<PAGE> 1
EXHIBIT 99.2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
NEN Life Sciences, Inc.
We have audited the accompanying consolidated balance sheets of NEN Life
Sciences, Inc. (the Company) as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the period from July 1, 1997 through December 31, 1997 and the years ended
December 31, 1998 and 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NEN Life
Sciences, Inc. at December 31, 1998 and 1999, and the consolidated results of
its operations and its cash flows for the period from July 1, 1997 through
December 31, 1997 and the years ended December 31, 1998 and 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
--------------------------------------
March 10, 2000, except for the last
paragraph of Note 16, as to which
the date is June 12, 2000
Boston, Massachusetts
1
<PAGE> 2
NEN LIFE SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
------------------ -----------
1998 1999 2000
------- ------- -----------
<S> <C> <C> (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,447 $ 888 $ 790
Accounts receivables less allowances ($1,101 at December
31, 1998; $1,508 at December 31, 1999; $1,580 at
March 31, 2000)........................................ 14,908 17,602 19,438
Inventories............................................... 8,543 10,321 11,240
Prepaid expenses.......................................... 1,973 1,132 1,203
Deferred income taxes..................................... 2,077 2,318 2,007
Other current assets...................................... 2,986 1,294 1,189
------- ------- --------
Total current assets.............................. 31,934 33,555 35,867
Property, plant and equipment, net.......................... 36,555 34,253 34,489
Investments................................................. 502 14,941 5,204
Goodwill and other intangible assets........................ 11,520 14,512 27,150
Deferred income taxes....................................... 6,648 -- --
Other....................................................... 2,456 2,181 2,081
------- ------- --------
Total assets...................................... $89,615 $99,442 104,791
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,686 $ 8,446 $ 9,095
Accrued expenses.......................................... 9,922 14,469 15,411
Current maturities of long-term debt...................... -- 3,402 4,910
------- ------- --------
Total current liabilities......................... 17,608 26,317 29,416
Long-term debt, net of current portion...................... 53,168 41,647 49,300
Other long-term liabilities................................. 10,353 4,142 4,895
Deferred income taxes....................................... -- 2,218 1,220
Commitments and contingencies............................... -- -- --
Stockholders' equity:
Class A common stock, par value $.01 per share authorized
20,000,000 shares; 16,035,000 shares issued as of
December 31, 1998 and 1999 and 16,146,111 shares issued
as of March 31, 2000................................... 161 161 161
Class B common stock, par value $.01 per share, authorized
20,000,000 shares; none issued or outstanding.......... -- -- --
Additional paid-in capital.................................. 16,333 16,333 16,833
Retained earnings (deficit)................................. (7,930) 9,039 3,008
Treasury stock, at cost (80,000 shares)..................... -- (80) (80)
Accumulated other comprehensive income/(loss)............... (78) (335) 38
------- ------- --------
Total stockholders' equity........................ 8,486 25,118 19,960
------- ------- --------
Total liabilities and stockholders' equity........ $89,615 $99,442 $104,791
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
NEN LIFE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1997 YEAR ENDED FOR THE THREE MONTHS
THROUGH DECEMBER 31 ENDED MARCH 31
DECEMBER 31, ------------------ --------------------
1997 1998 1999 1999 2000
------------ ------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales................................................... $45,415 $94,784 $103,854 $26,871 $28,987
Cost of sales............................................... 21,616 41,148 44,808 11,459 12,917
------- ------- -------- ------- -------
Gross profit................................................ 23,799 53,636 59,046 15,412 16,070
Selling and marketing expenses.............................. 9,547 22,813 24,122 6,535 6,624
General and administrative expenses......................... 6,330 13,891 12,354 3,026 3,210
Research and development expenses........................... 3,482 8,740 9,422 2,633 2,267
Purchased in-process research and development............... 10,000 1,200 -- -- 1,010
------- ------- -------- ------- -------
Operating profit (loss)..................................... (5,560) 6,992 13,148 3,218 2,959
Other expenses (income):
Gain on termination of pension and retiree healthcare
plans.................................................. -- -- (11,014) -- --
Unrealized (gain)/loss on warrant......................... -- -- (10,079) -- 9,762
Interest expense.......................................... 3,626 5,225 5,074 1,313 1,282
Interest income........................................... (463) (343) (247) (62) (63)
Foreign currency exchange loss............................ 277 148 419 297 163
Amortization and other.................................... 793 984 1,198 289 358
------- ------- -------- ------- -------
Income (loss) before income tax expense (benefit)........... (9,793) 978 27,797 1,381 (8,543)
Income tax expense (benefit)................................ (1,124) 80 10,828 538 (3,049)
------- ------- -------- ------- -------
Net income (loss)........................................... $(8,669) $ 898 $ 16,969 $ 843 $(5,494)
======= ======= ======== ======= =======
Net income (loss) per share:
Basic..................................................... $ (.57) $ .06 $ 1.06 $ .05 $ .34
======= ======= ======== ======= =======
Diluted................................................... $ (.57) $ .06 $ 1.02 $ .05 $ .34
======= ======= ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
NEN LIFE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED NET
ADDITIONAL RETAINED OTHER COMPREHENSIVE
SHARES COMMON PAID-IN EARNINGS TREASURY COMPREHENSIVE INCOME
ISSUED STOCK CAPITAL (DEFICIT) STOCK LOSS TOTAL (LOSS)
---------- ------ ---------- --------- -------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A common stock
issued at inception... 150,000 $ 2 $14,998 $15,000
Class A common stock
issued July 2 through
December 31, 1997..... 8,300 830 830
Net loss for the period
July 1 through
December 31, 1997..... $ (8,669) (8,669) $ (8,669)
--------
Net comprehensive
loss.................. $ (8,669)
---------- ---- ------- -------- ------- ========
Balance at December 31,
1997.................... 158,300 2 15,828 (8,669) 7,161
Class A common stock
issued................ 2,050 205 205
Stock dividend.......... 15,874,650 159 (159)
Issuance of equity
warrant in connection
with the ABL
acquisition........... 300 300
Net income for the year
ended December 31,
1998.................. 898 898 $ 898
Loss on foreign exchange
contracts............. $ (78) (78) (78)
--------
Net comprehensive
income................ $ 820
---------- ---- ------- -------- ----- ------- ========
Balance at December 31,
1998.................... 16,035,000 161 16,333 (7,930) (78) 8,486
Purchase of 80,000
shares................ $(80) (80)
Net income for the year
ended December 31,
1999.................. 16,969 16,969 $ 16,969
Loss on foreign exchange
contracts............. (257) (257) (257)
--------
Net comprehensive
income................ $ 16,712
---------- ---- ------- -------- ---- ----- ------- ========
Balance at December 31,
1999.................... 16,035,000 161 16,333 9,039 (80) (335) 25,118
Class A common stock
issued................ 111,000 500 500
Dividend................ (537) (537)
Net loss for the three
months ended March 31,
2000 (unaudited)...... (5,494) (5,494) $ (5,494)
Gain on foreign exchange
contracts............. 373 373 373
--------
Net comprehensive loss.. $ (5,121)
---------- ---- ------- -------- ---- ----- ------- ========
Balance at March 31, 2000
(unaudited)............. 16,146,000 $161 $16,833 $ 3,008 $(80) $ 38 $19,960
