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, 2002
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 8, 2002, there were 209,213,503 shares
of Applera Corporation - Applied Biosystems Group Common Stock and 71,514,885
shares of Applera Corporation - Celera Genomics Group Common Stock outstanding.
APPLERA CORPORATION
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2001 and 2002 1
Condensed Consolidated Statements of Financial Position at
June 30, 2002 and September 30, 2002 2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2001 and 2002 3
Notes to Unaudited Condensed Consolidated Financial Statements 4-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Discussion of Applera Corporation 18-23
Discussion of Applied Biosystems Group 24-28
Discussion of Celera Genomics Group 28-30
Discussion of Celera Diagnostics 31
Outlook 31-33
Forward-Looking Statements 33-54
Item 3. Quantitative and Qualitative Disclosures About Market Risk 55
Item 4. Controls and Procedures 55
Part II. Other Information 56
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
APPLERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands except per share amounts)
Three Months Ended
September 30,
2001 2002
--------- ---------
Net Revenues $ 387,854 $ 417,333
Cost of sales 186,524 194,894
--------- ---------
Gross Margin 201,330 222,439
Selling, general and administrative 107,107 108,101
Research, development and engineering 84,502 103,291
Amortization of intangible assets 471 2,700
--------- ---------
Operating Income 9,250 8,347
Interest expense (240) (210)
Interest income 14,347 8,589
Other income (expense), net (1,738) (2,115)
--------- ---------
Income Before Income Taxes 21,619 14,611
Provision for income taxes 4,634 2,546
--------- ---------
Income From Continuing Operations 16,985 12,065
Loss from discontinued operations, net of income taxes (16,400)
--------- ---------
Net Income (Loss) $ 16,985 $ (4,335)
========= =========
Applied Biosystems Group (see Note 4)
Income From Continuing Operations $ 32,196 $ 34,222
Basic per share $ 0.15 $ 0.16
Diluted per share $ 0.15 $ 0.16
Loss From Discontinued Operations $ - $ (16,400)
Basic per share $ - $ (0.08)
Diluted per share $ - $ (0.08)
Net Income $ 32,196 $ 17,822
Basic per share $ 0.15 $ 0.08
Diluted per share $ 0.15 $ 0.08
Dividends per share $ 0.0425 $ 0.0425
Celera Genomics Group (see Note 4)
Net Loss $ (15,562) $ (19,649)
Basic and diluted per share $ (0.25) $ (0.28)
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,
2002 2002
----------- -----------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 470,218 $ 559,184
Short-term investments 889,685 783,056
Accounts receivable, net 406,244 375,344
Inventories, net 146,804 154,817
Prepaid expenses and other current assets 99,547 98,507
----------- -----------
Total current assets 2,012,498 1,970,908
Property, plant and equipment, net 488,744 485,391
Other long-term assets 574,157 580,645
----------- -----------
Total Assets $ 3,075,399 $ 3,036,944
=========== ===========
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 299 $ 9,271
Accounts payable 168,218 158,855
Accrued salaries and wages 82,165 64,739
Accrued taxes on income 101,209 88,380
Other accrued expenses 275,348 255,095
----------- -----------
Total current liabilities 627,239 576,340
Long-term debt 17,983 17,823
Other long-term liabilities 205,234 227,629
----------- -----------
Total Liabilities 850,456 821,792
Stockholders' Equity
Capital stock
Applera Corporation - Applied Biosystems Group 2,128 2,128
Applera Corporation - Celera Genomics Group 710 715
Capital in excess of par value 2,086,929 2,093,175
Retained earnings 292,690 278,619
Accumulated other comprehensive loss (91,574) (91,525)
Treasury stock, at cost (65,940) (67,960)
----------- -----------
Total Stockholders' Equity 2,224,943 2,215,152
----------- -----------
Total Liabilities And Stockholders' Equity $ 3,075,399 $ 3,036,944
=========== ===========
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,
2001 2002
--------- ---------
Operating Activities From Continuing Operations
Income from continuing operations $ 16,985 $ 12,065
Adjustments to reconcile income from continuing
operations to net cash provided (used) by operating activities:
Depreciation and amortization 24,483 36,091
Long-term compensation programs 2,102 2,500
Deferred income taxes (9,563) (9,667)
Loss from equity method investees 311 4,109
Changes in operating assets and liabilities:
Accounts receivable 36,664 26,632
Inventories (9,889) (9,033)
Prepaid expenses and other assets (7,694) (13,436)
Accounts payable and other liabilities (29,381) (52,314)
--------- ---------
Net Cash Provided (Used) By Operating Activities 24,018 (3,053)
--------- ---------
Investing Activities From Continuing Operations
Additions to property, plant and equipment, net (31,451) (24,194)
Sales (purchases) of short-term investments, net (9,594) 107,356
--------- ---------
Net Cash Provided (Used) By Investing Activities (41,045) 83,162
--------- ---------
Net Cash Used By Operating Activities
From Discontinued Operations (300) (728)
--------- ---------
Financing Activities
Net change in loans payable (3,115) 9,137
Dividends (8,979) (8,931)
Purchases of common stock for treasury (941) (6,847)
Proceeds from stock issued for stock plans 6,652 15,020
--------- ---------
Net Cash Provided (Used) By Financing Activities (6,383) 8,379
--------- ---------
Effect Of Exchange Rate Changes On Cash 14,355 1,206
--------- ---------
Net Change In Cash And Cash Equivalents (9,355) 88,966
Cash And Cash Equivalents Beginning Of Period 608,535 470,218
--------- ---------
Cash And Cash Equivalents End Of Period $ 599,180 $ 559,184
========= =========
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 consolidated financial statements presented in the Applera
Corporation (the "Company") 2002 Annual Report to Stockholders. Significant
accounting policies disclosed therein have not changed.
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.
NOTE 2 - RESTRUCTURING
The Celera Genomics group recorded a restructuring charge of $2.8 million during
fiscal 2002 for severance costs associated with the termination of 132 employees
primarily within the functional areas of DNA sequencing, data management and
analysis support, sales, and general administration. This restructuring plan was
undertaken to realign the organization with the Celera Genomics group's drug
discovery strategy and to reduce infrastructure previously built to support
whole genome sequencing and the acquisition of customers for the
Online/Information Business. All actions under this plan were taken as of June
30, 2002. Cash payments associated with this restructuring plan during the three
months ended September 30, 2002 were $1.5 million. The remaining cash payments
of $0.6 million are expected to be made during the remainder of fiscal 2003.
NOTE 3 - COMPREHENSIVE LOSS
Accumulated other comprehensive loss included in stockholders' equity in 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 is presented in the
following table:
4
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
(Dollar amounts in millions) 2001 2002
----------------------------------------------------------------------------------------------
Net income (loss) $ 17.0 $ (4.3)
Other comprehensive gain (loss):
Net unrealized losses on investments, net of tax (24.9) (5.7)
Net unrealized gains (losses) on hedge contracts, net of tax (8.9) 9.3
Net unrealized (gains) losses on hedge contracts reclassified
into earnings, net of tax (3.3) 1.8
Foreign currency translation adjustments 19.3 (5.4)
----------------------------------------------------------------------------------------------
Other comprehensive loss (17.8) -
----------------------------------------------------------------------------------------------
Comprehensive loss $ (0.8) $ (4.3)
----------------------------------------------------------------------------------------------
NOTE 4 - 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. Dilutive common stock equivalents primarily consist
of employee stock options.
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 of Directors can, at its discretion, change
the method of allocating earnings or losses to each class of common stock at any
time.
The following table presents a reconciliation of basic and diluted earnings
(loss) per share from continuing operations for the three months ended September
30:
5
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Applied Biosystems Celera Genomics
Group Group
---------------------- -----------------------
(Amounts in thousands except per share amounts) 2001 2002 2001 2002
------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
used in the calculation of basic earnings
(loss) per share 211,363 208,825 61,792 71,100
Common stock equivalents 3,850 1,185
------------------------------------------------------------------------------------------------------------------------
Shares used in the calculation of diluted
earnings (loss) per share 215,213 210,010 61,792 71,100
------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations used
in the calculation of basic and diluted
earnings (loss) per share from continuing operations $ 32,196 $ 34,222 $(15,562) $(19,649)
Income (loss) per share from continuing operations
Basic $ 0.15 $ 0.16 $ (0.25) $ (0.28)
Diluted $ 0.15 $ 0.16 $ (0.25) $ (0.28)
------------------------------------------------------------------------------------------------------------------------
Options to purchase 20.1 million and 27.3 million shares of Applera Corporation
- Applied Biosystems Group Common Stock were outstanding at September 30, 2001
and 2002, respectively, but were not included in the computation of diluted
earnings per share because the effect was antidilutive. Options and warrants to
purchase 14.1 million and 12.4 million shares of Applera Corporation - Celera
Genomics Group Common Stock ("Applera - Celera stock") were outstanding at
September 30, 2001 and 2002, respectively, but were not included in the
computation of diluted loss per share because the effect was antidilutive.
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) 2002 2002
-----------------------------------------------------------------------------
Raw materials and supplies $ 71.3 $ 70.3
Work-in-process 11.1 8.3
Finished products 64.4 76.2
-----------------------------------------------------------------------------
Total inventories $ 146.8 $ 154.8
-----------------------------------------------------------------------------
6
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
The following table presents the Company's intangible assets subject to
amortization:
June 30, 2002 September 30, 2002
--------------------------- -------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
(Dollar amounts in millions) Amount Amortization Amount Amortization
--------------------------------------------------------------------------------------------------
Patents $ 33.1 $ 8.6 $ 33.1 $ 9.5
Acquired technology 66.2 28.1 66.3 31.8
Favorable operating leases 11.6 1.8 11.6 2.6
--------------------------------------------------------------------------------------------------
Total $ 110.9 $ 38.5 $ 111.0 $ 43.9
--------------------------------------------------------------------------------------------------
Aggregate amortization expense for the three months ended September 30, 2001 and
2002 was $2.0 million and $5.6 million, respectively. The amortization expense
in fiscal 2003 includes the amortization of intangible assets acquired as part
of the acquisition of Axys Pharmaceuticals, Inc. and Boston Probes, Inc. in the
second quarter of fiscal 2002. The Applied Biosystems group and Celera
Diagnostics, a 50/50 joint venture between the Applied Biosystems group and the
Celera Genomics group, record amortization expense in costs of sales. The Celera
Genomics group records amortization expense in amortization of intangible
assets. The estimated annual amortization expense for each of the next five
fiscal years ending June 30 for intangible assets recorded in the Statement of
Financial Position as of September 30, 2002 is as follows:
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in millions) Group Group Diagnostics Consolidated
-------------------------------------------------------------------------------------
2003 $ 9.5 $ 5.9 $ 1.9 $ 17.3
2004 9.0 2.9 2.0 13.9
2005 8.7 2.9 2.0 13.6
2006 8.6 1.1 2.0 11.7
2007 7.7 1.8 9.5
-------------------------------------------------------------------------------------
The carrying amount of goodwill at September 30, 2002 was $39.4 million, of
which $36.7 million was allocated to the Applied Biosystems group and $2.7
million was allocated to the Celera Genomics group.
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
7
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Three months ended
September 30,
(Dollar amounts in millions) 2001 2002
----------------------------------------------------------------------
Tax benefit related to employee stock options $ 3.4 $ 0.5
Dividends declared but not paid $ 9.0 $ 8.9
----------------------------------------------------------------------
NOTE 8 - FINANCIAL INSTRUMENTS
Cash Flow Hedges
The Company's international sales are typically denominated in the customers'
local (non-U.S. dollar) currencies. 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 accumulated other
comprehensive income (loss), is reclassified to net revenues in the Condensed
Consolidated Statements of Operations. During the three month periods ended
September 30, 2001 and 2002, the Company recognized net gains of $4.7 million
and net losses of $2.6 million, respectively, in net revenues from derivative
instruments designated as cash flow hedges of anticipated sales. At September
30, 2002, $20.1 million of net derivative losses ($13.4 million net of deferred
taxes) recorded in accumulated other comprehensive loss are expected to be
reclassified to earnings during the next twelve months.
NOTE 9 - CONTINGENCIES
Litigation
The Company is involved in various legal proceedings from time to time,
including actions with respect to commercial, intellectual property, antitrust,
environmental, securities, and employment matters. The Company believes that it
has meritorious defenses against the claims currently asserted against it and
intends to defend them vigorously. Following is a description of certain claims
currently being defended by the Company.
The Company and some of its officers were served in five lawsuits between April
and May, 2000, purportedly on behalf of purchasers of Applera - Celera stock in
the Company's follow-on public offering of Applera - Celera stock completed on
March 6, 2000. In the offering, the Company sold an aggregate of approximately
4.4 million shares of Applera - Celera stock at a public offering price of $225
per share. All of these lawsuits have been consolidated into a single case and
are pending in the United States District Court for the District of Connecticut,
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 monetary damages, rescission, costs and
expenses, and other relief as the court deems proper. A motion to dismiss the
complaint is pending.
8
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
The Company is involved in several litigation matters with MJ Research, Inc.,
commencing with the Company's filing claims against MJ Research based on its
alleged infringement of certain polymerase chain reaction, or PCR, patents. On
December 21, 2000, MJ Research filed an action against the Company in the United
States District Court for the District of Columbia. The complaint is based on
the allegation that the patents underlying the Company's DNA sequencing
instruments were invalidly obtained because one of the alleged inventors, whose
work was funded in part by the United States government, was knowingly omitted
from the patent applications. The Company patents at issue are U.S. Patent Nos.
