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 March 31, 2001
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)
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 May 10, 2001, there were 211,140,878 shares of
Applera Corporation - Applied Biosystems Group Common Stock and 61,442,490
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 Nine Months Ended March 31, 2000 and 2001 1
Condensed Consolidated Statements of Financial Position at
June 30, 2000 and March 31, 2001 2
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2000 and 2001 3
Notes to Unaudited Condensed Consolidated Financial Statements
4-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-27
B. Applied Biosystems Group
Item 1. Financial Statements
Condensed Combined Statements of Operations for the
Three and Nine Months Ended March 31, 2000 and 2001 28
Condensed Combined Statements of Financial Position at
June 30, 2000 and March 31, 2001 29
Condensed Combined Statements of Cash Flows for the
Nine Months Ended March 31, 2000 and 2001 30
Notes to Unaudited Condensed Combined Financial Statements 31-36
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 37-47
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 Nine Months Ended March 31, 2000 and 2001 48
Condensed Combined Statements of Financial Position at
June 30, 2000 and March 31, 2001 49
Condensed Combined Statements of Cash Flows for the
Nine Months Ended March 31, 2000 and 2001 50
Notes to Unaudited Condensed Combined Financial Statements 51-55
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 56-71
Part II. Other Information 72
APPLERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands except per share amounts)
Three months ended Nine months ended
March 31, March 31,
2000 2001 2000 2001
----------------- ------------------ ------------------ -----------------
Net Revenues $ 363,130 $ 447,086 $ 979,337 $ 1,227,765
Cost of sales 158,590 202,519 438,402 557,129
----------------- ------------------ ------------------ -----------------
Gross Margin 204,540 244,567 540,935 670,636
Selling, general and administrative 104,227 119,288 305,718 331,474
Research, development and engineering 69,421 89,038 186,806 257,022
Amortization of goodwill and intangibles 10,916 32,965
----------------- ------------------ ------------------ -----------------
Operating Income 30,892 25,325 48,411 49,175
Gain on investments 25,811 14,985
Interest expense 1,047 288 2,297 1,678
Interest income 9,430 19,286 18,981 63,185
Other income (expense), net 5,040 (1,175) (3,845) (4,331)
----------------- ------------------ ------------------ -----------------
Income Before Income Taxes 44,315 43,148 87,061 121,336
Provision for income taxes 11,464 14,822 24,956 41,080
----------------- ------------------ ------------------ -----------------
Net Income $ 32,851 $ 28,326 $ 62,105 $ 80,256
================= ================== ================== =================
Applied Biosystems Group (see Note 4)
Net Income $ 56,067 $ 57,669 $ 129,608 $ 164,767
Basic per share $ .27 $ .27 $ .63 $ .78
Diluted per share $ .26 $ .26 $ .60 $ .74
Dividends per share $ .085 $ .085 $ .17 $ .17
Celera Genomics Group (see Note 4)
Net Loss $ (24,107) $ (29,087) $ (67,783) $ (84,480)
Basic and diluted per share $ (.45) $ (.48) $ (1.29) $ (1.40)
See accompanying notes to the Applera Corporation unaudited condensed
consolidated financial statements.
1
APPLERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At June 30, At March 31,
2000 2001
------------------- ---------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 964,502 $ 825,917
Short-term investments 541,140 548,934
Accounts receivable, net 378,593 427,652
Inventories, net 157,827 171,874
Prepaid expenses and other current assets 83,465 107,259
------------------- ---------------------
Total current assets 2,125,527 2,081,636
Property, plant and equipment, net 334,855 417,639
Other long-term assets 622,933 526,589
------------------- ---------------------
Total Assets $ 3,083,315 $ 3,025,864
=================== =====================
Liabilities and Stockholders' Equity
Current liabilities
Loans payable $ 15,693 $ 20,415
Accounts payable 191,484 199,434
Accrued salaries and wages 89,660 70,977
Accrued taxes on income 149,584 113,224
Other accrued expenses 200,079 219,768
------------------- ---------------------
Total current liabilities 646,500 623,818
Long-term debt 82,115 30,715
Other long-term liabilities 134,208 154,102
------------------- ---------------------
Total Liabilities 862,823 808,635
Stockholders' Equity
Capital stock
Applera Corporation - Applied Biosystems group 2,087 2,111
Applera Corporation - Celera Genomics group 593 613
Capital in excess of par value 1,714,362 1,823,413
Retained earnings 377,996 422,506
Accumulated other comprehensive income (loss) 125,454 (31,414)
------------------- ---------------------
Total Stockholders' Equity 2,220,492 2,217,229
------------------- ---------------------
Total Liabilities and Stockholders' Equity $ 3,083,315 $ 3,025,864
=================== =====================
See accompanying notes to the Applera Corporation unaudited condensed
consolidated financial statements.
2
APPLERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
Nine months ended
March 31,
2000 2001
----------------- ------------------
Operating Activities from Continuing Operations
Net income $ 62,105 $ 80,256
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 54,301 93,995
Long-term compensation programs 6,822 5,549
Gain on sale of assets (25,811) (14,985)
Deferred income taxes (5,496) (3,221)
Changes in operating assets and liabilities:
Increase in accounts receivable (40,838) (73,434)
Increase in inventories (12,468) (20,692)
Increase in prepaid expenses and other assets (9,869) (33,816)
Decrease in accounts payable and other liabilities (1,253) (8,708)
----------------- ------------------
Net Cash Provided by Operating Activities 27,493 24,944
----------------- ------------------
Investing Activities from Continuing Operations
Additions to property, plant and equipment
(net of disposals of $2,014 and $887, respectively) (92,365) (139,921)
Purchases of short-term investments, net (7,249)
Investments (16,998) (8,912)
Proceeds from the sale of assets, net 31,056 15,498
----------------- ------------------
Net Cash Used by Investing Activities (78,307) (140,584)
----------------- ------------------
Net Cash Used by Continuing Operations
Before Financing Activities (50,814) (115,640)
----------------- ------------------
Net Cash Used by Operating Activities
From Discontinued Operations (8,493) (2,279)
----------------- ------------------
Financing Activities
Net change in loans payable 76,292 (38,170)
Dividends (17,530) (26,702)
Net proceeds from stock offering 943,303
Proceeds from stock issued for stock plans 45,355 50,249
----------------- ------------------
Net Cash Provided (Used) by Financing Activities 1,047,420 (14,623)
----------------- ------------------
Effect of Exchange Rate Changes on Cash (9,950) (6,043)
----------------- ------------------
Net Change in Cash and Cash Equivalents 978,163 (138,585)
Cash and Cash Equivalents Beginning of Period 308,021 964,502
----------------- ------------------
Cash and Cash Equivalents End of Period $ 1,286,184 $ 825,917
================= ==================
See accompanying notes to the Applera Corporation 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 Nine months ended
March 31, 2000 March 31, 2000
-------------------------- -------------------------
Net revenues $365.2 $ 986.9
Net income $ 20.4 $ 23.4
Applied Biosystems Group
Net income $ 56.1 $ 129.6
Basic per share $ .27 $ .63
Diluted per share $ .26 $ .60
Celera Genomics group
Net loss $(36.6) $(106.5)
Basic and diluted per share $ (.66) $ (1.97)
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 (loss) 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 nine months ended March 31, 2000
and 2001 is presented in the following table:
(Dollar amounts in millions) Three months ended Nine months ended
March 31, March 31,
2000 2001 2000 2001
------------ ----------- ------------ -------------
Net income $ 32.9 $ 28.3 $ 62.1 $ 80.3
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (13.4) (21.5) (19.1) (26.3)
Unrealized gain on hedge contracts, net 4.4 10.0
Unrealized gain (loss) on investments, net 82.7 (48.3) 144.6 (130.9)
Reclassification adjustments for realized
gains included in net income (16.7) (9.7)
------------ ----------- ------------ -------------
Other comprehensive income (loss) 69.3 (65.4) 108.8 (156.9)
------------ ----------- ------------ -------------
Comprehensive income (loss) $102.2 $(37.1) $170.9 $ (76.6)
============ =========== ============ =============
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 March 31:
(Amounts in thousands Applied Biosystems Celera Genomics
except per share amounts) Group Group
---------------------------- ------------------------------
2000 2001 2000 2001
------------- ------------- -------------- --------------
Weighted average number of common shares
used in the calculation of basic earnings (loss)
per share 207,516 210,599 53,884 61,071
Common stock equivalents 11,489 10,896
------------- ------------- -------------- --------------
Shares used in the calculation of diluted
earnings (loss) per share 219,005 221,495 53,884 61,071
============= ============= ============== ==============
Earnings (loss) used in the calculation
of basic and diluted earnings (loss) per share $ 56,067 $ 57,669 $ (24,107) $ (29,087)
============= ============= ============== ==============
Earnings (loss) per share
Basic $ .27 $ .27 $ (.45) $ (.48)
Diluted $ .26 $ .26 $ (.45) $ (.48)
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 nine months ended March 31:
(Amounts in thousands Applied Biosystems Celera Genomics
except per share amounts) Group Group
---------------------------- ------------------------------
2000 2001 2000 2001
------------- ------------- -------------- --------------
Weighted average number of common shares
used in the calculation of basic earnings (loss)
per share 206,551 209,925 52,430 60,480
Common stock equivalents 9,201 11,771
------------- ------------- -------------- --------------
Shares used in the calculation of diluted
earnings (loss) per share 215,752 221,696 52,430 60,480
============= ============= ============== ==============
Earnings (loss) used in the calculation
of basic and diluted earnings (loss) per share $129,608 $164,767 $(67,783) $(84,480)
============= ============= ============== ==============
Earnings (loss) per share
Basic $ .63 $ .78 $ (1.29) $ (1.40)
Diluted $ .60 $ .74 $ (1.29) $ (1.40)
Options and warrants to purchase 5.7 million and 6.9 million shares of Applera
Corporation - Applied Biosystems Group Common Stock were outstanding at March
31, 2000 and 2001, respectively, but were not included in the computation of
diluted earnings per share because the effect was antidilutive. Options and
warrants to purchase 14.3 million and 14.8 million shares of Applera Corporation
- Celera Genomics Group Common Stock were outstanding at March 31, 2000 and
2001, respectively, 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, March 31,
2000 2001
--------------------- ---------------------
Raw materials and supplies $ 53.1 $ 70.0
Work-in-process 6.3 6.3
Finished products 98.4 95.6
--------------------- ---------------------
Total inventories $ 157.8 $ 171.9
===================== =====================
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
(Dollar amounts in millions) Nine months ended
March 31,
2000 2001
------------ ------------
Tax benefit related to employee stock options $ - $ 53.3
Dividends declared not paid $ 17.7 $ 17.9
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 (loss) 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 this
strategy is to minimize the risks and/or costs associated with the Company's
global financial and
9
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
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 (loss)
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 (loss), is reclassified to net revenues in the Condensed
Consolidated Statements of Operations. During the three and nine months ended
March 31, 2001, the Company recognized net gains of $5.9 million and $10.7
million, respectively, in net revenues from derivative instruments designated as
cash flow hedges of anticipated sales. At March 31, 2001, $15.9 million of
derivative gains ($10.3 million net of deferred taxes) recorded in other
comprehensive income (loss) are expected to be reclassified to earnings during
the next twelve months. For the three and nine months ended March 31, 2001, the
Company recognized expense of $.7 million and $3.4 million, respectively,
included in other income (expense), net 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-denominated 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 March 31:
(Dollar amounts Applied Celera
in millions) Biosystems Genomics
Group Group Other Consolidated
----------------- ----------------- ----------------- -----------------
2000
Net revenues from
external customers $ 352.1 $ 11.0 $ - $ 363.1
Intersegment revenues 16.0 (16.0)
----------------- ----------------- ----------------- -----------------
Total revenues $ 368.1 $ 11.0 $ (16.0) $ 363.1
================= ================= ================= =================
Operating income (loss) $ 72.4 $ (42.9) $ 1.4 $ 30.9
2001
Net revenues from
external customers $ 423.7 $ 23.4 $ - $ 447.1
Intersegment revenues 16.1 (16.1)
----------------- ----------------- ----------------- -----------------
Total revenues $ 439.8 $ 23.4 $ (16.1) $ 447.1
================= ================= ================= =================
Operating income (loss) $ 79.6 $ (54.9) $ .6 $ 25.3
11
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
The following table presents summarized segment financial information for the
nine months ended March 31:
(Dollar amounts Applied Celera
in millions) Biosystems Genomics
Group Group Other Consolidated
----------------- ----------------- ----------------- -----------------
2000
Net revenues from
external customers $ 951.6 $ 27.7 $ - $ 979.3
Intersegment revenues 44.7 (44.7)
----------------- ----------------- ----------------- -----------------
Total revenues $ 996.3 $ 27.7 $ (44.7) $ 979.3
================= ================= ================= =================
Operating income (loss) $ 161.0 $ (114.5) $ 1.9 $ 48.4
2001
Net revenues from
external customers $ 1,166.5 $ 61.3 $ - $ 1,227.8
Intersegment revenues 47.9 .7 (48.6)
----------------- ----------------- ----------------- -----------------
Total revenues $ 1,214.4 $ 62.0 $ (48.6) $ 1,227.8
================= ================= ================= =================
Operating income (loss) $ 213.8 $ (165.2) $ .6 $ 49.2
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 March 31, 2001, TIGR
owned 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 three and nine months ended March 31, 2001, the Celera Genomics group
recognized revenues of $3.2 million and $4.8 million, respectively, from TIGR,
of which $1.6 million was receivable as of March 31, 2001.
