===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
[ X ] Annual Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
For the Fiscal Year Ended June 30, 2002
OR
[ ] Transition Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
For the transition period from _________to __________
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 No.)
301 Merritt 7, Norwalk, Connecticut 06851-1070
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-840-2000
--------------------
Securities registered pursuant to Section 12 (b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Class on Which Registered
------------------------------------------------- --------------------------------------------
<S> <C>
Applera Corporation - Applied Biosystems New York Stock Exchange
Group Common Stock (par value $0.01 per share) Pacific Exchange
Rights to Purchase Series A Participating New York Stock Exchange
Junior Preferred Stock (par value $0.01 per share) Pacific Exchange
Applera Corporation - Celera Genomics Group New York Stock Exchange
Common Stock (par value $0.01 per share) Pacific Exchange
Rights to Purchase Series B Participating New York Stock Exchange
Junior Preferred Stock (par value $0.01 per share) Pacific Exchange
</TABLE>
Securities registered pursuant to Section 12 (g) of the Act:
Title of Class
--------------------
Class G Warrants
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of September 4, 2002, 208,797,987 shares of Applera Corporation -
Applied Biosystems Group Common Stock were outstanding, and the aggregate market
value of such shares (based upon the average of the high and low price) held by
non-affiliates was $3,778,158,063. As of September 4, 2002, 71,290,854
shares of Applera Corporation - Celera Genomics Group Common Stock were
outstanding, and the aggregate market value of such shares (based upon the
average of the high and low price) held by non-affiliates was $638,363,165.
-------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders for Fiscal Year ended June 30, 2002 -
Parts I, II, and IV. Proxy Statement for Annual Meeting of
Stockholders dated September 4, 2002 - Part III.
===============================================================================
PART I
Item 1. BUSINESS
General Development of Business
Applera Corporation (hereinafter referred to as the "Company") was
incorporated in 1998 under the laws of the State of Delaware. The Company
conducts its business through two groups: the Applied Biosystems Group ("Applied
Biosystems") and the Celera Genomics Group ("Celera Genomics"). In April 2001,
Applied Biosystems and Celera Genomics formed a joint venture in the field of
diagnostics ("Celera Diagnostics"). The Company maintains a corporate staff to
provide accounting, tax, treasury, legal, information technology, human
resources, and other internal services for Applied Biosystems, Celera Genomics,
and Celera Diagnostics.
The Company is the successor to PE Corporation (NY), formerly "The
Perkin-Elmer Corporation," which became a wholly owned subsidiary of the Company
as a result of a recapitalization of PE Corporation (NY) completed in May 1999.
As part of the recapitalization, the Company established two classes of common
stock that were intended to reflect separately the performance of the businesses
of each of Applied Biosystems and Celera Genomics (i.e., Applera Corporation -
Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics
Group Common Stock). Effective November 30, 2000, the Company, which was named
"PE Corporation" at the time of the recapitalization, was renamed "Applera
Corporation," and Applied Biosystems, which was named the "PE Biosystems Group"
at the time of the recapitalization, was renamed the "Applied Biosystems Group."
Applied Biosystems is engaged principally in the development,
manufacture, sale, and service of instrument-based systems, reagents, and
software, and the provision of contract services, for life science and related
applications. Its products are used in various applications including synthesis,
amplification, purification, isolation, analysis, and sequencing of nucleic
acids, proteins, and other biological molecules. The markets for Applied
Biosystems' products span the spectrum of the life sciences industry and
research community, including: basic human disease research; genetic analysis;
pharmaceutical drug discovery, development, and manufacturing; human
identification; agriculture; and food and environmental testing. Universities,
government agencies, and other non-profit organizations engaged in research
activities also use Applied Biosystems' products.
During the 2001 fiscal year, Applied Biosystems implemented an
organizational realignment away from a business unit structure organized
according to specific technologies to a more integrated marketing and product
development structure. During the 2002 fiscal year, Applied Biosystems
implemented further organizational changes intended to improve upon its new
marketing and product development structure. As part of these additional
organizational changes, in April 2002 Applied Biosystems announced the formation
of its new Knowledge Business for the purpose of developing and marketing
products and services designed to meet the needs of life science researchers in
performing specific biological analysis applications. Products and services
under development or expected to be developed by the Knowledge Business include
genomic assays and related information, as well as other information-rich
products, services, and analytical tools. Also in April 2002, Applied Biosystems
and Celera Genomics entered into a marketing and distribution agreement pursuant
to which Applied
Biosystems has become the exclusive marketer of Celera Genomics' Celera
Discovery System(TM) and related information assets as part of the Knowledge
Business.
Celera Genomics is engaged principally in integrating advanced
technologies to discover and develop new therapeutics. Celera Genomics intends
to leverage its capabilities in proteomics, bioinformatics, and genomics to
identify and validate drug targets and diagnostic marker candidates, and to
discover and develop novel therapeutic candidates. Celera Genomics was
originally formed for the purpose of generating and commercializing information
to accelerate the understanding of biological processes and to assist the
research endeavors of pharmaceutical, biotechnology, and life science research
entities. Celera Genomics' original business strategy was the development and
sale of its Celera Discovery System, an online information and discovery system
through which users can access Celera Genomics' genomic and related biological
and medical information. During the 2001 fiscal year, Celera Genomics announced
that it was expanding its operations to include a therapeutics discovery and
development business. During the 2002 fiscal year, Celera Genomics completed a
number of steps, including the following, to further develop its therapeutics
business and establish that business as its primary focus:
o In November 2001, Celera Genomics completed its acquisition of
Axys Pharmaceuticals, Inc. ("Axys"), a small molecule drug
discovery and development company. Celera Genomics believes
that Axys' medicinal and structural chemistry and biology
capabilities and preclinical programs will accelerate the
development of its therapeutics business.
o Celera Genomics announced a number of important management
changes. In January 2002, Celera Genomics announced the
resignation of J. Craig Venter as its President, and in April
2002, Celera Genomics announced the appointment of Kathy
Ordonez, who is also President of Celera Diagnostics, as his
replacement. Also in January 2002, Celera Genomics announced
the appointment of David Block as the Chief Operating Officer
of its therapeutics business. In July 2002, Celera Genomics
announced the appointment of Robert Booth as its Senior Vice
President of Research and Development to lead its therapeutics
research and development efforts.
o In April 2002, Celera Genomics and Applied Biosystems entered
into a marketing and distribution agreement pursuant to which
Applied Biosystems has become the exclusive marketer of Celera
Genomics' Celera Discovery System and related information
assets as part of Applied Biosystems' new Knowledge Business.
The agreement is expected to enable Celera Genomics' executive
team to focus on therapeutics discovery and development.
o Celera Genomics substantially increased the number of research
and development employees assigned to its therapeutics
programs. In addition, in June 2002, Celera Genomics announced
the implementation of a restructuring of its organization
intended to focus the group's resources on therapeutic
discovery and development. The restructuring also involved the
reduction of infrastructure, including personnel and
positions, previously built to support the group's sequencing
activities and online/information business.
Celera Diagnostics is focused on the discovery, development, and
commercialization of novel diagnostic products. In June 2002, Celera Diagnostics
announced the formation of a long-
-2-
term strategic alliance with Abbott Laboratories to develop, manufacture, and
market a broad range of in vitro molecular diagnostic products for disease
detection, disease progression monitoring, and therapy selection.
In July 2001, the Company announced the Applera Genomics Initiative, a
collaboration among Celera Genomics, Applied Biosystems, and Celera Diagnostics
for commercializing products derived from information obtained through analysis
of variations in the human genome. The Company expects that these products will
be based on the identification of variations in the sequence and expression of
genes, and their association with disease and therapy. As part of this program,
Celera Genomics has prioritized and is resequencing approximately 25,000 genes
from 39 individuals and a chimpanzee, which the Company believes will reveal a
larger number of single nucleotide polymorphisms ("SNPs") with health related
implications than is currently available. SNPs are naturally occurring genetic
variations within a genome that scientists believe can be correlated with
susceptibility to disease, disease prognosis, therapeutic efficiency, and
therapeutic toxicity. Celera Genomics has identified over 100,000 SNPs to date,
a majority of which the Company believes have not been previously identified by
other researchers. In addition, Applied Biosystems has begun the process of
validating the SNPs identified by Celera Genomics to enable their use in
internal research and development and incorporation into commercial products and
services. Celera Genomics intends to use this SNP data in its internal discovery
efforts to improve the prediction of the efficacy and toxicity of drug
candidates. Applied Biosystems intends to use this information to develop new
assays for the study of SNPs and other polymorphisms, and gene expression and
other genomic products. Applied Biosystems' Knowledge Business may also
incorporate this data into its database offerings. Celera Diagnostics expects to
use this information in genotyping and gene expression studies ultimately aimed
at identifying new diagnostic markers. In July 2002, Applied Biosystems'
Knowledge Business announced the launch of its Assays-on-Demand(TM) products, a
collection of ready-to-use assays for gene expression and genotyping.
Assays-on-Demand products represent the first commercial products resulting from
the Applera Genomics Initiative, and the Company believes that Assays-on-Demand
is also the first commercial product line to incorporate genomic data from both
the public and private sector human genome sequencing projects.
Financial Information About Industry Segments
A summary of net revenues from external customers and operating income
(loss) attributable to each of the Company's industry segments for the fiscal
years ended June 30, 2000, 2001, and 2002, and total assets attributable to each
of the Company's industry segments for the fiscal years ended June 30, 2001 and
2002, is incorporated herein by reference to Note 14 on pages 71-83 of the
Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002.
Total assets for the fiscal year ended June 30, 2000, were $1,698.2 million for
Applied Biosystems, $1,413.3 million for Celera Genomics, and $3,083.3 million
for the Company after the effects of ($28.2) million related to intercompany
eliminations. Celera Diagnostics has been presented as a segment during fiscal
2002, and fiscal 2001 amounts have been restated accordingly.
-3-
Narrative Description of Business
Applied Biosystems Group
Overview. Applied Biosystems is engaged principally in the development,
manufacture, sale, and service of instrument-based systems, reagents, and
software, and the provision of contract services, for life science and related
applications. Its products are used in various applications including the
synthesis, amplification, purification, isolation, analysis, and sequencing of
nucleic acids, proteins, and other biological molecules. The markets for Applied
Biosystems' products span the spectrum of the life sciences industry and
research community, including: basic human disease research; genetic analysis;
pharmaceutical drug discovery, development, and manufacturing; human
identification; agriculture; and food and environmental testing. Universities,
government agencies, and other non-profit organizations engaged in research
activities also use Applied Biosystems' products. For information on revenues
from instruments and consumables for fiscal years 2000 through 2002, refer to
pages 22-24 of Management's Discussion and Analysis in the Company's Annual
Report to Stockholders for the fiscal year ended June 30, 2002, which pages are
incorporated herein by reference.
During the 2001 fiscal year, Applied Biosystems implemented an
organizational realignment away from a business unit structure organized
according to specific technologies to a more integrated marketing and product
development structure. During the 2002 fiscal year, Applied Biosystems
implemented further organizational changes intended to improve upon its new
marketing and product development structure. Under this structure, Applied
Biosystems' business operations are divided among several principal operating
units organized primarily according to their business function. These units are
responsible for various aspects of product and service discovery, development,
marketing, manufacturing, sales, and service. The operating activities of these
units are supported by a shared service organization responsible for the human
resources, finance, communications, legal, intellectual property, and advanced
research functions.
Scientific Background. All living organisms contain four basic
biological molecules: nucleic acids, which include DNA and RNA; proteins;
carbohydrates; and lipids. Biological molecules are typically much larger and
more complex than common molecules. These structural differences make the
analysis of biological molecules significantly more complex than the analysis of
smaller compounds. Although all of these biological molecules are critical for a
cell to function normally, key advances in therapeutics have historically come
from an understanding of either proteins or DNA.
DNA molecules provide instructions that ultimately control the
synthesis of proteins within a cell, a process referred to as gene expression.
DNA molecules consist of long chains of chemical subunits, called nucleotides.
There are four nucleotides - adenine, cytosine, guanine, and thymine - often
abbreviated with their first letters A, C, G, and T. DNA molecules consist of
two long chains of nucleotides bound together to form a double helix. Genes are
individual segments of these DNA molecules that carry the specific information
necessary to construct particular proteins. Genes may contain from several dozen
to tens of thousands of nucleotides. The entire collection of DNA in an
organism, called the genome, may contain a wide range of nucleotides, including
as few as 4 million nucleotides in the case of simple bacteria and 3.1 billion
base pairs of nucleotides in the case of human beings.
-4-
RNA molecules are similar to DNA in structure and facilitate
intracellular function. There are different types of RNA molecules, each of
which has a different function. For example, messenger RNA, the most common form
of RNA, acts as an intermediary between DNA and protein, transcribing the
genetic code from DNA into protein.
Principally driven by the "biotechnology revolution," and the
increasing focus on DNA, researchers are developing a better understanding of
DNA's role in human disease. An increased appreciation of how DNA ultimately
determines the functions of living organisms has generated a worldwide effort to
identify and sequence genes of many organisms, including the genes that make up
the human genome. The Company believes the best scientific evidence to date
indicates that the number of genes in the human genome that code for proteins is
between 25,000 and 35,000, which is significantly less than had been previously
thought.
Individual research efforts in genetics generally fall into three broad
categories: sequencing, genotyping, and gene expression. In sequencing
procedures, the goal is to determine the exact order of the individual
nucleotides in a DNA strand so that this information can be related to the
genetic activity influenced by that piece of DNA. In genotyping, the goal is to
determine a particular sequence variant of a gene and its particular association
with an individual's DNA. Genotyping is not performed to determine the complete
structure of the gene, but rather is performed to determine if the particular
variant can be associated with a particular disease susceptibility or drug
response. In gene expression studies, the goal is to determine whether a
particular gene is expressed in a relevant biological tissue.
As researchers learn more about DNA and genes, they are also developing
a better understanding of the role of proteins in human disease through efforts
in the field of proteomics, the study of proteins expressed, or encoded, by
genes. Proteins are the products of genes and, after gene expression and
modification, are believed to be the key drivers and mediators of cellular
function and biological system activity. The understanding and treatment of
disease today involves the study of genes and the proteins they code for, and
frequently involves the measurement of a drug's ability to bind to specific
proteins in the body.
The Company believes that gene and protein research will increase as
companies in the pharmaceutical and biotechnology industries seek to accelerate
their drug discovery and development efforts. The Company also believes that
ongoing drug discovery and development efforts will increase research of cells
as researchers seek to further understand how drugs work in the body. These
efforts are expected to create a demand for increased automation and efficiency
in pharmaceutical and biotechnology laboratories. Applied Biosystems' products
are designed to address this demand by combining the detection capabilities of
analytical instruments with advances in automation and laboratory work-flow
design.
Knowledge Business; Online Marketing and Distribution Agreement with
Celera Genomics. In April 2002, Applied Biosystems announced the formation of
its new Knowledge Business for the purpose of developing and marketing products
and services designed to meet the needs of life science researchers in
performing specific biological analysis applications. Products and services
under development or expected to be developed by the Knowledge Business include:
genomic assays and related information, such as DNA sequence information and
annotations linking researchers to relevant databases; products for human
identification; products for agriculture, food, and environmental testing;
products for functional proteomics, the study of protein function; cellular
assays; as well as other information-rich products, services, and analytical
tools. The Knowledge Business is focused on generating value to life science
-5-
customers through products and services with high information content that
support improved experimental work-flows.
Concurrently with Applied Biosystems' formation of the new Knowledge
Business in April 2002, Celera Genomics and Applied Biosystems entered into a
marketing and distribution agreement pursuant to which Applied Biosystems has
become the exclusive marketer of Celera Genomics' Celera Discovery System and
related information assets. Applied Biosystems is expected to integrate the
Celera Discovery System and other genomic and biological information into the
Knowledge Business.
In exchange for marketing and distribution rights to the Celera
Discovery System and other genomic and biological information and access to the
Celera Discovery System and related information, Applied Biosystems will provide
Celera Genomics with royalty payments on revenues generated by sales of certain
products of the Knowledge Business from July 1, 2002, through the end of fiscal
2012. The royalty rate is progressive, up to a maximum of 5%, with the level of
sales through fiscal 2008. The royalty rate becomes a fixed percentage of sales
starting in fiscal 2009, and the rate declines each succeeding fiscal year
through fiscal 2012. Assays-on-Demand, Assays-by-Design(SM), certain reagents
for arrays, and new database subscriptions sold by the Knowledge Business are
the products subject to royalties. Arrays are consumable devices used to perform
analysis that are designed for, and ready for introduction into, an analytical
instrument.
Under the terms of the marketing and distribution agreement, Celera
Genomics 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). In
addition, Applied Biosystems has agreed to reimburse Celera Genomics for any
shortfall in earnings before interest, taxes, depreciation, and amortization
from these contracts below $62.5 million (as well as renewals, if any) during
the four fiscal years ending with the 2006 fiscal year if the shortfall is due
to changes made to Celera Discovery System products by or at the request of
Applied Biosystems, provided Celera Genomics otherwise continues to perform
under these contracts. During the term of the marketing and distribution
agreement (other than the transition period), Celera Genomics will not be
marketing Celera Discovery System products and services to, and will not be
contracting with, new customers.
Products for the Genomics Market. Customers in the genomics market use
systems for the analysis of nucleic acids for: basic research; pharmaceutical
and diagnostic discovery and development; food and environmental testing;
analysis of infectious diseases; and human identification and forensic analysis.
Applied Biosystems has developed technologies and products to support key
applications in sequencing, genotyping, and gene expression studies. The
following is a description of Applied Biosystems' products for the genomics
market:
o PCR Products. Polymerase chain reaction ("PCR") is a process
in which a short strand of DNA is copied multiple times, or
"amplified," so that it can be more readily detected and
analyzed. Applied Biosystems' PCR product line includes
amplification instruments, known as thermal cyclers, several
combination thermal cyclers and PCR detection systems, and
reagents and software necessary for the PCR amplification and
detection process.
-6-
Applied Biosystems' model 9700 dual 384-well sample thermal
cycler is the highest capacity thermal cycler it offers. This
instrument supports all key applications in genetic analysis
and fills a significant market need for laboratories
conducting high volume genomic research. This instrument is
referred to as a "dual 384-well" instrument because it can
simultaneously amplify samples on two plastic cards, referred
to by researchers as microtiter plates, each having wells to
hold 384 samples. Applied Biosystems also offers 60 and 96
sample thermal cyclers.
Applied Biosystems is currently adapting its model 9700 dual
384-well thermal cycler to support a new proprietary
microfluidic card system, rather than microtiter plates, for
PCR-based assays, or analyses, such as TaqMan(R) assays
described below. The microfluidic card system is being jointly
developed with 3M Company. Applied Biosystems expects to
complete development and commence sales of the modified model
9700 and the microfluidic cards in the 2003 fiscal year.
Microfluidic cards are consumable laminated plastic sheets
containing microscopic fluid channels and wells. This
consumable, microscopic fluid channel design offers several
advantages:
o it requires less reagent for PCR amplification and
analysis;
o it enables researchers to introduce the initial
sample to a single main fluid channel, which
automatically routs the sample to the assay wells.
Scientists using microtiter plates must either
deposit samples into wells by hand, which is labor
intensive and time consuming, or using robotics,
which is expensive and complex; and
o assay reagents can be deposited on the microfluidic
cards before shipment to researchers, which
eliminates a time consuming step in experiment setup.
During the 2002 fiscal year, Applied Biosystems introduced new
PCR reagent products for high-fidelity, or high accuracy,
amplification of long DNA segments. These are useful in the
determination of haplotypes, which are correlated patterns of
inherited DNA mutations. Haplotypes are just beginning to be
understood by scientists and be used in complex disease-gene
association studies.
Applied Biosystems' Sequence Detection Systems(TM) product
line includes products both for sample preparation and for
analysis. Applied Biosystems' sample preparation products take
whole cells provided by a customer and extract DNA and/or RNA
from them. This DNA or RNA, largely separated from the other
molecules found in cells, can then be analyzed in instruments
largely without interference from those other molecules, such
as proteins. The Applied Biosystems model 6700 Automated
Nucleic Acid Workstation automates this phase of preparation
as well as the two other key phases, depositing the DNA and/or
RNA samples on assay plates and sealing those plates to avoid
contamination prior to analysis. The model 6700 is designed to
substantially decrease the labor and cost involved in
preparing DNA and RNA for analysis. During the 2002 fiscal
year, Applied Biosystems introduced the ABI PRISM(R) 6100
Nucleic Acid PrepStation. This instrument shares some features
of the model 6700, but is less automated and is designed for
researchers seeking an economical alternative to higher
performance, higher priced instruments.
-7-
Applied Biosystems offers two Sequence Detection System
instruments for analysis of nucleic acids. The ABI PRISM
7900HT Sequence Detection System provides high throughput
analysis of DNA for gene expression and genotyping studies.
This is an automated analyzer that can process more than
250,000 samples in 24 hours for genotyping. Applied Biosystems
is currently developing an optional module for the model 7900,
allowing it to run assays implemented in the new proprietary
microfluidic card format. Applied Biosystems expects to
complete development and commence sales of the optional module
for the model 7900 and the microfluidic cards in the 2003
fiscal year. Also, during the 2002 fiscal year, Applied
Biosystems introduced the ABI PRISM 7000 Sequence Detection
System. This instrument offers many of the same specifications
as the model 7900, but in a less automated and lower
throughput system designed for researchers seeking an
economical alternative to higher performance and higher priced
instruments.
The Sequence Detection Systems product line uses TaqMan
chemistry, a unique PCR technology designed by the Roche Group
and developed by Applied Biosystems. TaqMan chemistry can be
used both for measurement of RNA gene expression and for DNA
genotyping. TaqMan chemistry detects the product of PCR
amplification and quantifies the initial sample during the
amplification process. This technique is referred to as
quantitative real-time PCR. The Sequence Detection Systems
instruments analyze a sample by measuring fluorescence
resulting from the reaction of the TaqMan chemistry and the
sample. This product line has been widely accepted in the
pharmaceutical discovery research market.
o Genetic Analysis Products. Genetic analysis uses
electrophoresis to separate DNA molecules based on their
differing lengths and the resulting differences in the speeds
at which they will pass through a separation medium. Applied
Biosystems' genetic analysis products, referred to as DNA
sequencers or genetic analyzers, can be used to perform both
DNA sequencing and fragment analysis.
DNA sequencing is used to determine the exact order of
nucleotides in a strand of DNA. Typically, fluorescent tags
are used to generate labeled products, with each of the four
different nucleotides labeled with a different color. The
labeled fragments are run through an electrophoresis
separation medium and detected. DNA fragment analysis is used
to determine the size, quantity, or pattern of DNA fragments.
DNA sequencing instruments have been used extensively to
obtain the DNA sequence of the human genome and of other
species. DNA sequencing instruments are also being used to
help interpret genomes that have been sequenced. For example,
as part of the Applera Genomics Initiative, Celera Genomics is
in the process of resequencing approximately 25,000 genes from
39 individuals and a chimpanzee to find the differences
between them. The Company believes this will reveal a larger
number of SNPs with health related implications than are
currently available.
All of Applied Biosystems' genetic analysis instruments now
use capillaries, which are tubes through which a DNA sample
moves during electrophoresis. Capillary systems have higher
throughput and greater automation than those based on
slab-gels, an older and less efficient technology. During the
2002 fiscal year, Applied Biosystems introduced three new DNA
sequencing instruments: the model 3730xl DNA Analyzer, a
sequencer with 96 capillaries; the model 3730 DNA Analyzer, a
sequencer with 48 capillaries; and the model 3100-Avant
Genetic Analyzer, a
-8-
sequencer with 4 capillaries. In addition, Applied Biosystems
offers the model 3100 Genetic Analyzer, a 16 capillary
sequencer, and the model 310 Genetic Analyzer, a one capillary
sequencer, as well as sequencing reagents and analysis
software. Applied Biosystems has discontinued its model 377
DNA Sequencer, the last of its instruments to use slab-gel
technology.
The model 3730xl DNA Analyzer has superseded the 96 capillary
model 3700 DNA Analyzer. Applied Biosystems expects to
continue to offer the model 3700 only for a limited time
during the remainder of 2002. At the time of its introduction
in 1999, the model 3700 DNA Analyzer represented a significant
advance in DNA sequencing technology because it could perform
high throughput analysis of samples in unattended operation.
The model 3700 DNA Analyzer was the principal instrument used
by Celera Genomics for sequencing, and the Company believes
the model 3700 DNA Analyzer is also the principal instrument
used by the Human Genome Project for its sequencing projects.
The model 3730xl DNA Analyzer offers significant increases in
data quality, throughput, and cost effectiveness over the
model 3700 DNA Analyzer. Because of these advances, the model
3730xl DNA Analyzer is able to read longer DNA fragments than
its predecessor. For a given sequencing project, this means
that customers will need to process fewer samples, lowering
their preparation costs. Also, by incorporating a more
sensitive optical design, the model 3730xl is able to complete
the same analysis with lower reagent consumption per sample.
The 48-capillary model 3730 DNA Analyzer, which incorporates
the same technological advances as the model 3730xl, can be
upgraded to become a 96-capillary model 3730xl.
The 16-capillary model 3100 Genetic Analyzer was introduced in
the 2000 fiscal year. It was designed for use by academic
programs and commercial laboratories. It was the technological
precursor of the model 3730 DNA Analyzer and incorporates many
of the same features, though it has lower throughput and is
less expensive. The 4-capillary model 3100-Avant Genetic
Analyzer is a reduced capacity instrument derived from the
model 3100 Genetic Analyzer, which has a lower cost than the
model 3100. A model 3100-Avant Genetic Analyzer can be
upgraded to a model 3100.
Applied Biosystems offers several sequencing chemistries
optimized for various customer requirements. Samples prepared
using these chemistries are then analyzed on Applied
Biosystems sequencer instruments.
o DNA Synthesis. DNA synthesizers produce synthetic polymers of
DNA, called oligonucleotides, for genetic analysis. The
synthetic DNA is an essential reagent for PCR and DNA
sequencing and is also used in drug discovery applications.
DNA synthesis is used both by companies performing high
throughput synthesis as a service as well as individual
laboratories that synthesize DNA for their own use. Applied
Biosystems offers several models of synthesizers and
supporting reagents for the needs of its different customers.
Applied Biosystems also provides custom synthesis, in which
oligonucleotides are made to order and shipped to customers.
o PNA. Applied Biosystems has a license, which is exclusive for
certain applications, to manufacture and sell peptide nucleic
acid ("PNA") for molecular biology research, diagnostic, and
certain other applications. PNA resembles DNA in its chemical
-9-
structure except that it has a neutral peptide-like
"backbone," whereas DNA has a negatively charged sugar
phosphate backbone. The unique chemical structure of PNA
enhances its affinity and specificity as a DNA or RNA probe,
which is used to search for DNA and RNA sequences, which are
complementary to the probe. PNA may be used in many areas,
including basic research, pharmaceutical discovery, diagnostic
development, and food and environmental testing. During the
2002 fiscal year, Applied Biosystems acquired additional
rights to PNA technology, particularly exclusive rights in the
field of diagnostics, through its acquisition of Boston
Probes, Inc. and a party related to Boston Probes.
o Genomic Assays. Through its Knowledge Business, Applied
Biosystems offers its Assays-on-Demand product lines and its
Assays-by-Design service. Assays are chemical tests used to
measure a particular biochemical quantity. A genomic assay
combines a set of pre-selected oligonucleotides, or synthetic
polymers of DNA, with other analytical reagents that allow a
researcher to measure differences between samples of genetic
material. For example, a gene expression assay is a chemical
test to measure how much RNA is being produced from a specific
gene in the cells of a tissue sample. A genotyping assay is a
chemical test to measure the presence or absence of a specific
genetic sequence variation or mutation among DNA samples from
different populations that can be used to correlate genetic
traits with physical traits such as disease susceptibility or
drug response.
In July 2002, the Knowledge Business announced the launch of
its Assays-on-Demand product line, a collection of assays for
gene expression and genotyping that incorporates genome data
into a tool that is ready to use for experimentation.
Assays-on-Demand is the first commercial product resulting
from the Applera Genomics Initiative, and Applied Biosystems
believes that Assays-on-Demand is also the first commercial
product line to incorporate genomic data from both the public
and private sector human genome sequencing projects. The
Knowledge Business also offers the Assays-by-Design service
for the manufacture of custom-made assays. Researchers using
the Assays-by-Design service supply the desired target and
Applied Biosystems designs and manufactures an assay for that
target using Applied Biosystems' proprietary software
algorithms.
Researchers traditionally have used "home brew" assays, which
are assays that researchers both design and prepare themselves
in their laboratories, a process that is relatively time
consuming and expensive. Applied Biosystems believes that its
Assays-on-Demand product line offers significant advantages to
researchers compared with home brew assay design. These
advantages include:
o facilitation of experiments with many genes in
parallel;
o substantial reduction in experiment setup time;
o decreased assay cost; and
o creation of a set of standard and validated assays
that enable comparisons of data between laboratories.
-10-
Applied Biosystems' current Assays-on-Demand and
Assays-by-Design offerings are designed to be used with
Applied Biosystems' Sequence Detection Systems PCR
instruments.
Products for the Proteomics Market. Genes code for proteins in
biological organisms, and proteins are the key biological molecules that
function in all aspects of living things such as growth, development, and
reproduction. Differences in the types or amounts of specific proteins in
biological systems are thought to be the primary differences between healthy and
diseased systems or organs. A majority of drugs to treat human disease bind to
and affect proteins. Proteins are large biological molecules made up of
peptides, and peptides are made up of amino acids chemically linked together in
long chains. Customers in the proteomics research market need systems for the
analysis of proteins and peptides for the purpose of discovery of drug targets,
protein therapeutics, and diagnostics. Applied Biosystems has developed products
for the identification, characterization, and measurement of expression of
proteins and peptides. The following is a description of Applied Biosystems'
products for the proteomics market:
o Mass Spectrometry. Mass spectrometry has become very useful
for the analysis of large molecules of biological importance
such as proteins. Analysis of proteins and other molecules by
mass spectrometry involves the very accurate measurement of
the mass, or size, of components in a sample, such as the
measurement of the multiple different peptides that make up a
defective protein. The technique involves the measurement of
these molecules in instruments utilizing very high vacuum and
sensitive electronics capable of measuring extremely fine
differences in very small quantities of complex samples with
multiple components. The technique of mass spectrometry
requires three key elements be incorporated into the
instrument:
o a unique sample preparation process call ionization
to charge the molecules for analysis;
o mass analysis, which involves the separation of
molecules based on their mass; and
o detection, which is the electronic measurement of the
mass and the relative amounts of molecule present.
The market for mass spectrometry is served by a wide range of
instrument types based on a variety of technologies for both
ionization and mass analysis and combined together in
different combinations in different instruments. The different
instrument types, technologies, and combinations result in
differing performance characteristics and price levels, and
the suitability of any particular system for any researcher or
research laboratory will depend on the nature of the work
being performed and the capital budget of the researcher or
research laboratory.
Applied Biosystems sells instruments with ionization by either
a laser based system called MALDI, which refers to matrix
assisted laser desorption ionization, or a high voltage
electric system called ESI, which refers to electrospray
ionization. Applied Biosystems also has a variety of mass
analysis technologies which separate and measure the mass of
molecules in a sample. These include TOF, which refers to time
of flight, which measures mass based on flight time in an
electric field under vacuum; and quad, which refers to
quadrupole, and ion trap, both of which measure
-11-
mass using radio frequencies and electric charges though using
distinctly different technologies. Applied Biosystems and
Applied Biosystems/MDS SCIEX Instruments, a joint venture
between Applied Biosystems and MDS Inc. of Canada, supply a
broad family of mass spectrometry products for the proteomics
market that involve different combinations of these
technologies. Customers select from this range of product
types based on their workflows, sample types, preferences, and
experience.
Mass spectrometry products are often referred to or named
based on their sample preparation and mass analysis
technologies. For example, a "MALDI TOF" instrument is an
instrument that uses MALDI to charge molecules for analysis
and TOF for mass analysis. Also, mass spectrometry instruments
are often referred to or named based on whether they are
connected to liquid chromatography separation devices, which
devices are used for sample preparation prior to analysis
using mass spectrometry. An "LC/MS" system is a liquid
chromatography device connected directly to a mass
spectrometry instrument, and an "LC/MS/MS" system is a liquid
chromatography device coupled with tandem mass spectrometry
instruments. Tandem mass spectrometry enables a more detailed
and accurate analysis of the components of the molecules being
studied.
The Applied Biosystems MALDI TOF product line includes the
Voyager(TM) DE STR and DE PRO instruments and the Voyager
based Proteomics Solution 1(TM) systems for automated protein
identification. During the 2002 fiscal year, Applied
Biosystems introduced the 4700 Proteomics Analyzer with
TOF/TOF(TM) optics, which was designed to address the needs of
proteomic researchers for increased speed and throughput as
well as enhanced data quality and molecular information. This
instrument incorporates a new high speed MALDI system with a
tandem TOF mass analyzer, and Applied Biosystems believes it
is the only instrument currently available that offers this
combination of these advanced features.
The ESI based product line from Applied Biosystems/MDS SCIEX
Instruments includes the API QSTAR(R) Pulsar LC/MS/MS system
which is a hybrid quadrupole - time of flight instrument
(often referred to as a Qq-TOF instrument). The API QSTAR
Pulsar LC/MS/MS system offers a choice of sample introduction
technologies and therefore is a highly flexible life science
mass spectrometer and proteomics instrument. During the 2002
fiscal year, Applied Biosystems/MDS SCIEX Instruments
introduced the Q TRAP(TM) LC/MS/MS system, which uses ESI
ionization. Applied Biosystems believes that this new mass
spectrometer, which can be used for both protein and small
molecule analysis, has performance advantages over
competitively priced mass spectrometry instruments. Under the
terms of the joint venture agreement with MDS Inc., Applied
Biosystems has the exclusive worldwide distribution rights to
the LC/MS systems manufactured for the joint venture by the
MDS SCIEX Division of MDS Inc. for the analytical instruments
market.
In addition to the range of mass spectrometry instruments and
software, Applied Biosystems has developed and commercialized
the ICAT(TM) reagent technology of Dr. Ruedi Aebersold and
others at the University of Washington. This chemistry
technology, when utilized with various mass spectrometry
systems, enables the quantitation and identification of
proteins in experiments that compare normal and
-12-
diseased cells or samples. The ICAT reagent approach now
offers laboratories a new way of running protein experiments
using mass spectrometry and is the foundation of an expanding
family of Applied Biosystems consumables, software, and
systems for proteomics.
o Biochromatography. Researchers studying complex protein
samples through mass spectrometry must first prepare these
samples and separate them into the components to be analyzed.
A common and important technique for the separation, and in
some cases purification, of biological molecules is generally
referred to as biochromatography, a process by which molecules
are separated according to one or more of their physical
properties such as their size, shape, charge, or affinity to
other molecules.
Applied Biosystems' biochromatography products use liquid
chromatography. Liquid chromatography is a process that
separates molecules by passing them, in a liquid, across a
stationary or solid medium such as chemically modified plastic
beads specially designed for this process. Separation occurs
because different molecules, which have different affinities
to the beads, will migrate, or pass, across the beads at
different rates. Instruments that perform liquid
chromatography under high pressure are referred to as high
pressure liquid chromatography, or HPLC, instruments.
Applied Biosystems believes that its biochromatography
products can be incorporated readily into the proteomics
discovery process and the development and manufacturing
process of protein based pharmaceutical products. Applied
Biosystems also believes its biochromatography products offer
productivity advantages, enabled by high speed separation
combined with high capacity and resolution, over competitive
product offerings.
Applied Biosystems' patented Perfusion Chromatography(R)
technology uses proprietary flow-through POROS(R) beads and
BioCad(R) Chromatography workstations to reduce the time
necessary for the purification and analysis of biological
molecules. Applied Biosystems' Vision(TM) Workstation is a
robotic-equipped chromatography instrument marketed to life
science researchers that allows for the separation of proteins
followed by analysis of the fractions collected in an
unattended operation. Together, the automated platform and
flow-through beads are designed to increase throughput and
efficiency for the separation and purification of biological
molecules.
o Protein Sequencing and Synthesis. Proteins are large
biological molecules and are made of peptides, and peptides
are made of amino acids chemically linked together in long
chains. Protein sequencers provide information about the
sequence of amino acids that make up a given protein by
chemically disassembling the protein and analyzing the amino
acids. The Procise(R) Protein Sequencing system uses a protein
sequencing chemistry known as Edman chemistry to sequence a
peptide, one amino acid at a time, and in turn to identify or
characterize the protein that contains the peptide.
Synthetically produced peptides are used in understanding
antibody reactions and as potential drugs or drug analogs.
Applied Biosystems' 433A Peptide Synthesis system is designed
for the quality synthesis of peptides, peptide analogs, and
small
-13-
proteins. Applied Biosystems also manufactures and sells
proprietary synthesis reagents and fine chemicals for use with
this and other products.
Products for the Drug Metabolism and Pharmacokinetics Market. Applied
Biosystems has a number of mass spectrometry products that life science
researchers use to analyze small molecules. Small molecules studied in life
science research are typically smaller than peptides and include, for example:
o drugs;
o metabolites, the compounds resulting from the body's acting
upon a drug, and present in bodily fluids such as blood or
urine; and
o other small biological molecules found naturally in the human
body such as hormones, which affect physiological activity by
sending signals to cells and organs, and cholesterol, which
the body uses, for example, to build cells and produce
hormones.
Mass spectrometry instruments are especially important for
pharmaceutical researchers studying pharmacokinetics, the measurement of the
bodily absorption, distribution, metabolism, and excretion of drugs.
Pharmacokinetic information is required by the United States Food and Drug
Administration and other regulatory agencies for the approval of drugs. This
application requires instruments which have a high resolution, or the ability to
distinguish among different molecules with similar masses, and high sensitivity,
or the ability to identify very small quantities of molecules, because the
amounts of the drugs and their metabolites are very low and the mixtures are
very complex. Researchers can perform the required pharmacokinetic analysis with
LC/MS/MS systems that have been developed and refined by Applied Biosystems/MDS
SCIEX Instruments.
Applied Biosystems/MDS SCIEX Instruments offers a broad product line
for small molecule and pharmacokinetics researchers. This product line includes
the API 2000(TM), API 3000(TM), and API 4000(TM) systems, all of which are
triple quadrupole LC/MS/MS instruments. These instruments offer a range of
sensitivity at varying costs, the API 4000 system being the most sensitive. The
API product line has been widely accepted by pharmaceutical researchers, and the
Company believes the API 4000 system is the most sensitive mass spectrometry
instrument available to this research market. Applied Biosystems/MDS SCIEX
Instruments also offers API QSTAR Pulsar LC/MS/MS system, which is a quadrupole
- time of flight instrument (often referred to as a Qq-TOF instrument). This
instrument offers higher resolution and mass accuracy, or the ability to
accurately determine the mass of a molecule, than the API 2000, 3000, and 4000
systems, which is particularly useful to researchers seeking to identify unknown
molecules such as metabolites.
In the 2002 fiscal year, Applied Biosystems/MDS SCIEX Instruments
introduced the Q TRAP(TM) LC/MS/MS system, which uses ESI ionization. Applied
Biosystems believes that this new mass spectrometer, which can be used for both
protein and small molecule analysis, has advantages over competitively priced
mass spectrometry instruments.