5,171,534, 5,821,058, 6,200,748, and 4,811,218. The complaint asserts violations
of the federal False Claims Act and the federal Bayh Dole Act, invalidity and
unenforceability of the patents at issue, patent infringement, and various other
civil claims against Applera. MJ Research is seeking monetary damages, costs and
expenses, injunctive relief, transfer of ownership of the patents in dispute,
and other relief as the court deems proper. MJ Research claims to be suing in
the name of the United States government although the government has to date
declined to participate in the suit.
On April 24, 2001, Promega Corporation filed a patent infringement action
against the Company, Lifecodes Corporation, Cellmark Diagnostics, and Genomics
International Corporation in the United States District Court for the Western
District of Wisconsin. The complaint alleges that the defendants are infringing
Promega's U.S. Patent Nos. 6,221,598 and 5,843,660, both entitled "Multiplex
Amplification of Short Tandem Repeat Loci," due to the defendants' sale of
forensic identification and paternity testing kits. Promega is seeking monetary
damages, costs and expenses, injunctive relief, and other relief as the court
deems proper. The defendants answered the complaint on July 9, 2001, and the
Company asserted counterclaims alleging that Promega is infringing the Company's
U.S. Patent No. 6,200,748, entitled "Tagged Extendable Primers and Extension
Products," due to Promega's sale of forensic identification and paternity
testing kits.
On July 3, 2002, Beckman Coulter, Inc. filed a patent infringement action
against the Company in the United States District Court for the Central District
of California. The complaint alleges that the Company is infringing Beckman
Coulter's U.S. Patent Nos. RE 37,606 and 5,421,980, both entitled "Capillary
Electrophoresis Using Replaceable Gels," and U.S. Patent No. 5,552,580, entitled
"Heated Cover Device," although it does not identify the specific facts on which
this allegation is based. Beckman Coulter is seeking monetary damages, costs and
expenses, injunctive relief, and other relief as the court deems proper.
On or about November 3, 1999, On-Line Technologies, Inc. (since acquired by MKS
Instruments, Inc.) filed claims for patent infringement, trade secret
misappropriation, fraud, breach of contract and unfair trade practices against
the Company, PerkinElmer, Inc. and Sick UPA, GmbH in the United States District
Court for the District of Connecticut. The complaint alleges that products
called the Spectrum One and the MCS100E manufactured by former divisions of the
Applied Biosystems group, which divisions were sold to the co-defendants in this
case, are based on allegedly proprietary information belonging to On-Line
Technologies and that the MCS100E infringes U.S. Patent No. 5,440,143. On-Line
Technologies is seeking monetary damages, costs, expenses, injunctive relief,
and other relief as the court deems proper.
The Company has not made any accrual in its consolidated financial statements
for any potential losses in the cases described above because it believes that
an adverse determination is not probable, and potential losses cannot be
reasonably estimated, in any of these cases. However, the outcome of litigation
is inherently uncertain, and the Company cannot be sure that it will prevail in
any of the cases described above or in the Company's other current litigation.
An adverse determination in certain of the Company's current litigation,
particularly the cases described above, could have a material adverse effect on
the consolidated financial statements of the Company.
9
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
NOTE 10 - SUBSEQUENT EVENT
In October 2002, the Company received an adverse jury verdict in connection with
a patent lawsuit between TA Instruments, Inc., a subsidiary of Waters
Corporation, and The Perkin-Elmer Corporation relating to thermal analysis
products. The Applied Biosystems group is involved as the successor to The
Perkin-Elmer Corporation, having sold the thermal instruments product line as
part of the sale of its analytical instruments division to EG&G, Inc. (now named
PerkinElmer, Inc.) in 1999. The Company retained liability with respect to the
litigation, which has gone through several stages since being commenced in 1995.
The jury awarded TA Instruments $13.3 million based on lost sales, price
erosion, and reasonable royalties. This award is subject to entry of a final
order by the court, where interest and additional damages may be added. The
Company recorded a charge of $16.4 million, net of income taxes, as part of
discontinued operations in the quarter ended September 30, 2002. However, the
Company intends to appeal the ultimate judgment.
NOTE 11 - SEGMENT AND CONSOLIDATING INFORMATION
Presented below is the Company's segment and consolidating financial
information, including the allocation of expenses between the segments in
accordance with the Company's allocation policies, as well as other related
party transactions, such as sales of products between segments. Earnings
attributable to each group are determined by the Company's Board of Directors.
This determination is generally based on net income or loss amounts of the
corresponding group determined in accordance with accounting principles
generally accepted in the United States of America.
See Note 14 to the consolidated financial statements included in the Company's
2002 Annual Report to Stockholders for a detailed description of the segments
and the management and allocation policies (which information is incorporated
herein by reference).
Intersegment Revenues
For the three month periods ended September 30, 2001 and 2002, the Applied
Biosystems group recorded net revenues from leased instruments, shipments of
consumables and project materials, and contracted R&D services to the Celera
Genomics group of $6.1 million and $0.9 million, respectively.
For the three month periods ended September 30, 2001 and 2002, the Applied
Biosystems group purchased $1.7 million and $3.0 million, respectively, of
diagnostics products from Celera Diagnostics under a distribution arrangement.
For the three month period ended September 30, 2002, the Applied Biosystems
group recorded revenues from leased instruments and shipments of consumables to
Celera Diagnostics of $0.9 million.
10
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
For the three month period ended September 30, 2002, the Celera Genomics group
recorded net revenues of $0.4 million for royalties generated by sales of
certain products of the Knowledge Business under an online marketing and
distribution agreement with the Applied Biosystems group. Pursuant to this
agreement, the Applied Biosystems group became the exclusive distributor of the
Celera Discovery Systems(TM) online platform, beginning July 1, 2002, operated
by the Celera Genomics group.
Allocation of Federal and State Income Taxes
For the three month periods ended September 30, 2001 and 2002, the Applied
Biosystems group utilized, without reimbursement, $7.9 million and $9.7 million,
respectively, of tax benefits generated by the Celera Genomics group.
Celera Diagnostics
For the three month periods ended September 30, 2001 and 2002, the Celera
Genomics group recorded 100% of the losses of Celera Diagnostics in its net loss
as well as tax benefits associated with those losses. Also for the three month
periods ended September 30, 2001 and 2002, the Applied Biosystems group paid
$3.3 million and $5.0 million, respectively, to the Celera Genomics group for
the utilization of those tax benefits generated by Celera Diagnostics.
During the three months ended September 30, 2001 and 2002, the Celera Genomics
group funded $8.8 million and $12.4 million, respectively, of operating losses
of Celera Diagnostics. The Applied Biosystems group and the Celera Genomics
group each funded $1.8 million for the first quarter of fiscal 2003 for capital
expenditures and working capital needs related to Celera Diagnostics.
In the following tables, the "Eliminations" column represents the elimination of
intergroup activity and the loss on Celera Diagnostics, which is included both
in the "Celera Diagnostics" column and net within the "Celera Genomics group"
column as "Loss from joint venture."
11
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Condensed Consolidating Statement of Operations For the Three Months Ended September 30, 2002
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------------------
Net revenues from external customers $ 394,118 $ 23,186 $ 29 $ - $ 417,333
Intersegment revenues 1,779 462 2,951 (5,192)
----------------------------------------------------------------------------------------------------------------------------------
Net Revenues 395,897 23,648 2,980 (5,192) 417,333
Cost of sales 193,298 3,418 2,417 (4,239) 194,894
----------------------------------------------------------------------------------------------------------------------------------
Gross Margin 202,599 20,230 563 (953) 222,439
Selling, general and administrative 87,486 5,036 2,169 13,410 108,101
Corporate allocated expenses 10,790 1,956 664 (13,410)
Research, development and engineering 61,032 32,533 11,063 (1,337) 103,291
Amortization of intangible assets 2,700 2,700
----------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 43,291 (21,995) (13,333) 384 8,347
Interest expense (29) (181) (210)
Interest income 3,223 5,366 8,589
Other income (expense), net 1,045 (3,160) (2,115)
Loss from joint venture (13,333) 13,333
----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 47,530 (33,303) (13,333) 13,717 14,611
Provision (benefit) for income taxes 13,308 (13,654) 2,892 2,546
----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations 34,222 (19,649) (13,333) 10,825 12,065
Loss from discontinued operations,
net of income taxes (16,400) (16,400)
----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 17,822 $ (19,649) $ (13,333) $ 10,825 $ (4,335)
----------------------------------------------------------------------------------------------------------------------------------
12
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Condensed Consolidating Statement of Financial Position At September 30, 2002
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 431,463 $ 127,721 $ - $ - $ 559,184
Short-term investments 29,303 753,753 783,056
Accounts receivable, net 363,855 12,588 194 (1,293) 375,344
Inventories, net 149,973 2,130 2,858 (144) 154,817
Prepaid expenses and other current assets 87,243 10,081 1,235 (52) 98,507
-------------------------------------------------------------------------------------------------------------------------------
Total current assets 1,061,837 906,273 4,287 (1,489) 1,970,908
Property, plant and equipment, net 357,896 119,040 9,535 (1,080) 485,391
Other long-term assets 411,400 178,186 9,639 (18,580) 580,645
-------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,831,133 $ 1,203,499 $ 23,461 $ (21,149) $ 3,036,944
===============================================================================================================================
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 9,271 $ - $ - $ - $ 9,271
Accounts payable 148,742 8,870 2,691 (1,448) 158,855
Accrued salaries and wages 52,932 9,225 2,582 64,739
Accrued taxes on income 78,947 9,433 88,380
Other accrued expenses 201,427 51,877 1,587 204 255,095
------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 491,319 79,405 6,860 (1,244) 576,340
Long-term debt 17,823 17,823
Other long-term liabilities 197,076 30,443 110 227,629
------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 688,395 127,671 6,970 (1,244) 821,792
Total Stockholders' Equity 1,142,738 1,075,828 16,491 (19,905) 2,215,152
------------------------------------------------------------------------------------------------------------------------------
Total Liabilities And Stockholders' Equity $ 1,831,133 $ 1,203,499 $ 23,461 $ (21,149) $ 3,036,944
===============================================================================================================================
13
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Condensed Consolidating Statement of Cash Flows For the Three Months Ended September 30, 2002
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------------------
Operating Activities From Continuing Operations
Income (loss) from continuing operations $ 34,222 $ (19,649) $ (13,333) $ 10,825 $ 12,065
Adjustments to reconcile income (loss) from
continuing operations to net cash provided (used)
by operating activities:
Depreciation and amortization 23,588 12,074 911 (482) 36,091
Long-term compensation programs 1,930 570 2,500
Deferred income taxes (13,131) 761 2,703 (9,667)
Loss from joint venture and equity method investees 17,442 (13,333) 4,109
Nonreimbursable utilization of intergroup tax benefits 9,716 (9,716)
Changes in operating assets and liabilities:
Accounts receivable 8,252 17,362 (17) 1,035 26,632
Inventories (8,117) (270) (643) (3) (9,033)
Prepaid expenses and other assets (11,608) (1,351) (471) (6) (13,436)
Accounts payable and other liabilities (29,247) (21,303) (1,025) (739) (52,314)
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Operating Activities 15,605 (4,080) (14,578) (3,053)
----------------------------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment, net (20,908) (1,871) (1,415) (24,194)
Sales of short-term investments, net 107,356 107,356
Investments, net (1,786) (14,207) 15,993
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Investing Activities (22,694) 91,278 (1,415) 15,993 83,162
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used By Operating Activities
From Discontinued Operations (728) (728)
----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable 9,137 9,137
Dividends (8,931) (8,931)
Net cash funding from groups 15,993 (15,993)
Purchases of common stock for treasury (6,847) (6,847)
Proceeds from stock issued for stock plans 3,387 11,633 15,020
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Financing Activities (3,254) 11,633 15,993 (15,993) 8,379
----------------------------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash 1,206 1,206
----------------------------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents (9,865) 98,831 88,966
Cash And Cash Equivalents Beginning Of Period 441,328 28,890 470,218
----------------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Period $ 431,463 $ 127,721 $ - $ - $ 559,184
==================================================================================================================================
14
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Condensed Consolidating Statement of Operations For the Three Months Ended September 30, 2001
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------------
Net revenues from external customers $ 360,480 $ 27,274 $ 100 $ - $ 387,854
Intersegment revenues 6,072 1,748 (7,820)
-----------------------------------------------------------------------------------------------------------------------------
Net Revenues 366,552 27,274 1,848 (7,820) 387,854
Cost of sales 179,373 11,915 1,496 (6,260) 186,524
-----------------------------------------------------------------------------------------------------------------------------
Gross Margin 187,179 15,359 352 (1,560) 201,330
Selling, general and administrative 81,727 10,588 2,199 12,593 107,107
Corporate allocated expenses 10,023 2,017 553 (12,593)
Research, development and engineering 52,318 27,742 6,977 (2,535) 84,502
Amortization of intangible assets 471 471
-----------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 43,111 (25,459) (9,377) 975 9,250
Interest expense (240) (240)
Interest income 3,497 10,850 14,347
Other income (expense), net (1,022) (716) (1,738)
Loss from joint venture (9,377) 9,377
-----------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 45,346 (24,702) (9,377) 10,352 21,619
Provision (benefit) for income taxes 13,150 (9,140) 624 4,634
-----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 32,196 $ (15,562) $ (9,377) $ 9,728 $ 16,985
=============================================================================================================================
15
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Condensed Consolidating Statement of Financial Position At June 30, 2002
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 441,328 $ 28,890 $ - $ - $ 470,218
Short-term investments 29,653 860,032 889,685
Accounts receivable, net 376,375 29,950 177 (258) 406,244
Inventories, net 142,876 1,860 2,215 (147) 146,804
Prepaid expenses and other current assets 81,759 17,082 764 (58) 99,547
----------------------------------------------------------------------------------------------------------------------------------
Total current assets 1,071,991 937,814 3,156 (463) 2,012,498
Property, plant and equipment, net 354,536 127,024 8,746 (1,562) 488,744
Other long-term assets 392,055 185,206 9,924 (13,028) 574,157
----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,818,582 $1,250,044 $ 21,826 $ (15,053) $ 3,075,399
----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Loans payable $ 299 $ - $ - $ - $ 299
Accounts payable 152,959 12,276 3,241 (258) 168,218
Accrued salaries and wages 65,187 13,585 3,393 82,165
Accrued taxes on income 92,972 8,237 101,209
Other accrued expenses 210,731 63,409 1,266 (58) 275,348
----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 522,148 97,507 7,900 (316) 627,239
Long-term debt 17,983 17,983
Other long-term liabilities 171,203 33,936 95 205,234
----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 693,351 149,426 7,995 (316) 850,456
----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,125,231 1,100,618 13,831 (14,737) 2,224,943
----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 1,818,582 $1,250,044 $ 21,826 $ (15,053) $ 3,075,399
==================================================================================================================================
16
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Condensed Consolidating Statement of Cash Flows For the Three Months Ended September 30, 2001
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------------------
Operating Activities From Continuing Operations
Net income (loss) $ 32,196 $ (15,562) $ (9,377) $ 9,728 $ 16,985
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 17,511 7,353 594 (975) 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 and equity method investees 9,688 (9,377) 311
Nonreimbursable utilization of intergroup tax benefits 7,934 (7,934)
Changes in operating assets and liabilities:
Accounts receivable 39,126 (192) (100) (2,170) 36,664
Inventories (9,943) (175) 229 (9,889)
Prepaid expenses and other assets (4,063) (2,010) (1,165) (456) (7,694)
Accounts payable and other liabilities (23,928) (13,879) 4,173 4,253 (29,381)
--------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Operating Activities 51,130 (21,010) (5,646) (456) 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) (1,769) 7,871 (41,045)
--------------------------------------------------------------------------------------------------------------------------------
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)
Net cash funding from groups 7,415 (7,415)
Purchases of common stock for treasury (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 7,415 (7,415) (6,383)
--------------------------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On 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
================================================================================================================================
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of the following Management's Discussion and Analysis is to provide
an overview of the business of Applera Corporation to help facilitate the
understanding of significant factors influencing the historical operating
results, financial condition and cash flows and also to convey our expectations
of the potential impact of known trends, events or uncertainties that may impact
future results. You should read this discussion in conjunction with our
consolidated financial statements and related notes included in this report and
in our 2002 Annual Report to Stockholders. Historical results and percentage
relationships are not necessarily indicative of operating results for future
periods.
