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 September 30, 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)
301 Merritt 7,
Norwalk, Connecticut 06851-0001
(Address of Principal Executive Offices, Including Zip Code)
(203) 840-2000
(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 November 7, 2001, there were 211,930,744 shares
of Applera Corporation - Applied Biosystems Group Common Stock and 62,171,827
shares of Applera Corporation - Celera Genomics Group Common Stock outstanding.
APPLERA CORPORATION
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
A. Applera Corporation Consolidated
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2000 and 2001 1
Condensed Consolidated Statements of Financial Position at
June 30, 2001 and September 30, 2001 2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2000 and 2001 3
Notes to Unaudited Condensed Consolidated Financial Statements 4-17
B. Applied Biosystems Group
Condensed Combined Statements of Operations for the
Three Months Ended September 30, 2000 and 2001 18
Condensed Combined Statements of Financial Position at
June 30, 2001 and September 30, 2001 19
Condensed Combined Statements of Cash Flows for the
Three Months Ended September 30, 2000 and 2001 20
Notes to Unaudited Condensed Combined Financial Statements 21-25
C. Celera Genomics Group
Condensed Combined Statements of Operations for the
Three Months Ended September 30, 2000 and 2001 26
Condensed Combined Statements of Financial Position at
June 30, 2001 and September 30, 2001 27
Condensed Combined Statements of Cash Flows for the
Three Months Ended September 30, 2000 and 2001 28
Notes to Unaudited Condensed Combined Financial Statements 29-33
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 34-58
Part II. Other Information 59
APPLERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands except per share amounts)
Three Months Ended
September 30,
2000 2001
--------- ---------
Net Revenues $367,414 $387,854
Cost of sales 169,268 186,524
-------- --------
Gross Margin 198,146 201,330
Selling, general and administrative 103,005 107,107
Research, development and engineering 77,940 84,502
Amortization of goodwill and intangibles 11,081 471
-------- --------
Operating Income 6,120 9,250
Gain on investments 12,004
Interest expense (1,053) (240)
Interest income 22,567 14,347
Other expense, net (2,902) (1,738)
-------- --------
Income Before Income Taxes 36,736 21,619
Provision for income taxes 12,280 4,634
-------- --------
Net Income $ 24,456 $ 16,985
======== ========
Applied Biosystems Group (see Note 5)
Net Income $ 49,144 $ 32,196
Basic per share $ 0.23 $ 0.15
Diluted per share $ 0.22 $ 0.15
Dividends Per Share $ 0.0425 $ 0.0425
Celera Genomics Group (see Note 5)
Net Loss $(25,689) $(15,562)
Basic and diluted per share $ (0.43) $ (0.25)
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 September 30,
2001 2001
---------- ----------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 608,535 $ 599,180
Short-term investments 779,482 791,859
Accounts receivable, net 400,803 374,949
Inventories, net 149,658 160,903
Prepaid expenses and other current assets 103,006 88,675
---------- ----------
Total current assets 2,041,484 2,015,566
Property, plant and equipment, net 435,560 448,112
Other long-term assets 410,814 401,475
---------- ----------
Total Assets $2,887,858 $2,865,153
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Loans payable $ 14,678 $ 11,954
Current portion of long-term debt 30,480 31,757
Accounts payable 178,264 151,831
Accrued salaries and wages 64,854 58,808
Accrued taxes on income 83,016 86,992
Other accrued expenses 215,823 221,394
---------- ----------
Total current liabilities 587,115 562,736
Other long-term liabilities 152,432 152,703
---------- ----------
Total Liabilities 739,547 715,439
Stockholders' Equity
Capital stock
Applera Corporation - Applied Biosystems Group 2,115 2,117
Applera Corporation - Celera Genomics Group 617 620
Capital in excess of par value 1,832,000 1,844,070
Retained earnings 369,444 377,435
Accumulated other comprehensive loss (55,865) (73,716)
Treasury stock (812)
---------- ----------
Total Stockholders' Equity 2,148,311 2,149,714
---------- ----------
Total Liabilities and Stockholders' Equity $2,887,858 $2,865,153
========== ==========
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)
Three months ended
September 30,
2000 2001
--------- ---------
Operating Activities from Continuing Operations
Net income $ 24,456 $ 16,985
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 28,962 24,483
Long-term compensation programs 1,950 2,102
Gain on sale of assets (12,004)
Deferred income taxes (249) (9,563)
Changes in operating assets and liabilities:
Decrease in accounts receivable 5,532 36,664
Increase in inventories (2,806) (9,889)
Increase in prepaid expenses and other assets (13,480) (7,383)
Decrease in accounts payable and other liabilities (94,169) (29,381)
--------- ---------
Net Cash Provided (Used) by Operating Activities (61,808) 24,018
--------- ---------
Investing Activities from Continuing Operations
Additions to property, plant and equipment, net (76,674) (31,451)
Sales (purchases) of short-term investments, net 622 (9,594)
Investments (3,006)
Proceeds from the sale of assets, net 12,004
--------- ---------
Net Cash Used by Investing Activities (67,054) (41,045)
--------- ---------
Net Cash From Continuing Operations
Before Financing Activities (128,862) (17,027)
--------- ---------
Net Cash Used by Operating Activities
From Discontinued Operations (1,228) (300)
--------- ---------
Financing Activities
Net change in loans payable (1,462) (3,115)
Dividends (8,860) (8,979)
Purchases of common stock for treasury (941)
Proceeds from stock issued for stock plans 25,817 6,652
--------- ---------
Net Cash Provided (Used) by Financing Activities 15,495 (6,383)
--------- ---------
Effect of Exchange Rate Changes on Cash (5,637) 14,355
--------- ---------
Net Change in Cash and Cash Equivalents (120,232) (9,355)
Cash and Cash Equivalents Beginning of Period 964,502 608,535
--------- ---------
Cash and Cash Equivalents End of Period $ 844,270 $ 599,180
========= =========
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 interim condensed consolidated financial statements should be read in
conjunction with the financial statements presented in the Applera Corporation
(the "Company") 2001 Annual Report to Stockholders. Significant accounting
policies disclosed therein have not changed, except for the accounting for
goodwill and other intangibles discussed in Note 2.
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 accounting principles generally accepted
in the United States of America 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 and related notes thereto.
NOTE 2 - CHANGE IN ACCOUNTING POLICY
Effective July 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." As a result, the Company has reclassified certain other intangible
assets associated with its workforce to goodwill and no longer amortizes
goodwill. The following table provides pro forma information for the three
months ended September 30, 2000 had the provisions of SFAS No. 142 been applied
to the fiscal 2001 financial results:
Applera Net Income $ 34.8
Applied Biosystems Group
Net Income $ 49.6
Basic per share $ 0.24
Diluted per share $ 0.22
Celera Genomics Group
Net Loss $(15.6)
Basic and diluted per share $(0.26)
4
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
NOTE 3 - PENDING ACQUISITIONS
Axys Pharmaceuticals, Inc.
In June 2001, the Company signed a definitive merger agreement to acquire Axys
Pharmaceuticals, Inc. ("Axys") in a stock-for-stock transaction. A special
meeting of Axys' stockholders is scheduled for November 16, 2001 in order for
the Axys stockholders to vote on the proposed merger. Subject to the approval
of the Axys stockholders and the satisfaction of other closing conditions,
the merger is expected to be completed on November 16, 2001, or shortly
thereafter. The net assets and results of operations of Axys are not included
in the Company's consolidated financial statements. The following selected
unaudited pro forma information for the Company has been prepared assuming
the merger had occurred at the beginning of fiscal 2001 and gives effect to
purchase accounting adjustments, except for the write-off of between
approximately $65 million and $75 million relating to in-process research and
development expected to be expensed upon consummation of the merger.
Three months ended
(Dollar amounts in millions except September 30,
per share amounts) 2000 2001
------ ------
Net revenues $370.0 $388.7
Net income $ 18.9 $ 2.0
Applied Biosystems Group
Net Income $ 49.1 $ 32.2
Basic per share $ 0.23 $ 0.15
Diluted per share $ 0.22 $ 0.15
Celera Genomics group
Net Loss $(31.2) $(30.5)
Basic and diluted per share $(0.48) $(0.45)
During the three months ended September 30, 2001, Axys recorded a noncash pretax
charge of $10.8 million for the impairment of an investment.
See Note 2 to the consolidated financial statements in the Company's 2001 Annual
Report to Stockholders for a further discussion of this pending acquisition.
Boston Probes, Inc.
During the second quarter of fiscal 2002, the Company acquired the remaining
shares of Boston Probes, Inc. not previously owned, or approximately 87% of the
outstanding shares, and certain intellectual property rights related to peptide
nucleic acids for approximately $33 million in cash. Boston Probes develops and
commercializes products employing peptide nucleic acid (PNA) probe technology
and has developed novel chemistry platforms based on its PNA technology.
5
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
NOTE 4 - COMPREHENSIVE LOSS
Accumulated other comprehensive 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 loss for the three months ended September 30, 2000 and 2001 is
presented in the following table:
Three months ended
September 30,
(Dollar amounts in millions) 2000 2001
------ ------
Net income $ 24.5 $ 17.0
Other comprehensive loss:
Foreign currency translation adjustments (12.6) 19.3
Unrealized gain (loss) on hedge contracts, net
of tax 5.1 (8.9)
Reclassification adjustments for net gains on
hedge contracts included in net income, net
of tax (.7) (3.3)
Unrealized loss on investments, net of tax (21.9) (24.9)
Reclassification adjustments for gains on
investments included in net income, net of tax (7.8)
------ ------
Other comprehensive loss (37.9) (17.8)
------ ------
Comprehensive loss $(13.4) $ (.8)
====== ======
NOTE 5 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share for each class of common stock is computed by
dividing the earnings or losses allocated to each class of common stock by the
weighted average number of outstanding shares of that class of common stock.
Diluted earnings (loss) per share is computed by dividing the earnings or losses
allocated to each class of common stock by the weighted average number of
outstanding shares of that class of common stock including the dilutive effect
of common stock equivalents.
The earnings or losses allocated to each class of common stock are 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 accounting principles generally accepted in the United States of America
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 or losses to each class of common stock at any time.
6
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 three months ended September 30:
Applied Biosystems Celera Genomics
Group Group
(Amounts in thousands ------------------- --------------------
except per share amounts) 2000 2001 2000 2001
-------- -------- -------- --------
Weighted average number of common shares
used in the calculation of basic earnings
(loss) per share 209,127 211,363 59,709 61,792
Common stock equivalents 12,046 3,850
-------- -------- -------- --------
Shares used in the calculation of diluted
earnings (loss) per share 221,173 215,213 59,709 61,792
======== ======== ======== ========
Earnings (loss) used in the calculation of
basic and diluted earnings (loss) per share $ 49,144 $ 32,196 $(25,689) $(15,562)
======== ======== ======== ========
Earnings (loss) per share
Basic $ 0.23 $ 0.15 $ (0.43) $ (0.25)
Diluted $ 0.22 $ 0.15 $ (0.43) $ (0.25)
Options to purchase 6.1 million and 20.1 million shares of Applera Corporation -
Applied Biosystems Group Common Stock were outstanding at September 30, 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
12.3 million and 17.6 million shares of Applera Corporation - Celera Genomics
Group Common Stock were outstanding at September 30, 2000 and 2001,
respectively, but were not included in the computation of diluted loss per share
because the effect was antidilutive.