Cell Biology and Functional Proteomics Products. Within the Knowledge
Business, a new product group has been formed to develop products for early
phase drug discovery and development. This group is focused on products that
reveal gene and protein function. This
-14-
group also intends to develop products that reveal the biological reactions that
take place in cells, which researchers refer to as biological pathways. Some
scientists believe that a better understanding of this information may enable
structure based drug design, which refers to the design of drugs based on the
molecular structure of the intended drug target. This method can be contrasted
with the traditional approach to drug development, whereby researchers seek to
determine whether chemicals may work as drugs through trial-and-error
experimentation. The following is a description of the existing products of this
group as well as certain products in development:
o Cell Based Detection Systems. Through its strategic alliance
with Becton, Dickinson and Company, Applied Biosystems has
co-developed a fluorometric microvolume assay technology
system, referred to as an FMAT system. This instrument system
uses proprietary scanning technology to rapidly detect and
measure fluorescence associated with objects as small as a
single cell. This system was designed for pharmaceutical
researchers needing a high throughput screening system for the
analysis of cells.
o Chemiluminescence Products. Applied Biosystems' high
throughput screening products include reagents and
chemiluminescent plate readers that measure light emitted by a
sample. Chemiluminescence is the conversion of chemical energy
stored within a molecule into light. Chemiluminescent
substrates are substances that emit light in the presence of
another target substance that is tagged, or chemically linked,
with an enzyme. Chemiluminescent technology is used in life
science research and commercial applications including drug
discovery and development, clinical diagnostics, gene function
study, molecular biology, and immunology research. Applied
Biosystems also licenses its technology to companies selling
bioanalytical and clinical diagnostic tests.
o Functional Proteomics Products. During the 2002 fiscal year,
Applied Biosystems entered into licensing, supply, and
collaboration agreements with HTS Biosystems, Inc. to jointly
develop and commercialize a functional proteomics system based
on HTS Biosystems' high throughput affinity screening
technology. This technology enables functional proteomics
research, or the study of protein function, by analyzing
proteins based on the way they bind to each other. Under these
agreements, Applied Biosystems and HTS Biosystems also plan to
jointly further develop and commercialize HTS Biosystems'
existing surface plasmon resonance technology, referred to as
SPR technology. SPR technology, used in functional genomics
research, or the study of gene function, enables the high
throughput study of protein interactions in a more
cost-effective and efficient manner than other existing
technologies. The study of protein interactions is an
important part of functional genomics research because genes
contain the code for proteins.
Applied Genetic Analysis Products. Applied Biosystems has developed,
and expects to continue to develop, products and services specially designed for
specific markets, with a focus in the areas of human identification, and
environmental and food testing.
For example, Applied Biosystems develops systems that are used by crime
laboratories and other agencies to identify individuals based on their DNA.
Applied Biosystems believes these systems are most often used in cases of
violent crime where DNA found at the crime scene is matched with DNA from
suspects. The use of DNA in some criminal investigations may help
-15-
solve the crimes and may reduce the cost of the investigation, and the Company
believes there is a growing recognition of the validity of the use of DNA
testing and DNA databases for this purpose. The systems are also used in the
identification of human remains at disaster sites.
Also, Applied Biosystems is developing technologies for bacterial and
fungal detection, characterization, and identification. It has developed the
MicroSeq 16S rDNA Bacterial Sequencing Kit to accurately identify
microorganisms. TaqMan Pathogen Detection Kits relying on Sequence Detection
Systems instrument platforms are under development. These kits are being
developed to rapidly detect bacterial contamination and to detect and analyze
genetically modified organisms in foods.
Information Products. The Knowledge Business currently offers, and
intends to further develop, products that offer information content designed to
assist research and development efforts. The information products currently
offered by the Knowledge Business include the Celera Discovery System database,
as well as software, for use in combination with the Knowledge Business assay
products, designed to facilitate and make more efficient experiment design and
biological data analysis.
Informatics Products and Services. The Knowledge Business develops,
markets, and distributes informatics software and services used to integrate and
automate life sciences research, development, and manufacturing laboratories.
The science of informatics seeks to blend biology and computing to transform
massive amounts of data into useful information. Informatics technology that is
specifically designed for biological information is commonly referred to as
bioinformatics technology.
Users of Knowledge Business informatics products and services are
typically involved in gene mapping, drug discovery, drug development, and drug
manufacturing. The Knowledge Business offers various software products for
laboratory information management. These products are designed to facilitate
sample tracking, data collection, data analysis, and data mining. The Knowledge
Business also offers informatics consulting services through its Rapid
Integration Solutions Program. These system integration services are designed
for laboratories seeking greater automation and integration of lab processes.
Knowledge Business consultants assist customers in selecting and integrating
technologies to streamline and accelerate their genomics, proteomics, and high
throughput screening activities.
Marketing and Distribution. The markets for Applied Biosystems'
products and services span the spectrum of the life sciences industry,
including: basic human disease research; genetic analysis; pharmaceutical drug
discovery, development, and manufacturing; human identification; agriculture;
and food and environmental testing. Universities, government agencies, and other
non-profit organizations engaged in research activities also use Applied
Biosystems' products. Each of these markets has unique requirements and
expectations that Applied Biosystems seeks to address in its product offerings.
Applied Biosystems' customers are continually searching for processes and
systems that can perform tests faster, more efficiently, and at lower costs.
Applied Biosystems believes that its focus on automated and high throughput
systems enables it to respond to these needs.
The size and growth of Applied Biosystems' markets are influenced by a
number of factors, including:
o technological innovation in methods for analyzing biological
data;
-16-
o government funding for basic and disease-related research,
such as in heart disease, AIDS, and cancer;
o application of biotechnology to basic agricultural processes;
o increased awareness of biological contamination in food and
the environment; and
o research and development spending by biotechnology and
pharmaceutical companies.
In the United States, Applied Biosystems markets the largest portion of
its products directly through its own sales and distribution organizations,
although certain products are marketed through independent distributors and
sales representatives. Sales to major markets outside of the United States are
generally made by Applied Biosystems' foreign-based sales and service staff, but
are also made directly from the United States to foreign customers in some
cases. In some foreign countries, sales are made through various representative
and distributorship arrangements. Applied Biosystems owns or leases sales and
service offices in the United States and in foreign countries through its
foreign sales subsidiaries and distribution operations. None of Applied
Biosystems' products are distributed through retail outlets.
Raw Materials. There are no specialized raw materials that are
particularly essential to the operation of Applied Biosystems' business. Applied
Biosystems' manufacturing operations require a wide variety of raw materials,
electronic and mechanical components, chemical and biochemical materials, and
other supplies, some of which are occasionally found to be in short supply.
Applied Biosystems has multiple commercial sources for most components and
supplies, but it is dependent on single sources for a limited number of such
items, in which case Applied Biosystems normally secures long-term supply
contracts. In some cases, if a supplier discontinues a product, it could
temporarily interrupt the business of Applied Biosystems.
Patents, Licenses, and Franchises. Applied Biosystems' products are
based on complex, rapidly developing technologies. Some of these technologies
are covered by patents owned by Applied Biosystems, and others are owned by
third parties and used by Applied Biosystems under license. Applied Biosystems
has pursued a policy of seeking patent protection in the United States and other
countries for developments, improvements, and inventions originating within its
organization that are incorporated into Applied Biosystems' products or that
fall within its fields of interest. Applied Biosystems' business depends on its
ability to continue developing new technologies which can be patented, or
licensing new technologies from third parties that own patents in such
technologies. The rights that Applied Biosystems considers important to its
current business include the following:
o Applied Biosystems has rights to PCR technology under a series
of agreements with the Roche Group, which owns the patents
covering the PCR process. The first of these patents expires
in 2005 in the United States, and in 2006 in Europe and
certain other jurisdictions. In July 2000, Applied Biosystems
and the Roche Group agreed to expand the markets each company
serves with products incorporating PCR. This arrangement will
allow both companies to develop and market products for all
potential uses of PCR. Additionally, Applied Biosystems
continues to distribute products the Roche Group manufactures
for research and non-diagnostic applications.
-17-
o Applied Biosystems also licenses rights under certain patents
assigned to the California Institute of Technology relating to
DNA sequencing. These patents expire between 2009 and 2018 in
the United States, and in 2005 in Europe and certain other
jurisdictions.
o Applied Biosystems also licenses rights under certain patents
assigned to the University of Colorado relating to
oligonucleotide synthesis. The last of these patents in the
United States will expire in 2007. The corresponding foreign
patents have expired except for certain patents in Canada and
Mexico, which expire in 2003.
From time to time, Applied Biosystems has asserted that various
competitors and others are infringing its patents; and similarly, from time to
time, others have asserted that Applied Biosystems was or is infringing patents
owned by them. These claims are sometimes settled by mutual agreement on a
satisfactory basis and result in the granting of licenses by or to Applied
Biosystems. However, the Company cannot make any assurances as to the outcome of
any pending or future claims.
Applied Biosystems has established a licensing program that provides
industry access to certain of its intellectual property.
Backlog. Applied Biosystems' total recorded backlog at June 30, 2001,
was $202.3 million, which included $5.0 million of orders from Celera Genomics.
Applied Biosystems' total recorded backlog at June 30, 2002 was $235.8 million,
which included $4.6 million of orders from Celera Genomics and $3.0 million of
orders from Celera Diagnostics. It is Applied Biosystems' general policy to
include in backlog only purchase orders or production releases that have firm
delivery dates within one year. Recorded backlog may not result in sales because
of cancellation or other factors. It is anticipated that all orders included in
the current backlog will be delivered before the close of fiscal year 2003.
Competition. The markets in which Applied Biosystems operates are
highly competitive and are characterized by the application of advanced
technology. A number of Applied Biosystems' competitors are well known
manufacturers with a high degree of technical proficiency. In addition,
competition is intensified by the ever-changing nature of the technologies in
the industries in which Applied Biosystems is engaged.
Applied Biosystems' principal competition comes from specialized
manufacturers that have strengths in narrow segments of the life science
markets. Applied Biosystems competes principally in terms of the breadth and
quality of its product offerings, and its service and distribution capabilities.
While the absence of reliable statistics makes it difficult to determine Applied
Biosystems' relative market position in its industry segment, Applied Biosystems
believes it is one of the principal suppliers in its fields, marketing a broad
line of instruments and life science systems.
Research, Development, and Engineering. Applied Biosystems is actively
engaged in basic and applied research, development, and engineering programs
designed to develop new products and to improve existing products. Research,
development, and engineering expenses for Applied Biosystems totaled $141.2
million in fiscal 2000, $184.5 million in fiscal 2001, and $219.6 million in
fiscal 2002. The Company expensed $255.6 million in fiscal 2000, $323.4
-18-
million in fiscal 2001, and $381.9 million in fiscal 2002 for Company-sponsored
research, development, and engineering activities.
Applied Biosystems' new products generally originate from four sources:
internal research and development programs; external collaborative efforts with
technology companies and individuals in academic institutions; devices or
techniques that are generated in customers' laboratories; and business and
technology acquisitions.
Research and development projects at Applied Biosystems include: the
development of improved electrophoresis techniques for DNA analysis; real-time
PCR for nucleic acid quantification; innovative approaches to cellular analysis;
sample preparation; information technologies; and mass spectrometry.
Environmental Matters. Applied Biosystems is subject to federal, state,
and local laws and regulations regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, in
those jurisdictions where Applied Biosystems operates or maintains facilities.
Applied Biosystems does not believe that any liability arising under, or
compliance with, environmental laws or regulations will have a material effect
on its business, and no material capital expenditures are expected for
environmental control.
Celera Genomics Group
Overview. Celera Genomics is engaged principally in integrating
advanced technologies to discover and develop new therapeutics. Celera Genomics
intends to leverage its capabilities in proteomics, bioinformatics, and genomics
to identify and validate drug targets and diagnostic marker candidates, and to
discover and develop novel therapeutic candidates. Celera Genomics expects to
use these capabilities with its molecular and cell biology, medicinal and
computational chemistry, pharmacology, and other drug development technologies
to optimize the potency, selectivity, and physical properties of new drug
candidates. Currently, Celera Genomics has collaborations with large
pharmaceutical companies and internal programs for discovering therapeutics for
inflammatory diseases, including asthma, osteoporosis, and rheumatoid arthritis.
Celera Genomics also has internal programs for discovering therapeutics for the
treatment of thrombosis and various types of cancer, including pancreatic and
lung cancer.
Celera Genomics was originally formed for the purpose of generating and
commercializing information to accelerate the understanding of biological
processes and to assist the research endeavors of pharmaceutical, biotechnology,
and life science research entities. A key component of Celera Genomics' original
business strategy was the development and sale of its Celera Discovery System,
an online information and discovery system through which users can access Celera
Genomics' genomic and related biological and medical information.
Development of Therapeutics Business. During its 2001 fiscal year,
Celera Genomics announced that it was expanding its operations to include
therapeutics discovery and development in addition to its online database
business. During the 2002 fiscal year, Celera Genomics completed a number of
steps, including the following, to further develop its therapeutics business and
establish that business as its primary focus:
o In November 2001, Celera Genomics completed the acquisition of
Axys, a small molecule drug discovery and development company.
Celera Genomics believes that
-19-
Axys' medicinal and structural chemistry and biology
capabilities and preclinical programs will accelerate the
development of its therapeutics business.
o Celera Genomics announced a number of important management
changes. In January 2002, Celera Genomics announced the
resignation of J. Craig Venter, Ph.D. as its President, and in
April 2002, Celera Genomics announced the appointment of Kathy
Ordonez, who is also President of Celera Diagnostics, as his
replacement. Before her affiliation with the Company, Ms.
Ordonez served as the President and Chief Executive Officer of
Roche Molecular Systems for nine years. Also in January 2002,
Celera Genomics announced the appointment of David Block,
M.D., as the Chief Operating Officer of its therapeutics
business. Prior to his employment by the Company, Dr. Block
was employed by DuPont Pharmaceuticals in various capacities
for approximately 12 years, including Vice President for
International Operations. In July 2002, Celera Genomics
announced the appointment of Robert Booth, Ph.D., as its
Senior Vice President of Research and Development to lead its
therapeutics research and development efforts. Prior to his
appointment by the Company, Dr. Booth was employed by
Hoffmann-La Roche in various capacities for approximately 13
years, including as Senior Vice President responsible for all
research and early development of inflammatory, viral,
respiratory, and bone disease products.
o In April 2002, Celera Genomics and Applied Biosystems entered
into a marketing and distribution agreement pursuant to which
Applied Biosystems has become the exclusive marketer of Celera
Genomics' Celera Discovery System and related information
assets as part of Applied Biosystems' new Knowledge Business.
The agreement is expected to enable Celera Genomics' executive
team to focus on therapeutic discovery and development.
o Celera Genomics substantially increased the number of research
and development employees assigned to therapeutic programs.
Also, in June 2002, Celera Genomics announced the
implementation of a restructuring of its organization intended
to focus the group's resources on therapeutic discovery and
development. The restructuring also involved the reduction of
infrastructure, including personnel and positions, previously
built to support the group's sequencing activities and
online/information business.
Celera Genomics may pursue both small molecule and antibody
therapeutics. Small molecule therapeutics are low molecular weight synthetic
pharmaceuticals, whereas antibody therapeutics are generally large molecular
weight protein-based biological compounds. Celera Genomics plans to
commercialize discoveries, either at the target or therapeutic level, through
internal product development, collaborations, or licensing of intellectual
property.
Scientific Approach to Discovery. Celera Genomics expects its
scientific approach in therapeutic discovery to be as follows:
o Proteomics. Celera Genomics expects that its discovery program
will use high throughput proteomics to identify proteins which
are associated with the onset or progression of disease, and
which may therefore be potential targets for therapeutic
intervention or markers for disease detection or progression.
In the 2002 fiscal year,
-20-
Celera Genomics completed the construction of its proteomics
facility. Celera Genomics is currently scaling up the
operations of the proteomics facility, which is expected to
become fully operational during the Company's 2003 fiscal
year. Using its proteomics technology, Celera Genomics plans
to generate and identify proteins as therapeutic targets in
the areas of pancreatic and lung cancer. Celera Genomics also
intends to initiate a proteomics program for an additional
disease during the 2003 fiscal year.
Celera Genomics plans to evaluate differential protein
patterns in biological samples from both healthy and diseased
individuals. Celera Genomics expects to evaluate sera samples,
which are readily available, as well as tissue samples, which
are less readily available. Celera Genomics has designed
advanced methods to separate cellular and subcellular
components of biological samples and to capture from these
components proteins belonging to druggable target classes.
Druggable target classes are related proteins which in the
past have been successfully used in the pharmaceutical
industry as points of therapeutic intervention. Celera
Genomics intends to use advanced chromatography and mass
spectrometer systems that are amenable to high throughput
quantitation and identification of proteins. Celera Genomics
expects to use its assembled human and mouse genomes and
proprietary software and algorithms to identify proteins
associated with diseases.
Celera Genomics expects to use a variety of methodologies to
validate targets and markers. Validation refers to the process
whereby the biological relevance of a particular target or
marker, and, therefore, its potential therapeutic or
diagnostic relevance, is confirmed. Celera Genomics intends to
use immunohistochemistry, or the identification of proteins in
tissues and cells using antibody reagents, to refine its
understanding of therapeutic targets and diagnostic markers of
interest and, for example, to identify expression profiles
that would support or preclude meaningful progression of the
drug targets. For targets and markers of interest, Celera
Genomics intends to perform tests to determine their relevance
across a broad range of tissues and diseases. Celera Genomics
has obtained and expects to continue accessing further
validation capabilities through collaborations. For example,
in 2001, Celera Genomics entered into a collaboration with
SomaLogic, Inc. to access its aptamer technology, which is
used to identify protein expression and function.
o Bioinformatics. Celera Genomics believes that its
bioinformatics infrastructure will accelerate the discovery
process of identifying targets and markers. For example,
Celera Genomics expects to develop the capability to perform
simulated, computer-based experimentation, which Celera
Genomics believes would minimize or eliminate the need to
perform more labor intensive experiments in the laboratory.
Also, Celera Genomics believes that it can develop proprietary
algorithms for use in its large scale computing infrastructure
for the extraction of data from proteomics experiments and the
integration of this data with genome, gene expression, and
protein characterization information, scientific literature,
and the patent status of possible targets or markers. Celera
Genomics believes the application of these algorithms to this
data could be used to facilitate the identification of targets
and markers. However, Celera Genomics' ability to develop
these capabilities is unproven, and, if developed, their
utility in the therapeutics discovery and development process
is uncertain.
-21-
o Genomics. As a complementary approach to the proteomics
methods described above, Celera Genomics expects to use
genomics to identify therapeutic targets. Celera Genomics
intends to further characterize novel genes, including those
for which the Company has been granted patents or for which it
has filed patent applications, by conducting in vitro cell
studies and in vivo animal studies. In vitro refers to testing
or other activities performed outside the living body, and in
vivo refers to testing or other activities performed in the
living body. Celera Genomics expects to incorporate its
bioinformatics capabilities into this process. After the
functions of genes are determined, Celera Genomics intends to
establish the priorities of these genes or their gene products
as targets based on the families of proteins they encode, the
association of the expression of these genes with specific
diseases, and the functional importance of the genes products
to cells. In 2001, Celera Genomics entered into a
collaboration with Isis Pharmaceuticals, Inc. to add to its
capabilities in this area. The collaboration provides Celera
Genomics with access to Isis Pharmaceuticals' antisense
technology, which is used to characterize the function of
selected genes.
Although Celera Genomics intends to use scientific methods that may
result in diagnostic discoveries, Celera Genomics has not yet determined how it
would seek to commercialize those discoveries, if any. They could be
commercialized through Celera Diagnostics or through other arrangements.
Axys Acquisition. In November 2001, Celera Genomics completed the
acquisition of Axys, a small molecule drug discovery and development company.
Celera Genomics believes that Axys' medicinal and structural chemistry and
biology capabilities and preclinical programs will accelerate the development of
its therapeutic discovery business for the following reasons:
o Axys' medicinal chemistry and biology capabilities are
expected to provide additional capabilities for in vivo and in
vitro target validation, as well as chemistry based validation
through hit-based functionation, which is the identification
of function through interaction with molecules of known
biological activity.
o Celera Genomics expects to benefit from Axys' expertise in the
fields of small molecule structure based drug design,
medicinal and combinatorial chemistry, and pharmacokinetic and
safety evaluation. Axys has developed a general expertise in
proteases, a known druggable class of proteins. Proteases are
enzymes that break down certain chemical bonds in proteins and
are essential to the body's physiological processes such as
inflammation. Proteases are generally classified by how they
break down a protein's chemical bonds. Cysteine and serine
proteases are two classes of these enzymes.
o Axys has existing drug discovery partnerships in the area of
inflammatory diseases, including (1) a collaboration with
Merck & Co. to develop small molecule inhibitors of cathepsin
K, a cysteine protease, for the treatment of osteoporosis, (2)
a collaboration with Aventis Pharmaceuticals to develop
inhibitors of cathepsin S, another type of cysteine protease,
for the treatment of rheumatoid arthritis, chronic obstructive
pulmonary disease, atherosclerosis, allergic rhinitis, and
asthma, and (3) a collaboration with Bayer AG to develop
inhibitors of tryptase, a serine protease, for the treatment
of asthma.
-22-
o Axys also has non-partnered preclinical programs, including a
program to develop inhibitors of Factor VIIa, a serine
protease, for the treatment of deep vein thrombosis and
cathepsin F, a cysteine protease, for the treatment of asthma
and other inflammatory diseases.
Scientific Progress Relating to Sequencing Efforts. In June 2000,
Celera Genomics and the Human Genome Project each announced the "first assembly"
of the human genome, and in April 2001, Celera Genomics 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 placed or
positioned on each chromosome within the genome. Celera Genomics' 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. Celera Genomics
released a detailed ordered consensus human genome assembly in the journal
Science in February 2001. Celera Genomics intends to continue updating the
assembly of the human and mouse genomes as it continues to annotate these
genomes, and to incorporate this information into its Celera Discovery System
database. 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.
In sequencing and assembling the human and mouse genomes, Celera
Genomics used an advanced strategy known as "shotgun sequencing." This technique
uses a combination of Applied Biosystems' high throughput sequencing equipment
to sequence DNA fragments and powerful computers and proprietary software
algorithms to assemble them. Celera Genomics believes that its shotgun
sequencing strategy has accelerated the generation of genomic information and
the discovery of new genes. This information includes rarely expressed genes,
predicted proteins, and other factors, such as regulatory regions, that control
gene expression. This data forms the basis of Celera Genomics' human genome
database. Information from this database is available through the Celera
Discovery System, which is currently being marketed by the Applied Biosystems
Knowledge Business.
As part of the Applera Genomics Initiative, Celera Genomics has
prioritized and is resequencing approximately 25,000 genes from 39 individuals
and a chimpanzee, which the Company believes will reveal a larger number of SNPs
with health related implications than are currently available. SNPs are
naturally occurring genetic variations within a genome that scientists believe
can be correlated with susceptibility to disease, disease prognosis, therapeutic
efficiency, and therapeutic toxicity. Celera Genomics has identified over
100,000 SNPs to date, a majority of which Celera Genomics believes have not been
previously identified by other researchers. Celera Genomics intends to use this
SNP data in its internal discovery efforts to improve the prediction of the
efficacy and toxicity of drug candidates.
Online Marketing and Distribution Agreement with Applied Biosystems;
Celera Discovery System. In April 2002, Celera Genomics and Applied Biosystems
entered into a marketing and distribution agreement pursuant to which Applied
Biosystems has become the exclusive marketer of Celera Genomics' Celera
Discovery System and related information assets. Applied Biosystems is expected
to integrate the Celera Discovery System and other genomic and biological
information into its new Knowledge Business. The agreement is expected to enable
Celera Genomics' executive team to focus on therapeutics discovery and
development.
-23-
In exchange for marketing and distribution rights to the Celera
Discovery System and other genomic and biological information and access to the
Celera Discovery System and related information, Applied Biosystems will provide
Celera Genomics with royalty payments on revenues generated by sales of certain
products of the Knowledge Business from July 1, 2002, through the end of fiscal
2012. The royalty rate is progressive, up to a maximum of 5%, with the level of
sales through fiscal 2008. The royalty rate becomes a fixed percentage of sales
starting in fiscal 2009, and the rate declines each succeeding fiscal year
through fiscal 2012. Assays-on-Demand, Assays-by-Design, certain reagents for
arrays, and new database subscriptions sold by the Knowledge Business are the
products subject to royalties.
Whether Celera Genomics actually receives any royalties from Applied
Biosystems under this agreement, and the amount of these royalties, depends on
Applied Biosystems' ability to successfully commercialize Knowledge Business
products subject to the royalty. The Knowledge Business is an emerging business,
and Applied Biosystems has not proven its ability to successfully commercialize
these products. Celera Genomics believes that in order for the Knowledge
Business to be successful, Applied Biosystems may have to devote significant
resources to researching, developing, marketing, and distributing Knowledge
Business products and services. However, Celera Genomics has no control over the
amount and timing of Applied Biosystems' use of its resources, including for
products subject to Celera Genomics' 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.
Under the terms of the marketing and distribution agreement, Celera
Genomics 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). The
revenue anticipated by Celera Genomics under these contracts could be adversely
impacted as a result of changes made to Celera Discovery System products by or
at the request of Applied Biosystems pursuant to the marketing and distribution
agreement. However, Applied Biosystems has agreed to reimburse Celera Genomics
for any shortfall in earnings before interest, taxes, depreciation, and
amortization from these contracts below $62.5 million (as well as renewals, if
any) during the four fiscal years ending with the 2006 fiscal year if the
shortfall is due to changes made to Celera Discovery System products by or at
the request of Applied Biosystems, provided Celera Genomics otherwise continues
to perform under these contracts. During the term of the marketing and
distribution agreement (other than the transition period), Celera Genomics 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 in effect on June 30, 2002 and
renewals of these contracts, if any, and Applied Biosystems' corresponding
reimbursement obligation, Celera Genomics does not expect any revenues from
Celera Discovery System and related products and services other than the
potential royalty payments from Applied Biosystems under the marketing and
distribution agreement. Although under certain contracts with existing Celera
Discovery System customers, Celera Genomics is entitled to milestone payments or
future royalties based on products developed by its customers, Celera Genomics
believes these arrangements are unlikely to produce any significant revenue for
the group.
-24-
Celera Genomics will continue to have access to all data, which may
include formats not available to third parties, and other intellectual property
associated with the Celera Discovery System for its therapeutic programs. Celera
Genomics expects that such data and intellectual property will have a
significant role in its product research and development.
Raw Materials. Celera Genomics' operations require a variety of raw
materials, such as chemical and biochemical materials and other supplies, some
of which are occasionally found to be in short supply. Any interruption in the
availability of these materials could adversely affect Celera Genomics'
operations.
In particular, Celera Genomics 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. Celera
Genomics may not be able to obtain or maintain access to these materials and
information on acceptable terms. In addition, government regulation in the
United States and foreign countries could result in restricted access to, or use
of, human and other tissue samples. If Celera Genomics loses access to
sufficient numbers or sources of tissue samples, or if tighter restrictions are
imposed on its use of the information generated from tissue samples, its
business may be harmed.
Patents, Licenses, Franchises and other Intellectual Property. Through
its internal research programs and collaborative programs, Celera Genomics
anticipates that it will develop an increasing portfolio of intellectual
property. Celera Genomics may use this intellectual property in its internal
development programs or may license such intellectual property to third party
collaborators or customers for some combination of license fees, milestone
payments, and royalty payments.
Celera Genomics' business and competitive position are dependent, in
part, on its ability to protect its database information, its software
technology, its novel DNA sequence discoveries, its SNP discoveries, its protein
discoveries, its therapeutic discoveries, and its diagnostic discoveries using a
variety of intellectual property mechanisms. In addition to seeking patent
protection, Celera Genomics may rely on copyright and trade secret laws to
protect its discoveries. Celera Genomics recognizes that many of the
intellectual property laws are directly suitable for application to such
discoveries while other protections may not be available or extend to cover
genomic and/or proteomic-based discoveries.
Celera Genomics has sought and expects to continue seeking patent
protection for inventions relating to its DNA sequence, SNP, protein,
therapeutic, and diagnostic discoveries. Celera Genomics' current plan is to
apply for patent protection for novel DNA sequences, SNPs, proteins, and novel
uses for these DNA sequences, SNPs and proteins, as well as therapeutic and
diagnostic agents it discovers or develops. Although obtaining patent protection
based on DNA sequences, SNPs, and proteins might enhance Celera Genomics'
business, Celera Genomics does not believe that its commercial success will be
materially dependent on its ability to do so. However, Celera Genomics' failure
to receive patents for its therapeutic and diagnostic discoveries could
adversely affect the commercial value of such discoveries. Currently, Celera
Genomics has patent applications claiming its DNA sequence, SNP, protein,
therapeutic, and diagnostic discoveries that are pending in the United States
and in foreign jurisdictions and currently owns 55 United States patents.
The issuance of patents is uncertain worldwide. Furthermore, laws
relating to the patenting of novel DNA sequences and proteins are currently
under review and revision in many
-25-
countries. Moreover, publication of information concerning partial DNA sequences
prior to the time that Celera Genomics applies for patent protection may affect
Celera Genomics' ability to obtain patent protection. In addition, patent claims
to a partial sequence may not cover a full-length sequence inclusive of that
partial sequence. Currently, the United States Patent and Trademark Office
requires disclosure in the patent application of a specific and substantial and
credible utility in order to support the patentability of a DNA sequence or
protein.
In January 1997, TIGR, in collaboration with the National Center for
Biological Information, disclosed full-length DNA sequences assembled from
expressed sequence tags available in publicly accessible databases or sequenced
at TIGR. The National Human Genome Research Institute also plans to release
sequence information to the public. These disclosures might limit the scope of
Celera Genomics' claims or make subsequent discoveries related to certain DNA
sequences and proteins unpatentable. While Celera Genomics believes that the
publication of sequence data will not preclude it or others in all instances
from obtaining patent protection on certain DNA sequences and proteins, there
can be no assurances that these publications will not affect the ability to
obtain patent protection.
In February 2001, Celera Genomics disclosed an assembly of the human
genome and gene/protein annotations in a publicly accessible database at Celera
Genomics. The federally funded Human Genome Project also released a human genome
sequence assembly to the public on this date, and has announced that a finished
version of its human genome sequence will be completed in 2003. These
disclosures might limit the scope of Celera Genomics' claims or make subsequent
discoveries related to certain DNA sequences and proteins unpatentable. While
Celera Genomics believes that the publication of sequence data will not preclude
it or others in all instances from obtaining patent protection on certain DNA
sequences and proteins, there can be no assurances that these publications will
not affect the ability to obtain patent protection.
Celera Genomics also cannot ensure that any changes to, or
interpretations of, the patent laws will not adversely affect its patent
position. Celera Genomics anticipates that there may be significant litigation
regarding genomic patent and other intellectual property rights. If Celera
Genomics becomes involved in such litigation, it could consume a substantial
portion of Celera Genomics' resources, and Celera Genomics may not ultimately
prevail. If Celera Genomics does not prevail in a patent litigation dispute, it
may be required to pay damages or royalties or to take measures to avoid any
future infringement, or Celera Genomics may not be able to stop a competitor
from making, using, or selling similar products or technology.
Celera Genomics also intends to rely on trade secret protection for its
confidential and proprietary information. Celera Genomics believes it has
developed proprietary procedures for sequencing and analyzing genes and for
assembling the genes in their naturally occurring order. In addition, Celera
Genomics believes it has developed novel methods for searching and identifying
particularly important regions of genetic information or whole genes of
interest. Celera Genomics currently protects these methods and procedures as
trade secrets and has sought patent protection for some of the proprietary
methods although no such patents have yet been issued.
Celera Genomics has sought and plans to continue seeking intellectual
property protection, including copyright protection, for the Celera Discovery
System, including its content, and the software and methods it creates to
manage, store, analyze, and search novel information. Celera Genomics has taken
security measures to protect its databases, including entering into
confidentiality agreements with employees and academic collaborators who are
-26-
provided or have access to confidential or proprietary information. Celera
Genomics continues to explore ways to further enhance the security for its data,
including copyright protection for its databases.
Backlog. Celera Genomics' total recorded backlog at June 30, 2001 was
$66.1 million. Celera Genomics' total recorded backlog at June 30, 2002 was
$81.5 million. It is Celera Genomics' general policy to include in backlog only
purchase orders that have firm delivery dates within one year. Recorded backlog
may not result in sales because of cancellation or other factors. It is
anticipated that all orders included in the current backlog will be delivered
before the close of fiscal year 2003.
Competition. The pharmaceutical industry is 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 Celera
Genomics;
o develop therapeutic products which are more effective or more
cost-effective than those developed by Celera Genomics;
o obtain regulatory approvals of their therapeutic products more
rapidly than Celera Genomics; or
o obtain patent protection or other intellectual property rights
that would limit Celera Genomics' ability to develop and
commercialize therapeutic products.
Research and Development. Celera Genomics is actively engaged in basic
and applied research and development programs designed to develop new
therapeutic products and support the commitments of existing online/information
contracts. Research and development expenses for Celera Genomics totaled $148.6
million in fiscal 2000, $164.7 million in fiscal 2001, and $132.7 million in
fiscal 2002. The Company expensed $255.6 million in fiscal 2000, $323.4 million
in fiscal 2001, and $381.9 million in fiscal 2002 for Company-sponsored
research, development, and engineering activities.
Celera Genomics' new products are expected to originate from three
sources: internal research and development programs, external collaborative
efforts or alliances, and business and technology acquisitions.
Environmental Matters. Celera Genomics is subject to federal, state,
and local laws and regulations regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, in
those jurisdictions where Celera Genomics operates or maintains facilities.
Celera Genomics does not believe that any liability arising under, or compliance
with, environmental laws or regulations will have a material effect on its
business, and no material capital expenditures are expected for environmental
control.
Celera Diagnostics, a Joint Venture between Applied Biosystems and
Celera Genomics
Overview. Celera Diagnostics is engaged principally in the discovery,
development, and commercialization of novel human diagnostic products. These
products are expected to provide genetic information which may lead to earlier
and more effective treatment of disease. Celera
-27-
Diagnostics expects that the primary users of its products will be reference
laboratories, hospitals, and medical clinics worldwide that perform diagnostic
testing for human health care.
During the 2001 fiscal year, Celera Diagnostics was formed and moved
into its principal facilities in Alameda, California. During the 2002 fiscal
year, its first full fiscal year of operations, it took a number of steps,
including the following, to develop its business:
o it assembled an experienced management team;
o it integrated the pre-existing molecular diagnostics business
contributed by Applied Biosystems in connection with the
formation of Celera Diagnostics;
o it substantially increased its staff in the area of discovery
research, product development, manufacturing, quality,
regulatory affairs, and marketing;
o it completed construction of its high-volume discovery
laboratories for conducting genotyping and gene expression
research;
o it initiated its first gene-disease association study, which
is being conducted to identify genetic markers that correlate
with Alzheimer's disease;
o it entered into a strategic alliance with Abbott Laboratories
to develop, manufacture, and market a broad range of in vitro
molecular diagnostic products, or molecular diagnostic
products that are used for testing outside of the living body,
for disease detection, disease progression monitoring, and
therapy selection; and
o it submitted its first regulatory filing to the United States
Food and Drug Administration for an HIV diagnostic product.
Summary of Joint Venture Agreement. Celera Diagnostics was formed
during the 2001 fiscal year as a joint venture between Applied Biosystems and
Celera Genomics. In connection with the formation of Celera Diagnostics, Applied
Biosystems contributed, among other things, its then-existing molecular
diagnostics business to Celera Diagnostics, and Celera Genomics contributed,
among other things, access to its genome databases. Also, Celera Genomics agreed
to fund all of the cash operating losses of Celera Diagnostics up to a maximum
of $300 million ("initial losses"), after which, operating losses, if any, will
be shared equally by Applied Biosystems and Celera Genomics. Celera Diagnostics'
profits, if any, will be shared in the ratio of 65 percent to Celera Genomics
and 35 percent to Applied Biosystems until the cumulative profits of Celera
Diagnostics equal the initial losses. Subsequently, profits and losses and cash
flows would be shared equally between the groups. Capital expenditures and
working capital requirements of Celera Diagnostics will be funded equally by the
groups. Applied Biosystems will reimburse Celera Genomics for all tax benefits
generated by Celera Diagnostics to the extent such tax benefits are utilized by
Applied Biosystems. In the event of liquidation of the assets attributable to
Celera Diagnostics, including sale of these assets, the proceeds upon
liquidation would be distributed to Applied Biosystems and Celera Genomics based
on a proportion similar to their relative investment accounts. If the proceeds
upon liquidation are in excess of the groups' combined investment accounts, the
excess liquidation proceeds would be shared in the ratio of 65 percent to Celera
Genomics and 35 percent to Applied Biosystems until the cumulative amount of the
distributed excess proceeds equals the initial losses funded by Celera
-28-
Genomics. Any additional liquidation proceeds would be allocated equally to
Celera Genomics and Applied Biosystems.
Research and Development; Abbott Laboratories Strategic Alliance.
During the 2002 fiscal year, Celera Diagnostics first focused its activities on
staffing and completing its high-volume discovery laboratories, and then began
research and development of products that detect infectious diseases and human
genetic disorders. Celera Diagnostics expects to expand these research and
development efforts, and in particular, it intends to leverage its genotyping
and gene expression capabilities, and the SNP data from the Applera Genomics
Initiative, to perform large-scale gene-disease association studies to identify
new diagnostic markers. Celera Diagnostics' first gene-disease association
study, involving Alzheimer's disease, is currently underway, and several
additional studies in cancer, cardiovascular disease, and inflammatory diseases
are planned for the current fiscal year. If these studies are successful, Celera
Diagnostics expects to develop and market reagents that detect the newly
discovered genetic markers.
In June 2002, Celera Diagnostics announced a strategic alliance with
Abbott Laboratories, one of the world's largest diagnostics companies, to
discover, develop and commercialize a broad range of in vitro diagnostic
products for disease detection, disease progression monitoring, and therapy
selection. The agreement with Abbott Laboratories is limited to diagnostic
products that detect nucleic acids, for example DNA or RNA. Diagnostics based on
the detection of proteins, rather than nucleic acids, is another potential
business area for Celera Diagnostics but is not a part of the agreement with
Abbott Laboratories and is not a current focus of Celera Diagnostics. Under the
Abbott Laboratories agreement, Celera Diagnostics and Abbott Laboratories will
jointly fund research and development. Celera Diagnostics believes that Abbott
Laboratories' expertise in the diagnostics industry will enhance Celera
Diagnostics' research and development efforts, and expedite its ability to bring
products to market.
Celera Diagnostics expects to rely substantially on its alliance with
Abbott Laboratories for the success of its business strategy for the foreseeable
future. The Abbott Laboratories agreement may be terminated by a 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. Also,
Celera Diagnostics cannot ensure that Abbott Laboratories will perform its
obligations as expected. If Abbott Laboratories terminates the alliance or
otherwise fails to conduct its collaborative activities in a timely manner, the
development or commercialization of diagnostics products may be delayed or
otherwise adversely affected.
Research and development expenses for Celera Diagnostics totaled $4.5
million in fiscal 2001 and $39.0 million in fiscal 2002. The Company expensed
$255.6 million in fiscal 2000, $323.4 million in fiscal 2001, and $381.9 million
in fiscal 2002 for Company-sponsored research, development, and engineering
activities.
Celera Diagnostics Products. Celera Diagnostics plans to develop
products that provide useful genetic information to facilitate disease
detection, prediction of disease predisposition, disease progression, disease
severity, and responsiveness to treatment regimens. Such products are expected
to include primarily in vitro diagnostic test kits, which may be labeled for use
in diagnosing specific diseases or other conditions, as well as products
referred to as "analyte specific reagents," which may be used for clinical
testing but which may not be labeled for use in diagnosing any specific disease
or condition.