Overview
We are comprised of three business segments: the Applied Biosystems group, the
Celera Genomics group, and Celera Diagnostics.
The Applied Biosystems group develops and markets instrument-based systems,
reagents, software, and contract services to the life science industry and
research community. Customers use these tools to analyze nucleic acids ("DNA"
and "RNA"), small molecules, and proteins to make scientific discoveries,
develop new pharmaceuticals, and conduct standardized testing.
The Celera Genomics group is engaged principally in integrating advanced
technologies to discover and develop new therapeutics. The Celera Genomics group
intends to leverage its proteomic, bioinformatic, and genomic capabilities to
identify and validate drug targets and diagnostic marker candidates, and to
discover and develop new therapeutics. Its Celera Discovery System(TM) ("CDS")
online platform, marketed exclusively through the Knowledge Business of the
Applied Biosystems group, is an integrated source of information based on the
human genome and other biological and medical sources.
Celera Diagnostics was established in the fourth quarter of fiscal 2001 as a
50/50 joint venture between the Applied Biosystems group and the Celera Genomics
group. This venture is focused on the discovery, development, and
commercialization of novel diagnostics products.
In fiscal 1999, following a recapitalization, we created two classes of common
stock referred to as "tracking" stocks. Tracking stock is a class of stock of a
corporation intended to "track" or reflect the performance of a specific
business within the corporation.
Applera Corporation - Applied Biosystems Group Common Stock ("Applera - Applied
Biosystems stock") is listed on the New York Stock Exchange under the ticker
symbol "ABI" and is intended to reflect the relative performance of the Applied
Biosystems group. Applera Corporation - Celera Genomics Group Common Stock
("Applera - Celera stock") is listed on the New York Stock Exchange under the
ticker symbol "CRA" and is intended to reflect the relative performance of the
Celera Genomics group. There is no single security that represents the
performance of Applera Corporation as a whole, nor is there a separate security
traded for Celera Diagnostics.
18
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Holders of Applera - Applied Biosystems stock and Applera - Celera stock are
stockholders of Applera. The Applied Biosystems group and the Celera Genomics
group are not separate legal entities, and holders of these stocks are
stockholders of a single company, Applera. As a result, holders of these stocks
are subject to all of the risks associated with an investment in Applera and all
of its businesses, assets, and liabilities.
The Applied Biosystems group and the Celera Genomics group do not have separate
Boards of Directors. Applera has one Board of Directors, which will make any
decision in accordance with its good faith business judgment that the decision
is in the best interests of Applera and all of its stockholders as a whole.
Our company's fiscal year ends on June 30. The financial information for each
segment is presented in Note 11 to our condensed consolidated financial
statements, Segment and Consolidating Information. Management's Discussion and
Analysis addresses the consolidated financial results followed by the
discussions of our three segments.
The following noteworthy developments have occurred at our company since the
beginning of fiscal 2003:
Applied Biosystems Group
o In August 2002, the Applied Biosystems group announced two collaborations
to develop new technologies and applications for proteomics, one with
Myriad Proteomics, Inc. and the other with the Institute for Systems
Biology.
o In September 2002, MDS SCIEX Instruments, a partnership between the Applied
Biosystems group and MDS INC., introduced the QSTAR(R) XL LC/MS/MS system.
This system is designed to provide improved sensitivity and resolution to
proteomics researchers as well as improved sensitivity and mass accuracy to
pharmaceutical drug discovery researchers.
o In October 2002, the Applied Biosystems group, as successor to The
Perkin-Elmer Corporation, received an adverse jury verdict in a patent
lawsuit with TA Instruments, Inc., a subsidiary of Waters Corporation,
relating to thermal analysis products. Please refer to Note 10 to our
condensed consolidated financial statements for more information.
Celera Genomics Group
o In August 2002, Robert Booth, Ph.D. joined the Celera Genomics group, as
Senior Vice President of Research & Development, responsible for
integrating and leading all of the Celera Genomics group's therapeutic
discovery and development activities.
o In October 2002, the Celera Genomics group purchased a number of
pre-clinical oral tryptase inhibitors for the treatment of asthma from
Bayer AG. These compounds were generated under a prior collaboration
between the Celera Genomics group and Bayer. Please refer to the acquired
in-process research and development section of this Management's Discussion
and Analysis for more information.
19
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Celera Diagnostics
o In October 2002, Celera Diagnostics announced three new collaborations,
with:
- Bristol-Meyers Squibb to study genes that may be useful in the
diagnosis and treatment of cardiovascular disease and diabetes;
- Laboratory Corporation of America to establish the clinical utility of
laboratory tests based on novel diagnostic markers for Alzheimer's disease,
breast cancer and prostate cancer; and
- Quest Diagnostics Incorporated to establish the clinical utility of
laboratory tests based on novel diagnostic markers for cardiovascular
disease and diabetes.
Critical Accounting Policies
Please refer to the discussion of our critical accounting policies contained in
the Management's Discussion and Analysis section of our 2002 Annual Report to
Stockholders (which discussion is incorporated herein by reference).
Acquired In-Process Research and Development
During fiscal 2002, the Celera Genomics group recorded a $99.0 million charge to
write-off the value of acquired in-process research and development ("IPR&D") in
connection with the acquisition of Axys Pharmaceuticals, Inc. As of the
acquisition date, the technological feasibility of the related projects had not
been established, and it was determined that the acquired projects had no future
alternative uses.
The Axys projects acquired as part of the acquisition are in various stages of
research and development and will require additional research and development
efforts by the Celera Genomics group or its collaborators before any eventual
products can be marketed, if ever. These efforts include extensive pre-clinical
and clinical testing and are subject to lengthy regulatory review and approval
by the United States Food and Drug Administration. The nature and timing of
these remaining efforts are dependent upon successful testing and approval of
the products as well as maintaining the existing collaborative relationships and
entering into new collaborative relationships. If collaboration partners
terminate or elect to cancel their agreements or otherwise fail to conduct their
collaborative activities in a timely manner, the development or
commercialization process could be delayed or abandoned.
In October 2002, the Celera Genomics group purchased a number of pre-clinical
tryptase inhibitors, including study data and a broad intellectual property
estate pertaining to use of these compounds in all fields, for the treatment of
asthma from Bayer AG. These compounds were generated under a prior collaboration
between Axys and Bayer AG.
During the quarter, we continued to pursue all acquired projects that were
active as of June 30, 2002; however, pre-clinical studies for these projects are
now expected to continue through calendar 2003.
20
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
As of September 30, 2002, the Celera Genomics group's portion of the estimated
costs to complete the partnered projects is not expected to be significant. The
costs to complete the proprietary projects are dependent on decisions of how to
commercialize, such as whether to partner the project, and at what stage to
partner. The Celera Genomics group continues to review the proprietary
pre-clinical projects, which may lead to revised prioritization, resourcing and
strategy to move toward clinical trials and commercialization. As a result,
actual results may vary from the valuation assumptions outlined in Note 2 to our
consolidated financial statements contained in our 2002 Annual Report to
Stockholders.
Discussion of Consolidated Operations
Results of Continuing Operations--The Three Months Ended September 30, 2002
Compared With The Three Months Ended September 30, 2001
We reported income from continuing operations of $12.1 million for the first
quarter of fiscal 2003 compared with $17.0 million for the first quarter of
fiscal 2002. The decrease in income from continuing operations reflected higher
R&D expenses and lower interest income, partially offset by higher net revenues.
On a segment basis, the Applied Biosystems group reported income from continuing
operations of $34.2 million for the first quarter of fiscal 2003 compared with
$32.2 million for the prior year period. The Celera Genomics group reported a
net loss of $19.6 million for the first quarter of fiscal 2003 compared with a
net loss of $15.6 million for the first quarter of fiscal 2002. Celera
Diagnostics reported a pre-tax loss of $13.3 million for the first quarter of
fiscal 2003 compared with a pre-tax loss of $9.4 million for the first quarter
of fiscal 2002.
Our net revenues increased 7.6% in the first quarter of fiscal 2003 compared
with the prior year quarter. The effects of foreign currency increased net
revenues by approximately $5 million, or 1%, for the same period. On a segment
basis, net revenues for the Applied Biosystems group were $395.9 million for the
first quarter of fiscal 2003 compared with $366.6 million for the first quarter
of fiscal 2002, an increase of 8.0%. The Celera Genomics group reported net
revenues of $23.6 million for the first quarter of fiscal 2003 compared with
$27.3 million for the first quarter of fiscal 2002, a decrease of 13.6%. Celera
Diagnostics reported net revenues of $3.0 million for the first quarter of
fiscal 2003 compared with $1.8 million for the first quarter of fiscal 2002.
Please refer to the discussion on pages 24 to 31 of this quarterly report for
further information on the financial results of our segments.
Gross margin, as a percentage of net revenues, was 53.3% for the first quarter
of fiscal 2003 compared with 51.9% for the first quarter of fiscal 2002. The
higher gross margin percentage in fiscal 2003 was due primarily to a decrease in
the lower margin sequencing service business for the Celera Genomics group
combined with the positive effects of foreign currency.
Our SG&A expenses, as a percentage of net revenues, decreased to 25.9% for the
first quarter of fiscal 2003 compared with 27.6% for the first quarter of fiscal
2002 primarily due to a workforce reduction at the Celera Genomics group
resulting from the June 2002 restructuring of the organization, partially offset
by an increased number of employees resulting from the acquisition of Axys in
November 2002. On a segment basis, SG&A expenses for the Applied Biosystems
group were $98.3 million for the first quarter of fiscal 2003 and $91.8 million
for the first quarter of 2002. SG&A expenses for the Celera Genomics group were
$7.0 million for the first quarter of fiscal 2003 and $12.6 million for the
first quarter of fiscal 2002. Celera Diagnostics reported SG&A expenses of $2.8
million for the first quarter of fiscal 2003 and $2.7 million for the first
quarter of fiscal 2002.
21
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
R&D expenses increased by $18.8 million for the first quarter of fiscal 2003 to
$103.3 million from $84.5 million for the first quarter of fiscal 2002 primarily
due to spending on: continued funding of the Applera Genomics Initiative, the
costs of which are shared among our three businesses; the development of new
products and technologies by the Applied Biosystems group; small molecule
therapeutic programs by the Celera Genomics group; and diagnostics programs by
the Celera Diagnostics business. The Applera Genomics Initiative includes the
resequencing of genes and regulatory regions at the Celera Genomics group,
validation of single nucleotide polymorphisms at the Applied Biosystems group,
and disease gene association studies at Celera Diagnostics. On a segment basis,
R&D expenses for the Applied Biosystems group were $61.0 million for the first
quarter of fiscal 2003 and $52.3 million for the first quarter of fiscal 2002.
R&D expenses for the Celera Genomics group were $32.5 million for the first
quarter of fiscal 2003 and $27.8 million for the first quarter of fiscal 2002.
Celera Diagnostics reported R&D expenses of $11.1 million for the first quarter
of fiscal 2003 and $7.0 million for the first quarter of fiscal 2002.
Interest income decreased by $5.8 million for the first quarter of fiscal 2003,
primarily due to lower average interest rates and, to a lesser extent, to lower
average cash and cash equivalents and short-term investments balances during the
first quarter of fiscal 2003 as compared to the first quarter of fiscal 2002.