========== ==== ======= ======== ==== ===== =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
NEN LIFE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM FOR THE THREE
JULY 1, 1997 YEAR ENDED MONTHS
THROUGH DECEMBER 31 ENDED MARCH 31
DECEMBER 31, ------------------- --------------------
1997 1998 1999 1999 2000
---------------- -------- -------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ (8,669) $ 898 $ 16,969 $ 843 $(5,495)
Adjustments to reconcile net income (loss) to cash
provided (used) by operating activities:
Loss on foreign currency transactions................... 115 148 229 83 40
Depreciation and amortization........................... 2,450 5,518 6,867 1,675 1,979
Gain on termination of pension and retiree healthcare
plans................................................. -- -- (11,014) -- --
Unrealized (gain)/loss on warrant....................... -- -- (10,079) -- 9,762
Loss on disposal of fixed assets........................ -- -- 30 -- --
Charge for purchased in-process research and
development........................................... 10,000 1,200 -- -- 1,010
Deferred income taxes................................... (2,284) (691) 8,588 (78) (3,916)
Cash (used in) provided by:
Accounts receivable................................... 272 (1,123) (3,286) (9,061) (1,686)
Due to/from DuPont.................................... 965 (242) 934 -- --
Inventories........................................... 4,056 99 (1,813) 193 (118)
Prepaid expenses and other current assets............. (2,179) (1,863) 1,621 (148) (90)
Accounts payable...................................... 7,940 4,265 951 2,027 612
Accrued expenses...................................... 248 371 3,636 283 1,146
Other................................................. 1,514 2,287 1,509 1,776 634
-------- -------- -------- ------ -------
Net cash provided (used) by operating activities.... 14,428 10,867 15,142 (2,407) 3,878
FINANCING ACTIVITIES
Long-term debt borrowings................................. 70,000 3,100 -- 2,150 7,300
Principal payments on long-term debt...................... (10,000) (10,336) (8,101) -- (1,639)
Proceeds from issuance of common stock.................... 15,830 205 -- -- 500
Acquisition of treasury stock............................. -- -- (80) (80) --
-------- -------- -------- ------ -------
Net cash provided by (used in) financing
activities........................................ 75,830 (7,031) (8,181) 2,070 6,161
INVESTING ACTIVITIES
Capital expenditures...................................... (1,003) (9,296) (3,314) (330) (1,166)
Investments and intangibles............................... -- (503) (2,995) -- (1,261)
Acquisition of NEN assets................................. (84,289) 6,588 -- -- --
Acquisition of ABL........................................ -- (4,446) (1,275) -- (350)
Acquisition of Receptor Biology, net of cash acquired..... -- -- -- -- (7,278)
-------- -------- -------- ------ -------
Net cash used in investing activities............... (85,292) (7,657) (7,584) (330) (10,055)
-------- -------- -------- ------ -------
Net change in cash and cash equivalents............. 4,966 (3,821) (623) (667) (16)
Effect of exchange rate changes on cash and cash
equivalents............................................... 162 140 64 194 (82)
Cash and cash equivalents at beginning of period............ -- 5,128 1,447 1,447 888
-------- -------- -------- ------ -------
Cash and cash equivalents at end of period.................. $ 5,128 $ 1,447 $ 888 $ 974 $ 790
======== ======== ======== ====== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 2,388 $ 5,518 $ 4,504
Income taxes paid......................................... 2,176 1,205 478
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Warrant issued as part of acquisition..................... -- 300 --
Warrant received as part of strategic agreement........... -- -- 4,358
Promissory note issued in connection with Receptor Biology
acquisition............................................. -- -- -- -- 3,500
Dividend out of ownership interest in Orchid Bio
Science, Inc. .......................................... -- -- -- -- 547
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
NEN Life Sciences, Inc. (NEN or the Company) designs, manufactures and
markets in-vitro biochemicals (chemical and biological testing products,
radioactive isotopes and radioactively and non-radioactively labeled reagents)
for labeling and detection in research and clinical diagnostic applications for
academic, government, industrial, pharmaceutical and clinical research
laboratories worldwide.
In April 2000, the Company changed its name from NEN Holding, Inc. to NEN
Life Sciences, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of all
subsidiaries of the Company. All significant intercompany transactions are
eliminated. NEN has determined that the U.S. dollar is the functional currency
of its worldwide operations and that the functional currency determination is
appropriate to the economic environment in which NEN operates. The financial
data of foreign subsidiaries is translated using current exchange rates at the
end of the year for balance sheet accounts, except for inventories and property,
plant and equipment, which are translated at historical rates, and average
exchange rates for operations, except for expenses related to balance sheet
amounts that are translated at historical rates. Translation and transaction
gains and losses are reflected in the statements of operations.
The Company was incorporated in March 1997 and was inactive until the
acquisition of the NEN Life Science Products business from E.I. du Pont de
Nemours and Company (DuPont) on July 1, 1997, as described in Note 12.
Unaudited Interim Financial Statements
The consolidated financial statements as of March 31, 2000 and for the
three months ended March 31, 1999 and 2000 have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue from product sales when goods are shipped to
customers and provides for estimated returns and allowances. Proceeds received
in advance of product shipment are recorded as deferred revenue in the balance
sheet until the products are shipped.
Research and Development Expenses
Research and development costs are charged to expense as incurred.
Advertising
Advertising costs are expensed as incurred and are included in selling and
marketing expense. Advertising expense for the period July 1, 1997 through
December 31, 1997 (the 1997 Period), 1998 and 1999 amounted to $786,000,
$2,113,000 and $1,334,000, respectively.
6
<PAGE> 7
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company uses the liability method in measuring the provision for income
taxes and recognizing deferred tax assets and liabilities in the balance sheet.
The liability method requires that deferred income taxes reflect the tax
consequences of currently enacted rates for differences between the tax and
financial reporting basis of assets and liabilities. A valuation allowance is
provided for deferred tax assets if it is more likely than not these items will
either expire before the Company is able to realize their benefit, or that
future deductibility is uncertain.
Earnings Per Share
Basic earnings per share have been computed based on the weighted-average
number of common shares outstanding during the period. Diluted earnings per
share have been computed based upon the weighted-average number of common shares
outstanding during the year, adjusted for the dilutive effect of shares issuable
upon the exercise of stock options and warrants determined based upon the
average market price for the period.
Cash Equivalents
Cash equivalents are stated at cost plus accrued interest, which
approximates market. The Company considers all highly liquid investments with a
maturity of 90 days or less when purchased to be cash equivalents.
Concentration of Credit Risk
The Company invests its excess cash in both deposits with major banks
throughout the world and in a U.S. government security-based money market fund.
The Company has not incurred any related losses. The carrying amount of cash
equivalents approximates fair value. No cash equivalents were held at December
31, 1998. At December 31, 1999, $467,000 in cash equivalents were held.
