SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 1-4389
APPLERA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1534213
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
761 Main Avenue,
Norwalk, Connecticut 06859-0001
(Address of Principal Executive Offices, Including Zip Code)
(203) 762-1000
(Registrant's Telephone Number, Including Area Code)
PE Corporation
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
---- ----
As of the close of business on February 13, 2001, there were 210,879,760 shares
of Applera Corporation - Applied Biosystems Group Common Stock and 61,191,533
shares of Applera Corporation - Celera Genomics Group Common Stock outstanding.
APPLERA CORPORATION
INDEX
Part I. Financial Information Page
A. Applera Corporation Consolidated
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended December 31, 1999 and 2000 1
Condensed Consolidated Statements of Financial Position at
June 30, 2000 and December 31, 2000 2
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1999 and 2000 3
Notes to Unaudited Condensed Consolidated Financial
Statements 4-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-26
B. Applied Biosystems Group
Item 1. Financial Statements
Condensed Combined Statements of Operations for the
Three and Six Months Ended December 31, 1999 and 2000 27
Condensed Combined Statements of Financial Position at
June 30, 2000 and December 31, 2000 28
Condensed Combined Statements of Cash Flows for the
Six Months Ended December 31, 1999 and 2000 29
Notes to Unaudited Condensed Combined Financial Statements 30-35
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 36-45
APPLERA CORPORATION
INDEX
Part I. Financial Information (continued) Page
C. Celera Genomics Group
Item 1. Financial Statements
Condensed Combined Statements of Operations for the
Three and Six Months Ended December 31, 1999 and 2000 46
Condensed Combined Statements of Financial Position at
June 30, 2000 and December 31, 2000 47
Condensed Combined Statements of Cash Flows for the
Six Months Ended December 31, 1999 and 2000 48
Notes to Unaudited Condensed Combined Financial Statements 49-53
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 54-68
Part II. Other Information 69
APPLERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands except per share amounts)
Three months ended Six months ended
December 31, December 31,
1999 2000 1999 2000
-------- -------- -------- --------
Net Revenues $327,364 $413,265 $616,207 $780,679
Cost of sales 147,261 191,109 279,812 354,610
-------- -------- -------- --------
Gross Margin 180,103 222,156 336,395 426,069
Selling, general and administrative 115,347 109,181 201,491 212,186
Research, development and engineering 60,725 84,277 117,385 167,984
Amortization of goodwill and intangibles 10,968 22,049
-------- -------- -------- --------
Operating Income 4,031 17,730 17,519 23,850
Gain on investments 25,811 2,981 25,811 14,985
Interest expense 856 337 1,250 1,390
Interest income 5,143 21,332 9,551 43,899
Other expense, net (4,305) (254) (8,885) (3,156)
-------- -------- -------- --------
Income Before Income Taxes 29,824 41,452 42,746 78,188
Provision for income taxes 10,649 13,978 13,492 26,258
-------- -------- -------- --------
Net Income $ 19,175 $ 27,474 $ 29,254 $ 51,930
======== ======== ======== ========
Applied Biosystems Group (see Note 4)
Net Income $ 43,834 $ 57,954 $ 73,541 $107,098
Basic per share $ .21 $ .28 $ .36 $ .51
Diluted per share $ .20 $ .26 $ .34 $ .48
Dividends per share $ .0425 $ .0425 $ .085 $ .085
Celera Genomics Group (see Note 4)
Net Loss $(24,278) $(29,704) $(43,676) $(55,393)
Basic and diluted per share $ (.47) $ (.49) $ (.84) $ (.92)
See accompanying notes to unaudited condensed consolidated financial statements.
1
APPLERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At June 30, At December 31,
2000 2000
---------- ---------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 964,502 $ 616,352
Short-term investments 541,140 692,634
Accounts receivable, net 378,593 438,572
Inventories 157,827 168,161
Prepaid expenses and other current assets 83,465 114,034
---------- ----------
Total current assets 2,125,527 2,029,753
Property, plant and equipment, net 334,855 406,936
Other long-term assets 622,933 558,003
---------- ----------
Total Assets $3,083,315 $2,994,692
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Loans payable $ 15,693 $ 20,131
Accounts payable 191,484 178,577
Accrued salaries and wages 89,660 53,100
Accrued taxes on income 149,584 114,484
Other accrued expenses 200,079 207,337
---------- ----------
Total current liabilities 646,500 573,629
Long-term debt 82,115 33,182
Other long-term liabilities 134,208 140,893
---------- ----------
Total Liabilities 862,823 747,704
Stockholders' Equity
Capital stock
Applera Corporation - Applied Biosystems group 2,087 2,105
Applera Corporation - Celera Genomics group 593 609
Capital in excess of par value 1,714,362 1,798,297
Retained earnings 377,996 412,086
Accumulated other comprehensive income 125,454 33,891
---------- ----------
Total Stockholders' Equity 2,220,492 2,246,988
---------- ----------
Total Liabilities and Stockholders' Equity $3,083,315 $2,994,692
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
2
APPLERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
Six months ended
December 31,
1999 2000
-------- --------
Operating Activities from Continuing Operations
Net income $ 29,254 $ 51,930
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation and amortization 35,211 61,028
Long-term compensation programs 27,974 3,600
Gain on sale of assets (25,811) (14,985)
Deferred income taxes (4,937) (1,355)
Changes in operating assets and liabilities
Increase in accounts receivable (15,063) (67,962)
Increase in inventories (17,572) (13,259)
Increase in prepaid expenses and other assets (18,323) (38,736)
Decrease in accounts payable and other liabilities (26,737) (59,031)
-------- --------
Net Cash Used by Operating Activities (16,004) (78,770)
-------- --------
Investing Activities from Continuing Operations
Additions to property, plant and equipment
(net of disposals of $594 and $412, respectively) (50,513) (108,276)
Purchases of short-term investments, net (151,205)
Investments (12,000) (4,131)
Proceeds from the sale of assets, net 31,056 15,498
-------- --------
Net Cash Used by Investing Activities (31,457) (248,114)
-------- --------
Net Cash Used by Continuing Operations
Before Financing Activities (47,461) (326,884)
-------- --------
Net Cash Used by Operating Activities
From Discontinued Operations (7,435) (1,561)
-------- --------
Financing Activities
Net change in loans payable 74,999 (39,960)
Dividends (8,748) (17,758)
Proceeds from stock issued for stock plans 27,692 37,821
-------- --------
Net Cash Provided (Used) by Financing Activities 93,943 (19,897)
-------- --------
Effect of Exchange Rate Changes on Cash 2,413 192
-------- --------
Net Change in Cash and Cash Equivalents 41,460 (348,150)
Cash and Cash Equivalents Beginning of Period 308,021 964,502
-------- --------
Cash and Cash Equivalents End of Period $349,481 $616,352
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
3
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The name of PE Corporation was changed to Applera Corporation (the "Company")
and the name of the PE Biosystems group was changed to the Applied Biosystems
group effective November 30, 2000.
The interim condensed consolidated financial statements should be read in
conjunction with the financial statements presented in the Company's 2000 Annual
Report to Stockholders. Significant accounting policies disclosed therein have
not changed, except for the accounting for derivative instruments and hedging
activities, which is discussed in Note 7 of the Company's condensed consolidated
financial statements.
The unaudited condensed consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments that are necessary for a
fair statement of the results for the interim periods. All such adjustments are
of a normal recurring nature. These results are, however, not necessarily
indicative of the results to be expected for a full year. 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, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Certain amounts in the condensed consolidated financial
statements have been reclassified for comparative purposes.
The Applied Biosystems group's and the Celera Genomics group's condensed
combined financial statements should be read in conjunction with the Company's
condensed consolidated financial statements.
4
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
NOTE 2 - ACQUISITIONS
Paracel, Inc. During the fourth quarter of fiscal 2000, the Company acquired
Paracel, Inc. in a stock-for-stock transaction. The net assets and results of
operations of Paracel were included in the Company's condensed consolidated
financial statements from the date of acquisition. The following selected
unaudited pro forma information for the Company assumes the acquisition had
occurred at the beginning of fiscal 2000 and gives effect to purchase accounting
adjustments:
(Dollar amounts in millions except per share amounts) Three months ended Six months ended
December 31, 1999 December 31, 1999
------------------ -------------------
Net revenues $329.9 $621.7
Net income $ 7.0 $ 3.0
Applied Biosystems Group
Net income $ 43.8 $ 73.5
Basic per share $ .21 $ .36
Diluted per share $ .20 $ .34
Celera Genomics group
Net loss $(36.4) $(69.9)
Basic and diluted per share $ (.68) $(1.31)
See Note 2 to the consolidated financial statements in the Company's 2000 Annual
Report to Stockholders for a further discussion of this acquisition.
5
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income included in Stockholders' Equity on the
Condensed Consolidated Statements of Financial Position consists of foreign
currency translation adjustments, unrealized gains and losses on foreign
currency and interest rate hedge contracts, unrealized gains and losses on
available-for-sale investments, and minimum pension liability adjustments. Total
comprehensive income (loss) for the three and six months ended December 31, 1999
and 2000 is presented in the following table:
(Dollar amounts in millions) Three months ended Six months ended
December 31, December 31,
1999 2000 1999 2000
------ ------ ------ ------
Net income $ 19.2 $ 27.4 $ 29.3 $ 51.9
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (18.6) 7.8 (5.7) (4.8)
Unrealized gain on hedge contracts, net 1.2 5.6
Unrealized gain (loss) on investments, net 29.3 (60.7) 61.9 (82.6)
Reclassification adjustments for realized
gains included in net income (16.7) (1.9) (16.7) (9.7)
------ ------ ------ ------
Other comprehensive income (loss) (6.0) (53.6) 39.5 (91.5)
------ ------ ------ ------
Comprehensive income (loss) $ 13.2 $(26.2) $ 68.8 $(39.6)
====== ====== ====== ======
6
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
NOTE 4 - EARNINGS PER SHARE
Basic earnings per share for each series of common stock is computed by dividing
the earnings allocated to each series of common stock by the weighted average
number of outstanding shares of that series of common stock. Diluted earnings
per share is computed by dividing the earnings allocated to each series of
common stock by the weighted average number of outstanding shares of that series
of common stock including the dilutive effect of common stock equivalents.
The earnings allocated to each series of common stock is determined by the
Company's Board of Directors. This determination is generally based on the net
income or loss amounts of the corresponding group determined in accordance with
generally accepted accounting principles consistently applied. The Company
believes this method of allocation is systematic and reasonable. The Board can,
at its discretion, change the method of allocating earnings to each series of
common stock at any time.
The following table presents a reconciliation of basic and diluted earnings
(loss) per share for the three months ended December 31:
(Amounts in thousands Applied Biosystems Celera Genomics
except per share amounts) Group Group
----------------------- ----------------------
1999 2000 1999 2000
-------- -------- -------- --------
Weighted average number of common shares
used in the calculation of basic earnings (loss)
per share 206,416 210,034 51,918 60,645
Common stock equivalents 8,658 12,656
-------- -------- -------- --------
Shares used in the calculation of diluted
earnings (loss) per share 215,074 222,690 51,918 60,645
======== ======== ======== ========
Earnings (loss) used in the calculation
of basic and diluted earnings (loss) per share $ 43,834 $ 57,954 $(24,278) $(29,704)
======== ======== ======== ========
Earnings (loss) per share
Basic $ .21 $ .28 $ (.47) $ (.49)
Diluted $ .20 $ .26 $ (.47) $ (.49)
7
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
The following table presents a reconciliation of basic and diluted earnings
(loss) per share for the six months ended December 31:
(Amounts in thousands Applied Biosystems Celera Genomics
except per share amounts) Group Group
---------------------- -----------------------
1999 2000 1999 2000
-------- -------- -------- --------
Weighted average number of common shares
used in the calculation of basic earnings (loss)
per share 206,064 209,584 51,695 60,182
Common stock equivalents 7,954 12,341
-------- -------- -------- --------
Shares used in the calculation of diluted
earnings (loss) per share 214,018 221,925 51,695 60,182
======== ======== ======== ========
Earnings (loss) used in the calculation
of basic and diluted earnings (loss) per share $ 73,541 $107,098 $(43,676) $(55,393)
======== ======== ======== ========
Earnings (loss) per share
Basic $ .36 $ .51 $ (.84) $ (.92)
Diluted $ .34 $ .48 $ (.84) $ (.92)
Options to purchase 6.1 million shares of Applera Corporation-Applied Biosystems
Group Common Stock were outstanding at December 31, 2000, but were not included
in the computation of diluted earnings per share because the effect was
antidilutive. There were no antidilutive options outstanding at December 31,
1999. Options and warrants to purchase 14.0 million and 13.7 million shares of
Applera Corporation-Celera Genomics Group Common Stock were outstanding at
December 31, 1999 and 2000, but were not included in the computation of diluted
loss per share because the effect was antidilutive.
8
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
NOTE 5 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories included the following components:
(Dollar amounts in millions) June 30, December 31,
2000 2000
---------- -------------
Raw materials and supplies $ 53.1 $ 64.4
Work-in-process 6.3 5.9
Finished products 98.4 97.9
---------- -------------
Total inventories $157.8 $168.2
========== =============
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
(Dollar amounts in millions) Six months ended
December 31,
1999 2000
---------- ----------
Tax benefit related to employee stock options $ - $42.5
Dividends declared not paid $ 8.8 $ 8.9
NOTE 7 - FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," amended in June 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The statements require the recognition of all derivative financial instruments
as either assets or liabilities in the statement of financial position and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative is driven by the intended use of the derivative
and the resulting designation. The Company adopted the statements effective July
1, 2000. The cumulative effect of adoption resulted in an immaterial adjustment
for a change in accounting principle in both the Condensed Consolidated
Statements of Operations and in accumulated other comprehensive income in the
Condensed Consolidated Statements of Financial Position.
The Company's foreign currency risk management strategy utilizes derivative
instruments to hedge certain foreign currency forecasted revenues and to offset
the impact of changes in foreign currency exchange rates on certain foreign
currency-denominated net asset positions. The principal objective of
9
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
this strategy is to minimize the risks and/or costs associated with the
Company's global financial and operating activities. The Company utilizes
foreign exchange forward, option, and range forward contracts to manage its
foreign currency exposures, and an interest rate swap agreement to manage its
interest rate exposure. The Company does not use derivative financial
instruments for trading purposes, nor is it a party to leveraged derivatives.
The fair value of all foreign currency derivative contracts is recorded in
prepaid expenses and other current assets and other accrued expenses. The fair
value of the interest rate swap agreement is recorded in other long-term
liabilities.
Cash Flow Hedges
The Company's international sales are typically denominated in the customers'
local (non-U.S. dollar) currency. The Company uses foreign exchange forward,
option, and range forward contracts to hedge a portion of forecasted
international sales not denominated in U.S. dollars. These contracts are
designated as cash flow hedges and the effective portion of the change in the
fair value of these contracts is recorded in other comprehensive income in the
Condensed Consolidated Statements of Financial Position until the underlying
external forecasted transaction affects earnings. At that time, the gain or loss
on the derivative instrument, which had been deferred in other comprehensive
income, is reclassified to net revenues in the Condensed Consolidated Statements
of Operations. During the three and six months ended December 31, 2000, the
Company recognized net gains of $3.7 million and $4.8 million, respectively, in
net revenues from derivative instruments designated as cash flow hedges of
anticipated sales. At December 31, 2000, $9.1 million of derivative gains ($6.0
million net of deferred taxes) recorded in other comprehensive income are
expected to be reclassified to earnings during the next twelve months. For the
three and six months ended December 31, 2000, the Company recognized expense of
$1.0 million and $2.7 million, respectively, included in other expense in the
Condensed Consolidated Statements of Operations, which represented the change in
the time value component of the fair value of option contracts designated as
cash flow hedges. The time value component is not included in the assessment of
hedge effectiveness, and as a result, any changes are recognized in earnings in
the period in which they occur.
The Company maintains an interest rate swap in conjunction with a five-year
Japanese yen debt obligation. The interest rate swap agreement involves the
payment of a fixed rate of interest and the receipt of a floating rate of
interest without the exchange of the underlying notional loan principal amount.
Under the terms of this contract, the Company will make fixed interest payments
of 2.1% while receiving interest at a LIBOR floating rate. No other cash
payments will be made unless the contract is terminated prior to maturity, in
which case the amount to be paid or received in settlement will be established
by agreement at the time of termination. The agreed upon amount would usually
represent the net present value at current interest rates of the remaining
obligation to exchange payments under the terms of the contract.
10
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
Other Hedges
The Company also uses derivative financial instruments to hedge against the
adverse effects that foreign currency exchange rate fluctuations may have on its
foreign currency-denominated net asset positions. The gains and losses on these
derivatives are expected to largely offset transaction losses and gains,
respectively, on the underlying foreign currency-denominated assets and
liabilities, both of which are recorded in other expense.