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. On April 6, 2001, the court granted the Company's motion for summary
judgment finding that the Company's recently introduced BigDye Version 3.0 dye
technology does not infringe 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 been scheduled for trial on August 6, 2001.
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 of, 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
13
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
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. A claims
construction hearing has been scheduled for June 7, 2001.
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 first nine months of fiscal 2001 included gains of
$15.0 million, or $9.7 million on an after-tax basis, related to sales of
minority equity investments. These sales occurred during the first and second
quarters of fiscal 2001. The second quarter of fiscal 2000 included a gain of
$25.8 million, or $16.8 million on an after-tax basis, 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 charge of $21.6 million, or $16.8 million on an after-tax basis, 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 March 31, 2001 Compared With
the Three Months Ended March 31, 2000
Applera Corporation reported net income of $28.3 million for the third quarter
of fiscal 2001 compared with $32.9 million for the third quarter of fiscal 2000.
On a segment basis, the Applied Biosystems group reported net income of $57.7
million for the third quarter of fiscal 2001 compared with $56.1 million for the
third 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 $4 million in the third quarter of fiscal 2001 as
compared with the same period in the previous year. The Celera Genomics group
reported a net loss of $29.1 million for the third quarter of fiscal 2001
compared with a net loss of $24.1 million for the third quarter of fiscal 2000.
The increase in the net loss reflected: the
15
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
increased expenses incurred as a result of the amortization of goodwill and
other intangibles primarily due to the Paracel acquisition; the increased
investment in research and development activities relating to expanded efforts
in its discovery program; and the expansion of sales and marketing capabilities.
These increased expenses were partially offset by higher net revenues and higher
interest income.
Net revenues for the Company were $447.1 million for the third quarter of fiscal
2001 compared with $363.1 million for the third quarter of fiscal 2000, an
increase of 23.1%. On a segment basis, net revenues for the Applied Biosystems
group were $439.8 million for the third quarter of fiscal 2001 compared with
$368.1 million for the third quarter of the prior year. Net revenues for the
Celera Genomics group were $23.4 million for the third quarter of fiscal 2001
compared with $11.0 million for the third quarter of fiscal 2000.
Net revenues for the Applied Biosystems group for the third quarter of fiscal
2001 increased $71.7 million, or 19.5%, over the third quarter of fiscal 2000.
The effects of foreign currency reduced net revenues by approximately $11
million, or 3%, compared with the prior year due primarily to weakness in the
euro, the British pound, and the Japanese yen against the U.S. dollar. Revenues
from leased instruments and shipments to the Celera Genomics group were $16.1
million and $16.0 million for the third quarter of fiscal 2001 and fiscal 2000,
respectively. Geographically, the Applied Biosystems group reported revenue
growth in all regions for the third quarter of fiscal 2001 compared with the
third quarter of fiscal 2000. Revenues increased 25.0% in the United States,
14.2% in Europe, 15.3% in the Far East, and 17.1% in Latin America and other
markets, compared with the third quarter of the prior fiscal year. Excluding the
effects of foreign currency, revenues grew approximately 22% in Europe and 19%
in the Far East. Revenue growth was fairly balanced between instruments and
recurring revenue sources, primarily consumables. Contributors to the increase
in net revenues included genetic analysis products, sequence detection systems,
and mass spectrometry instruments for proteomics, as well as higher royalties
and service revenues.
Net revenues for the Celera Genomics group for the third quarter of fiscal 2001
increased $12.4 million over the third quarter of fiscal 2000. The increased
revenues resulted primarily from database subscription agreements with
commercial and academic customers, as well as revenues from genomics services
and collaborations. The acquisition of Paracel during the fourth quarter of
fiscal 2000 also contributed to the increase in net revenues.
Gross margin as a percentage of net revenues for the Company was 54.7% for the
third quarter of fiscal 2001 compared with 56.3% for the third quarter of fiscal
2000. Gross margin as a percentage of net revenues for the Applied Biosystems
group was 52.6% for the third quarter of fiscal 2001 compared with 54.9% for the
third quarter of fiscal 2000. Gross margin was negatively affected by a number
of factors. The effects of foreign currency reduced gross margin by
approximately $8 million. While the Applied Biosystems group derives
approximately 50% of its revenues from markets outside of the U.S., a
significant portion of the related costs are based in U.S. dollars. In
16
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
addition, preproduction costs related to the expansion of the custom oligo
business and investments in certain other product lines also reduced gross
margin by a similar amount.
SG&A expenses for the Company were $119.3 million for the third quarter of
fiscal 2001 compared with $104.2 million for the third quarter of fiscal 2000.
On a segment basis, SG&A expenses for the Applied Biosystems group were $104.1
million and $93.8 million for the third quarter of fiscal 2001 and 2000,
respectively. SG&A expenses for the Celera Genomics group were $15.1 million and
$10.5 million for the third quarter of fiscal 2001 and 2000, respectively.
SG&A expenses for the Applied Biosystems group increased $10.3 million, or
11.1%, over the third quarter of the prior year. This increase was primarily 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 23.7% for the third quarter of fiscal 2001 compared with 25.5% for the
third quarter of fiscal 2000 primarily due to the realization of economies of
scale related to administrative and overhead costs.
The Celera Genomics group's SG&A expenses increased $4.6 million over the third
quarter of the prior year. The increase was caused primarily by the Celera
Genomics group's expansion of its sales and marketing capabilities. 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 $89.0 million for the third quarter of
fiscal 2001 compared with $69.4 million for the third quarter of the prior year.
R&D expenses for the Applied Biosystems group were $47.5 million for the third
quarter of fiscal 2001 compared with $36.1 million for the third quarter of the
prior year, an increase of 31.7%. The increase was primarily due to planned
investments in the genotyping and proteomics fields. As a percentage of net
revenues, R&D expenses were 10.8% for the third quarter of fiscal 2001 compared
with 9.8% for the third quarter of fiscal 2000. The increase in R&D as a
percentage of net revenues was primarily due to the investment in new products,
as well as the negative effects of currency on revenues as R&D costs are
predominantly based in U.S. dollars.
The Celera Genomics group's R&D expenses increased $8.8 million to $52.2 million
for the third quarter of fiscal 2001 from $43.4 million for the third quarter of
fiscal 2000 primarily as the result of the development of its discovery program
and gene discovery work as well as the acceleration of 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 Company recorded $10.9 million of expenses in the third quarter of fiscal
2001 relating to the amortization of goodwill and other intangibles primarily
due to the Celera Genomics group's acquisition of Paracel.
17
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Operating income was $25.3 million for the third quarter of fiscal 2001 compared
with $30.9 million for the third quarter of the prior year. On a segment basis,
operating income for the Applied Biosystems group increased to $79.6 million for
the third quarter of fiscal 2001 compared with $72.4 million for the third
quarter of the prior year, an increase of $7.2 million, or 9.8%. 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 lower gross margin as a percentage of net revenues and
higher R&D expenses. Excluding the negative effects of foreign currency,
operating income increased approximately 17%. Operating income as a percentage
of net revenues decreased to 18.1% for the third quarter of fiscal 2001 compared
with 19.7% for the third quarter of the prior year. Excluding the effects of
foreign currency in fiscal 2001, operating income as a percentage of net
revenues decreased to 18.7% in the third quarter of fiscal 2001 primarily due to
the lower gross margin as a percentage of net revenues and the expansion of and
investment in new products discussed previously.
Operating loss for the Celera Genomics group was $54.9 million for the third
quarter of fiscal 2001 compared with $42.9 million for the third quarter of
fiscal 2000. The increase in the operating loss reflected: increased expenses
incurred as a result of the amortization of goodwill and other intangibles
primarily due to the Paracel acquisition; the increased investment in research
and development activities relating to expanded efforts in its discovery
program; and the expansion of sales and marketing capabilities. These increased
expenses were partially offset by higher net revenues.