7
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
NOTE 6 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories included the following components:
June 30, September 30,
(Dollar amounts in millions) 2001 2001
------ ------
Raw materials and supplies $ 58.8 $ 63.8
Work-in-process 12.9 10.4
Finished products 78.0 86.7
------ ------
Total inventories $149.7 $160.9
====== ======
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
Three months ended
September 30,
(Dollar amounts in millions) 2000 2001
------ ----
Tax benefit related to employee stock options $20.3 $3.4
Dividends declared not paid $ 8.9 $9.0
NOTE 8 - FINANCIAL INSTRUMENTS
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. The Company utilizes hedge
accounting on derivative contracts that are considered highly effective in
offsetting the changes in fair value of the forecasted sales transactions caused
by movements in foreign currency exchange rates. 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 first three months of fiscal 2002, the
Company recognized net gains of $4.7 million in net revenues from derivative
instruments designated as cash flow hedges of anticipated sales. At September
30, 2001, $1.3 million of derivative losses ($1.1
8
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
million net of deferred taxes) recorded in other comprehensive income (loss) are
expected to be reclassified to earnings during the next twelve months.
NOTE 9 - SEGMENT INFORMATION
The following table presents summarized segment financial information for the
three months ended September 30:
Applied Celera
Biosystems Genomics
(Dollar amounts in millions) Group Group Other Consolidated
---------- -------- ------- ------------
2000
Net revenues from
external customers $ 349.1 $ 18.3 $ -- $ 367.4
Intersegment revenues 14.5 -- (14.5) --
------- ------- ------- -------
Total revenues $ 363.6 $ 18.3 $ (14.5) $ 367.4
======= ======= ======= =======
Operating income (loss) $ 57.9 $ (52.6) $ 0.8 $ 6.1
======= ======= ======= =======
2001
Net revenues from
external customers $ 360.5 $ 27.3 $ 0.1 $ 387.9
Intersegment revenues 6.1 -- (6.1) --
------- ------- ------- -------
Total revenues $ 366.6 $ 27.3 $ (6.0) $ 387.9
======= ======= ======= =======
Operating income (loss) $ 43.1 $ (25.5) $ (8.3) $ 9.3
======= ======= ======= =======
The "Other" column represents the elimination of intergroup activity and the
results of the Celera Diagnostics joint venture, a joint venture between the
Applied Biosystems group and the Celera Genomics group. See Note 6 to the
consolidated financial statements included in the Company's 2001 Annual Report
to Stockholders.
NOTE 10 - 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
9
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
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.
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.
The trial date previously scheduled for August 6, 2001 was vacated in July 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 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. The claims
construction hearing previously scheduled for June 7, 2001 has been postponed.
On July 10, 2001, United States Judge Charles R. Breyer stayed all cases in the
litigation described above for the purpose of facilitating court ordered
settlement mediation. The stay is scheduled to expire on March 11, 2002.
10
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
The Company believes that the claims asserted by Amersham and Molecular Dynamics
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.
NOTE 11 - CONSOLIDATING INFORMATION
Presented below is the consolidating financial information reflecting the
businesses of the individual groups, including the allocation of expenses
between groups in accordance with the Company's allocation policies, as well as
other related party transactions, such as sales of products between groups and
interest income and expense on intercompany borrowings. Earnings attributable to
each group has been determined in accordance with accounting principles
generally accepted in the U.S.
See Note 1 to the Applied Biosystems group's and the Celera Genomics group's
combined financial statements in the Company's 2001 Annual Report to
Stockholders for a detailed description of allocation policies.
In the following tables, the "Eliminations/Other" column represents the
elimination of intergroup activity and the results of the Celera Diagnostics
joint venture, a joint venture between the Applied Biosystems group and the
Celera Genomics group.
11
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Operations For the Three Months Ended
September 30, 2001
Applied Celera
Biosystems Genomics Eliminations/
(Dollar amounts in thousands) Group Group Other Consolidated
----------- --------- ------------- ------------
Net revenues from external customers $ 360,480 $ 27,274 $ 100 $ 387,854
Intergroup revenues 6,072 (6,072)
--------- --------- --------- ---------
Net Revenues 366,552 27,274 (5,972) 387,854
Cost of sales 179,373 11,915 (4,764) 186,524
--------- --------- --------- ---------
Gross Margin 187,179 15,359 (1,208) 201,330
Selling, general and administrative 81,727 10,588 14,792 107,107
Corporate allocated expenses 10,023 2,017 (12,040)
Research, development and engineering 52,318 27,742 4,442 84,502
Amortization of goodwill and intangibles 471 471
--------- --------- --------- ---------
Operating Income (Loss) 43,111 (25,459) (8,402) 9,250
Interest expense (240) (240)
Interest income 3,497 10,850 14,347
Other expense, net (1,022) (716) (1,738)
Loss from joint venture (9,377) 9,377
--------- --------- --------- ---------
Income (Loss) Before Income Taxes 45,346 (24,702) 975 21,619
Provision (benefit) for income taxes 13,150 (9,140) 624 4,634
--------- --------- --------- ---------
Net Income (Loss) $ 32,196 $ (15,562) $ 351 $ 16,985
========= ========= ========= =========
12
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Financial Position At September 30, 2001
Applied Celera
Biosystems Genomics Eliminations/
(Dollar amounts in thousands) Group Group Other Consolidated
---------- ---------- ------------- ------------
Assets
Current assets
Cash and cash equivalents $ 422,690 $ 176,490 $ -- $ 599,180
Short-term investments 791,859 791,859
Accounts receivable, net 354,244 24,211 (3,506) 374,949
Inventories 152,112 6,414 2,377 160,903
Prepaid expenses and other current assets 81,654 5,962 1,059 88,675
---------- ---------- ---------- ----------
Total current assets 1,010,700 1,004,936 (70) 2,015,566
Property, plant and equipment, net 336,360 112,516 (764) 448,112
Other long-term assets 337,601 64,249 (375) 401,475
---------- ---------- ---------- ----------
Total Assets $1,684,661 $1,181,701 $ (1,209) $2,865,153
========== ========== ========== ==========
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 11,954 $ -- $ -- $ 11,954
Current portion of long-term debt 31,757 31,757
Accounts payable 140,898 10,751 182 151,831
Accrued salaries and wages 47,005 10,479 1,324 58,808
Accrued taxes on income 83,573 3,419 86,992
Other accrued expenses 172,447 51,816 (2,869) 221,394
---------- ---------- ---------- ----------
Total current liabilities 487,634 73,046 2,056 562,736
Other long-term liabilities 130,190 22,513 152,703
---------- ---------- ---------- ----------
Total Liabilities 617,824 95,559 2,056 715,439
---------- ---------- ---------- ----------
Stockholders' Equity
Applera Corporation - Applied Biosystems stock 2,117 2,117
Applera Corporation - Celera Genomics stock 620 620
Other stockholders' equity 1,066,837 1,086,142 (6,002) 2,146,977
---------- ---------- ---------- ----------
Total Stockholders' Equity 1,066,837 1,086,142 (3,265) 2,149,714
---------- ---------- ---------- ----------
Total Liabilities And Stockholders' Equity $1,684,661 $1,181,701 $ (1,209) $2,865,153
========== ========== ========== ==========
13
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Cash Flows For the Three Months Ended
September 30, 2001
Applied Celera
Biosystems Genomics Eliminations/
(Dollar amounts in thousands) Group Group Other Consolidated
---------- --------- ------------- ------------
Operating Activities From Continuing Operations
Net income (loss) $ 32,196 $ (15,562) $ 351 $ 16,985
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation and amortization 17,511 7,353 (381) 24,483
Long-term compensation programs 1,619 483 2,102
Deferred income taxes (9,322) 1,218 (1,459) (9,563)
Loss from joint venture 9,377 (9,377)
Nonreimbursable utilization of tax benefits generated
by the Celera Genomics group 7,934 (7,934)
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable 39,126 (192) (2,270) 36,664
Increase in inventories (9,943) (175) 229 (9,889)
Increase in prepaid expenses and other assets (4,063) (1,699) (1,621) (7,383)
Decrease in accounts payable and other liabilities (23,928) (13,879) 8,426 (29,381)
--------- --------- --------- ---------
Net Cash Provided (Used) By Operating Activities 51,130 (21,010) (6,102) 24,018
--------- --------- --------- ---------
Investing Activities From Continuing Operations
Additions to property, plant and equipment, net (26,446) (3,236) (1,769) (31,451)
Purchases of short-term investments, net (9,594) (9,594)
Acquisitions and investments, net 431 (8,302) 7,871 --
--------- --------- --------- ---------
Net Cash Used By Investing Activities (26,015) (21,132) 6,102 (41,045)
--------- --------- --------- ---------
Net Cash From Continuing Operations Before
Financing Activities 25,115 (42,142) (17,027)
--------- --------- --------- ---------
Net Cash Used by Operating Activities
From Discontinued Operations (300) (300)
--------- --------- --------- ---------
Financing Activities
Net change in loans payable (3,115) (3,115)
Dividends (8,979) (8,979)
Purchases of treasury stock (941) (941)
Proceeds from stock issued for stock plans 3,155 3,497 6,652
--------- --------- --------- ---------
Net Cash Provided (Used) By Financing Activities (8,939) 2,556 (6,383)
--------- --------- --------- ---------
Effect of Exchange Rate on Changes In Cash 14,355 14,355
--------- --------- --------- ---------
Net Change In Cash And Cash Equivalents 30,231 (39,586) (9,355)
Cash And Cash Equivalents Beginning Of Period 392,459 216,076 608,535
--------- --------- --------- ---------
Cash And Cash Equivalents End Of Period $ 422,690 $ 176,490 $ -- $ 599,180
========= ========= ========= =========
14
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Operations For the Three Months Ended
September 30, 2000
Applied Celera
Biosystems Genomics Eliminations/
(Dollar amounts in thousands) Group Group Other Consolidated
---------- --------- ------------- ------------
Net revenues from external customers $ 349,161 $ 18,253 $ -- $ 367,414
Intergroup revenues 14,411 (14,411)
--------- --------- --------- ---------
Net Revenues 363,572 18,253 (14,411) 367,414
Cost of sales 169,625 5,767 (6,124) 169,268
--------- --------- --------- ---------
Gross Margin 193,947 12,486 (8,287) 198,146
Selling, general and administrative 79,878 10,939 12,188 103,005
Corporate allocated expenses 10,097 2,091 (12,188)
Research, development and engineering 46,115 40,977 (9,152) 77,940
Amortization of goodwill and intangibles 11,081 11,081
--------- --------- --------- ---------
Operating Income (Loss) 57,857 (52,602) 865 6,120
Gain on investments 12,004 12,004
Interest expense (267) (786) (1,053)
Interest income 4,381 18,186 22,567
Other income (expense), net (2,913) 11 (2,902)
--------- --------- --------- ---------
Income (Loss) Before Income Taxes 71,062 (35,191) 865 36,736
Provision (benefit) for income taxes 21,918 (9,502) (136) 12,280
--------- --------- --------- ---------
Net Income (Loss) $ 49,144 $ (25,689) $ 1,001 $ 24,456
========= ========= ========= =========
15
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Financial Position At June 30, 2001
Applied Celera
Biosystems Genomics Eliminations/
(Dollar amounts in thousands) Group Group Other Consolidated
---------- ---------- ------------- ------------
Assets
Current assets
Cash and cash equivalents $ 392,459 $ 216,076 $ -- $ 608,535
Short-term investments 779,482 779,482
Accounts receivable, net 382,560 24,019 (5,776) 400,803
Inventories 140,813 6,239 2,606 149,658
Prepaid expenses and other current assets 98,124 4,838 44 103,006
---------- ---------- ---------- ----------
Total current assets 1,013,956 1,030,654 (3,126) 2,041,484
Property, plant and equipment, net 315,356 123,497 (3,293) 435,560
Other long-term assets 348,575 65,985 (3,746) 410,814
---------- ---------- ---------- ----------
Total Assets $1,677,887 $1,220,136 $ (10,165) $2,887,858
========== ========== ========== ==========
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 14,678 $ -- $ -- $ 14,678