-29-
While the sale of in vitro diagnostic test kits requires clearance or
approval by the United States Food and Drug Administration, analyte specific
reagents are a class of products defined by the agency's regulations which may
be sold without any regulatory submission, so long as they are manufactured and
marketed in compliance with the requirements of the agency's Quality System
regulations, such as Good Manufacturing Practices. Because analyte specific
reagents are not subject to United States Food and Drug Administration clearance
or approval, Celera Diagnostics believes they can generally be commercialized
sooner than diagnostic test kits, though the labeling restrictions would likely
affect market acceptance of the products.
Celera Diagnostics is currently marketing three products, all of which
were contributed by Applied Biosystems in connection with the formation of
Celera Diagnostics in different stages of development. Following is a
description of these products:
o ViroSeq(TM) HIV-1 Genotyping System. The genome of human
immunodeficiency virus, commonly known as HIV, undergoes
mutations in an infected patient, especially in response to
anti-viral drug treatment. Some of the mutations have been
shown to render the virus resistant to the action of these
drugs, thereby diminishing the effectiveness of the treatment.
Therefore, the detection of mutations in HIV that correlate
with drug resistance provides useful information to physicians
in monitoring the course of treatment and selecting the most
effective regimen for each individual HIV-infected patient.
During the 2002 fiscal year, Celera Diagnostics submitted a
510(k) filing to the United States Food and Drug
Administration for the ViroSeq(TM) HIV-1 Genotyping System. A
510(k) filing is a pre-market notification to the United
States Food and Drug Administration that Celera Diagnostics
intends to market this product as an in vitro diagnostic test
kit. This product is for use in testing human blood samples
for identifying drug-resistant mutations in the HIV-1 genome.
HIV-1 is one of the most prevalent strains of HIV. Celera
Diagnostics' filing is currently under review by the agency,
which must provide clearance before Celera Diagnostics can
market the product in the United States. Regulatory approval
was granted in France for this product during the 2002 fiscal
year, and the product is currently being marketed in that
country.
o Cystic Fibrosis Assay. Cystic fibrosis is an inherited genetic
disorder that affects children and young adults. It is caused
by a number of mutations in the cystic fibrosis gene.
Detection of these mutations should allow for testing of women
during pregnancy, as currently recommended by the American
College of Obstetricians and Gynecologists, as well as for
early monitoring of the disease and prescription of
appropriate treatment. Celera Diagnostics sells analyte
specific reagents that identify mutations in the cystic
fibrosis gene.
o HLA Sequencing-Based Typing Kits. Transplantation of tissues
and organs between genetically-unrelated individuals usually
results in rejection of the donor graft, or tissue, by the
recipient. Such rejection is due to differences in certain
genes between a donor and a recipient. These genes have been
mapped to a region of the human genome known as HLA. Analysis
of HLA genes to match donor-recipient pairs with minimal
differences in these genes has greatly improved the success of
transplantation. Celera Diagnostics' HLA-typing products
detect specific DNA
-30-
sequences in several HLA genes that are known to be involved
in transplantation rejection, and thus provide useful
information regarding the likelihood of transplant rejection
by a recipient. Celera Diagnostics has not sought or received
clearance or approval of the United States Food and Drug
Administration for these products, and does not manufacture
these products in accordance with United States Food and Drug
Administration requirements. Accordingly, these products can
be sold only for research use and cannot be sold for
diagnostic purposes either as diagnostic kits or as analyte
specific reagents. Celera Diagnostics is evaluating its
strategy for these products, which may result in
discontinuance or which may result in further development to
enable sale as diagnostic products.
Regulation of Diagnostic Products. In the United States and in other
countries, diagnostic products are heavily regulated by governmental agencies.
Although some of the products that Celera Diagnostics expects to market may not
require regulatory clearance or approval, its current business strategy is to
develop and market a number of products that will require this clearance or
approval, including for example its ViroSeq HIV-1 Genotyping System. In the
United States, either Celera Diagnostics or its collaborators will have to show
through pre-clinical studies and clinical trials that each of these 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-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 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.
Marketing and Distribution. Celera Diagnostics expects that reference
laboratories, hospitals, and medical clinics that perform diagnostic testing
will be the primary users of its products. Celera Diagnostics does not expect to
develop its own marketing and distribution organization for the foreseeable
future. Under the terms of its strategic alliance with Abbott Laboratories,
Abbott Laboratories will serve as Celera Diagnostics' exclusive worldwide
distributor of nucleic acid-based diagnostic products developed under the
agreement.
Celera Diagnostics expects that substantially all of its nucleic acid
testing products for the foreseeable future will be covered by the Abbott
Laboratories agreement. However, in the future Celera Diagnostics may develop
products not covered by the agreement, in which case
-31-
Celera Diagnostics would have to develop its own marketing and distribution
capability or find other distributors for these products.
Raw Materials. Celera Diagnostics' operations require a variety of raw
materials, such as chemical and biochemical materials, and other supplies, some
of which are occasionally found to be in short supply. Any interruption in the
availability of these materials could adversely affect Celera Diagnostics'
operations.
In particular, 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.
Patents, Licenses, and Franchises. Through its internal research
programs and collaborative programs, including the Applera Genomics Initiative,
Celera Diagnostics anticipates that it will develop an increasing portfolio of
intellectual property. Celera Diagnostics may use such intellectual property in
its internal development programs or may license it to third parties or
customers for some combination of license fees, milestone payments, and royalty
payments.
Celera Diagnostics' products are based on complex, rapidly developing
technologies. Some of these technologies are covered by patents owned by Applied
Biosystems and Celera Genomics, and other patents are owned by third parties and
used by Celera Diagnostics under license.
Competition. The diagnostic industry in which Celera Diagnostics
operates is competitive and evolving. There is intense competition among
healthcare, 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 clearance or approval 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:
-32-
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 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, which are used to
determine the physical traits of diseased samples; and
o manufacturers and distributors of DNA probe-based diagnostic
systems.
Environmental Matters. Celera Diagnostics is subject to federal, state,
and local laws and regulations regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, in
those jurisdictions where Celera Diagnostics operates or maintains facilities.
Celera Diagnostics does not believe that any liability arising under, or
compliance with, environmental laws or regulations will have a material effect
on its business, and no material capital expenditures are expected for
environmental control.
Employees
As of June 30, 2002, the Company had approximately 5,950 employees
allocated as follows:
Business/Function Number
----------------- ------
Applied Biosystems 4,790
Celera Genomics 820
Celera Diagnostics 160
Corporate Staff 180
The Company's corporate staff provides accounting, tax, treasury,
legal, information technology, human resources, and other internal services for
Applied Biosystems, Celera Genomics, and Celera Diagnostics. None of Applied
Biosystems' United States employees, and none of Celera Genomics' or Celera
Diagnostics' employees or the Company's corporate staff employees, are subject
to collective bargaining agreements. The Company generally considers its
relations with its employees to be good.
Financial Information About Geographic Areas
A summary of net revenues from external customers and long-lived assets
attributed to each of the Company's geographic areas for the fiscal years 2000,
2001, and 2002 is incorporated herein by reference to Note 14 on pages 71-83 of
the Company's Annual Report to Stockholders for the fiscal year ended June 30,
2002.
-33-
The Company's consolidated net revenues from external customers in
countries other than the United States for fiscal years 2000, 2001, and 2002
were $690.0 million, $833.9 million, and $845.4 million, or 50.3%, 50.7%, and
49.7%, respectively, of the Company's consolidated net revenues.
The Company's manufacturing facilities outside the continental United
States are located in the United Kingdom, Japan, and Singapore.
Executive Officers of the Registrant
Information concerning the executive officers of the Company is
incorporated by reference to the description under the heading "Identification
and Business Experience of Executive Officers" on pages 71 and 72 in Part III of
this Annual Report on Form 10-K.
Item 2. PROPERTIES
Applied Biosystems Group Facilities
Applied Biosystems' headquarters are located in leased facilities in
Foster City, California. Applied Biosystems owns or leases various other
facilities worldwide for manufacturing, distribution, warehousing, research and
development, sales and demonstration, service, and administration. The following
is a list of Applied Biosystems' principal and other material facilities. Except
as otherwise noted below, substantially all of the space in these facilities is
used by Applied Biosystems and these facilities are maintained in good working
order.
Owned or Leased
Location (Approximate Floor Area in Sq. Ft.) (Expiration Date of Leases)
-------------------------------------------- ---------------------------
Foster City, CA (762,000) Leased (2003-2015)
Hayward, CA (66,000) Leased (2004)
San Jose, CA (81,000) Owned
Bedford, MA (73,000) Leased (2004 - 2011)
Framingham, MA (140,000) Leased (2009)
Cambridge, MA (10,700) Leased (2003)
Santa Fe, NM (14,000) Leased (2010)
Houston, TX (50,000) Leased (2004)
Warrington, United Kingdom (88,000) Owned
Rotterdam, Netherlands (64,000) Leased (2010)
Singapore (36,000) Leased (2002)
Narita, Japan (24,000) Owned
The Foster City, California facilities are comprised of 27 buildings
located at a single complex. These buildings are leased from various parties
under leases that expire between 2003 and 2015. The Bedford, Massachusetts
facilities include 3 buildings at separate locations within that city having
approximately 30,000, 28,000, and 15,000 square feet, the leases for which
expire in 2011, 2004, and 2007. The Warrington, United Kingdom facilities
include 2 buildings at separate locations within that city having approximately
49,000 and 39,000 square feet.
-34-
Applied Biosystems purchased an 80-acre property in Pleasanton,
California, in September 2000, on which the Company intends to construct new
facilities with approximately 600,000 square feet for research and development,
manufacturing, and administrative purposes. Since acquiring this property,
Applied Biosystems has demolished a majority of the existing facilities and
commenced the first phase of construction. During this first phase, Applied
Biosystems is constructing two buildings comprising approximately 140,000 and
95,000 square feet. Applied Biosystems expects to complete and occupy the
smaller of these two buildings during the first half of 2003. Completion and
occupancy of the other building is expected to occur later in 2003.
Also, Applied Biosystems is currently constructing a new building with
approximately 30,000 square feet in Bedford, Massachusetts. Applied Biosystems
expects to move its Cambridge, Massachusetts operations to this building upon
the expiration of the Cambridge, Massachusetts lease in March 2003.
Applied Biosystems also owns approximately 15 acres of undeveloped land
in Vacaville, California, and is evaluating whether to develop or sell this
property.
Celera Genomics Group Facilities
Celera Genomics' headquarters are located in two owned adjacent
buildings in Rockville, Maryland. Celera Genomics' administrative facilities,
sequencing facility, research and development laboratories, bioinformatics data
center, and proteomics laboratory are located at its headquarters. Celera
Genomics also leases various other facilities for research and development,
sales, and service, as well as a facility in Pasadena, California which is the
headquarters for Paracel, Inc., which was acquired by Celera Genomics in June
2000. The following is a list of Celera Genomics' principal and other material
facilities. Except as otherwise noted below, substantially all of the space in
these facilities is used by Celera Genomics and these facilities are maintained
in good working order:
Owned or Leased
Location (Approximate Floor Area in Sq. Ft.) (Expiration Date of Leases)
-------------------------------------------- ---------------------------
Rockville, MD (220,000) Owned
Pasadena, CA (85,000) Leased (2011)
South San Francisco, CA (69,300) Leased (2006)
South San Francisco, CA (44,000) Owned
South San Francisco, CA (13,600) Leased (2006)
Celera Genomics expects to use approximately 80% of the capacity of the
owned facility in Rockville, Maryland for the foreseeable future. The Company
expects that the remaining approximately 20% of capacity will be used by Applied
Biosystems and for general corporate purposes. Also, this facility is located on
a parcel of land owned by the Company that includes approximately 13 acres of
undeveloped land. The Company believes this land could be used for the
construction of additional facilities, if necessary.
Celera Genomics expects to use approximately 35% of the capacity of the
leased facility in Pasadena, California for the remainder of the lease term. The
Company has subleased a
-35-
portion of the remaining capacity and is seeking to sublease the balance of the
remaining capacity for the remainder of the lease term.
The owned facility in South San Francisco, California is located on
land leased by the Company under a long-term ground lease.
Celera Diagnostics Facilities
The Company has leased the following two facilities to serve as the
principal facilities for Celera Diagnostics, which Celera Diagnostics is using
as its headquarters as well as for research and development and administrative
purposes, and which it expects to use for manufacturing purposes in the future.
Except as otherwise noted below, these facilities are maintained in good working
order.
Owned or Leased
Location (Approximate Floor Area in Sq. Ft.) (Expiration Date of Leases)
-------------------------------------------- ---------------------------
Alameda, CA (48,000) Leased (2006)
Alameda, CA (19,000) Leased (2006)
Celera Diagnostics is using substantially all of the space in these two
facilities except for approximately 10,000 square feet in the larger facility,
which Celera Diagnostics is renovating for use in manufacturing, and
approximately 8,000 square feet in the same facility, which Celera Diagnostics
is renovating for use as additional research and development space. Celera
Diagnostics expects to complete the renovations of, and occupy, the
manufacturing space by the end of 2002, and expects to complete the renovations
of, and occupy, the research and development space in early 2003. Pending
completion of these manufacturing facilities, Celera Diagnostics has been using
up to approximately 19,000 square feet of Applied Biosystems' space in Foster
City, California, for manufacturing.
Corporate Facilities
The Company's corporate headquarters is located in a leased facility in
Norwalk, Connecticut. The Company leases approximately 51,000 square feet at
this facility, substantially all of which the Company uses for corporate staff
and related support functions. This facility is maintained in good working
order.
The Company also owns another facility in Norwalk and Wilton,
Connecticut, with an area of approximately 402,000 square feet. This facility
was previously used for the Company's corporate headquarters, but is no longer
used by the Company. This facility is being held for sale or long term lease.
This facility is currently vacant and is expected to remain vacant pending
completion of such a sale or lease.
Item 3. 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 certain claims currently being defended by the Company. The
Company believes that it has meritorious defenses against the claims
-36-
currently asserted against it, including those 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 any of the
cases described below or in the Company's other current litigation. An adverse
determination in certain of the Company's current litigation, particularly the
cases described below under the headings "Securities Litigation," "MJ Research
Litigation," "Promega Litigation," and "Beckman Coulter Litigation," could have
a material adverse effect on the Company.
Securities Litigation
The Company and some of its officers were served in five lawsuits
between April and May 2000, purportedly on behalf of purchasers of Applera
Corporation - Celera Genomics Group Common Stock in the Company's follow-on
public offering of Applera Corporation - Celera Genomics Group Common Stock
completed on March 6, 2000. In the offering, the Company sold an aggregate of
approximately 4.4 million shares of Applera Corporation - Celera Genomics Group
Common Stock at a public offering price of $225 per share. All of these lawsuits
have been consolidated into a single case and 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 Celera Genomics has never sought, or
intended to seek, a patent on the basic human genome sequence data, the
complaint also alleges that the Company did not adequately disclose the risk
that it would not be able to patent this data. The consolidated complaint seeks
unspecified money damages, rescission, costs and expenses, and other relief as
the court deems proper. A motion to dismiss the case filed by the Company and
the other defendants is pending.
MJ Research Litigation
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 the Company. 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.
-37-
Promega Litigation
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. The trial in this case is currently scheduled for
November 18, 2002.
Beckman Coulter Litigation
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.
United States v. Davis
The Company is a party to the action United States v. Davis, pending in
the United States District Court for the District of Rhode Island. The Company
was brought into the case along with numerous other companies as a result of a
third party complaint filed by United Technologies Corporation ("UTC") seeking
contribution for environmental cleanup costs imposed by the United States
government. In December 1998, the District Court found the Company liable to UTC
along with certain, but not all, of the defendants in the case. The Company
believes the amount of such liability to be less than $200,000, which will be
determined when all appeals have been concluded. Both UTC and the Company
appealed the District Court's decision. In August 2001, the United States Court
of Appeals for the First Circuit affirmed the District Court's decision and
remanded the case to the District Court for further proceedings. The Company and
the other defendants are considering the decision of the Court of Appeals and
their legal alternatives.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-38-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information
The principal United States market where the Company's Applera
Corporation - Applied Biosystems Group Common Stock and Applera Corporation -
Celera Genomics Group Common Stock are traded is the New York Stock Exchange,
although such stock is also traded on the Pacific Exchange.
Applera Corporation - Applied Biosystems Group Common Stock is listed
on the New York Stock Exchange under the trading symbol "ABI" and is intended to
reflect the relative performance of Applied Biosystems. Applera Corporation -
Celera Genomics Group Common Stock is listed on the New York Stock Exchange
under the trading symbol "CRA" and is intended to reflect the relative
performance of Celera Genomics. There is no single security that represents the
performance of the Company as a whole, nor is there a separate security traded
for Celera Diagnostics.
Holders of Applera Corporation - Applied Biosystems Group Common Stock
and Applera Corporation - Celera Genomics Group Common Stock are stockholders of
the Company. Applied Biosystems and Celera Genomics are not separate legal
entities, and holders of these stocks are stockholders of a single company, the
Company. As a result, holders of these stocks are subject to all of the risks
associated with an investment in the Company and all of its businesses, assets,
and liabilities.
The high and low sales prices of Applera Corporation - Applied
Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group
Common Stock for each quarterly period during fiscal years 2001 and 2002 is
incorporated herein by reference to Note 11, page 69, of the Company's Annual
Report to Stockholders for the fiscal year ended June 30, 2002.
Holders
On September 4, 2002, the approximate number of holders of Applera
Corporation - Applied Biosystems Group Common Stock was 6,244, and the
approximate number of holders of Applera Corporation - Celera Genomics Group
Common Stock was 6,535. The approximate number of holders is based upon the
actual number of holders registered in the Company's records at such date and
does not include holders of shares in "street name" or persons, partnerships,
associations, corporations, or other entities identified in security position
listings maintained by depository trust companies. The calculation of the market
value of shares held by non-affiliates shown on the cover of this Annual Report
on Form 10-K was made on the assumption that there were no affiliates other than
executive officers and directors as of the date of calculation.
-39-
Dividends
Information regarding the amount of quarterly dividends during fiscal
years 2001 and 2002 is incorporated herein by reference to Note 11, page 69, of
the Company's Annual Report to Stockholders for the fiscal year ended June 30,
2002.
Sale of Unregistered Securities
The Company has not sold any securities during the fiscal year ended
June 30, 2002, that were not registered under the Securities Act of 1933.
Forward Looking Statements and Risk Factors
Certain statements contained in, or incorporated by reference in, this
Annual Report on Form 10-K are forward-looking and are subject to a variety of
risks and uncertainties. These statements may be identified by the use of
forward-looking words or phrases such as "believe," "expect," "intend,"
"anticipate," "should," "plan," "estimate," and "potential," among others. These
forward-looking statements are based on the Company's current expectations. The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
such forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause actual results
and experience to differ materially from the anticipated results or other
expectations expressed in such forward-looking statements. Also, the Company
notes that owners of Applera Corporation - Applied Biosystems Group Common Stock
and Applera Corporation - Celera Genomics Group Common Stock are subject to
risks arising from their ownership of common stock of a corporation with two
separate classes of common stock. The risks and uncertainties that may affect
the operations, performance, development, and results of the Company's business,
and the risks arising from a capital structure with two separate classes of
common stock, include, but are not limited to:
Risks Relating to Applied Biosystems
Rapidly changing technology in life sciences could make Applied
Biosystems' 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 Applied Biosystems each
year is derived from products that did not exist in the prior year. Applied
Biosystems' 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. Applied Biosystems' products are based on complex
technology which is subject to rapid change as new technologies are developed
and introduced in the marketplace. Unanticipated difficulties or delays in
replacing existing products with new products could adversely affect Applied
Biosystems' 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.
-40-
Applied Biosystems' new Knowledge Business may not be successful.
In April 2002, Applied Biosystems became the exclusive distributor of
Celera Genomics' Celera Discovery System and related human genomic and other
biological and medical information under the terms of a 10-year marketing and
distribution agreement. Applied Biosystems expects to integrate the Celera
Discovery System and Celera Genomics' 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
Applied Biosystems believes that in order for it to be successful Applied
Biosystems 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 Applied Biosystems' instrument product sales
are capital purchases by its customers. Applied Biosystems' 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 Applied Biosystems' 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 Applied Biosystems' products.
A substantial portion of Applied Biosystems' 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 Applied
Biosystems' products were to become unavailable to researchers for any extended
period of time, or if overall research funding were to decrease, the business of
Applied Biosystems could be adversely affected.
Applied Biosystems is currently and could in the future be subject to
claims for infringement of patents and other intellectual property
rights.
Applied Biosystems' 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 Applied
Biosystems' belief that its products do not infringe the technology covered by
valid
-41-
and enforceable patents could be successfully challenged by third parties. Also,
in the course of its business, Applied Biosystems 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 Applied Biosystems
asserting that Applied Biosystems' products improperly use technologies which
are not patented but which are protected as trade secrets. Applied Biosystems
has been made a party to litigation regarding intellectual property matters,
including the litigation described in the following paragraph, some of which, if
determined adversely, could have a material adverse effect on Applied
Biosystems. Due to the fact that Applied Biosystems' business depends in large
part on rapidly developing and dynamic technologies, there remains a constant
risk of intellectual property litigation affecting the group. Applied Biosystems
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 Applied Biosystems cannot be assured that it
will be able to obtain these licenses or other rights on commercially reasonable
terms.
MJ Research, Inc. has filed a lawsuit against the Company based on the
allegation that four patents underlying Applied Biosystems' 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 Applied Biosystems, 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 Applied Biosystems is infringing three
Beckman Coulter patents, although it has not identified the specific facts on
which the allegation is based. At present, only the Promega litigation is
scheduled for trial. If any of these matters does 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, Applied Biosystems, or Celera
Genomics 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, Applied Biosystems, or Celera Genomics.
Since Applied Biosystems' business is dependent on foreign sales,
fluctuating currencies will make revenues and operating results more
volatile.
Approximately 50% of Applied Biosystems' 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 Applied Biosystems are based on the
U.S. dollar. As a result, Applied Biosystems' reported and anticipated operating
results and cash flows are subject to fluctuations due to material changes in
foreign currency exchange rates that are beyond Applied Biosystems' control.
Integrating acquired technologies may be costly and may not result in
technological advances.
The future growth of Applied Biosystems depends in part on its ability
to acquire complementary technologies through acquisitions and investments. The
consolidation of
-42-
employees, operations, and marketing and distribution methods could present
significant managerial challenges. For example, Applied Biosystems 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.
Applied Biosystems' 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 Applied Biosystems' 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, Applied Biosystems depends on the continuous, effective, reliable, and
secure operation of its computer hardware, software, networks, Internet servers,
and related infrastructure. To the extent that Applied Biosystems' hardware or
software malfunctions or access to Applied Biosystems' data by internal
Knowledge Business research personnel or Knowledge Business customers through
the Internet is interrupted, the Knowledge Business could suffer.
Applied Biosystems' 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
Applied Biosystems 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 Applied Biosystems 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
Applied Biosystems, its significant suppliers, and the general infrastructure is
unknown, but operating results could be materially affected in the event of a
major earthquake.
-43-
Risks Relating to Celera Genomics
Celera Genomics has incurred net losses to date and may not achieve
profitability.
Celera Genomics has accumulated net losses of $576.8 million as of June
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
Celera Genomics 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 Applied Biosystems. Celera Genomics
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 Celera Genomics and Applied Biosystems. As an early stage business,
Celera Genomics 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 Celera Genomics will be able to achieve profitable
operations.
Celera Genomics has entered into an exclusive arrangement with Applied
Biosystems to distribute the Celera Discovery System and related
information as part of Applied Biosystems' new Knowledge Business, and
the revenue that Celera Genomics receives from Applied Biosystems will
depend heavily on Applied Biosystems' ability to market and distribute
its Knowledge Business products.
Effective April 2002, Applied Biosystems became the exclusive
distributor of Celera Discovery System and Celera Genomics' related human
genomic and other biological and medical information under the terms of a
ten-year marketing and distribution agreement. Celera Genomics expects that
Applied Biosystems 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, Applied Biosystems is obligated to
pay a royalty to Celera Genomics based on sales, if any, of certain Knowledge
Business products after July 1, 2002. Whether Celera Genomics actually receives
any royalties from Applied Biosystems under this agreement, and the amount of
these royalties, depends on Applied Biosystems' ability to successfully
commercialize Knowledge Business products subject to the royalty. The Knowledge
Business is an emerging business, and Applied Biosystems has not proven its
ability to successfully commercialize these products. Celera Genomics believes
that in order for the Knowledge Business to be successful, Applied Biosystems
may have to devote a significant amount of its resources to researching,
developing, marketing, and distributing Knowledge Business products and
services. However, Celera Genomics has no control over the amount and timing of
Applied Biosystems' use of its resources, including for products subject to
Celera Genomics' 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.
-44-
Celera Genomics 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
Celera Genomics and Applied Biosystems, Celera Genomics 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 Celera Genomics
under these contracts could be adversely impacted as a result of changes made to
Celera Discovery System products by or at the request of Applied Biosystems
pursuant to the agreement, although Applied Biosystems has agreed to reimburse
Celera Genomics for any shortfall in earnings before interest, taxes,
depreciation, and amortization from these contracts below $62.5 million (as well
as renewals, if any) during the four fiscal years ending with the 2006 fiscal
year if the shortfall is due to these changes, provided Celera Genomics
otherwise continues to perform under these contracts. However, during the term
of the marketing and distribution agreement (other than the transition period),
Celera Genomics 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' corresponding reimbursement obligation, Celera Genomics does
not expect any revenues from Celera Discovery System and related products and
services other than the potential royalty payments from Applied Biosystems under
the marketing and distribution agreement. Although under certain contracts with
existing Celera Discovery System customers Celera Genomics is entitled to
milestone payments or future royalties based on products developed by its
customers, Celera Genomics believes these arrangements are unlikely to produce
any significant revenue for the group.
Celera Genomics' 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, Celera Genomics and the Human Genome Project each
announced the "first assembly" of the human genome, and in April 2001, Celera
Genomics 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. Celera
Genomics' 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. Celera Genomics 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. Celera
Genomics' 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
Celera Genomics' revenues.
-45-
Celera Genomics' ability to develop and commercialize proprietary
therapeutics is unproven.
As Celera Genomics expands its therapeutics discovery and development
business, it faces the difficulties inherent in developing and commercializing
therapeutic products. It is possible that Celera Genomics' discovery and
development efforts will not result in any commercial products or services. In
particular, Celera Genomics 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 Celera
Genomics' technologies.
Therapeutic product candidates may never result in a commercialized
product.
All of Celera Genomics' therapeutic product candidates are in various
stages of research and development and will require significant additional
research and development efforts by Celera Genomics 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 development of Celera Genomics' new therapeutics products is highly
uncertain and subject to a number of significant risks. To date, Celera Genomics
has not commercialized a therapeutic product and Celera Genomics 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:
o Celera Genomics or its collaborators may not successfully
complete any research and development efforts;
o Celera Genomics or its collaborators may not successfully
build the necessary preclinical and clinical development
organizations;
o any therapeutic product candidates Celera Genomics or its
collaborators develop may be found during preclinical testing
or clinical trials to be ineffective or to cause harmful side
effects;
o Celera Genomics or its collaborators may fail to obtain
required regulatory approvals for products they develop;
o Celera Genomics or its collaborators may be unable to
manufacture enough of any potential products at an acceptable
cost and with appropriate quality;
o Celera Genomics or its collaborators may fail to build
necessary distribution channels;
o Celera Genomics' or its collaborator's products may not be
competitive with other existing or future products;
-46-
o adequate reimbursement for Celera Genomics' or its
collaborators products may not be available to physicians and
patients from the government or insurance companies; and
o Celera Genomics or its collaborators may be unable to obtain
necessary intellectual property protection, or third parties
may own proprietary rights that prevent Celera Genomics or its
collaborators from commercializing their products.
If Celera Genomics 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.
Celera Genomics' strategy for the discovery, development, clinical
testing, manufacturing and commercialization of most of its therapeutic product
candidates includes entering into collaborations with partners. Although Celera
Genomics 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 Celera Genomics' 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 Celera Genomics' collaborators are not within
Celera Genomics' control. Celera Genomics cannot ensure that its collaborators
will perform their obligations as expected. If any of Celera Genomics'
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 Celera Genomics assumes responsibilities for
continuing programs on its own after termination of a collaboration, Celera
Genomics may be required to devote additional resources to product development
and commercialization or Celera Genomics may need to cancel certain development
programs.
If Celera Genomics fails to satisfy regulatory requirements for any
therapeutic product candidate, Celera Genomics will be unable to
complete the development and commercialization of that product.
Celera Genomics 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 Celera Genomics or its
collaborators must show through pre-clinical studies and clinical trials that
each of Celera Genomics' 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 Celera Genomics 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.
Celera Genomics 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
-47-
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 Celera Genomics 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 Celera Genomics from generating revenues
from the sale of that therapeutic product.
Celera Genomics' research and product development, including its
proteomics efforts, depends on access to tissue samples and other
biological materials.
Celera Genomics will need 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. Celera Genomics
may not be able to obtain or maintain access to these materials and information
on acceptable terms. In addition, government regulation in the United States and
foreign countries could result in restricted access to, or use of, human and
other tissue samples. If Celera Genomics loses access to sufficient numbers or
sources of tissue samples, or if tighter restrictions are imposed on its use of
the information generated from tissue samples, its business may be harmed.
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 Celera
Genomics;
o develop therapeutic products which are more effective or more
cost-effective than those developed by Celera Genomics;
o obtain regulatory approvals of their therapeutic products more
rapidly than Celera Genomics; or
o obtain patent protection or other intellectual property rights
that would limit Celera Genomics' ability to develop and
commercialize therapeutic products.
Introduction of new products may expose Celera Genomics to product
liability claims.
New products developed by Celera Genomics or its collaborators could
expose Celera Genomics 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 Celera Genomics to spend significant time and money in litigation
and to pay significant damages. Although Celera Genomics expects to seek and
maintain product liability insurance to cover claims relating to the testing and
use of
-48-
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 Celera Genomics' therapeutics
business.
Celera Genomics 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
who possess this technical background. Celera Genomics competes for these
personnel with other pharmaceutical and biotechnology companies, academic
institutions and government entities. If Celera Genomics 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.
Celera Genomics could incur liabilities relating to hazardous materials
that it uses in its research and development activities.
Celera Genomics' research and development activities involve the
controlled use of hazardous materials, chemicals and various radioactive
materials. In the event of an accidental contamination or injury from these
materials, Celera Genomics could be held liable for damages in excess of its
resources.
Celera Genomics' business depends on the continuous, effective,
reliable, and secure operation of its computer hardware, software, and
Internet applications and related tools and functions.
Because Celera Genomics' 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, Celera
Genomics depends on the continuous, effective, reliable, and secure operation of
its computer hardware, software, networks, Internet servers, and related
infrastructure. To the extent that Celera Genomics' hardware or software
malfunctions or access to Celera Genomics' data by Celera Genomics' internal
research personnel or customers through the Internet is interrupted, its
business could suffer.
Celera Genomics' computer and communications hardware is protected
through physical and software safeguards. However, it is still vulnerable to
fire, storm, flood, power loss, earthquakes, telecommunications failures,
physical or software break-ins, and similar events. In addition, Celera
Genomics' 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
Celera Genomics 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 Celera Genomics' business.
-49-
Celera Genomics' competitive position depends on maintaining its
intellectual property protection and obtaining licenses to intellectual
property it may need from others.
Celera Genomics' ability to compete and to achieve and maintain
profitability depends on its ability to protect its proprietary discoveries or
technology, 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. Celera Genomics'
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 Celera Genomics may own or license if the applicant is unable
to satisfy the new guidelines.
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,
Celera Genomics 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 Celera Genomics 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,
Celera Genomics cannot be certain that others have not filed patent applications
for inventions covered by Celera Genomics' patent applications or that Celera
Genomics inventors were the first to make the invention. Accordingly, Celera
Genomics' patent applications may be preempted or Celera Genomics 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 Genomics 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 Celera Genomics could use a substantial amount of its
financial resources in either case. An adverse outcome could subject Celera
Genomics to significant liabilities to third parties and require Celera Genomics
to license disputed rights from third parties or to cease using the technology.
-50-
Celera Genomics 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 Celera Genomics and its customers are able to protect their
intellectual property. Accordingly, Celera Genomics is uncertain as to whether
it can prevent such copying or resale through copyright law.
Celera Genomics 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. Celera Genomics 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 Genomics may not have adequate remedies for a breach. In
addition, Celera Genomics' trade secrets may otherwise become known or be
independently developed by competitors. Accordingly, it is unclear whether
Celera Genomics' trade secrets will provide adequate protection.
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 Genomics' products. In addition, these disputes
could require or result in lawsuits or arbitration. Lawsuits and arbitration are
time-consuming and expensive. Even if Celera Genomics wins, the cost of these
proceedings could adversely affect its business, financial condition and
operating results.
Celera Genomics may infringe the intellectual property rights of third
parties and may become involved in expensive intellectual property
litigation.
The intellectual property rights of biotechnology companies, including
Celera Genomics, are generally uncertain and involve complex legal, scientific
and factual questions. Celera Genomics' success in 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.
Celera Genomics 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
Genomics 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 Genomics of any patent
litigation or similar proceeding could be substantial, and it may absorb
significant management time. If infringement litigation against Celera Genomics
is resolved unfavorably to Celera Genomics, Celera Genomics may be enjoined from
manufacturing or selling its products or services without a license from a third
party. Celera Genomics may not be able to obtain a license on commercially
acceptable terms, or at all.
-51-
Ethical, legal and social issues related to the use of genetic
information and genetic testing may cause less demand for Celera
Genomics' 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 Genomics.
Future acquisitions and other transactions may absorb significant
resources, may be unsuccessful and could dilute the holders of Applera
Corporation - Celera Genomics Group Common Stock.
As part of Celera Genomics' strategy, it expects to pursue
acquisitions, investments and other strategic relationships and alliances.
Acquisitions, investments and other strategic relationships and alliances may
involve significant cash expenditures, debt incurrence, additional operating
losses, and expenses that could have a material effect on Celera Genomics'
financial condition and operating results. Acquisitions involve numerous other
risks, including:
o difficulties integrating acquired technologies and personnel
into the business of Celera Genomics;
o diversion of management from daily operations;
o inability to obtain required financing on favorable terms;
o entry into new markets in which Celera Genomics has little
previous experience;
o potential loss of key employees, key contractual
relationships, or key customers of acquired companies or of
Celera Genomics; and
o assumption of the liabilities and exposure to unforeseen
liabilities of acquired companies.
It may be difficult for Celera Genomics 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
Celera Genomics 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 Corporation - Celera Genomics Group
Common Stock without the approval of the holders of Applera Corporation - Celera
Genomics Group Common Stock. Any issuances
-52-
of this nature will be dilutive to holders of Applera Corporation - Celera
Genomics Group Common Stock.
Applera Corporation - Celera Genomics Group Common Stock price is
highly volatile.
The market price of Applera Corporation - Celera Genomics Group Common
Stock has been and may continue to be highly volatile due to the risks and
uncertainties described in this section of this Annual Report on Form 10-K, 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 Celera Genomics' operating performance;
and
o comments by securities analysts or government officials,
including with regard to the viability or profitability of the
biotechnology sector generally or with regard to intellectual
property rights of biotechnology companies, or Celera
Genomics' failure to meet market expectations.
The stock market has from time to time experienced extreme price and
volume fluctuations that are unrelated to the operating performance of
particular companies. In the past, companies that have experienced volatility
have sometimes been the 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.
The Company is subject to a purported class action lawsuit relating to
its 2000 offering of shares of Applera Corporation - Celera Genomics
Group Common Stock that may be expensive and time consuming.
The Company and some of its officers were served in five lawsuits
purportedly on behalf of purchasers of Applera Corporation - Celera Genomics
Group Common Stock in the Company's follow-on public offering of Applera
Corporation - Celera Genomics Group Common Stock completed on March 6, 2000. In
the offering, the Company sold an aggregate of approximately 4.4 million shares
of Applera Corporation - Celera Genomics Group Common Stock at a public offering
price of $225 per share. All of these lawsuits have been consolidated into a
single case and an amended consolidated complaint was filed on August 21, 2001.
The consolidated complaint generally alleges that the prospectus used in
connection with the offering was inaccurate or misleading because it failed to
adequately disclose the alleged opposition of the Human Genome Project and two
of its supporters, the governments of the United States and the United Kingdom,
to providing patent protection to the Company's genomic-based products. Although
Celera Genomics has never sought, or intended to seek, a patent on the basic
human genome sequence data, the complaint also alleges that the Company did not
adequately disclose the risk that it would not be able to patent this data. The
consolidated complaint seeks unspecified monetary damages, rescission, costs and
expenses, and other relief as the court deems proper. The Company and the other
defendants have filed a motion to dismiss the case, which motion is pending
before the court. Although the Company believes the asserted claims are without
merit and intends to defend the case vigorously, the outcome of this or any
other
-53-
litigation is inherently uncertain. The defense of this case will require
management attention and resources.
Risks Relating to Celera Diagnostics, a Joint Venture Between Applied
Biosystems and Celera Genomics
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. The development of Celera Diagnostics' 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:
o Celera Diagnostics or its collaborators may not successfully
complete any research and development efforts;
o any diagnostic products 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 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
-54-
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 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-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 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.
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
-55-
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 and
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.
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.
-56-
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 marketing capability in the clinical
diagnostic market.
Celera Diagnostics currently does not have a marketing organization.
Accordingly, its ability to successfully sell its products will depend on its
ability to either develop a marketing 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.
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
-57-
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.
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 approvals from the United States Food and Drug Administration or foreign
regulatory agencies prior to commercialization.
-58-
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 or
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.
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 unclear whether Celera Diagnostics' trade secrets will
provide adequate protection.
-59-
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.
-60-
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 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 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.
-61-
Risks Relating to a Capital Structure with Two Separate Classes of
Common Stock
Stockholders of the Company are stockholders of one company and,
therefore, financial effects on one group could adversely affect the
other.
Applied Biosystems and Celera Genomics are not separate legal entities.
As a result, stockholders will continue to be subject to all of the risks of an
investment in the Company, including Applied Biosystems and Celera Genomics. The
risks and uncertainties that may affect the operations, performance,
development, and results of the businesses of Applied Biosystems and Celera
Genomics are described above. The assets attributed to one group could be
subject to the liabilities of the other group, even if these liabilities arise
from lawsuits, contracts, or indebtedness that the Company attributes to the
other group. If the Company is unable to satisfy one group's liabilities out of
the assets attributed to it, the Company may be required to satisfy those
liabilities with assets attributed to the other group.
Financial effects from one group that affect the Company's consolidated
results of operations or financial condition could, if significant, affect the
results of operations or financial condition of the other group and the market
price of the common stock relating to the other group. In addition, net losses
of either group and dividends or distributions on, or repurchases of, either
class of common stock or repurchases of preferred stock will reduce the funds
the Company can pay as dividends on each class of common stock under Delaware
law. For these reasons, stockholders should read the consolidated financial
information with the financial information the Company provides for each group.
The market price of either class of the Company's common stock may not reflect
the separate performance of the group related to that common stock.
The market price of Applera Corporation - Applied Biosystems Group
Common Stock and Applera Corporation - Celera Genomics Group Common Stock may
not reflect the separate performance of the business of the group relating to
that class of common stock. The market price of either class of common stock
could simply reflect the performance of the Company as a whole, or the market
price of either class of common stock could move independently of the
performance of the business of either group. Investors may discount the value of
either class of common stock because it is part of a common enterprise rather
than a stand-alone company.