Interest expense was $.3 million for the third quarter of fiscal 2001 compared
with $1.0 million for the third quarter of the prior year primarily due to lower
debt levels in the third quarter of fiscal 2001 compared with the same period of
the prior year. Interest expense in the prior year primarily 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 $19.3 million for
the third quarter of fiscal 2001 compared with $9.4 million for the third
quarter of the prior year. This increase was attributable to the interest income
on cash and cash equivalents and short-term investments, which increased
primarily as a result of the follow-on public offering of Applera Corporation -
Celera Genomics Group Common Stock completed in March 2000. The third 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 income (expense), net was expense of $1.2 million for the third quarter of
fiscal 2001 compared with income of $5.0 million for the third quarter of fiscal
2000. These amounts are primarily related to the Company's foreign currency
management program. The Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," effective July 1, 2000. See Note 7 to the Company's condensed
consolidated financial statements for further discussion of the Company's policy
for financial instruments.
18
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Company's effective income tax rate was 34% for the third quarter of fiscal
2001 compared with 26% for the third quarter of the prior year. The increase in
the effective income tax rate was primarily due to the amortization of
nondeductible goodwill relating to the acquisition of Paracel.
Results of Operations for the Nine Months Ended March 31, 2001 Compared With the
Nine Months Ended March 31, 2000
Applera Corporation reported net income of $80.3 million for the first nine
months of fiscal 2001 compared with $62.1 million for the first nine months of
fiscal 2000. On a segment basis, the Applied Biosystems group reported net
income of $164.8 million for the first nine months of fiscal 2001 compared with
$129.6 million for the first nine months 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 $25.4 million, or 19.6%, to $155.0 million for the first nine months
of fiscal 2001 compared with the first nine months 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 $15 million, or 12%, as
compared with the first nine months of fiscal 2000. The Celera Genomics group
reported a net loss of $84.5 million for the first nine months of fiscal 2001
compared with a net loss of $67.8 million for the first nine months of fiscal
2000. The increase in the net loss reflected: the increased investment in
research and development activities relating to expanded efforts in its
discovery program as well as in its bioinformatics and software development
capabilities; the increased expenses incurred as a result of the amortization of
goodwill and other intangibles primarily due to the Paracel acquisition; the
increased operating expenses required to support expanded product and business
development activities; and the expansion of sales and marketing capabilities.
These increased expenses were partially offset by higher net revenues and higher
interest income.
Net revenues for the Company were $1.2 billion for the first nine months of
fiscal 2001 compared with $979.3 million for the first nine months of fiscal
2000, an increase of 25.4%. On a segment basis, net revenues for the Applied
Biosystems group were $1.2 billion for the first nine months of fiscal 2001
compared with $996.3 million for the first nine months of the prior year. Net
revenues for the Celera Genomics group were $62.0 million for the first nine
months of fiscal 2001 compared with $27.7 million for the first nine months of
fiscal 2000.
Net revenues for the Applied Biosystems group for the first nine months of
fiscal 2001 increased $218.0 million, or 21.9%, over the first nine months of
fiscal 2000. The effects of foreign currency reduced net revenues by
approximately $38 million, or 4%, compared with the first nine months of the
prior year due primarily to weakness in the euro, the British pound, and the
Japanese yen against the U.S. dollar. Revenues from leased instruments and
shipments to the Celera Genomics group were $47.9 million and $44.7 million for
the first nine months of fiscal 2001 and fiscal 2000, respectively.
Geographically, the Applied Biosystems group reported revenue growth in all
regions for the first nine months of fiscal 2001 compared with the first nine
months of fiscal 2000. Revenues increased
19
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
23.0% in the United States, 15.9% in Europe, 27.4% in the Far East, and 20.9% in
Latin America and other markets, compared with the first nine months of the
prior fiscal year. Excluding the effects of foreign currency, revenues grew
approximately 28% in Europe and 29% in the Far East. 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.
Net revenues for the Celera Genomics group for the first nine months of fiscal
2001 increased $34.3 million over the first nine months of fiscal 2000. The
increased revenues resulted primarily from database subscription agreements with
commercial and academic customers, as well as revenues from genomics services
and collaborations. The acquisition of Paracel during the fourth quarter of
fiscal 2000 also contributed to the increase in net revenues.
Gross margin as a percentage of net revenues for the Company was 54.6% for the
first nine months of fiscal 2001 compared with 55.2% for the first nine months
of fiscal 2000. Gross margin as a percentage of net revenues for the Applied
Biosystems group was 52.6% for the first nine months of fiscal 2001 compared
with 54.0% for the first nine months of fiscal 2000. Gross margins were
negatively affected by a number of factors, including the negative effects of
foreign currency, preproduction costs related to the expansion of the custom
oligo business, and investments in certain other product lines.
SG&A expenses for the Company were $331.5 million for the first nine months of
fiscal 2001 compared with $305.7 million for the first nine months of fiscal
2000. On a segment basis, SG&A expenses for the Applied Biosystems group were
$288.9 million and $277.3 million for the first nine months of fiscal 2001 and
2000, respectively. SG&A expenses for the Celera Genomics group were $42.5
million and $28.4 million for the first nine months of fiscal 2001 and 2000,
respectively.
SG&A expenses for the Applied Biosystems group increased $11.6 million, or 4.2%,
over the first nine months of the prior year. On a comparable basis, excluding
the long-term compensation charge in the prior year, SG&A expenses increased
13.0% 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 23.8% for the first
nine months of fiscal 2001 compared with 25.7% for the first nine months of
fiscal 2000, excluding the long-term compensation charge, primarily due to the
realization of economies of scale related to administrative and overhead costs.
The Celera Genomics group's SG&A expenses increased $14.1 million over the first
nine months of the prior year. The increase was caused primarily by the Celera
Genomics group's expansion of its sales and marketing capabilities. The
acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed
to the increase in SG&A expenses.
20
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
R&D expenses for the Company increased to $257.0 million for the first nine
months of fiscal 2001 compared with $186.8 million for the first nine months of
the prior year. R&D expenses for the Applied Biosystems group were $135.6
million for the first nine months of fiscal 2001 compared with $99.5 million for
the first nine months of the prior year, an increase of 36.3%. The increase was
primarily due to planned investments in the genotyping and proteomics fields. As
a percentage of net revenues, R&D expenses were 11.2% for the first nine months
of fiscal 2001 compared with 10.0% for the first nine months of fiscal 2000. The
increase in R&D as a percentage of net revenues was primarily due to the
investment in new products, as well as the negative effects of currency on
revenues as R&D costs are predominantly based in U.S. dollars.
The Celera Genomics group's R&D expenses increased $37.9 million to $151.7
million for the first nine months of fiscal 2001 from $113.8 million for the
first nine 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 has accelerated the
development of its discovery program and gene discovery work and has expanded
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 Company recorded $33.0 million of expenses in the first nine months of
fiscal 2001 relating to the amortization of goodwill and other intangibles
primarily due to the Celera Genomics group's acquisition of Paracel.
Operating income was $49.2 million for the first nine months of fiscal 2001
compared with $48.4 million for the first nine months of the prior year. On a
segment basis, operating income for the Applied Biosystems group increased to
$213.8 million for the first nine months of fiscal 2001 compared with $161.0
million for the first nine months of the prior year. On a comparable basis,
excluding the long-term compensation charge in fiscal 2000, operating income
increased $31.3 million, or 17.1%, over the first nine months of 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 lower gross margin as a percentage of net revenues and
higher R&D expenses. Excluding the negative effects of foreign currency in
fiscal 2001 and the special charge from the prior year, operating income
increased approximately 27%. Operating income as a percentage of net revenues,
excluding the long-term compensation charge in fiscal 2000, decreased to 17.6%
for the first nine months of fiscal 2001 compared with 18.3% for the first nine
months of the prior year. Excluding the effects of foreign currency in fiscal
2001, operating income as a percentage of net revenues increased to 18.5% in the
first nine months of fiscal 2001 primarily due to lower SG&A expenses as a
percentage of net revenues, partly offset by the lower gross margin as a
percentage of net revenues and the expansion of and investment in new products
discussed previously.
Operating loss for the Celera Genomics group was $165.2 million for the first
nine months of fiscal 2001 compared with $114.5 million for the first nine
months of fiscal 2000. The increase in the
21
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
operating loss reflected: the increased investment in research and development
activities relating to expanded efforts in its discovery program as well as in
its bioinformatics and software development capabilities; the increased expenses
incurred as a result of the amortization of goodwill and other intangibles
primarily due to the Paracel acquisition; the increased operating expenses
required to support expanded product and business development activities; and
the expansion of sales and marketing capabilities. These increased expenses were
partially offset by higher net revenues.
Interest expense was $1.7 million for the first nine months of fiscal 2001
compared with $2.3 million for the first nine months of the prior year primarily
due to lower debt levels in the first nine months of fiscal 2001 compared with
the same period of the prior year. Interest expense in both periods primarily
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 $63.2
million for the first nine months of fiscal 2001 compared with $19.0 million for
the prior year. This increase was attributable to the interest income on cash
and cash equivalents and short-term investments, which increased primarily as a
result of the follow-on public offering of Applera Corporation - Celera Genomics
Group Common Stock completed in March 2000. The first nine 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 income (expense), net was expense of $4.3 million for the first nine
months of fiscal 2001 compared with expense of $3.8 million for the prior year.
These amounts are primarily related to the Company's foreign currency management
program. The Company adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective
July 1, 2000. See Note 7 to the Company's condensed consolidated financial
statements for further discussion of the Company's policy for financial
instruments.
The Company's effective income tax rate was 34% for the first nine months of
fiscal 2001 compared with 29% for the prior year. Excluding the sales of
minority equity investments during the first nine months of both fiscal years
and the long-term compensation charge in fiscal 2000, the effective tax rates
were 34% and 25% for fiscal 2001 and 2000, respectively. 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 nine months of fiscal 2001, the Company derived approximately 50% of its
revenues from countries outside of the United States while a significant portion
of the related costs are based in U.S. dollars. Results continue to be affected
by market risk, including fluctuations in foreign currency exchange rates and
changes in economic conditions in foreign markets.
22
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Company performed a sensitivity analysis as of March 31, 2001 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 March
31, 2001, the Company calculated a hypothetical $14.0 million reduction of a
deferred gain 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 $1.4 billion
at March 31, 2001 compared with $1.5 billion at June 30, 2000, with total debt
of $51.1 million at March 31, 2001 compared with $97.8 million at June 30, 2000.
Working capital was $1.5 billion at March 31, 2001 and June 30, 2000. Debt to
total capitalization decreased to 2% at March 31, 2001 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 $49.1 million to $427.7 million at March 31, 2001
from $378.6 million at June 30, 2000. The increase was primarily due to the
growth in the Applied Biosystems group's net revenues.
Prepaid expenses and other current assets increased $23.8 million to $107.3
million at March 31, 2001 from $83.5 million at June 30, 2000, primarily due to
the fair value of financial instruments used for hedging.
Property, plant and equipment, net increased $82.7 million to $417.6 million at
March 31, 2001 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 and other capital expenditures related to the
construction of laboratory facilities.