Current portion of long-term debt 30,480 30,480
Accounts payable 162,104 21,024 (4,864) 178,264
Accrued salaries and wages 49,553 15,088 213 64,854
Accrued taxes on income 82,717 299 83,016
Other accrued expenses 168,552 49,468 (2,197) 215,823
---------- ---------- ---------- ----------
Total current liabilities 508,084 85,580 (6,549) 587,115
Other long-term liabilities 128,592 23,840 152,432
---------- ---------- ---------- ----------
Total Liabilities 636,676 109,420 (6,549) 739,547
---------- ---------- ---------- ----------
Stockholders' Equity
Applera Corporation - Applied Biosystems stock 2,115 2,115
Applera Corporation - Celera Genomics stock 617 617
Other stockholders' equity 1,041,211 1,110,716 (6,348) 2,145,579
---------- ---------- ---------- ----------
Total Stockholders' Equity 1,041,211 1,110,716 (3,616) 2,148,311
---------- ---------- ---------- ----------
Total Liabilities And Stockholders' Equity $1,677,887 $1,220,136 $ (10,165) $2,887,858
========== ========== ========== ==========
16
Consolidating Statement of Cash Flows For the Three Months Ended
September 30, 2000
Applied Celera
Biosystems Genomics Eliminations/
(Dollar amounts in thousands) Group Group Other Consolidated
---------- -------- ------------- ------------
Operating Activities From Continuing Operations
Net income (loss) $ 49,144 $(25,689) $ 1,001 $ 24,456
Adjustments to reconcile net income (loss) to net
cash used by operating activities
Depreciation and amortization 13,866 15,961 (865) 28,962
Long-term compensation programs 1,618 332 1,950
Deferred income taxes (249) (249)
Gain from sales of assets (12,004) (12,004)
Nonreimbursable utilization of tax benefits generated
by the Celera Genomics group 2,908 (2,908)
Changes in operating assets and liabilities
Decrease in tax benefit receivable from the
Applied Biosystems group 10,224 (10,224)
(Increase) decrease in accounts receivable (655) 3,422 2,765 5,532
(Increase) decrease in inventories (3,336) 530 (2,806)
(Increase) decrease in prepaid expenses and other assets (13,847) 503 (136) (13,480)
Decrease in accounts payable and other liabilities (92,310) (9,318) 7,459 (94,169)
-------- -------- ------- ---------
Net Cash Used By Operating Activities (54,616) (7,192) (61,808)
-------- -------- ------- ---------
Investing Activities From Continuing Operations
Additions to property, plant and equipment, net (71,707) (4,967) (76,674)
Purchases of short-term investments, net 622 622
Acquisitions and investments, net (3,006) (3,006)
Proceeds from the sale of assets, net 12,004 12,004
-------- -------- ------- ---------
Net Cash Used By Investing Activities (62,709) (4,345) (67,054)
-------- -------- ------- ---------
Net Cash From Continuing Operations Before
Financing Activities (117,325) (11,537) (128,862)
-------- -------- ------- ---------
Net Cash Used by Operating Activities
From Discontinued Operations (1,228) (1,228)
-------- -------- ------- ---------
Financing Activities
Net change in loans payable (1,462) (1,462)
Dividends (8,860) (8,860)
Proceeds from stock issued for stock plans 17,626 8,191 25,817
-------- -------- ------- ---------
Net Cash Provided By Financing Activities 7,304 8,191 15,495
-------- -------- ------- ---------
Effect of Exchange Rate on Changes In Cash (5,637) (5,637)
-------- -------- ------- ---------
Net Change In Cash And Cash Equivalents (116,886) (3,346) (120,232)
Cash And Cash Equivalents Beginning Of Period 394,608 569,894 964,502
-------- -------- ------- ---------
Cash And Cash Equivalents End Of Period $277,722 $566,548 $ -- $ 844,270
======== ======== ======= =========
17
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands)
Three Months Ended
September 30,
2000 2001
-------- --------
Net Revenues $363,572 $366,552
Cost of sales 169,625 179,373
-------- --------
Gross Margin 193,947 187,179
Selling, general and administrative 89,975 91,750
Research, development and engineering 46,115 52,318
-------- --------
Operating Income 57,857 43,111
Gain on investments 12,004
Interest expense (267) (240)
Interest income 4,381 3,497
Other expense, net (2,913) (1,022)
-------- --------
Income Before Income Taxes 71,062 45,346
Provision for income taxes 21,918 13,150
-------- --------
Net Income $ 49,144 $ 32,196
======== ========
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
18
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At June 30, At September 30,
2001 2001
----------- ----------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 392,459 $ 422,690
Accounts receivable, net 382,560 354,244
Inventories, net 140,813 152,112
Prepaid expenses and other current assets 98,124 81,654
----------- ----------
Total current assets 1,013,956 1,010,700
Property, plant and equipment, net 315,356 336,360
Other long-term assets 348,575 337,601
----------- ----------
Total Assets $ 1,677,887 $1,684,661
=========== ==========
Liabilities and Allocated Net Worth
Current liabilities
Loans payable $ 14,678 $ 11,954
Current portion of long-term debt 30,480 31,757
Accounts payable 162,104 140,898
Accrued salaries and wages 49,553 47,005
Accrued taxes on income 82,717 83,573
Other accrued expenses 168,552 172,447
----------- ----------
Total current liabilities 508,084 487,634
Other long-term liabilities 128,592 130,190
----------- ----------
Total Liabilities 636,676 617,824
Allocated Net Worth 1,041,211 1,066,837
----------- ----------
Total Liabilities and Allocated Net Worth $ 1,677,887 $1,684,661
=========== ==========
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
19
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
September 30,
2000 2001
--------- --------
Operating Activities from Continuing Operations
Net income $ 49,144 $ 32,196
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 13,866 17,511
Long-term compensation programs 1,618 1,619
Gain on sale of assets (12,004)
Nonreimbursable utilization of tax benefits generated
by the Celera Genomics group 2,908 7,934
Deferred income taxes (9,322)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (655) 39,126
Increase in inventories (3,336) (9,943)
Increase in prepaid expenses and other assets (13,847) (4,063)
Decrease in accounts payable and other liabilities (92,310) (23,928)
--------- --------
Net Cash Provided (Used) by Operating Activities (54,616) 51,130
--------- --------
Investing Activities from Continuing Operations
Additions to property, plant and equipment, net (71,707) (26,446)
Investments (3,006) 431
Proceeds from the sale of assets, net 12,004
--------- --------
Net Cash Used by Investing Activities (62,709) (26,015)
--------- --------
Net Cash from Continuing Operations
Before Financing Activities (117,325) 25,115
--------- --------
Net Cash Used by Operating Activities
From Discontinued Operations (1,228) (300)
--------- --------
Financing Activities
Net change in loans payable (1,462) (3,115)
Dividends (8,860) (8,979)
Proceeds from stock issued for stock plans 17,626 3,155
--------- --------
Net Cash Provided (Used) by Financing Activities 7,304 (8,939)
--------- --------
Effect of Exchange Rate Changes on Cash (5,637) 14,355
--------- --------
Net Change in Cash and Cash Equivalents (116,886) 30,231
Cash and Cash Equivalents Beginning of Period 394,608 392,459
--------- --------
Cash and Cash Equivalents End of Period $ 277,722 $422,690
========= ========
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
20
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED COMBINED FINANCIAL STATEMENTS
The interim condensed combined financial statements should be read in
conjunction with the financial statements presented in the Applera Corporation
(the "Company") 2001 Annual Report to Stockholders. Significant accounting
policies disclosed therein have not changed, except for the accounting for
goodwill and other intangibles. Effective July 1, 2001, the Applied Biosystems
group adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," and as a result, the
Applied Biosystems group no longer amortizes goodwill. Amortization of goodwill
in prior year periods was immaterial.
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 accounting principles generally accepted in the
United States of America 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 and related notes thereto.
NOTE 2 - ACQUISITIONS AND OTHER
Boston Probes, Inc.
During the second quarter of fiscal 2002, the Company acquired the remaining
shares of Boston Probes, Inc. not previously owned, or approximately 87% of the
outstanding shares, and certain intellectual property rights related to peptide
nucleic acids for approximately $33 million in cash. Boston Probes develops and
commercializes products employing peptide nucleic acid (PNA) probe technology
and has developed novel chemistry platforms based on its PNA technology.
Transfer of Business Unit from the Celera Genomics Group
Effective July 1, 2001, the Company transferred the assets, liabilities and
personnel of a business unit from the Celera Genomics group to the Applied
Biosystems group. The Company's Board of Directors determined that the assets of
the business to be transferred and the liabilities of the business to be assumed
by the Applied Biosystems group constituted fair value for the transfer. The net
assets were transferred at recorded book value as an increase to the Applied
Biosystems group's allocated net worth. The Applied Biosystems group plans to
utilize the resources of this business unit for initiatives that will include
validation of single nucleotide polymorphisms.
21
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 3 - COMPREHENSIVE INCOME
Accumulated other comprehensive loss included in allocated net worth on the
Condensed Combined Statements of Financial Position consists of foreign currency
translation adjustments, unrealized gains and losses on foreign currency and
interest rate hedge contracts, unrealized gains and losses on available-for-sale
investments, and minimum pension liability adjustments. Total comprehensive
income for the three months ended September 30, 2000 and 2001 is presented in
the following table:
Three months ended
September 30,
(Dollar amounts in millions) 2000 2001
----- -----
Net income $49.1 $32.2
Other comprehensive loss:
Foreign currency translation adjustments (12.6) 19.2
Unrealized gain (loss) on hedge contract, net
of tax 5.1 (8.9)
Reclassification adjustments for net gains on
hedge contracts included in net income, net
of tax (.7) (3.3)
Unrealized loss on investments, net of tax (22.2) (26.7)
Reclassification adjustments for gains on
investments included in net income, net of tax (7.8)
----- -----
Other comprehensive loss (38.2) (19.7)
----- -----
Comprehensive income $10.9 $12.5
===== =====
22
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
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:
June 30, September 30,
(Dollar amounts in millions) 2001 2001
--------- -------------
Raw materials and supplies $ 51.8 $ 57.0
Work-in-process 12.2 9.4
Finished products 76.8 85.7
------- -------
Total inventories $ 140.8 $ 152.1
======= =======
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
Three months ended
September 30,
(Dollar amounts in millions) 2000 2001
------ --------
Nonreimbursable utilization of tax benefits
generated by the Celera Genomics group $ 2.9 $ 7.9
Tax benefit related to employee stock options $ 14.6 $ 1.3
Dividends declared not paid $ 8.9 $ 9.0
Transfer of business unit from the Celera
Genomics group (Note 2) $ 8.1
NOTE 6 - FINANCIAL INSTRUMENTS
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. The
Applied Biosystems group utilizes hedge accounting on derivative contracts that
are considered highly effective in offsetting the changes in fair value of the
forecasted sales transactions caused by movements in foreign currency exchange
rates. These contracts are designated as cash flow hedges and the effective
portion of the change in the fair value of these contracts is recorded in other
comprehensive income in the Condensed Combined Statements of Financial Position
until the underlying external forecasted transaction affects earnings. At that
time, the gain or loss on the derivative instrument, which had been deferred in
other comprehensive income, is reclassified to net revenues in the Condensed
Combined Statements of Operations. During the first three months of
23
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
fiscal 2002, the Applied Biosystems group recognized net gains of $4.7 million
in net revenues from derivative instruments designated as cash flow hedges of
anticipated sales. At September 30, 2001, $1.3 million of derivative losses
($1.1 million net of deferred taxes) recorded in other comprehensive income
(loss) are expected to be reclassified to earnings during the next twelve
months.