The Company sells a broad range of products in many countries of the world.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base. Ongoing
credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations.
Inventories
Inventories are stated at the lower of cost or market with cost determined
by the first-in, first-out, (FIFO) method. Market costs are based on the lower
of replacement cost or estimated net realizable value.
Property and Equipment
Property and equipment are stated on the basis of cost. The Company
principally uses the straight-line method of depreciation for financial
reporting purposes to amortize the cost of the assets over their estimated
useful lives. Upon disposal of property, plant and equipment, the cost of the
asset and the related accumulated depreciation are removed from the accounts and
the resulting gain or loss is reflected in earnings. Fully depreciated assets
are not removed from the accounts until physical disposition. Expenditures for
maintenance and repairs are charged to expense as incurred.
7
<PAGE> 8
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capitalized Interest
Interest in the amount of $257,000 was capitalized in 1998 in connection
with the Company's development of computer software for internal use. No
interest was capitalized in 1999 or the 1997 Period. The amount capitalized was
computed by applying the effective interest rate on the Company's borrowings to
the amount of cost capitalized on the project until implementation. Costs
incurred relating to development of the information technology project were
approximately $.6 million and $11.2 million in the 1997 Period and 1998,
respectively, of which an aggregate of approximately $7.5 million was
capitalized and is being amortized over the useful lives of the related hardware
and software.
Goodwill and Other Intangible Assets
The excess of aggregate purchase price over the fair value of net assets
acquired is amortized by use of the straight-line method for periods of 20 years
(in the case of the acquisition of Advanced Bioconcept described in Note 11) and
40 years (in the case of the acquisition of the NEN Life Science Products
business described in Note 12).
The cost of patents acquired as part of the July 1, 1997 purchase of the
NEN business from DuPont are being amortized over the average estimated
remaining economic life of the patents acquired (seven years). Costs of other
intangibles, principally patents, acquired or internally developed subsequent to
July 1, 1997, are being amortized over the estimated useful life of the items.
License agreements and other intangibles are amortized on a straight-line
basis over the estimated useful lives of the assets.
Long-Lived Assets
NEN continually evaluates the reasonableness of its amortization of
intangibles and depreciation of property, plant and equipment. If it becomes
probable that expected future undiscounted cash flows associated with the asset
are less than the carrying value, the asset is written down to fair value. Based
on the Company's review as of December 31, 1999, no impairment was evident.
Environmental Matters
Accruals for environmental matters are recorded as an expense when it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated. The Company accrues its estimate of the costs to
dispose of both radioactive and other hazardous wastes resulting from various
production processes as the waste is generated.
Liabilities related to future remediation costs are recorded when
environmental assessments and/or clean ups are probable, and the cost can be
reasonably estimated. Other than for assessments, the timing and magnitude of
these accruals is generally based on the Company's commitment to a formal plan
of action such as an approved remediation plan.
The Company utilizes a $5.6 million letter of credit to collaterize its
potential obligation for decommissioning its Boston and Billerica, Massachusetts
sites, should such decommissioning be required. Management does not expect any
material loss to result from the letter of credit because performance is not
expected to be required, and, therefore, is of the opinion that the fair value
of these instruments is zero.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations in accounting for its employee stock
8
<PAGE> 9
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options. Under APB 25, when the exercise price of employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation. (See Note 10).
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income (Statement 130), which became effective for
the Company in 1998. Statement 130 requires that an enterprise classify items of
other comprehensive income, as defined therein, by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid in capital in the equity
section of the balance sheet.
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP, which was adopted by
the Company in March 1998, requires capitalization of certain costs incurred in
connection with developing or obtaining internal use software. In the prior
year, the Company capitalized such costs on a basis consistent with SOP 98-1.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities(Statement
133). The Statement requires the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives are either offset against
the change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. The Company adopted Statement
133 in September 1998 in connection with its execution of a series of foreign
exchange hedging transactions, as described in Note 9. The Company did not have
any significant hedging activity prior to that date. The Company received a
warrant in 1999 in connection with a strategic business relationship (see Note
9). The warrant is a derivative under Statement 133.
The adoption of Statement 133 in September 1998 and the foreign exchange
hedging transaction described in Note 9 resulted in comprehensive income being
recorded in September 1998. The Company has no other elements of comprehensive
income.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation (the Interpretation). This
Interpretation clarifies how companies should apply the Accounting Principles
Board's Opinion No. 25, Accounting for Stock Issued to Employees. The
Interpretation will be applied prospectively to new awards, modifications to
outstanding awards, and changes in employee status on or after July 1, 2000,
except as follows: the definition of an employee applies to awards granted after
December 15, 1998; the Interpretation applies to modifications that reduce the
exercise price of an award after December 15, 1998; and the Interpretation
applies to modifications that add a reload feature to an award made after
January 12, 2000. At the present time, there are no awards granted by the
Company which would result in an adjustment at July 1, 2000 as a result of this
Interpretation.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. SAB
101 clarifies the SEC staff's views on applying generally accepted accounting
principles to revenue recognition in financial statements. During 2000, the SEC
issued amendments SAB 101A and SAB 101B, which deferred the effective date of
SAB
9
<PAGE> 10
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
101. The Company believes its current accounting is consistent with this SAB,
and therefore, the adoption of the SAB is not expected to have a significant
impact on the Company's financial statements.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the presentation used for the year ended
December 31, 1999.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------- MARCH 31,
1998 1999 2000
------ ------- ----------
(Unaudited)
<S> <C> <C> <C>
Finished products......................................... $1,834 $ 2,561 $ 3,911
Work in process........................................... 5,290 6,332 5,824
Raw material.............................................. 1,419 1,428 1,505
------ ------- -------
$8,543 $10,321 $11,240
====== ======= =======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES -------------------
(YEARS) 1998 1999
------------ ------- --------
<S> <C> <C> <C>
Land.................................. $ 2,250 $ 2,250
Buildings and improvements............ 10 to 40 6,331 6,699
Equipment............................. 3 to 15 34,435 37,339
------- --------
43,016 46,288
Less allowance for depreciation....... (6,461) (12,035)
------- --------
$36,555 $ 34,253
======= ========
</TABLE>
Depreciation expense for the 1997 Period, 1998 and 1999 was $1,995,000,
$4,513,000 and $5,589,000, respectively.
In addition, the Company leases production and office space and equipment
under various cancelable and non-cancelable operating leases. Rental expense for
the 1997 Period, 1998 and 1999 was approximately $133,000, $385,000 and
$701,000, respectively.