Other long-term assets decreased $96.3 million to $526.6 million at March 31,
2001 from $622.9 million at June 30, 2000. The Company's minority equity
investments decreased $214.3 million due to a decrease in the fair value of the
securities, as well as the sales of certain investments mentioned previously. In
addition, the Celera Genomics group recorded amortization of goodwill and other
23
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
intangibles primarily related to Paracel. The decrease was partially offset by
an increase of $132.5 million in noncurrent deferred tax assets, an increase in
purchased license agreements, and the acquisitions of minority equity
investments during the first nine months of fiscal 2001.
Accrued salaries and wages decreased $18.7 million to $71.0 million at March 31,
2001 from $89.7 million at June 30, 2000 primarily reflecting the payments of
certain compensation-related accruals.
Accrued taxes on income decreased $36.4 million to $113.2 million at March 31,
2001 from $149.6 million at June 30, 2000 primarily due to timing of income tax
payments.
Other long-term liabilities increased $19.9 million to $154.1 million at March
31, 2001 from $134.2 million at June 30, 2000 primarily due to payments received
for long-term database subscription agreements.
Condensed Consolidated Statements of Cash Flows. Net cash provided by operating
activities was $24.9 million for the first nine months of fiscal 2001 compared
with $27.5 million for the same period in fiscal 2000. For the first nine months
of fiscal 2001, compared with the same period in the prior year, higher
increases in accounts receivable and prepaid expenses and other assets and
higher payments to suppliers were only partially offset by higher income-related
cash flows and cash collected on subscription and services agreements for which
revenue has been deferred.
Net cash used by investing activities was $140.6 million for the first nine
months of fiscal 2001 compared with $78.3 million for the first nine months of
the prior year. During the first nine months of fiscal 2001, the Company had net
purchases of $7.2 million of short-term investments and $140.8 million of
capital expenditures. The Applied Biosystems group had capital expenditures of
$120.9 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. Capital expenditures for the
Applied Biosystems group also included $22.9 million for building improvements
and equipment for the construction of laboratory facilities. The Celera Genomics
group had capital expenditures of $21.4 million primarily for building
improvements and equipment related to the development of a laboratory to support
its proteomics and discovery genomics capabilities. For the same period in the
prior year, capital expenditures for the Company were $94.4 million. An
investment by the Celera Genomics group of $4.1 million during the first nine
months of fiscal 2001 relates to the acquisition of a minority interest in
Tokyo-based Hubit Genomix, an entity focused on the association of genes with
disease for use in the development of therapeutics and diagnostics. The Celera
Genomics group had investments of $3.0 million for the comparable prior year
period which included the acquisitions of the Panther(TM) technology and a 47.5%
interest in Shanghai GeneCore Biotechnologies Co. Ltd. Investments for the
Applied Biosystems group included minority equity interests in Aclara
Biosciences, Inc. and Illumina, Inc. during fiscal 2000 and Genomica Corporation
during fiscal 2001.
24
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Net cash used by discontinued operations was $2.3 million for the first nine
months of fiscal 2001 compared with $8.5 million for the first nine 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 used by financing activities was $14.6 million for the first nine
months of fiscal 2001 compared with net cash provided by financing activities of
$1.0 billion for the prior year. During the first nine months of fiscal 2001,
the Company repaid $46.0 million of its commercial paper borrowing which it
secured in the second quarter of fiscal 2000 specifically for the purchase of
the Celera Genomics group's Rockville, Maryland facilities. Dividends paid were
$26.7 million during the first nine months of fiscal 2001 compared with $17.5
million in the prior year. The increase in the amount of dividends paid was due
to timing. Proceeds from employee stock option exercises were $50.2 million in
the first nine months of fiscal 2001 compared with $45.4 million for the first
nine months of fiscal 2000. In March 2000, the Company completed a follow-on
public offering of Applera Corporation - Celera Genomics Group Common Stock from
which the Company received net proceeds of $943.3 million.
At March 31, 2001, the Company had unused credit facilities, including the
Company's revolving credit facility, totaling $262.8 million.
Outlook
Applied Biosystems Group
The Applied Biosystems group expects to continue to grow and maintain
profitability for the remainder of fiscal 2001. 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 nine months of fiscal 2001 while a significant portion of its
costs are based in U.S. dollars. Over the long term, the Applied Biosystems
group believes that its business is positioned to grow at a compounded rate of
20 percent before the effects of foreign currency. However, as the Company
stated in its press release dated March 21, 2001 (filed in a current report on
Form 8-K on March 22, 2001), based on currency translation rates at that time,
the Applied Biosystems group expected that the growth rate would moderate to the
10-13 percent range over the next few quarters due to several factors including
the weakening of foreign currencies. Since that date, currency translation rates
for important markets have trended lower. Therefore, if current rates hold or
currencies weaken further, a corresponding impact on growth rates is expected.
Other factors include the postponement of large standing instrument orders from
a few smaller companies that are trimming capital expenditures in a period of
unusual economic and financial market uncertainty and temporary production
constraints on our new API 4000 mass spectrometer.
25
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Management is restraining selling, general, and administrative expense growth
but continues to invest in new product research and development. As a result,
earnings are expected to increase more slowly than revenues in this short-term
period. While continuing global economic uncertainty makes it difficult to
predict, management currently believes that the Applied Biosystems group will
begin to return to its long-term compounded annual growth target of 20 percent
before the effects of currency during calendar 2002.
The Applied Biosystems group also remains subject to various other
uncertainties, many of which are referenced in the "Forward-Looking Statements"
section below.
Celera Genomics Group
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 the remainder of fiscal 2001.
Revenue growth is expected to be generated primarily from increasing the
customer base with new biotechnology companies and academic institutions for the
on-line business, and expanding the Celera Genomics group's research
collaborations and services business. The actual rate of revenue increase will
depend on numerous factors, including the types of customers that it attracts
and the timing of those agreements. The Celera Genomics group also faces
potentially lengthy selling cycles with some of its customers.
The expected increase in revenues should be more than offset by investments as
the Celera Genomics group expands its discovery initiatives. The Celera Genomics
group intends to continue to expand its efforts in the development of its
proteomics and functional genomics capabilities and plans to scale up its new
proteomics factory during the next quarter. The Celera Genomics group also
intends to continue to strengthen its bioinformatics platform, both in
information content and in delivery systems. R&D expenditures are dependent on a
variety of factors, including the timing of new projects and the work in
research and development programs that are undertaken internally or with
collaborators. While the rate of increase of R&D expense is dependent on the
factors listed above, the Celera Genomics group believes that R&D expenditures
will be higher in the fourth quarter than in the third quarter. SG&A expenses
are also expected to increase modestly during the fourth quarter.
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 and other genomes; the
generation of selected genetic variation data; the development of complementary
information and information products and bioinformatics tools to make this
information useful to researchers; 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 discovery initiatives and new therapeutic and diagnostic products
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
26
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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."
In November 2000, the Company announced the formation of a major initiative in
the field of molecular diagnostics and the appointment of Kathy Ordonez,
formerly president of Roche Molecular Systems, to lead this initiative. The
initiative continues to develop as its strategy is refined and resources are
built. The Company has evaluated the initiative's anticipated relationships with
the Company's two operating groups, the Applied Biosystems group and the Celera
Genomics group, and decided that it will be optimally positioned as a joint
venture between those two groups. Further details and developments regarding
this business, which will be named Celera Diagnostics, will be announced as the
initiative continues to evolve.
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," "plan," "estimate," 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 45 to 47 of this report. For information concerning the risks and
uncertainties that may affect the operations, performance, development and
results of the Celera Genomics Group see "Celera Genomics group - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward-Looking Statements" on pages 61 to 71 of this report.
27
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands)
Three months ended Nine months ended
March 31, March 31,
2000 2001 2000 2001
----------------- ------------------ ------------------ -----------------
Net Revenues $ 368,133 $ 439,781 $ 996,329 $ 1,214,374
Cost of sales 165,864 208,595 458,565 576,063
----------------- ------------------ ------------------ -----------------
Gross Margin 202,269 231,186 537,764 638,311
Selling, general and administrative 93,776 104,142 277,335 288,936
Research, development and engineering 36,050 47,467 99,454 135,592
----------------- ------------------ ------------------ -----------------
Operating Income 72,443 79,577 160,975 213,783
Gain on investments 25,811 14,985
Interest expense 2,218 288 6,547 849
Interest income 4,831 4,028 13,015 12,617
Other income (expense), net 5,040 (933) (3,845) (4,085)
----------------- ------------------ ------------------ -----------------
Income Before Income Taxes 80,096 82,384 189,409 236,451
Provision for income taxes 24,029 24,715 59,801 71,684
----------------- ------------------ ------------------ -----------------
Net Income $ 56,067 $ 57,669 $ 129,608 $ 164,767
================= ================== ================== =================
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
28
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At June 30, At March 31,
2000 2001
------------------- ---------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 394,608 $ 339,795
Accounts receivable, net 367,370 416,155
Inventories, net 154,491 167,746
Prepaid expenses and other current assets 81,338 100,707
------------------- ---------------------
Total current assets 997,807 1,024,403
Property, plant and equipment, net 230,940 306,846
Other long-term assets 469,409 388,659
------------------- ---------------------
Total Assets $ 1,698,156 $ 1,719,908
=================== =====================
Liabilities and Group Equity
Current liabilities
Loans payable $ 15,693 $ 20,415
Tax benefit payable to the Celera Genomics group 16,702
Accounts payable 173,631 182,227
Accrued salaries and wages 79,409 56,221
Accrued taxes on income 149,505 114,092
Other accrued expenses 167,718 180,689
------------------- ---------------------
Total current liabilities 602,658 553,644
Long-term debt 36,115 30,715
Other long-term liabilities 125,019 128,430
------------------- ---------------------
Total Liabilities 763,792 712,789
Group Equity 934,364 1,007,119
------------------- ---------------------
Total Liabilities and Group Equity $ 1,698,156 $ 1,719,908
=================== =====================
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
29
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
Nine months ended
March 31,
2000 2001
----------------- ------------------
Operating Activities from Continuing Operations
Net income $ 129,608 $ 164,767
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 39,662 48,337
Long-term compensation programs 6,123 4,598
Gain on sale of assets (25,811) (14,985)
Deferred income taxes 1,821 (1,308)
Changes in operating assets and liabilities:
Increase in accounts receivable (39,266) (73,160)
Increase in inventories (12,468) (19,900)
Increase in prepaid expenses and other assets (11,623) (30,274)
Decrease in accounts payable and other liabilities (6,191) (28,334)
----------------- ------------------
Net Cash Provided by Operating Activities 81,855 49,741
----------------- ------------------
Investing Activities from Continuing Operations
Additions to property, plant and equipment
(net of disposals of $839 and $874, respectively) (69,098) (120,062)
Investments (13,998) (4,831)
Proceeds from the sale of assets 31,056 15,498
----------------- ------------------
Net Cash Used by Investing Activities (52,040) (109,395)
----------------- ------------------
Net Cash Provided (Used) by Continuing Operations
Before Financing Activities 29,815 (59,654)
----------------- ------------------
Net Cash Used by Operating Activities
From Discontinued Operations (8,493) (2,279)
----------------- ------------------
Financing Activities
Net change in loans payable 30,292 7,830
Dividends (17,530) (26,702)
Proceeds from stock issued for stock plans 34,413 32,035
----------------- ------------------
Net Cash Provided by Financing Activities 47,175 13,163
----------------- ------------------
Effect of Exchange Rate Changes on Cash (9,950) (6,043)
----------------- ------------------
Net Change in Cash and Cash Equivalents 58,547 (54,813)
Cash and Cash Equivalents Beginning of Period 236,530 394,608
----------------- ------------------
Cash and Cash Equivalents End of Period $ 295,077 $ 339,795
================= ==================
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
30
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 March 31, 2001, the Celera Genomics group generated
cumulative tax benefits of $98.3 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 Applied Biosystems
group's Condensed Combined Statements of Financial
31
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
Position. See Note 1 of 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 (LOSS)
Accumulated other comprehensive income (loss) 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 (loss) for the three and nine months ended March 31, 2000 and 2001 is
presented in the following table:
(Dollar amounts in millions) Three months ended Nine months ended
March 31, March 31,
2000 2001 2000 2001
------------- ------------- ------------ -------------
Net income $ 56.1 $ 57.7 $129.6 $ 164.8
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (13.4) (21.3) (19.1) (26.1)
Unrealized gain on hedge contracts, net 4.4 10.0
Unrealized gain (loss) on investments, net 82.7 (48.2) 144.6 (131.3)
Reclassification adjustments for realized
gains included in net income (16.7) (9.7)
------------- ------------- ------------ -------------
Other comprehensive income (loss) 69.3 (65.1) 108.8 (157.1)
------------- ------------- ------------ -------------
Comprehensive income (loss) $ 125.4 $ (7.4) $238.4 $ 7.7
============= ============= ============ =============
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, March 31,
2000 2001
----------------- -----------------
Raw materials and supplies $ 51.2 $ 66.3
Work-in-process 6.3 6.0
Finished products 97.0 95.4
----------------- -----------------
Total inventories $ 154.5 $ 167.7
================= =================
32
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) Nine months ended
March 31,
2000 2001
------------- --------------
Nonreimbursable utilization of tax benefits
generated by the Celera Genomics group $ - $ 23.3
Tax benefit related to employee stock options $ - $ 40.9
Dividends declared not paid $ 17.7 $ 17.9
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 (loss) as part of Group Equity 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.