NOTE 7 - RELATED PARTY TRANSACTIONS
Sales of Products and Services Between Groups. For the three month periods ended
September 30, 2000 and 2001, net revenues from leased instruments, shipments of
consumables and project materials, and contracted R&D services to the Celera
Genomics group totaled $14.4 million and $6.1 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.
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.
The trial date previously scheduled for August 6, 2001 was vacated in July 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
24
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
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. The claims
construction hearing previously scheduled for June 7, 2001 has been postponed.
On July 10, 2001, United States Judge Charles R. Breyer stayed all cases in the
litigation described above for the purpose of facilitating court ordered
settlement mediation. The stay is scheduled to expire on March 11, 2002.
The Company believes that the claims asserted by Amersham and Molecular Dynamics
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 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.
25
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands)
Three months ended
September 30,
2000 2001
-------- --------
Net Revenues $ 18,253 $ 27,274
-------- --------
Costs and Expenses
Cost of sales 5,767 11,915
Research and development 40,977 27,742
Selling, general and administrative 13,030 12,605
Amortization of goodwill and intangibles 11,081 471
-------- --------
Operating Loss (52,602) (25,459)
Interest expense (786)
Interest income 18,186 10,850
Other income (expense), net 11 (716)
Loss from joint venture (9,377)
-------- --------
Loss Before Income Taxes (35,191) (24,702)
Benefit for income taxes (9,502) (9,140)
-------- --------
Net Loss $(25,689) $(15,562)
======== ========
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
26
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At June 30, At September 30,
2001 2001
---------- ----------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 216,076 $ 176,490
Short-term investments 779,482 791,859
Accounts receivable, net 24,019 24,211
Inventories, net 6,239 6,414
Prepaid expenses and other current assets 4,838 5,962
---------- ----------
Total current assets 1,030,654 1,004,936
Property, plant and equipment, net 123,497 112,516
Other long-term assets 65,985 64,249
---------- ----------
Total Assets $1,220,136 $1,181,701
========== ==========
Liabilities and Allocated Net Worth
Current liabilities
Accounts payable $ 21,024 $ 10,751
Accrued salaries and wages 15,088 10,479
Deferred revenues 37,486 34,296
Other accrued expenses 11,982 17,520
---------- ----------
Total current liabilities 85,580 73,046
Other long-term liabilities 23,840 22,513
---------- ----------
Total Liabilities 109,420 95,559
Allocated Net Worth 1,110,716 1,086,142
---------- ----------
Total Liabilities and Allocated Net Worth $1,220,136 $1,181,701
========== ==========
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
27
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
Three months ended
September 30,
2000 2001
------------- ------------
Operating Activities
Net loss $ (25,689) $ (15,562)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 15,961 7,353
Long-term compensation programs 332 483
Deferred income taxes (249) 1,218
Loss from joint venture 9,377
Nonreimbursable utilization of tax benefits by the
Applied Biosystems group (2,908) (7,934)
Changes in operating assets and liabilities:
Decrease in tax benefit receivable from the Applied
Biosystems group 10,224
(Increase) decrease in accounts receivable 3,422 (192)
(Increase) decrease in inventories 530 (175)
(Increase) decrease in prepaid expenses and other assets 503 (1,699)
Decrease in accounts payable and other liabilities (9,318) (13,879)
--------- ---------
Net Cash Used by Operating Activities (7,192) (21,010)
--------- ---------
Investing Activities
Additions to property, plant and equipment, net (4,967) (3,236)
Sales (purchases) of short-term investments, net 622 (9,594)
Investments (8,302)
--------- ---------
Net Cash Used by Investing Activities (4,345) (21,132)
--------- ---------
Financing Activities
Purchases of treasury stock (941)
Proceeds from stock issued for stock plans 8,191 3,497
--------- ---------
Net Cash Provided by Financing Activities 8,191 2,556
--------- ---------
Net Change in Cash and Cash Equivalents (3,346) (39,586)
Cash and Cash Equivalents Beginning of Period 569,894 (216,076)
--------- ---------
Cash and Cash Equivalents End of Period $ 566,548 $ 176,490
========= =========
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
28
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED COMBINED FINANCIAL STATEMENTS
The interim condensed combined financial statements should be read in
conjunction with the financial statements presented in the Applera Corporation
(the "Company") 2001 Annual Report to Stockholders. Significant accounting
policies disclosed therein have not changed, except for the accounting for
goodwill and other intangibles discussed in Note 2.
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 accounting principles generally accepted in the
United States of America 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 and related notes thereto.
NOTE 2 - CHANGE IN ACCOUNTING POLICY
Effective July 1, 2001, the Celera Genomics group adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." As a result, the Celera Genomics group has
reclassified certain other intangible assets associated with its workforce to
goodwill and no longer amortizes goodwill. Had the provisions of SFAS No. 142
been applied to the fiscal 2001 financial results, the Celera Genomics group's
net loss would have been $15.6 million for the three months ended September 30,
2000 on a pro forma basis.
NOTE 3 - PENDING ACQUISITION AND OTHER
Axys Pharmaceuticals, Inc.
In June 2001, the Company signed a definitive merger agreement to acquire Axys
Pharmaceuticals, Inc. ("Axys") in a stock-for-stock transaction. A special
meeting of Axys' stockholders is scheduled for November 16, 2001 in order for
the Axys stockholders to vote on the proposed merger. Subject to the approval of
the Axys stockholders and the satisfaction of other closing conditions, the
merger is expected to be completed on November 16, 2001, or shortly thereafter.
The net assets and results of operations of Axys are not included in the Celera
Genomics group's combined financial statements, but if the merger is
consummated, such assets and results of operations will be allocated to the
Celera Genomics group. The following selected unaudited pro forma information
for the Celera Genomics group has been prepared assuming the merger had occurred
at the beginning of fiscal 2001 and gives effect to purchase accounting
29
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
adjustments, except for the write-off of between $65 million and $75 million
relating to in-process research and development expected to be expensed upon
consummation of the merger.
(Dollar amounts in millions except September 30, September 30,
per share amounts) 2000 2001
-------------------- --------------------
Net revenues $ 20.9 $ 28.1
Net loss $ (31.2) $ (30.5)
During the three months ended September 30, 2001, Axys recorded a noncash pretax
charge of $10.8 million for the impairment of an investment.
See Note 2 to the Celera Genomics group's combined financial statements in the
Company's 2001 Annual Report to Stockholders for a further discussion of this
acquisition.
Transfer of Business Unit To The Applied Biosystems Group
Effective July 1, 2001, the Company transferred the assets, liabilities and
personnel of a business unit from the Celera Genomics group to the Applied
Biosystems group. The Company's Board of Directors determined that the assets of
the business to be transferred and the liabilities of the business to be assumed
by the Applied Biosystems group constituted fair value for the transfer. The net
assets were transferred at recorded book value as a charge to the Celera
Genomics group's allocated net worth.
NOTE 4 - COMPREHENSIVE LOSS
Accumulated other comprehensive income (loss) included in allocated net worth 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 months
ended September 30, 2000 and 2001 is presented in the following table:
Three months ended
September 30,
(Dollar amounts in millions) 2000 2001
-------------- ------------
Net loss $ (25.7) $ (15.6)
Other comprehensive income:
Foreign currency translation adjustment .1
Unrealized gain on investments, net
of tax .3 1.8
-------------- ------------
Other comprehensive income .3 1.9
-------------- ------------
Comprehensive loss $ (25.4) $ (13.7)
============== ============
30
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:
June 30, September 30,
(Dollar amounts in millions) 2001 2001
------------ ------------
Raw materials and supplies $ 4.9 $ 5.0
Work-in-process .6 1.0
Finished products .7 .4
------------ ------------
Total inventories $ 6.2 $ 6.4
============ ============
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
Three months ended
September 30,
(Dollar amounts in millions) 2000 2001
------------- --------------
Nonreimbursable utilization of tax benefits by
the Applied Biosystems group $ 2.9 $ 7.9
Tax benefit related to employee stock options $ 5.7 $ 2.1
Transfer of business unit to the Applied
Biosystems group (Note 3) $ 8.1
NOTE 8 - RELATED PARTY TRANSACTIONS
Sales of Products and Services Between Groups. For the three months ended
September 30, 2000, research and development expenses included $13.2 million for
lease payments on instruments, the purchase of consumables and project
materials, and services contracted from the Applied Biosystems group. For the
three months ended September 30, 2001, research and development expenses
included $6.1 million for lease payments on instruments, the purchase of
consumables, and services contracted from the Applied Biosystems group.
31
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
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.
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.
The trial date previously scheduled for August 6, 2001 was vacated in July 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 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.
32
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
On May 30, 2000, the Company filed a patent infringement action against Amersham
in the United States District Court for the Northern District of California. The
Company asserts that one of its patents (U.S. Patent No. 5,945,526) is infringed
by reason of Amersham's sale of DNA analysis reagents and systems that
incorporate ET Terminator fluorescence detection technology. The claims
construction hearing previously scheduled for June 7, 2001 has been postponed.
On July 10, 2001, United States Judge Charles R. Breyer stayed all cases in the
litigation described above for the purpose of facilitating court ordered
settlement mediation. The stay is scheduled to expire on March 11, 2002.
The Company believes that the claims asserted by Amersham and Molecular Dynamics
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 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.
33
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion of Operations
The following discussion should be read in conjunction with the Applera
Corporation (the "Company") condensed consolidated financial statements and
related notes included in this report, the Applied Biosystems group's combined
financial statements and related notes included in this report, and the Celera
Genomics group's combined financial statements and related notes included in
this report and "Management's Discussion and Analysis" appearing on pages 13 -
25 of the Company's 2001 Annual Report to Stockholders. Historical results and
percentage relationships are not necessarily indicative of operating results for
any future periods.
Celera Diagnostics was established as a joint venture between the Applied
Biosystems group and the Celera Genomics group during the fourth quarter of
fiscal 2001. This new venture is focused on discovery, development and
commercialization of novel diagnostic tests.
Events Impacting Comparability
Gain on Investments. The first quarter of fiscal 2001 included a before-tax gain
of $12.0 million related to the sale of a minority equity investment.
Discussion of Consolidated Operations
Results of Operations--The Three Months Ended September 30, 2001 Compared With
The Three Months Ended September 30, 2000
The Company reported net income of $17.0 million for the first quarter of fiscal
2002 compared with $24.5 million for the first quarter of fiscal 2001. Net
income for the Company, on a comparable basis excluding the gain on investments
from fiscal 2001 previously described, increased 1.8% from $16.7 million for the
first quarter of fiscal 2001. The increase in net income reflected increased net
revenues and lower amortization of goodwill and other intangibles, which were
substantially offset by lower interest income and higher R&D and SG&A expenses.
On a segment basis, the Applied Biosystems group reported net income of $32.2
million for the first quarter of fiscal 2002 compared with $41.3 million for
fiscal 2001 excluding the gain on investments, and the Celera Genomics group
reported a net loss of $15.6 million for the first quarter of fiscal 2002
compared with a net loss of $25.7 million for the first quarter of fiscal 2001.
Net revenues for the Company were $387.9 million for the first quarter of fiscal
2002 compared with $367.4 million for the first quarter of fiscal 2001, an
increase of 5.6%. On a segment basis, net revenues for the Applied Biosystems
group were $366.6 million for the first quarter of fiscal 2002 compared with
$363.6 million for the first quarter of fiscal 2001. The Celera Genomics group
reported net revenues of $27.3 million for the first quarter of fiscal 2002
compared with $18.3 million for the first quarter of fiscal 2001.
