products and services which the Company provides to
its customers; 2) supplier implications; and 3) administrative and management
information systems used by the Company. The assessment and resulting action
plans are in various stages of completion. Areas which require corrective
action have been identified as a result of the work performed to date and a
significant amount of such corrective action has already been successfully
completed. However, additional assessments need to be performed by the Company
in order to minimize the risks and exposures associated with Y2K. The
following is an overview of the Company's current state of readiness as it
relates to Y2K along with a summary of the process the Company plans to follow
to address Y2K issues, including the related potential risks and costs:
1) PRODUCTS AND SERVICES
Within the products and services area, the Company has been divided into its
major business segments, Canberra and Packard. Certain management personnel
within each segment have been assigned the responsibility to perform the Y2K
product assessments.
Canberra began the assessment process in September 1997. This included: a)
the formation of a Y2K product task force consisting of key management and
product personnel; b) establishment of a database whereby Canberra employees
can exchange relevant product Y2K information; and c) establishment of a
policy statement addressing customers questions pertaining to Y2K. In
addition, testing of all active products was commenced to identify and
correct Y2K related problems. To date, testing and correction has been
performed on the majority of products with completion of the process
expected by December 1, 1998. Ad hoc reviews have been, and will continue
to be, performed on inactive product lines to assess the likelihood of Y2K
problems occurring and the corrective action, if any, that will be taken.
The product assessment plan for Packard is currently being formalized.
Testing of key products and product lines is underway to ensure Y2K
compliance. In addition, the effect and responsibility of OEM equipment
used in Packard's products is being evaluated.
It is the Company's objective to have Y2K product testing completed prior to
the year 2000 and to have corrective actions, if any, developed and/or
completed by such time also. There can be no assurance that the Company
will be able to accomplish this objective or that such actions will
adequately address all issues or problems which may arise relating to the
Y2K dilemma.
To date, the Company has not expended a material amount in performing the
product and services Y2K assessments. At this time, the Company is unable
to reasonably quantify the total estimated costs that will be expended in
connection with the Y2K issue. All costs are expensed as incurred.
2) VENDORS/SUPPLIERS
Company management is identifying vendors and service providers which are
critical to the Company's business processes including manufacturing and
distribution. Depending on the criticality of such vendors and suppliers to
the Company's day-to-day operations, some degree of assessment has been or
will be performed to determine whether the vendor/supplier is compliant with
Y2K and what risk non-compliance poses to the Company. The Company is in
the process of compiling a list of such parties and anticipates completing
it by the end of 1998. The Company intends to contact such parties in early
1999 to determine the extent to which they are vulnerable to the Y2K
problem. The Company does not currently have sufficient information about
the Y2K exposure or remediation plans of such parties to predict the risk
they pose to the Company. If the third parties with which the Company
interacts have Y2K problems that are not remedied, resulting problems could
include the inability to obtain crucial supplies or services, the loss of
telecommunications and electrical service, the receipt of inaccurate
financial and billing-related information, and the disruption of capital
flow potentially resulting in liquidity stress.
As part of the assessment in this area, contingency plans are being
developed in order to minimize the effect of Y2K considerations. Such
contingency plans may include identification of acceptable, alternative
suppliers and vendors where such Y2K exposures appear not to exist or
advance purchasing of required supplies or materials at levels necessary to
sustain business operations for an extended period of time if a Y2K problem
were expected to arise.
The costs of performing the vendor/supplier assessments to date have
consisted solely of internal labor costs and have been immaterial. The
Company does not expect that the total cost to perform this portion of the
assessment will be material to the consolidated financial position or
results of operations of the Company.
3) ADMINISTRATION
The Company has recently initiated a significant, worldwide enterprise
resource planning ("ERP") project which will supplant the majority of
management information systems currently utilized by the Company. In light
of the Company's growth and expansion in recent years, its worldwide
presence and positioning for future growth, it has been management's
intention to introduce such a worldwide information platform. The ERP
initiative and its implementation timeframe is not a result of the Y2K
information technology issues which the Company is aware exist in certain of
its current applications and at certain subsidiary locations. However, it
is expected that the ERP implementation will address such issues which
management considers a secondary benefit of the ERP system. As such, all
costs associated with the ERP project will be capitalized and/or expensed as
part of such project and not treated as incremental Y2K specific costs. The
Company may need to make capital expenditures of up to $0.75 million to
purchase lap-top and desk-top computers, many of which were already
scheduled for replacement.