Other expense, net increased in the first quarter of fiscal 2003 due to losses
related to an investment acquired as part of the Axys acquisition, accounted for
under the equity method, offset in part by benefits associated with our foreign
currency risk management program.
The effective income tax rate was 17% for the first quarter of fiscal 2003
compared with 21% for the first quarter of fiscal 2002. The lower effective
income tax rate in fiscal 2003 was primarily due to increased R&D credits and
the implementation of certain tax planning strategies allowing for the increased
utilization of foreign tax credits.
Discussion of Condensed Consolidated Financial Resources and Liquidity
We had cash and cash equivalents and short-term investments of $1.3 billion at
September 30, 2002 and $1.4 billion at June 30, 2002. We maintain a $100 million
revolving credit agreement with four banks that expires on April 20, 2005, under
which there are no outstanding borrowings. Cash provided by operating activities
has been our primary source of funds over the last fiscal year.
We believe that existing funds, cash generated from operations, and existing
sources of debt financing are adequate to satisfy our normal operating cash flow
needs, planned capital expenditure requirements, and dividends for the
foreseeable future. However, we may raise additional capital from time to time.
22
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
In connection with the adverse jury verdict against Applera in the TA
Instruments patent lawsuit, we expect to be required to extend a financial
guarantee for the amount of the damages awarded plus interest. Upon entry of a
final judgment, the cash applied to secure the guarantee will be reclassed to
other assets as restricted cash.
June 30, September 30,
(Dollar amounts in millions) 2002 2002
------------------------------------------------------------------------
Cash and cash equivalents $ 470.2 $ 559.2
Short-term investments 889.7 783.1
Total debt 18.3 27.1
Working capital 1,385.3 1,394.6
Debt to total capitalization 0.8% 1.2%
------------------------------------------------------------------------
Cash and cash equivalents increased in the first quarter of fiscal 2003 as
proceeds from maturing short-term investments, short-term loans, and stock
issuances were used to fund operations, purchase capital assets, pay dividends
and purchase common stock for treasury. Net cash flows for the three months
ended September 30 were as follows:
(Dollar amounts in millions) 2001 2002
----------------------------------------------------------------------
Net cash from operating activities $ 24.0 $(3.1)
Net cash from investing activities (41.0) 83.2
Net cash from financing activities (6.4) 8.4
----------------------------------------------------------------------
Net cash from operating activities for the first quarter of fiscal 2003
decreased $27.1 million in comparison to the first quarter of fiscal 2002 as
higher income-related cash flows were offset by increased working capital
requirements. For the first quarter of fiscal 2003 compared with the first
quarter of fiscal 2002, higher compensation-related and tax-related payments,
and increased royalty and license activity were only partially offset by lower
vendor payments.
In the first quarter of fiscal 2003, cash was generated as short-term
investments matured and were reinvested in cash equivalents.
During the first quarter of fiscal 2003, we purchased 380,000 shares of Applera
- Applied Biosystems stock for treasury for $6.8 million. During the first
quarter of fiscal 2002, we purchased 47,700 shares of Applera - Celera stock for
treasury for $0.9 million.
23
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Discussion of Segments' Operations, Financial Resources and Liquidity
Applied Biosystems Group
Results of Continuing Operations--The Three Months Ended September 30, 2002
Compared With The Three Months Ended September 30, 2001
(Dollar amounts in millions) % Increase/
2001 2002 (Decrease)
-------------------------------------------------------------------------------
Net revenues $ 366.6 $ 395.9 8.0%
Cost of sales 179.4 193.3 7.7%
-------------------------------------------------------------------------------
Gross margin 187.2 202.6 8.2%
SG&A expenses 91.8 98.3 7.1%
R&D 52.3 61.0 16.6%
-------------------------------------------------------------------------------
Operating income 43.1 43.3 0.5%
Interest income, net 3.3 3.2 (3.0%)
Other income (expense), net (1.0) 1.0
-------------------------------------------------------------------------------
Income before income taxes 45.4 47.5 4.6%
Provision for income taxes 13.2 13.3 0.8%
-------------------------------------------------------------------------------
Income from continuing operations $ 32.2 $ 34.2 6.2%
-------------------------------------------------------------------------------
Percentage of net revenues:
Gross margin 51.1% 51.2%
SG&A expenses 25.0% 24.8%
R&D 14.3% 15.4%
Operating income 11.8% 10.9%
Effective income tax rate 29% 28%
-------------------------------------------------------------------------------
Income from continuing operations increased in the first quarter of fiscal 2003
primarily due to strong instrument sales, higher service and license revenue,
and the favorable effects of foreign currency, partially offset by higher
spending related to new products in development and ongoing funding of the
Applera Genomics Initiative. The favorable effects of foreign currency increased
income from continuing operations by approximately $2 million, or 6%, as
compared with the first quarter of fiscal 2002.
Net revenues from the Celera Genomics group, primarily from leased instruments
and shipments of consumables and project materials, and contracted R&D services,
were $0.9 million for the first quarter of fiscal 2003, or 0.2% of the Applied
Biosystems group's net revenues, and $6.1 million for the first quarter of
fiscal 2002, or 1.7%. The favorable effects of foreign currency increased net
revenues during the first quarter of fiscal 2003 by approximately $5 million, or
1%, as compared to the prior year period. The following table sets forth the
Applied Biosystems group's revenues by geographic area for the quarters ended
September 30:
24
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
% Increase/
(Dollar amounts in millions) 2001 2002 (Decrease)
---------------------------------------------------------------------------
United States $ 187.5 $ 212.6 13.4%
Europe 94.3 96.5 2.3%
Asia Pacific 74.8 74.2 (0.8%)
Latin America and other markets 10.0 12.6 26.0%
---------------------------------------------------------------------------
Total $ 366.6 $ 395.9 8.0%
---------------------------------------------------------------------------
Excluding the effects of foreign currency, revenues decreased approximately 3%
in Europe during the first quarter of fiscal 2003 compared to the prior year
period.
For the first quarter of fiscal 2003, revenues from instrument sales were $189.0
million, an increase of 16.5% from $162.3 million in the prior year period.
Instrument sales increased in all three strategic product categories, including
DNA sequencing, Sequence Detection Systems ("SDS"), and mass spectrometry. The
DNA sequencing product line growth was driven by early shipments of the 3730xl
DNA Analyzer to some of the large genome centers in the United States. SDS
instrument sales growth was primarily driven by the ABI Prism(R) 7000 and the
TaqMan(R) reagents. Additionally, strong demand in the drug metabolism and
pharmacokinetics and the protein discovery markets helped drive sales of mass
spectrometry instruments, primarily relating to the API 4000(TM) LC/MS/MS System
and the AB 4700 Proteomics Analyzer with TOF/TOF(TM) Optics.
Consumables sales were $138.4 million in the first quarter of fiscal 2003
compared to $149.2 million in the first quarter of fiscal 2002, a decrease of
7.2%. Consumables sales were impacted primarily by a decline in revenues from
DNA sequencing consumables resulting from sequencing capacity not increasing at
a fast enough pace with the rate of reagent dilution, as well as by a decline in
sales of core DNA synthesis and PCR consumables.
Revenues from other sources, which included service contracts, royalties,
licenses, and contract research, increased 24.3% to $68.5 million in the first
quarter of fiscal 2003 from $55.1 million in the first quarter of fiscal 2002.
The increase in revenue resulted from higher service revenues, license fees, and
royalties, including $5.4 million for a license related to certain mass
spectrometry technology.
Additionally, the following table sets forth the Applied Biosystems group's
revenues by product categories for the three-month periods ended September 30:
25
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
(Dollar amounts in millions) 2001 2002 % Change
------------------------------------------------------------------------------
DNA sequencing products $150.2 $149.3 (1%)
% of total revenues 41% 38%
SDS and other applied genomics products 68.8 83.5 21%
% of total revenues 19% 21%
Mass Spectrometry 54.2 83.4 54%
% of total revenues 15% 21%
Core DNA synthesis and PCR products 59.1 49.0 (17%)
% of total revenues 16% 12%
Other 34.3 30.7 (10%)
% of total revenues 9% 8%
------------------------------------------------------------------------------
Total $366.6 $395.9 8%
------------------------------------------------------------------------------
Gross margin, as a percentage of net revenues, remained relatively unchanged
from the prior year quarter, as higher margins from royalty and license revenues
were offset by increases in lower margin service revenues.
As a percentage of sales, SG&A expenses were approximately the same as the first
quarter of fiscal 2002.
As a percentage of net revenues, R&D expenses were 15.4% for the first quarter
of fiscal 2003 compared with 14.3% for the first quarter of fiscal 2002. The
increase in R&D expenses was primarily the result of ongoing funding of the
Applera Genomics Initiative and support for new products in development.
Interest income decreased primarily due to lower average interest rates,
partially offset by higher average cash and cash equivalents and short-term
investments balances for the first quarter of fiscal 2003 compared with the
first quarter of fiscal 2002.
Other income, net increased due to benefits associated with our foreign currency
risk management program.
The effective income tax rate decreased during the first quarter of fiscal 2003
due to the implementation of certain tax planning strategies allowing for the
increased utilization of foreign tax credits.
Discussion of Financial Resources and Liquidity
The Applied Biosystems group had cash and cash equivalents and short-term
investments of $460.8 million at September 30, 2002 and $471.0 million at June
30, 2002. We maintain a $100 million revolving credit agreement with four banks
that expires on April 20, 2005, under which there are no outstanding borrowings.
Cash provided by operating activities has been the Applied Biosystems group's
primary source of funds.
26
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
We believe that existing funds, cash generated from operations, and existing
sources of debt financing are adequate to satisfy the Applied Biosystems group's
normal operating cash flow needs, planned capital expenditure requirements,
funding of the Celera Diagnostics joint venture, and dividends for the
foreseeable future. However, we may raise additional capital from time to time
and allocate it to the Applied Biosystems group.
In connection with the adverse jury verdict against Applera in the TA
Instruments patent lawsuit, we expect to be required to extend a financial
guarantee for the amount of the damages awarded plus interest. Upon entry of a
final judgment, the cash applied to secure the guarantee will be reclassed to
other assets as restricted cash.
We manage the investment of surplus cash and the issuance and repayment of
short-term and long-term debt for the Applied Biosystems group and the Celera
Genomics group and allocate activity within these balances to the group that
uses or generates such resources.
June 30, September 30,
(Dollar amounts in millions) 2002 2002
-------------------------------------------------------------------------------
Cash and cash equivalents $ 441.3 $ 431.5
Short-term investments 29.7 29.3
Total debt 0.3 9.3
Working capital 549.8 570.5
Debt to total capitalization -% 0.8%
-------------------------------------------------------------------------------
Cash and cash equivalents in the first quarter of fiscal 2003 decreased as cash
generated from operating activities and proceeds from short-term loans and stock
issuances were expended for capital assets, the funding of the Celera
Diagnostics joint venture and dividends, and to purchase common stock for
treasury. Net cash flows for the three months ended September 30 were as
follows:
(Dollar amounts in millions) 2001 2002
------------------------------------------------------------------------------
Net cash from operating activities $ 51.1 $ 15.6
Net cash from investing activities (26.0) (22.7)
Net cash from financing activities (8.9) (3.3)
------------------------------------------------------------------------------
Net cash from operating activities for the first quarter of fiscal 2003 was
$35.5 million lower than the first quarter of fiscal 2002. For the first quarter
of fiscal 2003 compared with the first quarter of fiscal 2002, higher
compensation-related and tax-related payments and increased royalty and license
activity were only partially offset by higher income-related cash flows and
lower vendor payments. Higher revenues during the first quarter of fiscal 2003
compared to the first quarter of fiscal 2002 resulted in a higher accounts
receivable balance. The Applied Biosystems group's days sales outstanding was 75
days at September 30, 2002 compared to 72 days at June 30, 2002 and 82 days at
September 30, 2001. Inventory on hand was 3.9 months at September 30, 2002
compared to 3.3 months at June 30, 2002.
27
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
During the first quarter of fiscal 2003, we purchased 380,000 shares of Applera
- Applied Biosystems stock for treasury for $6.8 million.
Celera Genomics Group
Results of Operations--The Three Months Ended September 30, 2002 Compared With
The Three Months Ended September 30, 2001
% Increase/
(Dollar amounts in millions) 2001 2002 (Decrease)
------------------------------------------------------------------------------
Net revenues $ 27.3 $23.6 (13.6%)
Cost of sales 11.9 3.4 (71.4%)
R&D 27.8 32.5 16.9%
SG&A expenses 12.6 7.0 (44.4%)
Amortization of intangible assets 0.5 2.7 440.0%
------------------------------------------------------------------------------
Operating loss (25.5) (22.0) (13.7%)
Interest income, net 10.9 5.2 (52.3%)
Other income (expense), net (0.7) (3.2) 357.1%
Loss from joint venture (9.4) (13.3) 41.5%
------------------------------------------------------------------------------
Loss before income taxes (24.7) (33.3) 34.8%
Benefit for income taxes 9.1 13.7 50.5%
------------------------------------------------------------------------------
Net loss $ (15.6) $(19.6) 25.6%
------------------------------------------------------------------------------
Effective income tax rate 37% 41%
------------------------------------------------------------------------------
The higher net loss for the Celera Genomics group in the first quarter of fiscal
2003 primarily resulted from increased R&D, higher R&D within the Celera
Diagnostics joint venture with the Applied Biosystems group, and lower interest
income. Partially offsetting these factors were lower cost of sales and SG&A
expenses. Higher Online/Information Business operating income of $9.1 million in
first quarter fiscal 2003 compared to $2.1 million in the first quarter of
fiscal 2002 resulted from higher subscription revenue, and lower expenses
subsequent to the CDS marketing and distribution agreement with the Applied
Biosystems group.