34
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Gross margin as a percentage of net revenues for the Company was 51.9% for the
first quarter of fiscal 2002 compared with 53.9% for the first quarter of fiscal
2001. The lower gross margin percentage in fiscal 2002 was due primarily to
lower license fee income and product mix within the Applied Biosystems group's
product revenue.
SG&A expenses for the Company were $107.1 million for the first quarter of
fiscal 2002 compared with $103.0 million for the first quarter of fiscal 2001.
As a percentage of net revenues, SG&A expenses decreased to 27.6% for the first
quarter of fiscal 2002 compared with 28.0% for the first quarter of fiscal 2001
primarily due to lower discretionary spending and reduced spending on travel in
the latter part of the first quarter of fiscal 2002. On a segment basis, SG&A
expenses for the Applied Biosystems group were $91.8 million and $90.0 million
for the first quarter of fiscal 2002 and 2001, respectively. SG&A expenses for
the Celera Genomics group were $12.6 million and $13.0 million for the first
quarter of fiscal 2002 and 2001, respectively.
R&D expenses increased $6.6 million for the first quarter of fiscal 2002 to
$84.5 million from $77.9 million for the first quarter of fiscal 2001 primarily
due to spending on diagnostics programs associated with the Celera Diagnostics
business and spending on the Company's comprehensive genomics program for
commercializing products from information obtained through analysis of the human
genome, which is a collaboration among the Company's businesses. This increase
was partially offset by lower R&D expenses associated with whole genome
sequencing. On a segment basis, R&D expenses for the Applied Biosystems group
were $52.3 million and $46.1 million for the first quarter of fiscal 2002 and
2001, respectively. R&D expenses for the Celera Genomics group were $27.7
million and $41.0 million for the first quarter of fiscal 2002 and 2001,
respectively.
The Company recorded non-cash amortization expenses of $.5 million in the first
quarter of fiscal 2002 compared to $11.1 million in the first quarter of fiscal
2001 relating to the amortization of goodwill and other intangibles. Effective
July 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
and as a result, the Company no longer amortizes goodwill.
Operating income for the Company was $9.3 million for the first quarter of
fiscal 2002 compared with $6.1 million for the first quarter of fiscal 2001. On
a segment basis, operating income for the Applied Biosystems group decreased to
$43.1 million for the first quarter of fiscal 2002 from $57.9 million for the
first quarter of fiscal 2001. This decrease in operating income was caused
primarily by lower gross margin as a percentage of net revenues, resulting from
lower license fee income and product mix, and higher R&D expense primarily due
to diagnostics programs and the Company's comprehensive genomics program.
Operating income as a percentage of net revenues for the Applied Biosystems
group was 11.8% in the first quarter of fiscal 2002 compared with 15.9% in the
first quarter of fiscal 2001.
The operating loss for the Celera Genomics group was $25.5 million for the first
quarter of fiscal 2002 compared with $52.6 million for first quarter of fiscal
2001. The decrease in the Celera
35
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Genomics group's operating loss reflected lower R&D expenses, lower amortization
of goodwill and other intangibles, and higher net revenues.
Interest expense was $.2 million for the first quarter of fiscal 2002 compared
with $1.1 million for first quarter of fiscal 2001. The higher interest expense
for fiscal 2001 reflected the financing of the purchase of the Celera Genomics
group's Rockville, Maryland facilities. This financing was repaid in the second
quarter of fiscal 2001. Interest income was $14.3 million for first quarter of
fiscal 2002 compared with $22.6 million for first quarter of fiscal 2001. This
decrease was primarily attributable to lower average interest rates in the first
quarter of fiscal 2002 as compared to the first quarter of fiscal 2001.
Other expense, net was $1.7 million for the first quarter of fiscal 2002
compared with $2.9 million for the first quarter of fiscal 2001. The amount in
both years was primarily related to costs associated with the Company's foreign
currency management program.
The Company's effective income tax rate was 21% for the first quarter of fiscal
2002 compared with 33% for the first quarter of fiscal 2001. The higher
effective income tax rate during fiscal 2001 was primarily due to amortization
of nondeductible goodwill, which is no longer being amortized, in fiscal 2002
due to the adoption of SFAS No. 142 as previously discussed.
Discussion of Segment Operations
Applied Biosystems Group
Results of Operations--The Three Months Ended September 30, 2001 Compared With
The Three Months Ended September 30, 2000
The Applied Biosystems group reported net income of $32.2 million for the first
quarter of fiscal 2002 compared with $49.1 million for the first quarter of
fiscal 2001. On a comparable basis excluding the special item from fiscal 2001,
net income decreased 22.1% during the first quarter of fiscal 2002 compared with
$41.3 million for the first quarter of fiscal 2001. This decrease was primarily
attributable to lower gross margins as a percentage of net revenues and higher
R&D expenses. The negative effects of foreign currency reduced net income by
approximately $2 million, or 5%, as compared with the first quarter of fiscal
2001 excluding the special item.
Net revenues were $366.6 million for the first quarter of fiscal 2002 compared
with $363.6 million for the first quarter of fiscal 2001, an increase of .8%.
Net revenues from the Celera Genomics group, primarily from leased instruments
and consumables shipments, were $6.1 million for the first quarter of fiscal
2002, or 1.7% of the Applied Biosystems group's net revenues, and $14.4 million
for the first quarter of fiscal 2001, or 4.0%.
Geographically, net revenues decreased .7% in the United States and 2.5% in
Europe, and increased 10.5% in Asia Pacific and 1.4% in Latin America and other
markets, compared with the prior fiscal
36
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
year. Excluding the effects of foreign currency, revenues grew approximately 15%
in Asia Pacific and decreased approximately 1% in Europe.
For the first quarter of fiscal year 2002, revenues from instrument sales were
$162.3 million, a decrease of 12.3% from $185.0 million in the prior year. The
decrease in instrument sales was caused primarily by weakened economic and
equity market conditions, as well as the comparison with a strong quarter in
fiscal 2001 resulting from numerous placements of the ABI PRISM(R) 3700 DNA
Analyzer. These factors, which contributed to the decrease in instrument sales,
were partially offset by increased sales of the ABI PRISM(R) 3100 Genetic
Analyzer, which increased approximately 75%. Additionally, revenues from the API
3000 and API 4000 high-performance triple-quadrupole mass spectrometer systems
increased approximately 56% in the first quarter of fiscal 2002 compared to
revenues from the API 3000 system in the first quarter of fiscal 2001. Shipments
of the API 4000 began in the fourth quarter of fiscal 2001. Consumables sales
grew to $149.2 million in the first quarter of fiscal 2002 from $124.5 million
in the first quarter of fiscal 2001, a 19.8% increase, reflecting continued
demand for sequencing and sequence detection reagents. Revenues from other
sources, which included service contracts, royalties, licenses, and contract
research, increased 1.8% to $55.1 million in the first quarter of fiscal 2002
from $54.1 million in the first quarter of fiscal 2001.
Gross margin as a percentage of net revenues declined to 51.1% for the first
quarter of fiscal 2002 from 53.3% for the first quarter of fiscal 2001 due
primarily to lower license fee income in the first quarter of fiscal 2002 as
compared to the prior year and product mix, specifically the decrease in
shipments of the ABI PRISM(R) 3700 DNA Analyzer discussed previously.
SG&A expenses were $91.8 million for the first quarter of fiscal 2002 compared
with $90.0 million for the first quarter of fiscal 2001, an increase of 2.0%.
This increase was restrained due to lower discretionary spending in response to
the lower sales growth rates and reduced spending on travel in the latter part
of the first quarter of fiscal 2002.
R&D expenses were $52.3 million for first quarter of fiscal 2002 compared with
$46.1 million for the first quarter of fiscal 2001, an increase of 13.5%. As a
percentage of net revenues, R&D expenses were 14.3% for the first quarter of
fiscal 2002 compared with 12.7% for the first quarter of fiscal 2001. The
increase in R&D expenses was primarily a result of the Applied Biosystems
group's participation in the collaborative genomics program among the Company's
businesses and continued development of other new products and technologies such
as novel, high-throughput instruments for gene and protein studies and related
consumable products.
The first quarter of fiscal 2001 included a before-tax gain of $12.0 million
related to the sale of a minority equity investment.
Interest income was $3.5 million for the first quarter of fiscal 2002 compared
with $4.4 million for the first quarter of fiscal 2001. The decrease was
primarily due to lower average interest rates
37
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
partially offset by larger average cash balances for the first quarter of fiscal
2002 compared with the first quarter of fiscal 2001.
Other expense, net was $1.0 million for the first quarter of fiscal 2002
compared with $2.9 million for the first quarter of fiscal 2001. The amounts for
both periods were primarily related to the Company's foreign currency management
program.
The effective income tax rate was 29% for the first quarter of fiscal 2002
compared with 31% for the first quarter of fiscal 2001. Excluding the sale of
the minority equity investment during the first quarter of fiscal 2001, the
effective income tax rate was 30% in the first quarter of fiscal 2001. The
decrease in the effective income tax rate was due to the implementation of
certain tax planning strategies allowing for the utilization of foreign tax
credits. See Note 1 to the Applied Biosystems group's combined financial
statements in the Company's 2001 Annual Report to Stockholders for a discussion
of allocations of federal and state income taxes.
Celera Genomics Group
Results of Operations--The Three Months Ended September 30, 2001 Compared With
The Three Months Ended September 30, 2000
The Celera Genomics group reported a net loss of $15.6 million for the first
quarter of fiscal 2002 compared with a net loss of $25.7 million for the first
quarter of fiscal 2001. The decrease in the net loss primarily resulted from
lower R&D activities, decreased amortization of goodwill and other intangibles,
and higher net revenues. These decreases to the net loss were partially offset
by lower interest income and the loss recognized from the Celera Genomics
group's interest in the Celera Diagnostics joint venture with the Applied
Biosystems group.
Net revenues for the Celera Genomics group were $27.3 million for the first
quarter of fiscal 2002 compared with $18.3 million for the first quarter of
fiscal 2001. The increased revenues resulted primarily from increased database
subscription agreements with commercial and academic customers, as well as
revenues from genomic services and collaborations.
Cost of sales increased $6.1 million to $11.9 million for the first quarter of
fiscal 2002 from $5.8 million in the first quarter of fiscal 2001. This increase
was primarily due to the increased use of sequencing capacity for revenue
generating activities.
R&D expenses decreased $13.3 million to $27.7 million for the first quarter of
fiscal 2002 from $41.0 million in the first quarter of fiscal 2001. R&D expenses
associated with therapeutic discovery programs, such as proteomics and discovery
informatics, increased in comparison to the same quarter last year. R&D spending
also increased for the Celera Genomics group's participation in the
collaborative genomics program among the Company's businesses. These increases
were more than offset by lower R&D expenses for whole genome sequencing and an
increased use of sequencing capacity for commercial activity in the first
quarter of fiscal 2002 as compared to the prior year.
38
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
R&D expense also decreased due to reduced personnel as a result of the transfer
of the personnel and the assets and liabilities of a business unit to the
Applied Biosystems group effective July 1, 2001. See Note 3 to the Celera
Genomics group's condensed combined financial statements for a further
discussion of this transfer.
SG&A expenses remained relatively consistent year over year, with $12.6 million
for the first quarter of fiscal 2002 compared with $13.0 million for the first
quarter of fiscal 2001.
The Celera Genomics group recorded non-cash amortization expenses of $.5 million
in the first quarter of fiscal 2002 compared with $11.1 million in the first
quarter of fiscal 2001 relating to the amortization of goodwill and other
intangibles. Effective July 1, 2001, the Celera Genomics group adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," and as a
result, the Celera Genomics group no longer amortizes goodwill.
Interest expense was $.8 million in the first quarter of fiscal 2001 reflecting
the financing of the purchase of the Celera Genomics group's Rockville, Maryland
facilities. This financing was repaid in the second quarter of fiscal 2001;
therefore, there was no interest expense in the first quarter of fiscal 2002.