The market price of either class of the Company's common stock may be
affected by factors that do not affect traditional common stock.
o The complex nature of the terms of Applera Corporation -
Applied Biosystems Group Common Stock and Applera Corporation
- Celera Genomics Group Common Stock may adversely affect the
market price of either class of common stock. The complex
nature of the terms of the two classes of common stock, such
as the convertibility of Applera Corporation - Applied
Biosystems Group Common Stock into Applera Corporation -
Celera Genomics Group Common Stock, or vice versa, and the
potential difficulties investors may have understanding these
terms, may adversely affect the market price of either class
of common stock.
o The market price of Applera Corporation - Applied Biosystems
Group Common Stock or Applera Corporation - Celera Genomics
Group Common Stock may be adversely affected by the fact that
holders have limited legal interests in the group relating to
the class of common stock held as a separate legal entity. For
example,
-62-
as described in greater detail in the subsequent risk factors,
holders of either class of common stock generally do not have
separate class voting rights with respect to significant
matters affecting either group. In addition, upon a
liquidation or dissolution of the Company, holders of either
class of common stock will not have specific rights to the
assets of the group relating to the class of common stock held
and will not be entitled to receive proceeds that are
proportional to the relative performance of that group.
o The market price of Applera Corporation - Applied Biosystems
Group Common Stock or Applera Corporation - Celera Genomics
Group Common Stock may be adversely affected by events
involving the group relating to the other class of common
stock or the performance of the class of common stock relating
to that group. Events, such as earnings announcements or other
developments concerning one group that the market does not
view favorably and which thus adversely affect the market
price of the class of common stock relating to that group, may
adversely affect the market price of the class of common stock
relating to the other group. Because both classes of common
stock are common stock of the Company, an adverse market
reaction to one class of common stock may, by association,
cause an adverse reaction to the other class of common stock.
This reaction may occur even if the triggering event was not
material to the Company as a whole.
Limits exist on the voting power of group common stock.
o Applera Corporation - Celera Genomics Group Common Stock May
Not Have Any Influence on the Outcome of Stockholder Voting.
Applera Corporation - Applied Biosystems Group Common Stock
currently has a substantial majority of the voting power of
the Company's common stock and had approximately 83.3% of the
voting power as of August 28, 2002, the record date for the
Company's 2002 annual meeting of stockholders. Except in
limited circumstances where there is separate class voting,
the relative voting power of the two classes of common stock
fluctuates based on their relative market values. Therefore,
except in cases of separate class voting, either class of
common stock that is entitled to more than the number of votes
required to approve any stockholder action could control the
outcome of the vote even if the matter involves a divergence
or conflict of the interests of the holders of Applera
Corporation - Applied Group Biosystems Common Stock and
Applera Corporation - Celera Genomics Group Common Stock.
These matters may include mergers and other extraordinary
transactions.
o A class of group common stock with less than majority voting
power can block action if a class vote is required. If
Delaware law, stock exchange rules, or the Company's Board of
Directors requires a separate vote on a matter by the holders
of either Applera Corporation - Applied Biosystems Group
Common Stock or Applera Corporation - Celera Genomics Group
Common Stock, those holders could prevent approval of the
matter even if the holders of a majority of the total number
of votes cast or entitled to be cast, voting together as a
class, were to vote in favor of it. As a result, in cases
where holders of Applera Corporation - Applied Biosystems
Group Common Stock or Applera Corporation - Celera Genomics
Group Common Stock vote as separate classes on a proposal, the
affirmative vote of shares representing a majority of one
class of common stock will not prevent the holders of the
other class of common stock from defeating the proposal.
-63-
o Holders of only one class of common stock cannot ensure that
their voting power will be sufficient to protect their
interests. Since the relative voting power per share of
Applera Corporation - Applied Biosystems Group Common Stock
and Applera Corporation - Celera Genomics Group Common Stock
will fluctuate based on the market values of the two classes
of common stock, the relative voting power of a class of
common stock could decrease. As a result, holders of shares of
only one of the two classes of common stock cannot ensure that
their voting power will be sufficient to protect their
interests.
o Stockholders of either class of common stock will not have
some of the stockholder rights traditionally associated with
common stock. Neither Applied Biosystems nor Celera Genomics
will have a separate board of directors to represent solely
the interests of either class of common stock as holders of
that class. Consequently, there will be no board of directors
that owes any separate duties to holders of one class of
common stock as holders of that class. The Company's Board of
Directors will act in accordance with its good faith business
judgment of the best interests of the Company, taking into
consideration the interests of all common stockholders
regardless of class or series, which may be detrimental to
holders of one class of common stock has holders of that
class.
Stockholders may not have any remedies for breach of fiduciary duties
if any action by directors or officers has a disadvantageous effect on
either class of common stock.
Stockholders may not have any remedies if any action or decision of the
Company's Board of Directors or officers has a disadvantageous effect on Applera
Corporation - Applied Biosystems Group Common Stock or Applera Corporation -
Celera Genomics Group Common Stock compared to the other class of common stock.
Cases in Delaware involving tracking stocks have established that decisions by
directors or officers involving differing treatment of tracking stocks are
judged under the principle known as the "business judgment rule" unless
self-interest is shown.
In addition, principles of Delaware law established in cases involving
differing treatment of two classes of common stock or two groups of holders of
the same class of common stock provide that a board of directors owes an equal
duty to all stockholders regardless of class or series. Absent abuse of
discretion, a good faith business decision made by a disinterested and
adequately informed Board of Directors, Board of Directors' committee, or
officer of the Company with respect to any matter having different effects on
holders of Applera Corporation - Applied Biosystems Group Common Stock and
holders of Applera Corporation - Celera Genomics Group Common Stock would be a
defense to any challenge to the determination made by or on behalf of the
holders of either class of common stock.
Stock ownership could cause directors and officers to favor one group
over the other.
As a policy, the Company's Board of Directors periodically monitors the
ownership of shares of Applera Corporation - Applied Biosystems Group Common
Stock and Applera Corporation - Celera Genomics Group Common Stock by the
Company's directors and senior officers as well as their option holdings and
other benefits so that their interests are not
-64-
misaligned with the two classes of common stock and with their duty to act in
the best interests of the Company and its stockholders as a whole. However,
because the actual stock market value of their interests in Applera Corporation
- Applied Biosystems Group Common Stock and Applera Corporation - Celera
Genomics Group Common Stock could vary significantly, it is possible that they
could favor one group over the other as a result of their common stock holdings,
options and other benefits. As of August 26, 2002, the Company's directors and
senior officers held shares of Applera Corporation - Applied Biosystems Group
Common Stock and Applera Corporation - Celera Genomics Group Common Stock
representing approximately equal percentages of the total shares outstanding of
Applera Corporation - Applied Biosystems Group Common Stock and Applera
Corporation - Celera Genomics Group Common Stock. The stock market value of
these shares will vary with fluctuations in the market price of Applera
Corporation - Applied Biosystems Group Common Stock and Applera Corporation -
Celera Genomics Group Common Stock. However, the market capitalization of
Applied Biosystems is substantially greater than that of Celera Genomics and,
therefore, the market value of Applera Corporation - Applied Biosystems Group
Common Stock held by the Company's directors and senior officers was
significantly higher than the market value of Applera Corporation - Celera
Genomics Group Common Stock held by them on that date.
Numerous potential conflicts of interest exist between the classes of
common stock that may be difficult to resolve by the Company's Board of
Directors or that may be resolved adversely to one of the classes.
o Allocation of corporate opportunities could favor one group
over the other. The Company's Board of Directors may be
required to allocate corporate opportunities between Applied
Biosystems and Celera Genomics. In some cases, the Company's
directors could determine that a corporate opportunity, such
as a business that the Company is acquiring or a new business,
should be shared by the groups or be allocated to one group
over the other. Any decisions could favor one group to the
detriment of the other.
o Applied Biosystems and Celera Genomics may compete with each
other to the detriment of their businesses. The existence of
two separate classes of common stock will not prevent Applied
Biosystems and Celera Genomics from competing with each other.
Any competition between Applied Biosystems and Celera Genomics
could be detrimental to the businesses of either or both of
the groups. Under a Board of Directors' policy, the groups
will generally not engage in the principal businesses of the
other, except for joint transactions with each other. However,
the Company's Chief Executive Officer or Board of Directors
will permit indirect competition between the groups, such as
one group doing business with a competitor of the other group,
based on his or its good faith business judgment that the
competition is in the best interests of the Company and all of
the Company's stockholders as a whole. In addition, the groups
may compete in a business that is not a principal business of
the other group.
o The Company's Board of Directors may pay more or less
dividends on group common stock than if that group were a
separate company. Subject to the limitations referred to
below, the Company's Board of Directors has the authority to
declare and pay dividends on Applera Corporation - Applied
Biosystems Group Common Stock and Applera Corporation - Celera
Genomics Group Common Stock in any amount and could, in its
sole discretion, declare and pay dividends exclusively
-65-
on Applera Corporation - Applied Biosystems Group Common
Stock, exclusively on Applera Corporation - Celera Genomics
Group Common Stock, or on both, in equal or unequal amounts.
The Company's Board of Directors is not required to consider
the amount of dividends previously declared on each class, the
respective voting or liquidation rights of each class, or any
other factor. The performance of one group may cause the
Company's Board of Directors to pay more or less dividends on
the common stock relating to the other group than if that
other group were a stand-alone company. In addition, Delaware
law and the Company's certificate of incorporation impose
limitations on the amount of dividends that may be paid on
each class of common stock.
o Proceeds of mergers or consolidations may be allocated
unfavorably. The Company's Board of Directors will determine
how consideration to be received by holders of common stock in
connection with a merger or consolidation involving the
Company is to be allocated among holders of each class of
common stock. This percentage may be materially more or less
than that which might have been allocated to the holders had
the Company's Board of Directors chosen a different method of
allocation.
o Holders of either class of common stock may be adversely
affected by a conversion of group common stock. The Company's
Board of Directors could, in its sole discretion and without
stockholder approval, determine to convert shares of Applera
Corporation - Applied Biosystems Group Common Stock into
shares of Applera Corporation - Celera Genomics Group Common
Stock, or vice versa, at any time, including when either or
both classes of common stock may be considered to be
overvalued or undervalued. If the Company's Board of Directors
chose to issue Applera Corporation - Celera Genomics Group
Common Stock in exchange for Applera Corporation - Applied
Biosystems Group Common Stock, or vice versa, the conversion
would dilute the interests in the Company of the holders of
the class of common stock being issued in the conversion. If
the Company's Board of Directors were to choose to issue
Applera Corporation - Celera Genomics Group Common Stock in
exchange for Applera Corporation - Applied Biosystems Group
Common Stock, or vice versa, the conversion could give holders
of shares of the class of common stock being converted a
greater or lesser premium than any premium that was paid or
might be paid by a third-party buyer of all or substantially
all of the assets of the group whose stock is converted.
o Cash proceeds of newly issued Applera Corporation - Celera
Genomics Group Common Stock in the future could be allocated
to Applied Biosystems. If and to the extent Applied Biosystems
holds "Celera Genomics Designated Shares" at the time of any
future sale of Applera Corporation - Celera Genomics Group
Common Stock, the Company's Board of Directors could allocate
some or all of the proceeds of that sale to Applied Biosystems
in consideration of a reduction in the number of these shares.
Celera Genomics Designated Shares are a type of authorized
shares of Applera Corporation - Celera Genomics Group Common
Stock. Any decision could favor one group over the other
group. For example, the decision to allocate the proceeds of
that sale to Applied Biosystems could adversely affect Celera
Genomics' ability to obtain funds to finance its growth
strategies. Applied Biosystems does not hold any Celera
Genomics Designated Shares as of the date of this Annual
Report on Form 10-K. Celera Genomics Designated Shares could
be issued in the future if the
-66-
Company's Board of Directors determines that Celera Genomics
requires additional capital to finance its business and that
Applied Biosystems should supply that capital.
The Company's Board of Directors may change its management and
allocation policies without stockholder approval to the detriment of
either group.
The Company's Board of Directors may modify or rescind the Company's
policies with respect to the allocation of corporate overhead, taxes, debt,
interest, and other matters, or may adopt additional policies, in its sole
discretion without stockholder approval. A decision to modify or rescind these
policies, or adopt additional policies, could have different effects on holders
of Applera Corporation - Applied Biosystems Group Common Stock and holders of
Applera Corporation - Celera Genomics Group Common Stock or could result in a
benefit or detriment to one class of stockholders compared to the other class.
The Company's Board of Directors will make any decision in accordance with its
good faith business judgment that the decision is in the best interests of the
Company and all of its stockholders as a whole.
Either Applied Biosystems or Celera Genomics may finance the other
group on terms unfavorable to either group.
From time to time, the Company anticipates that it will transfer cash
and other property between groups to finance their business activities. When
this occurs, the group providing the financing will be subject to the risks
relating to the group receiving the financing. The Company will account for
those transfers in one of the following ways:
o as a reallocation of pooled debt or preferred stock;
o as a short-term or long-term loan between groups or as a
repayment of a previous borrowing;
o as an increase or decrease in Celera Genomics Designated
Shares; or
o as a sale of assets between groups.
The Company's Board of Directors has not adopted specific criteria for
determining when it will account for transfer of cash or other property as a
reallocation of pooled debt or preferred stock, a loan or repayment, an increase
or decrease in Celera Genomics Designated Shares, or a sale of assets. These
determinations, including the terms of any transactions accounted for as debt,
may be unfavorable to either the group transferring or receiving the cash or
other property. The Company's Board of Directors expects to make these
determinations, either in specific instances or by setting generally applicable
policies, after considering the financing requirements and objectives of the
receiving group, the investment objectives of the transferring group, and the
availability, cost, and time associated with alternative financing sources,
prevailing interest rates, and general economic conditions.
The Company cannot assure stockholders that any terms that it fixes for
debt will approximate those that could have been obtained by the borrowing group
if it were a stand-alone company.
-67-
Celera Genomics could incur a higher tax liability than if it were a
stand-alone taxpayer.
The Company's tax allocation policy provides that some tax benefits
that cannot be used by the group generating those benefits but can be used on a
consolidated basis are to be transferred, without reimbursement, to the group
that can use the benefits. Any tax benefits that are transferred from Celera
Genomics to Applied Biosystems will not be carried forward to reduce Celera
Genomics' future tax liability. As a result of this policy, Celera Genomics
generated tax benefits of $32.2 million for the Company's 2001 fiscal year and
$19.0 million for the Company's 2002 fiscal year that were utilized by Applied
Biosystems with no reimbursement to Celera Genomics. This and future use by
Applied Biosystems, without reimbursement, of tax benefits generated by Celera
Genomics will result in Celera Genomics paying a greater portion of the total
corporate tax liability than would have been the case if Celera Genomics were a
stand-alone taxpayer.
Holders of group common stock may receive less consideration upon a
sale of assets than if the group were a separate company.
The Company's certificate of incorporation provides that if a
disposition of all or substantially all of the assets of either group occurs,
the Company must, subject to certain exceptions:
o distribute to holders of the class of common stock relating to
that group an amount equal to the net proceeds of such
disposition; or
o convert at a 10% premium the common stock relating to that
group into shares of the class of common stock relating to the
other group.
If the group subject to the disposition were a separate, independent
company and its shares were acquired by another person, some of the costs of
that disposition, including corporate level taxes, might not be payable in
connection with that acquisition. As a result, if the group subject to the
disposition were a stand-alone company, stockholders of that group might receive
a greater amount than the net proceeds that would be received by those
stockholders if the assets of that group were sold and the proceeds distributed
to those stockholders. In addition, the Company cannot assure stockholders that
the net proceeds per share of the common stock relating to that group will be
equal to or more than the market value per share of that common stock prior to
or after announcement of a disposition.
The Company's capital structure and variable vote per share may
discourage acquisitions of a group or a class of common stock.
A potential acquirer could acquire control of the Company by acquiring
shares of common stock having a majority of the voting power of all shares of
common stock outstanding. This majority could be obtained by acquiring a
sufficient number of shares of both classes of common stock or, if one class of
common stock has a majority of the voting power, only shares of that class since
the relative aggregate voting power of the two classes of common stock
fluctuates based on their relative aggregate market values. Currently, Applera
Corporation - Applied Biosystems Group Common Stock has a substantial majority
of the voting power. As a
-68-
result, it might be possible for an acquirer to obtain control by purchasing
only shares of Applera Corporation - Applied Biosystems Group Common Stock.
Decisions by the Company's Board of Directors and officers that affect
market values could adversely affect voting and conversion rights.
The relative voting power per share of each class of common stock and
the number of shares of one class of common stock issuable upon the conversion
of the other class of common stock will vary depending upon the relative market
values of Applera Corporation - Applied Biosystems Group Common Stock and
Applera Corporation - Celera Genomics Group Common Stock. The market value of
either or both classes of common stock could be adversely affected by market
reaction to decisions by the Company's Board of Directors or management that
investors perceive as affecting differently one class of common stock compared
to the other. These decisions could involve changes to the Company's management
and allocation policies, transfers of assets between groups, allocations of
corporate opportunities and financing resources between groups, and changes in
dividend policies.
Provisions governing common stock could discourage a change of control
and the payment of a premium for stockholders' shares.
The Company's stockholder rights plan could prevent stockholders from
profiting from an increase in the market value of their shares as a result of a
change in control of the Company by delaying or preventing a change in control.
The existence of two classes of common stock could also present complexities and
may pose obstacles, financial and otherwise, to an acquiring person. In
addition, provisions of Delaware law and the Company's certificate of
incorporation and bylaws may also deter hostile takeover attempts.
Legislative proposals could have adverse tax consequences for the
Company and holders of Applera Corporation - Celera Genomics Group
Common Stock and Applera Corporation - Applied Biosystems Group Common
Stock.
The Clinton Administration Budget Proposals in 1999 and 2000 proposed
legislation that would have adversely affected holders of tracking stock such as
Applera Corporation - Celera Genomics Group Common Stock and Applera Corporation
- Applied Biosystems Group Common Stock. The 1999 proposal would have required
corporate-level gain recognition on the issuance of tracking stock, while the
2000 proposal would have required that the stockholders of the issuing
corporation be taxed upon the receipt of tracking stock in specified
circumstances. Although Congress did not act on either proposal and the 2001 and
2002 Bush Administration Budget Proposals do not contain a similar provision, it
is impossible to predict whether any proposals relating to tracking stock will
be made in the future, and to what extent Congress would act upon any proposals.
The Company may convert Applera Corporation - Celera Genomics Group
Common Stock or Applera Corporation - Applied Biosystems Group Common Stock into
shares of the other class without any premium if, based on the legal opinion of
its tax counsel, it is more likely than not as a result of the enactment of
legislative changes or administrative proposals or changes that the Company or
its stockholders will be subject to tax upon issuance of Applera Corporation -
Celera Genomics Group Common Stock or Applera Corporation - Applied Biosystems
Group Common Stock or that the stock will not be treated as stock of the
Company.
-69-
Item 6. SELECTED FINANCIAL DATA
The Company incorporates herein by reference pages 9 and 10 of the
Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company incorporates herein by reference pages 11-45 of the
Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company incorporates herein by reference page 30 of the Company's
Annual Report to Stockholders for the fiscal year ended June 30, 2002.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and the supplementary financial
information included in the Company's Annual Report to Stockholders for the
fiscal year ended June 30, 2002, are incorporated herein by reference: the
Consolidated Financial Statements and the report thereon of
PricewaterhouseCoopers LLP dated July 25, 2002, on pages 46-84 of said Annual
Report, including Note 11, page 69, which contains unaudited quarterly financial
information.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
-70-
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Identification and Business Experience of Directors
With respect to the identification and business experience of the
Company's directors and persons nominated to become directors, the Company
incorporates herein by reference pages 3 and 4 of the Company's Proxy Statement
dated September 4, 2002, in connection with its Annual Meeting of Stockholders
to be held on October 17, 2002.
Identification and Business Experience of Executive Officers
The following is a list of the Company's executive officers, their
ages, and their corporate offices with the Company and other positions held as
of September 27, 2002.
<TABLE>
<CAPTION>
Name Age Present Corporate Office (Year First Elected), and Other Positions Held
---- --- -----------------------------------------------------------------------
<S> <C> <C>
Ugo D. DeBlasi................40 Assistant Controller (1999), and Vice President, Finance, Celera
Genomics Group
David S. Block................42 Vice President (2002), and Senior Vice President and Chief Operating
Officer, Therapeutics, of the Celera Genomics Group
Robert F.G. Booth.............48 Vice President (2002), and Senior Vice President, Research and
Development, Celera Genomics Group
Patrick T. Carroll............50 Vice President (2002), and Senior Vice President, Worldwide Sales,
Service and Support, Applied Biosystems Group
Michael W. Hunkapiller........53 Senior Vice President, and President, Applied Biosystems Group (1997)
Vikram Jog....................46 Corporate Controller (1999), and Vice President, Finance, Celera
Diagnostics
Robert C. Jones...............47 Vice President (2001), and Senior Vice President, R&D, Applied
Biosystems Group
Barbara J. Kerr...............56 Vice President, Human Resources (2000)
Sandeep Nayyar................43 Assistant Controller (2002), and Vice President, Finance, Applied
Biosystems Group
Kathy P. Ordonez..............52 Senior Vice President, and President, Celera Genomics Group and Celera
Diagnostics (2002)
Robert P. Ragusa..............42 Vice President (2001), and Senior Vice President, Global Operations,
Applied Biosystems Group
William B. Sawch..............48 Senior Vice President (1997) and General Counsel (1993)
Deborah A. Smeltzer...........48 Vice President (2002), and Vice President, Knowledge Business, Applied
Biosystems Group
Tony L. White.................56 Chairman, President, and Chief Executive Officer (1995)
Dennis L. Winger..............54 Senior Vice President and Chief Financial Officer (1997)
</TABLE>
Each of the foregoing named officers was either elected at the last
organizational meeting of the Company's Board of Directors, or elected by the
Board since that date. The term of each officer will expire on October 17, 2002,
the date of the next scheduled organizational meeting of the Board of Directors,
unless renewed for another year.
Each executive officer of the Company has been employed by the Company
or a subsidiary in one or more executive or managerial capacities for at least
the past five years, with the exception of Dr. Block, Dr. Booth, Mr. Jog, Ms.
Kerr, Mr. Nayyar, Ms. Ordonez, Ms. Smeltzer, and Mr. Winger. Mr. DeBlasi
previously served as Controller of the Company, from November 1996 to August
1999. Dr. Hunkapiller previously served as Vice President of the Company from
September 1994 to October 1997. Mr. Sawch previously served as Vice President,
General Counsel, and Secretary of the Company from July 1993 to October 1997,
and as Senior Vice President, General Counsel, and Secretary of the Company from
October 1997 to March 2000.
-71-
Dr. Block was elected Vice President of the Company on April 5, 2002.
Prior to his employment by the Company in January 2002, Dr. Block was employed
by DuPont Pharmaceuticals Company, an international pharmaceutical company,
where he held a series of executive positions over 12 years, including most
recently Executive Vice President of International Operations throughout 2001.
Prior to that he was the Senior Vice President, Business Development and
Strategic Planning from 1999 to 2001 and Vice President, Product Planning and
Acquisition from 1997 to 1999.
Dr. Booth was elected Vice President of the Company on August 15, 2002.
Prior to his employment by the Company in August 2002, Dr. Booth was employed
by Hoffmann-La Roche, a leading international healthcare company, where he held
a series of executive positions over 13 years, including most recently as Senior
Vice President responsible for all research and early development of
inflammatory, viral, respiratory, and bone disease products from January 1996 to
August 2002.
Mr. Jog was elected Controller of the Company on August 19, 1999. Prior
to his employment by the Company in August 1999, Mr. Jog served as Vice
President and Controller of Hercules Incorporated, a manufacturer of chemicals,
for seven years.
Ms. Kerr was elected Vice President, Human Resources of the Company on
September 5, 2000. Prior to her employment by the Company in September 2000, Ms.
Kerr served as a principal of Quantic, Inc., a human resources and compensation
consulting firm. Prior to that, Ms. Kerr was employed by Chiron Corporation,
which conducts research and development in the fields of biological proteins,
gene therapy, and combinatorial chemistry, where she was Vice President, Human
Resources from 1990 to 1997.
Mr. Nayyar was elected Assistant Controller of the Company on April 5,
2002. Prior to his employment by the Company in October 2001, Mr. Nayyar was
employed by Quantum Corporation, a data storage company, where he was Vice
President of Finance for the Hard Disk Drive Group from 2000 to 2001, Vice
President, Finance for the High-end Storage Division from 1998 to 2000, Director
of Finance for the Corporate Finance Group from 1997 to 1998, and Controller for
the High Capacity Storage Group from 1994 to 1997.
Ms. Ordonez was elected Vice President of the Company on December 1,
2000, and was elected Senior Vice President, and President Celera Genomics
Group and Celera Diagnostics on August 15, 2002. Prior to her employment by the
Company in December 2000, Ms. Ordonez was employed by Hoffmann-La Roche, a
leading international healthcare company, where she was President and Chief
Executive Officer of Roche Molecular Systems from 1991 to 2000.
Ms. Smeltzer was elected Assistant Controller of the Company on
November 18, 1999, and was elected Vice President of the Company on April 5,
2002. Prior to her employment by the Company in November 1999, Ms. Smeltzer
served as Chief Financial Officer and Vice President of Genset, SA, a global
genomics company from May 1996 to November 1999, and she was a general partner
of Grotech Capital Group, Inc. from 1988 to 1996.
Mr. Winger was elected Senior Vice President and Chief Financial
Officer of the Company on October 16, 1997. Prior to his employment by the
Company in September 1997, Mr. Winger was employed by Chiron Corporation, which
conducts research and development in the fields of biological proteins, gene
therapy, and combinatorial chemistry, where he was Senior Vice President,
Finance and Administration, and Chief Financial Officer from 1989 to 1997.
-72-
Identification of Certain Significant Employees
Not applicable.
Family Relationships
To the best of the Company's knowledge and belief, there is no family
relationship between any of the Company's directors, executive officers, or
persons nominated or chosen by the Company to become a director or an executive
officer.
Involvement in Certain Legal Proceedings
To the best of the Company's knowledge and belief, none of the
Company's directors, persons nominated to become directors, or executive
officers has been involved in any proceedings during the past five years that
are material to an evaluation of the ability or integrity of such persons to be
directors or executive officers of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated herein by reference to page 10 of the
Company's Proxy Statement dated September 4, 2002, in connection with its Annual
Meeting of Stockholders to be held on October 17, 2002.
Item 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference pages 11-21 of the
Company's Proxy Statement dated September 4, 2002, in connection with its Annual
Meeting of Stockholders to be held on October 17, 2002.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding securities authorized for issuance under equity
compensation plans as of the end of the 2002 fiscal year is incorporated herein
by reference to pages 35-37 of the Company's Proxy Statement dated September 4,
2002, in connection with its Annual Meeting of Stockholders to be held on
October 17, 2002.
Security Ownership of Certain Beneficial Owners
Information concerning the security ownership of certain beneficial
owners is incorporated herein by reference to pages 8-10 of the Company's Proxy
Statement dated September 4, 2002, in connection with its Annual Meeting of
Stockholders to be held on October 17, 2002.
-73-
Security Ownership of Management
Information concerning the security ownership of management is
incorporated herein by reference to pages 8-10 of the Company's Proxy Statement
dated September 4, 2002, in connection with its Annual Meeting of Stockholders
to be held on October 17, 2002.
Changes in Control
The Company knows of no arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a subsequent
date result in a change in control of the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is incorporated herein by reference to pages 21 and 22 of the Company's Proxy
Statement dated September 4, 2002, in connection with its Annual Meeting of
Stockholders to be held on October 17, 2002.
Item 14. CONTROLS AND PROCEDURES
There have not been any significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
during the 90 days prior to the filing of this Annual Report on Form 10-K.
-74-
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements, together with the report thereon of
PricewaterhouseCoopers LLP dated July 25, 2002, appearing in the Company's
Annual Report to Stockholders for the fiscal year ended June 30, 2002, are
incorporated by reference in this Annual Report on Form 10-K. With the exception
of the aforementioned information and that which is specifically incorporated in
Parts I and II, the Annual Report to Stockholders for the fiscal year ended June
30, 2002, is not to be deemed filed as part of this Annual Report on Form 10-K.
Annual Report
Page No.
-----------------
Consolidated Statements of Operations
Fiscal years 2000, 2001, and 2002 46
Consolidated Statements of Financial Position
At June 30, 2001 and 2002 47
Consolidated Statements of Cash Flows
Fiscal years 2000, 2001, and 2002 48
Consolidated Statements of Stockholders' Equity
Fiscal years 2000, 2001, and 2002 49
Notes to Consolidated Financial Statements 50-83
Report of Management 84
Report of Independent Accountants 84
-75-
(a) 2. Financial Statement Schedule
The following additional financial data should be read in conjunction with the
consolidated financial statements in said Annual Report to Stockholders for the
fiscal year ended June 30, 2002. Schedules not included with this additional
financial data have been omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
10-K Page No.
-------------
Report of Independent Accountants on Financial Statement
Schedule................................................. 83
Schedule II - Valuation and Qualifying Accounts and
Reserves................................................. 84
(a) 3. Exhibits
Exhibit
No.
---------
2.1 Agreement and Plan of Merger dated March 10, 1999, among The
Perkin-Elmer Corporation, a New York corporation, The Perkin-Elmer
Corporation, a Delaware corporation, and PE Merger Corp., a New York
corporation (incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-4 (No. 333-67797)).
2.2 Agreement and Plan of Merger dated as of June 12, 2001, among Applera
Corporation, a Delaware corporation, Angel Acquisition Sub, Inc., a
Delaware corporation, and Axys Pharmaceuticals, Inc., a Delaware
corporation (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated June 12, 2001 (Commission
file number 1-4389)).
3.1.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3(i) to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 2000 (Commission file
number 1-4389)).
3.1.2 Certificate of Designations of Series A Participating Junior
Preferred Stock and Series B Participating Junior Preferred Stock
(incorporated by reference to Exhibit A to Exhibit 4.1 to the
Company's Registration Statement on Form S-4 (No. 333-67797)).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-4 (No. 333-67797)).
4.1 Stockholder Protection Rights Agreement between the Company and
BankBoston, N.A. (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4 (No. 333-67797)).
4.2 Amendment to Rights Agreement among BankBoston, N.A., EquiServe Trust
Company, N.A., and the Company.
4.3 Credit Agreement dated as of April 20, 2000, among The Perkin-Elmer
Corporation, the Company, the lenders party thereto, Salomon Smith
Barney Inc., Wachovia Bank, N.A., The Chase Manhattan Bank, and
Citibank, N.A. (incorporated by reference to Exhibit 4(2) to Annual
Report on Form 10-K of the Company for the fiscal year ended June 30,
2000 (Commission file number 1-4389)).
4.4 Indenture dated as of September 22, 2000, between U.S. Bank Trust
National Association and Axys Pharmaceuticals, Inc. (incorporated by
reference to Exhibit 4.1 to Current Report on Form 8-K of Axys
Pharmaceuticals, Inc. filed September 28, 2000 (Commission file
number 0-22788)).
4.5 First Supplemental Indenture dated as of September 22, 2000, between
U.S. Bank Trust National Association and Axys Pharmaceuticals, Inc.
(incorporated by reference to Exhibit 4.2 to Current Report on Form
8-K of Axys Pharmaceuticals, Inc. filed September 28, 2000
(Commission file number 0-22788)).
-76-
10.1 The Perkin-Elmer Corporation 1988 Stock Incentive Plan for Key
Employees (incorporated by reference to Exhibit 10(4) to Annual
Report on Form 10-K of the Company for the fiscal year ended July 31,
1988 (Commission file number 1-4389)).*
10.2 The Perkin-Elmer Corporation 1993 Stock Incentive Plan for Key
Employees (incorporated by reference to Exhibit 99 to the Company's
Registration Statement on Form S-8 (No. 33-50847)).*
10.3 The Perkin-Elmer Corporation 1996 Stock Incentive Plan (incorporated
by reference to Exhibit 99 to the Company's Registration Statement on
Form S-8 (No. 333-15189)).*
10.4 The Perkin-Elmer Corporation 1996 Employee Stock Purchase Plan, as
amended October 15, 1998 (incorporated by reference to Exhibit A to
the Company's Proxy Statement for its 1998 Annual Meeting of
Stockholders (Commission file number 1-4389)).*
10.5 The Perkin-Elmer Corporation 1997 Stock Incentive Plan (incorporated
by reference to Exhibit 99 to the Company's Registration Statement on
Form S-8 (No. 333-38713)).*
10.6 The Perkin-Elmer Corporation 1998 Stock Incentive Plan (incorporated
by reference to Exhibit B to the Company's Proxy Statement for its
1998 Annual Meeting of Stockholders (Commission file number
1-4389)).*
10.7 Applera Corporation 1999 Employee Stock Purchase Plan (incorporated
by reference to Exhibit A to the Company's Proxy Statement for its
1999 Annual Meeting of Stockholders (Commission file number
1-4389)).*
10.8 Applera Corporation/Applied Biosystems Group 1999 Stock Incentive
Plan, as amended October 18, 2001 (incorporated by reference to
Appendix A to Schedule 14A, filed September 24, 2001, containing the
Company's Proxy Statement for its 2001 Annual Meeting of Stockholders
(Commission file number 1-4389)).*
10.9 Applera Corporation/Celera Genomics Group 1999 Stock Incentive Plan,
as amended October 18, 2001 (incorporated by reference to Appendix B
to Schedule 14A, filed September 24, 2001, containing the Company's
Proxy Statement for its 2001 Annual Meeting of Stockholders
(Commission file number 1-4389)).*
10.10 The Perkin-Elmer Corporation Supplemental Retirement Plan effective
as of August 1, 1979, as amended through October 1, 1996
(incorporated by reference to Exhibit 10(22) to Annual Report on Form
10-K of the Company for the fiscal year ended June 30, 2000
(Commission file number 1-4389)).*
10.11 The Excess Benefit Plan of The Perkin-Elmer Corporation dated August
1, 1984, as amended through August 17, 2000 (incorporated by
reference to Exhibit 10(23) to Annual Report on Form 10-K of the
Company for the fiscal year ended June 30, 2000 (Commission file
number 1-4389)).*
10.12 Third Amendment to The Excess Benefit Plan of The Perkin-Elmer
Corporation effective January 1, 2001 (incorporated by reference to
Exhibit 10.25 to Annual Report on Form 10-K of the Company for the
fiscal year ended June 30, 2001 (Commission file number 1-4389)). *
10.13 Fourth Amendment to The Excess Benefit Plan of The Perkin-Elmer
Corporation effective October 1, 2001.*
10.14 1993 Director Stock Purchase and Deferred Compensation Plan, as
amended through March 17, 2000 (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q of the Company for the quarter
ended March 31, 2000 (Commission file number 1-4389)).*
10.15 Applera Corporation Performance Unit Bonus Plan, as amended through
August 16, 2001 (incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q of the Company for the quarter ended
December 31, 2001 (Commission file number 1-4389)).*
10.16 The Estate Enhancement Plan of The Perkin-Elmer Corporation
(incorporated by reference to Exhibit 10(22) to Annual Report on Form
10-K of the Company for the fiscal year ended June 30, 1997
(Commission file number 1-4389)).*
10.17 Applera Corporation Deferred Compensation Plan, as amended and
restated effective as of January 1, 2002 (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q of the Company for
the quarter ended December 31, 2001 (Commission file number
1-4389)).*
10.18 Applied Biosystems, Inc. 1992 Stock Option Plan (incorporated by
reference to Exhibit 28(a) to the Company's Registration Statement on
Form S-8 (No. 33-58778)).*
10.19 PerSeptive Biosystems, Inc. 1992 Stock Plan, as amended January 20,
1997 (incorporated by reference to Exhibit 4.1 to the Quarterly
Report on Form 10-Q of PerSeptive Biosystems, Inc. for the fiscal
quarter ended March 29, 1997 (Commission file No. 0-20032)).*
10.20 PerSeptive Biosystems, Inc. 1997 Non-Qualified Stock Option Plan, as
amended August 21, 1997 (incorporated by reference to Exhibit 4.1 to
the Registration Statement on Form S-8 of PerSeptive Biosystems, Inc.
(No. 333-38989)).*
-77-
10.21 Molecular Informatics, Inc. 1997 Equity Ownership Plan (incorporated
by reference to Exhibit 99 to the Company's Registration Statement on
Form S-8 (No. 333-42683)).*
10.22 Paracel, Inc. Stock Option Plan.*
10.23 Axys Pharmaceuticals, Inc. 1989 Stock Plan (incorporated by
reference to Exhibit 10.2 to Annual Report on Form 10-K of Axys
Pharmaceuticals, Inc. for the fiscal year ended December 31, 1996
(Commission file number 0-22788)).*
10.24 Axys Pharmaceuticals, Inc. 1997 Equity Incentive Plan (incorporated
by reference to Exhibit 10.30 to the Company's Registration Statement
on Form S-8 (No. 333-73980)).*
10.25 Axys Pharmaceuticals, Inc. 1997 Non-Officer Equity Incentive Plan
(incorporated by reference to Exhibit 10.31 to the Company's
Registration Statement on Form S-8 (No. 33-73980)).*
10.26 Employment Agreement dated as of September 12, 1995, between the
Company and Tony L. White (incorporated by reference to Exhibit
10(21) to Annual Report on Form 10-K of the Company for the fiscal
year ended June 30, 1995 (Commission file number 1-4389)).*
10.27 Amendment dated August 17, 2001, to Employment Agreement dated as of
September 12, 1995, between the Company and Tony L. White
(incorporated by reference to Exhibit 10.l4 to Annual Report on
Form 10-K of the Company for the fiscal year ended June 30, 2001
(Commission file number 1-4389)).*
10.28 Change of Control Agreement dated as of September 12, 1995, between
the Company and Tony L. White (incorporated by reference to Exhibit
10(16) to Annual Report on Form 10-K of the Company for the fiscal
year ended June 30, 1995 (Commission file number 1-4389)).*
10.29 Employment Agreement dated as of November 16, 1995, between the
Company and Michael W. Hunkapiller (incorporated by reference to
Exhibit 10(11) to Annual Report on Form 10-K of the Company for the
fiscal year ended June 30, 1996 (Commission file number 1-4389)).*
10.30 Deferred Compensation Contract dated as of September 15, 1994,
between the Company and Michael W. Hunkapiller (incorporated by
reference to Exhibit 10(7) to Annual Report on Form 10-K of the
Company for the fiscal year ended June 30, 1995 (Commission file
number 1-4389)).*
10.31 Employment Agreement dated as of November 16, 1995, between the
Company and William B. Sawch (incorporated by reference to Exhibit
10(16) to Annual Report on Form 10-K of the Company for fiscal year
ended June 30, 1998 (Commission file number 1-4389)).*
10.32 Deferred Compensation Contract dated as of July 15, 1993, between the
Company and William B. Sawch (incorporated by reference to Exhibit
10(19) to Annual Report on Form 10-K of the Company for the fiscal
year ended June 30, 1998 (Commission file number 1-4389)).*
10.33 Letter Agreement dated June 24, 1997, between the Company and Dennis
L. Winger (incorporated by reference to Exhibit 10(18) to Annual
Report on Form 10-K of the Company for the fiscal year ended June 30,
1998 (Commission file number 1-4389)).*
10.34 Employment Agreement dated as of September 25, 1997, between the
Company and Dennis L. Winger (incorporated by reference to Exhibit
10(17) to Annual Report on Form 10-K of the Company for the fiscal
year ended June 30, 1998 (Commission file number 1-4389)).*
10.35 Employment Agreement dated as of December 1, 2000, between the
Company and Kathy P. Ordonez.*
10.36 Celera Diagnostics Joint Venture Agreement dated as of April 1, 2001,
among the Company, its Applied Biosystems Group, its Celera Genomics
Group, Foster City Holdings, LLC, and Rockville Holdings, LLC
10.37 Description of Celera Genomics/Applied Biosystems Marketing and
Distribution Agreement.