33
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 (loss) 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 (loss), is reclassified to net revenues in the Condensed
Combined Statements of Operations. During the three and nine months ended March
31, 2001, the Applied Biosystems group recognized net gains of $5.9 million and
$10.7 million, respectively, in net revenues from derivative instruments
designated as cash flow hedges of anticipated sales. At March 31, 2001, $15.9
million of derivative gains ($10.3 million net of deferred taxes) recorded in
other comprehensive income (loss) are expected to be reclassified to earnings
during the next twelve months. For the three and nine months ended March 31,
2001, the Applied Biosystems group recognized expense of $.7 million and $3.4
million, respectively, included in other income (expense), net 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-denominated 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.
34
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 nine months
ended March 31, 2000, net revenues from leased instruments, shipments of
consumables and project materials, and contracted R&D services to the Celera
Genomics group totaled $16.0 million and $44.7 million, respectively. For the
three and nine months ended March 31, 2001, net revenues from leased
instruments, shipments of consumables and project materials, and contracted R&D
services to the Celera Genomics group totaled $16.1 million and $47.9 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. On April 6, 2001, the court granted the Company's motion for summary
judgment finding that the Company's recently introduced BigDye Version 3.0 dye
technology does not infringe 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 been scheduled for trial on August 6, 2001.
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 of, and inducing the infringement of U.S. Patent No.
35
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
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.
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. A claims
construction hearing has been scheduled for June 7, 2001.
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.
36
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 first nine months of fiscal 2001 included gains of
$15.0 million, or $9.7 million on an after-tax basis, related to sales of
minority equity investments. These sales occurred during the first and second
quarters of fiscal 2001. The second quarter of fiscal 2000 included a gain of
$25.8 million, or $16.8 million on an after-tax basis, 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 charge of $21.6 million, or $16.8 million on an
after-tax basis, 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 March 31, 2001 Compared With
the Three Months Ended March 31, 2000
The Applied Biosystems group reported net income of $57.7 million for the third
quarter of fiscal 2001 compared with $56.1 million for the third 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 $4
million in the third quarter of fiscal 2001 as compared with the same period in
the previous year.
Net revenues were $439.8 million for the third quarter of fiscal 2001 compared
with $368.1 million for the third quarter of fiscal 2000, an increase of 19.5%.
The effects of foreign currency reduced net revenues by approximately $11
million, or 3%, compared with the prior year due primarily to weakness in the
euro, the British pound, and the Japanese yen against the U.S. dollar. Revenues
from leased instruments and shipments to the Celera Genomics group were $16.1
million and $16.0 million for the third quarter of fiscal 2001 and fiscal 2000,
respectively.
37
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Geographically, the Applied Biosystems group reported revenue growth in all
regions for the third quarter of fiscal 2001 compared with the third quarter of
fiscal 2000. Revenues increased 25.0% in the United States, 14.2% in Europe,
15.3% in the Far East, and 17.1% in Latin America and other markets, compared
with the third quarter of the prior fiscal year. Excluding the effects of
foreign currency, revenues grew approximately 22% in Europe and 19% in the Far
East. Revenue growth was fairly balanced between instruments and recurring
revenue sources, primarily consumables. Contributors to the increase in net
revenues included genetic analysis products, sequence detection systems, and
mass spectrometry instruments for proteomics, as well as higher royalties and
service revenues.
Gross margin as a percentage of net revenues was 52.6% for the third quarter of
fiscal 2001 compared with 54.9% for the third quarter of fiscal 2000. Gross
margin was negatively affected by a number of factors. The effects of foreign
currency reduced gross margin by approximately $8 million. While the Applied
Biosystems group derives approximately 50% of its revenues from markets outside
of the U.S., a significant portion of the related costs are based in U.S.
dollars. In addition, preproduction costs related to the expansion of the custom
oligo business and investments in certain other product lines also reduced gross
margin by a similar amount.
SG&A expenses were $104.1 million for the third quarter of fiscal 2001 compared
with $93.8 million for the third quarter of fiscal 2000, an increase of 11.1%.
This increase was primarily 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 23.7% for the third quarter of
fiscal 2001 compared with 25.5% for the third quarter of fiscal 2000 primarily
due to the realization of economies of scale related to administrative and
overhead costs.
R&D expenses were $47.5 million for the third quarter of fiscal 2001 compared
with $36.1 million for the third quarter of the prior year, an increase of
31.7%. The increase was primarily due to planned investments in the genotyping
and proteomics fields. As a percentage of net revenues, R&D expenses were 10.8%
for the third quarter of fiscal 2001 compared with 9.8% for the third quarter of
fiscal 2000. The increase in R&D as a percentage of net revenues was primarily
due to the investment in new products, as well as the negative effects of
currency on revenues as R&D costs are predominantly based in U.S. dollars.
Operating income increased to $79.6 million for the third quarter of fiscal 2001
compared with $72.4 million for the third quarter of the prior year, an increase
of $7.2 million, or 9.8%. 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 lower gross margin as a
percentage of net revenues and higher R&D expenses. Excluding the negative
effects of foreign currency, operating income increased approximately 17%.
Operating income as a percentage of net revenues decreased to 18.1% for the
third quarter of fiscal 2001 compared with 19.7% for the third quarter of the
prior year. Excluding the effects of foreign currency in fiscal 2001, operating
income as a percentage of net revenues decreased to 18.7% in the third quarter
of fiscal 2001 primarily due to
38
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
the lower gross margin as a percentage of net revenues and the expansion of and
investment in new products discussed previously.
Interest expense was $.3 million for the third quarter of fiscal 2001 compared
with $2.2 million for the third quarter of the prior year. The third quarter of
fiscal 2000 included interest expense 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 $4.0 million for the third quarter of fiscal 2001 compared
with $4.8 million for the third quarter of the prior year. Excluding the
interest income in the third quarter of fiscal 2000 on the $150 million note
receivable relating to the sale of the Analytical Instruments business, interest
income increased due to larger cash balances and higher average interest rates
for the third quarter of fiscal 2001 compared with the third quarter of fiscal
2000.
Other income (expense), net was expense of $.9 million for the third quarter of
fiscal 2001 compared with income of $5.0 million for the third quarter of fiscal
2000. These amounts are primarily related to the Company's foreign currency
management program. The Applied Biosystems group adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," effective July 1, 2000. See Note 6 to the Applied Biosystems
group's condensed combined financial statements for further discussion of the
Applied Biosystems group's policy for financial instruments.
The effective income tax rate was 30% for the third quarter of both fiscal 2001
and 2000. 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 Nine Months Ended March 31, 2001 Compared With the
Nine Months Ended March 31, 2000
The Applied Biosystems group reported net income of $164.8 million for the first
nine months of fiscal 2001 compared with $129.6 million for the first nine
months 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 $25.4 million, or
19.6%, to $155.0 million for the first nine months of fiscal 2001 compared with
the first nine months 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 $15 million, or 12%, as compared with the
first nine months of fiscal 2000.
Net revenues were $1.2 billion for the first nine months of fiscal 2001 compared
with $996.3 million for the first nine months of fiscal 2000, an increase of
21.9%. The effects of foreign currency reduced net revenues by approximately $38
million, or 4%, compared with the first nine months of the prior year due
primarily to weakness in the euro, the British pound, and the Japanese yen
against the U.S. dollar. Revenues from leased instruments and shipments to the
Celera Genomics group were $47.9 million and $44.7 million for the first nine
months of fiscal 2001 and fiscal 2000, respectively.
39
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Geographically, the Applied Biosystems group reported revenue growth in all
regions for the first nine months of fiscal 2001 compared with the first nine
months of fiscal 2000. Revenues increased 23.0% in the United States, 15.9% in
Europe, 27.4% in the Far East, and 20.9% in Latin America and other markets,
compared with the first nine months of the prior fiscal year. Excluding the
effects of foreign currency, revenues grew approximately 28% in Europe and 29%
in the Far East. 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.
Gross margin as a percentage of net revenues was 52.6% for the first nine months
of fiscal 2001 compared with 54.0% for the first nine months of fiscal 2000.
Gross margins were negatively affected by a number of factors, including the
negative effects of foreign currency, preproduction costs related to the
expansion of the custom oligo business, and investments in certain other product
lines.
SG&A expenses were $288.9 million for the first nine months of fiscal 2001
compared with $277.3 million for the first nine months of fiscal 2000, an
increase of 4.2%. On a comparable basis, excluding the long-term compensation
charge in the prior year, SG&A expenses increased 13.0% 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 23.8% for the first nine months of fiscal 2001
compared with 25.7% for the first nine months of fiscal 2000, excluding the
long-term compensation charge, primarily due to the realization of economies of
scale related to administrative and overhead costs.