10
<PAGE> 11
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, aggregate minimum annual rental commitments under
operating leases with initial or remaining non-cancelable lease terms of one
year or more consisted of the following (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 926
2001........................................................ 875
2002........................................................ 563
2003........................................................ 284
2004........................................................ 197
Thereafter.................................................. 192
------
$3,037
======
</TABLE>
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1999
------- -------
<S> <C> <C>
Goodwill -- gross........................................ $ 6,513 $ 7,789
Less accumulated amortization............................ (150) (412)
------- -------
Goodwill -- net.......................................... 6,363 7,377
Patents and trademarks -- gross.......................... 6,370 6,370
Less accumulated amortization............................ (1,324) (2,233)
------- -------
Patents and trademarks -- net............................ 5,046 4,137
License agreements and other intangibles -- gross........ 151 3,146
Less accumulated amortization............................ (40) (148)
------- -------
License agreements and other intangibles -- net.......... 111 2,998
------- -------
Total intangible assets -- gross......................... 13,034 17,305
Less accumulated amortization............................ (1,514) (2,793)
------- -------
Total intangible assets -- net........................... $11,520 $14,512
======= =======
</TABLE>
Amortization expense for the 1997 Period, 1998 and 1999 was $483,000,
$1,031,000 and $1,279,000, respectively.
11
<PAGE> 12
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. CURRENT LIABILITIES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1998 1999
------ -------
<S> <C> <C>
Accrued salaries and wages................................ $4,297 $ 6,390
Accrued income taxes...................................... 388 2,202
Deferred revenue.......................................... - 867
Accrued royalties......................................... 199 730
Accrued professional fees................................. 2,188 594
Accrued interest.......................................... 395 531
Accrued waste disposal.................................... 375 418
Accrued freight........................................... 224 621
Other..................................................... 1,856 2,116
------ -------
$9,922 $14,469
====== =======
</TABLE>
6. LONG-TERM OBLIGATIONS, BANK CREDIT ARRANGEMENTS AND COMMITMENTS
The Company has available a term loan facility ($50 million outstanding at
December 31, 1998 and $45 million outstanding at December 31, 1999) with varying
maturities through 2005, and a revolving credit agreement for $20 million
expiring in 2002 to support overall working capital needs. There were no
borrowings outstanding under the revolving credit agreement at December 31, 1999
($3.1 million was outstanding at December 31, 1998). The agreement contains
various market rate borrowing options for the term loans and revolver (which
range from base rate plus 1.75% to 2.25% or LIBOR plus 2.75% to 3.25%) and is
secured by all of the Company's assets. At December 31, 1999, the interest rates
ranged from 8.94% to 9.75%. Financial covenants limit the Company's borrowing
capacity, require minimum EBITDA, interest coverage and fixed coverage ratios,
and restrict capital expenditures and dividend payments.
The Company estimates that the fair value of its long-term debt at December
31, 1998 and 1999 approximates its carrying value because the debt bears
interest at or near market rates for similar issues.
Maturities of long-term debt, including the current portion for the five
years following December 31, 1999 are as follows: $3.4 million in 2000, $5.8
million in 2001, $4.9 million in 2002, $3.7 million in 2003, $18.8 million in
2004 and $8.5 million in 2005.
The Company has entered into various agreements which require the Company
to pay a specific percentage of product sales and/or a minimum royalty. These
agreements have different terms (expirations through 2022), include a variety of
renewal options and were acquired directly by NEN or via assignment as a result
of the acquisition of the NEN Life Science Products Business described in Note
12. Expense under these agreements are recognized on an as-earned basis and
recorded in the period earned as a component of cost of sales. Expense
associated with these agreements was approximately $137,000 in the 1997 Period,
$942,000 in 1998 and $2,268,000 in 1999.
12
<PAGE> 13
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The components of income (loss) before income tax expense (benefit)
consisted of the following (in thousands):
<TABLE>
<CAPTION>
JULY 1, 1997 YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 31 -----------------
1997 1998 1999
------------ ------ -------
<S> <C> <C> <C>
United States................................ $(10,378) $1,777 $27,247
Foreign...................................... 585 (799) 550
-------- ------ -------
$ (9,793) $ 978 $27,797
======== ====== =======
</TABLE>
The provision for (benefit from) income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
JULY 1, 1997 YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 31 ----------------
1997 1998 1999
------------ ----- -------
<S> <C> <C> <C>
Current:
Federal..................................... $ 709 $ 344 $ 1,678
State....................................... 181 46 21
Foreign..................................... 270 326 371
------- ----- -------
1,160 716 2,070
Deferred:
Federal..................................... (1,745) (311) 6,744
State....................................... (539) (325) 1,977
Foreign..................................... - - 37
------- ----- -------
(2,284) (636) 8,758
------- ----- -------
$(1,124) $ 80 $10,828
======= ===== =======
</TABLE>
A reconciliation between the provision for (benefit from) income taxes and
the amount computed through the application of the U.S. statutory tax rate (34%
for the 1997 Period and 1998 and 35% for 1999) to income (loss) before income
tax expense (benefit) taxes is as follows (in thousands):
<TABLE>
<CAPTION>
JULY 1, 1997 YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 31 ----------------
1997 1998 1999
------------ ----- -------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory
rate........................................ $(3,330) $ 332 $ 9,729
Add (deduct):
In-process research and development......... 2,064 -- --
Research and development tax credits........ -- (388) (465)
State income taxes, net of federal income
tax benefit.............................. (237) (200) 1,299
Other items................................. 379 336 265
------- ----- -------
$(1,124) $ 80 $10,828
======= ===== =======
</TABLE>
13
<PAGE> 14
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes for 1998 and 1999 reflect the impact of temporary
differences between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. Deferred tax assets
(liabilities) are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss and tax credit carryforwards........ $ 2,521 $ 2,390
Intangible assets...................................... 2,245 2,106
Post retirement/employee benefits...................... 4,030 84
Accrued liabilities not deductible until paid.......... 1,188 1,357
Inventory/other reserves............................... 1,528 1,561
------- -------
Total deferred tax assets......................... 11,512 7,498
Deferred tax liabilities:
Unrealized gain on warrant............................. -- (4,088)
Depreciation and other................................. (2,787) (3,310)
------- -------
Total deferred tax liabilities.................... (2,787) (7,398)
------- -------
Net deferred tax assets........................ $ 8,725 $ 100
======= =======
</TABLE>
At December 31, 1999, net operating loss and tax credit carryforwards
consisted of research and development tax credits of $1,164,000, which expire in
2018 and 2019, alternative minimum tax credits of $1,002,000 and state
investment tax credits of $224,000, which expire in 2002.
Undistributed earnings of foreign subsidiaries aggregated approximately
$1,300,000 at December 31, 1999, which, under existing law, will not be subject
to U.S. tax until distributed as dividends. Because the earnings have been or
are intended to be indefinitely reinvested in foreign operations, no provision
has been made for U.S. income taxes that may be applicable thereto.
The income tax expense (benefit) for the three months ended March 31, 2000
is computed based on (a) the estimated effective tax rate for 2000 for the
results of operation excluding the purchased in-process research and
development charge (for which there is no benefit) and the unrealized loss on
warrant and (b) the combined federal and state rate used in 1999 to establish
the deferred tax on the unrealized gain on the warrant that is being reversed
by the first quarter 2000 unrealized loss on the warrant. The change in
deferred taxes in the first quarter of 2000 is principally the reversal of the
deferred tax liability resulting from the first quarter 2000 unrealized loss on
the warrant.