11 Computation of Net Income (Loss) per Share for the three years ended
June 30, 2002 (incorporated by reference to Note 1 to Consolidated
Financial Statements of Annual Report to Stockholders for the fiscal
year ended June 30, 2002).
13 Annual Report to Stockholders for the fiscal year ended June 30, 2002
(to the extent incorporated herein by reference).
21 List of Subsidiaries.
23 Consent of PricewaterhouseCoopers LLP.
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
-78-
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* Management plan or compensatory plan or arrangement
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, the Company did not file any
Current Reports on Form 8-K.
-79-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ William B. Sawch
------------------------------------
William B. Sawch
Senior Vice President and
General Counsel
Date: September 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Tony L. White September 27, 2002
--------------------------------------------
Tony L. White
Chairman of the Board of Directors, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ Dennis L. Winger September 27, 2002
-----------------------------------------------------
Dennis L. Winger
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Vikram Jog September 27, 2002
-----------------------------------------------------
Vikram Jog
Corporate Controller
(Principal Accounting Officer)
-80-
/s/ Richard H. Ayers September 27, 2002
-----------------------------------------------------
Richard H. Ayers
Director
/s/ Jean-Luc Belingard September 27, 2002
-----------------------------------------------------
Jean-Luc Belingard
Director
/s/ Robert H. Hayes September 27, 2002
-----------------------------------------------------
Robert H. Hayes
Director
/s/ Arnold J. Levine September 27, 2002
-----------------------------------------------------
Arnold J. Levine
Director
/s/ Theodore E. Martin September 27, 2002
-----------------------------------------------------
Theodore E. Martin
Director
/s/ Georges C. St. Laurent, Jr. September 27, 2002
-----------------------------------------------------
Georges C. St. Laurent, Jr.
Director
/s/ Carolyn W. Slayman September 27, 2002
-----------------------------------------------------
Carolyn W. Slayman
Director
/s/ Orin R. Smith September 27, 2002
--------------------------------------------
Orin R. Smith
Director
/s/ James R. Tobin September 27, 2002
-----------------------------------------------------
James R. Tobin
Director
-81-
CERTIFICATIONS
Principal Executive Officer Certification
I, Tony L. White, certify that:
1. I have reviewed this annual report on form 10-K of Applera Corporation;
2. Based on my knowledge, this annual 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 annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: September 27, 2002
/s/ Tony L. White
-----------------------------------
Chief Executive Officer
Principal Financial Officer Certification
I, Dennis L. Winger, certify that:
1. I have reviewed this annual report on Form 10-K of Applera Corporation;
2. Based on my knowledge, this annual 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 annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: September 27, 2002
/s/ Dennis L. Winger
-----------------------------------
Chief Financial Officer
-82-
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors
of Applera Corporation
Our audits of the consolidated financial statements referred to in our
report dated July 25, 2002, appearing in the 2002 Annual Report to Stockholders
of Applera Corporation (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
July 25, 2002
-83-
APPLERA CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED JUNE 30, 2000, 2001, and 2002
(Amounts in thousands)
<TABLE>
<CAPTION>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
-----------------
<S> <C>
Balance at June 30, 1999............................................. $ 3,834
Charged to income in fiscal year 2000................................ 3,146
Deductions from reserve in fiscal year 2000.......................... (3,015)
-------
Balance at June 30, 2000............................................. 3,965
Charged to income in fiscal year 2001................................ 3,326
Deductions from reserve in fiscal year 2001.......................... (2,221)
-------
Balance at June 30, 2001 (1)......................................... 5,070
Charged to income in fiscal year 2002................................ 8,858
Deductions from reserve in fiscal year 2002.......................... (2,978)
-------
Balance at June 30, 2002 (1)......................................... $ 10,950
========
</TABLE>
(1) Deducted in the Consolidated Statements of Financial Position from accounts
receivable.
SCHEDULE II
-84-
EXHIBIT INDEX
Exhibit Number
4.2 Amendment to Rights Agreement dated as of April 17, 2002,
among BankBoston, N.A., EquiServe Trust Company, N.A., and the
Company
10.13 Fourth Amendment to the Excess Benefit Plan of The
Perkin-Elmer Corporation effective October 1, 2001
10.22 Paracel, Inc. Stock Option Plan
10.35 Employment Agreement dated as of December 1, 2000, between
the Company and Kathy P. Ordonez
10.36 Celera Diagnostics Joint Venture Agreement dated as of April
1, 2001, among the Company, its Applied Biosystems Group, its
Celera Genomics Group, Foster City Holdings, LLC, and
Rockville Holdings, LLC
10.37 Description of Celera Genomics/Applied Biosystems Marketing
and Distribution Agreement
13 Annual Report to Stockholders for the fiscal year ended June
30, 2002 (to the extent incorporated herein by reference)
21 List of Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
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
Exhibit 4.2
AMENDMENT TO RIGHTS AGREEMENT
1. General Background. In accordance with Section 27 of the Rights
Agreement between Fleet National Bank, N.A. (f/k/a BankBoston, N.A.)"
(the "Rights Agent") and Applera Corporation ("Applera") dated April
28, 1999 (the "Agreement"), the Rights Agent and Applera Corporation,
desire to amend the Agreement to appoint EquiServe Trust Company, N.A.
2. Effectiveness. This Amendment shall be effective as of April 17, 2002
(the "Amendment") and all defined terms and definitions in the
Agreement shall be the same in the Amendment except as specifically
revised by the Amendment.
3. Revision. The section in the Agreement entitled "Change of Rights
Agent" is hereby deleted in its entirety and replaced with the
following:
Change of Rights Agent. The Rights Agent or any successor Rights Agent
may resign and be discharged from its duties under this Agreement upon
30 days' notice in writing mailed to the Company and to each transfer
agent of the Common Stock or Preferred Stock by registered or certified
mail and, following the Distribution Date, to the holders of the Right
Certificates by first-class mail. The Company may remove the Rights
Agent or any successor Rights Agent upon 30 days' notice in writing,
mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Stock or Preferred Stock
by registered or certified mail, and, following the Distribution Date,
to the holders of the Right Certificates by first-class mail. If the
Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the
Rights Agent. If the Company shall fail to make such appointment within
a period of 30 days after giving notice of such removal or after it has
been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Right
Certificate (who shall, with such notice, submit such holder's Right
Certificate for inspection by the Company), then the registered holder
of any Right Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court,
shall be a corporation or trust company organized and doing business
under the laws of the United States or any state thereof, in good
standing, which is authorized under such laws to exercise corporate
trust or stock transfer powers and is subject to supervision or
examination by federal or state authority and which has individually or
combined with an affiliate at the time of its appointment as Rights
Agent a combined capital and surplus of at least $100 million dollars.
After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor
Rights Agent any property at the time held by it hereunder, and execute
and deliver any further assurance, conveyance, act or deed necessary
for the purpose. Not later than the effective date of any such
appointment the Company shall file notice thereof in writing with the
predecessor Rights Agent and each transfer agent of the Common Stock or
Preferred Stock, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided
for in this Section 21, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the
Rights Agent or the appointment of the successor Rights Agent, as the
case may be.
4. Except as amended hereby, the Agreement and all schedules or exhibits
thereto shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
in their names and on their behalf by and through their duly authorized
officers, as of this 17th day of April, 2002.
Applera Corporation Bank Boston, N.A.
/s/ Thomas P. Livingston /s/ Tyler Haynes
------------------------------------ ------------------------------------
By: Thomas P. Livingston By: Tyler Haynes
Title: Secretary Title: Managing Director
EquiServe Trust Company, N.A.
/s/ Tyler Haynes
-----------------------------------
By: Tyler Haynes
Title: Managing Director
EXHIBIT 10.13
FOURTH AMENDMENT
THE EXCESS BENEFIT PLAN
OF
THE PERKIN-ELMER CORPORATION
WHEREAS, the PE Corporation ("Company") last restated The Excess Benefit Plan of
The Perkin-Elmer Corporation ("Plan") effective October 1, 1995; and
WHEREAS, the Board of Directors of the Company pursuant to Section 6.1 of the
Plan reserves the right to amend the Plan from time to time; and
WHEREAS, it has been determined that an amendment is required at this time.
NOW, THEREFORE, the Plan be amended as stipulated below:
1. Effective October 1, 2001, Section 4.1(b) of the Plan is amended to
replace the "Vanguard Life Strategy Moderate Growth Fund" with the
"Fidelity Asset Manager Fund as held by The Employee 401(k) Savings
Plan of the Applera Corporation."
2. Effective October 1, 2001, Article 6 of the Plan is amended by the
addition of a new section which shall be titled Section 6.2 and shall
now read as follows:
"The Committee shall be granted the authority to make administrative
changes to the Plan document by amendment of the Plan authorized by
resolution of the Committee. Administrative changes include, but are
not limited to, conforming provisions for administrative procedures to
actual practice or changes in practice; deleting or correcting language
that fails to accurately reflect the intended provisions of the Plan;
updates for different funds used to measure performance; changes to the
name of the Plan and Company; and implementing policy decisions that
assist or clarify the administration of the Plan."
EXHIBIT 10.22
PARACEL, INC.
STOCK OPTION PLAN
1. Purpose
The purposes of the Paracel, Inc. Stock Option Plan are to assist
Paracel, Inc. in attracting, motivating and retaining key employees, consultants
and directors, and to provide incentives that will further its development and
success and will unify the interests of key employees, consultants, directors
and shareholders through increased stock ownership.
2. Definitions
For purposes of this Plan:
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Stock Option Committee appointed pursuant to
Section 13 of this Plan.
"Company" means Paracel, Inc., a California corporation.
"Consultant" means any person who is a consultant to the Company or to
any Subsidiary Corporation, as defined in Rule 701 promulgated under the
Securities Act.
"Director" means any person who is a member of the Board.
"Employee" means any person who is an employee of the Company or of any
Subsidiary Corporation.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Incentive Stock Option" means and Option that is designated by the
Committee as an "incentive stock option" within the meaning of Code Section 422.
"Nonstatutory Option" means an Option that is designated by the
Committee as such or that is not designated by the Committee as an Incentive
Stock Option.
"Option" means an option granted under this Plan to purchase shares of
Stock. An "Option" may be either an Incentive Stock Option or a Nonstatutory
Option.
"Parent Corporation" shall have the meaning set forth in Code Section
424(e).
-1-
"Participant" means a person to whom an Option is granted under this
Plan.
"Permanent Disability" means permanent and total disability within the
meaning of Code Section 22(e)(3), which reads, in pertinent part, as follows:
An individual is permanently and totally disabled if he is
unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment
which can be expected to result in death or which has lasted
or can be expected to last for a continuous period of not less
than 12 months.
"Plan" means this Paracel, Inc. Stock Option Plan.
"Retirement" means normal retirement of an Employee under policies
established by his or her employer.
"Securities Act" means the Securities Act of 1933, as amended.
"Stock" means the Common Stock of the Company. Unless the context
expressly indicates otherwise, "shares" means shares of Stock.
"Subsidiary Corporation" shall have the meaning set forth in Code
Section 424(f).
"Ten Percent Shareholder" means an Employee who on the date of grant of
the Option owns (within the meaning of Code Section 424(d)) more than 10% of the
total combined voting power of all classes of stock of the Company, any
Subsidiary Corporation or any Parent Corporation.
3. Shares Subject to Plan
Options may be granted under this Plan to acquire an aggregate of up to
750, 000 shares of Stock, subject to adjustment as provided in Section 7 of this
Plan. If Options terminate, expire or are cancelled without having been fully
exercised, the number of shares subject to such Options (but only to the extent
not exercised prior to termination, expiration or cancellation) may again be
subject to Options granted under this Plan.
4. Eligibility
Any Key Employee, any Consultant and any Director shall be eligible to
become a Participant and to be granted an Option to purchase Stock. Additional
Options may be granted to a Participant while such Participant continues as an
Employee, Consultant or Director. The Committee may exclude otherwise eligible
persons.
-2-
5. Grant of Options
The Committee shall, from time to time and in its absolute discretion,
determine which Employees are key Employees and which eligible persons shall
become Participants. Either Incentive Stock Options or Nonstatutory Options, as
determined by the Committee in its absolute discretion, may be granted to
Employees, and only Nonstatutory Options may be granted to Consultants and to
Directors who are not Employees. The Committee also shall determine the number
of shares of Stock to be subject to each Option and the price, terms and
conditions, consistent with this Plan, of each Option.
Without limiting the generality of the preceding paragraph, the
Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition to the grant of an Option to an Employee, Consultant or
Director, that the Employee, Consultant or Director surrender for cancellation
some or all of any unexercised Options which have been previously granted to the
Employee, Consultant or Director. An Option, the grant of which is conditioned
upon such surrender, may have an option price lower or higher than the option
price of the surrendered Option, may cover the same, or a lesser or greater,
number of shares as the surrendered Option, may contain such other terms as the
Committee deems appropriate and shall be exercisable in accordance with its
terms, without regard to the number of shares, price, option period or any other
term or condition of the surrendered Option.
Notwithstanding any other provision of this Plan, the aggregate fair
market value (determined as of the dates of their respective grants) of shares
as to which Incentive Stock Options (within the meaning of Code Section 422(b))
granted or assumed by the Company, any Parent Corporation and any Subsidiary
Corporation first become exercisable by a Participant in any calendar year shall
not exceed $100,000. Should it be determined that an entire Option granted under
this Plan or any portion thereof exceeds such maximum for any reason other than
the failure of a good faith attempt to value the stock subject to the Option,
such Option or portion thereof shall be considered a Nonstatutory Option to the
extent, but only to the extent, of such excess.
6. Option Terms
Each Option shall be evidenced by a written Stock Option Agreement in a
form approved by the Committee. Each Stock Option Agreement shall be executed by
the Company and by the Participant receiving the Option. Each Option shall be
subject to the following terms and conditions and to such other terms and
conditions as the Committee may deem appropriate:
6.1 Type of Option; Number of Shares
Each Stock Option Agreement shall indicate whether the Option
is an Incentive Stock Option or a Nonstatutory Option and shall specify the
number of shares of Stock subject to the Option.
-3-
6.2 Option Price
The price of the shares subject to each Option shall be
determined by the Committee and shall be set forth in the Stock Option
Agreement, provided that the price per share shall not be less than the fair
market value of such share on the day the Option is granted; and provided
further that, in the case of an Incentive Stock Option granted to a Ten Percent
Shareholder, the price per share shall not be less than 110% of the fair market
value of such share at the time such Option is granted.
6.3 Period of Exercise
No Option shall be exercisable in whole or in part before one
year from the date of grant or after ten years from the date of grant.
Notwithstanding the foregoing, no Incentive Stock Option granted to a Ten
Percent Shareholder may be exercisable after five years from the date such
Option is granted. Subject to the forgoing limitations and Sections 6.5, 6.7 and
8 of this Plan, Options shall become exercisable at such times and in such
installments (which may be cumulative) as the Committee shall provide in each
Stock Option Agreement.
The Committee may in its absolute discretion, and on such
terms and conditions as it considers appropriate, accelerate the times at which
an Option may be exercised in whole or in part.
6.4 Manner and Conditions of Exercise
To exercise an Option or any portion thereof, the Participant
or other person then entitled to exercise such Option or portion thereof shall
deliver to the Secretary of the Company a notice in writing signed by the
Participant or such other person stating that such Option or portion is
exercised, specifying the number of shares to be acquired upon exercise and
complying with all applicable rules established by the Committee, together with
the following:
(a) Full payment (in cash or bank cashiers' check) for the
shares with respect to which such Option or portion is being exercised;
or
(b) With the consent of the Committee, shares of Stock owned
by the Participant, duly endorsed for transfer to the Company, with a
fair market value on the date of exercise equal to the aggregate
purchase price of the shares with respect to which such Option or
portion is being exercised; or
(c) With the consent of the Committee, a full recourse
promissory note in a form, bearing interest (at a rate at least equal
to the minimum rate necessary to avoid imputed interest under the Code)
and payable upon such terms as may be prescribed by the Committee; or
(d) Any combination of the consideration provided in the
foregoing subsections (a), (b) and (c).
-4-
No such exercise shall be effective unless and until a proper notice and payment
have been delivered as provided above. No fractional shares shall be issued on
exercise of Options under this Plan.
In the event that an Option or portion thereof shall be
exercised pursuant to Section 6.5 of this Plan by any person or persons other
than the Participant, appropriate proof of the right of such person or persons
to exercise the Option or portion thereof shall be delivered to the Company.
The Committee may require, as a condition to the exercise of
an Option, such representations and covenants as it, in its absolute discretion,
deems necessary to effect compliance with the Securities Act, any state
securities laws or rules and regulations thereunder, including a representation
that the shares to be acquired upon exercise of an Option will be purchased for
the Participant's own account and not with a view to or for sale in connection
with any distribution of the Stock.
The Participant, as a condition to exercising an Option, shall
also make any arrangements determined by the Committee to be necessary or
appropriate to satisfy any federal and state withholding tax obligation
resulting from the exercise of an Option, from a disposition described in
Section 9 of this Plan or from the termination or partial termination of any
restriction applicable to any shares acquired on exercise of an Option,
including the retention of shares by the Company or the delivery of shares to
the Company equal in amount to all or a portion of the withholding tax
obligation pursuant to such arrangements as may be established by the Committee.
Any shares retained by or delivered to the Company under this Section shall be
valued at the date of exercise at their fair market value as determined by the
Committee.
To insure that such exercise and any resales are made in
compliance with the Securities Act and the Articles of Incorporation and Bylaws
of the Company, the Company may imprint an appropriate legend on certificates
representing shares acquired on the exercise of an Option and issue appropriate
stop-transfer orders to its transfer agents. Any stock certificate evidencing
shares of Stock issued pursuant to the exercise of an Option shall bear such
other legends as the Committee, in the exercise of its absolute discretion,
shall require.
6.5 Cessation of Employment or Service as Consultant or Director
A Stock Option Agreement may provide, on such terms and
conditions as the Committee shall deem appropriate in its absolute discretion,
for acceleration of the times at which an Option may be exercised in the event
of a Participant's Retirement, death or Permanent Disability, and may provide
for expiration prior to the stated expiration date in the event of cessation of
employment or service as a Consultant or Director. In the absence of provision
in the Stock Option Agreement, Options shall be accelerated or expire as set
forth below in this Section 6.5.
-5-
If a Participant who is an Employee but is not a Director
ceases to be an Employee other than by reason of death or Permanent Disability,
the Participant shall be permitted to exercise his or her Option, to the extent
it was exerciseable at the date of cessation, until 30 days after such date, but
in no event after its stated expiration date.
If a Participant who is a Consultant or Director but not an
Employee ceases to be a Consultant or Director, other than by reason of death,
the Participant shall be permitted to exercise his or her Option, to the extent
it was exercisable at the date of cessation, until 30 days after such date, but
in no event after its stated expiration date.
If a Participant who is an Employee but not a Director ceases
to be an Employee because of Permanent Disability, the Participant shall be
permitted to exercise his or her Option, to the extent it was exercisable at the
date of cessation of employment, until 90 days after the date he or she ceases
to be an Employee, but in no event after its stated expiration date.
If a Participant dies while an Employee, a Director or a
Consultant or within 90 days after ceasing to be an Employee because of
Permanent Disability, his or her Option may be exercised by the Participant's
estate or any person who acquired the right to exercise the Option by Will or
the laws of decent and distribution, to the extent it was exercisable at the
date of death, until one year after such date, but in no event after its stated
expiration date.
If a Participant who is both an Employee and a Director ceases
to be an Employee but remains a Director, or ceases to be a Director but remains
an Employee, then subject to this Section 6.5 all of the Participant's
Nonstatutory Options shall remain in effect and, if the Participant ceases to be
an Employee, all of the Participant's Incentive Stock Options shall become
Nonstatutory Options 30 days after the date of cessation.
Transfers of employment between the Company and any Subsidiary
Corporation or between Subsidiary Corporations shall not be deemed cessation of
employment for purposes of any Option granted hereunder.
6.6 Nontransferability
During the lifetime of a Participant, his or her Options shall
be exercisable only by the Participant and no Option shall be transferable other
than by Will or the laws of descent and distribution. No interest of any
Participant under this Plan or in any Option shall be subject to attachment,
execution, garnishment, sequestration, the laws of bankruptcy or any other legal
or equitable process.
-6-
6.7 Stock Restriction Agreement
In its absolute discretion, and on such terms and conditions
as it deems appropriate, the Committee may require by the terms of any Option
that Stock received upon exercise of such Option is subject to the Participant's
execution and delivery of an agreement providing for (i) a right of first
refusal for the benefit of the Company, and (ii) repurchase by the Company on
the occurrence of certain events, including the death, disability, retirement or
termination of employment of the Participant. The execution and delivery of such
an agreement prior to the delivery of any shares issued upon exercise of an
Option containing such a requirement shall be a condition precedent to the right
of a Participant to acquire any shares upon exercise of the Option.
7. Adjustment Upon Changes in Capitalization
In the event of any change in the Stock by reason of any stock
dividend, recapitalization, split-up, combination or exchange of shares, or by
reason of any similar change affecting the Stock (but not the issuance of
additional shares, securities convertible into shares or options or rights to
acquire shares of Stock or the Company's repurchase of shares), the number and
class of shares which thereafter may be acquired on exercise of Options under
Section 3 of this Plan and the number and class of shares subject to outstanding
Options and the exercise price of each such share shall be appropriately
adjusted consistent with such change in such manner as the Committee may deem
equitable to prevent substantial dilution or enlargement of the rights granted
to, or available for, Participants. Any such adjustment shall be final and
binding on each Participant.
8. Merger, Consolidation, Etc.
In its absolute discretion, and on such terms and conditions as it
deems appropriate, the Committee may provide by the terms of any Option that
such Option cannot be exercised after the merger or consolidation of the Company
with or into another corporation, the acquisition by another corporation or
person of all or substantially all of the Company's assets or the liquidation or
dissolution of the Company; and if the Committee so provides, it may, in its
absolute discretion, and on such terms and conditions as it deems appropriate,
also provide, either by the terms of such Option or by a resolution adopted
prior to the occurrence of such merger, consolidation, acquisition, liquidation
or dissolution, that, for some period of time prior to such event, such Option
shall become exercisable as to all shares covered thereby, notwithstanding
anything to the contrary in Section 6.3 of this Plan or any installment
provisions of such Option.
9. Disqualifying Dispositions
If a Participant makes a "disposition" (within the meaning of Code
Section 424(c)) of any shares issued upon exercise of an Incentive Stock Option
within two years after the date the Incentive Stock Option is granted or within
one year after shares are issued to the Participant pursuant to the exercise of
the Incentive Stock Option, the Participant shall notify the Committee in
writing of such disposition within 20 days thereafter.
-7-
10. No Rights as a Shareholder
No Participant shall have any rights or privileges as a shareholder
with respect to any shares subject to Options prior to the date of issuance to
him or her of a certificate for such shares.
11. No Right to Continued Employment
Neither this Plan nor any Option granted under this Plan shall confer
upon any Participant or any other person any right to continued employment by
the Company or any Subsidiary Corporation, nor shall it interfere in any way
with the right of his or her employer to terminate his or her employment at any
time for any reason whatsoever, with or without cause.
12. Compliance With Laws and Regulations
This Plan, the grant and exercise of Options under this Plan and the
obligation of the Company to sell and deliver shares under Options shall be
subject to all applicable federal and state laws, rules and regulations and to
any approvals by any government or regulatory agency as may be required. The
Company shall not be required to issue or deliver any certificate for shares of
Stock either (a) prior to (i) the listing of such shares on any stock exchange
on which the Stock may then be listed or inclusion on any interdealer quotation
system on which the Stock may be quoted, and (ii) the completion of any
registration or qualification of such shares which is required under any federal
or state law, or any ruling or regulation of any government body, and which the
Company shall, in its sole discretion, determine to be necessary or advisable,
or (b) until exemptions from such registration and qualification requirements
are established to the reasonable satisfaction of the Company and its counsel.
13. Administration
The Board may appoint a Stock Option Committee consisting of two or
more Directors to administer this Plan. The Committee members shall serve at the
pleasure of the Board. If the Board does not appoint a Committee, the Board
shall administer this Plan and shall have the powers and duties granted to the
Committee in this Plan.
If Stock is registered under Section 12 of the Exchange Act, no
Director shall be appointed to, or shall serve on, the Committee unless he or
she shall be a "disinterested person" within the meaning of Rule 16b-3 under
such Act as presently in effect or hereafter amended.
-8-
The Committee shall administer this Plan in accordance with its
provisions and shall have full authority to interpret this Plan, prescribe,
amend and rescind any rules and regulations necessary or appropriate for the
administration of this Plan and make such other determinations and take such
other action as it deems necessary or advisable, except as otherwise expressly
reserved to the Board in this Plan. Without limiting the generality of the
preceding sentence, the Committee may, in its discretion, determine that for
Option purposes a Participant remains an Employee during all or any portion of a
leave of absence approved by the Company. Any interpretation, determination or
other action made or taken by the Committee shall be final and binding upon all
Participants.
No member of the Committee and no officer of the Company shall be
personally liable for any action, determination or interpretation made in good
faith with respect to this Plan or any Option, and all such persons shall be
fully indemnified and protected by the Company, to the full extent that the
Company is permitted to provide such indemnification and protection, in respect
to an such action, determination or interpretation.
14. Severability
The invalidity or unenforceability of any particular provision of this
Plan shall not affect the other provisions, and this Plan shall be construed in
all respects as if any invalid or unenforceable provisions were omitted, but
only to the extent invalid or unenforceable under the circumstances.
15. Effective Date
This Plan shall be effective as of the date of adoption by the Board.
16. Approval by Shareholders
This Plan will be submitted for the approval by holders of a majority
of the shares of Stock voting thereon within twelve months after the Board's
adoption of this Plan. Options may be granted prior to such shareholder
approval, provided that such Options shall not be exercisable prior to the time
when the Plan is approved by shareholders and, if such approval is not obtained
by the end of the twelve-month period, all Options previously granted shall
thereupon be cancelled.
17. Amendment and Discontinuance
The Board may from time to time amend, suspend or discontinue this
Plan; provided that, without approval of the holders of a majority of the shares
of Stock voting thereon, no action of the Board shall (a) increase the number of
shares reserved for Options pursuant to Section 3 of this Plan, (b) permit the
grant of any Option at a price less than that determined in accordance with
Section 6.2 of this Plan, or (c) permit the grant of Options which expire beyond
the periods provided for in Section 6.3 of this Plan. Without the written
consent of a Participant, no such amendment, suspension or discontinuance of
this Plan shall alter or impair any Option previously granted to such
Participant pursuant to this Plan.
-9-
18. Term
Unless terminated earlier pursuant to Section 17 of this Plan, this
Plan shall expire on, and no further Options shall be granted pursuant to this
Plan on or after, ten years after the date of adoption of this Plan by the
Board.
-10-
Exhibit 10.35
EMPLOYMENT AGREEMENT
AGREEMENT entered into as of December 1, 2000, between APPLERA
CORPORATION, a Delaware corporation having its principal place of business at
Norwalk, Connecticut (the "Company"), and Kathy P. Ordonez, residing at 5465
Hilltop Crescent, Oakland, CA 94618 (the "Employee").
WHEREAS, the Employee has rendered and/or will render valuable
services to the Company and it is regarded essential by the Company that it have
the benefit of Employee's services in future years; and
WHEREAS, the Board of Directors of the Company believes that
it is essential that, in the event of the possibility of a Change in Control of
the Company (as defined herein), the Employee be able to continue her attention
and dedication to her duties and to assess and advise the Board of Directors of
the Company (the "Board") whether such proposals would be in the best interest
of the Company and its stockholders without distraction regarding any
uncertainty concerning her future with the Company; and
WHEREAS, the Employee is willing to agree to continue to serve
the Company in the future;
NOW, THEREFORE, it is mutually agreed as follows:
1. Employment. The Company agrees to employ Employee, and the
Employee agrees to serve as an employee of the Company or one or more of its
subsidiaries after a Change of Control during the Period of Employment (as those
terms are defined in Section 2 hereof) in such executive capacity as Employee
served immediately prior to the Change in Control which caused the commencement
of the Period of Employment. The Employee also agrees to serve during the Period
of Employment, if elected or appointed thereto, as a Director of the Board of
Directors of the Company and as a member of any committee of the Board of
Directors. Notwith-standing anything to the contrary herein, the Period of
Employment shall not commence and the Employee shall not be entitled to any
rights, benefits, or payments hereunder unless and until a Change in Control has
occurred.
2. Definitions.
(a) Cause. During the Period of Employment, "Cause" means
termination upon (i) the willful and continued failure by the Employee to
perform substantially her duties with the Company (other than any such failure
resulting from the Employee's incapacity due to physical or mental illness)
after a demand for a substantial performance is delivered to the Employee by the
Chief Executive Officer of the Company ("CEO") which specifically identifies the
manner in which the CEO believes that the Employee has not substantially
performed her duties, or (ii) the willful engaging by the Employee in illegal
conduct which is materially and demonstrably injurious to the Company. For
purposes of this Section 2(a), no act, or failure to act, on the part of the
Employee shall be considered "willful" unless done, or omitted to be done, by
the Employee in bad faith and without reasonable belief that the Employee's
action or omission was in, or not opposed to, the best interests of the Company.
-2-
Any act, or failure to act, based upon authority given pursuant to a resolution
duly adopted by the Board or based upon the advice of counsel for the Company
shall be conclusively presumed to be done, or omitted to be done, by the
Employee in good faith and in the best interests of the Company. Notwithstanding
the foregoing, the Employee shall not be deemed to have been terminated for
Cause unless and until there shall have been delivered to the Employee a copy of
a resolution duly adopted by the affirmative vote of not less than three
quarters of the entire membership of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to the Employee and an
opportunity for her, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board the Employee was guilty of
the conduct set forth above in (i) or (ii) of this Section 2(a) and specifying
the particulars thereof in detail.
(b) Cash Compensation. "Cash Compensation" shall mean the sum
of (i) Employee's Base Salary (determined in accordance with the provisions of
Section 4(a) hereof) and (ii) Employee's incentive compensation (provided for
under Section 4(b) hereof), which shall be an amount equal to the greatest of
(x) the average of the amount of Employee's incentive compensation for the last
three completed fiscal years immediately prior to the Employee's termination of
employment (whether or not such years occurred during the Period of Employment),
(y) the target amount of such Employee's incentive compensation for the fiscal
year in which her termination of employment occurs, or (z) the Employee's target
amount for the fiscal year in which the Change in Control occurs.
(c) Change in Control. "Change in Control" means the
occurrence of any of the following: an event that would be required to be
reported (assuming such event has not been "previously reported") in response to
Item 1(a) of the Current Report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934;
provided, however, that, without limitation, such a Change in Control shall be
deemed to have occurred at such time as (i) any "person" within the meaning of
Section 14(d) of the Securities Exchange Act of 1934 becomes the "beneficial
owner" as defined in Rule 13d-3 thereunder, directly or indirectly, of more than
25% of the Company's Common Stock; (ii) during any two-year period, individuals
who constitute the Board of Directors of the Company (the "Incumbent Board") as
of the beginning of the period cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director during such
period whose election or nomination for election by the Company's stockholders
was approved by a vote of at least three quarters of the Incumbent Board (either
by a specific vote or by approval of the proxy statement of the Company in which
such person is named as a nominee for director without objection to such
nomination) shall be, for purposes of this clause (ii), considered as though
such person were a member of the Incumbent Board; or (iii) the approval by the
Company's stockholders of the sale of all or substantially all of the stock or
assets of the Company.
-3-
(d) Disability. "Disability" means the absence of the Employee
from her duties with the Company on a full-time basis for one hundred eighty
(180) consecutive days as a result of incapacity due to physical or mental
illness.
(e) Good Reason. During the Period of Employment, "Good
Reason" means:
(i) an adverse change in the status of the Employee (other
than any such change primarily attributable to the fact that the Company may no
longer be publicly owned) or position(s) as an officer of the Company as in
effect immediately prior to the Change in Control or the assignment to the
Employee of any duties or responsibilities which, in her reasonable judgment,
are inconsistent with such status or position(s), or any removal of the Employee
from or any failure to reappoint or reelect her to such position(s) (except in
connection with the termination of the Employee's employment for Cause,
Disability, or upon attaining age 65 or upon taking early retirement under any
of the Company's retirement plans, or as a result of death or by the Employee
other than for Good Reason);
(ii) a reduction by the Company after a Change in Control in
the Employee's Base Salary;
(iii) a material reduction after a Change in Control in the
Employee's total annual compensation; provided, however, that for these purposes
a reduction for any year of over 10% of total compensation measured by the
preceding year without a substantially similar reduction to all other executives
participating in incentive compensation plans shall be considered "material";
and the failure of the Company to adopt or renew a stock option plan or to grant
amounts of restricted stock or stock options, which are consistent with the
Company's prior practices, to the Employee shall also be considered a material
reduction, unless the Employee participates in substitute programs that provide
substantially equivalent economic value to the Employee;
(iv) the failure by the Company to continue in effect any
Benefit Plan (as hereinafter defined) in which Employee was participating at the
time of the Change in Control (or Benefit Plans providing Employee with at least
substantially similar benefits) other than as a result of the normal expiration
of any such Benefit Plan in accordance with its terms as in effect at the time
of the Change in Control, or the taking of any action, or the failure to act, by
the Company which would adversely affect Employee's continued participation in
any such Benefit Plans on at least as favorable a basis to Employee as was the
case immediately prior to the Change in Control or which would materially reduce
Employee's benefits in the future under any of such Benefit Plans or deprive
Employee of any material benefit enjoyed by Employee immediately prior to the
Change in Control;
-4-
(v) the failure by the Company after a Change in Control to
provide and credit Employee with the number of paid vacation days to which
Employee was then entitled in accordance with the Company's normal vacation
policy as in effect immediately prior to the Change in Control; or
(vi) the Company's requiring the Employee after a Change in
Control to be based more than fifty miles from the Employee's principal place of
business immediately prior to the Change in Control except for required travel
on the Company's business to an extent substantially consistent with the
business travel obligations which she undertook on behalf of the Company prior
to the Change in Control.
(f) Period of Employment. (i) "Period of Employment" means,
subject to the provisions of Section 2(f)(ii), the period of thirty-six (36)
months commencing on the date of a Change in Control (as defined in Section 2(c)
hereof) and the period of any extension or extensions thereof in accordance with
the terms of this Section. The Period of Employment shall be extended
automatically by one week for each week in which the Employee's employment
continues after the date of a Change in Control.
(ii) Notwithstanding the provisions of Section 2(f)(i) hereof,
the Period of Employment shall terminate upon the occurrence of the earliest of
(A) the Employee's attainment of age 65, or the election by the Employee to
retire early from the Company under any of its retirement plans, (B) the death
of the Employee, (C) the Disability of the Employee or (D) a termination of
Employee's employment by the Company for Cause or by the Employee without Good
Reason.
(g) Termination Date. "Termination Date" means the date on
which the Period of Employment terminates.
3. Duties During the Period of Employment. While employed by
the Company during the Period of Employment, the Employee shall devote her full
business time, attention, and best efforts to the affairs of the Company and its
subsidiaries; provided, however, that the Employee may engage in other
activities, such as activities involving charitable, educational, religious, and
similar types of organizations, speaking engagements, membership on the board of
directors of other organizations, and similar types of activities to the extent
that such other activities do not prohibit the performance of her duties under
this Agreement, or inhibit or conflict in any material way with the business of
the Company and its subsidiaries.
-5-
4. Current Cash Compensation.
(a) Base Salary. The Company will pay to the Employee while
employed by the Company during the Period of Employment an annual base salary
("Base Salary") in an amount determined by the Board of Directors or its
Compensation Committee which shall never be less than the greater of (i) the
Employee's Base Salary prior to the commencement of the Period of Employment or
(ii) her Base Salary during the preceding year of the Period of Employment;
provided, however, that it is agreed between the parties that the Company shall
review annually the Employee's Base Salary, and in light of such review may, in
the discretion of the Board of Directors or its Compensation Committee, increase
such Base Salary taking into account the Employee's responsi-bilities, inflation
in the cost of living, increase in salaries of executives of other corporations,
performance by the Employee, and other pertinent factors. The Base Salary shall
be paid in substantially equal biweekly installments while Employee is employed
by the Company.
(b) Incentive Compensation. While employed by the Company
during the Period of Employment, the Employee shall continue to participate in
such of the Company's incentive compensation programs for executives as the
Employee participated in prior to the commencement of the Period of Employment.
Any amount awarded to the Employee under such programs shall be paid to Employee
in accordance with the terms thereof.
5. Employee Benefits.
(a) Vacation and Sick Leave. The Employee shall be entitled
during the Period of Employment to a paid annual vacation of not less than
twenty (20) business days during each calendar year while employed by the
Company and to reasonable sick leave.
(b) Regular Reimbursed Business Expenses. The Company shall
reimburse the Employee for all expenses and disbursements reasonably incurred by
the Employee in the performance of her duties during the Period of Employment.
(c) Employment Benefit Plans or Arrangements. While employed
by the Company, Employee shall be entitled to participate in all employee
benefit plans, programs, or arrangements ("Benefit Plans") of the Company, in
accordance with the terms thereof, as in effect from time to time, which provide
benefits to senior executives of the Company. For purposes of this Agreement,
Benefit Plans shall include, without limitation, any compensation plan such as
an incentive, deferred, stock option or restricted stock plan, or any employee
benefit plan such as a thrift, pension, profit sharing, pre-tax savings,
medical, dental, disability, salary continuation, accident, life insurance plan,
or a relocation plan or policy, or any other plan, program, or policy of the
Company intended to benefit employees.
-6-
6. Termination of Employment.
(a) Termination by the Company for Cause or Termination by the
Employee Other Than for Good Reason. If during the Period of Employment the
Company terminates the employment of the Employee for Cause or if the Employee
terminates her employment other than for Good Reason the Company shall pay the
Employee (i) the Employee's Base Salary through the end of the month in which
the Termination Date occurs, (ii) any incentive compensation payable to her
pursuant to Section 4(b) hereof, including a pro rata share for any partial
year, (iii) any accrued vacation pay, and (iv) benefits payable to her pursuant
to the Company's Benefit Plans as provided in Section 5(c) hereof through the
end of the month in which the Termination Date occurs. The amounts and benefits
set forth in clauses (i), (ii), (iii) and (iv) of the preceding sentence shall
hereinafter be referred to as "Accrued Benefits."