NOTE 8 - SEGMENT INFORMATION
The following table presents summarized segment financial information for the
three months ended December 31:
(Dollar amounts Applied Celera
in millions) Biosystems Genomics
Group Group Other Consolidated
---------- -------- ------- ------------
1999
Net revenues from
external customers $ 319.1 $ 8.3 $ - $ 327.4
Intersegment revenues 16.8 (16.8)
------- ------- ------- -------
Total revenues $ 335.9 $ 8.3 $ (16.8) $ 327.4
======= ======= ======= =======
Operating income (loss) $ 43.5 $ (39.3) $ (.2) $ 4.0
2000
Net revenues from
external customers $ 393.7 $ 19.6 $ - $ 413.3
Intersegment revenues 17.3 .7 (18.0)
------- ------- ------- -------
Total revenues $ 411.0 $ 20.3 $ (18.0) $ 413.3
======= ======= ======= =======
Operating income (loss) $ 76.3 $ (57.8) $ (.7) $ 17.8
11
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
The following table presents summarized segment financial information for the
six months ended December 31:
(Dollar amounts Applied Celera
in millions) Biosystems Genomics
Group Group Other Consolidated
---------- -------- ------- ------------
1999
Net revenues from
external customers $ 599.6 $ 16.6 $ - $ 616.2
Intersegment revenues 28.5 (28.5)
------- ------- ------- -------
Total revenues $ 628.1 $ 16.6 $ (28.5) $ 616.2
======= ======= ======= =======
Operating income (loss) $ 88.5 $ (71.6) $ .6 $ 17.5
2000
Net revenues from
external customers $ 742.8 $ 37.9 $ - $ 780.7
Intersegment revenues 31.8 .7 (32.5)
------- ------- ------- -------
Total revenues $ 774.6 $ 38.6 $ (32.5) $ 780.7
======= ======= ======= =======
Operating income (loss) $ 134.2 $(110.4) $ .1 $ 23.9
See Note 6 to the consolidated financial statements included in the Company's
2000 Annual Report to Stockholders.
NOTE 9 - DEBT
Long-term debt at June 30, 2000 consisted of $46.0 million of commercial paper
borrowing. The Company had the necessary credit facilities, through its
revolving credit agreement, to refinance the commercial paper borrowings on a
long-term basis. At June 30, 2000, these borrowings were classified as a
noncurrent liability because it was the Company's intent to refinance these
obligations on a long-term basis. However, in October 2000, the Company repaid
this debt.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Institute of Genomic Research ("TIGR"). During the second quarter of fiscal
2001, the Celera Genomics group entered into an agreement to perform sequencing
services for TIGR. The President of the Celera Genomics group is also the
current Chairman of the Board of Trustees of TIGR. An immediate family member of
the President of the Celera Genomics group currently serves as TIGR's President
and is on TIGR's Board of Trustees. Additionally, as of December 31, 2000, TIGR
owns approximately 1.4 million options to purchase Applera Corporation - Celera
Genomics Group Common Stock.
12
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
During the second quarter of fiscal 2001, the Celera Genomics group recognized
revenues of $1.6 million from TIGR, which was also a receivable as of December
31, 2000.
NOTE 11 - CONTINGENCIES
Amersham
On November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a
patent infringement action against the Company in the United States District
Court for the Northern District of California. The complaint alleges that the
Company is directly, contributorily, or by inducement infringing U.S. Patent No.
5,688,648 ("the '648 patent"). Amersham asserts that the Company's use and sale
of DNA analysis reagents and systems that incorporate "BigDye" fluorescence
detection technology infringe the '648 patent, and seeks injunctive and monetary
relief. The Company answered the complaint, alleging that the '648 patent is
invalid and unenforceable, and that the Company has not infringed the '648
patent. In December 2000, the court granted Amersham's motion for summary
judgment in part, finding that certain of the Company's activities infringe the
claims of the '648 patent, but denied Amersham's motion for summary judgment
that the Company induced its customers to infringe the claims of the '648
patent. The trial date has been postponed and is currently expected to be
scheduled for spring or summer 2001.
On March 13, 1998, the Company filed a patent infringement action against
Amersham and Molecular Dynamics, Inc. in the United States District Court for
the Northern District of California. The Company asserts that one of its patents
(U.S. Patent No. 4,811,218) is infringed by reason of Molecular Dynamics' and
Amersham's sale of certain DNA analysis systems (e.g., the MegaBACE 1000
System). In response, Amersham has asserted various affirmative defenses and
several counterclaims, including that the Company is infringing two patents,
U.S. Patent No. 5,091,652 ("the '652 patent") and U.S. Patent No. 5,459,325,
each owned by or licensed to Molecular Dynamics, by selling certain ABI
PRISM(TM)DNA sequencing systems. In December 2000, the court granted the
Company's motion for summary judgment of non-infringement of the '652 patent.
This case has not yet been scheduled for trial.
On May 21, 1998, Amersham filed a patent infringement action against the Company
in the United States District Court for the Southern District of New York. The
complaint alleges that the Company is infringing, contributing to the
infringement, and inducing the infringement of U.S. Patent No. 4,707,235 ("the
'235 patent") by reason of the Company's sale of certain ABI PRISM(TM) DNA
sequencing systems. The complaint seeks injunctive and monetary relief. The
Company answered the complaint, alleging that the '235 patent is invalid and
that the Company does not infringe the '235 patent. The matters described in
this paragraph and the immediately preceding paragraph have been consolidated
into a single case to be heard in the United States District Court for the
Northern District of California. In December 2000, the court granted the
Company's motion for summary judgment of non-infringement of the '235 patent.
However, on December 18, 2000, Amersham filed a new complaint alleging that the
Company is infringing the '235 patent by reason of the Company's sale of certain
DNA sequencing systems, which allegations were not in the previous suit under
the '235 patent. This action is in the early stages of discovery.
13
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
On May 30, 2000, the Company filed a patent infringement action against Amersham
in the United States District Court for the Northern District of California. The
Company asserts that one of its patents (U.S. Patent No. 5,945,526) is infringed
by reason of Amersham's sale of DNA analysis reagents and systems that
incorporate ET Terminator fluorescence detection technology. This case is in the
early stages of discovery.
The Company believes that the claims asserted by Amersham in the foregoing cases
are without merit and intends to defend the cases vigorously. However, the
outcome of this or any other litigation is inherently uncertain, and the Company
cannot be sure that it will prevail in any of these matters. An adverse
determination in any of the actions brought by Amersham could have a material
adverse effect on the financial statements of the Company.
Other
The Company has been named as a defendant in several other legal actions,
including patent, commercial, and environmental, arising from the conduct of
normal business activities. Although the amount of any liability that might
arise with respect to any of these matters cannot be accurately predicted, the
resulting liability, if any, will not in the opinion of management have a
material adverse effect on the financial statements of the Company.
14
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion of Operations
The name of PE Corporation was changed to Applera Corporation (the "Company")
and the name of the PE Biosystems group was changed to the Applied Biosystems
group effective November 30, 2000.
The following discussion should be read in conjunction with the Company's
condensed consolidated financial statements and related notes included in this
report and "Management's Discussion and Analysis" appearing on pages 73 - 87 of
the Company's 2000 Annual Report to Stockholders. Historical results and
percentage relationships are not necessarily indicative of operating results for
any future periods.
Events Impacting Comparability
Gains on investments. The three and six months ended December 31, 2000 included
before-tax gains of $3.0 million and $15.0 million, respectively, related to the
sales of minority equity investments. The second quarter of fiscal 2000 included
a before-tax gain of $25.8 million related to the sale of the Company's interest
in a minority equity investment.
Other special charges. During the second quarter of fiscal 2000, the Company
recorded a before-tax charge of $21.6 million in selling, general and
administrative expenses for costs related to the acceleration of certain
long-term compensation programs as a result of the attainment of performance
targets.
Acquisition. During the fourth quarter of fiscal 2000, Paracel, Inc. was
acquired in a stock-for-stock transaction. Paracel produces advanced genomic and
text analysis technologies. Its products include a hardware accelerator for
sequence comparison, a hardware accelerator for text search, and sequence
analysis software tools. See Note 2 to the condensed consolidated financial
statements for a discussion of this acquisition.
Results of Operations for the Three Months Ended December 31, 2000 Compared With
the Three Months Ended December 31, 1999
Applera Corporation reported net income of $27.5 million for the second quarter
of fiscal 2001 compared with $19.2 million for the second quarter of fiscal
2000. On a segment basis, the Applied Biosystems group reported net income of
$58.0 million for the second quarter of fiscal 2001 compared with $43.8 million
for the second quarter of fiscal 2000. On a comparable basis, excluding the
gains on the sales of minority equity investments from both fiscal years and the
long-term compensation charge from fiscal 2000, net income increased $12.2
million, or 27.8%, to $56.0 million for the second quarter of fiscal 2001
compared with the second quarter of fiscal 2000. This increase was attributable
to the growth in net revenues, lower operating expenses as a percentage of net
revenues and lower interest expense. The negative effects of foreign currency
reduced net income by approximately $7 million, or 16%, as compared with the
second quarter of fiscal 2000. The Celera
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Genomics group reported a net loss of $29.7 million for the second quarter of
fiscal 2001 compared with a net loss of $24.3 million for the second quarter of
fiscal 2000. The increase in the net loss reflected the increased investment in
research and development activities relating to expanded efforts in
bioinformatics and software development capabilities; increased operating
expenses required to support expanded product and business development
activities; expansion of sales and marketing capabilities; and amortization of
goodwill and intangibles primarily due to the Paracel acquisition. These
increased expenses were partially offset by increased net revenues and interest
income.
Net revenues for the Company were $413.3 million for the second quarter of
fiscal 2001 compared with $327.4 million for the second quarter of fiscal 2000,
an increase of 26.2%. On a segment basis, net revenues for the Applied
Biosystems group increased $75.1 million to $411.0 million for the second
quarter of fiscal 2001 compared with $335.9 million for the prior year. Net
revenues for the Celera Genomics group were $20.3 million for the second quarter
of fiscal 2001 compared with $8.3 million for the second quarter of fiscal 2000.
Net revenues for the Applied Biosystems group increased 22.3% compared with the
prior year. The effects of foreign currency reduced net revenues by
approximately $19 million for the second quarter of fiscal 2001, or 6%, compared
with the prior year due primarily to weakness in the euro, the British pound,
and the Japanese yen. Revenues from leased instruments and shipments to the
Celera Genomics group were $17.3 million and $16.9 million for the second
quarter of fiscal 2001 and fiscal 2000, respectively. Geographically, the
Applied Biosystems group reported revenue growth in all regions for the second
quarter of fiscal 2001 compared with the second quarter of fiscal 2000. Revenues
increased 14.5% in the United States, 15.2% in Europe, 59.4% in the Far East,
and 29.5% in Latin America and other markets, compared with the second quarter
of the prior fiscal year. Excluding the effects of foreign currency, revenues
grew approximately 31% in Europe and 63% in the Far East. Contributors to the
increase in net revenues included genetic analysis products; polymerase chain
reaction product lines; genetic synthesizer products; mass spectrometry
instruments for proteomics; and royalties.
Net revenues for the Celera Genomics group were $20.3 million for the second
quarter of fiscal 2001 compared with $8.3 million for the second quarter of
fiscal 2000. The increased revenues resulted primarily from database
subscription agreements with commercial and academic customers, as well as
revenues from Paracel and genomics services.
Gross margin as a percentage of net revenues for the Company was 53.8% for the
second quarter of fiscal 2001 compared with 55.0% for the second quarter of
fiscal 2000. Gross margin as a percentage of net revenues for the Applied
Biosystems group was 51.9% for the second quarter of fiscal 2001 compared with
53.8% for the second quarter of fiscal 2000. The decrease in the gross margin as
a percentage of net revenues was primarily attributable to the negative effects
of foreign currency and a change in product mix.
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SG&A expenses for the Company were $109.2 million for the second quarter of
fiscal 2001 compared with $115.3 million for the second quarter of fiscal 2000.
On a segment basis, SG&A expenses for the Applied Biosystems group were $94.8
million and $105.8 million for the second quarter of fiscal 2001 and 2000,
respectively. SG&A expenses for the Celera Genomics group were $14.4 million and
$9.5 million for the second quarter of fiscal 2001 and 2000, respectively.
SG&A expenses for the Applied Biosystems group, on a comparable basis excluding
the long-term compensation charge in the second quarter of fiscal 2000,
increased 12.5% over the prior year. This increase was due to higher planned
worldwide selling and marketing expenses commensurate with the growth in
revenues and orders. As a percentage of net revenues, SG&A expenses were 23.1%
for the second quarter of fiscal 2001 compared with 25.1% for the second quarter
of fiscal 2000, excluding the long-term compensation charge.
The Celera Genomics group's SG&A expenses increased $4.9 million over the prior
year. The increase was caused primarily by the Celera Genomics group's expansion
of its sales and marketing capabilities and business development efforts. The
acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed
to the increase in SG&A expenses.
R&D expenses for the Company increased to $84.3 million for the second quarter
of fiscal 2001 compared with $60.7 million for the prior year. R&D expenses for
the Applied Biosystems group were $42.0 million for the second quarter of fiscal
2001 compared with $31.4 million for the prior year, an increase of 33.9%, as a
result of investment in new products and technologies. As a percentage of net
revenues, R&D expenses were 10.2% for the second quarter of fiscal 2001 compared
with 9.3% for the second quarter of fiscal 2000.
The Celera Genomics group's R&D expenses increased $14.5 million to $52.7
million for the second quarter of fiscal 2001 from $38.2 million for the second
quarter of fiscal 2000 primarily as a result of the development of expanded
bioinformatics and software development capabilities. The group also expanded
its scientific and annotation research teams and bioinformatics and software
engineering staff. In addition, the Celera Genomics group accelerated the
development of its discovery platform and is currently accelerating its gene
discovery work and expanding its capabilities in proteomics and functional
genomics. The acquisition of Paracel during the fourth quarter of fiscal 2000
also contributed to the increase in R&D expenses.
The Celera Genomics group recorded $11.0 million of expenses in the second
quarter of fiscal 2001 relating to the amortization of goodwill and other
intangibles primarily due to Paracel.
Operating income was $17.7 million for the second quarter of fiscal 2001
compared with $4.0 million for the second quarter of the prior year. On a
segment basis, operating income for the Applied Biosystems group increased to
$76.3 million for the second quarter of fiscal 2001 compared with $43.5 million
for the prior year. On a comparable basis, excluding the long-term compensation
charge from the prior year, operating income increased $11.2 million, or 17.3%.
The Applied
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Biosystems group benefited from increased revenues as a result of strong
worldwide demand and lower SG&A expenses as a percentage of net revenues,
partially offset by the negative effect of foreign currency. Excluding the
negative effect of foreign currency and the special charge from the prior year,
operating income increased approximately 33%. Operating income as a percentage
of net revenues decreased to 18.6% for the second quarter of fiscal 2001
compared with 19.4% for the prior year, excluding the long-term compensation
charge in fiscal 2000, primarily due to the negative effects of foreign currency
and a change in product mix. Excluding the effects of foreign currency,
operating income as a percentage of net revenues increased to 20.1% in the
second quarter of fiscal 2001.
Operating loss for the Celera Genomics group was $57.8 million for the second
quarter of fiscal 2001 compared with $39.3 million for the second quarter of
fiscal 2000. The increase in the operating loss reflected the increased
investment in research and development activities relating to expanded efforts
in bioinformatics and software development capabilities; increased operating
expenses required to support expanded product and business development
activities; expansion of sales and marketing capabilities; and amortization of
goodwill and intangibles primarily due to the Paracel acquisition. These
increased expenses were partially offset by increased net revenues.
Interest expense was $.3 million for the second quarter of fiscal 2001 compared
with $.9 million for the prior year primarily due to lower debt levels in the
second quarter of fiscal 2001 compared with the same period of the prior year.
Interest expense in both periods reflected the Company's financing of the
purchase of the Celera Genomics group's Rockville, Maryland facilities. The
financing, entered into during the first quarter of fiscal 2000, was repaid in
October 2000. Interest income was $21.3 million for the second quarter of fiscal
2001 compared with $5.1 million for the prior year. The increase was
attributable to the interest income on larger cash and cash equivalents and
short-term investments, which increased as a result of the follow-on public
offering of Applera Corporation-Celera Genomics Group Common Stock completed in
March 2000. The second quarter of fiscal 2000 included interest income on the
$150 million note receivable relating to the sale of the Analytical Instruments
business. The note was collected in the fourth quarter of fiscal 2000.
Other expense, net was $.3 million for the second quarter of fiscal 2001
compared with $4.3 million for the prior year. These amounts were primarily
related to the Company's foreign currency management program.
The Company's effective income tax rate was 34% for the second quarter of fiscal
2001 compared with 36% for the prior year. Excluding the gain on the sale of the
minority equity investment in fiscal 2001, the effective income tax rate was
34%. Excluding the sale of a minority equity investment and the long-term
compensation charge in fiscal 2000, the effective income tax rate was 25% for
the second quarter of 2000. The increase in the effective income tax rate,
excluding the special items, was primarily due to the amortization of
nondeductible goodwill relating to the acquisition of Paracel.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Results of Operations for the Six Months Ended December 31, 2000 Compared With
the Six Months Ended December 31, 1999
Applera Corporation reported net income of $51.9 million for the first six
months of fiscal 2001 compared with $29.3 million for the first six months of
fiscal 2000. On a segment basis, the Applied Biosystems group reported net
income of $107.1 million for the first six months of fiscal 2001 compared with
$73.5 million for the first six months of fiscal 2000. On a comparable basis,
excluding the gains on the sales of minority equity investments from the first
six months of fiscal 2001 and 2000 and the long-term compensation charge from
fiscal 2000, net income increased $23.8 million, or 32.4%, compared with the
first six months of fiscal 2000. This increase was attributable to the growth in
net revenues, lower operating expenses as a percentage of net revenues, lower
interest expense, and lower non-operating costs related to the Applied
Biosystems group's foreign currency management program. The Celera Genomics
group reported a net loss of $55.4 million for the first six months of fiscal
2001 compared with a net loss of $43.7 million for the first six months of
fiscal 2000. The increase in the net loss reflected the increased investment in
research and development activities; increased operating expenses required to
support expanded product and business development activities; expansion of sales
and marketing capabilities; and amortization of goodwill and intangibles
primarily due to the Paracel acquisition. These increased expenses were
partially offset by increased net revenues and interest income.