Interest income was $10.9 million for the first quarter of fiscal 2002 compared
with $18.2 million for the first quarter of fiscal 2001. The decrease was
primarily attributable to lower average interest rates during the first quarter
of fiscal 2002.
Other expense, net of $.7 million in the first quarter of fiscal 2002 consisted
primarily of a loss from an equity method investment and other nonoperating
costs.
The effective income tax benefit rate was 37% for the first quarter of fiscal
2002 and 27% for the first quarter of fiscal 2001. The income tax benefit rate
was lower in fiscal 2001 primarily because of the amortization of nondeductible
goodwill during fiscal 2001. As discussed previously, the Celera Genomics group
no longer amortizes goodwill due to the adoption of SFAS No. 142.
Management's Discussion of Condensed Consolidated Financial Resources and
Liquidity
The following discussion of financial resources and liquidity focuses on the
Company's Condensed Consolidated Statements of Financial Position and Condensed
Consolidated Statements of Cash Flows, the Applied Biosystems group's Condensed
Combined Statements of Financial Position and Condensed Combined Statements of
Cash Flows, and the Celera Genomics group's Condensed Combined Statements of
Financial Position and Condensed Combined Statements of Cash Flows.
39
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Significant Changes in the Condensed Consolidated Statements of Financial
Position
Cash and cash equivalents and short-term investments were $1.4 billion at
September 30, 2001 and June 30, 2001, with total debt of $43.7 million at
September 30, 2001 and $45.2 million at June 30, 2001. Working capital was $1.5
billion at September 30, 2001 and June 30, 2001. Debt to total capitalization
was 2% at September 30, 2001 and June 30, 2001.
Accounts receivable decreased by $25.9 million to $374.9 million at September
30, 2001 from $400.8 million at June 30, 2001, reflecting the lower net revenues
in the first quarter of fiscal 2002 as compared to the fourth quarter of fiscal
2001 as well as the effect of currency translation.
Prepaid expenses and other current assets decreased $14.3 million to $88.7
million at September 30, 2001 from $103.0 million at June 30, 2001, primarily
due to a decrease in the fair value of financial instruments used for hedging.
Other long-term assets decreased to $401.5 million at September 30, 2001 from
$410.8 million at June 30, 2001. The fair value of the company's minority equity
investments decreased $41.1 million primarily caused by the decline in market
prices of the securities. These decreases were partially offset by an increase
of $26.3 million in noncurrent deferred tax assets and spending of approximately
$10 million for purchased licensed technology and supply agreements.
Accrued salaries and wages decreased $6.1 million to $58.8 million at September
30, 2001 from $64.9 million at June 30, 2001. Accrued salaries and wages were
higher at June 30, 2001 primarily due to accruals for fiscal year incentive
compensation programs that were paid during the first quarter of fiscal 2002.
Discussion of the Condensed Consolidated Statements of Cash Flows
Operating activities generated $24.0 million of cash for the first three months
of fiscal 2002 compared with a use of $61.8 million for the first three months
of fiscal 2001. For the first three months of fiscal 2002 compared with the
first three months of fiscal 2001, lower payments of compensation-related
accruals, higher collections of accounts receivable balances, and lower
tax-related payments were only partially offset by lower income-related cash
flows and higher increases in inventory balances.
For the first three months of fiscal 2002, net cash used by investing activities
was $41.0 million, compared with $67.1 million for the first three months of
fiscal 2001. Capital expenditures were $31.5 million for the first three months
of fiscal 2002 compared with $76.7 million in the prior year. Capital
expenditures were higher during fiscal 2001 primarily due to the Applied
Biosystems group's purchase of additional property. During the first three
months of fiscal 2002, the Company had net purchases of short-term investments
of $9.6 million compared with net proceeds from maturities and sales of
short-term investments of $.6 million during the prior year. During the first
three months of fiscal 2001, the Company realized $12.0 million in net cash
proceeds from the sale of minority equity investments. Investments made by the
Company during the first three months of fiscal 2001 included Genomica
Corporation and Hubit Genomix.
40
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Net cash used by financing activities was $6.4 million for the first three
months of fiscal 2002 compared with net cash provided by financing activities of
$15.5 million for the first three months of fiscal 2001. During the first three
months of fiscal 2002, the Company received $6.7 million of proceeds from stock
issued for stock plans compared with $25.8 million during the first three months
of fiscal 2001. Dividends paid were $9.0 million for the first three months of
fiscal 2002 compared with $8.9 million for the first three months of fiscal
2001. The Company made net payments of $3.1 million on loans payable during the
first three months of fiscal 2002 compared with $1.5 million during the first
three months of fiscal 2001. During the first three months of fiscal 2002, the
Company purchased $.9 million of Applera Corporation - Celera Genomics Group
Common Stock for treasury.
Discussion of Segment Financial Resources and Liquidity
Applied Biosystems Group
Significant Changes in the Applied Biosystems Group's Condensed Combined
Statements of Financial Position
Cash and cash equivalents were $422.7 million at September 30, 2001 and $392.5
at June 30, 2001, with total debt of $43.7 million at September 30, 2001 and
$45.2 million at June 30, 2001. Working capital was $523.1 million at September
30, 2001 and $505.9 million at June 30, 2001. Debt to total capitalization was
4% at September 30, 2001 and June 30, 2001.
Accounts receivable decreased by $28.4 million to $354.2 million at September
30, 2001 from $382.6 million at June 30, 2001, reflecting the lower net revenues
in the first quarter of fiscal 2002 as compared to the fourth quarter of fiscal
2001 as well as the effect of currency translation.
Prepaid expenses and other current assets decreased $16.4 million to $81.7
million at September 30, 2001 from $98.1 million at June 30, 2001, primarily due
to a decrease in the fair value of financial instruments used for hedging.
Other long-term assets decreased to $337.6 million at September 30, 2001 from
$348.6 million at June 30, 2001. The fair value of the company's minority equity
investments decreased $41.1 million primarily caused by the decline in market
prices of the securities of Millennium Pharmaceuticals, Inc. and Aclara
Biosciences, Inc. These decreases were partially offset by an increase of $23.4
million in noncurrent deferred tax assets and spending of approximately $10
million for purchased licensed technology and supply agreements.
Accounts payable decreased to $140.9 million at September 30, 2001 from $162.1
million at June 30, 2001 primarily due to the timing of vendor payments.
41
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Discussion of the Applied Biosystems Group's Condensed Combined Statements of
Cash Flows
Operating activities generated $51.1 million of cash for the first three months
of fiscal 2002 compared with a use of $54.6 million for the first three months
of fiscal 2001. For the first three months of fiscal 2002 compared with the
first three months of fiscal 2001, lower payments of compensation-related
accruals, higher collections of accounts receivable balances, and lower
tax-related payments were only partially offset by lower income-related cash
flows and higher increases in inventory balances.
For the first three months of fiscal 2002, net cash used by investing activities
was $26.0 million, compared with $62.7 million for the first three months of
fiscal 2001. Capital expenditures were $26.4 million, net of disposals, for the
first three months of fiscal 2002 compared with $71.7 million in the prior year.
Capital expenditures were higher during fiscal 2001 primarily due to the Applied
Biosystems group's purchase of property in Pleasanton, California for
approximately $54 million. During the first three months of fiscal 2001, the
Applied Biosystems group realized $12.0 million in net cash proceeds from the
sale of minority equity investments and invested $3 million in Genomica
Corporation.
Net cash used by financing activities was $8.9 million for the first three
months of fiscal 2002 compared with net cash provided by financing activities of
$7.3 million for the first three months of fiscal 2001. During the first three
months of fiscal 2002, the Applied Biosystems group received $3.2 million of
proceeds from stock issued for stock plans compared with $17.6 million during
the first three months of fiscal 2001. Dividends paid on Applera Corporation
-Applied Biosystems Group common stock were $9.0 million for the first three
months of fiscal 2002 compared with $8.9 million for the first three months of
fiscal 2001. The Applied Biosystems group made net payments of $3.1 million on
loans payable during the first three months of fiscal 2002 compared with $1.5
million during the first three months of fiscal 2001.
Celera Genomics Group
Significant Changes in the Celera Genomics Group's Condensed Combined Statements
of Financial Position
Cash and cash equivalents and short-term investments were $968.3 million at
September 30, 2001 compared with $995.6 million at June 30, 2001. Working
capital was $931.9 million at September 30, 2001 and $945.1 million at June 30,
2001.
Accounts payable decreased to $10.8 million at September 30, 2001 from $21.0
million at June 30, 2001 primarily due to the timing of vendor payments.
Accrued salaries and wages decreased $4.6 million to $10.5 million at September
30, 2001 from $15.1 million at June 30, 2001. Accrued salaries and wages were
higher at June 30, 2001 primarily due to accruals for fiscal year incentive
compensation programs that were paid during the first quarter of fiscal 2002.
42
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Discussion of the Celera Genomics Group's Condensed Combined Statements of Cash
Flows
Operating activities used $21.0 million of cash for the first three months of
fiscal 2002 compared with $7.2 million for the first three months of fiscal
2001. For the first three months of fiscal 2002 compared with the first three
months of fiscal 2001, lower reimbursements for the utilization of tax benefits
by the Applied Biosystems group and higher payments to suppliers were only
partially offset by lower net cash operating losses. During the first quarter of
fiscal 2001, the Applied Biosystems group had begun utilizing tax benefits in
excess of the maximum reimbursable amount. See Note 1 to the Celera Genomics
group's combined financial statements in the Company's 2001 Annual Report to
Stockholders for a discussion of allocations of federal and state income taxes.
For the first three months of fiscal 2002, net cash used by investing activities
was $21.1 million, compared with $4.3 million for the first three months of
fiscal 2001. During the first three months of fiscal 2002, the Celera Genomics
group had net purchases of short-term investments of $9.6 million compared with
net proceeds from maturities and sales of short-term investments of $.6 million
during the prior year. During the first three months of fiscal 2002, the Celera
Genomics group made investments of $8.3 million, which were primarily related to
the Celera Diagnostics joint venture.
Net cash generated by financing activities was $2.6 million for the first three
months of fiscal 2002 compared with net cash provided by financing activities of
$8.2 million for the first three months of fiscal 2001. During the first three
months of fiscal 2002, the Celera Genomics group received $3.5 million of
proceeds from stock issued for stock plans compared with $8.2 million during the
first three months of fiscal 2001. During the first three months of fiscal 2002,
the Company purchased $.9 million of Applera Corporation - Celera Genomics Group
Common Stock for treasury.
Recently Issued Accounting Standards
In October 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 provides new guidance on the recognition of impairment losses on
long-lived assets to be held and used or to be disposed of and also broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS 144 is effective
for the Company's fiscal year 2003 and is not expected to materially change the
methods used by the Company to measure impairment losses on long-lived assets,
but may result in more dispositions being reported as discontinued operations
than is permitted under current accounting principles.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), which will be effective for the Company beginning
fiscal year 2003. SFAS 143 addresses the financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company has not yet determined the impact
of adopting SFAS 143 on the Company's financial statements.
43
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Outlook
Applied Biosystems Group
Current economic and political uncertainties add risk to the business outlook.
The Applied Biosystems group's expectations for performance for the full fiscal
year 2002 remain unchanged from the outlook given for the Applied Biosystems
group in the Company's 2001 Annual Report to Stockholders. However, the Applied
Biosystems group believes it may encounter softness in the next two quarters
relative to the outlook given in the Company's 2001 Annual Report to
Stockholders.