Revenues decreased as lower contract sequencing revenue, resulting from the
Celera Genomics group's decision not to pursue additional sequencing service
business, was only partially offset by an increase in subscription revenue.
Online/Information Business revenues increased to $20.6 million in the first
quarter of fiscal 2003, compared to $17.0 million in the first quarter of fiscal
2002.
Cost of sales decreased primarily due to the decrease in the sequencing service
business.
28
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
R&D expenses increased in the first quarter of fiscal 2003 in comparison to the
same quarter last year due primarily to: higher expenses for small molecule
therapeutic programs; continued participation in the Applera Genomics
Initiative; and $2.9 million recorded in fiscal 2003 for asset write-downs
associated with the Rockville sequencing facility due to the group's decision
not to pursue additional sequencing service business. These increases were
partially offset by lower R&D related to DNA sequencing programs.
SG&A decreased in the first quarter of fiscal 2003 compared to the prior year
quarter primarily due to a workforce reduction resulting from the June 2002
restructuring of the organization to focus on drug discovery and development,
partially offset by an increased number of employees resulting from the
acquisition of Axys in November 2002.
Interest income decreased primarily due to lower average interest rates and, to
a lesser extent, to lower average cash and cash equivalents and short-term
investments balances during the first quarter of fiscal 2003 compared to the
prior year quarter.
Other expense, net increased in the first quarter of fiscal 2003 due to losses
relating to an investment acquired as part of the Axys acquisition, accounted
for under the equity method.
The effective income tax benefit rate increased in the first quarter of fiscal
2003 and was primarily attributable to increased R&D credits.
Discussion of Financial Resources and Liquidity
The Celera Genomics group had cash and cash equivalents and short-term
investments of $881.5 million at September 30, 2002 and $888.9 million at June
30, 2002. We maintain a $100 million revolving credit agreement with four banks
that expires on April 20, 2005, under which there are no outstanding borrowings.
We believe that existing funds and existing sources of debt financing are
adequate to satisfy the Celera Genomics group's normal operating cash flow
needs, planned capital expenditure requirements and funding of the Celera
Diagnostics joint venture for the foreseeable future. However, we may raise
additional capital from time to time and allocate it to the Celera Genomics
group.
We manage the investment of surplus cash and the issuance and repayment of
short-term and long-term debt for the Celera Genomics group and the Applied
Biosystems group and allocate activity within these balances to the group that
uses or generates such resources.
29
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
June 30, September 30,
(Dollar amounts in millions) 2002 2002
-----------------------------------------------------------------------------
Cash and cash equivalents $ 28.9 $ 127.7
Short-term investments 860.0 753.8
Total debt 18.0 17.8
Working capital 840.3 826.9
Debt to total capitalization 1.6% 1.6%
-----------------------------------------------------------------------------
Cash and cash equivalents in the first quarter of fiscal 2003 increased as
proceeds from maturing short-term investments and stock issuances were only
partially expended on its operations, the funding of the Celera Diagnostics
joint venture and the purchase of capital assets. Net cash flows for the three
months ended September 30 were as follows:
(Dollar amounts in millions) 2001 2002
------------------------------------------------------------------------------
Net cash from operating activities $ (21.0) $ (4.1)
Net cash from investing activities (21.1) 91.3
Net cash from financing activities 2.6 11.6
------------------------------------------------------------------------------
Net cash used by operating activities for the first quarter of fiscal 2003 was
$16.9 million lower than the first quarter of fiscal 2002. For the first quarter
of fiscal 2003 in comparison to the first quarter of fiscal 2002, the decrease
resulted from lower net cash operating losses and larger decreases in accounts
receivable and deferred revenues reflect lower revenues resulting from the
Celera Genomics group's decision to forego new contract sequencing and service
business.
In the first quarter of fiscal 2003, cash was generated as short-term
investments matured and were reinvested in cash equivalents. During the first
quarters of fiscal 2003 and 2002, the Celera Genomics group's cash investments
were primarily related to the Celera Diagnostics joint venture.
Net cash from financing activities for the first quarter of fiscal 2003
increased primarily due to proceeds received from employee stock option
exercises.
During the first quarter of fiscal 2002, we purchased 47,700 shares of Applera -
Celera stock for treasury for $0.9 million.
30
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Celera Diagnostics
Results of Operations--The Three Months Ended September 30, 2002 Compared With
The Three Months Ended September 30, 2001
% Increase/
(Dollar amounts in millions) 2001 2002 (Decrease)
----------------------------------------------------------------------------
Net revenues $ 1.8 $ 3.0 66.7%
Cost of sales 1.5 2.4 60.0%
R&D 7.0 11.1 58.6%
SG&A expenses 2.7 2.8 3.7%
----------------------------------------------------------------------------
Operating loss $ (9.4) $ (13.3) 41.5%
----------------------------------------------------------------------------
Revenues for the first quarter of fiscal 2003 increased primarily due to higher
sales of cystic fibrosis reagents. End-user product sales were $3.9 million for
the first quarter of fiscal 2003 and $2.4 million for the first quarter of
fiscal 2002. The Applied Biosystems group distributed Celera Diagnostics'
products and recorded end-user sales through September 2002. On October 1, 2002,
pursuant to the profit-sharing alliance announced in June 2002, sales
responsibilities for products manufactured by Celera Diagnostics were largely
transferred to the diagnostic division of Abbott Laboratories, which now records
end-user sales for those products.
R&D increased in the first quarter of fiscal 2003 as a result of Celera
Diagnostics' participation in the Applera Genomics Initiative, as well as
increased spending for marker discovery and product development. R&D expenses in
the first quarter of fiscal 2003 included $0.9 million of lease payments on
instruments and purchases of consumables from the Applied Biosystems group.
Outlook
Applied Biosystems Group
Forecasting remains challenging for several reasons, including: unpredictable
spending patterns in the pharmaceutical and biotechnology sectors; delays in
consideration by the U.S. Congress of the fiscal 2003 National Institutes of
Health budget; uncertainty over the status of supplemental annual funding by the
Japanese government in its current fiscal year; and difficulties in predicting
trends in the consumption of sequencing reagents by the Applied Biosystems
group's customer base.
At this time, the Applied Biosystems group reiterates its previous expectation
that revenue percentage growth in fiscal 2003 will be in the high single digits
to low teens. The Applied Biosystems group continues to expect that growth in
fiscal 2003 will be heavily influenced by the adoption of new products. Gross
margin in fiscal 2003 is expected to approximate fiscal 2002 levels.
Additionally, the Applied Biosystems group expects SG&A expenses to rise
somewhat more slowly than revenue during fiscal 2003.
31
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
While the Applied Biosystems group anticipates that the Applera Genomics
Initiative will be substantially completed by the end of calendar year 2002,
spending for this initiative, as well as development costs related to the
Knowledge Business, are expected to lead to an increase in the level of overall
R&D spending during the second quarter of fiscal 2003. However, as a percentage
of revenues, R&D spending is expected to trend downward during the second and
remaining quarters of fiscal 2003 and to approximate 14 percent of revenue for
the fiscal year. This annual outlook includes approximately $12 million in
expenses, the majority of which are expected to be spent during the first half
of fiscal 2003, for the Applied Biosystems group's share of the Applera Genomics
Initiative funding.
The Applied Biosystems group expects the effective tax rate for fiscal 2003 to
be approximately 28 percent, one percentage point lower than previously forecast
due to anticipated higher utilization of foreign tax credits. Future tax
legislation may repeal or replace the existing U.S. export tax regime, as well
as significantly change other international tax provisions of the Internal
Revenue Code. Such changes may result in a change in the effective tax rate for
the Applied Biosystems group.
The Applied Biosystems group reiterates its previous expectation that diluted
earnings per share from continuing operations for fiscal 2003 will be in the
range of $0.85 to $0.95. The Applied Biosystems group expects diluted EPS from
continuing operations during the first half of fiscal 2003 to be approximately
flat with the prior year period due to the high levels of R&D spending
anticipated during this period. The Applied Biosystems group anticipates EPS
growth in the second half of fiscal 2003 due to the expected increases in sales
and the moderation in R&D spending growth.
Capital spending in fiscal 2003 is anticipated to be approximately $170 million,
including approximately $80 million for the facilities expansion in Pleasanton,
CA.
Celera Genomics Group
The Celera Genomics group's cash use in fiscal 2003 is expected to decrease from
fiscal 2002's level of $106 million to between $75 and $85 million, primarily
due to anticipated reductions in SG&A expenses and increased operating margin
from the Online/Information Business arrangement with the Applied Biosystems
group.
The Celera Genomics group anticipates R&D expenses to be in the range of $130 to
$140 million, including approximately $12 million for its share of the Applera
Genomics Initiative. SG&A expenses are expected to be between $30 and $35
million. Pre-tax losses related to the Celera Diagnostics joint venture are
expected to be approximately $50 to $60 million.
The Celera Genomics group anticipates total revenues between $85 and $95
million, based on its decision not to pursue new service business. Revenues from
CDS subscriptions and from Knowledge Business royalties are expected to be
between $75 and $80 million.
This outlook does not include potential expenses for downstream pre-clinical or
clinical development programs that may be added in the future.
32
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Celera Diagnostics
For fiscal 2003, Celera Diagnostics continues to anticipate end-user sales,
including those from its alliance with Abbott Laboratories, in a range of $18 to
$22 million. This outlook assumes continued demand growth, both from new
products and from higher sales of existing products, and successful product
migration into the alliance. For fiscal 2003, Celera Diagnostics anticipates
pretax losses of $50 to $60 million and net cash use in the range of $55 to $65
million, including capital spending of approximately $10 million.
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 "expect," "anticipate," "forecast," "believe," "should," "plan," "intend,"
"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
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, or the inability to gain market
acceptance of new products on a timely basis, 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.
The Applied Biosystems group relies on third parties for the manufacture of some
of its products and also for the supply of some components of the products it
manufactures on its own. Although the Applied Biosystems group has contracts
with most of these manufacturers and suppliers, there can be no assurance that
their operations will not be disrupted. The Applied Biosystems group does not
currently have alternative third party manufacturing or supply arrangements for
some of the key products and key components manufactured or supplied by third
parties. Although the Applied Biosystems group has its own manufacturing
facilities, and believes it might be able to manufacture some of the products
and components currently sourced from third parties, it also believes that it
would take considerable time and resources to establish the capability to do so.
Accordingly, if third party manufacturers or suppliers are unable or fail to
fulfill their obligations to the Applied Biosystems group, the Applied
Biosystems group might not be able to satisfy customer demand in a timely manner
and its business could be adversely affected.
33
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Applied Biosystems group's new Knowledge Business may not be successful. In
April 2002, the Applied Biosystems group became the exclusive distributor of the
Celera Genomics group's Celera Discovery System and related human genomic and
other biological and medical information under the terms of a 10-year marketing
and distribution agreement. The Applied Biosystems group expects to integrate
the Celera Discovery System and the Celera Genomics group's related information
into a new Knowledge Business that combines current Applied Biosystems assay,
human identification and forensics, and cell biology products with new
biological information content and analytical tools. The Knowledge Business is
an emerging business and the Applied Biosystems group believes that in order for
it to be successful the Applied Biosystems group may have to devote a
significant amount of resources to researching, developing, marketing, and
distributing Knowledge Business products and services. The market for these
products and services is intensely competitive, and there can be no assurance
that there will be market acceptance of the utility and value of the product and
service offerings of the Knowledge Business.
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 patent applications that mature into patents 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 and enforceable 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
litigation described in the following paragraph and elsewhere in this quarterly
report, some of which, if determined adversely, could have a material adverse
effect on the Applied Biosystems group. Due to the fact that the Applied
Biosystems group's business depends in large part on rapidly developing and
dynamic technologies, there remains a constant risk of intellectual property
litigation affecting the group. The Applied Biosystems group has from time to
time been notified that it may be infringing 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.
34
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
MJ Research, Inc. has filed a lawsuit against the Company based on the
allegation that four patents underlying the Applied Biosystems group's DNA
sequencing instruments were invalidly obtained because one of the alleged
inventors, whose work was funded in part by the United States government, was
knowingly omitted from the patent applications. MJ Research claims to be suing
in the name of the United States government although the government has to date
declined to participate in the lawsuit. Promega Corporation has filed a lawsuit
against the Company alleging that the Applied Biosystems group, along with
certain other named defendants, is infringing two Promega patents due to the
sale of forensic identification and paternity testing kits. Beckman Coulter,
Inc. has filed a lawsuit against the Company alleging that the Applied
Biosystems group is infringing three Beckman Coulter patents, although it has
not identified the specific facts on which the allegation is based. If any of
these matters 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 these matters will be resolved favorably, that
the Company, the Applied Biosystems group, or the Celera Genomics group 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 Applied
Biosystems group, or the Celera Genomics 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
2002 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.
35
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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.
The Applied Biosystems group's Knowledge Business depends on the continuous,
effective, reliable, and secure operation of its computer hardware, software,
and Internet applications and related tools and functions. Because the Applied
Biosystems group's Knowledge 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 Applied Biosystems
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 Applied Biosystems group's hardware or
software malfunctions or access to the Applied Biosystems group's data by
internal Knowledge Business research personnel or Knowledge Business customers
through the Internet is interrupted, the Knowledge Business could suffer.
The Applied Biosystems 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 Knowledge
Business online 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
Applied Biosystems group fails to maintain and further develop the necessary
computer capacity and data to support its computational needs and its customers'
access to the Knowledge Business product offerings, it could experience a loss
of or delay in revenues or market acceptance. In addition, any sustained
disruption in Internet access provided by third parties could adversely affect
the Knowledge Business.