Net revenues for the Company were $780.7 million for the first six months of
fiscal 2001 compared with $616.2 million for the first six months of fiscal
2000, an increase of 26.7%. On a segment basis, net revenues for the Applied
Biosystems group increased $146.4 million to $774.6 million for the first six
months of fiscal 2001 compared with $628.2 million for the prior year. Net
revenues for the Celera Genomics group were $38.6 million for the first six
months of fiscal 2001 compared with $16.6 million for the first six months of
fiscal 2000.
Net revenues for the Applied Biosystems group increased 23.3% compared with the
prior year. The effects of foreign currency reduced net revenues by
approximately $26 million, or 4%, compared with the prior year due primarily to
weakness in the euro and the British pound. Revenues from leased instruments and
shipments to the Celera Genomics group were $31.8 million and $28.6 million for
the first six months of fiscal 2001 and fiscal 2000, respectively.
Geographically, the Applied Biosystems group reported revenue growth in all
regions for the first six months of fiscal 2001 compared with the first six
months of fiscal 2000. Revenues increased 21.9% in the United States, 16.7% in
Europe, 38.3% in the Far East, and 23.5% in Latin America and other markets,
compared with the first six months of the prior fiscal year. Excluding the
effects of foreign currency, revenues grew approximately 31% in Europe.
Contributors to the increase in net revenues included genetic analysis products;
sequence detection systems, including reagents and instrument systems for gene
expression analysis and single nucleotide polymorphism ("SNP") detection; mass
spectrometry products; polymerase chain reaction product lines; and royalties.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Net revenues for the Celera Genomics group were $38.6 million for the first six
months of fiscal 2001 compared with $16.6 million for the first six months of
fiscal 2000. The increased revenues resulted primarily from database
subscription agreements with commercial and academic customers, as well as
revenues from Paracel and genomics services.
Gross margin as a percentage of net revenues for the Company was 54.6% for the
first six months of both fiscal 2001 and 2000. Gross margin as a percentage of
net revenues for the Applied Biosystems group was 52.6% for the first six months
of fiscal 2001 compared with 53.4% for the first six months of fiscal 2000. The
decrease in the gross margin as a percentage of net revenues was primarily
attributable to the negative effects of foreign currency and a change in product
mix.
SG&A expenses for the Company were $212.2 million for the first six months of
fiscal 2001 compared with $201.5 million for the first six months of fiscal
2000. On a segment basis, SG&A expenses for the Applied Biosystems group were
$184.8 million and $183.6 million for the first six months of fiscal 2001 and
2000, respectively. SG&A expenses for the Celera Genomics group were $27.4
million and $17.9 million for the first six months of fiscal 2001 and 2000,
respectively.
SG&A expenses for the Applied Biosystems group, on a comparable basis excluding
the long-term compensation charge in the first six months of fiscal 2000,
increased 14.1% over the prior year. This increase was due to higher planned
worldwide selling and marketing expenses commensurate with the growth in
revenues and orders. As a percentage of net revenues, SG&A expenses were 23.9%
for the first six months of fiscal 2001 compared with 25.8% for the first six
months of fiscal 2000, excluding the long-term compensation charge.
The Celera Genomics group's SG&A expenses increased $9.5 million over the prior
year. The increase was caused primarily by the Celera Genomics group's expansion
of its sales and marketing capabilities and its business development efforts.
The acquisition of Paracel during the fourth quarter of fiscal 2000 also
contributed to the increase in SG&A expenses.
R&D expenses for the Company increased to $168.0 million for the first six
months of fiscal 2001 compared with $117.4 million for the prior year. R&D
expenses for the Applied Biosystems group were $88.1 million for the first six
months of fiscal 2001 compared with $63.4 million for the prior year, an
increase of 39.0%, as a result of investment in new products and technologies.
As a percentage of net revenues, R&D expenses for the Applied Biosystems group
were 11.4% for the first six months of fiscal 2001 compared with 10.1% for the
first six months of fiscal 2000.
The Celera Genomics group's R&D expenses increased $29.2 million to $99.5
million for the first six months of fiscal 2001 from $70.3 million for the first
six months of fiscal 2000 primarily as a result of the expansion of its
scientific and annotation research teams and bioinformatics and software
engineering staff. In addition, the Celera Genomics group accelerated the
development of its discovery platform and is currently accelerating its gene
discovery work and expanding its
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APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
capabilities in proteomics and functional genomics. The acquisition of Paracel
during the fourth quarter of fiscal 2000 also contributed to the increase in R&D
expenses.
The Celera Genomics group recorded $22.0 million of expenses in the first half
of fiscal 2001 relating to the amortization of goodwill and other intangibles
primarily due to Paracel.
Operating income was $23.9 million for the first six months of fiscal 2001
compared with $17.5 million for the first six months of the prior year. On a
segment basis, operating income for the Applied Biosystems group increased to
$134.2 million for the first six months of fiscal 2001 compared with $88.5
million for the prior year. On a comparable basis, excluding the long-term
compensation charge in fiscal 2000, operating income increased $24.1 million, or
21.9%, over the prior year. The Applied Biosystems group benefited from
increased revenues as a result of strong worldwide demand and lower SG&A
expenses as percentage of net revenues, partially offset by the negative effect
of foreign currency. Excluding the negative effect of foreign currency and the
special charge from the prior year, operating income increased approximately
34%. Operating income as a percentage of net revenues, excluding the long-term
compensation charge in fiscal 2000, remained essentially unchanged. Excluding
the effects of foreign currency in fiscal 2001 and the long-term compensation
charge in fiscal 2000, operating income as a percentage of net revenues was
18.4% for the first six months of fiscal 2001 compared with 17.5% in the prior
year.
Operating loss for the Celera Genomics group was $110.4 million for the first
six months of fiscal 2001 compared with $71.6 million for the first six months
of fiscal 2000. The increase in the operating loss reflected the increased
investment in research and development activities; increased operating expenses
required to support expanded product and business development activities;
expansion of sales and marketing capabilities; and amortization of goodwill and
intangibles primarily due to the Paracel acquisition. These increased expenses
were partially offset by increased net revenues.
Interest expense was $1.4 million for the first six months of fiscal 2001
compared with $1.3 million for the prior year. Interest expense in both periods
reflected the Company's financing of the purchase of the Celera Genomics group's
Rockville, Maryland facilities. The financing, entered into during the first
quarter of fiscal 2000, was repaid in October 2000. Interest income was $43.9
million for the first six months of fiscal 2001 compared with $9.6 million for
the prior year. This increase was attributable to the interest income on larger
cash and cash equivalents and short-term investments, which increased as a
result of the follow-on public offering of Applera Corporation-Celera Genomics
Group Common Stock completed in March 2000. The first six months of fiscal 2000
included interest income on the $150 million note receivable relating to the
sale of the Analytical Instruments business. The note was collected in the
fourth quarter of fiscal 2000.
Other expense, net was $3.2 million for the first six months of fiscal 2001
compared with $8.9 million for the prior year. These amounts were primarily
related to the Company's foreign currency management program.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Company's effective income tax rate was 34% for the first six months of
fiscal 2001 compared with 32% for the prior year. Excluding the sales of
minority equity investments during the first six months of fiscal 2001, the
effective tax rate was 33%. Excluding the sale of a minority equity investment
in fiscal 2000 and the long-term compensation charge, the effective income tax
rate was 24%. The increase in the effective income tax rate, excluding the
special items, was primarily due to the amortization of nondeductible goodwill
relating to the acquisition of Paracel.
Market Risk
The Company operates internationally, with manufacturing and distribution
facilities in various countries throughout the world. For fiscal 2000 and the
first half of fiscal 2001, the Company derived approximately 50% of its revenues
from countries outside of the United States. Results continue to be affected by
market risk, including fluctuations in foreign currency exchange rates and
changes in economic conditions in foreign markets.
The Company performed a sensitivity analysis as of December 31, 2000 on its
foreign currency derivative financial instruments. Assuming a hypothetical
adverse change of 10% in foreign exchange rates in relation to the U.S. dollar
at December 31, 2000, the Company calculated a hypothetical loss of $10.0
million when comparing the change in fair value of both the foreign currency
contracts outstanding and the underlying exposures being hedged. This
hypothetical analysis excludes the impact of foreign currency translation on the
Company's operations. Actual gains and losses in the future could, however,
differ materially from this analysis, based on changes in the timing and amount
of foreign currency exchange rate movements and actual exposures and hedges. See
Note 7 to the condensed consolidated financial statements for a further
discussion of derivative financial instruments.
Management's Discussion of Financial Resources and Liquidity
The following discussion of financial resources and liquidity focuses on the
Condensed Consolidated Statements of Financial Position and the Condensed
Consolidated Statements of Cash Flows.
Significant Changes in the Condensed Consolidated Statements of Financial
Position. Cash and cash equivalents and short-term investments were $1.3 billion
at December 31, 2000 compared with $1.5 billion at June 30, 2000, with total
debt of $53.3 million at December 31, 2000 compared with $97.8 million at June
30, 2000. Working capital was $1.5 billion at December 31, 2000 and June 30,
2000. Debt to total capitalization decreased to 2% at December 31, 2000 from 4%
at June 30, 2000. During the second quarter of fiscal 2001, the Company repaid
the $46.0 million of commercial paper borrowing that was outstanding at June 30,
2000.
Accounts receivable increased $60.0 million to $438.6 million at December 31,
2000 from $378.6 million at June 30, 2000. The increase was primarily due to
growth in the Applied Biosystem group's net revenues and timing of collections.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Prepaid expenses and other current assets increased $30.5 million to $114.0
million at December 31, 2000 from $83.5 million at June 30, 2000, primarily due
to certain nontrade receivables and the fair value of derivative financial
instruments.
Property, plant and equipment, net increased $72.0 million to $406.9 million at
December 31, 2000 from $334.9 million at June 30, 2000, primarily due to the
Applied Biosystems group's purchase of property in Pleasanton, California for
approximately $54 million.
Other long-term assets decreased $64.9 million to $558.0 million at December 31,
2000 from $622.9 million at June 30, 2000. The Company's minority equity
investments decreased $140.2 million due to a decrease in the fair value of the
securities, as well as the sales of certain investments mentioned previously.
This decrease was partially offset by an increase of $84.8 million in noncurrent
deferred tax assets and by an increase in purchased license agreements.
Accrued salaries and wages decreased $36.6 million to $53.1 million at December
31, 2000 from $89.7 million at June 30, 2000 reflecting the payments of certain
compensation-related accruals.
Accrued taxes on income decreased $35.1 million to $114.5 million at December
31, 2000 from $149.6 million at June 30, 2000 primarily due to income tax
payments.
Condensed Consolidated Statements of Cash Flows. Net cash used by operating
activities was $78.8 million for the first six months of fiscal 2001 compared
with $16.0 million for the same period in fiscal 2000. For the first six months
of fiscal 2001, compared with the same period in the prior year, increases in
accounts receivable, prepaid expenses and other assets, and higher payments to
suppliers and payments of certain compensation-related accruals were only
partially offset by higher income-related cash flows.
Net cash used by investing activities was $248.1 million for the first six
months of fiscal 2001 compared with $31.5 million for the first six months of
fiscal 2000. During the first six months of fiscal 2001, the Company had net
purchases of $151.2 million of short-term investments. For the first six months
of fiscal 2001, the Company had capital expenditures of $108.7 million. Capital
expenditures were $97.3 million for the Applied Biosystems group, which included
approximately $54 million related to the purchase of property in Pleasanton,
California for the future construction of new office, laboratory and light
manufacturing facilities, and $15.1 million for laboratory facilities. Capital
expenditures for the Celera Genomics group were $12.6 million for the first six
months of fiscal 2001. For the same period in the prior year, capital
expenditures for the Company were $51.1 million. In the first six months of
fiscal 2001, the Company realized net proceeds of $11.4 million from the sales
of minority equity investments compared with $19.1 million for the prior year.
Net cash used by discontinued operations was $1.6 million for the first six
months of fiscal 2001 compared with $7.4 million for the first six months of
fiscal 2000. The fiscal 2000 and fiscal 2001
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
uses were for transaction-related payments and other cash outlays associated
with the divestiture of the Analytical Instruments business.
Net cash used by financing activities was $19.9 million for the first six months
of fiscal 2001 compared with net cash provided by financing activities of $93.9
million for the prior year. During the first six months of fiscal 2001, the
Company repaid $46.0 million of its commercial paper borrowing which it secured
in the first half of fiscal 2000 specifically for the purchase of the Celera
Genomics group's Rockville, Maryland facilities. Dividends paid were $17.8
million during the first six months of fiscal 2001 compared with $8.7 million in
the prior year. The increase in the amount of dividends paid was due to timing.
Proceeds from employee stock option exercises were $37.8 million in the first
half of fiscal 2001 compared with $27.7 million for the first half of fiscal
2000.
At December 31, 2000, the Company had unused credit facilities, including the
existing revolving credit facility, totaling $319.2 million.
Outlook
The Applied Biosystems group expects to continue to grow and maintain
profitability for the remainder of fiscal 2001. The Applied Biosystems group
should continue to benefit from its customers in basic medical research,
pharmaceutical development, and applied markets for sophisticated, automated,
and cost-effective life science tools.
Demand is expected to continue for a variety of tools to gather, interpret, and
integrate biological information to achieve a better understanding of human
health and disease. The Applied Biosystems group should also benefit from the
introduction of new products designed to meet these demands during fiscal 2001.
For example, during the first half of fiscal 2001, the Applied Biosystems group
announced a new product and initiative in proteomics. Shipments of the first
Maldi TOF/TOF mass spectrometer were made to early access customers and the
Celera Genomics group in the first half of fiscal 2001. In addition, the Applied
Biosystems group recently introduced a new Productivity Pack, intended to offer
customers using the ABI PRISM(R) genetic analyzers a substantial improvement in
productivity, and the ABI PRISM(R) 7900 HT sequence detection system.
The Applied Biosystems group remains concerned about adverse currency effects
because approximately 50% of its revenues were derived from regions outside the
United States in fiscal 2000 and the first half of fiscal 2001. The Applied
Biosystems group also remains subject to various other uncertainties, many of
which are referenced in the "Forward-Looking Statements" section below.
The Celera Genomics group expects to see a continued expansion in the customer
base for online genomics information products and related genomics services,
with corresponding increases in revenues during fiscal 2001. Revenue growth is
expected to be generated primarily from increasing the customer base among the
major pharmaceutical and biotech companies, academic institutions, and
non-profit research organizations, and expanding the Celera Genomics group's
research collaborations and services business.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The expected increase in revenues should be more than offset as the Celera
Genomics group invests in the discovery aspects of its business and continues
staffing the organization. The Celera Genomics group has recently hired key
people to lead its efforts to develop potential new therapeutic targets and
molecular diagnostic markers. The Celera Genomics group intends to continue to
expand its efforts in the development of its proteomics and functional genomics
capabilities. The Celera Genomics group also intends to continue to strengthen
its bioinformatics platform, both in information content and in delivery
systems. SG&A expenses are also expected to increase as the group continues to
expand its sales and marketing functions.
The Company believes the Celera Genomics group's existing cash and cash
equivalents and short-term investments are sufficient to fund its operating
expenses and capital requirements related to its original business plan, which
relates to the sequencing and assembly of the human genome and the development
of information products and related genomics services from this data. While the
Company intends to use the net proceeds from the Celera Genomics group's
follow-on public offering, which was completed in March 2000, primarily to fund
its new product and technology development activities in functional genomics,
with an emphasis on proteomics and personalized health/medicine, such funds may
not be sufficient to support these new business activities as they develop. The
Celera Genomics group's actual future capital uses and requirements with respect
to its new activities will depend on many factors, including those discussed
under "Forward-Looking Statements."
During the first half of fiscal 2001, the Company announced plans to expand its
existing molecular diagnostics business. This initiative is anticipated to
leverage several technological resources of the Applied Biosystems group and the
Celera Genomics group. Further details regarding the initiative and its status
within the Company's capital structure are anticipated to be announced in the
coming quarters, as the initiative is refined.
Forward-Looking Statements
Certain statements contained in this report, including the Outlook section, are
forward-looking and are subject to a variety of risks and uncertainties. These
statements may be identified by the use of forward-looking words or phrases such
as "believe," "expect," "anticipate," "should," "planned," "estimated," and
"potential," among others. These forward-looking statements are based on our
current expectations. The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for such forward-looking statements. In order to comply
with the terms of the safe harbor, we note that a variety of factors could cause
our actual results and experience to differ materially from the anticipated
results or other expectations expressed in such forward-looking statements. For
information concerning the risks and uncertainties that may affect the
operations, performance, development and results of the Applied Biosystems group
see "Applied Biosystems group - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking Statements" on
pages 43 to 45 of this report. For information concerning the risks and
uncertainties that may affect the operations, performance, development and
results of the Celera
25
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Genomics Group see "Celera Genomics group - Management's Discussion and Analysis
of Financial Condition and Results of Operations - Forward-Looking Statements"
on pages 59 to 68 of this report.