(b) Termination by the Company Without Cause or by the
Employee for Good Reason. If during the Period of Employment the Company
terminates the Employee's employment with the Company without Cause or the
Employee terminates her employment with the Company for Good Reason, the Company
will pay to Employee all Accrued Benefits and, in addition, pay or provide to
the Employee the following:
(i) within thirty (30) days after the date of termination, a
lump sum equal to the greater of (A) the Employee's Cash
Compensation for the remainder of the Period of
Employment or (B) two times the Employee's Cash
Compensation;
(ii) for the greater of two years or the remainder of the
Period of Employment immediately following the
Employee's date of termination, the Employee and
Employee's family shall continue to participate in any
Benefit Plans of the Company (as defined in Section 5(c)
hereof) in which Employee or Employee's family
participated at any time during the one-year period
ending on the day immediately preceding Employee's
termination of employment, provided that (a) such
continued participation is possible under
-7-
the terms of such Benefit Plans, and (b) the Employee
continues to pay contributions for such participation at
the rates paid for similar participation by active
Company employees in similar positions to that held by
the Employee immediately prior to the date of
termination. If such continued participation is not
possible, the Company shall provide, at its sole cost
and expense, substantially identical benefits to the
Employee plus pay an additional amount to the Employee
equal to the Employee's liability for federal, state and
local income taxes on any amounts includible in the
Employee's income by virtue of the terms of this Section
6(b)(ii) so that Employee does not have to personally
pay any federal, state and local income taxes by virtue
of the terms of this Section 6(b)(ii);
(iii) three additional years of service credit under the
Company's Non-Qualified Plans and, for purposes of such
plans, Employee's final average pay shall be deemed to
be her Cash Compensation for the year in which the date
of termination occurs;
(iv) the Company shall take all reasonable actions to cause
any Company restricted stock ("Restricted Stock")
granted to Employee to become fully vested and any
options to purchase Company stock ("Options") granted to
Employee to become fully exercisable, and in the event
the Company cannot effect such vesting or acceleration
within sixty (60) days, the Company shall pay within
thirty (30) days thereafter to Employee (i) with respect
to each Option, an amount equal to the product of (x)
the number of unvested shares subject to such Option,
multiplied by (y) the excess of the fair market value of
such a share of Company common stock on the date of
Employee's termination of employment, over the per share
exercise price of such Option and (ii) with respect to
each unvested share of Restricted Stock an amount equal
to the fair market value of such a share of Company
common stock on the date of Employee's termination of
employment.
Except as provided in the following sentence, the amounts payable to
the Employee under this Section 6(b) shall be absolutely owing and shall not be
subject to reduction or mitigation as a result of employment of the Employee
elsewhere after the date of termination. Notwithstanding any provision herein to
the contrary, the benefits described in clauses (i), (ii) and (iii) of this
Section 6(b) shall only be payable with respect to the period ending upon the
earlier of (i) the end of the period specified in each such clause or (ii)
Employee's attainment of age 65.
-8-
7. Gross-Up. In the event any amounts due to the Employee
under this Agreement after a Change in Control, under the terms of any Benefit
Plan, or otherwise payable by the Company or an affiliate of the Company are
subject to excise taxes under Section 4999 of the Internal Revenue Code of 1986,
as amended ("Excise Taxes"), the Company shall pay to the Employee, in addition
to any other payments due under other provisions of this Agreement, an amount
equal to the amount of such Excise Taxes plus the amount of any federal, state
and local income or other taxes and Excise Taxes attributable to all amounts,
including income taxes, payable under this Section 7, so that after payment of
all income, Excise and other taxes with respect to the amounts due to the
Employee under this Agreement, the Employee will retain the same net after tax
amount with respect to such payments as if no Excise Taxes had been imposed.
8. Governing Law. This Agreement is governed by, and is to be
construed and enforced in accordance with, the laws of the State of Connecticut.
If under such laws any portion of this Agreement is at any time deemed to be in
conflict with any applicable statute, rule, regulation, or ordinance, such
portion shall be deemed to be modified or altered to conform thereto or, if that
is not possible, to be omitted from this Agreement, and the invalidity of any
such portion shall not affect the force, effect, and validity of the remaining
portion hereof.
9. Notices. All notices under this Agreement shall be in
writing and shall be deemed effective when delivered in person (in the Company's
case, to its Secretary) or seventy-two (72) hours after deposit thereof in the
U.S. mail, postage prepaid, for delivery as registered or certified mail --
addressed, in the case of the Employee, to the Employee at Employee's
residential address, and in the case of the Company, to its corporate
headquarters, attention of the Secretary, or to such other address as the
Employee or the Company may designate in writing at any time or from time to
time to the other party. In lieu of personal notice or notice by deposit in the
U.S. mail, a party may give notice by telegram, fax or telex.
10. Miscellaneous. This Agreement may be amended only by a
subsequent written agreement of the Employee and the Company. This Agreement
shall be binding upon and shall inure to the benefit of the Employee, the
Employee's heirs, executors, administrators, beneficiaries, and assigns and to
the benefit of the Company and its successors. Notwithstanding anything in this
Agreement to the contrary, nothing herein shall prevent or interfere with the
ability of the Company to terminate the employment of the Employee prior to a
Change in Control nor be construed to entitle Employee to be continued in
employment prior to a Change in Control and this Agreement shall terminate if
Employee or the Company terminates Employee's employment prior to a Change in
Control. Similarly, nothing herein shall prevent the Employee from retiring
under any of the Company's retirement plans and receiving the corresponding
benefits thereunder consistent with the treatment of other Company employees.
-9-
11. Fees and Expenses. The Company shall pay all reasonable
legal fees and related expenses incurred by the Employee in connection with this
Agreement following a Change in Control of the Company, including without
limitation, all such fees and expenses, if any, incurred in connection with (i)
contesting or disputing any termination of the Employee's employment hereunder,
or (ii) the Employee seeking to obtain or enforce any right or benefit provided
by the Agreement.
12. Arbitration. Any dispute or controversy arising under or
in connection with this Agreement shall be settled exclusively by arbitration in
Connecticut by three arbitrators in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that the
Employee shall be entitled to be paid as if his or her employment continued
during the pendency of any dispute or controversy arising under or in connection
with this Agreement. The Company shall bear all costs and expenses arising in
connection with any arbitration pursuant to this Section 12.
-10-
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the year and day first above written.
APPLERA CORPORATION
By: /s/ Tony L. White
------------------------------
Tony L. White
Chairman, President and
Chief Executive Officer
ATTEST:
By: /s/ William B. Sawch
----------------------------
William B. Sawch
Senior Vice President and
General Counsel
ACCEPTED AND AGREED:
/s/ Kathy P. Ordonez
-----------------------------------
Kathy P. Ordonez
Exhibit 10.36
================================================================================
CELERA DIAGNOSTICS
JOINT VENTURE AGREEMENT
AS OF APRIL 1, 2001
================================================================================
JOINT VENTURE AGREEMENT
JOINT VENTURE AGREEMENT (this "Agreement"), dated as of the
1st day of April, 2001, by and among Applera Corporation ("Applera"), the
Applied Biosystems Group of Applera ("ABI"), the Celera Genomics Group of
Applera ("CRA"), Foster City Holdings, LLC ("ABI LLC"), and Rockville Holdings,
LLC ("CRA LLC").
RECITALS
WHEREAS, effective as of December 1, 2000, Applera hired Kathy
Ordonez to lead a major initiative in diagnostics, with the expectation that
such initiative, although commenced within ABI, would be conducted with the
active participation of CRA; and
WHEREAS, the Board of Directors of Applera has determined that
it is appropriate and in the best interest of Applera and its stockholders that
such joint initiative be carried out in the form of a joint venture between ABI
and CRA on the terms and subject to the conditions set forth in this Agreement
(the "Joint Venture").
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Formation. ABI and CRA hereby agree to the legal formation
of the Joint Venture, which Joint Venture shall be structured in the manner
described in Annex A attached hereto.
2. Name. The name of the Joint Venture shall be "Celera
Diagnostics, LLC." The Joint Venture shall be referred to as a joint venture
with Applied Biosystems.
3. Field. The business of the Joint Venture shall be limited
to the field as described in Annex B attached hereto (as such description may be
amended from time to time in accordance with this Agreement, the "JV Field").
4. Contributions. ABI agrees to make the contributions to the
Joint Venture as described in Annex C-1 attached hereto (the "Initial ABI
Contribution"), and CRA agrees to make the contributions to the Joint Venture as
described in Annex C-2 attached hereto (the "Initial CRA Contribution" and,
together with the Initial ABI Contribution, the "Initial Contributions").
5. Employees. The initial employees of the Joint Venture shall
be those employees of ABI identified on Annex D attached hereto (the
"Employees").
6. Terms and Conditions. The Terms and Conditions described in
Annex E attached hereto shall govern all other aspects of the Joint Venture.
IN WITNESS WHEREOF, the parties agree to the foregoing as of
the date first written above.
APPLERA CORPORATION
By: /s/ Tony L. White
-------------------------------------------
Name: Tony L. White
Title: Chairman, President and
Chief Executive Officer
APPLIED BIOSYSTEMS GROUP OF
APPLERA CORPORATION
By: /s/ Michael W. Hunkapiller
-------------------------------------------
Name: Michael W. Hunkapiller
Title: President
CELERA GENOMICS GROUP OF
APPLERA CORPORATION
By: /s/ J. Craig Venter
-------------------------------------------
Name: J. Craig Venter
Title: President and Chief Scientific
Officer
FOSTER CITY HOLDINGS, LLC
By: PE Corporation (NY), acting through the
Applied Biosystems Group, as the sole member
of Foster City Holdings, LLC
By: /s/ Michael W. Hunkapiller
-------------------------------------------
Name: Michael W. Hunkapiller
Title: President
ROCKVILLE HOLDINGS, LLC
By: PE Corporation (NY), acting through
the Celera Genomics Group, as the sole member of
Rockville Holdings, LLC
By: /s/ J. Craig Venter
-------------------------------------------
Name: J. Craig Venter
Title: President
ANNEX A
JOINT VENTURE
FORMATION MECHANICS/STRUCTURE
--------------------- -----------------------
PE Corporation (NY) PE Corporation (NY)
acting through the 2 acting through the
Applied Biosystems ---------------- Celera Genomics Group
Group
--------------------- -----------------------
| |
| 100% | 100%
4 | Membership 4 | Membership
| Interest | Interest
| |
---------------------- -------------------------
1 Foster City Holdings, 3 Rockville Holdings, LLC 1
LLC ("ABI LLC") ---------------- ("CRA LLC")
---------------------- -------------------------
\ /
\ /
\ 4 4 /
Class A \ / Class B
Membership \ / Membership
Interest \ / Interest
\ /
-------------------------
Celera Diagnostics, LLC 1
("JV Company")
-------------------------
-------------------------
1. CRA LLC and ABI LLC have been formed on behalf of PE Corporation (NY)
acting through CRA and ABI, respectively. The JV Company has been
formed on behalf of CRA LLC and ABI LLC.
2. PE Corporation (NY) acting through CRA and ABI, respectively, has
signed separate operating agreements as the sole member of CRA LLC and
ABI LLC, respectively, for the purposes of establishing CRA LLC and ABI
LLC as single member limited liability companies to be treated as pass
through entities for tax purposes and certain other ministerial
matters.
3. ABI LLC and CRA LLC shall sign an operating agreement (the "JV
Operating Agreement") for the JV Company. Pursuant to this operating
agreement, ABI LLC and CRA LLC shall own separate classes of membership
interests in the JV Company (to be designated as the Class A membership
interest and the Class B membership interest in the JV Company) with
the economic and voting rights specified therein, which shall embody
and/or incorporate by reference, as applicable, the relevant provisions
of this Agreement, including the Terms and Conditions of Joint Venture
specified in Annex E.
4. The Initial ABI Contribution and the Initial CRA Contribution shall be
contributed by ABI and CRA, respectively, to the JV Company through ABI
LLC and CRA LLC, respectively, as the Class A and Class B members of
the JV Company. Such contributions shall be deemed contributed to the
JV Company as of the date of this Agreement (the "Commencement Date"),
and accounted for as such in accordance with this Agreement as net
assets of the JV Company as of such date. This Agreement shall serve as
the legal transfer document, provided that if any further documentation
is legally required from time to time after the date hereof the parties
shall cooperate in implementing such documentation.
ANNEX B
DESCRIPTION OF JV FIELD
The business of the Joint Venture shall be limited to the
field of Human In Vitro Diagnostics (HIVD). The HIVD field comprises products,
technologies, services, and/or processes for use in the measurement,
observation, or determination of attributes, characteristics, diseases, traits,
or other conditions:
o for medical management of a human being; and/or
o for quality control or testing of human blood or tissue
for transfusion or blood banking, bone marrow
transplantation or banking, or tissue typing for
transplantation..
Examples of activities in the HIVD field:
o Development, manufacture, or sale of anything labeled for
in vitro diagnostic use or any testing products labeled
for investigational use;
o Development, manufacture, or sale of products designated
as Analyte Specific Reagents (ASR's) by FDA or their
research use counterparts in Europe and Japan and general
purpose reagents (GPR's) that are specifically sold for
use with ASR's;
o Development and sale of software products for the
interpretation of data to provide an HIVD clinical test
result;
o Development, manufacture, and sale of products that convey
amplification, sequencing, or other patent rights in the
HIVD field, or products that are designated specifically
for use with products that convey amplification,
sequencing, or other patent rights in the HIVD field;
o Genetic testing for sample tracking in a clinical
laboratory;
o Sale of any in vitro testing products regulated by the
FDA, including products claimed to be produced under
cGMP to be sold to IVD companies or clinical testing
laboratories;
o In- and out-licensing or other transfer of patents,
technology, or know-how for HIVD use; and
o Development, manufacture, or sale of, or providing service
and support for, systems (reagents, components and/or
instruments) developed and manufactured for HIVD use or
developed specifically for use with ASRs (or their
counterparts outside the US).
Specific examples of activities not in the HIVD field:
o Development, manufacture, or sale of products or services
for basic and applied research, including clinical
research where the medical management of a patient is not
involved, unless the product or service is regulated as an
in vitro diagnostic test or ASR by the FDA;
o Development, manufacture, or sale of products or services
for quality assurance and quality control, including
testing to determine conformance with specifications,
purity and batch-to-batch consistency, but excluding human
plasma or tissue-derived samples for the pharmaceuticals
industry;
o Testing of environmental samples, including the detection
of organisms, where the medical management of a human is
not involved;
o Identity testing applications for forensic purposes or
determination of paternity, excluding genotyping or other
identification testing for medical management of a human
being or sample tracking in a clinical laboratory;
o In vitro diagnostic testing of non-human (plant or
animal) samples, including animal breeding, pedigree
determination, or gender determination;
o Testing for the agricultural or food industries, including
the identification of genetically modified organisms
(GMOs) for these industries;
o Sale or service of general purpose ("open") instrument
systems or general purpose reagents, including enzymes,
unless sold in conjunction with ASRs or other products
regulated by the FDA;
o Sale of non-exclusive information products and services
not regulated by FDA (such as the Celera Discovery System)
to any customers, including those customers operating in
the HIVD field;
o Sale of anything labeled for Therapeutic or Prophylactic
use;
o Sale of products or services that convey therapeutic or
research patent rights; and
o In- and out- licensing or other transfer of patents,
technology or know-how for use in the therapeutic or
research fields.
ANNEX C-1
INITIAL ABI CONTRIBUTION TO JOINT VENTURE
The Initial ABI Contribution shall consist of the following:
1. The ongoing commitment by ABI to pursue all opportunities within the JV
Field exclusively through the Joint Venture, pursuant to the terms of
this Agreement.
2. ABI's existing molecular diagnostics business unit headed by Kathy
Ordonez;
3. ABI's existing diagnostic sequencing business headed by Eric Shulse;
4 Rights under license with Roche to use PCR and ABI's instrumentation
platform in the human diagnostics field for the exclusive use by the JV
Company in the JV Field; as well as exclusive rights to all other
existing and future ABI patents, technology, and know-how in the JV
Field as more fully described in, and subject to the terms and
conditions of, Section 3.1(b) of Annex E to this Agreement;
5. On-going royalties payable to ABI under the terms of the License
Agreement between Visible Genetics and ABI;
6. ABI's agreement to fund 50% of the working capital and fixed capital
requirements of the Joint Venture as specified in Sections 2.3 and 7.3
of Annex E to this Agreement; and
7. ABI's agreement to reimburse CRA for tax benefits resulting from losses
generated by the JV Company as specified in Section 7.4 of Annex E to
this Agreement.
ANNEX C-2
INITIAL CRA CONTRIBUTION TO JOINT VENTURE
The Initial CRA Contribution shall consist of the following:
1. The ongoing commitment by CRA to pursue all opportunities within the JV
Field exclusively through the Joint Venture, pursuant to the terms of
this Agreement.
2. Access to the Celera Discovery System and all databases, including
databases developed after the date hereof and during the term of the
Joint Venture; as well as exclusive rights to all existing and future
CRA patents, technology, and know-how in the JV Field as more fully
described in, and subject to the terms and conditions of, Section
3.1(b) of Annex E to this Agreement;
3. CRA's payment of certain amounts relating to the molecular diagnostics
initiative (primarily salaries) incurred from January 1, 2001, to March
31, 2001) under the terms of that certain Agreement dated as of March
30, 2001 between CRA and ABI (the "Prior Payment");
4. CRA's agreement to fund 50% of the working capital and fixed capital
requirements of the Joint Venture as specified in Sections 2.3 and 7.3
of Annex E to this Agreement; and
5. CRA's agreement to fund all of the cash operating losses of the Joint
Venture up to a maximum of $300 million (excluding those amounts
required for periodic working and fixed capital contributions which are
to be shared equally by ABI and CRA) and to absorb the full operating
losses of the Joint Venture in the manner specified in Sections 7.1(a)
and 7.3(a) of Annex E to this Agreement, subject to a credit for the
Prior Payment as specified in such Sections.
ANNEX D
ABI EMPLOYEES INITIALLY TRANSFERRING TO THE JOINT VENTURE
[Intentionally omitted. The Company will furnish supplementally a copy of this
annex to the Securities and Exchange Commission upon request.]
ANNEX E
TERMS AND CONDITIONS OF JOINT VENTURE
1. Joint Venture Business and Related Fundamental Principles
1.1 Scope of JV Company Business; Activities of ABI and CRA. The
business of the Joint Venture as conducted through the JV
Company shall be limited to the JV Field (which expressly
includes the right to conduct such business jointly with
collaboration partners). The JV Company shall not conduct any
business outside of the JV Field unless the JV Field
definition is amended to include such other business in
accordance with the terms and conditions contained herein.
Similarly, subject to Sections 1.4, 1.5, 3.3 and 3.4 below,
ABI and CRA shall engage in activities in the JV Field
(whether directly or indirectly through collaboration with
third parties) exclusively through the JV Company and shall
not conduct any business within the JV Field other than
through the JV Company. Subject to Sections 1.4, 1.5, 3.3 and
3.4 of this Annex, the Joint Venture shall collect all
revenues or other consideration from the sale of any products,
services, licenses, or technology transfers in the JV Field,
unless otherwise agreed by the JV Board.
1.2 Role within Applera Corporation. The following principles
shall govern the operation of the Joint Venture as a business
unit within Applera Corporation:
(a) As specified in further detail in Section 4 below, the
JV Company shall have its own board of managers (the "JV
Board") and management who shall be responsible for the
operation of the JV Company's business.
(b) The parties recognize that certain matters relating to
or affecting the JV Company may also relate to or affect
ABI or CRA. Therefore, as a general principle these
matters should be subject to the same procedures and
processes currently used to resolve issues between ABI
and CRA, with the understanding that the JV Company
would be included in those procedures and processes as
applied to such matters. These procedures and processes
include the Applera Inter-Group Policy Committee (the
"Inter-Group Policy Committee," which term includes any
processes or procedures for resolution of issues between
ABI and CRA, or among ABI, CRA, and the JV Company, as
may be applicable from time to time, and any successor
committees, processes, or procedures). This Annex E
specifies certain matters that must be reviewed by the
Inter-Group Policy Committee, but these matters should
not be viewed as exclusive.
Annex E-1
(c) The parties also recognize that, since ABI, CRA, and the
JV Company operate under the authority of the Applera
Corporation Board of Directors (the "Applera Board"),
the terms, conditions, ownership, and operation of the
Joint Venture shall at all times remain subject to the
ultimate supervision of the Applera Board. Section 8
below outlines this principle in further detail, and in
particular identifies certain "Fundamental Changes"
which require the approval of the Applera Board.
(d) Within this framework, the parties anticipate that
disputes and disagreements can be minimized by
encouraging ongoing consultation and discussions among
the parties and by using formal processes and procedures
where necessary or appropriate. The parties shall
communicate regarding potential concerns before signing
agreements or committing to transactions, and are
encouraged to initiate dialogue, whenever there is
potential for conflict or disagreement even where this
potential is not deemed significant.
1.3 JV Field Definition and Interpretation. The JV Field
definition affects all parties, and therefore interpretation
and amendment of the definition shall be subject to the
approval of the Inter-Group Policy Committee (subject to the
oversight of the Applera Board as outlined in Section 8).
However, the JV Board, acting in consultation with JV Company
management, shall have the primary responsibility for
reviewing the JV Field definition from time to time and
recommending any proposed amendments to the Inter-Group Policy
Committee. Such review shall occur at least on an annual
basis, but shall also occur more frequently as circumstances
require, such as due to actual or anticipated technological
changes or evolution of the human in vitro diagnostics market,
with the goal of anticipating issues to minimize the
development of conflict. ABI and CRA may also make
recommendations to the Inter-Group Policy Committee from time
to time as they believe necessary or appropriate with respect
to the JV Field definition. Amendments approved by the
Inter-Group Policy Committee shall be binding on the parties
and shall be formally adopted as provided in Section 9 below.
Annex E-2
1.4 Business Opportunities, Including New Technology and IP. If
either ABI or CRA identifies a business opportunity within the
JV Field (including any proposed acquisition of technology or
other intellectual property or improvements thereto with
applications within the JV Field as contemplated by Section
3.3), they shall present this opportunity to the JV Company.
Subject to the authority of the Applera Board as described in
Section 8 of this Annex E, it shall be within the sole
discretion of the JV Board as to whether or not the JV Company
shall pursue the business opportunity. If the JV Board makes a
determination that the JV Company will not pursue such a
business opportunity, then the party that identified the
opportunity shall be permitted to pursue such opportunity in
the JV Field on the terms and conditions approved by the
Inter-Group Policy Committee.
1.5 Certain Third Party Collaborations. Notwithstanding the
restriction in Section 1.1 above, the JV Company, ABI and CRA
may individually establish collaborations with third party
companies to conduct pharmacogenomic research. Such research
relates to the identification, analysis or validation of
surrogate markers for drug activation or drug metabolism, and
the determination or prediction of treatment response,
efficacy or adverse effects specifically in connection with
the development of a therapeutic regimen. The JV Company shall
have royalty-free access to all markers derived from any third
party collaboration for use in the JV Field, except for
royalties owed to third parties. The JV Company shall maintain
the exclusive right within Applera to commercialize any
analyte specific reagents and in vitro diagnostic products
resulting from any such third party collaboration.
Furthermore, the JV Company shall have the right of first
refusal within Applera to establish a third party
collaboration that involves the discovery of markers for use
in the JV Field. Notwithstanding anything herein to the
contrary, CRA shall retain the right to utilize such markers
in its clinical trial activities without compensation to the
JV Company. However, the JV Company may not establish a third
party collaboration that is specifically designed to identify
therapeutic targets. In cases where the third party
collaboration involves the discovery of both diagnostic and
therapeutic markers, the JV Company and another Applera
operating group would jointly establish the collaboration. The
Applera operating group establishing a third party
collaboration shall collect all revenues from that
collaboration. If more than one Applera operating group
participates in the collaboration, the revenues shall be
shared proportionately as agreed between them with the
approval of the Inter-Group Policy Committee.
Annex E-3
2. Formation/Capitalization
2.1 Nature of Joint Venture; Ownership . The Joint Venture shall
be conducted by CRA and ABI through the JV Company. ABI and
CRA shall each own their respective interests in the JV
Company through ABI LLC and CRA LLC, respectively, which shall
own Class A and Class B membership interests, respectively, in
the JV Company. The economic and voting rights associated with
those two classes of membership interests are to be set forth
in the JV Operating Agreement, which shall have terms and
conditions which are not inconsistent with this Agreement. The
Class A and Class B membership interests in the JV Company
shall represent equal membership interests in the JV company
with respect to all matters (including voting and economic
rights) except as otherwise specifically provided in this
Agreement. ABI and CRA, as the Class A and Class B members,
respectively, of the JV Company, shall account for their
respective membership interests in the JV Company consistent
with the rights and obligations associated with those
interests pursuant to the JV Operating Agreement, which shall
embody and/or incorporate by reference the principles outlined
in Section 7 below.
2.2 Initial Capital Contributions. The Initial Contributions of
ABI through ABI LLC and CRA through CRA LLC to the JV Company
and the contribution mechanics are as described in Annexes A,
C-1, and C-2 attached hereto.
2.3 Future Capital Contributions. All future funding needs for the
JV Company shall be satisfied in accordance with Section 7.3
of this Annex subject to the following:
(a) The funding of the LLC pursuant to Section 7.3 shall not
alter ABI LLC's or CRA LLC's respective Class A or Class
B membership interest in the JV Company even though,
among other things, such provisions may require unequal
cash contributions to the JV Company, as the commitment
to make such contributions are part of the Initial
Contributions. The making of any contributions which
would cause deviation in the Class A or Class B
membership interests or the rights or obligations
associated with such interests as set forth in this
Annex is a Fundamental Change subject to Section 8
below.
(b) Except as set forth in this Agreement with respect to
the Initial Contributions, all contributions from the
parties shall be in the form of cash unless otherwise
approved by the JV Board. Non-cash contributions shall
be valued at the fair value of the property contributed
as determined by the Applera Board using outside
resources to the extent it deems necessary. For the
avoidance of doubt, it is understood that such valuation
is for purposes of determining the Class A and Class B
membership interests of each of ABI LLC and CRA LLC in
the JV Company and not for accounting purposes.
Annex E-4
The JV Board shall review and approve the JV Company business
plan and corresponding budget (including fixed and working
capital requirements) prior to the commencement of each of its
fiscal years, and at such other times as the JV Board
determines from time to time.
3. Intellectual Property Matters
3.1 IP Contributions by ABI and CRA. The initial intellectual
property contributions of each of ABI and CRA to the JV
Company through ABI LLC and CRA LLC, respectively, include (a)
the intellectual property specifically set forth in Annexes
C-1 and C-2, and (b) subject to Section 3.4 below and subject
to the rights of third parties, exclusive rights to all
existing and future ABI and CRA patents, technology, and
know-how (including improvements and modifications thereto)
for applications within the JV Field. Subject to Sections 1.4
and 1.5 above and Sections 3.3 and 3.4 below, the JV Company
shall have the right to use such intellectual property within
the JV Field (including the right to license or sublicense
such intellectual property) without the payment of any license
fees or royalties to ABI or CRA but subject to the terms and
conditions, including royalty or license fee obligations,
owing to any third party in respect of such intellectual
property. ABI and CRA shall use their commercially reasonable
efforts to ensure that future contracts with third parties do
not contain restrictions that would restrict the JV Company's
access to and use of their intellectual property as
contemplated by this Section, and before entering into any
contract that contains such a restriction they shall obtain
the approval of the Inter-Group Policy Committee.
Annex E-5
3.2 Rights to Technology Developed or Acquired by JV Company.
Subject to Sections 1.4 and 1.5 above, the JV Company shall
have the exclusive right to use intellectual property
developed or acquired by the JV Company within the JV Field.
Outside of the JV Field, subject to the rights of any third
party, any intellectual property developed or acquired by the
JV Company (a) may be used exclusively by ABI within the
research field without the payment of any license fees or
royalties to the JV Company, and (b) may be used exclusively
by CRA within the therapeutics field without the payment of
any license fees or royalties to the JV Company. The use of
any intellectual property developed by the JV Company in a
field of use not contemplated by this Section 3.2 shall be
determined by the Inter-Group Policy Committee. The foregoing
notwithstanding, the use of technology, know-how, information,
or data developed by the JV Company may be subjected to such
reasonable restrictions as the Inter-Group Policy Committee
may determine for purposes of securing necessary patent
protection, complying with JV Company obligations to third
parties, or maximizing the commercial value to Applera of the
technology, know-how, information, or data. The JV Company
shall use its commercially reasonable efforts to ensure that
future contracts with third parties do not contain
restrictions that would restrict ABI's or CRA's access to and
use of its intellectual property as contemplated by this
Section, and before entering into any contract that contains
such a restriction it shall obtain the approval of the
Inter-Group Policy Committee.
3.3 Rights to Third-Party Technology. ABI's or CRA's subsequent
acquisition of rights to technology or other intellectual
property or improvements thereto from a third party with
applications within the JV Field shall be subject to Section
1.4 above.
3.4 CRA's Existing Collaborations. The parties acknowledge that
CRA currently is a party to certain collaboration and other
agreements that, among other things, provide third parties
with access to certain CRA technology for use in certain
fields, including fields that would be considered within the
JV Field. Notwithstanding anything to the contrary contained
herein, these agreements and the transactions and
relationships established by them shall be deemed excluded
from the JV Field and the grant of rights to third parties
under these agreements shall not be a violation of this Joint
Venture Agreement if and to the extent that CRA is, under the
terms and conditions of such collaboration and other
agreements, prohibited from assigning them to the JV Company.
CRA and the JV Company will separately agree in writing on the
list of collaboration and other agreements that are covered by
the exception in this Section 3.4. For the avoidance of doubt,
it is understood that even if a collaboration or other
agreement is excluded under this Section 3.4, intellectual
property that CRA may derive from such agreement within the JV
Field shall be covered by Section 3.1 above, and will be
deemed contributed to the JV Company for its exclusive use
within the JV Field, unless prohibited under the terms of such
collaboration and other agreements.
Annex E-6
3.5 Determinations. The applicability to the JV Field of
intellectual property that is subsequently created or acquired
by either ABI or CRA, as the case may be, shall be determined
by the Inter-Group Policy Committee as contemplated by Section
1.2 above.
4. Governance.
4.1 JV Board
The Joint Venture shall operate under the supervision of the
JV Board, which shall have the authority of a "manager" of a
limited liability company under the Limited Liability Company
Act of the State of Delaware, subject to the specific limits
set forth herein. The following provisions shall apply to the
JV Board:
(a) Composition. The JV Board shall have six (6) members,
consisting of:
(i) the Chief Executive Officer of Applera (the
"CEO"),
(ii) the JV President (as defined below),
(iii) one member appointed by ABI LLC as the Class A
member of the JV Company (the "ABI Nominee"),
(iv) one member appointed by CRA LLC as the Class B
member of the JV Company (the "CRA Nominee"),
(v) the Chief Financial Officer of Applera, and
(vi) the General Counsel of Applera,
The CEO shall be the Chairman of the JV Board.
ABI LLC and CRA LLC can remove and replace the
ABI Nominee and CRA Nominee appointed by them,
respectively, from time to time without
restriction. Any member of the JV Board who is
unable to attend a meeting of the JV Board may,
for that meeting, designate an alternate or
proxy to act on behalf of such member of the JV
Board, subject to approval of the CEO.
(b) Meetings. Meetings of the JV Board shall be held from
time to time as the parties deem necessary or as
required to take the actions specified herein, and as
may otherwise be requested from time to time by the CEO.
A quorum for meetings requires the presence of the ABI
Nominee, the CRA Nominee, the JV President, and the CEO
(or, if applicable, their designated alternates or
proxies).
Annex E-7
(c) Voting. Approval of matters voted on by the JV Board at
meetings requires a vote of a majority of the entire JV
Board (regardless of who is present at a meeting);
provided, however, that (i) in the event of a tie vote
the CEO (or his designated alternate or proxy) shall
have a casting (i.e., tie-breaking) vote and (ii) in
lieu of exercising such casting vote, the CEO (or, if
applicable, his designated alternate or proxy) may
instead have the matter referred to and determined by
the Applera Board as contemplated by Section 8.3 below.
(d) No Fiduciary Duties. No members of the JV Board shall
have any fiduciary or similar duties to the members of
the JV Company, and are therefore free to vote in
accordance with instructions from the parties nominating
such members.
(e) Action By Written Consent. Notwithstanding the
foregoing, any action required or permitted to be taken
at any meeting of the JV Board may be taken without a
meeting if all members of the JV Board consent thereto
in writing.
(f) Indemnification. The JV Company shall indemnify and hold
harmless each member of the JV Board from and against
any and all claims and demands to the fullest extent
permitted by law and Applera's By-laws.
4.2 Joint Venture Management
The day-to-day operations of the Joint Venture shall be run by
a management team employed by, and dedicated to, the JV
Company under the management and direction of the JV Board.
Such management team shall be headed by a president (the "JV
President") who shall initially be Kathy Ordonez. The balance
of the management team, and the personnel filling management
positions, shall be determined from time to time by the JV
President under the supervision of the JV Board. The
management of the JV Company shall have such authority as the
JV Board shall from time to time delegate except that the JV
Company's management authority shall not extend to matters
requiring approval of the Applera Board or the Inter-Group
Policy Committee under the terms hereof.
5. Operations
5.1 Access to ABI and CRA Products and Services. From time to
time, the JV Company may require products and services of ABI
or CRA in addition to those products and services that
constitute the Initial Contributions. ABI and CRA, as
applicable, shall supply the JV Company with such products and
services on terms and conditions (including price) approved by
the Applera Board consistent with then applicable policies on
intra-company transactions. Such products and services will
not be treated as contributions to the JV Company through ABI
LLC or CRA LLC unless otherwise determined by the Applera
Board consistent with the principles set forth in this Annex.
Annex E-8
5.2 Access to Corporate Overhead. The JV Company shall have access
to Applera's general corporate resources (including tax,
accounting and legal) in accordance with, and subject to,
Applera management allocation policies as in effect from time
to time. The JV Company shall incur an administrative charge
to its operations reflecting an allocation of corporate costs
as determined by the overall allocation formula (commonly
referred to as the "Four-Factor Allocation").
6. Employees and Benefits
6.1 Employees. The JV Company shall be staffed with employees who
are dedicated full time to the business of the JV Company. The
JV Company shall be prohibited from hiring employees of either
ABI or CRA without the consent of the affected group, except
that the employees identified on Annex D shall initially staff
the JV and no consent of ABI is required with respect to such
employees.
6.2 Compensation and Benefits. Subject to Section 4.1(c) and
subject also to any matters which by their own terms require
Applera Board approval (such as stock options), matters
relating to the compensation of JV Company personnel shall be
determined by management of the JV Company consistent with
Applera policies applicable to such matters as in effect from
time to time. JV Company personnel shall also be provided with
Applera benefits in accordance with applicable Applera
policies as in effect from time to time.
7. Tax/Accounting Matters
7.1 Joint Venture Losses. JV Company losses shall be for the
account of ABI LLC, as the Class A member of the JV Company,
and CRA LLC, as the Class B member of the JV Company (and
accordingly recorded by ABI or CRA, as applicable, on their
books), as follows:
(a) During the Initial Loss Period (as defined below), all
operating losses of the JV Company up to an aggregate
amount equal to $300 million (the "Initial Loss
Commitment") shall be allocated to CRA LLC, provided
that CRA LLC shall receive a credit under this clause
against the Initial Loss Commitment for the Prior
Payment (the aggregate operating losses allocated to CRA
LLC from time to time under this clause, including the
credit for the Prior Payment, is referred to herein as
the "Allocated Initial Losses"); and
Annex E-9
(b) All operating losses of the JV Company above the Initial
Loss Commitment, or which occur after the Initial Loss
Period, shall be allocated 50% for the account of ABI
LLC and 50% for the account of CRA LLC (as the Class A
and Class B members, respectively, of the JV Company).
The "Initial Loss Period" shall mean the period beginning with
the formation of the Joint Venture and ending on the earliest
to occur of (i) the time at which Allocated Initial Losses
equal the Initial Loss Commitment, (ii) the last day of any
fiscal quarter during which the JV Company experiences gross
operating profits, if such fiscal quarter represents the
fourth of four consecutive fiscal quarters during which the JV
Company experiences gross operating profits. For these
purposes, the JV Company's operating results shall include all
items, except those deemed to be non-recurring in nature as
determined by the JV Board.
7.2 Joint Venture Profits. JV Company profits shall be for the
account of ABI LLC, as the Class A member of the JV Company,
and CRA LLC as the Class B member of the JV Company (and
accordingly recorded by ABI or CRA, as applicable, on their
books), as follows:
(a) All profits of the JV Company shall be allocated 65% for
the account of CRA LLC and 35% for the account of ABI
LLC until the cumulative profits of the JV Company equal
the Allocated Initial Losses; and
(b) All profits of the JV Company above the amount referred
to in clause (b) above shall be allocated to ABI LLC and
CRA LLC equally.
7.3 Cash Contributions.
(a) Cash operating losses of the JV Company shall be funded
by CRA LLC (as the Class B member of the JV Company) up
to the Initial Loss Commitment, subject to a [credit]
under this provision in an amount equal to the Prior
Payment. The amounts to be funded pursuant to the
following clauses (b) and (c) are incremental to this
amount.
(b) Working capital requirements of the JV Company shall be
funded by ABI LLC and CRA LLC (as the Class A and Class
B members, respectively, of the JV Company) equally.
Working capital shall be measured at the end of each
fiscal quarter as the cash flow impact of the change in
the current assets and liabilities of the JV Company.
Annex E-10
(c) Plant, property, and equipment ("fixed capital")
requirements of the JV Company shall be funded by ABI
LLC and CRA LLC (as the Class A and the Class B members,
respectively, of the JV Company) equally.
7.4 Reimbursement of Tax Benefits. If CRA LLC, as the Class B
member of the JV Company, assumes and CRA records on its books
JV Company losses as provided in Section 7.1 above, then ABI
shall reimburse CRA for any tax benefits resulting from such
losses or any other tax benefits generated by the JV Company
during the loss year to the extent that such benefits are
utilized by ABI.
7.5 Distributions On Liquidation. Upon a liquidation of the JV
Company business (which for these purposes includes a sale of
the business regardless of the legal structure of such
transaction), the assets of the JV Company (or, if applicable,
the proceeds of such sale) shall be allocated to ABI LLC and
CRA LLC as the Class A and Class B members of the JV Company
as follows (after payment of all of the JV Company's debts and
liabilities):
(a) First, to the extent of any such proceeds, to ABI LLC
and CRA LLC in an amount equal to the balance in their
respective shareholder equity accounts in the JV Company
(payable to them pro rata based on the amounts owing to
them under this clause (a) up to such amounts);
(b) Second, to the extent of any such proceeds after payment
of the amounts in clause (a) above, 65% to CRA LLC and
35% to ABI LLC until the cumulative amounts paid under
this clause (b), together with any cumulative profit
returned under Section 7.2(a), equals the Allocated
Initial Losses; and
(c) Third, to the extent of any remaining proceeds after
payments of the amounts referred to in clauses (a) and
(b) above, to ABI LLC and CRA LLC equally.
8. Matters Subject to Applera Board Approval or Review
8.1 Role of Applera Board. Notwithstanding anything to the
contrary contained herein, all matters relating to the JV
Company shall at all times remain within the purview of the
Applera Board, which shall have the authority to review
matters relating to the JV Company or the JV Board on its own
initiative and, if it deems appropriate, instruct the JV
Company or the JV Board regarding particular matters (in which
case the JV Company and the JV Board shall be bound to comply
with such instructions). Without limiting the foregoing, the
conduct of the business of ABI, CRA, ABI LLC, CRA LLC, and the
JV Company shall at all times remain subject to Applera
policies in effect from time to time.
Annex E-11
8.2 Fundamental Changes. Although the parties do not anticipate
any material alteration in the fundamental structure and
ownership of the JV Company for the foreseeable future, from
time to time circumstances may arise which warrant
consideration of such alterations ("Fundamental Changes").
Fundamental changes, defined to include the following matters,
require approval of the Applera Board:
(a) Terminating the Joint Venture by transferring its
business to either or both of ABI and/or CRA;
(b) Spinning off the JV Company into an independent
business;
(c) Altering the ownership of the JV Company between ABI and
CRA due to, for example, alterations in the rights or
obligations (including contribution commitments)
associated with their direct or indirect interests in
the JV Company as set forth in Section 7 above);
(d) Allowing a third party to participate in the JV Company,
including by way of a transfer by either or both of ABI
and/or CRA of its direct or indirect interest or by
contribution of new equity into the JV Company;
(e) Liquidating the JV Company in whole or in part by
disposing of some or all of its assets to a third party;
and
(f) Other matters identified by the CEO or the Applera Board
from time to time as Fundamental Changes.