8. RETIREMENT PLANS
The Company terminated its noncontributory defined benefit plan and retiree
healthcare plan which covered substantially all U.S. employees in August 1999.
The gain on termination of the plans consists of a gain on curtailment
($16,250,000), a settlement loss ($5,009,000) and expenses related to the
termination. The benefits from the pension plan were based primarily on
employees' years of service and pay near retirement. The retiree healthcare plan
provided benefits for retired U.S. employees and their eligible dependents on a
cost-sharing basis. The Company's U.S. employees became eligible for such
benefits when they achieved age 50 with 15 years of service. The Company did not
fund the retiree healthcare arrangements. In connection with the pension plan
termination, which was announced in August 1999, the Company invested its
pension assets in bonds with a similar duration and maturity to its pension
liability. The pension assets will be distributed to employees or used to
purchase annuities in 2000 in complete satisfaction of the Company's U.S.
pension obligation. The excess pension assets will be distributed to
participants in the pension plan.
The retiree healthcare plan was terminated in 1999 for all participants who
were not currently retired and had elected retiree healthcare.
Pension coverage for employees of non-U.S. subsidiaries are through
government programs or are provided under separate plans and funded through
deposits with trustees under insurance policies. The amounts under these
programs are not significant.
14
<PAGE> 15
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the changes in the plans' benefit obligation and fair
value of assets for the period from July 1, 1997 through December 31, 1997 and
for each of the two years in the period ended December 31, 1999, and a statement
of funded status as of December 31 of each period follows (in thousands):
<TABLE>
<CAPTION>
PENSION PLAN RETIREE HEALTHCARE PLAN
--------------------------- ---------------------------
1997 1998 1999 1997 1998 1999
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
RECONCILIATION OF BENEFIT OBLIGATION
Obligation at beginning of period........ $20,300 $21,729 $25,628 $ 4,935 $ 5,272 $ 6,948
Service cost............................. 693 1,549 1,068 161 399 248
Interest cost............................ 736 1,448 966 176 392 289
Actuarial (gain) loss.................... -- 917 (166) - 887 (877)
Gain due to curtailment.................. -- -- (9,854) -- -- (6,396)
Settlement loss.......................... -- -- 5,009 -- -- --
Benefits payments........................ -- (15) (37) -- (2) (4)
------- ------- ------- ------- ------- -------
Obligation at December 31................ $21,729 $25,628 $22,614 $ 5,272 $ 6,948 $ 208
======= ======= ======= ======= ======= =======
RECONCILIATION OF FAIR VALUE OF PLAN
ASSETS
Fair value of plan assets at beginning of
period................................. -- $19,316 $22,897 -- -- --
Actual return on plan assets............. $ 956 3,586 (110) -- -- --
Transfer of pension assets from DuPont as
part of NEN acquisition................ 18,360 38 -- -- -- --
Employer contributions................... -- -- -- -- $ 2 $ 4
Benefit payments......................... -- (15) (37) -- (2) (4)
Expenses................................. -- (28) (136) -- -- --
------- ------- ------- ------- ------- -------
Fair value of plan assets at December
31..................................... $19,316 $22,897 $22,614 $ -- $ -- $ --
======= ======= ======= ======= ======= =======
FUNDED STATUS OF PLAN
Funded status at December 31............. $(2,413) $(2,731) $ -- $(5,272) $(6,948) $ (208)
Unrecognized actuarial (gain) loss....... (177) (1,214) -- -- 887 --
------- ------- ------- ------- ------- -------
Net pension liability recognized on the
consolidated balance sheet............. $(2,590) $(3,945) $ -- $(5,272) $(6,061) $ (208)
======= ======= ======= ======= ======= =======
</TABLE>
Net periodic benefit cost for the plans are as follows (in thousands):
<TABLE>
<CAPTION>
PENSION PLAN RETIREE HEALTHCARE PLAN
-------------------------------- --------------------------
JULY 1, 1997 YEAR ENDED JULY 1, 1997 YEAR ENDED
THROUGH DECEMBER 31 THROUGH DECEMBER 31
DECEMBER 31 ----------------- DECEMBER 31 -----------
1997 1998 1999 1997 1998 1999
------------ ------- ------- ------------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the
period................................. $ 693 $ 1,549 $ 1,068 $161 $399 $248
Interest cost on projected benefit
obligation............................. 736 1,448 966 176 392 289
Recognized loss on termination........... -- -- -- -- -- 14
Expected return on plan assets........... (779) (1,642) (1,134) -- -- --
----- ------- ------- ---- ---- ----
$ 650 $ 1,355 $ 900 $337 $791 $551
===== ======= ======= ==== ==== ====
</TABLE>
15
<PAGE> 16
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average assumptions as of December 31 used in the measure of
the Company's benefit obligations are:
<TABLE>
<CAPTION>
PENSION PLAN RETIREE HEALTHCARE PLAN
------------------------ ------------------------
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate........................... 7.25% 6.75% 7.25% 7.25% 6.75% 7.25%
Expected return on plan assets.......... 8.50% 8.50% 8.50% N/A N/A N/A
Rate of compensation increases.......... 4.73% 4.73% 4.73% N/A N/A N/A
</TABLE>
For measurement purposes, prior to July 31, 1999, a 9.0% annual rate of
increase in the per capita cost of company-provided healthcare benefits was
assumed for 1999. The rate was assumed to decrease gradually by 1/2% annually
to 6% in 2006 and remain at that level thereafter.
After July 31, 1999, the trend rate before age 65 is 37% for 1999, 8% for
2000, decreasing 1/2% annually to 5%, and after age 65 the trend rate is 37%
for 1999, 10% for 2000, 9% for 2001, 8% for 2002, then decreasing 1/2% annually
to 5%.
Assumed healthcare cost trend rates have an effect on the amounts reported
for the healthcare plan. A 1% change in assumed healthcare cost trends would
have the following effects (in thousands):
<TABLE>
<CAPTION>
1% INCREASE 1% DECREASE
----------- -----------
<S> <C> <C>
Effect on total of service and interest cost components for
the year ended December 31, 1999.......................... $127 $(96)
Effect on December 31, 1999 post retirement benefit
obligation................................................ 22 (18)
</TABLE>
The Company also sponsors a defined contribution savings plan for eligible
U.S. employees. The Company contributed 50% of the first 4% of an employee's
pre-tax contribution in 1998 and 1999. The contribution percentage was increased
to 100% of the first 5% effective January 1, 2000. Expenses related to the
savings plan were $240,000 in the 1997 Period, $431,000 in 1998 and $466,000 in
1999.
9. FINANCIAL INSTRUMENTS
The Company operates internationally and, as a result, is exposed to
foreign currency fluctuations. Specifically, the exposure includes firm or
forecasted intercompany trade accounts, intercompany loans, and third-party
sales or payments. In an attempt to reduce the risk that the amounts due will be
adversely affected by changes in foreign currency exchange rates, foreign
currency forward contracts are utilized and accounted for as hedging
instruments. The Company does not use derivative financial instruments for
speculative purposes.