26
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands)
Three months ended Six months ended
December 31, December 31,
1999 2000 1999 2000
--------- --------- --------- ---------
Net Revenues $ 335,941 $ 411,021 $ 628,196 $ 774,593
Cost of sales 155,202 197,843 292,701 367,468
--------- --------- --------- ---------
Gross Margin 180,739 213,178 335,495 407,125
Selling, general and administrative 105,822 94,819 183,559 184,794
Research, development and engineering 31,372 42,010 63,404 88,125
--------- --------- --------- ---------
Operating Income 43,545 76,349 88,532 134,206
Gain on investments 25,811 2,981 25,811 14,985
Interest expense 2,116 294 4,329 561
Interest income 3,939 4,208 8,184 8,589
Other expense, net (4,305) (239) (8,885) (3,152)
--------- --------- --------- ---------
Income Before Income Taxes 66,874 83,005 109,313 154,067
Provision for income taxes 23,040 25,051 35,772 46,969
--------- --------- --------- ---------
Net Income $ 43,834 $ 57,954 $ 73,541 $ 107,098
========= ========= ========= =========
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
27
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At June 30, At December 31,
2000 2000
---------- ---------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 394,608 $ 270,054
Accounts receivable, net 367,370 427,594
Inventories 154,491 165,775
Prepaid expenses and other current assets 81,338 111,409
---------- ----------
Total current assets 997,807 974,832
Property, plant and equipment, net 230,940 300,071
Other long-term assets 469,409 416,989
---------- ----------
Total Assets $1,698,156 $1,691,892
========== ==========
Liabilities and Group Equity
Current liabilities
Loans payable $ 15,693 $ 20,131
Tax benefit payable to the Celera Genomics group 16,702
Accounts payable 173,631 165,292
Accrued salaries and wages 79,409 42,344
Accrued taxes on income 149,505 113,596
Other accrued expenses 167,718 177,990
---------- ----------
Total current liabilities 602,658 519,353
Long-term debt 36,115 33,182
Other long-term liabilities 125,019 133,062
---------- ----------
Total Liabilities 763,792 685,597
Group Equity 934,364 1,006,295
---------- ----------
Total Liabilities and Group Equity $1,698,156 $1,691,892
========== ==========
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
28
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
Six months ended
December 31,
1999 2000
--------- ---------
Operating Activities from Continuing Operations
Net income $ 73,541 $ 107,098
Adjustments to reconcile net income to net cash provided
(used) by operating activities
Depreciation and amortization 25,922 30,745
Long-term compensation programs 27,660 2,972
Gain on sale of assets (25,811) (14,985)
Deferred income taxes 1,678 (741)
Changes in operating assets and liabilities
Increase in accounts receivable (13,683) (68,207)
Increase in inventories (17,572) (14,209)
Increase in prepaid expenses and other assets (17,008) (39,494)
Decrease in accounts payable and other liabilities (23,844) (53,496)
--------- ---------
Net Cash Provided (Used) by Operating Activities 30,883 (50,317)
--------- ---------
Investing Activities from Continuing Operations
Additions to property, plant and equipment
(net of disposals of $594 and $412, respectively) (30,646) (96,904)
Investments (9,000) (4,131)
Proceeds from the sale of assets 31,056 15,498
--------- ---------
Net Cash Used by Investing Activities (8,590) (85,537)
--------- ---------
Net Cash Provided (Used) by Continuing Operations
Before Financing Activities 22,293 (135,854)
--------- ---------
Net Cash Used by Operating Activities
From Discontinued Operations (7,435) (1,561)
--------- ---------
Financing Activities
Net change in loans payable 28,999 6,040
Dividends (8,748) (17,758)
Proceeds from stock issued for stock plans 21,474 24,387
--------- ---------
Net Cash Provided by Financing Activities 41,725 12,669
--------- ---------
Effect of Exchange Rate Changes on Cash 2,413 192
--------- ---------
Net Change in Cash and Cash Equivalents 58,996 (124,554)
Cash and Cash Equivalents Beginning of Period 236,530 394,608
--------- ---------
Cash and Cash Equivalents End of Period $ 295,526 $ 270,054
========= =========
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
29
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED COMBINED FINANCIAL STATEMENTS
The name of PE Corporation was changed to Applera Corporation (the "Company")
and the name of the PE Biosystems group was changed to the Applied Biosystems
group effective November 30, 2000.
The interim condensed combined financial statements should be read in
conjunction with the financial statements presented in the Company's 2000 Annual
Report to Stockholders. Significant accounting policies disclosed therein have
not changed, except for the accounting for derivative instruments and hedging
activities, which is discussed in Note 6 of the Applied Biosystems group's
condensed combined financial statements.
The unaudited condensed combined financial statements reflect, in the opinion of
the Company's management, all adjustments that are necessary for a fair
statement of the results for the interim periods. All such adjustments are of a
normal recurring nature. These results are, however, not necessarily indicative
of the results to be expected for a full year. 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, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. Certain amounts in the condensed combined financial statements have
been reclassified for comparative purposes.
The Applied Biosystems group's condensed combined financial statements should be
read in conjunction with the Company's condensed consolidated financial
statements.
NOTE 2 - ALLOCATION OF FEDERAL AND STATE INCOME TAXES
The federal income taxes of the Company and its subsidiaries, which own assets
allocated between the groups, are determined on a consolidated basis.
Consolidated federal income tax provisions and related tax payments or refunds
are allocated between the groups based principally on the taxable income and tax
credits directly attributable to each group. Such allocations reflect each
group's contribution (positive or negative) to the Company's consolidated
federal taxable income and the consolidated federal tax liability and tax credit
position. Intergroup transactions are taxed as if each group were a stand-alone
company. Tax benefits that cannot be used by the group generating those benefits
but can be used on a consolidated basis are transferred to the group that can
utilize such benefits. Tax benefits generated by the Celera Genomics group
commencing July 1, 1998, which could be utilized on a consolidated basis, were
reimbursed by the Applied Biosystems group to the Celera Genomics group up to a
limit of $75 million. As of December 31, 2000, the Celera Genomics group
generated cumulative tax benefits of $89.4 million that were utilized by the
Applied Biosystems group. The amounts utilized by the Applied Biosystems group
in excess of the $75 million limit are not reimbursed to the Celera Genomics
group and are recorded to group equity in the Applied Biosystems group's
Condensed Combined Statements of Financial Position. See Note 1 of
30
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
Applied Biosystems combined financial statements included in the Company's 2000
Annual Report to Stockholders for a further discussion of the tax allocation
policy.
NOTE 3 - COMPREHENSIVE INCOME
Accumulated other comprehensive income included in Group Equity on the Condensed
Combined Statements of Financial Position consists of foreign currency
translation adjustments, unrealized gains and losses on foreign currency and
interest rate hedge contracts, unrealized gains and losses on available-for-sale
investments, and minimum pension liability adjustments. Total comprehensive
income for the three and six months ended December 31, 1999 and 2000 is
presented in the following table:
(Dollar amounts in millions) Three months ended Six months ended
December 31, December 31,
1999 2000 1999 2000
------ ------ ------ ------
Net income $ 43.8 $ 58.0 $ 73.5 $107.1
Other comprehensive income (loss),
net of tax:
Foreign currency translation adjustments (18.6) 7.8 (5.7) (4.8)
Unrealized gain on hedge contracts, net 1.2 5.6
Unrealized gain (loss) on
investments, net 29.3 (60.9) 61.9 (83.1)
Reclassification adjustments for
realized gains included in net income (16.7) (1.9) (16.7) (9.7)
------ ------ ------ ------
Other comprehensive income (loss) (6.0) (53.8) 39.5 (92.0)
------ ------ ------ ------
Comprehensive income $ 37.8 $ 4.2 $113.0 $ 15.1
====== ====== ====== ======
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories included the following components:
(Dollar amounts in millions) June 30, December 31,
2000 2000
------ ------------
Raw materials and supplies $ 51.2 $ 61.5
Work-in-process 6.3 5.9
Finished products 97.0 98.4
------ ------
Total inventories $154.5 $165.8
====== ======
31
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
(Dollar amounts in millions) Six months ended
December 31,
1999 2000
-------- ---------
Nonreimbursable utilization of tax benefits
generated by the Celera Genomics group $ - $14.4
Tax benefit related to employee stock options $ - $32.9
Dividends declared not paid $ 8.8 $ 8.9
NOTE 6 - FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," amended in June 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The statements require the recognition of all derivative financial instruments
as either assets or liabilities in the statement of financial position and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative is driven by the intended use of the derivative
and the resulting designation. The Applied Biosystems group adopted the
statements effective July 1, 2000. The cumulative effect of adoption resulted in
an immaterial adjustment for a change in accounting principle in both the
Condensed Combined Statements of Operations and in accumulated other
comprehensive income in the Condensed Combined Statements of Financial Position.
The Applied Biosystems group's foreign currency risk management strategy
utilizes derivative instruments to hedge certain foreign currency forecasted
revenues and to offset the impact of changes in foreign currency exchange rates
on certain foreign currency-denominated net asset positions. The principal
objective of this strategy is to minimize the risks and/or costs associated with
the Applied Biosystems group's global financial and operating activities. The
Applied Biosystems group utilizes foreign exchange forward, option, and range
forward contracts to manage its foreign currency exposures, and an interest rate
swap agreement to manage its interest rate exposure. The Applied Biosystems
group does not use derivative financial instruments for trading purposes, nor is
it a party to leveraged derivatives.
The fair value of all foreign currency derivative contracts is recorded in
prepaid expenses and other current assets and other accrued expenses. The fair
value of the interest rate swap agreement is recorded in other long-term
liabilities.
32
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
Cash Flow Hedges
The Applied Biosystems group's international sales are typically denominated in
the customers' local (non-U.S. dollar) currency. The Applied Biosystems group
uses foreign exchange forward, option, and range forward contracts to hedge a
portion of forecasted international sales not denominated in U.S. dollars. These
contracts are designated as cash flow hedges and the effective portion of the
change in the fair value of these contracts is recorded in other comprehensive
income in the Condensed Combined Statements of Financial Position until the
underlying external forecasted transaction affects earnings. At that time, the
gain or loss on the derivative instrument, which had been deferred in other
comprehensive income, is reclassified to net revenues in the Condensed Combined
Statements of Operations. During the three and six months ended December 31,
2000, the Applied Biosystems group recognized net gains of $3.7 million and $4.8
million, respectively, in net revenues from derivative instruments designated as
cash flow hedges of anticipated sales. At December 31, 2000, $9.1 million of
derivative gains ($6.0 million net of deferred taxes) recorded in other
comprehensive income are expected to be reclassified to earnings during the next
twelve months. For the three and six months ended December 31, 2000, the Applied
Biosystems group recognized expense of $1.0 million and $2.7 million,
respectively, included in other expense in the Condensed Combined Statements of
Operations, which represented the change in the time value component of the fair
value of option contracts designated as cash flow hedges. The time value
component is not included in the assessment of hedge effectiveness, and as a
result, any changes are recognized in earnings in the period in which they
occur.
The Applied Biosystems group maintains an interest rate swap in conjunction with
a five-year Japanese yen debt obligation. The interest rate swap agreement
involves the payment of a fixed rate of interest and the receipt of a floating
rate of interest without the exchange of the underlying notional loan principal
amount. Under the terms of this contract, the Applied Biosystems group will make
fixed interest payments of 2.1% while receiving interest at a LIBOR floating
rate. No other cash payments will be made unless the contract is terminated
prior to maturity, in which case the amount to be paid or received in settlement
will be established by agreement at the time of termination. The agreed upon
amount would usually represent the net present value at current interest rates
of the remaining obligation to exchange payments under the terms of the
contract.
Other Hedges
The Applied Biosystems group also uses derivative financial instruments to hedge
against the adverse effects that foreign currency exchange rate fluctuations may
have on its foreign currency-denominated net asset positions. The gains and
losses on these derivatives are expected to largely offset transaction losses
and gains, respectively, on the underlying foreign currency-denominated assets
and liabilities, both of which are recorded in other expense.
33
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 7 - RELATED PARTY TRANSACTIONS
Sales of Products and Services Between Groups. For the three and six months
ended December 31, 1999, net revenues from leased instruments, shipments of
consumables and project materials, and contracted R&D services to the Celera
Genomics group totaled $16.9 million and $28.6 million, respectively. For the
three and six months ended December 31, 2000, net revenues from leased
instruments, shipments of consumables and project materials, and contracted R&D
services to the Celera Genomics group totaled $17.3 million and $31.8 million,
respectively.
NOTE 8 - CONTINGENCIES
Amersham
On November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a
patent infringement action against the Company in the United States District
Court for the Northern District of California. The complaint alleges that the
Company is directly, contributorily, or by inducement infringing U.S. Patent No.
5,688,648 ("the '648 patent"). Amersham asserts that the Company's use and sale
of DNA analysis reagents and systems that incorporate "BigDye" fluorescence
detection technology infringe the '648 patent, and seeks injunctive and monetary
relief. The Company answered the complaint, alleging that the '648 patent is
invalid and unenforceable, and that the Company has not infringed the '648
patent. In December 2000, the court granted Amersham's motion for summary
judgment in part, finding that certain of the Company's activities infringe the
claims of the '648 patent, but denied Amersham's motion for summary judgment
that the Company induced its customers to infringe the claims of the '648
patent. The trial date has been postponed and is currently expected to be
scheduled for spring or summer 2001.
On March 13, 1998, the Company filed a patent infringement action against
Amersham and Molecular Dynamics, Inc. in the United States District Court for
the Northern District of California. The Company asserts that one of its patents
(U.S. Patent No. 4,811,218) is infringed by reason of Molecular Dynamics' and
Amersham's sale of certain DNA analysis systems (e.g., the MegaBACE 1000
System). In response, Amersham has asserted various affirmative defenses and
several counterclaims, including that the Company is infringing two patents,
U.S. Patent No. 5,091,652 ("the '652 patent") and U.S. Patent No. 5,459,325,
each owned by or licensed to Molecular Dynamics, by selling certain ABI
PRISM(TM)DNA sequencing systems. In December 2000, the court granted the
Company's motion for summary judgment of non-infringement of the '652 patent.
This case has not yet been scheduled for trial.
On May 21, 1998, Amersham filed a patent infringement action against the Company
in the United States District Court for the Southern District of New York. The
complaint alleges that the Company is infringing, contributing to the
infringement, and inducing the infringement of U.S. Patent No. 4,707,235 ("the
'235 patent") by reason of the Company's sale of certain ABI PRISM(TM) DNA
sequencing systems. The complaint seeks injunctive and monetary relief. The
Company answered the
34
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
complaint, alleging that the '235 patent is invalid and that the Company does
not infringe the '235 patent. The matters described in this paragraph and the
immediately preceding paragraph have been consolidated into a single case to be
heard in the United States District Court for the Northern District of
California. In December 2000, the court granted the Company's motion for summary
judgment of non-infringement of the '235 patent. However, on December 18, 2000,
Amersham filed a new complaint alleging that the Company is infringing the '235
patent by reason of the Company's sale of certain DNA sequencing systems, which
allegations were not in the previous suit under the '235 patent. This action is
in the early stages of discovery.
On May 30, 2000, the Company filed a patent infringement action against Amersham
in the United States District Court for the Northern District of California. The
Company asserts that one of its patents (U.S. Patent No. 5,945,526) is infringed
by reason of Amersham's sale of DNA analysis reagents and systems that
incorporate ET Terminator fluorescence detection technology. This case is in the
early stages of discovery.
The Company believes that the claims asserted by Amersham in the foregoing cases
are without merit and intends to defend the cases vigorously. However, the
outcome of this or any other litigation is inherently uncertain, and the Company
cannot be sure that it will prevail in any of these matters. An adverse
determination in any of the actions brought by Amersham could have a material
adverse effect on the financial statements of the Applied Biosystems group and
the Company.
Other
The Company has been named as a defendant in several other legal actions,
including patent, commercial, and environmental, arising from the conduct of
normal business activities. Although the amount of any liability that might
arise with respect to any of these matters cannot be accurately predicted, the
resulting liability, if any, will not in the opinion of management have a
material adverse effect on the financial statements of the Applied Biosystems
group or the Company.
The holders of Applera Corporation - Applied Biosystems Group Common Stock are
stockholders of the Company and will continue to be subject to all risks
associated with an investment in the Company, including any legal proceedings
and claims affecting the Celera Genomics group.
35
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion of Operations
The name of PE Corporation was changed to Applera Corporation (the "Company")
and the name of the PE Biosystems group was changed to the Applied Biosystems
group effective November 30, 2000.
The following discussion should be read in conjunction with the Applied
Biosystems group's condensed combined financial statements and related notes and
the Company's condensed consolidated financial statements and related notes
included in this report; Applied Biosystems' "Management's Discussion and
Analysis" appearing on pages 10 - 19 of the Company's 2000 Annual Report to
Stockholders; and the Company's "Management's Discussion and Analysis" appearing
on pages 73 - 87 of the Company's 2000 Annual Report to Stockholders. Historical
results and percentage relationships are not necessarily indicative of operating
results for any future periods.
Events Impacting Comparability
Gains on investments. The three and six months ended December 31, 2000 included
before-tax gains of $3.0 million and $15.0 million, respectively, related to the
sales of minority equity investments. The second quarter of fiscal 2000 included
a before-tax gain of $25.8 million related to the sale of the Company's interest
in a minority equity investment.
Other special charges. During the second quarter of fiscal 2000, the Applied
Biosystems group recorded a before-tax charge of $21.6 million in selling,
general and administrative expenses for costs related to the acceleration of
certain long-term compensation programs as a result of the attainment of
performance targets.
Results of Operations for the Three Months Ended December 31, 2000 Compared With
the Three Months Ended December 31, 1999
The Applied Biosystems group reported net income of $58.0 million for the second
quarter of fiscal 2001 compared with $43.8 million for the second quarter of
fiscal 2000. On a comparable basis, excluding the gains on the sales of minority
equity investments from both fiscal years and the long-term compensation charge
from fiscal 2000, net income increased $12.2 million, or 27.8%, to $56.0 million
for the second quarter of fiscal 2001 compared with the second quarter of fiscal
2000. This increase was attributable to the growth in net revenues, lower
operating expenses as a percentage of net revenues and lower interest expense.
The negative effects of foreign currency reduced net income by approximately $7
million, or 16%, as compared with the second quarter of fiscal 2000.
Net revenues were $411.0 million for the second quarter of fiscal 2001 compared
with $335.9 million for the second quarter of fiscal 2000, an increase of 22.3%.
The effects of foreign currency reduced net revenues by approximately $19
million for the second quarter of fiscal 2001, or 6%, compared with the prior
year due primarily to weakness in the euro, the British pound, and the Japanese
yen.