8.3 Interpretation of Agreement; Resolution of Disputes. It is the
intent of the parties that, subject to the preceding
provisions of this Section 8, all issues relating to the JV
Company, including the interpretation of this Agreement, be
decided or resolved by the JV Board or, in the case of issues
which affect or relate to ABI or CRA (including, without
limitation, issues relating to the definition of the JV
Field), the Inter-Group Policy Committee. However, any
dispute, disagreement, or deadlock relating to the JV Company
which cannot be so resolved may be referred by the CEO to the
Applera Board, and any resulting determination by the Applera
Board shall be binding on the parties.
Annex E-12
9. Amendment and Waiver
Subject to any approval of the Applera Board required under Section 8 of this
Annex, the terms and conditions contained in this Agreement may be amended, and
the conduct of the parties may deviate from such terms and conditions, with the
approval ofthe Inter-Group Policy Committee; provided, however, that any
amendment to this Agreement, upon receiving the necessary approval, shall be in
a written instrument signed by (a) ABI and ABI LLC, (b) CRA and CRA LLC, and (c)
the CEO. In addition, if any provision of this Agreement specifies that the
approval or determination of the Applera Board is required for or with respect
to any matter, then such provision may not be amended, and the conduct of the
parties shall not deviate from such provision, without the approval of the
Applera Board.
Annex E-13
EXHIBIT 10.37
Description of Celera Genomics/Applied Biosystems
Marketing and Distribution Agreement
In April 2002, the Celera Genomics group of Applera Corporation
("Celera Genomics") and the Applied Biosystems group of Applera Corporation
("Applied Biosystems") entered into a 10-year marketing and distribution
agreement pursuant to which Applied Biosystems has become the exclusive marketer
of Celera Genomics' Celera Discovery System(TM) and related information assets.
The principal terms and conditions of the marketing and distribution agreement
are described below.
o Applied Biosystems is expected to integrate the Celera Discovery System
and other genomic and biological information into its new Knowledge
Business. In exchange for marketing and distribution rights to the
Celera Discovery System and other genomic and biological information
and access to the Celera Discovery System and related information,
Applied Biosystems will provide Celera Genomics with royalty payments
on revenues generated by sales of certain products of its Knowledge
Business from July 1, 2002, through the end of fiscal 2012. The royalty
rate is progressive, up to a maximum of 5%, with the level of sales
through fiscal 2008. The royalty rate becomes a fixed percentage of
sales starting in fiscal 2009, and the rate declines each succeeding
fiscal year through fiscal 2012. Assays-on-Demand(TM),
Assays-by-Design(SM), certain reagents for arrays, and new database
subscriptions sold by the Knowledge Business are the products subject
to royalties.
o Celera Genomics 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). Applied Biosystems has agreed to reimburse
Celera Genomics for any shortfall in earnings before interest, taxes,
depreciation, and amortization from these contracts below $62.5 million
(as well as renewals, if any) during the four fiscal years ending with
the 2006 fiscal year if the shortfall is due to changes made to Celera
Discovery System products by or at the request of Applied Biosystems,
provided Celera Genomics otherwise continues to perform under these
contracts. During the term of the marketing and distribution agreement
(other than the transition period), Celera Genomics will not be
marketing Celera Discovery System products and services to, and will
not be contracting with, new customers.
o Celera Genomics will continue to have access to all data, which may
include formats not available to third parties, and other intellectual
property associated with the Celera Discovery System for its
therapeutic programs.
Exhibit 13
2002
APPLERA CORPORATION Annual Report
APPLIED BIOSYSTEMS CELERA GENOMICS
Table of contents
--------------------------------------------------------------------------------
Letter to Stockholders
Applera Corporation 3
Applied Biosystems Group 4
Celera Genomics Group 5
Celera Diagnostics 6
Financial Review 8
Directors and Officers 85
Stockholder Information 86
--------------------------------------------------------------------------------
APPLERA CORPORATION
Mission: To provide the world's leading technology and information
solutions that enable life scientists to understand and use the power of
biology.
Business Groups: Applied Biosystems and Celera Genomics
Headquarters: Norwalk, Connecticut
------------------
APPLIED BIOSYSTEMS GROUP
Profile: A leading provider of technology solutions for life sciences
research and related applications with customers in more than 100
countries.
Headquarters: Foster City, California
New York Stock Exchange Symbol: ABI
CELERA GENOMICS GROUP
Profile: A biopharmaceutical business engaged principally in integrating
advanced technologies to discover and develop new therapeutics by leveraging its
capabilities in proteomics, bioinformatics, genomics, and medicinal chemistry.
Headquarters: Rockville, Maryland
New York Stock Exchange Symbol: CRA
------------------
CELERA DIAGNOSTICS
Profile: A joint venture between Applied Biosystems and Celera Genomics, with a
mission to improve human health through discovery, development, and
commercialization of novel molecular diagnostic products.
Headquarters: Alameda, California
--------------------------------------------------------------------------------
To our stockholders:
--------------------------------------------------------------------------------
The past year was a challenging time at Applera Corporation, as it was for most
technology companies. Global economic pressures and uncertainty translated into
disappointing financial performance and unstable stock prices during the period.
Yet this has not dampened our optimism. Our commitment to research and
development produced a pipeline of new products that expanded our market
opportunities, while our culture of continuous innovation drove significant
redefinition of our businesses. As we begin fiscal 2003, these strategic actions
have given us an even stronger foundation for serving our customers and
contributing to advances in health care.
While tough times are always difficult to weather, Applera's ability to embrace
change and evolution in our businesses has set the stage for new growth. During
fiscal 2002, we announced an innovative concept called the Applied Biosystems
Knowledge Business, which should allow researchers seamless access to
information and products based on the sequencing of the human genome. At Applied
Biosystems, we launched new production-level sequencers and tools for drug
development that have been well received by the market. We completed the
transformation of Celera Genomics' focus from information to therapeutic
development. And we made investments that quickly built Celera Diagnostics into
an approximately 175-person organization with top diagnostic talent and
technology capabilities. The leaders of our businesses provide further detail on
these exciting developments in the following pages.
Our strategy has been to manage those things we can control during downturns,
while continuing to invest in the future. We have been able to increase our R&D
investments consistently over the past several years. This includes the
approximately $100 million we expect to invest in the Applera Genomics
Initiative. This initiative, begun in July 2001, has already resulted in
products that have reached the market. This level of commitment should allow us
to withstand current global economic pressures and ensure that we aren't
constrained when conditions improve.
Ultimately, Applera's collective resources distinguish our businesses and
maximize our opportunities for long-term success. Our technologies are
unmatched, yet we continue efforts to surpass them. Our financial resources
allow us to stay the course and invest at a level few in our industry can match.
Our businesses are strong and optimally situated in growing life sciences
segments. These businesses also complement each other and benefit from synergies
that don't exist elsewhere.
My confidence in our ability to grow by making breakthrough research more
productive and cost-efficient continues to be bolstered by Applera's global
organization of nearly 6000 employees. During a challenging year, our people
have proved themselves with their creativity, flexibility, and insight. Thanks
to their efforts, we will continue to help our customers operate at the
forefront of discovery and strive to deliver maximum long-term value to our
stockholders.
The need to facilitate discovery for the betterment of the human condition will
continue to increase, and at Applera, we remain committed to leading the way.
/s/ Tony L. White
------------------------
Tony L. White
Chairman, President, and Chief Executive
Officer
Applera Corporation
APPLERA CORPORATION Annual Report 2002 3
APPLIED BIOSYSTEMS GROUP
Fiscal 2002 has been a year of investment and preparation for new opportunities
as Applied Biosystems has introduced a new generation of tools and systems to
help biologists accelerate the pace of their discovery.
Revenues were $1.6 billion for the year, essentially unchanged from fiscal 2001,
excluding foreign currency effects. These results reflect the overall downturn
in technology spending and recent buying patterns of life sciences research
customers. In response, we have managed our financial resources conservatively
so we can remain productive in a tighter spending environment. As a result, we
continue to be in a strong financial position at the end of a difficult year.
We have also taken a longer-term view and made a conscious commitment to expand
R&D programs across our product lines. Thanks to our strong finances and the
investments we have made over the past several years, we continued to introduce
breakthrough products during fiscal 2002 and lay the groundwork for new products
going forward.
Our core genetic analysis business has been strengthened by several product
introductions that extend our offerings across the entire research spectrum. The
Applied Biosystems 3730 DNA Analyzer and 3730xl DNA Analyzer set new standards
in high-performance genetic analysis for medium- and production-level users.
These 48- and 96-capillary platforms can reliably determine sequences at nearly
twice the effective read length possible with previous systems. Participation in
our early access program for these next-generation systems has been strong, and
early response positive.
The 3100-Avant Genetic Analyzer also fills an important price/performance gap in
our genetic analysis business. With this four-capillary system, which delivers
higher performance for low- to medium-throughput DNA analysis, Applied
Biosystems now offers 1-, 4-, 16-, 48-, and 96-capillary systems that cover
virtually any genetic analysis need.
We were also pleased to announce our new Knowledge Business offering, through
which Applied Biosystems expects to integrate the rich genomic information and
sophisticated information portal from the Celera Discovery System(TM) (CDS) with
our own information-rich products, services, and analytical tools. We expect the
result will be a complete solution that will help our customers reduce the time
necessary to design their experiments, select the right reagents, run those
experiments, and interpret the results.
The Knowledge Business is a logical evolution. Early in our history, we provided
researchers with the technology tools and reagents they needed to focus on
small-scale biological problems. More recently, as sequencing and reagent
technologies developed, large-scale biology projects such as sequencing the
human genome have come to the fore. Here, too, Applied Biosystems has led the
way in supplying tools and consumables to industrial-scale research.
With the Knowledge Business, we have come full circle: providing an information
and product portal that enables researchers focused on smaller-scale biology
projects to take advantage of the knowledge emerging from industrial-scale,
high-throughput biology programs. The ability to conduct specific queries of
definitive genomic and proteomic information using Celera Genomics' informatics
tools in a context of definitive genomic and proteomic information, as well as
the ability to order our off-the-shelf Assays-on-Demand(TM) or customized
Assays-by-Design(SM) to run their experiments, should have a significant impact
on the quality of the results researchers receive. As the Applera Genomics
Initiative draws to a close and we continue to discover novel SNPs in and around
genes, we also envision that the Knowledge Business will provide an opportunity
to build on our already substantial genetic analysis business.
4 APPLERA CORPORATION Annual Report 2002
Fiscal 2002 was also an exciting year in mass spectrometry, as we expanded our
suite of next-generation tools for the proteomics and drug
metabolism/phar-macokinetics (DMPK) markets. In January we introduced the
Applied Biosystems 4700 Proteomics Analyzer, which uses tandem time-of-flight
technology to identify and characterize thousands of proteins per day -- up to
10 times faster than current technology. In May we launched the Q TRAP(TM)
LC/MS/MS System, a first ever union of triple quadrupole and ion trap
technologies, which researchers are using to identify proteins and peptides in
proteomics research and small molecule drug metabolites important in therapeutic
development.
Added to our existing mass spectrometry products, including the API 4000(TM)
LC/MS/MS System, which continues to be a strong performer for DMPK studies, our
family of mass spectrometry instruments now spans a wide range of needs for
protein and small molecule analysis problems. In addition, our recently
introduced ICAT(TM) protein expression reagents and upcoming second-generation
ICAT reagent technology should expand researchers' ability to look at proteomics
at a functional level. Upcoming products, such as the functional proteomics
system we are developing with partner HTS Biosystems, should further extend our
next-generation offerings in this area.
In closing, we would like to thank our stockholders and especially our employees
for their support. Going forward, we continue to look for opportunities to serve
the needs of the life sciences market. Applied Biosystems has faced downturns in
the past and has responded with new products that appealed to our customers and
carried us past our competitors. We believe that this cycle will be no
different.
/s/ Michael W. Hunkapiller
------------------------------
Michael W. Hunkapiller, Ph.D.
President
Applied Biosystems Group
CELERA GENOMICS GROUP
Celera Genomics has undergone tremendous organizational and strategic change in
its evolution from a genomics information company to a biopharmaceutical
business with innovative enabling technology platforms. We have undertaken this
change because we believe the potential return from a successful therapeutics
business is significantly greater and is more sustainable than what might be
realized from an information-based business. I'm pleased to report that we bring
fiscal 2002 to a close with a clear strategy and focused programs to build our
therapeutics business.
Our confidence in the future is based on the quality of our technology and our
people, the progress we have made toward aligning Celera's organization with its
strategy, and the promise of our preclinical pipeline. Thanks to
industry-leading expertise and platforms in proteomics, genomics, and
informatics, Celera is strategically positioned to discover new therapeutic
targets and diagnostic markers for disease. The acquisition of Axys
Pharmaceuticals in late calendar 2001 added a significant preclinical small
molecule pipeline, as well as an outstanding staff of biologists and structural
and medicinal chemists experienced in drug discovery and lead optimization.
Celera has restructured by eliminating nonstrategic businesses and
infrastructure, and by adding new management to focus on therapeutic discovery.
In April we entered into a marketing and distribution agreement for the Celera
Discovery System(TM) (CDS) with Applied Biosystems' Knowledge Business. Under
this agreement Celera will continue to receive revenue from its existing
customers and will also receive royalties on sales of various new Knowledge
Business products. Celera will also retain access to data and other intellectual
property for the benefit of its discovery programs. We intend to maintain
relationships with these existing customers, fully support them for the term of
their subscriptions, and explore opportunities to expand these relationships.
APPLERA CORPORATION Annual Report 2002 5
Executive appointments designed to further accelerate our efforts include the
hiring of several senior executives with extensive experience in therapeutics,
including Robert Booth, Ph.D., as our new head of R&D. With more than 20 years
in the pharmaceutical industry, Dr. Booth has a solid track record of leading
successful programs to discover new therapeutic compounds and to advance them
into clinical trials. He is well qualified to integrate and lead our staff of
almost 300 researchers.
Our most advanced preclinical programs include our collaboration with Merck &
Co. to develop small molecule inhibitors of Cathepsin K, a protease target that
has been shown to play a role in osteoporosis. Our collaboration with Aventis
Pharmaceuticals on inhibitors of Cathepsin S has advanced to a similar stage,
with compounds identified for development in multiple inflammation and
autoimmune disease indications. We are also working on a number of promising
unpartnered programs in antithrombotic therapeutics, specifically around the
coagulation enzyme, Factor VIIa, and in oncology.
Our industrial-scale proteomics facility is now operational as well. As results
from this unique integration of cell biology, protein chemistry, mass
spectrometry, and informatics emerge over the next year, we are optimistic that
Celera will identify targets for therapeutic intervention as well as
protein-based diagnostic markers that may be of interest to Celera Diagnostics.
Taken together, Celera's technology platforms, its growing small molecule
pipeline, and our plan to expand our product development team over the coming
year demonstrate our commitment to building shareholder value through successful
drug discovery.
/s/ Kathy Ordonez
---------------------------
Kathy Ordonez
President
Celera Genomics Group
CELERA DIAGNOSTICS
In its first full year of operation, Celera Diagnostics has made significant
progress toward our goal of improving human health by discovering, developing,
and commercializing novel diagnostic tests that allow for earlier intervention
and more successful disease therapy.
During fiscal 2002, we ramped up to a fully functional organization of
approximately 175 employees, and we now possess top talent and diagnostic
expertise in the areas of discovery, product development, manufacturing,
quality, clinical affairs, regulatory, and marketing. Our experienced management
team works well together and shares a common vision concerning how to proceed.
Fiscal 2002 was a year of foundation building at Celera Diagnostics. We upgraded
our facility in Alameda, California, and built out our high-volume discovery
laboratories for genotyping and gene expression. We integrated the molecular
diagnostics team from Applied Biosystems, a dedicated group of people who
created the products and technology that serve as Celera Diagnostics' entry into
the market. We also filed a 510(k) on our ViroSeq(TM) HIV-1 Genotyping System
with the U.S. Food and Drug Administration. The ViroSeq system is designed to
detect drug resistance and assist physicians in prescribing effective treatment
regimes.
We also made significant progress in building the infrastructure for a
cost-effective, industrial-scale method for conducting gene-disease association
studies, which are expected to yield novel diagnostic products based on their
ability to fill high-value and as yet unmet medical needs. In the first of these
studies, for Alzheimer's disease, we are searching for genetic factors in
differential diagnoses of senility. In the long term, we believe this
information may help tailor treatment as the effectiveness of Alzheimer's
medications improves. During the coming fiscal
6 APPLERA CORPORATION Annual Report 2002
year, we plan to complete the Alzheimer's study, and at least three additional
large-scale disease association studies. These studies, augmented by new data
from the Applera Genomics Initiative, will be integral to our development of
novel diagnostic products.
Through our recently announced profit-sharing alliance with Abbott Laboratories,
one of the world's largest diagnostics companies, we now have a
commercialization partner, which should ensure that customers around the world
have access to our products. Celera Diagnostics is teaming with Abbott to
develop, manufacture, and market a broad range of in vitro molecular diagnostic
products for disease detection, disease progression monitoring, and therapy
selection. At Celera Diagnostics, we will focus on genetic marker discovery, new
marker validation, and assay development, while Abbott will focus on product
development, sales, and marketing. Both companies will contribute existing
product sales to the alliance and collaborate on the development of new tests to
be provided to physicians and their patients through hospitals and clinical
laboratories throughout the world.
In the coming fiscal year, we expect continued revenue growth from our current
products, including our analyte-specific reagents (ASRs) for cystic fibrosis,
which detect mutations that have been associated with the disease. Select
clinical laboratories have started evaluating our next-generation ASRs for
cystic fibrosis testing, while we continue to develop ASRs for hepatitis viral
load and genotyping testing.
We are optimistic that we can move Celera Diagnostics toward profitability over
the next several years through a combination of new genetic and cancer tests
under development, as well as tests for the infectious disease market supported
by Abbott. We are also encouraged by the promise of proteomics-based diagnostics
products currently under development in conjunction with Celera Genomics.
Fiscal 2002 has been an exciting year of progress as we work with our partners
to develop novel, actionable diagnostics that will drive new advances in health
care. We look forward to an exciting and successful fiscal 2003.
/s/ Kathy Ordonez
----------------------------
Kathy Ordonez
President
Celera Diagnostics
APPLERA CORPORATION Annual Report 2002 7
APPLERA CORPORATION Financial Review
<TABLE>
<CAPTION>
<S> <C>
Selected Consolidating Financial Data 9 - 10
Management's Discussion and Analysis 11 - 45
Discussion of Applera Corporation 18
Discussion of Applied Biosystems Group 22
Discussion of Celera Genomics Group 26
Discussion of Celera Diagnostics 29
Market Risks 30
Outlook 31
Forward-Looking Statements 32
Financial Statements 46 - 49
Consolidated Statements of Operations 46
Consolidated Statements of Financial Position 47
Consolidated Statements of Cash Flows 48
Consolidated Statements of Stockholders' Equity 49
Notes to Consolidated Financial Statements 50 - 83
Report of Management 84
Report of Independent Accountants 84
</TABLE>
8 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Selected Consolidating Financial Data
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
Fiscal years ended June 30, 1998 1999 2000 2001 2002
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Financial Operations
Net revenues
Applied Biosystems group $ 940,095 $1,221,691 $ 1,388,100 $ 1,619,495 $ 1,604,019
Celera Genomics group 4,211 12,541 42,747 89,385 120,886
Celera Diagnostics 1,587 9,206
Eliminations (17,335) (59,812) (66,341) (32,893)
Applera Corporation 944,306 1,216,897 1,371,035 1,644,126 1,701,218
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
Applied Biosystems group $ 24,009 $ 148,365 $ 186,247 $ 212,391 $ 168,481
Celera Genomics group (8,315) (44,894) (92,737) (186,229) (211,772)
Celera Diagnostics (4,960) (44,763)
Eliminations (6,674) 1,986 6,032 47,473
Applera Corporation 15,694 96,797 95,496 27,234 (40,581)
-----------------------------------------------------------------------------------------------------------------------------------
Per Share Information
Applera Corporation
Income per share from continuing operations
Basic $ 0.32
Diluted $ 0.31
Dividends per share $ 0.68 $ 0.51
-----------------------------------------------------------------------------------------------------------------------------------
Applied Biosystems Group
Income per share from continuing operations
Basic $ 0.74 $ 0.90 $ 1.01 $ 0.80
Diluted $ 0.72 $ 0.86 $ 0.96 $ 0.78
Dividends per share $ 0.0425 $ 0.17 $ 0.17 $ 0.17
-----------------------------------------------------------------------------------------------------------------------------------
Celera Genomics Group
Net loss per share
Basic and diluted per share $ (0.89) $ (1.73) $ (3.07) $ (3.21)
===================================================================================================================================
Other Information
Cash and cash equivalents and short-term investments
Applied Biosystems group $ 84,091 $ 236,530 $ 394,608 $ 392,459 $ 470,981
Celera Genomics group 71,491 1,111,034 995,558 888,922
Eliminations
Applera Corporation 84,091 308,021 1,505,642 1,388,017 1,359,903
-----------------------------------------------------------------------------------------------------------------------------------
Total assets
Applied Biosystems group $1,128,937 $1,347,550 $ 1,698,156 $ 1,677,887 $ 1,818,582
Celera Genomics group 6,339 344,720 1,413,257 1,220,136 1,250,044
Celera Diagnostics 14,164 21,826
Eliminations (172,963) (28,098) (24,329) (15,053)
Applera Corporation 1,135,276 1,519,307 3,083,315 2,887,858 3,075,399
-----------------------------------------------------------------------------------------------------------------------------------
Long-term debt
Applied Biosystems group $ 33,726 $ 31,452 $ 36,115 $ - $ -
Celera Genomics group 46,000 17,983
Eliminations
Applera Corporation 33,726 31,452 82,115 17,983
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The selected financial data should be read in conjunction with Applera
Corporation's consolidated financial statements and related notes thereto.
The recapitalization of the Company on May 6, 1999 resulted in the issuance of
two new classes of common stock called Applera Corporation - Applied
Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group
Common Stock.
APPLERA CORPORATION Annual Report 2002 9
APPLERA CORPORATION Selected Consolidating Financial Data--continued
The Applied Biosystems group per share data and the Celera Genomics group per
share data reflect all stock splits.
Celera Diagnostics was established in 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 tests. The loss from continuing operations of Celera
Diagnostics does not include the tax benefit recorded by the Celera Genomics
group associated with such loss, as the Celera Genomics group recorded 100% of
Celera Diagnostics' losses in fiscal 2001 and 2002.
A number of items impact the comparability of Applera Corporation's data from
continuing operations. Before-tax amounts include:
Applied Biosystems Group
o Restructuring, other merger costs, and acquisition-related costs of $48.1
million for fiscal 1998, $6.1 million for fiscal 1999, and $2.1 million for
fiscal 2000;
o Acquired in-process research and development charges of $28.9 million for
fiscal 1998 and $2.2 million for fiscal 2002;
o Net gains on investments of $1.6 million for fiscal 1998, $6.1 million for
fiscal 1999, $48.6 million for fiscal 2000, and $15.0 million for fiscal
2001, and net losses on investments of $8.2 million for fiscal 2002;
o Tax benefit and valuation allowance reductions of $22.2 million for fiscal
1999;
o Charges for the impairment of assets of $14.5 million for fiscal 1999;
o A restructuring reserve adjustment of $9.2 million for fiscal 1999 relating
to excess fiscal 1998 restructuring liabilities;
o Charges related to the acceleration of certain long-term compensation
programs as a result of the attainment of performance targets of $9.1
million for fiscal 1999 and $45.0 million for fiscal 2000;
o Charges of $4.6 million for fiscal 1999 relating to the recapitalization of
the Company;
o A charge of $3.5 million for a donation to the Company's charitable
foundation for fiscal 1999;
o A foreign currency hedge contract-related gain of $2.3 million for fiscal
1999; and
o A gain of $8.2 million on the sale of real estate for fiscal 2000.
Celera Genomics Group
o Charges of $4.6 million for fiscal 1999 relating to the recapitalization of
the Company;
o A charge relating to the acceleration of certain long-term compensation
programs as a result of the attainment of performance targets of $1.0
million for fiscal 1999;
o Charges for the impairment of assets of $69.1 million for fiscal 2001 and
$15.6 million for fiscal 2002 and charges relating to excess lease space
and severance costs of $13.1 million for fiscal 2002;
o A loss from the Celera Genomics group's interest in Celera Diagnostics of
$5.0 million for fiscal 2001 and $44.7 million for fiscal 2002;
o Losses on investments of $6.0 million for fiscal 2002; and
o A charge for acquired in-process research and development of $99.0 million
for fiscal 2002.
10 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis
Discussion of Operations
Results of Operations--2002 Compared With 2001
The purpose of the following management's discussion and analysis is to
provide an overview of the business of Applera Corporation ("Applera" or "our
company") 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 company's consolidated financial
statements and related notes. Historical results and percentage relationships
are not necessarily indicative of operating results for future periods.
Overview
Our company is 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") 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 capabilities in proteomics, bioinformatics and
genomics to identify and validate drug targets and diagnostic marker
candidates, and to discover novel therapeutic candidates. 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 tests. Financial results of Celera
Diagnostics for fiscal 2001 included three months of operations.
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.
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 company has elected not to
present separate full financial statements for the Applied Biosystems group or
the Celera Genomics group but instead will present financial information for
each group in Note 14 to our consolidated financial statements, Segment,
Geographic, Customer and Consolidating Information. This revised presentation
is intended to facilitate stockholder understanding and analysis of our
company and its business segments. Management's discussion and analysis
addresses the consolidated financial results followed by the discussions of
our three segments.
The following noteworthy developments occurred at our company since the
beginning of fiscal 2002:
Applied Biosystems Group
o In November 2001, the Applied Biosystems group completed the acquisition of
Boston Probes, Inc. This acquisition was intended to further the
development of the Applied Biosystems group's platform for analysis of
genetic information.
o In February 2002, the Applied Biosystems group and Amersham plc announced a
court-mediated settlement in patent litigation between the parties.
o In March 2002, the Applied Biosystems group and MDS Inc. announced a
favorable ruling in a patent infringement lawsuit against Micromass.
o During the third quarter of fiscal 2002, the Applied Biosystems group
introduced the commercial version of the 4700 Proteomics Analyzer with
TOF/TOF(TM) Optics for high-throughput proteomics.
APPLERA CORPORATION Annual Report 2002 11
APPLERA CORPORATION Management's Discussion and Analysis--continued
o Effective April 1, 2002, the Applied Biosystems group and the Celera
Genomics group entered into an agreement pursuant to which the Applied
Biosystems group has become the exclusive distributor of CDS, beginning
July 1, 2002, operated by the Celera Genomics group. The Applied Biosystems
group is integrating CDS and other genomic and biological information into
a Knowledge Business to include genomic assays and related content, as well
as other information-rich products, services, and analytical tools to meet
the needs of its customers.
o In April 2002, the Applied Biosystems group introduced the ABI 3730 and ABI
3730xl DNA Analyzers, which are expected to allow for more cost- effective,
large-scale genome sequencing programs.
o In May 2002, the Applied Biosystems group, with its partner MDS Inc.,
introduced the Q Trap(TM) LC/MS/MS system. This system identifies proteins
and peptides in proteomics research and small molecule drug metabolites
important in therapeutic development. Both the 3730 analyzers and the Q
Trap(TM) are expected to increase customer productivity.
o In July 2002, the Applied Biosystems group announced the launch of its
Assays-on-Demand(TM) products, believed to be the first commercial product
line to emerge from genomic data from both the public and private sector
human genome sequence projects.
Celera Genomics Group
o In November 2001, the Celera Genomics group completed the acquisition of
Axys Pharmaceuticals, Inc. The Axys acquisition was intended to accelerate
the Celera Genomics group's evolution as a drug discovery and development
business.
o In April 2002, Kathy Ordonez was appointed President of the Celera Genomics
group in addition to her role as President of Celera Diagnostics.
o Effective April 1, 2002, the Celera Genomics group and the Applied
Biosystems group entered into an agreement pursuant to which the Applied
Biosystems group has become the exclusive distributor of CDS, beginning
July 1, 2002, from which the Celera Genomics group is entitled to earn
royalties from the sale of certain Knowledge Business products for the
ten-year term of the agreement.
o In fiscal 2002, the Celera Genomics group sold its plant and animal
genotyping businesses.
o In June 2002, the Celera Genomics group announced the restructuring of its
organization to align with its drug discovery and development strategy.
o In July 2002, The Celera Genomics group announced that Robert Booth, Ph.D.
will be joining the Celera Genomics group in August 2002, as Senior Vice
President of Research & Development, responsible for integrating and
leading all of the Celera Genomics group's therapeutic discovery and
development activities and its R&D staff of approximately 300 people.
Celera Diagnostics
o In June 2002, Celera Diagnostics and Abbott Laboratories announced an
alliance to develop, manufacture and market a range of in vitro molecular
diagnostic products for disease detection, disease progression monitoring
and therapy selection. This alliance is expected to double Celera
Diagnostics' R&D resources and provide access to Abbott's distribution
network for diagnostic products.
Critical Accounting Policies
Our financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of these
statements requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses as well as
disclosure of contingent assets and liabilities. Although we evaluate these
estimates, which are based on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, on an
on-going basis, actual results could differ from these estimates under
different assumptions or conditions. We believe that, of the significant
accounting policies discussed in Note 1 to our consolidated financial
statements, the following accounting policies require management's most
difficult, subjective or complex judgments:
o Revenue recognition;
o Asset impairment and valuation allowances;
o Allocation of purchase price to acquired assets and liabilities in business
combinations;
o Restructuring;
o Allocations to the Applied Biosystems group, the Celera Genomics group, and
Celera Diagnostics; and
o Related party transactions.
Revenue Recognition
The Applied Biosystems group records revenue generally at the time of shipment
of products or performance of services. Concurrently, it records provisions
for warranty, returns, and installation based on historical experience and
anticipated product performance. Revenue is not recognized at the time of
shipment of products in situations where risks and rewards of ownership are
transferred to the customer at a point other than shipment due to either the
shipping terms or the existence of an acceptance clause.
The Celera Genomics group recognizes revenue on subscription fees for access
to the Online/Information Business databases ratably over the contracted
period.
The Celera Genomics group recognizes revenue and profit on long-term contracts
in accordance with the percentage-of-completion method. Under this method,
12 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
revenue is recognized based on either the costs incurred compared to total
costs expected to be incurred as work is performed or on the relative costs
for a completed phase compared to the estimate of total expected contract
costs when delivery and/or acceptance provisions are present. Revenue from
short-term contracts is recognized upon completion. The percentage-of-
completion method relies on estimates of total expected contract revenues and
costs. Material changes in estimated costs to complete could have a material
impact on the profitability of such long-term contracts in future periods.
Asset Impairment and Valuation Allowances
Inventory
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market. Reserves for obsolescence and excess inventory are provided based
on historical experience and estimates of future product demand. If actual
demand is less favorable than our estimates, inventory write-downs may be
required.
Investments
Publicly traded minority equity investments are recorded at fair value, with
the difference between cost and fair value recorded to other comprehensive
income within stockholders' equity. When the fair value of these investments
declines below cost, and the decline is viewed as other-than-temporary, the
cost basis is written down to fair value which becomes the new cost basis, and
the write-down is included in current earnings. We determine whether a decline
in fair value is other-than-temporary based on the extent to which cost
exceeds fair value, the duration of the market decline, the intent to hold the
investment, and the financial health of, and specific prospects for, the
investee.
Deferred tax asset
We record a valuation allowance against deferred tax assets if it is more
likely than not that we will not be able to utilize these assets to offset
future taxes. This valuation allowance is based on estimates of future taxable
profits and losses and tax planning strategies. Subsequent revisions to
estimates of future taxable profits and losses and tax planning strategies
could change the amount of the deferred tax asset we would be able to realize
in the future, and therefore could increase or decrease the valuation
allowance.
Long-lived assets, including goodwill
In July 2001, we adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," and as a result no longer
amortize goodwill. Instead, we test goodwill for impairment at the reporting
unit level, at least annually, by determining the fair value of the reporting
unit and comparing it with its book value. A reporting unit is the lowest
level of an entity that is a business and can be distinguished from other
activities, operations, and assets of the entity. If, during the annual
impairment review, the book value of the reporting unit exceeds the fair
value, the implied fair value of the reporting unit's goodwill is compared
with the carrying amount of the unit's goodwill. If the carrying amount
exceeds the implied fair value, goodwill is written down to its implied fair
value. SFAS No. 142 requires management to estimate the fair value of each
reporting unit, as well as the fair value of the assets and liabilities of
each reporting unit, other than goodwill. The implied fair value of goodwill
is determined as the difference between the fair value of a reporting unit,
taken as a whole, and the fair value of the assets and liabilities of such
reporting unit.
We review other long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Events which could trigger an impairment review include, among
others, a decrease in the market value of an asset, the asset's inability to
generate income from operations and positive cash flow in future periods, a
decision to change the manner in which an asset is used, a physical change to
the asset or a change in business climate. We calculate estimated future
undiscounted cash flows, before interest and taxes, of the related operation
and compare it to the carrying value of the asset in determining whether
impairment potentially exists. If a potential impairment exists, a calculation
is performed to determine the fair value of the long-lived asset. This
calculation is based upon a valuation model and discount rate commensurate
with the risks involved. Third party appraised values may also be used in
determining whether impairment potentially exists.
Future adverse changes in market conditions or poor operating results of a
related reporting unit may require us to record an impairment charge in the
future.
Allocation of Purchase Price to Acquired Assets and Liabilities in Business
Combinations
The cost of an acquired business is assigned to the tangible and identifiable
intangible assets acquired and liabilities assumed on the basis of their fair
values at the date of acquisition. We assess fair value using a variety of
methods, including the use of independent appraisers, present value models,
and estimation of current selling prices and replacement values. Amounts
recorded as intangible assets, including acquired in-process research and
development ("IPR&D"), are based upon assumptions and estimates regarding the
amount and timing of projected revenues and costs, appropriate risk-adjusted
discount rates, as well as assessing the competition's ability to
commercialize products before we can. Also, upon acquisition, we determine the
estimated economic lives of the acquired intangible assets for amortization
purposes. Actual results may vary from projected results.
APPLERA CORPORATION Annual Report 2002 13
APPLERA CORPORATION Management's Discussion and Analysis--continued
Restructuring
From time to time, we may undertake actions to improve profitability and cash
flow performance, as appropriate. Upon approval of a restructuring plan by
management, we will expense costs related to the plan that do not benefit
future periods. These costs could include estimates of severance and
termination benefits, facility-related expenses, elimination or reduction of
product lines, asset-related write-offs, and termination of contractual
obligations, among other items. We will periodically review these cost
estimates and adjust the restructuring liability, as appropriate.
During fiscal 2002, the Celera Genomics group recorded a liability based on
management's estimates related to sublease activities for office space
associated with its Paracel business. We will evaluate the commercial real
estate market conditions periodically to determine if estimates of the amount
and timing of future sublease income are reasonable based on current and
expected commercial real estate market conditions and actual sublease
activity. If we determine that the estimates for sublease proceeds have
significantly changed, an adjustment to the liability would be recognized in
the period in which such determination was made.
In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Exit or Disposal Activities." Please refer to
Recently Issued Accounting Standards in this MD&A for further discussion.
Allocations to the Applied Biosystems Group, the Celera Genomics Group, and
Celera Diagnostics
The attribution of the assets, liabilities, revenues and expenses to the
Applied Biosystems group, the Celera Genomics group, or Celera Diagnostics is
primarily based on specific identification of the businesses included in each
business segment. Where specific identification is not practical, other
methods and criteria, which require the use of judgments and estimates, are
used that we believe are equitable and provide a reasonable estimate of the
assets, liabilities, revenues and expenses attributable to each business
segment.
It is not practical to specifically identify the portion of corporate overhead
expenses attributable to each of the businesses. As a result, we allocate
these corporate overhead expenses primarily based upon headcount, total
expenses, or revenues attributable to each business.
During the fourth quarter of fiscal 2001, Celera Diagnostics was established
as a joint venture between the Applied Biosystems group and the Celera
Genomics group. Refer to Note 14 to our consolidated financial statements for
more information regarding Celera Diagnostics. The Applied Biosystems group
contributed its molecular diagnostics business as part of its initial
contribution to the joint venture. The Celera Genomics group and the Applied
Biosystems group account for their investments in Celera Diagnostics under the
equity method of accounting, with the Celera Genomics group recording 100
percent of the initial losses, up to $300 million, in its income statement as
loss from joint venture. The Celera Genomics group and the Applied Biosystems
group will share losses incurred by Celera Diagnostics in excess of
$300 million equally. Celera Diagnostics has accumulated net losses of
$49.7 million through June 30, 2002. Celera Diagnostics' profits, if any, will
be shared in the ratio of 65 percent to the Celera Genomics group and 35
percent to the Applied Biosystems group until the cumulative profits of Celera
Diagnostics equal the initial losses. Once cumulative profits exceed initial
losses up to $300 million, Celera Diagnostics' profits will be shared equally
between the groups.
To determine earnings per share, the earnings allocated to each class of
common stock are determined by our 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 management and allocation policies applicable to the attribution of
assets, liabilities, revenues and expenses to the businesses may be modified
or rescinded, or additional policies may be adopted, at the sole discretion of
our Board of Directors at any time without stockholder approval. Our Board of
Directors would make any decision in accordance with its good faith business
judgment that its decision is in the best interests of our company and all of
its stockholders as a whole.
A decision to modify or rescind the management and allocation policies, or
adopt additional policies, could have different effects on holders of Applera
- Applied Biosystems stock and holders of Applera - Celera stock or could
result in a benefit or detriment to one class of stockholders compared to the
other class.
Related Party Transactions
The Applied Biosystems group is a supplier of instruments and consumables to
the Celera Genomics group and Celera Diagnostics. The Celera Genomics group
makes its genomic information and bioinformatic tools available to the Applied
Biosystems group and Celera Diagnostics.
The Applied Biosystems group, the Celera Genomics group or Celera Diagnostics
may sell or lease products to, or perform services for, one another at fair
value to be used in the purchasing business' commercial activities. The
selling business records revenues on these transactions when the product is
shipped, as the service is performed, or over the term of the lease, as
applicable.
14 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
The Applera businesses also may jointly undertake a project, such as the
Applera Genomics Initiative, where the total costs and benefits of the project
are shared. Shipments of products or performance of services related to such
joint projects are not recorded as revenue by any of the businesses, but
instead are included, at cost, in the total project costs that are shared
based on each business' expected benefit.
Our businesses may perform services for one another, which are not directly
attributable to either businesses' revenue generating activities. In these
cases, the business performing the services charges the benefiting business
the cost of performing the services, including overhead.
Effective April 1, 2002, the Applied Biosystems group entered into an
agreement pursuant to which the Applied Biosystems group has become the
exclusive distributor of CDS, beginning July 1, 2002, operated by the Celera
Genomics group. As a result of this arrangement, the Applied Biosystems group
is integrating CDS and other genomic and biological information into a
Knowledge Business. In exchange for marketing and distribution rights to CDS
and other genomic and biological information and access to CDS and related
content, the Applied Biosystems group will provide the Celera Genomics group
with royalty payments on revenues generated by sales of certain products of
the Knowledge Business from July 1, 2002 through the end of fiscal 2012. The
royalty rate is progressive, up to a maximum of 5%, with the level of sales
through fiscal 2008. The royalty rate becomes a fixed percentage of sales
starting in fiscal 2009, and the rate declines each succeeding fiscal year
through fiscal 2012. Assays-on-Demand(TM), Assays-by-Design(SM), certain
reagents for arrays, and new database subscriptions sold by the Knowledge
Business are the products subject to royalties.