R&D expenses were $135.6 million for the first nine months of fiscal 2001
compared with $99.5 million for the first nine months of the prior year, an
increase of 36.3%. The increase was primarily due to planned investments in the
genotyping and proteomics fields. As a percentage of net revenues, R&D expenses
were 11.2% for the first nine months of fiscal 2001 compared with 10.0% for the
first nine months of fiscal 2000. The increase in R&D as a percentage of net
revenues was primarily due to the investment in new products, as well as the
negative effects of currency on revenues as R&D costs are predominantly based in
U.S. dollars.
Operating income increased to $213.8 million for the first nine months of fiscal
2001 compared with $161.0 million for the first nine months of the prior year.
On a comparable basis, excluding the long-term compensation charge in fiscal
2000, operating income increased $31.3 million, or 17.1%, over the first nine
months of 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 lower gross margin as a
percentage of net revenues and higher R&D expenses. Excluding the negative
effects of foreign currency in fiscal 2001 and the special charge from the prior
year, operating income increased approximately 27%. Operating income as a
40
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
percentage of net revenues, excluding the long-term compensation charge in
fiscal 2000, decreased to 17.6% for the first nine months of fiscal 2001
compared with 18.3% for the first nine months of the prior year. Excluding the
effects of foreign currency in fiscal 2001, operating income as a percentage of
net revenues increased to 18.5% in the first nine months of fiscal 2001
primarily due to lower SG&A expenses as a percentage of net revenues, partly
offset by the lower gross margin as a percentage of net revenues and the
expansion of and investment in new products discussed previously.
Interest expense was $.8 million for the first nine months of fiscal 2001
compared with $6.5 million for the first nine months of the prior year. The
first nine months of fiscal 2000 included interest expense 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 $12.6 million for the first nine
months of fiscal 2001 compared with $13.0 million for the first nine months of
the prior year. Excluding the interest income in the first nine months of fiscal
2000 on the $150 million note receivable relating to the sale of the Analytical
Instruments business, interest income increased due to larger cash balances and
higher average interest rates for the first nine months of fiscal 2001 compared
with the first nine months of fiscal 2000.
Other income (expense), net was expense of $4.1 million for the first nine
months of fiscal 2001 compared with expense of $3.8 million for the prior year.
These amounts are primarily related to the Company's foreign currency management
program. The Applied Biosystems group adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," effective July 1, 2000. See Note 6 to the Applied Biosystems
group's condensed combined financial statements for further discussion of the
Applied Biosystems group's policy for financial instruments.
The effective income tax rate was 30% for the first nine months of fiscal 2001
compared with 32% for the prior year. Excluding the special items discussed
above, the effective income tax rate was 30% for the nine months ended March 31,
2001 and 2000. 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 nine months of fiscal 2001, the Applied Biosystems group
derived approximately 50% of its revenues from countries outside of the United
States while a significant portion of the related costs are based in U.S.
dollars. 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 March 31,
2001 on its foreign currency derivative financial instruments. Assuming a
hypothetical adverse change of 10% in foreign
41
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
exchange rates in relation to the U.S. dollar at March 31, 2001, the Applied
Biosystems group calculated a hypothetical $14.0 million reduction of a deferred
gain 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 $339.8 million at March 31, 2001 compared with
$394.6 million at June 30, 2000, with total debt of $51.1 million at March 31,
2001 compared with $51.8 million at June 30, 2000. Working capital was $470.8
million at March 31, 2001 and $395.1 million at June 30, 2000. Debt to total
capitalization was 5% at March 31, 2001 and June 30, 2000.
Accounts receivable increased $48.8 million to $416.2 million at March 31, 2001
from $367.4 million at June 30, 2000, primarily due to the growth in net
revenues.
Prepaid expenses and other current assets increased $19.4 million to $100.7
million at March 31, 2001 from $81.3 million at June 30, 2000, primarily due to
the fair value of financial instruments used for hedging.
Property, plant and equipment, net increased $75.9 million to $306.8 million at
March 31, 2001 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 and other capital expenditures related to the
construction of laboratory facilities.
Other long-term assets decreased $80.7 million to $388.7 million at March 31,
2001 from $469.4 million at June 30, 2000. The Applied Biosystems group's
minority equity investments decreased $214.3 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
$118.4 million in noncurrent deferred tax assets, an increase in purchased
license agreements, and an acquisition of a minority interest investment during
the first nine months of fiscal 2001.
The Applied Biosystems group had a tax benefit payable to the Celera Genomics
group of $16.7 million at June 30, 2000, representing tax benefits reimbursable
to the Celera Genomics group. The tax benefit payable was settled during the
first half of fiscal 2001. The reimbursable limit of $75
42
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
million was reached during the first quarter of fiscal 2001. See Note 2 to the
condensed combined financial statements for a further discussion of allocations
of federal and state income taxes.
Accrued salaries and wages decreased $23.2 million to $56.2 million at March 31,
2001 from $79.4 million at June 30, 2000 primarily reflecting the payments of
certain compensation-related accruals.
Accrued taxes on income decreased $35.4 million to $114.1 million at March 31,
2001 from $149.5 million at June 30, 2000 primarily due to timing of income tax
payments and the utilization of tax benefits generated by the Celera Genomics
group.
Condensed Combined Statements of Cash Flows. Net cash provided by operating
activities was $49.7 million for the first nine months of fiscal 2001 compared
with $81.9 million for the same period in fiscal 2000. For the first nine months
of fiscal 2001, compared with the same period in the prior year, increases in
accounts receivable and prepaid expenses and other assets and higher payments to
suppliers were only partially offset by higher income-related cash flows.
Net cash used by investing activities was $109.4 million for the first nine
months of fiscal 2001 compared with $52.0 million for the prior year. During the
first nine months of fiscal 2001, the Applied Biosystems group had capital
expenditures of $120.9 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.
Capital expenditures also included $22.9 million for building improvements and
equipment for the construction of laboratory facilities. For the same period in
the prior year, capital expenditures were $69.9 million, which included $20.3
million for an airplane. In the first nine months of fiscal 2001, the Applied
Biosystems group realized net proceeds of $15.5 million from the sales of
minority equity investments compared with $31.1 million for the prior year.
Investments included minority equity interests in Aclara Biosciences, Inc. and
Illumina, Inc. during fiscal 2000 and Genomica Corporation during fiscal 2001.
Net cash used by discontinued operations was $2.3 million for the first nine
months of fiscal 2001 compared with $8.5 million for the first nine 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 $13.2 million for the first nine
months of fiscal 2001 compared with $47.2 million for the prior year. Proceeds
from employee stock option exercises were $32.0 million in the first nine months
of fiscal 2001 compared with $34.4 million for fiscal 2000. Loans payable
increased $7.8 million for the first nine months of fiscal 2001 compared with an
increase of $30.3 million for the prior year. Dividends paid were $26.7 million
during the first nine months of fiscal 2001 compared with $17.5 million in the
prior year. The increase in the amount of dividends paid was primarily due to
timing.
43
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
At March 31, 2000, the Company had unused credit facilities, including the
Company's revolving credit facility, totaling $262.8 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
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 nine months of fiscal 2001 while a significant portion of its
costs are based in U.S. dollars. Over the long term, the Applied Biosystems
group believes that its business is positioned to grow at a compounded rate of
20 percent before the effects of foreign currency. However, as the Company
stated in its press release dated March 21, 2001 (filed in a current report on
Form 8-K on March 22, 2001), based on currency translation rates at that time,
the Applied Biosystems group expected that the growth rate would moderate to the
10-13 percent range over the next few quarters due to several factors including
the weakening of foreign currencies. Since that date, currency translation rates
for important markets have trended lower. Therefore, if current rates hold or
currencies weaken further, a corresponding impact on growth rates is expected.
Other factors include the postponement of large standing instrument orders from
a few smaller companies that are trimming capital expenditures in a period of
unusual economic and financial market uncertainty and temporary production
constraints on our new API 4000 mass spectrometer.
Management is restraining selling, general, and administrative expense growth
but continues to invest in new product research and development. As a result,
earnings are expected to increase more slowly than revenues in this short-term
period. While continuing global economic uncertainty makes it difficult to
predict, management currently believes that the Applied Biosystems group will
begin to return to its long-term compounded annual growth target of 20 percent
before the effects of currency during calendar 2002.
In November 2000, the Company announced the formation of a major initiative in
the field of molecular diagnostics and the appointment of Kathy Ordonez,
formerly president of Roche Molecular Systems, to lead this initiative. The
initiative continues to develop as its strategy is refined and resources are
built. The Company has evaluated the initiative's anticipated relationships with
the Company's two operating groups, the Applied Biosystems group and the Celera
Genomics group, and decided that it will be optimally positioned as a joint
venture between those two groups. Further details and developments regarding
this business, which will be named Celera Diagnostics, will be announced as the
initiative continues to evolve.
The Applied Biosystems group also remains subject to various other
uncertainties, many of which are referenced in the "Forward-Looking Statements"
section below.
44
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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," "plan," "estimate," 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, biotechnology, 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.
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
45
APPLIED BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 revenues and operating results more volatile.
Approximately 50% of the Applied Biosystems group's net revenues during fiscal
2000 and the first nine months 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. A significant portion of the related
costs for the Applied Biosystems group are based on the U.S. dollar. 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,
46
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
modest duration, could impair or cause a temporary suspension of the group's
operations, including the manufacturing and shipment of new products. Power
disruptions of an extended duration or high frequency 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.
The Celera Genomics/Applied Biosystems Joint Venture's ability to develop
proprietary molecular diagnostic products is unproven. The Company has announced
the formation of a major initiative in the field of molecular diagnostics and
has decided that it will be optimally positioned as a joint venture between the
Applied Biosystems group and the Celera Genomics group. The joint venture faces
the difficulties inherent in developing and commercializing diagnostic tests and
in building and operating a commercial research and development program. The
joint venture's ability to develop proprietary molecular diagnostic products is
unproven, and it is possible that its discovery process will not result in any
commercial products or services. Even if the joint venture is able to develop
products and services, it is possible that these products and services may not
be commercially viable or successful due to a variety of reasons, including:
difficulty obtaining regulatory approvals, competitive conditions, the inability
to obtain necessary intellectual property protection, the need to build
distribution channels, failure to get adequate reimbursement for these products
from insurance or government payors, or the inability of the joint venture to
recover its development costs in a reasonable period.