36
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Revenues from leased instruments and shipments to the Celera Genomics group were
$17.3 million and $16.9 million for the second quarter of fiscal 2001 and fiscal
2000, respectively.
Geographically, the Applied Biosystems group reported revenue growth in all
regions for the second quarter of fiscal 2001 compared with the second quarter
of fiscal 2000. Revenues increased 14.5% in the United States, 15.2% in Europe,
59.4% in the Far East, and 29.5% in Latin America and other markets, compared
with the second quarter of the prior fiscal year. Excluding the effects of
foreign currency, revenues grew approximately 31% in Europe and 63% in the Far
East. Contributors to the increase in net revenues included genetic analysis
products; polymerase chain reaction product lines; genetic synthesizer products;
mass spectrometry instruments for proteomics; and royalties.
Gross margin as a percentage of net revenues was 51.9% for the second quarter of
fiscal 2001 compared with 53.8% for the second quarter of fiscal 2000. The
decrease in the gross margin as a percentage of net revenues was primarily
attributable to the negative effects of foreign currency and a change in product
mix.
SG&A expenses were $94.8 million for the second quarter of fiscal 2001 compared
with $105.8 million for the second quarter of fiscal 2000, a decrease of 10.4%.
On a comparable basis, excluding the long-term compensation charge in the prior
year, SG&A expenses increased 12.5%. This increase was due to higher planned
worldwide selling and marketing expenses commensurate with the growth in
revenues and orders. As a percentage of net revenues, SG&A expenses were 23.1%
for the second quarter of fiscal 2001 compared with 25.1% for the second quarter
of fiscal 2000, excluding the long-term compensation charge.
R&D expenses were $42.0 million for the second quarter of fiscal 2001 compared
with $31.4 million for the prior year, an increase of 33.9%, as a result of
investment in new products and technologies. As a percentage of net revenues,
R&D expenses were 10.2% for the second quarter of fiscal 2001 compared with 9.3%
for the second quarter of fiscal 2000.
Operating income increased to $76.3 million for the second quarter of fiscal
2001 compared with $43.5 million for the prior year. On a comparable basis,
excluding the long-term compensation charge from the prior year, operating
income increased $11.2 million, or 17.3%. The Applied Biosystems group benefited
from increased revenues as a result of strong worldwide demand and lower SG&A
expenses as a percentage of net revenues, partially offset by the negative
effect of foreign currency. Excluding the negative effect of foreign currency
and the special charge from the prior year, operating income increased
approximately 33%. Operating income as a percentage of net revenues decreased to
18.6% for the second quarter of fiscal 2001 compared with 19.4% for the prior
year, excluding the long-term compensation charge in fiscal 2000, primarily due
to the negative effects of foreign currency and a change in product mix.
Excluding the effects of foreign currency, operating income as a percentage of
net revenues increased to 20.1% in the second quarter of fiscal 2001.
Interest expense was $.3 million for the second quarter of fiscal 2001 compared
with $2.1 million for the prior year. The second quarter of fiscal 2000 included
interest on the $150 million note payable to
37
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
the Celera Genomics group. The note was paid in the fourth quarter of fiscal
2000. Interest income was $4.2 million for the second quarter of fiscal 2001
compared with $3.9 million for the prior year. The increase was due to larger
cash balances and higher interest rates for fiscal 2001 compared with fiscal
2000. The second quarter of fiscal 2000 included interest income on the $150
million note receivable relating to the sale of the Analytical Instruments
business. The note was collected in the fourth quarter of fiscal 2000.
Other expense, net was $.2 million for the second quarter of fiscal 2001
compared with $4.3 million for the prior year. These amounts were primarily
related to the Company's foreign currency management program.
The effective income tax rate was 30% for the second quarter of fiscal 2001
compared with 34% for the prior year. Excluding the special items previously
discussed, the effective income tax rate was 30% for the second quarter of both
fiscal years. See Note 1 to Applied Biosystems combined financial statements in
the Company's 2000 Annual Report to Stockholders for a discussion of allocations
of federal and state income taxes.
Results of Operations for the Six Months Ended December 31, 2000 Compared With
the Six Months Ended December 31, 1999
The Applied Biosystems group reported net income of $107.1 million for the first
six months of fiscal 2001 compared with $73.5 million for the first six months
of fiscal 2000. On a comparable basis, excluding the gains on the sales of
minority equity investments from the first six months of fiscal 2001 and 2000
and the long-term compensation charge from fiscal 2000, net income increased
$23.8 million, or 32.4%, compared with the first six months of fiscal 2000. This
increase was attributable to the growth in net revenues, lower operating
expenses as a percentage of net revenues, lower interest expense, and lower
non-operating costs related to the Applied Biosystems group's foreign currency
management program.
Net revenues were $774.6 million for the first six months of fiscal 2001
compared with $628.2 million for the first six months of fiscal 2000, an
increase of 23.3%. The effects of foreign currency reduced net revenues by
approximately $26 million, or 4%, compared with the prior year due primarily to
weakness in the euro and the British pound. Revenues from leased instruments and
shipments to the Celera Genomics group were $31.8 million and $28.6 million for
the first six months of fiscal 2001 and fiscal 2000, respectively.
Geographically, the Applied Biosystems group reported revenue growth in all
regions for the first six months of fiscal 2001 compared with the first six
months of fiscal 2000. Revenues increased 21.9% in the United States, 16.7% in
Europe, 38.3% in the Far East, and 23.5% in Latin America and other markets,
compared with the first six months of the prior fiscal year. Excluding the
effects of foreign currency, revenues grew approximately 31% in Europe.
Contributors to the increase in net revenues included genetic analysis products;
sequence detection systems, including reagents and instrument
38
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
systems for gene expression analysis and single nucleotide polymorphism ("SNP")
detection; mass spectrometry products; polymerase chain reaction product lines;
and royalties.
Gross margin as a percentage of net revenues was 52.6% for the first six months
of fiscal 2001 compared with 53.4% for the first six months of fiscal 2000. The
decrease in the gross margin as a percentage of net revenues was primarily
attributable to the negative effects of foreign currency and a change in product
mix.
SG&A expenses were $184.8 million for the first six months of fiscal 2001
compared with $183.6 million for the first six months of fiscal 2000. On a
comparable basis, excluding the long-term compensation charge in the prior year,
SG&A expenses increased 14.1% over the prior year. This increase was due to
higher planned worldwide selling and marketing expenses commensurate with the
growth in revenues and orders. As a percentage of net revenues, SG&A expenses
were 23.9% for the first six months of fiscal 2001 compared with 25.8% for the
first six months of fiscal 2000, excluding the long-term compensation charge.
R&D expenses were $88.1 million for the first six months of fiscal 2001 compared
with $63.4 million for the prior year, an increase of 39.0%, as a result of
investment in new products and technologies. As a percentage of net revenues,
R&D expenses were 11.4% for the first six months of fiscal 2001 compared with
10.1% for the first six months of fiscal 2000.
Operating income increased to $134.2 million for the first six months of fiscal
2001 compared with $88.5 million for the prior year. On a comparable basis,
excluding the long-term compensation charge in fiscal 2000, operating income
increased $24.1 million, or 21.9%, over the prior year. The Applied Biosystems
group benefited from increased revenues as a result of strong worldwide demand
and lower SG&A expenses as percentage of net revenues, partially offset by the
negative effect of foreign currency. Excluding the negative effect of foreign
currency and the special charge from the prior year, operating income increased
approximately 34%. Operating income as a percentage of net revenues, excluding
the long-term compensation charge in fiscal 2000, remained essentially
unchanged. Excluding the effects of foreign currency in fiscal 2001 and the
long-term compensation charge in fiscal 2000, operating income as a percentage
of net revenues was 18.4% for the first six months of fiscal 2001 compared with
17.5% in the prior year.
Interest expense was $.6 million for the first six months of fiscal 2001
compared with $4.3 million for the prior year. The first six months of fiscal
2000 included interest on the $150 million note payable to the Celera Genomics
group. The note was paid in the fourth quarter of fiscal 2000. Interest income
was $8.6 million for the first six months of fiscal 2001 compared with $8.2
million for the prior year. The increase was due to larger cash balances and
higher interest rates for fiscal 2001 compared with fiscal 2000. The first half
of fiscal 2000 included interest income on the $150 million note receivable
relating to the sale of the Analytical Instruments business. The note was
collected in the fourth quarter of fiscal 2000.
39
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Other expense, net was $3.2 million for the first six months of fiscal 2001
compared with $8.9 million for the prior year. These amounts were primarily
related to the Company's foreign currency management program.
The effective income tax rate was 30% for the first six months of fiscal 2001
compared with 33% for the prior year. Excluding the special items discussed
above, the effective income tax rate was 30% for both six month periods ended
December 31, 2000 and 1999. See Note 1 to Applied Biosystems combined financial
statements in the Company's 2000 Annual Report to Stockholders for a discussion
of allocations of federal and state income taxes.
Market Risk
The Applied Biosystems group operates internationally, with manufacturing and
distribution facilities in various countries throughout the world. For fiscal
2000 and the first half of fiscal 2001, the Applied Biosystems group derived
approximately 50% of its revenues from countries outside of the United States.
Results continue to be affected by market risk, including fluctuations in
foreign currency exchange rates and changes in economic conditions in foreign
markets.
The Applied Biosystems group performed a sensitivity analysis as of December 31,
2000 on its foreign currency derivative financial instruments. Assuming a
hypothetical adverse change of 10% in foreign exchange rates in relation to the
U.S. dollar at December 31, 2000, the Applied Biosystems group calculated a
hypothetical loss of $10.0 million when comparing the change in fair value of
both the foreign currency contracts outstanding and the underlying exposures
being hedged. This hypothetical analysis excludes the impact of foreign currency
translation on the Applied Biosystems group's operations. Actual gains and
losses in the future could, however, differ materially from this analysis, based
on changes in the timing and amount of foreign currency exchange rate movements
and actual exposures and hedges. See Note 6 to the condensed combined financial
statements for a further discussion of derivative financial instruments.
Management's Discussion of Financial Resources and Liquidity
The following discussion of financial resources and liquidity focuses on the
Condensed Combined Statements of Financial Position and the Condensed Combined
Statements of Cash Flows.
Significant Changes in the Condensed Combined Statements of Financial Position.
Cash and cash equivalents were $270.1 million at December 31, 2000 compared with
$394.6 million at June 30, 2000, with total debt of $53.3 million at December
31, 2000 compared with $51.8 million at June 30, 2000. Working capital was
$455.5 million at December 31, 2000 compared with $395.1 million at June 30,
2000. Debt to total capitalization remained unchanged at 5% at December 31, 2000
compared with June 30, 2000.
40
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Accounts receivable increased $60.2 million to $427.6 million at December 31,
2000 from $367.4 million at June 30, 2000, primarily due to growth in net
revenues and timing of collections.
Prepaid expenses and other current assets increased $30.1 million to $111.4
million at December 31, 2000 from $81.3 million at June 30, 2000, primarily due
to certain nontrade receivables and the fair value of derivative financial
instruments.
Property, plant and equipment, net increased $69.2 million to $300.1 million at
December 31, 2000 from $230.9 million at June 30, 2000, primarily due to the
Applied Biosystems group's purchase of property in Pleasanton, California for
approximately $54 million.
Other long-term assets decreased $52.4 million to $417.0 million at December 31,
2000 from $469.4 million at June 30, 2000. The Applied Biosystems groups'
minority equity investments decreased $140.2 million due to a decrease in the
fair value of the securities, as well as the sales of certain investments
mentioned previously. This decrease was partially offset by an increase of $74.5
million in noncurrent deferred tax assets and by an increase in purchased
license agreements.
The tax benefit payable to the Celera Genomics group of $16.7 million at June
30, 2000 was settled during the first six months of fiscal 2001. The
reimbursable limit of $75 million was reached during the first quarter of fiscal
2001. See Note 2 to the condensed combined financial statements for a further
discussion of the tax allocation policy.
Accrued salaries and wages decreased $37.1 million to $42.3 million at December
31, 2000 from $79.4 million at June 30, 2000 reflecting the payments of certain
compensation-related accruals.
Accrued taxes on income decreased $35.9 million to $113.6 million at December
31, 2000 from $149.5 million at June 30, 2000 primarily due to income tax
payments and the utilization of tax benefits generated by the Celera Genomics
group.
Condensed Combined Statements of Cash Flows. Net cash used by operating
activities was $50.3 million for the first six months of fiscal 2001 compared
with $30.9 million of net cash provided by operating activities for the same
period in fiscal 2000. For the first six months of fiscal 2001, compared with
the same period in the prior year, increases in accounts receivable, prepaid
expenses and other assets, and higher payments to suppliers and payments of
certain compensation-related accruals were only partially offset by higher
income-related cash flows.
Net cash used by investing activities was $85.5 million for the first six months
of fiscal 2001 compared with $8.6 million for the prior year. In the first six
months of fiscal 2001, the Applied Biosystems group's capital expenditures were
$97.3 million, which included approximately $54 million related to the purchase
of property in Pleasanton, California for the future construction of new office,
laboratory and light manufacturing facilities and $15.1 million for laboratory
facilities. For the same period in the prior year, capital expenditures were
$31.2 million. In the first six months of
41
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
fiscal 2001, the Applied Biosystems group realized net proceeds of $11.4 million
from the sales of minority equity investments compared with $22.1 million for
the prior year.
Net cash used by discontinued operations was $1.6 million for the first six
months of fiscal 2001 compared with $7.4 million for the first six months of
fiscal 2000. The fiscal 2000 and fiscal 2001 uses were for transaction-related
payments and other cash outlays associated with the divestiture of the
Analytical Instruments business.
Net cash provided by financing activities was $12.7 million for the first six
months of fiscal 2001 compared with $41.7 million for the prior year. Proceeds
from employee stock option exercises were $24.4 million in the first half of
fiscal 2001 compared with $21.5 million for the first six months of fiscal 2000.
Loans payable increased $6.0 million for the first six months of fiscal 2001
compared with an increase of $29.0 million for the prior year. Dividends paid
were $17.8 million during the first six months of fiscal 2001 compared with $8.7
million in the prior year. The increase in the amount of dividends paid was due
to timing.
At December 31, 2000, the Company had unused credit facilities, including the
Company's revolving credit facility, totaling $319.2 million, which is available
to both the Applied Biosystems group and the Celera Genomics group.
Outlook
The Applied Biosystems group expects to continue to grow and maintain
profitability for the remainder of fiscal 2001. The Applied Biosystems group
should continue to benefit from its customers in basic medical research,
pharmaceutical development, and applied markets for sophisticated, automated,
and cost-effective life science tools.
Demand is expected to continue for a variety of tools to gather, interpret, and
integrate biological information to achieve a better understanding of human
health and disease. The Applied Biosystems group should also benefit from the
introduction of new products designed to meet these demands during fiscal 2001.
For example, during the first half of fiscal 2001, the Applied Biosystems group
announced a new product and initiative in proteomics. Shipments of the first
Maldi TOF/TOF mass spectrometer were made to early access customers and the
Celera Genomics group in the first half of fiscal 2001. In addition, the Applied
Biosystems group recently introduced a new Productivity Pack, intended to offer
customers using the ABI PRISM(R) genetic analyzers a substantial improvement in
productivity, and the ABI PRISM(R) 7900 HT sequence detection system.
During the first half of fiscal 2001, the Company announced plans to expand its
existing molecular diagnostics business. This initiative is anticipated to
leverage several technological resources of the Applied Biosystems group and the
Celera Genomics group. Further details regarding the initiative and its status
within the Company's capital structure are anticipated to be announced in the
coming quarters, as the initiative is refined.
42
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Applied Biosystems group remains concerned about adverse currency effects
because approximately 50% of its revenues were derived from regions outside the
United States in fiscal 2000 and the first half of fiscal 2001. The Applied
Biosystems group also remains subject to various other uncertainties, many of
which are referenced in the "Forward-Looking Statements" section below.
Forward-Looking Statements
Certain statements contained in this report, including the Outlook section, are
forward-looking and are subject to a variety of risks and uncertainties. These
statements may be identified by the use of forward-looking words or phrases such
as "believe," "expect," "anticipate," "should," "planned," "estimated," and
"potential," among others. These forward-looking statements are based on our
current expectations. The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for such forward-looking statements. In order to comply
with the terms of the safe harbor, we note that a variety of factors could cause
our actual results and experience to differ materially from the anticipated
results or other expectations expressed in such forward-looking statements. The
risks and uncertainties that may affect the operations, performance,
development, and results of our businesses include, but are not limited to:
Rapidly changing technology in life sciences could make the Applied Biosystems
group's product line obsolete unless it continues to improve existing products,
develop new products, and pursue new market opportunities. A significant portion
of the net revenues for the Applied Biosystems group each year is derived from
products that did not exist in the prior year. The Applied Biosystems group's
future success depends on its ability to continually improve its current
products, develop and introduce, on a timely and cost-effective basis, new
products that address the evolving needs of its customers, and pursue new market
opportunities that develop as a result of technological and scientific advances
in life sciences. The Applied Biosystems group's products are based on complex
technology which is subject to rapid change as new technologies are developed
and introduced in the marketplace. Unanticipated difficulties or delays in
replacing existing products with new products could adversely affect the Applied
Biosystems group's future operating results. The pursuit of new market
opportunities will add further complexity and require additional management
attention and resources as these markets are addressed.
A significant portion of sales depends on customers' capital spending policies
which may be subject to significant and unexpected decreases. A significant
portion of the Applied Biosystems group's instrument product sales are capital
purchases by its customers. The Applied Biosystems group's customers include
pharmaceutical, environmental, research, and chemical companies, and the capital
spending policies of these companies can have a significant effect on the demand
for the Applied Biosystems group's products. These policies are based on a wide
variety of factors, including the resources available to make purchases, the
spending priorities among various types of research equipment, and policies
regarding capital expenditures during recessionary periods. Any decrease in
capital spending or change in spending policies of these companies could
significantly reduce the demand for the Applied Biosystems group's products.