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. In 2001, the State of California experienced
a statewide electricity shortage due to a variety of factors. Although some of
the factors causing this shortage have been eliminated or mitigated, there are
ongoing concerns about the availability of electricity in California,
particularly during peak usage periods. 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.
36
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Applera - Applied Biosystems stock price is volatile. The market price of
Applera - Applied Biosystems stock has been and may continue to be volatile due
to the risks and uncertainties described in this section of this quarterly
report, as well as other factors that may have affected or may in the future
affect the market price, such as:
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 Applied Biosystems 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
life science companies, or the Applied Biosystems group's ability 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 subjects 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.
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 $596.4
million as of September 30, 2002, and expects that it will continue to incur
additional net losses for the foreseeable future. These cumulative losses are
expected to increase as the Celera Genomics group continues to make investments
in new technology and product development, including its investments in its
therapeutics business and the Applera Genomics Initiative, as well as
investments in diagnostics through Celera Diagnostics, its joint venture with
the Applied Biosystems group. 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 expanding its operations
into the therapeutics research and development business. As a result, there is a
high degree of uncertainty that the Celera Genomics group will be able to
achieve profitable operations.
37
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Celera Genomics group has entered into an exclusive arrangement with the
Applied Biosystems group to distribute the Celera Discovery System and related
information as part of the Applied Biosystems group's new Knowledge Business,
and the revenue that the Celera Genomics Group receives from the Applied
Biosystems group will depend heavily on the Applied Biosystems group's ability
to market and distribute its Knowledge Business products. Effective April 2002,
the Applied Biosystems group became the exclusive distributor of Celera
Discovery System and the Celera Genomics group's related human genomic and other
biological and medical information under the terms of a ten-year marketing and
distribution agreement. The Celera Genomics group expects that the Applied
Biosystems group will integrate the Celera Discovery System and the related
information into a new Knowledge Business that combines current Applied
Biosystems assay, human identification and forensics, and cell biology products
with new biological information content and analytical tools.
Under the terms of the agreement, the Applied Biosystems group is obligated to
pay a royalty to the Celera Genomics group based on sales, if any, of certain
Knowledge Business products after July 1, 2002. Whether the Celera Genomics
group actually receives any royalties from the Applied Biosystems group under
this agreement, and the amount of these royalties, depends on the Applied
Biosystems group's ability to successfully commercialize Knowledge Business
products subject to the royalty. The Knowledge Business is an emerging business,
and the Applied Biosystems group has not proven its ability to successfully
commercialize these products. The Celera Genomics group believes that in order
for the Knowledge Business to be successful, the Applied Biosystems group may
have to devote a significant amount of its resources to researching, developing,
marketing, and distributing Knowledge Business products and services. However,
the Celera Genomics group has no control over the amount and timing of the
Applied Biosystems group's use of its resources, including for products subject
to the Celera Genomics group's royalty. In addition, the market for these
products is intensely competitive, and there can be no assurance that there will
be market acceptance of the utility and value of the product offerings of the
Knowledge Business.
The Celera Genomics group does not intend to seek any new customers for its
Celera Discovery System and related information products and services after June
30, 2002, and therefore its future revenues from these products and services
will be limited. Under the terms of the marketing and distribution agreement
between the Celera Genomics group and the Applied Biosystems group, the Celera
Genomics group will receive all revenues under, and be responsible for all costs
and expenses associated with, Celera Discovery System and related information
contracts that were in effect on April 1, 2002, the effective date of the
agreement, or which were entered into during a three-month transition period
ended June 30, 2002 (as well as renewals of these contracts, if any). However,
the revenue anticipated by the Celera Genomics group under these contracts could
be adversely impacted as a result of changes made to Celera Discovery System
products by or at the request of the Applied Biosystems group pursuant to the
agreement, although the Applied Biosystems group has agreed to reimburse the
Celera Genomics group for any shortfall in earnings before interest, taxes,
depreciation, and amortization from these contracts (as well as renewals, if
any) below $62.5 million during the four fiscal years ending with the 2006
fiscal year if the shortfall is due to these changes, provided the Celera
Genomics group otherwise continues to perform under these contracts. However,
during the term of the marketing and distribution agreement (other than the
transition period), the Celera Genomics group will not be marketing Celera
Discovery System products and services to, and will not be contracting with, new
customers. Accordingly, except for the anticipated revenue under Celera
Discovery System contracts existing on June 30, 2002 and renewals of these
contracts, if any, and the Applied Biosystems group's corresponding
reimbursement obligation, the Celera Genomics group does not expect any revenues
from Celera Discovery System and related products and services other than the
potential royalty payments from the Applied Biosystems group under the marketing
and distribution agreement. Although under certain contracts with existing
Celera Discovery System customers the Celera Genomics group is entitled to
milestone payments or future royalties based on products developed by its
customers, the Celera Genomics group believes these arrangements are unlikely to
produce any significant revenue for the group.
38
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Celera Genomics group's ability to maintain its relationships with existing
Celera Discovery System customers depends heavily on continued assembly and
annotation of the human and mouse genomes. In June 2000, the Celera Genomics
group and the Human 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 the 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 maintain its relationship with the existing
Celera Discovery System customers depends heavily upon the continued assembly
and annotation of these genomes. Failure to continue to update the assembly and
annotation efforts in a timely manner may have a material adverse effect on the
Celera Genomics group's revenues.
The Celera Genomics group's ability to develop and commercialize proprietary
therapeutics is unproven. As the Celera Genomics group expands its therapeutics
discovery and development business, it faces the difficulties inherent in
developing and commercializing therapeutic products. It is possible that the
Celera Genomics group's discovery and development efforts will not result in any
commercial products. In particular, the Celera Genomics group and its
collaborators are seeking to develop new therapeutic products based on
information derived from the study of the genetic material of organisms, or
genomics, and the study of proteins, or proteomics. These methods are unproven,
as few therapeutic products based on genomic or proteomic discoveries have been
developed and commercialized and, to date, no one has developed or
commercialized any therapeutic products based on the Celera Genomics group's
technologies.
Therapeutic product candidates may never result in a commercialized product. All
of the Celera Genomics group's therapeutic product candidates are in various
stages of research and development and will require significant additional
research and development efforts by the Celera Genomics group or its
collaborators before they can be marketed. These efforts include extensive
preclinical and clinical testing and lengthy regulatory review and clearance or
approval by the United States Food and Drug Administration and comparable
agencies in other countries. The Celera Genomics group's development of
therapeutic products is highly uncertain and subject to a number of significant
risks. To date, the Celera Genomics group has not commercialized a therapeutic
product and the Celera Genomics group does not expect any of its therapeutic
product candidates to be commercially available for a number of years, if ever.
Therapeutic product candidates that appear to be promising at early stages of
development may not be developed into commercial products, or may not be
successfully marketed, for a number of reasons, including:
39
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
o the Celera Genomics group or its collaborators may not successfully
complete any research and development efforts;
o the Celera Genomics group or its collaborators may not successfully
build the necessary preclinical and clinical development
organizations;
o any therapeutic product candidates that the Celera Genomics group or
its collaborators develop may be found during preclinical testing or
clinical trials to be ineffective or to cause harmful side effects;
o the Celera Genomics group or its collaborators may fail to obtain
required regulatory approvals for products they develop;
o the Celera Genomics group or its collaborators may be unable to
manufacture enough of any potential products at an acceptable cost and
with appropriate quality;
o the Celera Genomics group or its collaborators may fail to build
necessary distribution channels;
o the Celera Genomics group's or its collaborator's products may not be
competitive with other existing or future products;
o adequate reimbursement for the Celera Genomics group's or its
collaborators products may not be available to physicians and patients
from the government or insurance companies; and
o the Celera Genomics group or its collaborators may be unable to obtain
necessary intellectual property protection, or third parties may own
proprietary rights that prevent the Celera Genomics group or its
collaborators from commercializing their products.
If the Celera Genomics group fails to maintain its existing collaborative
relationships and enter into new collaborative relationships, or if
collaborators do not perform under collaboration agreements, development of its
therapeutic product candidates could be delayed. The Celera Genomics group's
strategy for the discovery, development, clinical testing, manufacturing and
commercialization of most of its therapeutic product candidates includes
entering into collaborations with partners. Although the Celera Genomics group
has expended, and continues to expend, time and money on internal research and
development programs, it may be unsuccessful in creating therapeutic product
candidates that would enable it to form additional collaborations and receive
milestone and/or royalty payments from collaborators.
Each of the Celera Genomics group's existing collaboration agreements may be
canceled under certain circumstances. In addition, the amount and timing of
resources to be devoted to research, development, eventual clinical trials and
commercialization activities by the Celera Genomics group's collaborators are
not within the Celera Genomics group's control. The Celera Genomics group cannot
ensure that its collaborators will perform their obligations as expected. If any
of the Celera Genomics group's collaborators terminate or elect to cancel their
agreements or otherwise fail to conduct their collaborative activities in a
timely manner, the development or commercialization of therapeutic products may
be delayed or otherwise adversely affected. If in some cases the Celera Genomics
group assumes responsibilities for continuing programs on its own after
termination of a collaboration, the Celera Genomics group may be required to
devote additional resources to product development and commercialization or the
Celera Genomics group may need to cancel certain development programs.
40
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
If the Celera Genomics group fails to satisfy regulatory requirements for any
therapeutic product candidate, the Celera Genomics group will be unable to
complete the development and commercialization of that product. The Celera
Genomics group does not currently have the internal capability to move potential
products through clinical testing, manufacturing and the approval processes of
the United States Food and Drug Administration and comparable agencies in other
countries. In the United States, either the Celera Genomics group or its
collaborators must show through pre-clinical studies and clinical trials that
each of the Celera Genomics group's therapeutic product candidates is safe and
effective in humans for each indication before obtaining regulatory clearance
from the United States Food and Drug Administration for the commercial sale of
that product. Outside of the United States, the regulatory requirements vary
from country to country. If the Celera Genomics group or its collaborator fails
to adequately show the safety and effectiveness of a therapeutic product,
regulatory clearance or approval could be delayed or denied. The results from
pre-clinical studies may be different from the results that are obtained in
large-scale clinical trials. The Celera Genomics group cannot be certain that it
will show sufficient safety and effectiveness in its clinical trials to allow it
to obtain the needed regulatory clearance or approval. The regulatory review and
approval process can take many years and require substantial expense and may not
be successful. Many companies in the therapeutic industry, including
biotechnology companies, have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier studies.
Even if the Celera Genomics group obtains regulatory clearance or approval, it
will be subject to certain risks and uncertainties relating to regulatory
compliance, including: post-approval clinical studies and inability to meet the
compliance requirements of the United States Food and Drug Administration's Good
Manufacturing Practices regulations. In addition, identification of certain
adverse side effects after a therapeutic product is on the market or the
occurrence of manufacturing problems could cause subsequent suspension of
product manufacture or withdrawal of approval, or could require reformulation of
a therapeutic product, additional testing or changes in labeling of the product.
This could delay or prevent the Celera Genomics group from generating revenues
from the sale of that therapeutic product.
For certain of the Celera Genomics group's research and product development
programs, particularly its proteomics efforts, the Celera Genomics group needs
access to human and other tissue samples from diseased and healthy individuals,
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 other required biological materials, or if tighter
restrictions are imposed on the use of related clinical or other information or
information generated from tissue samples or other biological materials, these
research and development programs and the Celera Genomics group's business could
be adversely affected.
41
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The pharmaceutical industry is intensely competitive and evolving. There is
intense competition among pharmaceutical and biotechnology companies attempting
to discover candidates for potential new therapeutic products. These companies
may:
o develop new therapeutic products in advance of the Celera Genomics
group;
o develop therapeutic products which are more effective or more
cost-effective than those developed by the Celera Genomics group;
o obtain regulatory approvals of their therapeutic products more rapidly
than the Celera Genomics group; or
o obtain patent protection or other intellectual property rights that
would limit the Celera Genomics group's ability to develop and
commercialize therapeutic products.
Introduction of new products may expose the Celera Genomics group to product
liability claims. New products developed by the Celera Genomics group or its
collaborators could expose the Celera Genomics group to potential product
liability risks that are inherent in the testing, manufacturing, marketing and
sale of human therapeutic 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.
Although the Celera Genomics group expects to seek and maintain product
liability insurance to cover claims relating to the testing and use of
therapeutic products, there can be no assurance that such insurance will be
available on commercially reasonable terms, if at all, or that the amount of
coverage obtained will be adequate to cover losses from any particular claim.
The therapeutics discovery and development business is highly technical, and
there is a competitive market for personnel with the necessary expertise to
develop and expand the Celera Genomics group's therapeutics business. The Celera
Genomics group believes that in order to develop and commercialize therapeutic
products, it will need to recruit and retain scientific and management personnel
having specialized training or advanced degrees, or otherwise having the
technical background, necessary for an understanding of therapeutic products.
There is a shortage of qualified scientific and management personnel who possess
this technical background. The Celera Genomics group competes for these
personnel with other pharmaceutical and biotechnology companies, academic
institutions and government entities. If the Celera Genomics group is unable to
retain and attract qualified scientific and management personnel, the growth of
the group's therapeutics discovery and development business could be delayed or
curtailed.
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.
42
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Celera Genomics group's business depends 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 Celera
Genomics group's online 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'
therapeutics discovery and research efforts, it could experience a loss of or
delay in revenues. In addition, any sustained disruption in Internet access
provided by third parties could adversely affect the Celera Genomics group's
business.