The Company is following a formal assessment to address other Y2K
administrative implications such as facility security systems, HVAC
requirements, production machinery and power needs, etc. The Company
expects to complete such assessments by the end of 1999. Many of the Y2K
exposures identified associated with administrative technology can be
addressed through manual versus automated means or other acceptable
contingency plans. As part of management's assessment, such contingency
plans are being identified.
The Company estimates that, as of September 30, 1998, its costs of addressing
the Y2K problem have been less than $1.5 million. While the Company is
currently unable to estimate future costs of addressing the Y2K problem, it
does not believe that, excepting the ERP initiative, such costs will be
material to the Company's financial condition. The Company has funded, and
expects to continue to fund, the costs of its Y2K efforts through operating
cash flow, and to expense such costs as incurred.
This description of matters relating to the Y2K problem contains a number of
forward-looking statements. The Company's assessment of the costs of its Y2K
program and the timetable for completing its Y2K preparations are based on
current estimates, which reflect numerous assumptions about future events,
including the continued availability of certain resources, the timing and
effectiveness of third-party remediation plans and other factors. The Company
can give no assurance that these estimates will be achieved, and actual results
could differ materially from those currently anticipated. In addition, there
can be no assurance that he Company's Y2K program will be effective or that its
contingency plans will be sufficient. Specific factors that might cause
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct relevant
computer software codes and embedded technology, the results of internal and
external testing and the timeliness and effectiveness of remediation efforts of
third parties.
THE EURO
Effective January 1, 1999, the European single currency called "the Euro" will
be officially introduced as a major world currency. At its introduction,
eleven of the fifteen European Union ("EU") countries will replace their
existing currencies with the Euro. During the three years following its
introduction, adopting countries have agreed to phase-out existing national
currencies. During this transition period, existing national currencies of
adopting countries will co-exist with the Euro at fixed exchange rates. The
Euro is expected to 1) create greater price competitiveness and uniformity
throughout the EU by eliminating the effect of fluctuating currencies; 2)
enhance cross-border trade within the EU; and 3) lower costs of conducting
business within the EU by stabilizing or reducing interest rates and exchange
rate effects.
The Company is in the process of evaluating the impact which the Euro will have
on its worldwide operations. Specific areas of consideration are 1) foreign
exchange risk management policies; 2) pricing strategies; 3) information
technology requirements associated with implementing the Euro; and 4) related
tax and financial reporting considerations. Management does not believe that
the Euro will have a material effect on the Company's consolidated results of
operations or financial position.
SUBSEQUENT EVENT - LITIGATION SETTLEMENT
On November 2, 1998, the Company settled the lawsuit brought against it in 1996
by EG&G Instruments, Inc., a subsidiary of EG&G, Inc. In the lawsuit, EG&G
Instruments, Inc. alleged that the Company infringed on a patent surrounding
EG&G's automatic pole-zero cancellation circuit. The settlement calls for the
Company to make payments to EG&G totalling $10 million for a license to the
related technology through the year 2000 and to settle the litigation. The
Company also received a royalty-bearing license for years subsequent to
calendar 2000. Of the total payments of $10 million, $4 million was paid in
November,1998, and $3 million will be paid in each of 1999 and 2000. The
Company is required to make these payments, regardless of whether the Company
uses, sells or manufactures products which may infringe on the patent referred
to above.
The accompanying financial statements reflect the total settlement as of
September 30, 1998. Funds necessary to make the required payments to EG&G
Instruments will be provided through cash generated from operations and from
the revolving credit facility.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
PACKARD BIOSCIENCE COMPANY
Item 1. Legal Proceedings
On November 2, 1998, the Company settled the lawsuit brought against it in 1996
by EG&G Instruments, Inc., a subsidiary of EG&G, Inc. In the lawsuit, EG&G
Instruments, Inc. alleged that the Company infringed on a patent surrounding
EG&G's automatic pole-zero cancellation circuit. The settlement calls for the
Company to make payments to EG&G totalling $10 million for a license to the
related technology through the year 2000 and to settle the litigation. The
Company also received a royalty-bearing license for years subsequent to
calendar 2000. Of the total payments of $10 million, $4 million was paid in
November,1998, and $3 million will be paid in each of 1999 and 2000. The
Company is required to make these payments, regardless of whether the Company
uses, sells or manufactures products which may infringe on the patent referred
to above.
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
None.
<PAGE>
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 6, 1998.
PACKARD BIOSCIENCE COMPANY
By: /s/ Emery G. Olcott
Emery G. Olcott
Chairman of the Board, Chief
Executive Officer and President
By: /s/ Ben D. Kaplan
Ben D. Kaplan
Vice President and Chief
Financial Officer
By: /s/ David M. Dean
David M. Dean
Corporate Controller
<PAGE>
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