43
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
A substantial portion of the Applied Biosystems group's sales is to customers at
universities or research laboratories whose funding is dependent on both the
level and timing of funding from government sources. As a result, the timing and
amount of revenues from these sources may vary significantly due to factors that
can be difficult to forecast. Although research funding has increased during the
past several years, grants have, in the past, been frozen for extended periods
or otherwise become unavailable to various institutions, sometimes without
advance notice. Budgetary pressures, particularly in the United States and
Japan, may result in reduced allocations to government agencies that fund
research and development activities. If government funding necessary to purchase
the Applied Biosystems group's products were to become unavailable to
researchers for any extended period of time, or if overall research funding were
to decrease, the business of the Applied Biosystems group could be adversely
affected.
The Applied Biosystems group has been and could in the future be subject to
claims for infringement of patents and other intellectual property rights. The
Applied Biosystems group's products are based on complex, rapidly developing
technologies. These products could be developed without knowledge of previously
filed but unpublished patent applications that cover some aspect of these
technologies. In addition, there are relatively few decided court cases
interpreting the scope of patent claims in these technologies, and the Applied
Biosystems group's belief that its products do not infringe the technology
covered by patents and patent applications could be successfully challenged by
third parties. Also, in the course of its business, the Applied Biosystems group
may from time to time have access to confidential or proprietary information of
third parties, and such parties could bring a theft of trade secret claim
against the Applied Biosystems group asserting that the Applied Biosystems
group's products improperly utilize technologies which are not patented but
which are protected as trade secrets. The Applied Biosystems group has been made
a party to litigation regarding intellectual property matters, including patent
litigation, some of which, if determined adversely, could have a material
adverse effect on the Applied Biosystems group. Due to the fact that the Applied
Biosystems group's business depends in large part on rapidly developing and
dynamic technologies, there remains a constant risk of intellectual property
litigation affecting the group. The Applied Biosystems group has from time to
time been notified that it may be infringing certain patents and other
intellectual property rights of others. It may be necessary or desirable in the
future to obtain licenses relating to one or more products or relating to
current or future technologies, and the Applied Biosystems group cannot be
assured that it will be able to obtain these licenses or other rights on
commercially reasonable terms.
Since the Applied Biosystems group's business is dependent on foreign sales,
fluctuating currencies will make our revenues and operating results more
volatile. Approximately 50% of the Applied Biosystems group's net revenues
during fiscal 2000 and the first half of fiscal 2001 were derived from sales to
customers outside of the United States. The majority of these sales were based
on the relevant customer's local currency. As a result, the Applied Biosystems
group's reported and anticipated operating results and cash flows are subject to
fluctuations due to material changes in foreign currency exchange rates that are
beyond the Applied Biosystems group's control.
Integrating acquired technologies may be costly and may not result in
technological advances. The future growth of the Applied Biosystems group
depends in part on its ability to acquire complementary technologies through
acquisitions and investments. The consolidation of employees,
44
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
operations, and marketing and distribution methods could present significant
managerial challenges. For example, the Applied Biosystems group may encounter
operational difficulties in the integration of manufacturing or other
facilities. In addition, technological advances resulting from the integration
of technologies may not be achieved as successfully or rapidly as anticipated,
if at all.
Electricity shortages and earthquakes could disrupt operations in California.
The headquarters and principal operations of the Applied Biosystems group are
located in Foster City, California. The State of California and its principal
electrical utility companies have recently indicated that there is a statewide
electricity shortage and that these utility companies are in poor financial
condition. As a result, California has experienced temporary localized
electricity outages, or rolling blackouts, which may continue or worsen into
blackouts of longer duration in the future. Blackouts in Foster City, even of
relatively short duration, could impair or cause a temporary suspension of the
group's operations, including the manufacturing and shipment of new products,
and could have a material adverse effect on operating results. In addition,
Foster City is located near major California earthquake faults. The ultimate
impact of earthquakes on the Applied Biosystems group, its significant
suppliers, and the general infrastructure is unknown, but operating results
could be materially affected in the event of a major earthquake.
45
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands)
Three months ended Six months ended
December 31, December 31,
1999 2000 1999 2000
-------- -------- -------- --------
Net Revenues $ 8,346 $ 20,319 $ 16,625 $ 38,572
Costs and Expenses
Research and development 38,169 52,745 70,333 99,489
Selling, general and administrative 9,525 14,362 17,932 27,392
Amortization of goodwill and intangibles 10,968 22,049
-------- -------- -------- --------
Operating Loss (39,348) (57,756) (71,640) (110,358)
Interest expense 610 43 661 829
Interest income 3,074 17,124 5,107 35,310
Other expense, net 15 4
-------- -------- -------- --------
Loss Before Income Taxes (36,884) (40,690) (67,194) (75,881)
Benefit for income taxes 12,606 10,986 23,518 20,488
-------- -------- -------- --------
Net Loss $(24,278) $(29,704) $(43,676) $(55,393)
======== ======== ======== ========
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
46
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At June 30, At December 31,
2000 2000
---------- ---------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 569,894 $ 346,298
Short-term investments 541,140 692,634
Tax benefit receivable from the Applied Biosystems group 16,702
Accounts receivable, net 14,936 19,239
Inventories, net 3,336 2,957
Prepaid expenses and other current assets 2,283 2,625
---------- ----------
Total current assets 1,148,291 1,063,753
Property, plant and equipment, net 111,442 113,819
Other long-term assets 153,524 141,014
---------- ----------
Total Assets $1,413,257 $1,318,586
========== ==========
Liabilities and Group Equity
Current liabilities
Accounts payable $ 21,566 $ 21,546
Accrued salaries and wages 10,251 10,756
Deferred revenues 24,169 19,141
Other accrued expenses 11,266 14,156
---------- ----------
Total current liabilities 67,252 65,599
Long-term debt 46,000
Other long-term liabilities 9,189 7,831
---------- ----------
Total Liabilities 122,441 73,430
Group Equity 1,290,816 1,245,156
---------- ----------
Total Liabilities and Group Equity $1,413,257 $1,318,586
========== ==========
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
47
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
Six months ended
December 31,
1999 2000
--------- ---------
Operating Activities
Net loss $ (43,676) $ (55,393)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation and amortization 10,652 32,107
Long-term compensation program 314 628
Deferred income taxes (6,615) (15,043)
Changes in operating assets and liabilities
Decrease in tax benefit receivable
from the Applied Biosystems group 522 16,702
Increase in accounts receivable (6,512) (4,303)
Decrease in inventory 379
(Increase) decrease in prepaid expenses and other assets (2,051) 758
Increase (decrease) in accounts payable and other liabilities 479 (3,037)
--------- ---------
Net Cash Used by Operating Activities (46,887) (27,202)
--------- ---------
Investing Activities
Additions to property, plant and equipment (19,867) (12,623)
Purchases of short-term investments, net (151,205)
Investments (3,000)
--------- ---------
Net Cash Used by Investing Activities (22,867) (163,828)
--------- ---------
Financing Activities
Net change in loans payable 46,000 (46,000)
Proceeds from stock issued for stock plans 6,218 13,434
--------- ---------
Net Cash Provided (Used) by Financing Activities 52,218 (32,566)
--------- ---------
Net Change in Cash and Cash Equivalents (17,536) (223,596)
Cash and Cash Equivalents Beginning of Period 71,491 569,894
--------- ---------
Cash and Cash Equivalents End of Period $ 53,955 $ 346,298
========= =========
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
48
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED COMBINED FINANCIAL STATEMENTS
The name of PE Corporation was changed to Applera Corporation (the "Company")
and the name of the PE Biosystems group was changed to the Applied Biosystems
group effective November 30, 2000.
The interim condensed combined financial statements should be read in
conjunction with the financial statements presented in the Company's 2000 Annual
Report to Stockholders. Significant accounting policies disclosed therein have
not changed.
The unaudited condensed combined financial statements reflect, in the opinion of
the Company's management, all adjustments that are necessary for a fair
statement of the results for the interim periods. All such adjustments are of a
normal recurring nature. These results are, however, not necessarily indicative
of the results to be expected for a full year. 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, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. Certain amounts in the condensed combined financial statements have
been reclassified for comparative purposes.
The Celera Genomics group's condensed combined financial statements should be
read in conjunction with the Company's condensed consolidated financial
statements.
NOTE 2 - ALLOCATION OF FEDERAL AND STATE INCOME TAXES
The federal income taxes of the Company and its subsidiaries, which own assets
allocated between the groups, are determined on a consolidated basis.
Consolidated federal income tax provisions and related tax payments or refunds
are allocated between the groups based principally on the taxable income and tax
credits directly attributable to each group. Such allocations reflect each
group's contribution (positive or negative) to the Company's consolidated
federal taxable income and the consolidated federal tax liability and tax credit
position. Intergroup transactions are taxed as if each group were a stand-alone
company. Tax benefits that cannot be used by the group generating those benefits
but can be used on a consolidated basis are transferred to the group that can
utilize such benefits. Tax benefits generated by the Celera Genomics group
commencing July 1, 1998, which could be utilized on a consolidated basis, were
reimbursed by the Applied Biosystems group to the Celera Genomics group up to a
limit of $75 million. As of December 31, 2000, the Celera Genomics group
generated cumulative tax benefits of $89.4 million that were utilized by the
Applied Biosystems group since July 1, 1998. The amounts utilized by the Applied
Biosystems group in excess of the $75 million limit are not reimbursed to the
Celera Genomics group and are recorded to group equity in the Celera Genomics
group's Condensed Combined Statements of Financial Position. See Note 1 of the
49
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
Celera Genomics group's combined financial statements included in the Company's
2000 Annual Report to Stockholders for a further discussion of the tax
allocation policy.
NOTE 3 - ACQUISITIONS
Paracel, Inc. During the fourth quarter of fiscal 2000, the Company acquired
Paracel, Inc. in a stock-for-stock transaction. The net assets and results of
operations of Paracel were included in the Celera Genomics group's condensed
combined financial statements from the date of acquisition. The following
selected unaudited pro forma information for the Celera Genomics group assumes
the acquisition had occurred at the beginning of fiscal 2000 and gives effect to
purchase accounting adjustments:
(Dollar amounts in millions) Three months ended Six months ended
December 31, 1999 December 31, 1999
----------------- -----------------
Net revenues $ 10.8 $ 22.1
Net loss $ (36.4) $ (69.9)
See Note 2 to the Celera Genomics group's combined financial statements in the
Company's 2000 Annual Report to Stockholders for a further discussion of this
acquisition.
NOTE 4 - COMPREHENSIVE LOSS
Accumulated other comprehensive income included in Group Equity in the Condensed
Combined Statements of Financial Position consists of unrealized gains and
losses on available-for-sale investments. Total comprehensive loss for the three
and six months ended December 31, 1999 and 2000 is presented in the following
table:
(Dollar amounts in millions) Three months ended Six months ended
December 31, December 31,
1999 2000 1999 2000
-------------- ------------ ------------- ------------
Net loss $(24.3) $(29.7) $(43.7) $(55.4)
Other comprehensive income:
Unrealized gain on investments, net of tax 0.2 0.5
-------------- ------------ ------------- ------------
Comprehensive loss $(24.3) $(29.5) $(43.7) $(54.9)
============== ============ ============= ============
50
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 5 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories included the following components:
(Dollar amounts in millions) June 30, December 31,
2000 2000
-------- ------------
Raw materials and supplies $1.9 $2.9
Finished products 1.4 0.1
---- ----
Total inventories $3.3 $3.0
==== ====
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
(Dollar amounts in millions) Six months ended
December 31,
1999 2000
------- -------
Nonreimbursable utilization of tax benefits by
the Applied Biosystems group $ - $14.4
Tax benefit related to employee stock options $ - $ 9.6
NOTE 7 - DEBT
Long-term debt at June 30, 2000 consisted of $46.0 million of commercial paper
borrowing. The Company had the necessary credit facilities, through its
revolving credit agreement, to refinance the commercial paper borrowings on a
long-term basis. At June 30, 2000, these borrowings were classified as a
noncurrent liability because it was the Company's intent to refinance these
obligations on a long-term basis. However, in October 2000, the Company repaid
this debt.
NOTE 8 - RELATED PARTY TRANSACTIONS
Sales of Products and Services Between Groups. For the three and six months
ended December 31, 1999, research and development expenses included $14.3
million and $26.0 million, respectively, for lease payments on instruments, the
purchase of consumables and project materials, and services contracted from the
Applied Biosystems group. For the three and six month periods ended December 31,
2000, research and development expenses included $17.3 million and $30.5
million, respectively, for lease payments on instruments, the purchase of
consumables and project materials, and services contracted from the Applied
Biosystems group.
51
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
The Institute of Genomic Research ("TIGR"). During the second quarter of fiscal
2001, the Celera Genomics group entered into an agreement to perform sequencing
services for TIGR. The President of the Celera Genomics group is also the
current Chairman of the Board of Trustees of TIGR. An immediate family member of
the President of the Celera Genomics group currently serves as TIGR's President
and is on TIGR's Board of Trustees. Additionally, as of December 31, 2000, TIGR
owns approximately 1.4 million options to purchase Applera Corporation - Celera
Genomics Group Common Stock.
During the second quarter of fiscal 2001, the Celera Genomics group recognized
revenues of $1.6 million from TIGR, which was also a receivable as of December
31, 2000.
NOTE 9 - CONTINGENCIES
Amersham
On November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a
patent infringement action against the Company in the United States District
Court for the Northern District of California. The complaint alleges that the
Company is directly, contributorily, or by inducement infringing U.S. Patent No.
5,688,648 ("the '648 patent"). Amersham asserts that the Company's use and sale
of DNA analysis reagents and systems that incorporate "BigDye" fluorescence
detection technology infringe the '648 patent, and seeks injunctive and monetary
relief. The Company answered the complaint, alleging that the '648 patent is
invalid and unenforceable, and that the Company has not infringed the '648
patent. In December 2000, the court granted Amersham's motion for summary
judgment in part, finding that certain of the Company's activities infringe the
claims of the '648 patent, but denied Amersham's motion for summary judgment
that the Company induced its customers to infringe the claims of the '648
patent. The trial date has been postponed and is currently expected to be
scheduled for spring or summer 2001.
On March 13, 1998, the Company filed a patent infringement action against
Amersham and Molecular Dynamics, Inc. in the United States District Court for
the Northern District of California. The Company asserts that one of its patents
(U.S. Patent No. 4,811,218) is infringed by reason of Molecular Dynamics' and
Amersham's sale of certain DNA analysis systems (e.g., the MegaBACE 1000
System). In response, Amersham has asserted various affirmative defenses and
several counterclaims, including that the Company is infringing two patents,
U.S. Patent No. 5,091,652 ("the '652 patent") and U.S. Patent No. 5,459,325,
each owned by or licensed to Molecular Dynamics, by selling certain ABI
PRISM(TM)DNA sequencing systems. In December 2000, the court granted the
Company's motion for summary judgment of non-infringement of the '652 patent.
This case has not yet been scheduled for trial.
On May 21, 1998, Amersham filed a patent infringement action against the Company
in the United States District Court for the Southern District of New York. The
complaint alleges that the Company is infringing, contributing to the
infringement, and inducing the infringement of U.S. Patent No. 4,707,235 ("the
52
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
'235 patent") by reason of the Company's sale of certain ABI PRISM(TM) DNA
sequencing systems. The complaint seeks injunctive and monetary relief. The
Company answered the complaint, alleging that the '235 patent is invalid and
that the Company does not infringe the '235 patent. The matters described in
this paragraph and the immediately preceding paragraph have been consolidated
into a single case to be heard in the United States District Court for the
Northern District of California. In December 2000, the court granted the
Company's motion for summary judgment of non-infringement of the '235 patent.
However, on December 18, 2000, Amersham filed a new complaint alleging that the
Company is infringing the '235 patent by reason of the Company's sale of certain
DNA sequencing systems, which allegations were not in the previous suit under
the '235 patent. This action is in the early stages of discovery.
On May 30, 2000, the Company filed a patent infringement action against Amersham
in the United States District Court for the Northern District of California. The
Company asserts that one of its patents (U.S. Patent No. 5,945,526) is infringed
by reason of Amersham's sale of DNA analysis reagents and systems that
incorporate ET Terminator fluorescence detection technology. This case is in the
early stages of discovery.
The Company believes that the claims asserted by Amersham in the foregoing cases
are without merit and intends to continue to defend the cases vigorously.
However, the outcome of this or any other litigation is inherently uncertain,
and the Company cannot be sure that it will prevail in any of these matters. An
adverse determination in any of the actions brought by Amersham could have a
material adverse effect on the financial statements of the Celera Genomics group
and the Company.
Other
The Company has been named as a defendant in several other legal actions,
including patent, commercial, and environmental, arising from the conduct of
normal business activities. Although the amount of any liability that might
arise with respect to any of these matters cannot be accurately predicted, the
resulting liability, if any, will not in the opinion of management have a
material adverse effect on the financial statements of the Celera Genomics group
or the Company.
The holders of Applera Corporation - Celera Genomics Group Common Stock are
stockholders of the Company and will continue to be subject to all risks
associated with an investment in the Company, including any legal proceedings
and claims affecting the Applied Biosystems group.
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CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion of Operations
The name of PE Corporation was changed to Applera Corporation (the "Company")
and the name of the PE Biosystems group was changed to the Applied Biosystems
group effective November 30, 2000.