Financial Accounting Standards Board Statement No. 133 Accounting for
Derivative Instruments and Hedging Activity (Statement 133) requires that all
derivative financial instruments, such as foreign exchange contracts, be
recognized in the financial statements and measured at fair value regardless of
the purpose or intent for holding them. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or
shareholders' equity (as a component of comprehensive income) depending on
whether the derivative is being used to hedge changes in fair value (in our case
a firm commitment) or cash flow (in our case a forecasted foreign exchange
transaction). Fair values of the financial instruments are determined by
reference to market values based on the end of month spot rate for the Yen, the
contract rate and the time period to settlement.
NEN records the foreign exchange contracts at fair value in its
consolidated balance sheet, and the related gains or losses on these contracts
(which are cash flow hedges as they are hedging forecasted sales in a future
month and the related receipt of Yen) are deferred in shareholders' equity (as a
component of
16
<PAGE> 17
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comprehensive income). The deferred gains and losses are recognized in income in
the respective sales month. The contracts are then considered fair value hedges
until the related receivable is due.
As of December 31, 1999, the Company has one contract to sell 39 million
Japanese Yen for $350,000 with a settlement date of January 20, 2000, related to
Japanese Yen receivables outstanding at December 31, 1999. In addition, the
Company has 12 contracts to sell 399 million Japanese Yen for $3.8 million, with
settlement dates from February 2000 to January 2001, related to forecasted
transactions in 2000.
As of December 31, 1998, the Company had three contracts to sell 193
million Yen for $1.5 million with settlement dates from January 21, 1999 to
March 19, 1999, related to Yen receivables outstanding at December 31, 1998. In
addition, the Company had 12 contracts to sell 551 million Yen for $4.7 million,
with settlement dates from April 20, 1999 to March 21, 2000, related to
forecasted transactions in 1999.
No gain or loss has been recognized in 1998 or 1999 related to hedge
ineffectiveness, as defined in Statement 133.
In October 1999, the Company entered into a strategic relationship with an
e-commerce provider for scientific and laboratory products. As a part of the
agreement, the Company received a warrant to purchase 350,083 shares of common
stock at a purchase price of $0.01 per share. The warrant is dated November 1,
1999 and expires on the tenth anniversary of the warrant. The shares exercisable
under the warrant agreement vest over a five-year period (20% on each
anniversary date). The warrant agreement and the Company's right to acquire any
unexercised shares is terminated if the strategic relationship is terminated or
if the provider is no longer the Company's exclusive e-commerce provider.
The Company determined that the initial value of the warrant agreement
(based on the original offering price of the strategic partner who completed an
initial public offering in November 1999, discounted for termination risk) was
$4.4 million. The initial value will be reflected in earnings over the five-year
contract period on a straight-line basis. At December 31, 1999, $3.5 million of
the deferred revenue is included in other long-term liabilities and $867,000 is
included in accrued expenses.
The warrant agreement is a Derivative Instrument under Statement 133.
Accordingly, the warrant is carried at fair market value, with the change in
fair market value recognized in earnings. The fair market value at December 31,
1999 was determined to be $14.4 million, based on the December 31, 1999 closing
price of the underlying stock, discounted for termination risk. The $10.1
million increase in fair market value is reflected in 1999 earnings.
The price of the underlying stock declined from $79.50 at December 31, 1999
to $25.75 at March 31, 2000. As a result, an unrealized loss of $9.8 million was
recorded in the first quarter of 2000. The decline continued in April with the
closing price of the underlying stock dropping to $13.00 resulting in an
additional $2.5 million of unrealized loss in April 2000.
10. STOCKHOLDERS' EQUITY
Stock Split
On July 17, 1998, the Company effected a 100-for-1 stock split in the form
of a stock dividend. Shareholders of record on July 17, 1998 received 99
additional shares of common stock for every share they owned on July 17, 1998.
Share data for all periods presented herein have been adjusted to give effect to
the stock split.
Stock Purchase Warrant
In connection with the Company's acquisition of Advanced Bioconcept (1994)
Ltd. described in Note 11, the Company issued a Stock Purchase Warrant
(Warrant). The Warrant allows the purchase of between 81,183 and 324,734 shares
of NEN Class A common stock at $.01 per share. The Company has reserved 324,734
shares related to the Warrant. The actual number of shares that can be acquired
is based on the ratio of Advanced Bioconcept sales to consolidated sales at the
liquidity event, as defined in the
17
<PAGE> 18
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warrant agreement. As of December 31, 1999, the ratio would result in 81,183
shares being available for purchase under the Warrant. The Warrant expires in
August 2008.
The fair value of the Warrant was determined to be $300,000 when it was
issued based on negotiation of value between the parties at the time of sale.
Stock Options
The Board of Directors adopted and the Shareholders approved the 1997
Equity Incentive Plan (the Plan). The Plan provides for the issuance of up to
2,700,000 shares (increased from 1,666,700 on April 17, 1998 and from 1,966,700
on December 28, 1999) of Common Stock (either Class A common stock or Class B
common stock) in connection with stock options or other awards under the Plan.
The Plan allows a committee of the Board of Directors (the Committee) to grant
incentive stock options, non-qualified stock options, stock appreciation rights
and stock awards (including the use of restricted stock and phantom shares). The
Committee has the authority to determine the employees who will receive the
rewards, the amount of the awards, and other terms and conditions of the award.
Payments may be in cash and, to the extent permitted by the Committee, by common
stock or a combination thereof.
The Plan provides that shares granted come from the Company's authorized
but unissued or reacquired common stock and be granted at fair market value on
the date of the grant. The options currently outstanding become exercisable over
a five-to eight-year period commencing one year from the date of grant and
expire ten years after the date of grant.
A summary of the status of the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Options exercisable............................. -- 201,680 448,360
Options available for grant..................... 658,300 223,300 884,600
Weighted average exercise price of options
exercisable................................... $ 1.00 $ 1.00 $ 1.00
</TABLE>
Changes in the options outstanding since July 1, 1997 are summarized in the
following table (adjusted to reflect the 1998 100-for-1 stock split):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE RANGE PRICE
--------- ----------- --------
<S> <C> <C> <C>
Balance of July 1, 1997..................... --
Options granted............................. 1,008,400 $ 1.00 $1.00
---------
Balance at December 31, 1997................ 1,008,400 $ 1.00 $1.00
Options granted............................. 735,000 $ 1.00 $1.00
Options forfeited........................... --
---------
Balance at December 31, 1998................ 1,743,400 $ 1.00 $1.00
Options granted............................. 212,000 $3.50-$4.50 $3.65
Options forfeited........................... (140,000) $ 1.00 $1.00
---------
Balance at December 31, 1999................ 1,815,400 $1.00-$4.50 $1.31
=========
</TABLE>
18
<PAGE> 19
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.00................... 1,603,400 7.9 $1.00 448,360 $1.00
$3.50 to $4.50.......... 212,000 9.4 3.65 -- --
---------
$1.00 to $4.50.......... 1,815,400 8.1 1.31 448,360 $1.00
=========
</TABLE>
During the first quarter of 2000 the Company sold 111,111 shares of common
stock to its new Chief Executive Officer for $500,000 and issued options to
purchase 563,547 shares of its common stock at $4.50 per share. In addition, it
declared and paid a dividend to its shareholders of stock it had received in the
first quarter 2000 from strategic alliance with a value of $537,000.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(Statement 123). Accordingly, no compensation cost has been recognized for the
stock option plans.