47
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands)
Three months ended Nine months ended
March 31, March 31,
2000 2001 2000 2001
----------------- ------------------ ------------------ -----------------
Net Revenues $ 11,041 $ 23,375 $ 27,666 $ 61,947
Costs and Expenses
Research and development 43,447 52,174 113,780 151,663
Selling, general and administrative 10,451 15,146 28,383 42,538
Amortization of goodwill and intangibles 10,916 32,965
----------------- ------------------ ------------------ -----------------
Operating Loss (42,857) (54,861) (114,497) (165,219)
Interest expense 699 1,360 829
Interest income 6,469 15,258 11,576 50,568
Other expense, net (242) (246)
----------------- ------------------ ------------------ -----------------
Loss Before Income Taxes (37,087) (39,845) (104,281) (115,726)
Benefit for income taxes 12,980 10,758 36,498 31,246
----------------- ------------------ ------------------ -----------------
Net Loss $ (24,107) $ (29,087) $ (67,783) $ (84,480)
================= ================== ================== =================
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
48
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At June 30, At March 31,
2000 2001
-------------------- --------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 569,894 $ 486,122
Short-term investments 541,140 548,934
Tax benefit receivable from the Applied Biosystems group 16,702
Accounts receivable, net 14,936 22,275
Inventories, net 3,336 4,699
Prepaid expenses and other current assets 2,283 6,552
-------------------- --------------------
Total current assets 1,148,291 1,068,582
Property, plant and equipment, net 111,442 117,138
Other long-term assets 153,524 137,930
-------------------- --------------------
Total Assets $ 1,413,257 $ 1,323,650
==================== ====================
Liabilities and Group Equity
Current liabilities
Accounts payable $ 21,566 $ 27,985
Accrued salaries and wages 10,251 14,756
Deferred revenues 24,169 31,889
Other accrued expenses 11,266 8,519
-------------------- --------------------
Total current liabilities 67,252 83,149
Long-term debt 46,000
Other long-term liabilities 9,189 25,672
-------------------- --------------------
Total Liabilities 122,441 108,821
Group Equity 1,290,816 1,214,829
-------------------- --------------------
Total Liabilities and Group Equity $ 1,413,257 $ 1,323,650
==================== ====================
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
49
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
Nine months ended
March 31,
2000 2001
----------------- ------------------
Operating Activities
Net loss $ (67,783) $ (84,480)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 16,571 48,387
Long-term compensation program 699 951
Deferred income taxes (7,317) (25,183)
Changes in operating assets and liabilities:
(Increase) decrease in tax benefit receivable
from the Applied Biosystems group (2,343) 16,702
Increase in accounts receivable (3,558) (7,339)
Increase in inventory (1,363)
Decrease (increase) in prepaid expenses and other assets 1,117 (3,542)
Increase in accounts payable and other liabilities 8,252 32,617
----------------- ------------------
Net Cash Used by Operating Activities (54,362) (23,250)
----------------- ------------------
Investing Activities
Additions to property, plant and equipment
(net of disposals of $1,175 and $13, respectively) (23,267) (21,406)
Purchases of short-term investments, net (7,249)
Investments (3,000) (4,081)
----------------- ------------------
Net Cash Used by Investing Activities (26,267) (32,736)
----------------- ------------------
Financing Activities
Net change in long-term debt 46,000 (46,000)
Net proceeds from stock offering 943,303
Proceeds from stock issued for stock plans 10,942 18,214
----------------- ------------------
Net Cash Provided (Used) by Financing Activities 1,000,245 (27,786)
----------------- ------------------
Net Change in Cash and Cash Equivalents 919,616 (83,772)
Cash and Cash Equivalents Beginning of Period 71,491 569,894
----------------- ------------------
Cash and Cash Equivalents End of Period $ 991,107 $ 486,122
================= ==================
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
50
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 March 31, 2001, the Celera Genomics group generated
cumulative tax benefits of $98.3 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.
51
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
See Note 1 of the 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 Nine months ended
March 31, 2000 March 31, 2000
------------------------------- ------------------------------
Net revenues $ 13.1 $ 35.2
Net loss $ (36.6) $ (106.5)
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 (loss) included in Group Equity on the
Condensed Combined Statements of Financial Position consists of foreign currency
translation adjustments and unrealized gains and losses on available-for-sale
investments. Total comprehensive loss for the three and nine months ended March
31, 2000 and 2001 is presented in the following table:
(Dollar amounts in millions) Three months ended Nine months ended
March 31, March 31,
2000 2001 2000 2001
------------ ------------ ------------ -----------
Net loss $ (24.1) $ (29.1) $ (67.8) $ (84.5)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (.2) (.2)
Unrealized gain (loss) on investments, net (.1) .4
------------ ------------ ------------ -----------
Other comprehensive income (loss) (.3) .2
------------ ------------ ------------ -----------
Comprehensive loss $ (24.1) $ (29.4) $ (67.8) $ (84.3)
============ ============ ============ ===========
52
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, March 31,
2000 2001
--------------------- ---------------------
Raw materials and supplies $ 1.9 $ 3.7
Work-in-process .3
Finished products 1.4 .7
--------------------- ---------------------
Total inventories $ 3.3 $ 4.7
===================== =====================
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
(Dollar amounts in millions) Nine months ended
March 31,
2000 2001
------------- --------------
Nonreimbursable utilization of tax benefits by
the Applied Biosystems group $ - $ (23.3)
Tax benefit related to employee stock options $ - $ 12.4
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 nine months
ended March 31, 2000, research and development expenses included $14.4 million
and $40.4 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 nine month periods ended March 31, 2001,
research and development expenses included $14.5 million and $45.1 million,
respectively, for lease payments on instruments, the purchase of consumables and
project materials, and services contracted from the Applied Biosystems group.
53
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 March 31, 2001, TIGR
owned approximately 1.4 million options to purchase Applera Corporation - Celera
Genomics Group Common Stock.
During the three and nine months ended March 31, 2001, the Celera Genomics group
recognized revenues of $3.2 million and $4.8 million, respectively, from TIGR,
of which $1.6 million was receivable as of March 31, 2001.
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. On April 6, 2001, the court granted the Company's motion for summary
judgment finding that the Company's recently introduced BigDye Version 3.0 dye
technology does not infringe 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 been scheduled for trial on August 6, 2001.
54
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
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 of, 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.
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. A claims
construction hearing has been scheduled for June 7, 2001.
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 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.
55
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 March 31, 2001 Compared With
the Three Months Ended March 31, 2000
The Celera Genomics group reported a net loss of $29.1 million for the third
quarter of fiscal 2001 compared with a net loss of $24.1 million for the third
quarter of fiscal 2000. The increase in the net loss reflected: the increased
expenses incurred as a result of the amortization of goodwill and other
intangibles primarily due to the Paracel acquisition; the increased investment
in research and development activities relating to expanded efforts in its
discovery program; and the expansion of sales and marketing capabilities. These
increased expenses were partially offset by higher net revenues and higher
interest income.
Net revenues for the Celera Genomics group were $23.4 million for the third
quarter of fiscal 2001 compared with $11.0 million for the third quarter of
fiscal 2000. The increased revenues resulted primarily from database
subscription agreements with commercial and academic customers, as well as
revenues from genomics services and collaborations. The acquisition of Paracel
during the fourth quarter of fiscal 2000 also contributed to the increase in net
revenues.
R&D expenses increased $8.8 million to $52.2 million for the third quarter of
fiscal 2001 from $43.4 million for the third quarter of fiscal 2000 primarily as
the result of the development of its discovery program and gene discovery work
as well as the acceleration of its capabilities in proteomics and
56
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 $15.1 million for the third quarter of fiscal 2001 compared
with $10.5 million for the prior year. The increase was caused primarily by the
Celera Genomics group's expansion of its sales and marketing capabilities. 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 $10.9 million of expenses in the third
quarter of fiscal 2001 relating to the amortization of goodwill and other
intangibles primarily due to Paracel.
The Celera Genomics group incurred no interest expense for the third quarter of
fiscal 2001 compared with $.7 million for the third quarter of fiscal 2000.
Interest expense in the prior year 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 $15.3 million for the third quarter of fiscal
2001 compared with $6.5 million for the third 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 third quarter of fiscal 2000 also 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 third quarter of fiscal 2001 and
35% for the third 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 Nine Months Ended March 31, 2001 Compared With the
Nine Months Ended March 31, 2000
The Celera Genomics group reported a net loss of $84.5 million for the first
nine months of fiscal 2001 compared with a net loss of $67.8 million for the
first nine months of fiscal 2000. The increase in the net loss reflected: the
increased investment in research and development activities relating to expanded
efforts in its discovery program as well as in its bioinformatics and software
development capabilities; the increased expenses incurred as a result of the
amortization of goodwill and other intangibles primarily due to the Paracel
acquisition; the increased operating expenses required to support expanded
product and business development activities; and the expansion of sales and
marketing capabilities. These increased expenses were partially offset by higher
net revenues and higher interest income.
57
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Net revenues for the Celera Genomics group were $62.0 million for the first nine
months of fiscal 2001 compared with $27.7 million for the first nine months of
fiscal 2000. The increased revenues resulted primarily from database
subscription agreements with commercial and academic customers, as well as
revenues from genomics services and collaborations. The acquisition of Paracel
during the fourth quarter of fiscal 2000 also contributed to the increase in net
revenues.
R&D expenses increased $37.9 million to $151.7 million for the first nine months
of fiscal 2001 from $113.8 million for the first nine 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 has accelerated the development of its discovery program and gene
discovery work and has expanded 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 $42.5 million for the first nine months of fiscal 2001
compared with $28.4 million for the prior year. The increase was caused
primarily by the Celera Genomics group's expansion of its sales and marketing
capabilities. 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 $33.0 million of expenses in the first nine
months of fiscal 2001 relating to the amortization of goodwill and other
intangibles primarily due to Paracel.
Interest expense was $.8 million for the first nine months of fiscal 2001
compared with $1.4 million for the first nine 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 $50.6 million for the first nine months of fiscal 2001
compared with $11.6 million for the first nine 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 nine months of fiscal 2000 also 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 nine months of fiscal 2001
and 35% for the first nine 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.
58
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 March
31, 2001 compared with $1.1 billion at June 30, 2000. Working capital was $1.0
billion at March 31, 2001 and $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.
The Celera Genomics group had a tax benefit receivable from the Applied
Biosystems group of $16.7 million at June 30, 2000, representing tax benefits
reimbursable from the Applied Biosystems group. The tax benefit receivable was
settled during the first half of fiscal 2001. The reimbursable limit of $75
million was reached during the first quarter of fiscal 2001. See Note 2 to the
Celera Genomics group's condensed combined financial statements for a further
discussion of allocations of federal and state income taxes.
Accounts receivable increased $7.3 million to $22.3 million at March 31, 2001
from $14.9 million at June 30, 2000, primarily as a result of increased revenues
and the timing of payments received for subscription and service agreements.
Other long-term assets decreased $15.6 million to $137.9 at March 31, 2001 from
$153.5 million at June 30, 2000, primarily due to amortization of goodwill and
other intangibles primarily related to Paracel, partially offset by an increase
in deferred tax assets and an acquisition of a minority equity investment during
the third quarter of fiscal 2001.
Deferred revenues increased $7.7 million to $31.9 million at March 31, 2001 from
$24.2 million at June 30, 2000 due to payments received for subscription and
service agreements, partially offset by revenue recognized under these
agreements.