The following discussion should be read in conjunction with the Celera Genomics
group's condensed combined financial statements and related notes and the
Company's condensed consolidated financial statements and related notes included
in this report; the Celera Genomics group's "Management's Discussion and
Analysis" appearing on pages 46 - 54 of the Company's 2000 Annual Report to
Stockholders; and the Company's "Management's Discussion and Analysis" appearing
on pages 73 - 87 of the Company's 2000 Annual Report to Stockholders. Historical
results and percentage relationships are not necessarily indicative of operating
results for any future periods.
Events Impacting Comparability
Acquisition. During the fourth quarter of fiscal 2000, Paracel, Inc. was
acquired in a stock-for-stock transaction. Paracel produces advanced genomic and
text analysis technologies. Its products include a hardware accelerator for
sequence comparison, a hardware accelerator for text search, and sequence
analysis software tools. See Note 3 to the condensed combined financial
statements for a discussion of this acquisition.
Results of Operations for the Three Months Ended December 31, 2000 Compared With
the Three Months Ended December 31, 1999
The Celera Genomics group reported a net loss of $29.7 million for the second
quarter of fiscal 2001 compared with a net loss of $24.3 million for the second
quarter of fiscal 2000. The increase in the net loss reflected the increased
investment in research and development activities relating to expanded efforts
in bioinformatics and software development capabilities; increased operating
expenses required to support expanded product and business development
activities; expansion of sales and marketing capabilities; and amortization of
goodwill and intangibles primarily due to the Paracel acquisition. These
increased expenses were partially offset by increased net revenues and interest
income.
Net revenues for the Celera Genomics group were $20.3 million for the second
quarter of fiscal 2001 compared with $8.3 million for the second quarter of
fiscal 2000. The increased revenues resulted primarily from database
subscription agreements with commercial and academic customers, as well as
revenues from Paracel and genomics services.
R&D expenses increased $14.5 million to $52.7 million for the second quarter of
fiscal 2001 from $38.2 million for the second quarter of fiscal 2000 primarily
as a result of the development of expanded bioinformatics and software
development capabilities. The group also expanded its
54
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
scientific and annotation research teams and bioinformatics and software
engineering staff. In addition, the Celera Genomics group accelerated the
development of its discovery platform and is currently accelerating its gene
discovery work and expanding its capabilities in proteomics and functional
genomics. The acquisition of Paracel during the fourth quarter of fiscal 2000
also contributed to the increase in R&D expenses.
SG&A expenses were $14.4 million for the second quarter of fiscal 2001 compared
with $9.5 million for the second quarter of fiscal 2000. The increase was caused
primarily by the Celera Genomics group's expansion of its sales and marketing
capabilities and business development efforts. The acquisition of Paracel during
the fourth quarter of fiscal 2000 also contributed to the increase in SG&A
expenses.
The Celera Genomics group recorded $11.0 million of expenses in the second
quarter of fiscal 2001 relating to the amortization of goodwill and other
intangibles primarily due to Paracel.
Interest expense was less than $.1 million for the second quarter of fiscal 2001
compared with $.6 million for the second quarter of fiscal 2000. Interest
expense in both periods reflected the Company's financing of the purchase of the
Celera Genomics group's Rockville, Maryland facilities. The financing, entered
into during the first quarter of fiscal 2000, was repaid in October 2000.
Interest income was $17.1 million for the second quarter of fiscal 2001 compared
with $3.1 million for the second quarter of fiscal 2000. The increase was
attributable to interest income on cash and cash equivalents and short-term
investments, which increased as a result of the follow-on public offering of
Applera Corporation-Celera Genomics Group Common Stock completed in March 2000.
The second quarter of fiscal 2000 included interest income from the $150 million
note receivable from the Applied Biosystems group. The note was collected in the
fourth quarter of fiscal 2000.
The effective income tax rate was 27% for the second quarter of fiscal 2001 and
34% for the second quarter of fiscal 2000. The decrease in the effective income
tax benefit rate was primarily due to the amortization of nondeductible goodwill
relating to the acquisition of Paracel. See Note 1 to the Celera Genomics
group's combined financial statements in the Company's 2000 Annual Report to
Stockholders for a discussion of allocations of federal and state income taxes.
Results of Operations for the Six Months Ended December 31, 2000 Compared With
the Six Months Ended December 31, 1999
The Celera Genomics group reported a net loss of $55.4 million for the first six
months of fiscal 2001 compared with a net loss of $43.7 million for the first
six months of fiscal 2000. The increase in the net loss reflected the increased
investment in research and development activities; increased operating expenses
required to support expanded product and business development activities;
expansion of sales and marketing capabilities; and amortization of goodwill and
intangibles primarily due to the
55
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
Paracel acquisition. These increased expenses were partially offset by increased
net revenues and interest income.
Net revenues for the Celera Genomics group were $38.6 million for the first six
months of fiscal 2001 compared with $16.6 million for the first six months of
fiscal 2000. The increased revenues resulted primarily from database
subscription agreements with commercial and academic customers, as well as
revenues from Paracel and genomics services.
R&D expenses increased $29.2 million to $99.5 million for the first six months
of fiscal 2001 from $70.3 million for the first six months of fiscal 2000
primarily as a result of the expansion of its scientific and annotation research
teams and bioinformatics and software engineering staff. In addition, the Celera
Genomics group accelerated the development of its discovery platform and is
currently accelerating its gene discovery work and expanding its capabilities in
proteomics and functional genomics. The acquisition of Paracel during the fourth
quarter of fiscal 2000 also contributed to the increase in R&D expenses.
SG&A expenses were $27.4 million for the first six months of fiscal 2001
compared with $17.9 million for the prior year. The increase was caused
primarily by the Celera Genomics group's expansion of its sales and marketing
capabilities and its business development efforts. The acquisition of Paracel
during the fourth quarter of fiscal 2000 also contributed to the increase in
SG&A expenses.
The Celera Genomics group recorded $22.0 million of expenses in the first half
of fiscal 2001 relating to the amortization of goodwill and other intangibles
primarily due to Paracel.
Interest expense was $.8 million for the first six months of fiscal 2001
compared with $.7 million for the first six months of fiscal 2000. Interest
expense in both periods reflected the Company's financing of the purchase of the
Celera Genomics group's Rockville, Maryland facilities. The financing, entered
into during the first quarter of fiscal 2000, was repaid in October 2000.
Interest income was $35.3 million for the first six months of fiscal 2001
compared with $5.1 million for the first six months of fiscal 2000. The increase
was attributable to interest income on cash and cash equivalents and short-term
investments, which increased as a result of the follow-on public offering of
Applera Corporation-Celera Genomics Group Common Stock completed in March 2000.
The first six months of fiscal 2000 included interest income from the $150
million note receivable from the Applied Biosystems group. This note was
collected in the fourth quarter of fiscal 2000.
The effective income tax rate was 27% for the first six months of fiscal 2001
and 35% for the first six months of fiscal 2000. The decrease in the effective
income tax benefit rate was primarily due to the amortization of nondeductible
goodwill relating to the acquisition of Paracel. See Note 1 to the Celera
Genomics group's combined financial statements in the Company's 2000 Annual
Report to Stockholders for a discussion of allocations of federal and state
income taxes.
56
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
Management's Discussion of Financial Resources and Liquidity
The following discussion of financial resources and liquidity focuses on the
Condensed Combined Statements of Financial Position and the Condensed Combined
Statements of Cash Flows.
Significant Changes in the Condensed Combined Statements of Financial Position.
Cash and cash equivalents and short-term investments were $1.0 billion at
December 31, 2000 compared with $1.1 billion at June 30, 2000. During the second
quarter of fiscal 2001, the Company repaid the $46.0 million of commercial paper
borrowing that was outstanding at June 30, 2000. Working capital was $1.0
billion at December 31, 2000 and $1.1 billion at June 30, 2000.
The Celera Genomics group had a tax benefit receivable from the Applied
Biosystems group of $16.7 million at June 30, 2000. This amount represented the
tax benefits reimbursable from the Applied Biosystems group for the fourth
quarter of fiscal 2000. The tax benefit receivable was settled during the first
half of fiscal 2001. At December 31, 2000, the Applied Biosystems group had
utilized tax benefits generated by the Celera Genomics group in excess of the
maximum reimbursable amount. See Note 2 to the Celera Genomics group's condensed
combined financial statements for a discussion of allocations of federal and
state income taxes.
Accounts receivable increased $4.3 million to $19.2 million at December 31, 2000
from $14.9 million at June 30, 2000, primarily as a result of increased revenues
and the timing of payments received on subscription and service agreements.
Other long-term assets decreased $12.5 million to $141.0 at December 31, 2000
from $153.5 million at June 30, 2000, primarily due to amortization of goodwill
and other intangibles, partially offset by an increase in deferred tax assets.
Deferred revenues decreased $5.1 million to $19.1 million at December 31, 2000
from $24.2 million at June 30, 2000 due to revenue recognized under database
subscriptions and genomic service agreements, partially offset by the timing of
subscriptions received for these services.
Condensed Combined Statements of Cash Flows. Cash used by operating activities
was $27.2 million for the first six months of fiscal 2001 compared with $46.9
million for the same period in the prior year. The decrease in cash used by
operating activities resulted primarily from lower net cash operating losses,
the settlement of the tax benefit receivable from the Applied Biosystems group,
and lower increases in accounts receivable during the first six months of fiscal
2001. Prepaid expenses and other assets decreased during the first six months of
fiscal 2001 compared to an increase in the same period in the prior year. These
items were partially offset by a decrease in deferred revenues.
Net cash used by investing activities was $163.8 million for the first six
months of fiscal 2001 compared with $22.9 million for the first six months of
fiscal 2000. The Celera Genomics group had
57
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
net purchases of $151.2 million of short-term investments during fiscal 2001.
Capital expenditures were $12.6 million for the first six months of fiscal 2001
compared to $19.9 million for the first six months of fiscal 2000. Fiscal 2001
capital expenditures included $1.9 million of purchases from the Applied
Biosystems group. Fiscal 2000 capital expenditures included payments of $8.1
million for software licenses. The Celera Genomics group had investments of $3.0
million during the first six months of fiscal 2000.
Net cash used by financing activities was $32.6 million for the first six months
of fiscal 2001 compared with $52.2 million provided by financing activities for
the same period in the prior year. During the first six months of fiscal 2001,
the Company repaid $46.0 million of its commercial paper borrowing which it
secured in the first half of fiscal 2000 specifically for the purchase of the
Rockland, Maryland facilities. This repayment was offset in fiscal 2001 by $13.4
million in proceeds received from stock issued for employee stock plans compared
with $6.2 million in the same period of the prior year.
At December 31, 2000, the Company had unused credit facilities, including the
Company's revolving credit facility, totaling $319.2 million, which is available
to both the Celera Genomics group and the Applied Biosystems group.
Outlook
The Celera Genomics group expects to see a continued expansion in the customer
base for online genomics information products and related genomics services,
with corresponding increases in revenues during fiscal 2001. Revenue growth is
expected to be generated primarily from increasing the customer base among the
major pharmaceutical and biotech companies, academic institutions, and
non-profit research organizations, and expanding the Celera Genomics group's
research collaborations and services business.
The expected increase in revenues should be more than offset as the Celera
Genomics group invests in the discovery aspects of its business and continues
staffing the organization. The Celera Genomics group has recently hired key
people to lead its efforts to develop potential new therapeutic targets and
molecular diagnostic markers. The Celera Genomics group intends to continue to
expand its efforts in the development of its proteomics and functional genomics
capabilities. The Celera Genomics group also intends to continue to strengthen
its bioinformatics platform, both in information content and in delivery
systems. SG&A expenses are also expected to increase as the group continues to
expand its sales and marketing functions.
During the first half of fiscal 2001, the Company announced plans to expand its
existing molecular diagnostics business. This initiative is anticipated to
leverage several technological resources of the Applied Biosystems group and the
Celera Genomics group. Further details regarding the initiative
58
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
and its status within the Company's capital structure are anticipated to be
announced in the coming quarters, as the initiative is refined.
The Company believes the Celera Genomics group's existing cash and cash
equivalents and short-term investments are sufficient to fund its operating
expenses and capital requirements related to its original business plan, which
relates to the sequencing and assembly of the human genome and the development
of information products and related genomics services from this data. While the
Company intends to use the net proceeds from the Celera Genomics group's
follow-on public offering, which was completed in March 2000, primarily to fund
its new product and technology development activities in functional genomics,
with an emphasis on proteomics and personalized health/medicine, such funds may
not be sufficient to support these new business activities as they develop. The
Celera Genomics group's actual future capital uses and requirements with respect
to its new activities will depend on many factors, including those discussed
under "Forward-Looking Statements."
Forward-Looking Statements
Certain statements contained in this report, including the Outlook section, are
forward-looking and are subject to a variety of risks and uncertainties. These
statements may be identified by the use of forward-looking words or phrases such
as "believe," "expect," "anticipate," "should," "planned," "estimated," and
"potential," among others. These forward-looking statements are based on our
current expectations. The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for such forward-looking statements. In order to comply
with the terms of the safe harbor, we note that a variety of factors could cause
our actual results and experience to differ materially from the anticipated
results or other expectations expressed in such forward-looking statements. The
risks and uncertainties that may affect the operations, performance,
development, and results of our businesses include, but are not limited to:
The Celera Genomics group has incurred net losses to date and may not achieve
profitability. The Celera Genomics group has accumulated net losses of $234.2
million as of December 31, 2000 and expects that it will continue to incur
additional net losses for the foreseeable future. These losses may increase as
Celera expands its investments in new technology and product development,
including the development of its functional genomics and personalized
health/medicine efforts. As an early-stage business, the Celera Genomics group
faces significant challenges in simultaneously expanding its operations,
pursuing key scientific goals, and attracting customers for its information
products and services. As a result, there is a high degree of uncertainty that
the Celera Genomics group will be able to achieve profitable operations.
Celera Genomics' business plan is unique and expanding. No organization has ever
attempted to combine in one business organization all of the Celera Genomics
group's businesses. In addition, as Celera Genomics moves beyond completion of
the sequencing of the human genome, it is expanding its business plan to provide
new scientific services to customers in areas such as functional genomics,
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CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
personalized health/medicine, and proteomics. The offering of genomics
databases, functional genomics, proteomics, and personalized health/medicine
capabilities targeted at a wide variety of customers, from pharmaceutical
companies to university researchers, has a number of risks, including pricing
and volume issues, technology and access concerns, computer security, pursuit of
key scientific goals, and protection of intellectual property. The addition of
the functional genomics, personalized health/medicine, and proteomics efforts
will add further complexity and require additional management attention and
resources as these new markets are addressed.
Celera Genomics' business plan depends heavily on accurate and complete assembly
and annotation of the human and mouse genomes. The Celera Genomics group has
assembled human genome sequence data obtained using "whole genome shotgun
sequencing." Although the Celera Genomics group believes that its assembly
efforts have produced a human genome assembly of high quality, the Celera
Genomics group will continue to update its assembly as it continues to annotate
the human genome. The Celera Genomics group has also completed the first
assembly of the mouse genome using the same method. The Celera Genomics group's
ability to retain its existing customers and attract new customers is heavily
dependent upon the continued assembly and annotation of the human and mouse
genomes. This information is essential to the functional genomics and
personalized health/medicine components of Celera Genomics' business strategy in
which Celera Genomics intends to make substantial investments in the near
future. As a result, failure to update the assembly and annotation efforts in a
timely manner may have a material adverse effect on the Celera Genomics group's
business.
Celera Genomics' revenue growth depends on retaining existing and adding new
customers. The Celera Genomics group has a small number of customers, the
revenues from which will offset only a small portion of its expenses. In order
to generate significant additional revenues, the Celera Genomics group must
obtain additional customers and retain its existing customers. Celera Genomics'
ability to retain existing and add new customers depends upon customers'
continued belief that Celera Genomics' products can help accelerate their drug
discovery and development efforts and fundamental discoveries in biology.
Although customer agreements typically have multi-year terms, there can be no
assurance that any will be renewed upon expiration. The Celera Genomics group's
future revenues are also affected by the extent to which existing customers
expand their agreements to include new services and database products. In some
cases, the Celera Genomics group may accept milestone payments or future
royalties on products developed by its customers as consideration for access to
Celera Genomics' databases and products in lieu of a portion of subscription
fees. Such arrangements are unlikely to produce revenue for the Celera Genomics
group for a number of years, if ever, and depend heavily on the research and
product development, sales and marketing, and intellectual property protection
abilities of the customer.
Use of genomics information to develop or commercialize products is unproven.
The development of new drugs and the diagnosis of disease based on genomic
information is unproven. Few therapeutic or diagnostic products based on genomic
discoveries have been developed and commercialized, and to date no one has
developed or commercialized any therapeutic, diagnostic, or agricultural
products
60
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
based on the Celera Genomics group's technologies. If the Celera Genomics
group's customers are unsuccessful in developing and commercializing products
based on the group's databases or other products or services, customers and the
group may be unable to generate sufficient revenues, and its business may suffer
as a result. Development of such products will be subject to risks of failure,
including that such products will be found to be toxic, found to be ineffective,
fail to receive regulatory approvals, fail to be developed prior to the
successful marketing of similar products by competitors, or infringe on
proprietary rights of third parties.
The genomics industry is intensely competitive and evolving. There is intense
competition among entities attempting to sequence segments of the human genome
and identify genes associated with specific diseases and develop products,
services, and intellectual property based on these discoveries. Celera Genomics
faces competition in these areas from genomic, pharmaceutical, biotechnology and
diagnostic companies, academic and research institutions, and government or
other publicly funded agencies, both in the United States and abroad. A number
of companies, other institutions, and government-financed entities are engaged
in gene sequencing, gene discovery, gene expression analysis, positional
cloning, the study of genetic variation, functional genomics, and other genomic
service businesses. Some of these competitors are developing databases
containing gene sequence, gene expression, genetic variation, or other
biological information and are marketing or plan to market their data to
pharmaceutical and biotechnology companies and academic and research
institutions. Additional competitors may attempt to establish databases
containing this information in the future. The Celera Genomics group has
licensed some of its key technology on a non-exclusive basis from third parties,
and therefore such technology may be available for license by the Company's
competitors.