The Company's pro forma information is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
JULY 1, 1997 YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 31 --------------
1997 1998 1999
------------- ---- -------
<S> <C> <C> <C>
Net income (loss)............................... $(8,669) $898 $16,969
Estimated pro forma compensation expense from
stock options................................. (18) (64) (81)
------- ---- -------
Pro forma net income (loss)..................... $(8,687) $834 $16,888
======= ==== =======
Pro forma net income (loss) per share:
Basic......................................... $ (.57) $.05 $ 1.06
Diluted....................................... $ (.57) $.05 $ 1.02
</TABLE>
Compensation expense associated with an award is recognized over the
vesting period of the related option grant. Therefore, the impact on pro forma
net income/loss may not be representative of compensation expense in future
years, when the effect of the amortization of multiple awards would be reflected
in the pro forma net income/loss.
The fair value of each option grant is estimated on the date of grant with
the following weighted-average assumptions: dividend yield--none; risk-free
interest rate--5.4% to 6.5%; and expected life--7-10 years. The weighted-average
fair value of options granted in the 1997 Period, 1998 and 1999 was $.36, $.43
and $1.26, respectively. The weighted-average contractual life of options
outstanding at December 31, 1997, 1998 and 1999 was 9.6 years, 8.9 years and 8.1
years, respectively.
11. ACQUISITION OF ADVANCED BIOCONCEPT (1994) LTD.
On October 31, 1998, the Company acquired all of the outstanding stock of
Advanced Bioconcept (1994) Ltd. (ABL), a Canadian corporation, for $4 million in
cash and issuance of the Warrant with a value of $300,000 (See Note 10). The
Company also incurred transaction costs of $196,000 in connection with the
acquisition. ABL designs, manufactures and markets fluorescent-labeled peptides
for labeling and detection in research applications. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
total purchase price has been allocated to the assets acquired and the
liabilities assumed based upon their fair values at the date of acquisition. The
excess of the purchase price over the fair values of the net assets acquired was
$3.3 million and has been recorded as goodwill, which is being amortized on a
straight-line basis over 20 years. The operating results of ABL are included in
the Company's consolidated results of operations since October 31, 1998, and pro
forma effects are not material.
19
<PAGE> 20
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net initial purchase price, including transaction costs, was allocated
as follows (in thousands):
<TABLE>
<S> <C>
Current assets............................................ $ 799
Current liabilities....................................... (767)
Property and equipment.................................... 23
Other assets.............................................. 273
Purchased in-process research and development............. 1,200
Goodwill, patents and other intangibles................... 3,543
Other liabilities......................................... (325)
------
Purchase price............................................ $4,746
======
</TABLE>
Of the purchase price, $1,470,000 was allocated to identifiable intangible
assets including purchased research and development ($1,200,000) and patents
($270,000). The purchased research and development represents the value of ten
projects related to specific product applications that were between 24% and 75%
complete and had not reached technological feasibility. No alternative uses were
identified prior to reaching technological feasibility because of the uniqueness
of the specific product application. The purchased research and development was
valued using a discounted cash flow method allocating the anticipated discounted
cash flow between the portion that had been developed to date as compared to the
total (approximately 35% was allocated to the completed development stage and
65% was allocated to the development to be completed). The calculation was based
on the estimated revenue and expenses flowing from the completion of the R&D
projects, future R&D required to maintain the projects in the forecast period
and a working capital charge. The net cash flow was discounted to its present
value using a risk adjusted cost of capital of 31.5%. The net result was then
allocated 35% to the purchased research and development and 65% to the future
research and development. The risk adjusted cost of capital reflected the
additional risk related to Advanced Bioconcepts and its development stage
business.
Financial Accounting Standard Board Interpretation No. 4 requires that
in-process R&D be charged to expense upon consummation of the purchase
transaction. Accordingly, the $1.2 million allocated to in-process R&D was
expensed in 1998.
The purchase agreement includes additional contingent payments to the
selling shareholders of ABL based on certain performance and development
standards. The maximum contingent payout under the agreement is $9 million. The
contingent payout includes $3 million tied to new product development, $2
million tied to achieving sales targets in the high throughput sales market
(after which a percentage of sales will be paid) and $4 million tied to royalty
on diagnostic sales. The contingent payouts must be earned within five years of
closing for new product development and high throughput sales and within ten
years of closing or within five years from the introduction of the first
diagnostic product, whichever is earlier for the diagnostic revenue. The
contingent liability will be recorded and goodwill increased accordingly as the
payments are earned. Contingent payments of $250,000 and $1,275,000 have been
earned related to new product development in 1998 and 1999, respectively.
12. ACQUISITION OF NEN LIFE SCIENCE PRODUCTS BUSINESS
Effective as of July 1, 1997, the Company's wholly owned subsidiary, NEN
Life Sciences Products Inc., acquired substantially all of the assets of NEN
Life Science Products Business from E.I. du Pont de Nemours and Company
(DuPont).
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based upon the fair values at the
date of acquisition. The excess of the purchase price over the fair values of
the net assets acquired was $3.2 million and has been recorded as goodwill,
which is being amortized on a straight-line basis over 40 years.
20
<PAGE> 21
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Working capital.......................................... $32,331
Property and equipment................................... 32,323
Other assets............................................. 15,518
Purchased in-process research and development............ 10,000
Goodwill................................................. 3,240
Other liabilities........................................ (9,182)
-------
Purchase price........................................... $84,230
=======
</TABLE>
Of the purchase price, $16 million was allocated to identifiable intangible
assets including purchased research and development ($10 million) and patents
($6 million). The purchased research and development represents the value of
approximately 90 projects related to specific product applications that were in
various stages of development and had not reached technological feasibility. No
alternative uses were identified prior to reaching technological feasibility
because of the uniqueness of the specific product applications. The purchased
research and development was valued using the discounted cash flow method. The
calculations were based on estimates of revenues and expenses flowing from the
completion of the R&D projects, royalty charges related to the projects, future
R&D required to maintain the products in the forecast period and a working
capital charge. The net cash flow was discounted to its present value using risk
adjusted cost of capital of 21% and the estimated cost to complete the R&D ($2.7
million) was subtracted from the result. The risk adjusted cost of capital was
based on NEN's experience in research and development projects for new products
which enable it to establish reasonable time frame and cost estimates.
Financial Accounting Standards Board Interpretation No. 4 requires that
in-process R&D be charged to expense upon consummation of the purchase
transaction. Accordingly, the $10 million allocated to in-process R&D, net of
related deferred taxes of $1,583,000, is reflected in retained earnings
(deficit) at July 1, 1997 and is included as an expense in the period July 1,
1997 to December 31, 1997.