The Celera Genomics group's competitive position depends on maintaining its
intellectual property protection and obtaining licenses to intellectual property
it may need from others. The Celera Genomics group's ability to compete and to
achieve and maintain profitability depends on its ability to protect its
proprietary discoveries and technologies, in large part, through obtaining and
enforcing patent rights, obtaining copyright protection, maintaining its trade
secrets, and operating without infringing the intellectual property rights of
others. The Celera Genomics group's ability to obtain patent protection for the
inventions it makes is uncertain. The patentability of biotechnology and
pharmaceutical inventions involves complex factual and legal questions. As a
result, it is difficult to predict whether patents will issue or the breadth of
claims that will be allowed in biotechnology and pharmaceutical patents. This
may be particularly true with regard to the patenting of gene sequences, gene
functions, and genetic variations. In this regard, the United States Patent and
Trademark Office has adopted guidelines for use in the review of the utility of
inventions, particularly biotechnology inventions. These guidelines increased
the amount of evidence required to demonstrate utility in order to obtain a
patent in the biotechnology field, making patent protection more difficult 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.
43
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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, therapeutic
efficiency, and therapeutic 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.
In some instances, patent applications in the United States are maintained in
secrecy until a patent issues. In most instances, the content of United States
and international patent applications is made available to the public
approximately 18 months after the application's filing date. As a result, the
Celera Genomics group cannot be certain that others have not filed patent
applications for inventions covered by the Celera Genomics group's patent
applications or that the Celera Genomics group inventors were the first to make
the invention. Accordingly, the Celera Genomics group's patent applications may
be preempted or the Celera Genomics group may have to participate in
interference proceedings before the United States Patent and Trademark Office.
These proceedings determine the priority of invention and the right to a patent
for the claimed invention in the United States.
Furthermore, lawsuits may be necessary to enforce any patents issued to the
Celera Genomics group or to determine the scope and validity of the rights of
third parties. Lawsuits and interference proceedings, even if they are
successful, are expensive to pursue, and the Celera Genomics group could use a
substantial amount of its financial resources in either case. An adverse outcome
could subject the Celera Genomics group to significant liabilities to third
parties and require the Celera Genomics group to license disputed rights from
third parties or to cease using the technology.
The Celera Genomics group may be dependent on protecting its proprietary
databases through copyright law 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. Changes in copyright law could either expand or reduce the extent
to which the Celera Genomics group and its customers are able to protect their
intellectual property. Accordingly, the Celera Genomics group is uncertain as to
whether it can prevent such copying or resale through copyright law.
The Celera Genomics group also 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 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.
Accordingly, it is uncertain whether the Celera Genomics group's reliance on
trade secret protection will be adequate to safeguard its confidential and
proprietary information and procedures.
44
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Disputes may arise in the future with regard to the ownership of rights to any
invention developed with collaborators. These and other possible disagreements
with collaborators could lead to delays in the achievement of milestones or
receipt of royalty payments or in research, development and commercialization of
the Celera Genomics group's products. In addition, these disputes could require
or result in lawsuits or arbitration. Lawsuits and arbitration are
time-consuming and expensive. Even if the Celera Genomics group wins, the cost
of these proceedings could adversely affect its business, financial condition
and operating results.
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
therapeutics discovery and development may depend, in part, on its ability to
operate without infringing the intellectual property rights of others and to
prevent others from infringing its intellectual property rights.
There has been substantial litigation regarding patents and other intellectual
property rights in the biotechnology and pharmaceutical industries. 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. Interference proceedings may be necessary to establish
which party was the first to make the invention sought to be patented. The
Celera Genomics group may become involved in patent litigation against third
parties to enforce its 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 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.
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
regarding the use of genetic test results by insurance carriers or employers to
discriminate on the basis of this information, resulting in barriers to the
acceptance of genetic 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.
Future acquisitions and other transactions may absorb significant resources, may
be unsuccessful and could dilute the holders of Applera - Celera stock. The
Celera Genomics group 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 operating
results. Acquisitions involve numerous other risks, including:
45
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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, key contractual relationships, or key
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, intangibles and other assets and
other charges in the amounts of $69.1 million during fiscal 2001 and $25.9
million during fiscal 2002 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 - Celera stock without the approval of the holders
of Applera - Celera stock. Any issuances of this nature will be dilutive to
holders of Applera - Celera stock.
Applera - Celera stock price is volatile. The market price of Applera - Celera
stock has been and may continue to be volatile due to the risks and
uncertainties described in this section of this quarterly report, as well as
other factors that may have affected or may in the future affect the market
price, such as:
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
life science companies, or the Celera Genomics group's ability to meet
market expectations.
46
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 subjects 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.
Our company is subject to a purported class action lawsuit relating to its 2000
offering of shares of Applera - Celera stock that may be expensive and time
consuming. Our company and some of its officers were served in five lawsuits
purportedly on behalf of purchasers of Applera - Celera stock in our company's
follow-on public offering of Applera - Celera stock completed on March 6, 2000.
In the offering, our company sold an aggregate of approximately 4.4 million
shares of Applera - Celera 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 our 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 our company did not adequately
disclose the risk that it would not be able to patent this data. The
consolidated complaint seeks unspecified monetary damages, rescission, costs and
expenses, and other relief as the court deems proper. Our company and the other
defendants have filed a motion to dismiss the case, which motion is pending
before the court. Although our 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.
Factors Relating to Celera Diagnostics, a Joint Venture between the Applied
Biosystems Group and the Celera Genomics Group
Celera Diagnostics' ability to develop and commercialize proprietary diagnostic
products is unproven. Celera Diagnostics faces the difficulties inherent in
developing and commercializing diagnostic products. It is possible that Celera
Diagnostics' discovery and development efforts will not result in any commercial
products or services. In particular, Celera Diagnostics and its collaborators
are seeking to develop new diagnostic products based on information derived from
the study of the genetic material of organisms, or genomics, and the study of
proteins, or proteomics. This method carries inherent risks, as only a limited
number of diagnostic products based on genomic or proteomic discoveries have
been developed and commercialized to date.
Diagnostic product candidates may never result in a commercialized product. Most
of Celera Diagnostics' potential diagnostic products are in various stages of
research and development and will require significant additional research and
development efforts by Celera Diagnostics or its collaborators before they can
be marketed. These efforts include extensive clinical testing and may require
lengthy regulatory review and clearance or approval by the United States Food
and Drug Administration and comparable agencies in other countries. Celera
Diagnostics' development of new diagnostics products is highly uncertain and
subject to a number of significant risks. Diagnostic product candidates that
appear to be promising at early stages of development may not be developed into
commercial products, or may not be successfully marketed, for a number of
reasons, including:
47
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
o Celera Diagnostics or its collaborators may not successfully complete any
research and development efforts;
o any diagnostic products that Celera Diagnostics or its collaborators
develop may be found during clinical trials to have limited medical value;
o Celera Diagnostics or its collaborators may fail to obtain required
regulatory clearances or approvals for products they develop;
o Celera Diagnostics or its collaborators may be unable to manufacture enough
of any potential products at an acceptable cost and with appropriate
quality;
o any diagnostic products Celera Diagnostics or its collaborators develop may
not be competitive with other existing or future products;
o adequate reimbursement for Celera Diagnostics' and its collaborators'
products may not be available to physicians or patients from the government
or insurance companies; and
o Celera Diagnostics may be unable to obtain necessary intellectual property
protection, or third parties may own proprietary rights that prevent Celera
Diagnostics or its collaborators from commercializing their products.
If Celera Diagnostics fails to satisfy regulatory requirements for any
diagnostic product candidate, it may be unable to complete the development and
commercialization of that product. Celera Diagnostics is currently developing
its capability to move potential products through clinical testing,
manufacturing, and the approval processes of the United States Food and Drug
Administration and comparable agencies in other countries. In the United States,
either Celera Diagnostics or its collaborators must show through pre-clinical
studies and clinical trials that each of Celera Diagnostics' diagnostic product
candidates is safe and effective for each indication before obtaining regulatory
clearance or approval from the United States Food and Drug Administration for
the commercial sale of that product. Outside of the United States, the
regulatory requirements vary from country to country. If Celera Diagnostics or
its collaborator fails to adequately show the safety and effectiveness of a
diagnostic product, regulatory clearance or approval could be delayed or denied.
The results from pre-clinical studies may be different from the results that are
obtained in large-scale clinical trials. Celera Diagnostics cannot be certain
that it will show sufficient safety and effectiveness in its clinical trials to
allow it to obtain the needed regulatory clearance or approval. The regulatory
review and approval process can take many years and require substantial expense
and may not be successful. A number of companies in the diagnostics industry,
including biotechnology companies, have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier studies.
Even if Celera Diagnostics obtains regulatory clearance or approval, it will be
subject to certain risks and uncertainties relating to regulatory compliance,
including: post-clearance or approval clinical studies and inability to meet the
compliance requirements of the United States Food and Drug Administration's Good
Manufacturing Practices (Quality System) regulations. In addition, the
occurrence of manufacturing problems could cause subsequent suspension of
product manufacture or withdrawal of clearance or approval, or could require
reformulation of a diagnostic product, additional testing, or changes in
labeling of the product. This could delay or prevent Celera Diagnostics from
generating revenues from the sale of that diagnostic product.
48
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Celera Diagnostics' products may not be fully accepted by physicians and
laboratories. Celera Diagnostics' growth and success will depend on market
acceptance by physicians and laboratories of its products as clinically useful
and cost-effective. Celera Diagnostics expects that most of its products will
use genotyping and gene expression information to predict predisposition to
diseases, disease progression or severity, or responsiveness to treatment.
Market acceptance will depend on the widespread acceptance and use by doctors
and clinicians of genetic testing for these purposes. The use of genotyping and
gene expression information by doctors and clinicians for these purposes is
relatively new. Celera Diagnostics cannot be certain that doctors and clinicians
will want to use its products designed for these purposes.
Even if genetic testing is accepted as a method to manage health care, Celera
Diagnostics cannot be certain that its products will be accepted in the clinical
diagnostic market. If genetic testing becomes widely accepted in the clinical
diagnostic market, Celera Diagnostics cannot predict the extent to which doctors
and clinicians may be willing to utilize Celera Diagnostics' products in
providing patient care. Doctors and clinicians may prefer competing technologies
and products that can be used for the same purposes as Celera Diagnostics'
products.
Ethical, legal and social issues related to the use of genetic information and
genetic testing may cause less demand for Celera Diagnostics' products. Genetic
testing has raised issues regarding confidentiality and the appropriate uses of
the resulting information. For example, concerns have been expressed regarding
the use of genetic test results by insurance carriers or employers to
discriminate on the basis of this information, resulting in barriers to the
acceptance of genetic 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 Celera Diagnostics.
If insurance companies and other third-party payors do not reimburse doctors and
patients for Celera Diagnostics' tests, its ability to sell its products to the
clinical diagnostics market will be impaired. Sales of Celera Diagnostics'
products will depend, in large part, on the availability of adequate
reimbursement to users of those products from government insurance plans,
including Medicare and Medicaid in the United States, managed care
organizations, and private insurance plans. Physicians' recommendations to use
diagnostic tests, as well as decisions by patients to pursue those tests, are
likely to be influenced by the availability of reimbursement by insurance
companies and other third party payors. Third-party payors are increasingly
attempting to contain health care costs by limiting both the extent of coverage
and the reimbursement rate for testing and treatment products and services. In
particular, products and services that are determined to be investigational in
nature or that are not considered "reasonably necessary" for diagnosis or
treatment may be denied reimbursement coverage. In addition, third-party payors
are increasingly limiting reimbursement coverage for medical diagnostic products
and, in many instances, are exerting pressure on medical suppliers to reduce
their prices. Thus, third-party reimbursement may not be consistently available
or financially adequate to cover the cost of Celera Diagnostics' products. This
could limit the ability of Celera Diagnostics to sell its products, cause Celera
Diagnostics to reduce the prices of its products, or otherwise adversely affect
Celera Diagnostics' operating results.
49
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Because each third-party payor individually approves reimbursement, obtaining
these approvals is a time-consuming and costly process that requires Celera
Diagnostics to provide scientific and clinical support for the use of each of
its products to each payor separately with no assurance that such approval will
be obtained. This process can delay the broad market introduction of new
products and could have a negative effect on Celera Diagnostics' revenues and
operating results.
If Celera Diagnostics fails to maintain its existing collaborative relationships
and enter into new collaborative relationships, or if collaborators do not
perform under collaboration agreements, development of its diagnostic products
could be delayed. Celera Diagnostics' strategy for the discovery, development,
clinical testing, manufacturing and commercialization of most of its diagnostic
product candidates includes entering into collaborations with partners. Although
Celera Diagnostics has expended, and continues to expend, time and money on
internal research and development programs, it may be unsuccessful in creating
diagnostic product candidates that would enable it to form additional
collaborations.
Celera Diagnostics has entered into a strategic alliance agreement with Abbott
Laboratories for the joint discovery, development, manufacturing, and
commercialization of nucleic acid-based diagnostic products. The Abbott
Laboratories agreement may be terminated by the non-breaching party in the event
of a material breach and, under certain circumstances, by either party in the
event of a change in control of the other party. In addition, the amount and
timing of resources to be devoted to research, development, eventual clinical
trials and commercialization activities by Abbott are not within Celera
Diagnostics' control. Future collaborations with other third parties are likely
to be subject to similar terms and conditions. Celera Diagnostics cannot ensure
that its collaborators will perform their obligations as expected. If any of
Celera Diagnostics' collaborators terminate or elect to cancel their agreements
or otherwise fail to conduct their collaborative activities in a timely manner,
the development or commercialization of diagnostics products may be delayed or
otherwise adversely affected. If in some cases Celera Diagnostics assumes
responsibilities for continuing programs on its own after termination of a
collaboration, Celera Diagnostics may be required to devote additional resources
to product development and commercialization or Celera Diagnostics may need to
cancel certain development programs.