Year-to-year sales growth rates for the second and third quarters of fiscal 2002
currently are expected to be in the low to mid single digits, rising to double
digits in the fourth fiscal quarter ended June 30, 2002 and accelerating in the
second half of calendar 2002 toward the Applied Biosystems group's annual target
of 20 percent top-line growth. For fiscal 2002 overall, the Applied Biosystems
group continues to anticipate sales growth of approximately 7% to 9% assuming
current currency rates remain unchanged.
The Applied Biosystems group continues to expect diluted earnings per share for
fiscal 2002 to be in the range of $0.95 to $1.00. Given recent events, the
Applied Biosystems group believes it is likely that diluted earnings per share
will be toward the lower end of this range. Diluted earnings per share may be
flat versus prior year in the second and third quarters and attain substantially
higher growth in the fourth quarter as better year-to-year comparisons and a
ramp up in sales of newer products should accelerate sales and profit
performance. The Applied Biosystems group expects gross margin to be in the
range of 50% to 52% for the balance of fiscal 2002. Research and development
expenditures are anticipated to increase, in percentage terms, in the mid teens
in fiscal 2002 over prior year levels and anticipated to approximate 12 percent
of sales in fiscal 2002. Selling, general and administrative expenses are
expected to rise somewhat more slowly than revenue during the full fiscal year
2002. Capital spending in fiscal 2002 is anticipated to be approximately $110
million.
Celera Genomics Group
In June 2001, the Company signed a definitive merger agreement to acquire Axys
Pharmaceuticals, Inc. ("Axys") in a stock-for-stock transaction. Axys is an
integrated small molecule drug discovery and development company that is
developing products for chronic therapeutic applications through collaborations
with pharmaceutical companies and has a proprietary product portfolio in
oncology. If the merger is consummated, the Company expects to issue
approximately 5.5 million shares of Applera - Celera stock in exchange for all
of the outstanding shares of Axys common stock. If the merger is consummated,
the Celera Genomics group expects to record a noncash charge of between $65
million and $75 million for the write-off of in-process research and development
upon consummation of the merger. The following discussion in this outlook
includes the anticipated impact of this proposed merger, which is expected to
close in mid-November 2001.
44
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Celera Genomics group continues to expect a 40% to 50% increase in revenues
in fiscal 2002 as compared to fiscal 2001. In an effort to manage sequencing
capacity and priorities between internal programs such as the Celera Genomics
group's participation in the collaborative genomics program among the Company's
businesses and its service and contract commitments, the Celera Genomics group
plans to allocate a larger portion of its sequencing capacity toward revenue
generating customer commitments in the second quarter in comparison to other
quarters of the year. This is expected to shift the timing of approximately $4
million to $6 million of revenue to the second quarter from the third quarter,
and to a lesser extent, from the first quarter.
The Celera Genomics group expects fiscal 2002 R&D expenses to approximate $165
million to $180 million and expects only a modest increase for fiscal 2002 SG&A
expenses in comparison to fiscal 2001 SG&A expenses of $58.3 million. The
Company expects fiscal 2002 pre-tax losses related to the Celera Diagnostics
joint venture to be approximately $55 million to $65 million.
Based on the expectations outlined above, the most likely range for Celera's
fiscal 2002 net cash use is expected to be between $155 million and $170
million. This outlook reflects the expected impact of lower interest rates on
interest income, and approximately $11 million in anticipated one time costs
related to the Axys transaction.
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 the
Company's 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, the Company notes that a variety of
factors could cause 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 the Company's businesses include, but
are not limited to:
Factors Relating to the Applied Biosystems Group
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
45
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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
that 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 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 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 is currently 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 valid patents 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 these parties could bring a theft of trade secret claim against the Applied
Biosystems group asserting that the Applied Biosystems group's products
improperly use 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 the patent litigation
described in the next paragraph, 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
46
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 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.
The Company is currently subject to patent litigation with Amersham Pharmacia
Biotech, Inc. and Molecular Dynamics, Inc. In the litigation, Amersham and
Molecular Dynamics allege that the Applied Biosystems group has infringed four
Amersham patents as a result of the Applied Biosystems group's sale of DNA
sequencing instrumentations and reagents. Also in the litigation, the Company
has brought suit against Amersham and Molecular Dynamics alleging that they have
infringed two of the Company's patents as a result of their sale of their DNA
sequencing instrumentations and reagents. At present, these lawsuits are not
scheduled for trial. The sale of DNA sequencing instrumentation and reagents is
an important part of the Applied Biosystems group's business. If these lawsuits
proceed to trial, the cost of the litigation, and the amount of management time
that will be devoted to the litigation, will be significant. There can be no
assurance that this litigation will be resolved favorably to the Company or
either the Celera Genomics group or the Applied Biosystems group, that the
Company and both of its groups will not be enjoined from selling the products in
question or other products as a result, or that any monetary or other damages
assessed against the Company will not have a material adverse effect on the
financial condition of the Company, the Celera Genomics group, or the Applied
Biosystems group.
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
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, 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
47
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 group/Applied Biosystems group Joint Venture's ability to
develop proprietary diagnostic products is unproven. The Company has announced
the formation of Celera Diagnostics, a joint venture between the Applied
Biosystems group and the Celera Genomics group in the field of diagnostics.
Celera Diagnostics faces the difficulties inherent in developing and
commercializing diagnostic tests and in building and operating a commercial
research and development program. Celera Diagnostics' ability to develop
proprietary diagnostic products is unproven, and it is possible that Celera
Diagnostics' discovery process will not result in any commercial products or
services. Even if Celera Diagnostics 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 Celera Diagnostics to recover its
development costs in a reasonable period.
Factors Relating to the Celera Genomics Group
The Celera Genomics group has incurred net losses to date and may not achieve
profitability. The Celera Genomics group has accumulated net losses of $380.6
million as of September 30, 2001, and expects that it will continue to incur
additional net losses for the foreseeable future. These losses are expected to
increase as the Celera Genomics group increases its investments in new
technology and product development, including investments for the development of
its therapeutics discovery and development business and investments in Celera
Diagnostics, its joint venture with the Applied Biosystems group, for the
development of Celera Diagnostics' diagnostics business. The Celera Genomics
group will record all initial operating losses of Celera Diagnostics up to a
maximum of $300 million, after which any additional operating losses would be
shared equally by the Celera Genomics group and the Applied Biosystems group. 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 depends heavily on continued assembly
and annotation of the human and mouse genomes. In June 2000, the Celera Genomics
group and the Human
48
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Genome Project each announced the "first assembly" of the human genome, and in
April 2001, the Celera Genomics group announced the assembly of the mouse
genome. Assembly is the process by which individual fragments of DNA, the
molecule that forms the basis of the genetic material in virtually all living
organisms, are pieced together into their appropriate order and place on each
chromosome within the genome. The Celera Genomics group's first assembly of the
human genome covered approximately 95% of that genome, and its assembly of the
mouse genome covered approximately 99% of that genome. The Celera Genomics group
intends to continue updating its assembly of the human and mouse genomes as it
continues to annotate these genomes. Annotation is the process of assigning
features or characteristics to each chromosome. Each gene on each chromosome is
given a name, its structural features are described, and proteins encoded by
genes are classified into possible or known function.
The Celera Genomics group's ability to retain its existing customers and attract
new customers for its genome database business is heavily dependent upon the
continued assembly and annotation of these genomes. This information is also
essential to the therapeutics discovery and development 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.
The Celera Genomics group's revenue growth depends on retaining existing
customers and adding new customers. The revenues that the Celera Genomics group
expects to receive from its existing customers 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 customers 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 multiple 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. These 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 information
derived from the study of the genetic material of organisms, or genomics, 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 or diagnostic products based on the Celera
Genomics group's technologies. If the Celera Genomics group or its customers are
unsuccessful in developing and
49
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
commercializing products based on the group's databases or other products or
services, customers and the Celera Genomics group may be unable to generate
sufficient revenues and the Celera Genomics group's business may suffer as a
result. Development of these products will be subject to risks of failure,
including that these products will be found to be toxic, be 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 interpret 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 and protein analysis, and some
of them are developing databases containing gene, protein, and related
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. In addition, some pharmaceutical and
biotechnology companies may choose to develop or acquire competing technologies
to meet their needs rather than purchase products or services from the Celera
Genomics group. The Celera Genomics group has licensed some of its key
technology on a non-exclusive basis from third parties and therefore this
technology may be available for license by competitors of the Celera Genomics
group or pharmaceutical or biotechnology companies seeking to develop their own
databases for their own use. Also, a customer of the Celera Genomics group may
use the products or services of the Celera Genomics group to develop products or
services that compete with products or services separately developed by the
Celera Genomics group or its customers.
Competitors may also discover and characterize genes or proteins involved in
disease processes, potential candidates for new therapeutics, drug discovery and
development 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 or its customers do, any of
which could have a material adverse effect on any of the similar programs of the
Celera Genomics group or its customers. 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 group or its other customers.
The Celera Genomics group also faces competition from software providers. 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.
50
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 for its information products and services paid by
pharmaceutical companies and biotechnology companies engaged in drug discovery
and development. These fees accounted for approximately 70% of the Celera
Genomics group's revenue in fiscal year 2001. The Celera Genomics group expects
that these 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 may reduce the number of the group's existing and 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.
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 Applied Biosystems group leases instruments, sells
consumables and project materials and provides research and development services
to the Celera Genomics group. The Celera Genomics group paid the Applied
Biosystems group $17.3 million in fiscal year 1999, $54.4 million in fiscal year
2000 and $60.1 million in fiscal year 2001 for these products and services. The
Celera Genomics group's continued development of its database business and
successful extension of its business into therapeutics discovery and development
will depend on the Applied Biosystems group's ability to continue to provide
leading edge, proprietary technology and products, including advanced
technologies for gene and protein analysis. 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 that 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.
51
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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, chemicals and 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 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
those companies. In addition, each agreement involves the negotiation of unique
terms. The Celera Genomics group's ability to obtain new customers for genomic
information products, collaborative services, and licenses to intellectual
property depends on its customers' belief that the Celera Genomics group can
help accelerate their drug discovery efforts. 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 and biotechnology companies have affected and
may in the future affect the timing and progress of the Celera Genomics group's
sales efforts.
Scientific and management staff 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 and
Chief Scientific Officer. Additional members of the Celera Genomics group's
medical, scientific and information technology staff are important to the
implementation of its business plan. 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 and licenses to the important intellectual property
patented by others, 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 on-line information system, the Celera Genomics
group expects that obtaining patent protection may become increasingly important
to its business as it moves beyond the on-line database business. 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. However, patent law
affecting the Celera Genomics group's business, particularly gene sequences,
gene function and genetic variations, or polymorphisms, is uncertain. 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. The United States
Patent and Trademark Office has recently adopted new guidelines for use in the
review of the utility of inventions, particularly biotechnology inventions.
These guidelines increased the amount of evidence required to illustrate utility
in order to obtain a patent in the biotechnology field, making patent protection
more difficult
52
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
to obtain. Although others have been successful in obtaining patents to
biotechnology inventions, since the adoption of these guidelines these patents
have been issued with increasingly less frequency. As a result, patents may not
issue from patent applications that the Celera Genomics group may own or license
if the applicant is unable to satisfy the new guidelines. 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 those
applications.
The United States Patent and Trademark Office has issued several patents to
third parties covering inventions involving single nucleotide polymorphisms
(SNPs), naturally occurring genetic variations that scientists believe can be
correlated with susceptibility to disease, disease prognosis, drug efficiency,
and drug toxicity. These inventions are subject to the same new guidelines as
other biotechnology inventions. In addition, the Celera Genomics group may need
to obtain rights to patented SNPs in order to develop, use and sell analyses of
the overall human genome or particular full-length genes. These licenses may not
be available to the Celera Genomics group on commercially acceptable terms, or
at all.
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 those 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 that 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.