The purchase agreement provides for additional contingent payments to
DuPont to the extent that the Company's gross profit margin, as defined in the
purchase agreement, from the products in the catalog at the time of acquisition
or in the product pipeline exceeds specified levels over the subsequent five
years. The gross margin targets, as defined, are $66.5 million in 2000 and $67.0
million in 2001 (the final year of the earn-out). The percentage of gross margin
over these targets to be paid as earn-out is 95% in 2000 and 100% in 2001,
subject to a cap of $14.3 million for 2000 and $13.5 million plus the lesser of
$4.1 million or the amount unpaid under the cap for 2000. Products developed
since July 1997 are not included in the calculation. Gross margin for the year
ended December 31, 1999, as defined in the agreement, was $58.2 million. The
timing of such payments, to the extent earned, are subject to cash availability
under the Company's financing arrangements. The contingent payment liability
will be recorded if earned. No contingent payments have been earned in the 1997
Period, 1998 or 1999.
13. RELATED PARTY TRANSACTIONS
In connection with the NEN acquisition (see Note 12), the Company paid $3.0
million in fees and expenses to its primary stockholder. The Company also paid
to the primary stockholder management fees of $346,000, $711,000 and $732,000
for the 1997 Period, 1998 and 1999, respectively. In addition, the Company
reimbursed the primary stockholder for expenses incurred for the benefit of the
Company aggregating $114,000 and $20,000 during 1998 and 1999, respectively.
14. OPERATIONS BY INDUSTRY SEGMENTS AND GEOGRAPHIC AREA
NEN is a global provider of products, services and technologies for life
science research in the field of functional genomics, high throughput screening
and drug discovery. Products share similar distribution and manufacturing
resources and are marketed and sold to the research community. Operating results
are assessed on an aggregate basis.
21
<PAGE> 22
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consequently, as permitted by the provisions of Statement 131, Disclosure
About Segments of an Enterprise and Related Information, the Company has one
reportable segment for financial statement purposes.
Net sales, based on the point of sale, not the location of the customer,
and long-lived and net assets by geographic area, are as follows (in thousands):
<TABLE>
<CAPTION> THREE MONTHS
JULY 1, 1997 YEAR ENDED ENDED
THROUGH DECEMBER 31 MARCH 31
DECEMBER 31 ------------------ ------------------
1997 1998 1999 1999 2000
------------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers: (Unaudited)
North America........................................ $35,609 $73,049 $ 80,266 $20,374 $23,331
Europe............................................... 9,806 21,735 23,588 6,497 5,956
------- ------- -------- ------- -------
$45,415 $94,784 $103,854 $26,871 $28,987
======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
---------------------------------- ------------
1997 1998 1999 2000
------------- ------- -------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Long-lived assets:
North America........................................ $46,878 $55,774 $ 64,192 $67,298
Europe............................................... 1,718 1,907 1,695 1,626
------- ------- -------- -------
$48,596 $57,681 $ 65,887 $68,924
======= ======= ======== =======
Net assets:
North America........................................ $ 1,833 $ 3,051 $ 20,543 $15,757
Europe............................................... 5,328 5,435 4,575 4,203
------- ------- -------- -------
$ 7,161 $ 8,486 $ 25,118 $19,960
======= ======= ======== =======
</TABLE>
European operations are represented by subsidiaries located in the United
Kingdom, France, Switzerland, Belgium, Germany, the Netherlands and Italy.
22
<PAGE> 23
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS
JULY 1, 1997 YEAR ENDED ENDED
THROUGH DECEMBER 31 MARCH 31
DECEMBER 31 ----------------- ------------------
1997 1998 1999 1999 2000
------------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)......................................... ($8,669) $ 898 $16,969 $ 843 $(5,494)
======= ======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share -- weighted-average shares....................... 15,280 15,979 15,961 15,980 16,021
Dilutive employee stock options and stock warrant......... -- 14 625 49 --
------- ------- ------- ------- -------
Denominator for diluted earnings per share -- adjusted
weighted-average shares and assumed conversions........ 15,280 15,993 16,586 16,029 16,021
======= ======= ======= ======= =======
Net income (loss) per share:
Basic..................................................... $ (.57) $ .06 $ 1.06 $ .05 $ (.34)
Diluted................................................... $ (.57) $ .06 $ 1.02 $ .05 $ (.34)
</TABLE>
16. SUBSEQUENT EVENT
On February 29, 2000, the Company acquired all of the outstanding stock of
Receptor Biology Inc. (RB), a Delaware corporation, for $8.5 million in cash and
a $3.5 million promissory note. The $3.5 million promissory note is payable in
two equal installments, on the first and second anniversaries of the
acquisition. Interest is calculated in arrears at an average two-year treasury
rate, and is payable with the principal installment payments.
RB specializes in cloning and expressing G-protein coupled receptors (GPCR)
and developing assays for GPCR. RB products currently include 47 GPCR products,
specific cell lines and cell culture (clone expression services). RB products
are sold worldwide and its customers are among the largest pharmaceutical
companies in the world.
RB had net sales of $3.9 million and net income of $.7 million for the year
ended December 31, 1999. The acquisition will be accounted for using the
purchase method of accounting. The Company is currently in the process of
completing the purchase price allocation. The initial purchase price has been
allocated to the assets acquired and the liabilities assumed based on their fair
value at the date of acquisition. The excess of the initial purchase price over
the fair value of the net assets acquired was $4.3 million and has been recorded
as goodwill, which is being amortized on a straight-basis over 20 years. The
operating results of Receptor Biology are included in the Company's consolidated
results of operations since February 29, 2000, and pro forma effects are not
material.
23
<PAGE> 24
NEN LIFE SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net initial purchase price, including transaction costs, were allocated
as follows (in thousands):
<TABLE>
<S> <C>
Current assets............................................. $ 2,992
Current liabilities........................................ (796)
Property and equipment..................................... 582
Purchased in-process research and development.............. 1,010
Goodwill and other intangibles............................. 11,491
Long-term liabilities...................................... (2,985)
-------
Purchase price............................................. $12,294
=======
</TABLE>
Of the purchase price, $8,232,000 was allocated to identifiable intangible
assets including purchased research and development ($1,010,000), existing
technology ($6,680,000), assembled workforce ($430,000) and license agreements
($112,000). The purchased research and development represents the value of 14
projects related to specific product applications that were between 60% and 75%
complete and had not reached technological feasibility. No alternative uses were
identified prior to reaching technological feasibility because of the uniqueness
of the specific product application. The purchased research and development was
valued using a discounted cash flow model allocating the anticipated discounted
cash flow between the portion that had been developed to date as compared to the
total. The calculation was based on the estimated revenues and expenses flowing
from the completion of the R&D products, royalty charges related to the product,
future R&D required to maintain the projects in the forecast period and a
working capital charge. The net cash flow was discounted to its present value
using a risk adjusted cost of capital of 23.7%. The net result was allocated
between the purchased research and development (67%) and future research and
development (33%).
On June 12, 2000, the Company announced it will be acquired in a purchase
transaction, which is expected to close early in the third quarter of 2000.
24