Competitors may also discover, characterize, or develop important genes, drug
targets or leads, drug discovery technologies, or drugs in advance of Celera
Genomics or its customers, or which are more effective than those developed by
Celera Genomics or its customers, or may obtain regulatory approvals of their
drugs more rapidly than Celera Genomics' customers do, any of which could have a
material adverse effect on any of Celera Genomics' similar programs. Moreover,
these competitors may obtain patent protection or other intellectual property
rights that would limit Celera Genomics' rights or its customers' ability to use
Celera Genomics' products to commercialize therapeutic, diagnostic, or
agricultural products. In addition, a customer may use the Celera Genomics
group's services to develop products that compete with products separately
developed by the Celera Genomics group or its other customers.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery, drug
development, and diagnostics based on gene sequencing, target gene
identification, bioinformatics, and related technologies. In addition, certain
pharmaceutical and biotechnology companies have significant needs for genomic
information and may choose to develop or acquire competing technologies to meet
such needs. Celera Genomics also faces competition from providers of software. A
number of companies have announced their intent to
61
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
develop and market software to assist pharmaceutical companies and academic
researchers in managing and analyzing their own genomic data and publicly
available data.
Celera Genomics' current and potential customers are primarily from, and are
subject to risks faced by, the pharmaceutical and biotechnology industries. The
Celera Genomics group derives a substantial portion of its revenues from fees
paid by pharmaceutical companies and larger biotechnology companies for its
information products and services, including Amgen Inc., Novartis Pharma AG,
Pharmacia & Upjohn, Pfizer Inc., Takeda Chemical Industries, Ltd., American Home
Products Corporation, and Immunex Corporation. The Celera Genomics group expects
that pharmaceutical companies and larger biotechnology companies will continue
to be the Celera Genomics group's primary source of revenues for the foreseeable
future. As a result, the Celera Genomics group is subject to risks and
uncertainties that affect the pharmaceutical and biotechnology industries and to
reduction and delays in research and development expenditures by companies in
these industries.
In addition, the Celera Genomics group's future revenues may be adversely
affected by mergers and consolidation in the pharmaceutical and biotechnology
industries, which will reduce the number of the group's potential customers.
Large pharmaceutical and biotechnology customers could also decide to conduct
their own genomics programs or seek other providers instead of using Celera
Genomics' products and services.
Celera Genomics relies on its strategic relationship with the Applied Biosystems
group. The Celera Genomics group believes that its strategic relationship with
the Applied Biosystems group has provided it with a significant competitive
advantage in its efforts to date to sequence the human and other genomes. Celera
Genomics' timely completion of that work and successful extension of its
business into the functional genomics, personalized health/medicine, and
proteomics arenas will depend on the Applied Biosystems group's ability to
continue to provide leading-edge, proprietary technology and products, including
technologies relating to genetic analysis, protein analysis, and high-throughput
screening. If the Applied Biosystems group is unable to supply these
technologies, Celera will need to obtain access to alternative technologies,
which may not be available, or may only be available on unfavorable terms. Any
change in the relationship with the Applied Biosystems group that adversely
affects the Celera Genomics group's access to the Applied Biosystems group's
technology or failure by the Applied Biosystems group to continue to develop new
technologies or protect its proprietary technology could adversely affect Celera
Genomics' business.
Introduction of new products may expose Celera Genomics to product liability
claims. New products developed by Celera Genomics could expose Celera Genomics
to potential product liability risks which are inherent in the testing,
manufacturing, and marketing of human therapeutic and diagnostic products.
Product liability claims or product recalls, regardless of the ultimate outcome,
could require Celera Genomics to spend significant time and money in litigation
and to pay significant damages.
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AND RESULTS OF OPERATIONS
continued
Celera Genomics could incur liabilities relating to hazardous materials that it
uses in its research and development activities. Celera Genomics' research and
development activities involve the controlled use of hazardous materials and
chemicals, and may in the future involve various radioactive materials. In the
event of an accidental contamination or injury from these materials, the Celera
Genomics group could be held liable for damages in excess of its resources.
Celera Genomics' sales cycle is lengthy and it may spend considerable resources
on unsuccessful sales efforts or may not be able to complete deals on the
schedule anticipated. The Celera Genomics group's ability to obtain new
customers for genomic information products, value-added services and licenses to
intellectual property depends on its customers' belief that the group can help
accelerate their drug discovery efforts. The Celera Genomics group's sales cycle
is typically lengthy because the group needs to educate potential customers and
sell the benefits of its products and services to a variety of constituencies
within such companies. In addition, each agreement involves the negotiation of
unique terms. The Celera Genomics group may expend substantial funds and
management effort with no assurance that an agreement will be reached with a
potential customer. Actual and proposed consolidations of pharmaceutical
companies have affected, and may in the future affect, the timing and progress
of the Celera Genomics group's sales efforts.
Scientific and management staff have unique expertise which is key to Celera
Genomics' commercial viability and which would be difficult to replace. Celera
Genomics is highly dependent on the principal members of its scientific and
management staff, particularly J. Craig Venter, its President. For the
sequencing and assembly of the human genome, the Celera Genomics group believes
the following members of its staff are essential: Dr. Venter; Mark Adams, Vice
President for Genome Programs; and Eugene Myers, Vice President of Informatics
Research, who is responsible for the group assembling the genome. None of these
individuals are party to employment agreements, non-competition agreements, or
non-solicitation agreements with the Celera Genomics group. Additional members
of the Celera Genomics group's medical, scientific, and bioinformatics staff are
important to the development of information, tools, and services required for
implementation of its business plan. Also, in an effort to meet the demands of
its growing business, including the development of its discovery business, the
group recently hired other key management personnel in the areas of
immunotherapeutics, proteomics, operations, sales, marketing, and business
development, and the group believes that these persons will be important to the
successful growth of the group's business. The loss of any of these persons'
expertise would be difficult to replace and could have a material adverse effect
on the Celera Genomics group's ability to achieve its goals.
Celera Genomics' competitive position may depend on patent and copyright
protection, which may not be sufficiently available. The Celera Genomics group's
ability to compete and to achieve profitability may be affected by its ability
to protect its proprietary technology and other intellectual property. While
Celera Genomics' business is currently primarily dependent on revenues from
access fees to its discovery and information system, obtaining patent protection
may also be important to its
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CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
business, in that Celera Genomics would be able to prevent competitors from
making, using, or selling any of its technology for which it obtains a patent.
Patent law affecting Celera Genomics' business, particularly gene sequences,
gene function, and polymorphisms, is uncertain, and as a result, the Celera
Genomics group is uncertain as to its ability to obtain intellectual property
protection covering its information discoveries sufficient to prevent
competitors from developing similar subject matter. Patents may not issue from
patent applications that the Celera Genomics group may own or license. In
addition, because patent applications in the United States are maintained in
secrecy until patents issue, third parties may have filed patent applications
for technology used by Celera Genomics or covered by Celera Genomics' pending
patent applications without Celera Genomics being aware of such applications.
Moreover, the Celera Genomics group may be dependent on protecting, through
copyright law or otherwise, its databases to prevent other organizations from
taking information from such databases and copying and reselling it. Copyright
law currently provides uncertain protection regarding the copying and resale of
factual data. As such, Celera Genomics is uncertain whether it could prevent
such copying or resale. Changes in copyright and patent law could either expand
or reduce the extent to which the Celera Genomics group and its customers are
able to protect their intellectual property.
Celera Genomics' position may depend on its ability to protect trade secrets.
The Celera Genomics group relies on trade secret protection for its confidential
and proprietary information and procedures, including procedures related to
sequencing genes and to searching and identifying important regions of genetic
information. The Celera Genomics group currently protects such information and
procedures as trade secrets. The Celera Genomics group protects its trade
secrets through recognized practices, including access control, confidentiality
and non-use agreements with employees, consultants, collaborators and customers,
and other security measures. These confidentiality and non-use agreements may be
breached, however, and the group may not have adequate remedies for any such
breach. In addition, the group's trade secrets may otherwise become known or be
independently developed by competitors.
Public disclosure of genomics sequence data could jeopardize Celera Genomics'
intellectual property protection and have an adverse effect on the value of the
Celera Genomics group's products and services. The Celera Genomics group, the
federally funded Human Genome Project, and others engaged in similar research
have made and are expected to continue making available to the public basic
human sequence data. Such disclosures might limit the scope of the Celera
Genomics group's claims or make subsequent discoveries related to full-length
genes unpatentable. While the Celera Genomics group believes that the
publication of sequence data will not preclude it or others from being granted
patent protection on genes, there can be no assurance that such publication has
not affected, and will not affect, the ability to obtain patent protection.
Customers may conclude that uncertainties of such protection decrease the value
of the Celera Genomics group's information products and services and, as a
result, it may be required to reduce the fees it charges for such products and
services.
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CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
Celera Genomics may infringe the intellectual property rights of third parties
and may become involved in expensive intellectual property litigation. The
intellectual property rights of biotechnology companies, including Celera
Genomics, are generally uncertain and involve complex legal, scientific, and
factual questions. Celera Genomics' success in the functional genomics field may
depend, in part, on its ability to operate without infringing on the
intellectual property rights of others and to prevent others from infringing on
its intellectual property rights.
There has been substantial litigation regarding patents and other intellectual
property rights in the genomics industry. The Celera Genomics group may become a
party to patent litigation or proceedings in the federal courts or at the U.S.
Patent and Trademark Office to determine its patent rights with respect to third
parties which may include subscribers to Celera Genomics' database information
services. Interference proceedings may be necessary to establish which party was
the first to discover such intellectual property. Celera Genomics may become
involved in patent litigation against third parties to enforce the Celera
Genomics group's patent rights, to invalidate patents held by such third
parties, or to defend against such claims. The cost to Celera Genomics of any
patent litigation or similar proceeding could be substantial, and it may absorb
significant management time. If an infringement litigation against Celera
Genomics is resolved unfavorably to Celera Genomics, Celera Genomics may be
enjoined from manufacturing or selling certain of its products or services
without a license from a third party. Celera Genomics may not be able to obtain
such a license on commercially acceptable terms, or at all.
The U.S. Patent and Trademark Office has issued several patents to third parties
relating to single nucleotide polymorphisms ("SNPs"). If other important SNPs
receive patents, Celera Genomics will need to obtain rights to those important
SNPs in order to develop, use, and sell related assays. Such licenses may not be
available to Celera Genomics on commercially acceptable terms, or at all.
Celera Genomics' business is dependent on the continuous, effective, reliable,
and secure operation of its computer hardware, software, and internet
applications and related tools and functions. Because the Celera Genomics
group's business requires manipulating and analyzing large amounts of data, and
communicating the results of such analysis to customers via the Internet, the
Celera Genomics group depends on the continuous, effective, reliable, and secure
operation of its computer hardware, software, networks, internet servers, and
related infrastructure. To the extent that the Celera Genomics group's hardware
or software malfunctions or the Celera Genomics group's customers' access to
products through the Internet is interrupted, its business could suffer. The
Celera Genomics group's computer and communications hardware is protected
through physical and software safeguards. However, it is still vulnerable to
fire, storm, flood, power loss, earthquakes, telecommunications failures,
physical or software break-ins, and similar events. In addition, Celera
Genomics' database products are complex and sophisticated, and as such, could
contain data, design, or software errors that could be difficult to detect and
correct. Software defects could be found in current or future products. If the
Celera Genomics group fails to maintain and further develop the necessary
computer capacity and data to support computational needs and its customers'
drug efforts,
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CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
it could result in loss of or delay in revenues and market acceptance. In
addition, any sustained disruption in Internet access provided by third parties
could adversely impact the Celera Genomics group's business.
Celera Genomics' research and product development depends on access to tissue
samples and other biological materials. To continue to build its product base,
Celera Genomics will need access to normal and diseased human and other tissue
samples, other biological materials, and related clinical and other information,
which may be in limited supply. Celera Genomics may not be able to obtain or
maintain access to these materials and information on acceptable terms. In
addition, government regulation in the United States and foreign countries could
result in restricted access to, or use of, human and other tissue samples. If
Celera Genomics loses access to sufficient numbers or sources of tissue samples,
or if tighter restrictions are imposed on its use of the information generated
from tissue samples, its business may be harmed.
Ethical, legal, and social issues related to the use of genetic information and
genetic testing may cause less demand for the Celera Genomics group's products.
Genetic testing has raised issues regarding confidentiality and the appropriate
uses of the resulting information. For example, concerns have been expressed
toward insurance carriers and employers using such tests to discriminate on the
basis of such information, resulting in barriers to the acceptance of such tests
by consumers. This could lead to governmental authorities calling for limits on,
or regulation of, the use of genetic testing, or prohibit testing for genetic
predisposition to certain diseases, particularly those that have no known cure.
Any of these scenarios could reduce the potential markets for the Company's
products.
Expected rapid growth in the number of its employees could absorb valuable
management resources and be disruptive to the development of Celera Genomics'
business. The Celera Genomics group expects to grow significantly. This growth
will require substantial effort to hire new employees and train and integrate
them into the Celera Genomics group's business and to develop and implement
management information systems, financial controls, and facility plans. In
addition, the Celera Genomics group will be required to create a sales and
marketing organization and expand customer support resources as sales of its
information products increase. The Celera Genomics group's inability to manage
growth effectively would have a material adverse effect on its future operating
results.
The use of Celera Genomics' products and services by its customers may be
subject to government regulation. Within the field of genomics, the use of the
Celera Genomics group's products by pharmaceutical and biotechnology customers
may be subject to certain U.S. Food and Drug Administration or other regulatory
approvals. For example, any new drug developed by the efforts of the Celera
Genomics group's customers as a result of their use of the Celera Genomics
group's databases must undergo an extensive regulatory review process. This
process can take many years and require substantial expense.
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CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
Within the field of personalized health/medicine, current and future patient
privacy and healthcare laws and regulations issued by the FDA may limit the use
of polymorphism data. To the extent that use of the Celera Genomics group's
databases is limited, or additional costs are imposed on the Celera Genomics
group's customers due to regulation, the Celera Genomics group's business may be
adversely affected.
Furthermore, the Celera Genomics group may be directly subject to the
regulations as a provider of diagnostic information. To the extent that such
regulations restrict the sale of the Celera Genomics group's products or impose
other costs, the Celera Genomics group's business may be materially adversely
affected.
Future acquisitions may absorb significant resources and may be unsuccessful. As
part of the Celera Genomics group's strategy, it expects to pursue acquisitions,
investments, and other relationships and alliances. Acquisitions may involve
significant cash expenditures, debt incurrence, additional operating losses,
dilutive issuances of equity securities, and expenses that could have a material
effect on the Celera Genomics group's financial condition and results of
operations. For example, to the extent that it elects to pay the purchase price
for such acquisitions in shares of Applera Corporation - Celera Genomics Group
Common Stock, such issuance of additional shares of Applera Corporation - Celera
Genomics Group Common Stock will be dilutive to holders of Applera Corporation -
Celera Genomics Group Common Stock. Acquisitions involve numerous other risks,
including:
o difficulties integrating acquired technologies and personnel into the
business of the Celera Genomics group;
o diversion of management from daily operations;
o inability to obtain required financing on favorable terms;
o entry into new markets in which the Celera Genomics group has little or no
previous experience;
o potential loss of key employees or customers of acquired companies;
o assumption of the liabilities and exposure to unforseen liabilities of
acquired companies; and
o amortization of the intangible assets of acquired companies.
It may be difficult for the Celera Genomics group to complete such transactions
quickly and to integrate such business efficiently into its current business.
Any such acquisitions or investments by the Celera Genomics group may ultimately
have a negative impact on its business and financial condition.
Applera Corporation is subject to a purported class action lawsuit relating to
its 2000 offering of shares of Applera Corporation - Celera Genomics Group
Common Stock which may be expensive and time consuming. Applera Corporation and
certain of its officers have been served in five lawsuits purportedly on behalf
of purchasers of Applera Corporation - Celera Genomics Group Common Stock in
Applera Corporation's offering of Applera Corporation - Celera Genomics Group
Common
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
Stock completed on March 6, 2000. In the offering, Applera Corporation sold an
aggregate of approximately 4.4 million shares of Applera Corporation - Celera
Genomics Group Common Stock at a public offering price of $225 per share. The
complaints in these lawsuits generally allege that the prospectus used in
connection with the offering contained inaccurate and misleading statements in
violation of federal securities laws. The complaints seek unspecified damages,
rescission, costs and expenses, and such other relief as the court deems proper.
All of these lawsuits have been consolidated into a single case. Although
Applera Corporation believes the asserted claims are without merit and intends
to defend the case vigorously, the outcome of this or any other litigation is
inherently uncertain. The defense of this case will require management attention
and resources.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3(i) Restated Certificate of Incorporation.
(b) Reports on Form 8-K.
During the quarter ended December 31, 2000, the Company filed a
Current Report on Form 8-K dated November 27, 2000 to report
under Item 5 thereof the change of the Company's corporate name
to Applera Corporation and the name of the Company's PE
Biosystems Group to the Applied Biosystems Group and certain
related matters.
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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.
APPLERA CORPORATION
By: /s/ Dennis L. Winger
-----------------------------
Dennis L. Winger
Senior Vice President and
Chief Financial Officer
By: /s/ Vikram Jog
-----------------------------
Vikram Jog
Corporate Controller
(Chief Accounting Officer)
Dated: February 14, 2001
70