Other long-term liabilities increased $16.5 million to $25.7 million at March
31, 2001 from $9.2 million at June 30, 2000 primarily due to payments received
for long-term database subscription agreements.
Condensed Combined Statements of Cash Flows. Net cash used by operating
activities was $23.3 million for the first nine months of fiscal 2001 compared
with $54.4 million for the same period in the prior year. The decrease in cash
used by operating activities was primarily due to the settlement of the tax
benefit receivable from the Applied Biosystems group, as well as higher
increases in accounts payable and other liabilities primarily due to cash
collected on subscription and services agreements for which revenue has been
deferred. These items were partially offset by an increase in
59
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
prepaid expenses and other assets during the first nine months of fiscal 2001
compared to a decrease in the same period in the prior year, as well as higher
increases in accounts receivable balances.
Net cash used by investing activities was $32.7 million for the first nine
months of fiscal 2001 compared with $26.3 million for the prior year. Capital
expenditures of $21.4 million for the first nine months of fiscal 2001 included
$2.9 million of purchases from the Applied Biosystems group. For the first nine
months of fiscal 2000, capital expenditures of $24.4 million included payments
of $8.1 million for software licenses. Excluding the software purchases from the
prior year, fiscal 2001 capital expenditures increased primarily due to payments
for building improvements and equipment related to the development of a
laboratory to support its proteomics and discovery genomics capabilities. During
the first nine months of fiscal 2001, the Celera Genomics group had net
purchases of $7.2 million of short-term investments and $4.1 million relating to
the acquisition of a minority interest in Tokyo-based Hubit Genomix, an entity
focused on the association of genes with disease for use in the development of
therapeutics and diagnostics. The Celera Genomics group had investments of $3.0
million for the comparable prior year period which included the acquisitions of
the Panther(TM) technology and a 47.5% interest in Shanghai GeneCore
Biotechnologies Co. Ltd.
Net cash used by financing activities was $27.8 million for the first nine
months of fiscal 2001 compared with net cash provided by financing activities of
$1.0 billion for the prior year. During the first nine months of fiscal 2001,
the Company repaid $46.0 million of its commercial paper borrowing which it
secured in the second quarter of fiscal 2000 specifically for the purchase of
the Rockville, Maryland facilities. This repayment was offset by $18.2 million
in proceeds received from stock issued for employee stock plans during the first
nine months of fiscal 2001 compared with $10.9 million in the same period of the
prior year. In March 2000, the Company completed a follow-on public offering of
Applera Corporation - Celera Genomics Group Common Stock from which the Company
received net proceeds of $943.3 million.
At March 31, 2001, the Company had unused credit facilities, including the
Company's revolving credit facility, totaling $262.8 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 the remainder of fiscal 2001.
Revenue growth is expected to be generated primarily from increasing the
customer base with new biotechnology companies and academic institutions for the
on-line business, and expanding the Celera Genomics group's research
collaborations and services business. The actual rate of revenue increase will
depend on numerous factors, including the types of customers that it attracts
and the timing of those agreements. The Celera Genomics group also faces
potentially lengthy selling cycles with some of its customers.
60
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The expected increase in revenues should be more than offset by investments as
the Celera Genomics group expands its discovery initiatives. The Celera Genomics
group intends to continue to expand its efforts in the development of its
proteomics and functional genomics capabilities and plans to scale up its new
proteomics factory during the next quarter. The Celera Genomics group also
intends to continue to strengthen its bioinformatics platform, both in
information content and in delivery systems. R&D expenditures are dependent on a
variety of factors, including the timing of new projects and the work in
research and development programs that are undertaken internally or with
collaborators. While the rate of increase of R&D expense is dependent on the
factors listed above, the Celera Genomics group believes that R&D expenditures
will be higher in the fourth quarter than in the third quarter. SG&A expenses
are also expected to increase modestly during the fourth quarter.
In November 2000, the Company announced the formation of a major initiative in
the field of molecular diagnostics and the appointment of Kathy Ordonez,
formerly president of Roche Molecular Systems, to lead this initiative. The
initiative continues to develop as its strategy is refined and resources are
built. The Company has evaluated the initiative's anticipated relationships with
the Company's two operating groups, the Applied Biosystems group and the Celera
Genomics group, and decided that it will be optimally positioned as a joint
venture between those two groups. Further details and developments regarding
this business, which will be named Celera Diagnostics, will be announced as the
initiative continues to evolve.
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 and other genomes; the
generation of selected genetic variation data; the development of complementary
information and information products and bioinformatics tools to make this
information useful to researchers; 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 discovery initiatives and new therapeutic and diagnostic products
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," "plan," "estimate," 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
61
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 $263.3
million as of March 31, 2001 and expects that it will continue to incur
additional net losses for the foreseeable future. These losses may increase as
the Celera Genomics group 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.
The Celera Genomics group's 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 the Celera Genomics
group 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, 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.
The Celera Genomics group's 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 assembled 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 the Celera Genomics group's business strategy in
which the Celera Genomics group 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.
62
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Celera Genomics group's revenue growth depends on retaining existing and
adding new customers. The Celera Genomics group has a relatively small number of
customers, the revenues from which will offset only a portion of its expenses.
In order to generate significant additional revenues, the Celera Genomics group
must obtain additional customers and retain its existing customers. The Celera
Genomics group's ability to retain existing and add new customers depends upon
customers' continued belief that the Celera Genomics group's 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 the Celera Genomics group's 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 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 industry in which the Celera Genomics group operates 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. The Celera Genomics group 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
63
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 the Celera
Genomics group or its customers, or which are more effective than those
developed by the Celera Genomics group or its customers, or may obtain
regulatory approvals of their drugs more rapidly than the Celera Genomics
group's customers do, any of which could have a material adverse effect on any
of the Celera Genomics group's or its customers' similar programs. Moreover,
these competitors may obtain patent protection or other intellectual property
rights that would limit the Celera Genomics group's rights or its customers'
ability to use the Celera Genomics group's 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. The Celera Genomics group also faces competition from providers of
software. A number of companies have announced their intent to develop and
market software to assist pharmaceutical and biotechnology companies and
academic researchers in managing and analyzing their own genomic data and
publicly available data.
The Celera Genomics group's 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 the Celera
Genomics group's products and services.
64
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Celera Genomics group 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. The Celera Genomics group's 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, the Celera Genomics group 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 the Celera Genomics group's
business.
Introduction of new products may expose the Celera Genomics group to product
liability claims. New products developed by the Celera Genomics group could
expose the Celera Genomics group 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 the Celera Genomics group to spend
significant time and money in litigation and to pay significant damages.
The Celera Genomics group could incur liabilities relating to hazardous
materials that it uses in its research and development activities. The Celera
Genomics group's 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.
The Celera Genomics group's 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.
65
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Scientific and management staff has unique expertise which is key to the Celera
Genomics group's commercial viability and which would be difficult to replace.
The Celera Genomics group 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, mouse, and other genomes, 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.
The Celera Genomics group's 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 the Celera Genomics group's 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 business, in that the
Celera Genomics group would be able to prevent competitors from making, using,
or selling any of its technology for which it obtains a patent. Patent law
affecting the Celera Genomics group's 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 the Celera Genomics group or covered by the Celera
Genomics group's pending patent applications without the Celera Genomics group
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, the Celera Genomics group 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.
66
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Celera Genomics group's 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 the Celera Genomics
group's 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 intellectual property 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.
The Celera Genomics group 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 the
Celera Genomics group, are generally uncertain and involve complex legal,
scientific, and factual questions. The Celera Genomics group's 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 the Celera Genomics group's database
information services. Interference proceedings may be necessary to establish
which party was the first to discover such intellectual property. The Celera
Genomics group 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 the Celera
Genomics group of any patent litigation or similar proceeding could be
substantial, and it may absorb
67
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
significant management time. If an infringement litigation against the Celera
Genomics group is resolved unfavorably to the Celera Genomics group, the Celera
Genomics group may be enjoined from manufacturing or selling certain of its
products or services without a license from a third party. The Celera Genomics
group 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, the Celera Genomics group 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 the Celera Genomics group on commercially acceptable
terms, or at all.
The Celera Genomics group's 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, the Celera
Genomics group's 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, 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.
The Celera Genomics group's research and product development depends on access
to tissue samples and other biological materials. To continue to build its
product base, the Celera Genomics group 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. The Celera Genomics group
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 the Celera Genomics group 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.
68
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 the Celera Genomics
group's 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 the Celera Genomics group's 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.
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
69
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 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 follow-on public offering of Applera Corporation - Celera
Genomics Group Common 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.
The Celera Genomics group's ability to develop proprietary therapeutics and the
Celera Genomics/Applied Biosystems Joint Venture's ability to develop
proprietary molecular diagnostic products is unproven. The development and
commercialization of new drugs based on genomic and proteomic information is
unproven. As the Celera Genomics group expands its efforts into this new
business area, it faces the difficulties inherent in developing and
commercializing therapeutic products, and it has limited experience in operating
a commercial research and development program. In addition, the Company has
announced the formation of a major initiative in the field of molecular
diagnostics and has decided that it will be optimally positioned as a joint
venture between the Applied Biosystems group and the Celera Genomics group. The
joint venture faces the difficulties
70
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
inherent in developing and commercializing diagnostic tests and in building and
operating a commercial research and development program. Given the Celera
Genomics group's unproven ability to develop proprietary therapeutics and the
joint venture's unproven ability to develop proprietary molecular diagnostic
products, it is possible that the Celera Genomics group's and the joint
venture's discovery processes will not result in any commercial products or
services. Even if the group or the joint venture is able to develop products and
services, it is possible that these products and services may not be
commercially viable or successful due to a variety of reasons, including:
difficulty obtaining regulatory approvals, competitive conditions, the inability
to obtain necessary intellectual property protection, the need to build
distribution channels, failure to get adequate reimbursement for these products
from insurance or government payors, or the inability of the group or the joint
venture to recover its development costs in a reasonable period.
71
PART II - OTHER INFORMATION
Item 5. Other Information.
In November 2000, the Company announced the formation of a major
initiative in the field of molecular diagnostics and the appointment of Kathy
Ordonez, formerly president of Roche Molecular Systems, to lead this initiative.
The initiative continues to develop as its strategy is refined and resources are
built. The Company has evaluated the initiative's anticipated relationships with
the Company's two operating groups, the Applied Biosystems group and the Celera
Genomics group, and decided that it will be optimally positioned as a joint
venture between those two groups. Further details and developments regarding
this business, which will be named Celera Diagnostics, will be announced as the
initiative continues to evolve.
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K.
During the quarter ended March 31, 2001, the Company filed
a Current Report on Form 8-K dated March 21, 2001 and filed March
22, 2001 to incorporate under Item 5 thereof the text of the
Company's press release issued March 21, 2001 regarding an update
to the business outlook of its Applied Biosystems Group.
72
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: May 15, 2001
73