Celera Diagnostics does not have a sales and service capability in the clinical
diagnostic market. Celera Diagnostics currently does not have a sales and
service organization. Accordingly, its ability to successfully sell its products
will depend on its ability to either develop a sales and service organization or
work with Abbott Laboratories under their current agreement, or a combination of
both. In jurisdictions where Celera Diagnostics uses third party distributors,
its success will depend to a great extent on the efforts of the distributors.
50
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Celera Diagnostics has limited manufacturing capability and may encounter
difficulties expanding Celera Diagnostics' operations. Celera Diagnostics has
limited commercial manufacturing experience and capabilities. If product sales
increase, Celera Diagnostics will have to increase the capacity of its
manufacturing processes and facilities or rely on its collaborators, if any.
Celera Diagnostics may encounter difficulties in scaling-up manufacturing
processes and may be unsuccessful in overcoming such difficulties. In such
circumstances, Celera Diagnostics' ability to meet product demand may be
impaired or delayed.
Celera Diagnostics' facilities are subject, on an ongoing basis, to the United
States Food and Drug Administration's Good Manufacturing Practices (Quality
System) regulations, international quality standards and other regulatory
requirements, including requirements for good manufacturing practices. Celera
Diagnostics may encounter difficulties expanding Celera Diagnostics'
manufacturing operations in accordance with these regulations and standards,
which could result in a delay or termination of manufacturing or an inability to
meet product demand.
Celera Diagnostics is currently operating its manufacturing at an Applied
Biosystems group facility, and intends to relocate these operations to a new
facility currently under construction. Celera Diagnostics expects to operate its
manufacturing out of a single facility for the foreseeable future, and it does
not have alternative production plans in place or alternative facilities
available should its existing manufacturing facility or its new manufacturing
facility, after completion of and relocation to this facility, cease to
function. Accordingly, Celera Diagnostics' business could be adversely affected
by unexpected interruptions in manufacturing caused by events such as labor
problems, equipment failures, or other factors, and the resulting inability to
meet customer orders on a timely basis.
Celera Diagnostics' research and product development depends on access to tissue
samples and other biological materials. Celera Diagnostics needs access to human
tissue samples from diseased and healthy individuals, other biological
materials, and related clinical and other information, which may be in limited
supply. Celera Diagnostics 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 tissue samples. If Celera Diagnostics 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.
Single suppliers or a limited number of suppliers provide key components of
Celera Diagnostics' products. If these suppliers fail to supply these
components, Celera Diagnostics may be unable to satisfy product demand. Several
key components of Celera Diagnostics' products come from, or are manufactured
for Celera Diagnostics by, a single supplier or a limited number of suppliers.
This applies in particular to components such as enzymes and fluorescent dyes.
Celera Diagnostics acquires some of these and other key components on a
purchase-order basis, meaning that the supplier is not required to supply Celera
Diagnostics with specified quantities over longer periods of time or set-aside
part of its inventory for Celera Diagnostics' forecasted requirements. Celera
Diagnostics has not arranged for alternative supply sources for some of these
components and it may be difficult to find alternative suppliers, especially to
replace enzymes and fluorescent dyes. If Celera Diagnostics' product sales
increase beyond the forecast levels, or if its suppliers are unable or unwilling
to supply it on commercially acceptable terms, it may not have access to
sufficient quantities of key components on a timely basis and may be unable to
satisfy product demand.
51
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
In addition, if any of the components of Celera Diagnostics' products are no
longer available in the marketplace, it may be forced to further develop its
products or technology to incorporate alternate components. The incorporation of
new components into its products may require Celera Diagnostics to seek
clearances or approvals from the United States Food and Drug Administration or
foreign regulatory agencies prior to commercialization.
Celera Diagnostics' competitive position depends on maintaining its intellectual
property protection and obtaining licenses to intellectual property it may need
from others. Celera Diagnostics' ability to compete and to achieve and maintain
profitability depends on its ability to protect its proprietary discoveries and
technologies, in large part, through obtaining and enforcing patent rights,
maintaining its trade secrets, and operating without infringing the intellectual
property rights of others. Celera Diagnostics' ability to obtain patent
protection for the inventions it makes is uncertain. The patentability of
biotechnology inventions involves complex factual and legal questions. As a
result, it is difficult to predict whether patents will issue or the breadth of
claims that will be allowed in biotechnology and pharmaceutical patents. This
may be particularly true with regard to the patenting of gene sequences, gene
functions, and genetic variations. In this regard, the United States Patent and
Trademark Office has adopted guidelines for use in the review of the utility of
inventions, particularly biotechnology inventions. These guidelines increased
the amount of evidence required to demonstrate utility in order to obtain a
patent in the biotechnology field, making patent protection more difficult 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 Celera Diagnostics may own or license if the
applicant is unable to satisfy the new guidelines.
In some instances, patent applications in the United States are maintained in
secrecy until a patent issues. In most instances, the content of United States
and international patent applications is made available to the public
approximately 18 months after the application's filing date. As a result, Celera
Diagnostics cannot be certain that others have not filed patent applications for
inventions covered by Celera Diagnostics' patent applications or that Celera
Diagnostics inventors were the first to make the invention. Accordingly, Celera
Diagnostics' patent applications may be preempted or Celera Diagnostics may have
to participate in interference proceedings before the United States Patent and
Trademark Office. These proceedings determine the priority of invention and the
right to a patent for the claimed invention in the United States.
Furthermore, lawsuits may be necessary to enforce any patents issued to Celera
Diagnostics or to determine the scope and validity of the patent rights of third
parties. Lawsuits and interference proceedings, even if they are successful, are
expensive to pursue, and Celera Diagnostics could use a substantial amount of
its financial resources in either case. An adverse outcome could subject Celera
Diagnostics to significant liabilities to third parties and require Celera
Diagnostics to license disputed rights from third parties or to cease
development or sales of a product.
52
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Celera Diagnostics also relies on trade secret protection for its confidential
and proprietary information and procedures. Celera Diagnostics 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 Celera Diagnostics may not have
adequate remedies for a breach. In addition, Celera Diagnostics' trade secrets
may otherwise become known or be independently developed by competitors.
Accordingly, it is uncertain whether Celera Diagnostics' reliance on trade
secret protection will be adequate to safeguard its confidential and proprietary
information and procedures.
Disputes may arise in the future with regard to the ownership of rights to any
invention developed with collaborators. These and other possible disagreements
with collaborators could lead to delays in the achievement of milestones or
receipt of royalty payments or in research, development, and commercialization
of Celera Diagnostics' products. In addition, these disputes could require or
result in lawsuits or arbitration. Lawsuits and arbitration are time-consuming
and expensive. Even if Celera Diagnostics wins, the cost of these proceedings
could adversely affect its business, financial condition and operating results.
Celera Diagnostics may infringe the intellectual property rights of third
parties and may become involved in expensive intellectual property litigation.
The intellectual property rights of biotechnology companies, including Celera
Diagnostics, are generally uncertain and involve complex legal, scientific and
factual questions. Celera Diagnostics' success in diagnostic discovery and
development may depend, in part, on its ability to operate without infringing
the intellectual property rights of others and to prevent others from infringing
its intellectual property rights.
There has been substantial litigation regarding patents and other intellectual
property rights in the biotechnology and pharmaceutical industries. Celera
Diagnostics 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. Interference proceedings may be necessary to establish which
party was the first to make the invention sought to be patented. Celera
Diagnostics may become involved in patent litigation against third parties to
enforce its patent rights, to invalidate patents held by the third parties, or
to defend against these claims. The cost to Celera Diagnostics of any patent
litigation or similar proceeding could be substantial, and it may absorb
significant management time. If infringement litigation against Celera
Diagnostics is resolved unfavorably to Celera Diagnostics, Celera Diagnostics
may be enjoined from manufacturing or selling its products or services without a
license from a third party. Celera Diagnostics may not be able to obtain a
license on commercially acceptable terms, or at all.
Introduction of new products may expose Celera Diagnostics to product liability
claims. New products developed by Celera Diagnostics or its collaborators could
expose Celera Diagnostics to potential product liability risks that are inherent
in the testing, manufacturing, marketing, and sale of human diagnostic products.
In addition, clinicians, patients, third-party payors, and others may at times
seek damages based on testing or analysis errors based on a technician's
misreading of results, mishandling of the patient samples, or similar claims.
Product liability claims or product recalls, regardless of the ultimate outcome,
could require Celera Diagnostics to spend significant time and money in
litigation and to pay significant damages. Although Celera Diagnostics expects
to seek and maintain product liability insurance to cover claims relating to the
testing and use of diagnostic products, there can be no assurance that such
insurance will be available on commercially reasonable terms, if at all, or that
the amount of coverage obtained will be adequate to cover losses from any
particular claim.
53
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The diagnostics industry is intensely competitive and evolving. There is intense
competition among health care, biotechnology, and diagnostic companies
attempting to discover candidates for potential new diagnostic products. These
companies may:
o develop new diagnostic products in advance of Celera Diagnostics;
o develop diagnostic products which are more effective or more cost-effective
than those developed by Celera Diagnostics;
o obtain regulatory clearances or approvals of their diagnostic products more
rapidly than Celera Diagnostics; or
o obtain patent protection or other intellectual property rights that would
limit Celera Diagnostics' ability to develop and commercialize, or its
customers' ability to use, Celera Diagnostics' diagnostic products.
Celera Diagnostics competes with entities in the United States and abroad that
are engaged in the development and commercialization of products that provide
genetic information. They include:
o purveyors of genetic testing services, which are not subject to the same
clinical validation requirements as Celera Diagnostics' products, and which
do not require United States Food and Drug Administration or other
regulatory clearance or approval, including Laboratory Corporation of
America Holdings, Quest Diagnostics Inc., and Specialty Laboratories, Inc.;
o manufacturers of analyte specific reagents and genotyping test kits;
o purveyors of phenotyping assay services; and
o manufacturers and distributors of DNA probe-based diagnostic systems.
Electricity shortages and earthquakes could disrupt operations in California.
The headquarters and principal operations of Celera Diagnostics are located in
Alameda, California. In 2001, the State of California experienced a statewide
electricity shortage due to a variety of factors. Although some of the factors
causing this shortage have been eliminated or mitigated, there are ongoing
concerns about the availability of electricity in California, particularly
during peak usage periods. Blackouts in Alameda, even of modest duration, could
impair or cause a temporary suspension of Celera Diagnostics' 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, Alameda is located near major California
earthquake faults. The ultimate impact of earthquakes on the Celera Diagnostics,
its significant suppliers, and the general infrastructure is unknown, but
operating results could be materially affected in the event of a major
earthquake.
54
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to potential loss from exposure to market risks represented
principally by changes in foreign exchange rates, interest rates, and equity
prices. Please refer to the market risk section of the Management's Discussion
and Analysis included on page 30 of our 2002 Annual Report to Stockholders
(which section is incorporated herein by reference).
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures designed to ensure that the
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. We evaluated the effectiveness of the design and operation of
these disclosure controls and procedures under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, within 90 days prior to the filing of this report. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to achieve
their stated purpose. No significant changes were made to our internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their most recent evaluation.
55
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various legal proceedings from time to time,
including actions with respect to commercial, intellectual property, antitrust,
environmental, securities, and employment matters. The following is a
description of a claim currently being defended by the Company. The Company
believes that it has meritorious defenses against the claims currently asserted
against it, including the claim described below, and intends to defend them
vigorously. However, the outcome of litigation is inherently uncertain, and the
Company cannot be sure that it will prevail in the case described below or in
the Company's other current litigation. An adverse determination in certain of
the Company's current litigation, particularly the case described below or
elsewhere in this quarterly report, could have a material adverse effect on the
Company, the Applied Biosystems group, or the Celera Genomics group.
On or about November 3, 1999, On-Line Technologies, Inc. (since acquired by MKS
Instruments, Inc.) filed claims for patent infringement, trade secret
misappropriation, fraud, breach of contract and unfair trade practices against
the Company, PerkinElmer, Inc. and Sick UPA, GmbH in the United States District
Court for the District of Connecticut. The complaint alleges that products
called the Spectrum One and the MCS100E manufactured by former divisions of the
Applied Biosystems group, which divisions were sold to the co-defendants in this
case, are based on allegedly proprietary information belonging to On-Line
Technologies and that the MCS100E infringes United States Patent No. 5,440,143.
On-Line Technologies is seeking monetary damages, costs, expenses, injunctive
relief, and other relief as the court deems proper.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
13 Annual Report to Stockholders for the fiscal year
ended June 30, 2002, to the extent incorporated herein
by reference (incorporated by reference to Exhibit 13
to Annual Report on Form 10-K of the Company for the
fiscal year ended June 30, 2002 (Commission file
number 1-4389)).
99.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2002, the Company filed a
Current Report on Form 8-K dated September 27, 2002, to (a) report
under Item 9 thereof the text of Statements Under Oath, dated
September 27, 2002, of the Principal Executive Officer and
Principal Financial Officer of Applera Corporation Regarding Facts
and Circumstances Relating to Exchange Act Filings, which were
required under an Order of the Securities Exchange Commission dated
June 27, 2002, and (b) report under Item 9 thereof the filing by
the Company on the date thereof of certifications required under
sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
56
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, 2002
57
CERTIFICATIONS
Principal Executive Officer Certification
I, Tony L. White, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Applera Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
58
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Tony L. White
-----------------------------------
Chief Executive Officer
Principal Financial Officer Certification
I, Dennis L. Winger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Applera Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
59
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Dennis L. Winger
-----------------------------------
Chief Financial Officer
60
EXHIBIT INDEX
Exhibit Number
99.1 Certification of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002