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 its
information and procedures as trade secrets. The Celera Genomics group protects
its trade secrets through recognized practices, including access control,
confidentiality and nonuse agreements with employees, consultants,
collaborators, and customers, and other security measures. These confidentiality
and nonuse agreements may be breached, however, and the Celera Genomics group
may not have adequate remedies for a breach. In addition, the Celera Genomics
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 its 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.
These disclosures might limit the scope of the Celera Genomics group's claims or
make subsequent discoveries related to full-length genes and proteins
unpatentable. While the Celera
53
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Genomics group believes that the publication of sequence data will not preclude
it or others from being granted patent protection on genes and proteins, there
can be no assurance that the publication has not affected and will not affect
the ability to obtain patent protection. Customers may conclude that
uncertainties of that protection and the fact that the basic human sequence data
is available for free 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 its 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
therapeutics discovery and development fields 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 at the United States 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 the 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
the third parties, or to defend against these claims. The cost to the Celera
Genomics group of any patent litigation or similar proceeding could be
substantial, and it may absorb 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 its products or services without a license from a third
party. The Celera Genomics group may not be able to obtain a license 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 the analysis to its internal research personnel and
to its 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 access to
the Celera Genomics group's data by the Celera Genomics group's internal
research personnel or customers 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
54
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 its computational needs and its
customers' drug discovery 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. 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.
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
towards insurance carriers and employers using these tests to discriminate on
the basis of this information, resulting in barriers to the acceptance of these
tests by consumers. This could lead to governmental authorities calling for
limits on or regulation of the use of genetic testing or prohibiting testing for
genetic predisposition to certain diseases, particularly those that have no
known cure. Any of these scenarios could reduce the potential markets for
products of the Celera Genomics group.
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 increase its employee
base significantly. This growth will require substantial effort to hire new
employees and train and integrate them in the Celera Genomics group's business
and to develop and implement management information systems, financial controls
and facility plans. The Celera Genomics group's inability to manage growth
effectively would have a material adverse effect on its future operating
results.
Products and services developed using the Celera Genomics group's databases, and
the therapeutic discovery and development business of the Celera Genomics group,
may be subject to government regulation. The Celera Genomics group and its
pharmaceutical and biotechnology customers use the Celera Genomics group's
databases for drug discovery and development, which is subject to regulation by
the United States Food and Drug Administration. Any new drug developed must
undergo an extensive regulatory review and approval process. This process can
take many years and require substantial expense. The Celera Genomics group and
its customers may also use its
55
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
databases to develop products or services in the field of personalized
health/medicine. However, current and future patient privacy and health care
laws and regulations issued by the United States Food and Drug Administration
may limit the use of data concerning an individual's genetic information. To the
extent that such regulations restrict or discourage the Celera Genomics group or
its customers from developing these products and services, the Celera Genomics
group's business may be adversely affected.
Future acquisitions and other transactions may absorb significant resources, may
be unsuccessful and could dilute the holders of Applera - Celera stock. As part
of the Celera Genomics group's strategy, it expects to pursue acquisitions,
investments and other strategic relationships and alliances. Acquisitions,
investments and other strategic relationships and alliances may involve
significant cash expenditures, debt incurrence, additional operating losses, and
expenses that could have a material effect on the Celera Genomics group's
financial condition and results of operations. 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
previous experience;
o potential loss of key employees or customers of acquired companies or
of the Celera Genomics group; and
o assumption of the liabilities and exposure to unforeseen liabilities of
acquired companies.
It may be difficult for the Celera Genomics group to complete these transactions
quickly and to integrate these businesses efficiently into its current business.
Any acquisitions, investments or other strategic relationships and alliances by
the Celera Genomics group may ultimately have a negative impact on its business
and financial condition. For example, future acquisitions may not be as
successful as originally anticipated and may result in special charges, such as
the charges for impairment of Paracel goodwill and intangibles in the amount of
$69.1 million during fiscal 2001 and for the Molecular Informatics business in
the amount of $14.5 million during fiscal 1999.
In addition, acquisitions and other transactions may involve the issuance of a
substantial amount of Applera Corporation - Celera Genomics Group Common Stock
without the approval of the holders of Applera Corporation - Celera Genomics
Group Common Stock. Any issuances of this nature will be dilutive to holders of
Applera Corporation - Celera Genomics Group Common Stock.
Applera Corporation - Celera Genomics Group Common Stock price is highly
volatile. The market price of Applera Corporation - Celera Genomics Group Common
Stock has been and may continue to be highly volatile due to the risks and
uncertainties described in this section of this Form 10-Q, as well as other
factors that may have affected or may in the future affect the market price,
such as:
56
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
o conditions and publicity regarding the genomics, biotechnology,
pharmaceutical, or life sciences industries generally;
o price and volume fluctuations in the stock market at large which do not
relate to the Celera Genomics group's operating performance; and
o comments by securities analysts or government officials, including with
regard to the viability or profitability of the biotechnology sector
generally or with regard to intellectual property rights of
biotechnology companies, or the Celera Genomics group's failure to meet
market expectations.
The stock market has from time to time experienced extreme price and volume
fluctuations that are unrelated to the operating performance of particular
companies. In the past, companies that have experienced volatility have
sometimes been the subject of securities class action litigation. If litigation
was instituted on this basis, it could result in substantial costs and a
diversion of management's attention and resources.
The Company is subject to a purported class action lawsuit relating to its 2000
offering of shares of Applera Corporation - Celera Genomics Group Common Stock
that may be expensive and time consuming. The Company and some of its officers
have been served in five lawsuits purportedly on behalf of purchasers of Applera
Corporation - Celera Genomics Group Common Stock in the Company's follow-on
public offering of Applera Corporation - Celera Genomics Group Common Stock
completed on March 6, 2000. In the offering, the Company 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. All of these lawsuits
have been consolidated into a single case and an amended consolidated complaint
was filed on August 21, 2001. The consolidated complaint generally alleges that
the prospectus used in connection with the offering was inaccurate or misleading
because it failed to adequately disclose the alleged opposition of the Human
Genome Project and two of its supporters, the governments of the United States
and the United Kingdom, to providing patent protection to the Company's
genomic-based products. Although the Celera Genomics group has never sought, or
intended to seek, a patent on the basic human genome sequence data, the
complaint also alleges that the Company did not adequately disclose the risk
that it would not be able to patent this data. The consolidated complaint seeks
unspecified money damages, rescission, costs and expenses, and other relief as
the court deems proper. Although the Company 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 diagnostic products is unproven. The development and
commercialization of new drugs by determining the causes of diseases through the
study of genes, variations in genes, and the proteins expressed by genes 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
57
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
experience in operating a commercial research and development program. In
addition, the Company has announced the formation of Celera Diagnostics, a joint
venture between the Applied Biosystems group and the Celera Genomics group in
the field of diagnostics. Celera Diagnostics faces the difficulties 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 Celera Diagnostics'
unproven ability to develop proprietary diagnostic products, it is possible that
the Celera Genomics group's and Celera Diagnostics' discovery processes will not
result in any commercial products or services. Even if the Celera Genomics group
or Celera Diagnostics 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 Celera Genomics group or Celera
Diagnostics to recover its development costs in a reasonable period.
58
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on October 18,
2001. At that meeting, the stockholders of the Company elected all of the
nominees for director and approved all other proposals submitted by the Company
to stockholders for approval at the meeting, each as described in the Notice of
Annual Meeting and Proxy Statement dated September 18, 2001. The results of the
voting of the stockholders with respect to these matters is set forth below.
I. Election of Directors.
Total Vote For Total Vote Withheld
Each Director From Each Director
-------------- -------------------
Richard H. Ayers 237,988,608 1,604,286
Jean-Luc Belingard 237,992,429 1,600,465
Robert H. Hayes 238,155,151 1,437,743
Arnold J. Levine 238,163,468 1,429,426
Theodore E. Martin 237,975,190 1,617,704
Georges C. St. Laurent, Jr. 237,816,333 1,776,561
Carolyn W. Slayman 238,152,547 1,440,347
Orin R. Smith 237,989,651 1,603,243
James R. Tobin 238,163,900 1,428,994
Tony L. White 238,151,566 1,441,328
II. Ratification of the selection of PricewaterhouseCoopers LLP as
the Company's independent accountants for the fiscal year ending
June 30, 2002.
FOR AGAINST ABSTAIN
--- ------- -------
238,148,390 690,152 754,351
III. Approval of amendments to the Applera Corporation/Applied
Biosystems Group 1999 Stock Incentive Plan.
FOR AGAINST ABSTAIN
--- ------- -------
182,825,797 55,622,519 1,144,577
59
IV. Approval of amendments to the Applera Corporation/Celera Genomics
Group 1999 Stock Incentive Plan.
FOR AGAINST ABSTAIN
--- ------- -------
167,334,839 71,107,648 1,150,406
Item 5. Other Information.
The year-to-year increase in revenues from the Applied Biosystems
group's high-performance triple-quadrupole mass spectrometers was incorrectly
stated as approximately 80 percent when the Company reported first quarter
fiscal 2002 financial results for the Applied Biosystems group on October 24,
2001. Revenues from API 3000 and API 4000 mass spectrometer systems (which
includes kits and accessories) increased approximately 56 percent in the first
quarter of fiscal 2002 compared to revenues from API 3000 systems in the first
quarter of fiscal 2001. Shipments of the API 4000 began in the fourth quarter of
fiscal 2001.
At a meeting of the Board of Directors of the Company held immediately
following the Annual Meeting of Stockholders referred to in Item 4, above, the
Board of Directors elected the following persons as officers of the Company:
Tony L. White Chairman, President and Chief Executive Officer
Michael Albin Vice President, Strategic Technologies
Peter Barrett Vice President
Samuel E. Broder Vice President
Ugo D. DeBlasi Assistant Controller
Michael W. Hunkapiller Senior Vice President and President,
Applied Biosystems Group
Vikram Jog Corporate Controller
Robert C. Jones Vice President
Barbara J. Kerr Vice President, Human Resources
Thomas P. Livingston Secretary
Stephen J. Lombardi Vice President
Joseph E. Malandrakis Vice President
Robert A. Millman Assistant Secretary
Tama H. Olver Vice President and Chief Information Officer
Kathy P. Ordonez Vice President and President, Celera Diagnostics
John S. Ostaszewski Treasurer
Robert P. Ragusa Vice President
William B. Sawch Senior Vice President and General Counsel
Deborah A. Smeltzer Assistant Controller
Joseph H. Smith Assistant Secretary
J. Craig Venter Senior Vice President and President,
Celera Genomics Group
Dennis L. Winger Senior Vice President and Chief Financial Officer
60
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Amended and Restated Secured Promissory Note and
Agreement, dated as of October 24, 2001, issued by
Axys Pharmaceuticals, Inc.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2001, the Company filed the
following Current Reports on Form 8-K:
(1) Current Report on Form 8-K dated July 10, 2001 to incorporate
under Item 5 thereof the text of the Company's press release
issued July 10, 2001 regarding a preliminary report on anticipated
revenues of the Company's Applied Biosystems group for the fourth
quarter of fiscal year 2001.
(2) Current Report on Form 8-K dated July 26, 2001 to incorporate
under Item 5 thereof the text of the Company's press releases
issued July 26, 2001 regarding fiscal year 2001 fourth quarter and
year end results of the Company's Applied Biosystems and Celera
Genomics groups and the text of the Company's press release issued
July 24, 2001 referenced in the foregoing press releases.
(3) Current Report on Form 8-K dated September 6, 2001 to report under
Item 5 thereof a clarification of a statement made by the Company
in its press release issued July 26, 2001 regarding fiscal year
fourth quarter and year end results for the Company's Applied
Biosystems group.
61
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: November 14, 2001
62