The Celera Genomics group will continue to be responsible for the performance
of its obligations under all contracts relating to its information products
and services either existing on the effective date of the marketing and
distribution agreement or which were entered into during a transition period
ended June 30, 2002 (as well as renewals, if any, of these contracts) and will
receive all revenues and other benefits under, and be responsible for all
costs and expenses associated with, such contracts. Assuming the Celera
Genomics group continues to perform under its existing contracts, the Applied
Biosystems group will reimburse the Celera Genomics group if earnings before
interest, taxes, depreciation, and amortization from these contracts during
the four fiscal years ending with fiscal year 2006 are below $62.5 million and
the shortfall is due to business initiatives of the Applied Biosystems group.
Events Impacting Comparability
Acquisitions and Investments
Paracel
During the fourth quarter of fiscal 2000, we acquired Paracel, Inc. in a
stock-for-stock transaction and accounted for this acquisition under the
purchase method of accounting. Paracel produces advanced genomic and text
analysis technologies. Its products include a hardware accelerator for
sequence comparison, a hardware accelerator for text search, and sequence
analysis software tools. Approximately 1.6 million shares of Applera - Celera
stock were issued in exchange for the outstanding shares of Paracel common
stock not previously owned by us. At the time of the acquisition, we owned 14%
of Paracel. The net assets and results of operations of Paracel have been
allocated to the Celera Genomics group.
Axys Pharmaceuticals and Boston Probes
We acquired Axys Pharmaceuticals, Inc. and Boston Probes, Inc. during the
second quarter of fiscal 2002. The results of operations for these acquired
businesses, which were accounted for under the purchase method of accounting,
have been included in the consolidated financial statements since the date of
acquisition. The net assets and results of operations of Axys have been
allocated to the Celera Genomics group. The net assets and results of
operations of Boston Probes have been allocated to the Applied Biosystems
group.
A discussion of significant acquisitions and investments is provided in Note 2
to our consolidated financial statements.
Acquired Research and Development
During fiscal 2002, we recorded charges to write-off the value of acquired
IPR&D in connection with the Axys and Boston Probes acquisitions. The Applied
Biosystems group recorded a charge of $2.2 million relating to Boston Probes
and the Celera Genomics group recorded a charge of $99.0 million relating to
Axys. As of the acquisition dates, 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 amounts attributed to acquired IPR&D were based on independent appraisals
and were developed using an income approach. The in-process technologies were
valued using a discounted cash flow model on a project-by-project basis.
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 our collaborators before any eventual
products can be marketed, if ever. These efforts include extensive pre-
clinical and clinical testing
APPLERA CORPORATION Annual Report 2002 15
APPLERA CORPORATION Management's Discussion and Analysis--continued
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.
The following table briefly describes the Axys IPR&D projects.
<TABLE>
<CAPTION>
=============================================================================================================================
Development Development Status and Value at
Status at Nature/Timing of Remaining Acquisition
Project Acquisition Efforts at June 30, 2002 Date
=============================================================================================================================
(in millions)
<S> <C> <C> <C>
Partnered Projects:
Cathepsin S:
Collaboration with Aventis Pre-clinical Investigational New Drug ("IND") enabling $ 37.7
Pharmaceuticals Products, Inc. with the studies studies announced in January 2002;
objective of discovery and development Expect to continue pre-clinical studies
of small molecule drugs that inhibit during calendar 2002. Our portion of
Cathepsin S, a human cysteine protease collaboration completed in April 2002.
associated with certain inflammatory and
autoimmune diseases, such as asthma and
atherosclerosis
Cathepsin K:
Collaboration with Merck & Co., Inc. to Pre-clinical Expect to identify additional safety 26.6
develop small molecule inhibitors of studies assessment candidate(s) and carry out
Cathepsin K for the treatment of further pre-clinical efficacy, safety
osteoporosis and toxicology studies during calendar
2002. Our portion of collaboration
expected to be completed in
December 2002.
Tryptase:
Collaboration with Bayer AG to identify Pre-clinical Expect to continue pre-clinical studies 14.9
oral tryptase inhibitors for the studies during calendar 2002. Our portion of
treatment of asthma collaboration completed in January 2002.
-----------------------------------------------------------------------------------------------------------------------------
Total for partnered projects $ 79.2
-----------------------------------------------------------------------------------------------------------------------------
Unpartnered Projects:
Cathepsin F:
Development of compounds for inflammatory Pre-clinical Expect to continue pre-clinical studies $ 8.9
diseases such as asthma and rheumatoid studies through calendar 2002. IND enabling
arthritis studies expected in calendar 2003.
Urokinase:
Oncology program focused on development Pre-clinical Project is no longer being pursued. 4.7
of inhibitors of the protease urokinase studies
to interfere with angiogenesis and
metastasis processes
Serm-beta:
Oncology program utilizing licenses Pre-clinical Expect to complete pre-clinical studies 4.3
granted by Celgene Corp. for exclusive studies during calendar 2002.
rights to selective estrogen receptor-
beta modulators
Factors VIIa & Xa:
Development of oral and parenteral Pre-clinical Expect to complete pre-clinical studies 1.9
therapeutics for blood clotting studies during calendar 2002.
disorders, such as deep vein thrombosis,
stroke, and myocardial infarction or
heart attack
-----------------------------------------------------------------------------------------------------------------------------
Total for unpartnered projects $ 19.8
-----------------------------------------------------------------------------------------------------------------------------
$ 99.0
=============================================================================================================================
</TABLE>
16 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
As of June 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 unpartnered 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 has initiated a review of the
unpartnered pre-clinical projects that 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.
Restructuring and Other Special Charges
During the fourth quarter of fiscal 2002, the Celera Genomics group recorded a
before-tax charge of $2.8 million related to the restructuring of its
organization to focus on drug discovery and development. The charge related to
a workforce reduction.
Additionally, during fiscal 2002, the Celera Genomics group recorded a before-
tax charge of $25.9 million related to the Paracel business. This charge was
comprised of $23.0 million recorded in other special charges primarily for the
impairment of goodwill and other intangible assets and a provision for the
estimated cost of excess lease space. This charge also included $2.9 million
recorded in cost of sales for impairment of Paracel inventory. The charge
resulted from Paracel's unfavorable performance against the lowered
profitability outlook for the business established during the fourth quarter
of fiscal 2001, at the time of the initial charge described below.
During the fourth quarter of fiscal 2001, the Celera Genomics group recorded a
before-tax, non-cash charge of $69.1 million for the impairment of goodwill
and other intangible assets associated with Paracel. This special charge
reduced the carrying value of the net assets of Paracel to their estimated
fair value at that time. Management based the need for this assessment on
Paracel's substantially lower than originally anticipated performance and the
future outlook of this business.
During fiscal 2000, we incurred $2.1 million of before-tax costs associated
with acquisitions for the Applied Biosystems group which were not consummated.
Investments
During the fourth quarter of fiscal 2002, the Applied Biosystems group
recorded $8.2 million and the Celera Genomics group recorded $6.0 million of
before-tax charges for other-than-temporary impairments of minority equity
investments, net of gains from sales.
The Applied Biosystems group recorded before-tax gains of $15.0 million during
fiscal 2001 and $48.6 million during fiscal 2000 related to the sales of
minority equity investments.
Other Events Impacting Comparability
Fiscal 2000 included charges of $45.0 million to selling, general and
administrative expenses for costs related to the acceleration of certain long-
term compensation programs as a result of the attainment of performance
targets. This charge was allocated to the Applied Biosystems group.
During the fourth quarter of fiscal 2000, the Applied Biosystems group
recorded a gain of $8.2 million in other income from the sale of real estate.
APPLERA CORPORATION Annual Report 2002 17
APPLERA CORPORATION Management's Discussion and Analysis--continued
Discussion of Applera Corporation's Consolidated Operations
Results of Operations--2002 Compared With 2001
<TABLE>
<CAPTION>
Net Income (Loss)
(Dollar amounts in millions) 2001 2002
================================================================================
<S> <C> <C>
Net income before special items $ 84.7 $ 92.6
After-tax effect of special items:
Acquired IPR&D charges (101.2)
Paracel-related charges (67.2) (21.0)
Gain (loss) on investments 9.7 (9.2)
Restructuring charge (1.8)
--------------------------------------------------------------------------------
Net income (loss) $ 27.2 $ (40.6)
================================================================================
</TABLE>
Excluding special items, net income increased 9.3% in fiscal 2002 due to
increased net revenues and the non-amortization of goodwill, which were
partially offset by lower interest income and higher R&D expenses. On a group
basis, excluding the special items, the Applied Biosystems group reported net
income of $176.0 million for fiscal 2002 compared with $202.6 million for
fiscal 2001, and the Celera Genomics group reported a net loss of $86.1 million
for fiscal 2002 compared with a net loss of $119.0 million for fiscal 2001.
Our net revenues increased 3.5% in fiscal 2002. Net revenues increased 5.6% in
the United States, 0.9% in Europe, and 5.0% in Asia Pacific, and decreased
16.7% in Latin America and other markets, compared with the prior fiscal year.
The effects of foreign currency reduced net revenues by approximately
$13 million, or 1%, when comparing fiscal 2002 with fiscal 2001. On a segment
basis, net revenues for the Applied Biosystems group were $1,604.0 million for
fiscal 2002 and $1,619.5 million for fiscal 2001. The Celera Genomics group
reported net revenues of $120.9 million for fiscal 2002 compared with
$89.4 million for fiscal 2001. Celera Diagnostics reported net revenues of
$9.2 million for fiscal 2002 compared with $1.6 million for fiscal 2001.
Please read our discussion of segments for further information on their
financial results.
Gross margin as a percentage of net revenues was 53.0% for fiscal 2002
compared with 52.5% for fiscal 2001. Fiscal 2002 gross margin included
$2.9 million of inventory-related write-offs related to the Paracel business.
Excluding the special charge, gross margin increased to 53.2% of revenues. The
higher gross margin percentage for fiscal 2002 was due primarily to increased
subscription revenues for the Celera Genomics group, changes in product mix at
the Applied Biosystems group, and price increases in certain product lines of
the Applied Biosystems group, partially offset by lower margins from increased
revenue generated by contract sequencing at the Celera Genomics group and the
negative effects of foreign currency.
Our SG&A expenses, as a percentage of net revenues, decreased to 25.8% for
fiscal 2002 compared with 26.8% for fiscal 2001 primarily due to revenue
growth as well as the refocus towards drug discovery at the Celera Genomics
group, partially offset by increased expenses at Celera Diagnostics as it
increased its staff to meet business objectives. On a segment basis, SG&A
expenses for the Applied Biosystems group were $379.2 million for fiscal 2002
and $380.6 million for fiscal 2001. SG&A expenses for the Celera Genomics
group were $50.4 million for fiscal 2002 compared with $58.3 million for
fiscal 2001. SG&A expenses for Celera Diagnostics were $8.7 million for fiscal
2002 and $1.1 million for fiscal 2001.
R&D expenses increased $58.5 million to $381.9 million for fiscal 2002 as
compared to fiscal 2001 due primarily to spending on: our Applera Genomics
Initiative, a collaboration for which expenses have been shared equally among
our businesses, for commercializing products from information obtained through
analysis of the human genome; diagnostics programs associated with the Celera
Diagnostics business; the continued development of new products and
technologies by the Applied Biosystems group; therapeutic discovery programs
at the Celera Genomics group; and higher compensation-related expenses. These
increases were partially offset by lower R&D expenses associated with genome
sequencing programs conducted by the Celera Genomics group. On a segment
basis, R&D expenses for the Applied Biosystems group were $219.6 million for
fiscal 2002 and $184.5 million for fiscal 2001. R&D expenses for the Celera
Genomics group were $132.7 million for fiscal 2002 compared with $164.7 million
for fiscal 2001. R&D expenses for Celera Diagnostics were $39.0 million for
fiscal 2002 and $4.5 million for fiscal 2001.
We recorded non-cash amortization expenses of $7.4 million in fiscal 2002
compared to $43.9 million in fiscal 2001 relating to the amortization of
goodwill and other intangible assets. Effective July 1, 2001, we adopted the
provisions of SFAS No. 142, and as a result, we did not amortize goodwill
during fiscal 2002. Refer to Note 1 to our consolidated financial statements
for a further discussion.
Interest income decreased $35.4 million for fiscal 2002, primarily
attributable to lower average interest rates during fiscal 2002 as compared to
fiscal 2001.
Other income (expense), net was an expense of $5.1 million for fiscal 2002,
which consisted primarily of our share of losses from equity method
investments and other non-operating costs, partially offset by a net gain on
the sale of the Celera Genomics group's AgGen plant genotyping business. Other
income (expense), net was an expense of $6.7 million for fiscal 2001, which
was primarily related to costs associated with our foreign currency risk
management program.
Excluding the special items and the amortization of goodwill primarily related
to Paracel, the effective
18 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
income tax rate was 20% for fiscal 2002 compared with 26% for fiscal 2001. The
lower effective income tax rate in fiscal 2002 was primarily due to the
implementation of certain tax planning strategies allowing for the use of
foreign tax credits. In addition to the use of foreign tax credits, the
effective income tax rate for fiscal 2002 was favorably impacted by R&D tax
credits and tax benefits of export operations when comparing the effective
income tax rate to the federal statutory rate of 35%. The fiscal 2001
effective income tax rate also benefited from the same items as in fiscal
2002, as well as relatively higher income in foreign tax jurisdictions with
lower rates than the federal statutory rate. An analysis of the differences
between the federal statutory income tax rate and the effective income tax
rate is provided in Note 3 to our consolidated financial statements.
Results of Operations--2001 Compared With 2000
<TABLE>
<CAPTION>
Net Income
(Dollar amounts in millions) 2000 2001
================================================================================
<S> <C> <C>
Net income before special items $ 95.5 $ 84.7
After-tax effect of special items:
Asset impairment (67.2)
Long-term compensation programs (35.5)
Acquisition-related costs (1.4)
Gain on investments 31.6 9.7
Gain on sale of real estate 5.3
--------------------------------------------------------------------------------
Net income $ 95.5 $ 27.2
================================================================================
</TABLE>
Excluding special items, net income decreased 11.3% in fiscal 2001 due to
increased investment in research and development activities, the amortization
of goodwill and intangibles primarily due to Paracel, and the negative effects
of foreign currency. These increased expenses were partially offset by growth
in net revenues, higher interest income, and lower SG&A expenses as a
percentage of net revenues. On a group basis, excluding the special items from
both fiscal years, the Applied Biosystems group reported net income of
$202.6 million for fiscal 2001 compared with $186.2 million for fiscal 2000,
and the Celera Genomics group reported a net loss of $119.0 million for fiscal
2001 compared with a net loss of $92.7 million for fiscal 2000.
Our net revenues increased 19.9% in fiscal 2001. Geographically, we reported
revenue growth in all regions for fiscal 2001 compared with fiscal 2000. Net
revenues increased 19.0% in the United States, 16.1% in Europe, 24.3% in Asia
Pacific, and 41.9% in Latin America and other markets, compared with the prior
fiscal year. The effects of foreign currency reduced net revenues by
approximately $46 million, or 3%, when comparing fiscal 2001 with fiscal 2000,
due primarily to weakness in the euro, the British pound and the Japanese yen.
On a group basis, net revenues for the Applied Biosystems group were $1.6
billion for fiscal 2001 compared with $1.4 billion for fiscal 2000. The Celera
Genomics group reported net revenues of $89.4 million for fiscal 2001 compared
with $42.7 million for fiscal 2000.
Gross margin as a percentage of net revenues decreased to 52.5% for fiscal
2001 compared with 54.5% for fiscal 2000 due primarily to investment in new
products and the negative effects of foreign currency.
Excluding the long-term compensation charge from fiscal 2000, SG&A expenses
increased 12.3% in fiscal 2001 as compared with fiscal 2000 due to higher
planned worldwide selling and marketing expenses commensurate with growth in
revenues and orders. On a group basis, SG&A expenses for the Applied
Biosystems group were $380.6 million for fiscal 2001 compared with
$393.9 million for fiscal 2000. SG&A expenses for the Celera Genomics group
were $58.3 million for fiscal 2001 and $43.0 million for fiscal 2000.
R&D expenses increased $67.8 million for fiscal 2001 as compared to fiscal
2000 primarily due to investment in new products and technologies such as
novel, high-throughput instruments for gene and protein studies and related
consumable products, as well as increased expenses attributed to the
development of the Celera Genomics group's discovery program and gene
discovery work and the acceleration of its capabilities in proteomics and
functional genomics. Substantially offsetting the fiscal 2001 increases in R&D
expenses was the change in classification of the costs of certain activities,
previously performed for R&D purposes, to cost of sales as such activities
evolved into commercial business for the Celera Genomics group during fiscal
2001. On a group basis, R&D expenses for the Applied Biosystems group were
$184.5 million for fiscal 2001 and $141.2 million for fiscal 2000. R&D
expenses for the Celera Genomics group were $164.7 million for fiscal 2001
compared with $148.6 million for fiscal 2000.
We recorded non-cash amortization expenses of $43.9 million in fiscal 2001
compared to $4.2 million in fiscal 2000 relating to the amortization of
goodwill and other intangibles, primarily due to Paracel, which was acquired
during the fourth quarter of fiscal 2000.
The higher interest expense for fiscal 2000 reflected the financing of the
purchase of the Celera Genomics group's Rockville, Maryland facilities. The
financing, entered into during the first quarter of fiscal 2000, was repaid in
the second quarter of fiscal 2001. Interest income increased $40.9 million
primarily due to higher average cash and cash equivalents and short-term
investments in fiscal 2001. Interest income in fiscal 2000 included interest
on a $150 million note receivable relating to the sale of the Analytical
Instruments business. The note, which was outstanding for most of fiscal 2000,
was collected in the fourth quarter of fiscal 2000.
For fiscal 2001, other income (expense), net was an expense of $6.7 million,
which related primarily to our
APPLERA CORPORATION Annual Report 2002 19
APPLERA CORPORATION Management's Discussion and Analysis--continued
foreign currency management program. For fiscal 2000, other income (expense),
net was income of $3.4 million, which related primarily to a gain on the sale
of real estate, and was partially offset by costs associated with our foreign
currency management program. We adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective July 1, 2000. See
Note 10 to our consolidated financial statements for further discussion of our
policy for financial instruments.
Our effective income tax rate was 63% for fiscal 2001 compared with 30% for
fiscal 2000. Excluding the special items in both fiscal years and the
amortization of goodwill primarily relating to Paracel, the effective tax rate
was 26% for fiscal 2001 compared with 24% for fiscal 2000. An analysis of the
differences between the federal statutory income tax rate and the effective
income tax rate is provided in Note 3 to our consolidated financial
statements.
Discussion of Consolidated Financial Resources and Liquidity
We had cash and cash equivalents and short-term investments of $1.4 billion at
June 30, 2002 and 2001. 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.
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.
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001 2002
================================================================================
<S> <C> <C>
Cash and cash equivalents and short-term investments $ 1,388.0 $ 1,359.9
Total debt 45.2 18.3
Working capital 1,454.4 1,385.3
Debt to total capitalization 2.1% 0.8%
================================================================================
</TABLE>
During fiscal 2002, in connection with the Axys acquisition, we assumed
$26.0 million of 8% senior secured convertible notes, of which $10.0 million
was subsequently repaid. Also during fiscal 2002, we repaid a yen 3.8 billion,
or $29.0 million, loan upon its scheduled maturity. During fiscal 2000, we
obtained financing of $46 million, specifically for the purchase of the Celera
Genomics group's Rockville, Maryland facilities. We repaid this debt during
fiscal 2001.
Cash and cash equivalents in fiscal 2002 decreased as cash generated by
operating activities and proceeds from stock issuances was used to purchase
capital assets, invest in short-term investments, acquire Boston Probes, repay
debt, pay dividends and purchase common stock for treasury.
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001 2002
================================================================================
<S> <C> <C> <C>
Net cash from operating activities $ 108.2 $ 86.4 $ 212.9
Net cash from investing activities (455.0) (408.9) (259.4)
Net cash from financing activities 1,030.7 (20.0) (120.4)
================================================================================
</TABLE>
Net cash from operating activities for fiscal 2002 was $126.5 million higher
than the fiscal 2001 level. This increase was primarily due to strong working
capital management, partially offset by lower income-related cash flows.
Accounts payable and other liabilities increased in fiscal 2002 due to
increases in the accruals for compensation and benefits and taxes other than
income. Accounts payable and other liabilities decreased in fiscal 2001 due to
the timing of income tax payments and higher compensation costs accrued at the
end of fiscal 2000 relating to the acceleration of certain long-term
compensation programs.
Capital expenditures, net of disposals, were $114.1 million in fiscal 2002,
$177.3 million in fiscal 2001, and $123.6 million in fiscal 2000. Fiscal 2002
capital expenditures included the Applied Biosystems group's facilities
expansion in Pleasanton, CA and capital spending related to the expansion of
laboratory facilities for therapeutics research and development purposes for
the Celera Genomics group as well as software purchases for both groups.
Fiscal 2001 capital expenditures were primarily due to the Applied Biosystems
group's purchase of the property in Pleasanton, California, where the
facilities expansion is occurring, for approximately $54 million, capital
expenditures for production equipment related primarily to oligonucleotide
manufacturing, and other capital spending related to the construction of
laboratory facilities for the Applied Biosystems group. Fiscal 2001 capital
expenditures also included payments for building improvements and equipment
related to the development of a laboratory to support the Celera Genomics
group's proteomics and discovery capabilities efforts and costs related to
internally developed software. Capital expenditures in fiscal 2000 included
$8.6 million related to improvement of our information technology
infrastructure and $21.6 million for the acquisition of an airplane. Fiscal
2000 capital expenditures also included payments of $8.1 million for software
licenses and expenditures associated with the continued development of the
laboratories, facilities, and data center at the Celera Genomics group's
Rockville, Maryland facilities.
Cash paid in connection with our acquisitions and investments in equity
interests of other companies was $41.9 million in fiscal 2002, $8.9 million in
fiscal 2001, and $23.0 million in fiscal 2000. We acquired the remaining 87%
of Boston Probes, not previously owned, for approximately $37 million in
fiscal 2002. Net cash
20 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
proceeds from the sale of minority equity investments and real estate were
$5.2 million in fiscal 2002, $15.5 million in fiscal 2001, and $82.8 million
in fiscal 2000.
We purchased short-term investments with funds received in fiscal 2000 from
the follow-on public offering of Applera - Celera stock.
In fiscal 2002, we purchased $69.0 million of Applera - Applied Biosystems
stock and $0.9 million of Applera - Celera stock for treasury. $3.0 million of
Applera - Applied Biosystems stock and $0.9 million of Applera - Celera stock
was subsequently reissued for stock plans.
For information regarding our company's financial obligations and commitments,
see Notes 8 and 9 to our consolidated financial statements.
APPLERA CORPORATION Annual Report 2002 21
APPLERA CORPORATION Management's Discussion and Analysis--continued
Discussion of Segments' Operations, Financial Resources and Liquidity
Applied Biosystems Group
Results of Operations--2002 Compared With 2001
<TABLE>
<CAPTION>
% Increase/
(Dollar amounts in millions) 2001 2002 (Decrease)
===============================================================================================
<S> <C> <C> <C>
Net revenues $ 1,619.5 $ 1,604.0 (1.0%)
Cost of sales 774.5 768.5 (0.8%)
-----------------------------------------------------------------------------------------------
Gross margin 845.0 835.5 (1.1%)
SG&A expenses 380.6 379.2 (0.4%)
R&D 184.5 219.6 19.0%
Acquired research and development 2.2
-----------------------------------------------------------------------------------------------
Operating income 279.9 234.5 (16.2%)
Gain (loss) on investments, net 15.0 (8.6) (157.3%)
Interest expense (1.3) (0.9) (30.8%)
Interest income 16.8 13.1 (22.0%)
Other income (expense), net (5.9) (0.6) (89.8%)
-----------------------------------------------------------------------------------------------
Income before income taxes 304.5 237.5 (22.0%)
Provision for income taxes 92.1 69.0 (25.1%)
-----------------------------------------------------------------------------------------------
Net income $ 212.4 $ 168.5 (20.7%)
===============================================================================================
</TABLE>
As previously described in events impacting comparability, fiscal 2002 and
2001 results were impacted by the following pre-tax items:
o Gains related to the sale of investments of $15.0 million in fiscal 2001;
o $8.2 million charge for other-than-temporary impairment of minority equity
investments in fiscal 2002; and
o $2.2 million charge to write-off acquired IPR&D in fiscal 2002.
The following table presents the operating results for the Applied Biosystems
group excluding these special items from both fiscal years.
<TABLE>
<CAPTION>
% Increase/
(Dollar amounts in millions) 2001 2002 (Decrease)
=====================================================================================================
<S> <C> <C> <C>
Net revenues $ 1,619.5 $ 1,604.0 (1.0%)
Cost of sales 774.5 768.5 (0.8%)
-----------------------------------------------------------------------------------------------------
Gross margin 845.0 835.5 (1.1%)
SG&A expenses 380.6 379.2 (0.4%)
R&D 184.5 219.6 19.0%
-----------------------------------------------------------------------------------------------------
Operating income 279.9 236.7 (15.4%)
Loss on investments, net (0.4)
Interest expense (1.3) (0.9) (30.8%)
Interest income 16.8 13.1 (22.0%)
Other income (expense), net (5.9) (0.6) (89.8%)
-----------------------------------------------------------------------------------------------------
Income before income taxes 289.5 247.9 (14.4%)
Provision for income taxes 86.9 71.9 (17.3%)
-----------------------------------------------------------------------------------------------------
Net income $ 202.6 $ 176.0 (13.1%)
-----------------------------------------------------------------------------------------------------
Percentage of net revenues:
Gross margin 52.2% 52.1%
SG&A expenses 23.5% 23.6%
R&D 11.4% 13.7%
Operating income 17.3% 14.8%
Effective income tax rate 30% 29%
=====================================================================================================
</TABLE>
Net income, on a comparable basis excluding special items, decreased in fiscal
2002 primarily due to lower revenues and higher R&D expenses. The negative
effects of foreign currency reduced net income by approximately $3 million, or
1%, as compared with fiscal 2001.
Net revenues from the Celera Genomics group, primarily from leased instruments
and consumables shipments, were $22.4 million for fiscal 2002, or 1.4% of the
Applied Biosystems group's net revenues, and $64.1 million for fiscal 2001, or
4.0% of net revenues. The negative effects of currency reduced net revenues
during fiscal 2002 by approximately $13 million, or 1%, as compared to fiscal
2001. The following table sets forth the Applied Biosystems group's revenues
geographically for the fiscal years ended June 30:
<TABLE>
<CAPTION>
% Increase/
(Dollar amounts in millions) 2001 2002 (Decrease)
================================================================================
<S> <C> <C>
United States $ 812.4 $ 762.3 (6.2%)
Europe 419.9 439.2 4.6%
Asia Pacific 341.1 355.7 4.3%
Latin America and other markets 46.1 46.8 1.5%
--------------------------------------------------------------------------------
Total $ 1,619.5 $ 1,604.0
================================================================================
</TABLE>
For fiscal 2002, revenues from instrument sales were $762.9 million, a
decrease of 6.2% from $813.3 million in the prior fiscal year. The decrease in
instrument sales was caused primarily by weakened economic and equity market
conditions for biotechnology companies, as well as from significant placements
of the ABI PRISM(R) 3700 DNA Analyzer at large genome centers during fiscal
2001. These factors were partially offset by significant increases in sales of
Sequence Detection Systems ("SDS") instruments for gene expression and single
nucleotide polymorphism ("SNP") analysis and strong increases in revenues from
mass spectrometry systems in fiscal 2002 compared to fiscal 2001. The mass
spectrometry revenue increase was led by the API 4000 triple-quadrupole mass
spectrometer for studies of drug metabolism and pharmacokinetics, which began
shipping in the fourth quarter of fiscal 2001.
Consumables sales increased to $601.4 million in fiscal 2002 from
$592.1 million in fiscal 2001, an increase of 1.6%. Sales of consumables were
strong in TaqMan(R) reagents for gene expression and SNP analysis. DNA
sequencing consumables sales declined largely due to a lower rate of growth in
our installed sequencer base and lower sales of DNA sequencing consumables to
the Celera Genomics group and five large academic genome labs. Reagent
dilution, a shift of much of the Celera Genomics group's sequencing capacity
to the Applera Genomics Initiative, for which the Applied Biosystems group
does not recognize revenue, and a winding down of the sequencing phase of the
Japanese Millennium Project contributed to the decline in consumables.
Revenues from other sources, which included service contracts, royalties,
licenses, and contract research,
22 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
increased 12.0% to $239.7 million in fiscal 2002 from $214.1 million in fiscal
2001.
Additionally, the following table sets forth the Applied Biosystems group's
revenues by product categories for the fiscal years ended June 30:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001 2002 % Change
=================================================================================================
<S> <C> <C> <C>
DNA sequencing products $ 724.6 $ 602.9 (16.8%)
% of total revenues 44.7% 37.6%
SDS and other applied genomics products 262.1 322.6 23.1%
% of total revenues 16.2% 20.1%
Mass spectrometry 222.7 285.2 28.1%
% of total revenues 13.8% 17.8%
Core DNA synthesis and PCR products 253.1 236.9 (6.4%)
% of total revenues 15.6% 14.8%
Other 157.0 156.4 (0.4%)
% of total revenues 9.7% 9.7%
-------------------------------------------------------------------------------------------------
Total $ 1,619.5 $ 1,604.0 (1.0%)
=================================================================================================
</TABLE>
Revenues from DNA sequencing products decreased due to lower sales of the ABI
PRISM(R) 3700 DNA Analyzer during fiscal 2002 as compared to fiscal 2001,
lower sales of DNA sequencing consumables to the Celera Genomics group and
five large academic genome labs, and reagent dilution. Revenues from SDS and
other applied genomics products increased due to sales of the ABI PRISM(R)
7000 systems, which were introduced in fiscal 2002. The increase in mass
spectrometry sales was led by the API 4000 triple-quadrupole mass spectrometer
as previously noted.
Gross margin, as a percentage of net revenues, declined slightly in fiscal
2002 primarily due to lower license fee income in fiscal 2002 as compared to
the prior fiscal year and the negative effects of foreign currency, partially
offset by price increases in certain product lines and changes in product mix.
As a percentage of sales, SG&A expenses were relatively flat in comparison to
fiscal 2001.
R&D expenses in fiscal 2002 increased primarily due to the continued
development of new products and technologies such as novel, high-throughput
instruments for gene and protein studies, including the ABI 3730 and ABI
3730xl DNA Analyzers, SDS systems, the 4700 Proteomics Analyzer with TOF/
TOF(TM) Optics, ICAT(TM) software, Assays-on-Demand(TM) and QTrap(TM)
introduced during fiscal 2002, and related consumable products. Additionally,
R&D expenses included $18.2 million in fiscal 2002 related to the Applied
Biosystems group's participation in the Applera Genomics Initiative, the costs
of which are shared among our three businesses. The Applera Genomics
Initiative, which includes the resequencing of genes and regulatory regions at
the Celera Genomics group, validation of SNP's at the Applied Biosystems
group, and disease gene association studies at Celera Diagnostics, commenced
during the first quarter of fiscal 2002 and is expected to be substantially
completed by the end of the second quarter of fiscal 2003.
Interest income decreased in fiscal 2002 primarily due to lower average
interest rates, partially offset by larger average cash balances during fiscal
2002 compared with fiscal 2001. Other income (expense), net was a higher
expense in fiscal 2001, due primarily to changes in time value of foreign
currency options, used as part of the Applied Biosystems group's foreign
currency risk management program, which were expensed during fiscal 2001.
During the fourth quarter of fiscal 2001, the FASB issued guidance that
allowed deferral of these changes in the option's time value in other
comprehensive income. As a result, the change in time value of options has not
been recorded in other income (expense), net during fiscal 2002. See Note 10
to our consolidated financial statements for a further discussion of cash flow
hedges.
The effective income tax rate decreased during fiscal 2002 due to the
implementation of certain tax planning strategies allowing for the utilization
of foreign tax credits.
Results of Operations--2001 Compared With 2000
<TABLE>
<CAPTION>
% Increase/
(Dollar amounts in millions) 2000 2001 (Decrease)
====================================================================================================
<S> <C> <C> <C>
Net revenues $ 1,388.1 $ 1,619.5 16.7%
Cost of sales 637.7 774.5 21.5%
----------------------------------------------------------------------------------------------------
Gross margin 750.4 845.0 12.6%
SG&A expenses 393.9 380.6 (3.4%)
R&D 141.2 184.5 30.7%
Restructuring and other charges 2.1 (100.0%)
----------------------------------------------------------------------------------------------------
Operating income 213.2 279.9 31.3%
Gain on investments, net 48.6 15.0 (69.1%)
Interest expense (8.1) (1.3) (84.0%)
Interest income 18.6 16.8 (9.7%)
Other income (expense), net 3.4 (5.9) (273.5%)
----------------------------------------------------------------------------------------------------
Income before income taxes 275.7 304.5 10.4%
Provision for income taxes 89.5 92.1 2.9%
----------------------------------------------------------------------------------------------------
Net income $ 186.2 $ 212.4 14.1%
====================================================================================================
</TABLE>
As previously described in events impacting comparability, fiscal 2001 and
2000 results were impacted by the following pre-tax items:
o $2.1 million of costs for acquisitions not consummated during fiscal 2000;
o $48.6 million in fiscal 2000 and $15.0 million in fiscal 2001 of gains
related to the sale of minority equity investments;
o $45.0 million of costs related to the acceleration of long-term
compensation programs in fiscal 2000; and
o $8.2 million of gain related to the sale of real estate in fiscal 2000.
APPLERA CORPORATION Annual Report 2002 23
APPLERA CORPORATION Management's Discussion and Analysis--continued
The following table presents the operating results for the Applied Biosystems
group excluding these special items from both fiscal years.
<TABLE>
<CAPTION>
% Increase/
(Dollar amounts in millions) 2000 2001 (Decrease)
====================================================================================================
<S> <C> <C> <C>
Net revenues $ 1,388.1 $ 1,619.5 16.7%
Cost of sales 637.7 774.5 21.5%
----------------------------------------------------------------------------------------------------
Gross margin 750.4 845.0 12.6%
SG&A expenses 348.9 380.6 9.1%
R&D 141.2 184.5 30.7%
----------------------------------------------------------------------------------------------------
Operating income 260.3 279.9 7.5%
Interest expense (8.1) (1.3) (84.0%)
Interest income 18.6 16.8 (9.7%)
Other income (expense), net (4.8) (5.9) 22.9%
----------------------------------------------------------------------------------------------------
Income before income taxes 266.0 289.5 8.8%
Provision for income taxes 79.8 86.9 8.9%
----------------------------------------------------------------------------------------------------
Net income $ 186.2 $ 202.6 8.8%
====================================================================================================
Percentage of net revenues:
Gross margin 54.1% 52.2%
SG&A expenses 25.1% 23.5%
R&D 10.2% 11.4%
Operating income 18.8% 17.3%
Effective income tax rate 30% 30%
====================================================================================================
</TABLE>
The Applied Biosystems group's 8.8% increase in net income in fiscal 2001,
excluding special items, was primarily attributable to the growth in net
revenues, lower selling, general and administrative expenses as a percentage
of net revenues and lower interest expense, partially offset by higher R&D
expenses. The negative effects of foreign currency reduced net income by
approximately $18 million, or 10%, as compared with fiscal 2000.
The effects of foreign currency reduced net revenues by approximately
$46 million, or 3%, when comparing fiscal 2001 with fiscal 2000 primarily due
to weakness in the euro, the British pound and the Japanese yen. Net revenues
from the Celera Genomics group, primarily from leased instruments and
consumables shipments, were $64.1 million for fiscal 2001, or 4.0% of the
Applied Biosystems group's net revenues, and $59.8 million for fiscal 2000, or
4.3%.
Geographically, the Applied Biosystems group reported revenue growth in all
regions for fiscal 2001 compared with fiscal 2000. Net revenues increased
16.4% in the United States, 11.7% in Europe, 24.3% in Asia Pacific, and 16.4%
in Latin America and other markets, during fiscal 2001 as compared with fiscal
2000. Excluding the effects of foreign currency, revenues grew approximately
21.1% in Europe and 27.5% in Asia Pacific.
For fiscal 2001, revenues from instrument sales were $813.3 million, an
increase of 7.7% from $755.2 million in fiscal 2000. The increase in
instrument sales resulted primarily from the introductions of products for
genetic analysis, sequence detection, and mass spectrometry. The new
instrument introductions included in these product lines that contributed to
the growth were the ABI PRISM(R) 3100 Genetic Analyzer, introduced in the
latter part of fiscal 2000, and the ABI PRISM(R) 7900 HT Sequence Detection
System and the API 4000(TM) LC/MS/MS/ System, both of which were introduced
during fiscal 2001. Instrument sales growth was restrained in the latter half
of fiscal 2001 due to the economic slowdown that resulted in lower demand from
commercial customers. Consumables sales grew to $592.1 million during fiscal
2001 from $473.7 million during fiscal 2000, a 25.0% increase, reflecting
continued demand during fiscal 2001 for sequencing and sequence detection
reagents. Revenues from other sources, which included service contracts,
royalties, licenses, and contract research, increased 34.5% to $214.1 million
from $159.2 million in fiscal 2000.
Gross margin as a percentage of net revenues declined due primarily to
investment in new products during fiscal 2001, including start-up costs
related to product testing and validation for a substantial expansion in
oligonucleotide production capacity. This expansion was designed to meet
expected customer demand for assays for gene expression and SNPs. The negative
effects of foreign currency also contributed to the decline in gross margin as
a percentage of net revenues.
Excluding the long-term compensation charge for fiscal 2000, SG&A expenses
increased in fiscal 2001 due to higher planned worldwide selling and marketing
expenses commensurate with the growth in revenues and orders. As a percentage
of net revenues, SG&A expenses decreased, excluding the long-term compensation
charge, primarily due to the realization of economies of scale.
R&D expenses increased in fiscal 2001 as a result of investment in new
products and technologies such as novel, high-throughput instruments for gene
and protein studies and related consumable products. The increase in R&D
expenses as a percentage of net revenues was primarily due to the investment
in new products, as well as the negative effects of currency on revenues, as
R&D costs are predominantly based in U.S. dollars.
Excluding the negative effect of foreign currency and the special charge from
the prior fiscal year, operating income increased approximately 15% in fiscal
2001. Excluding the effects of foreign currency changes in fiscal 2001 and the
long-term compensation charge in fiscal 2000, operating income as a percentage
of net revenues was 18% for fiscal 2001 compared with 19% in fiscal 2000.
The higher interest expense for fiscal 2000 reflected interest on the
$150 million note payable to the Celera Genomics group. The note was paid in
the fourth quarter of fiscal 2000. The decrease in interest income was
primarily due to the collection of the $150 million note relating to the sale
of the Analytical Instruments business in the fourth quarter of fiscal 2000,
substantially offset by larger average cash balances and higher average
interest rates for fiscal 2001 compared with fiscal 2000.
24 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
In both fiscal years, excluding special items, other income (expense), net
related primarily to costs associated with our foreign currency management
program. The Applied Biosystems group adopted SFAS No. 133 effective July 1,
2000. See Note 10 to our consolidated financial statements for further
discussion of our policy for financial instruments.
Discussion of Financial Resources and Liquidity
The Applied Biosystems group had cash and cash equivalents and short-term
investments of $471.0 million at June 30, 2002 and $392.5 million at June 30,
2001. Our company maintains 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.
The Applied Biosystems group believes that existing funds, cash generated from
operations, and existing sources of debt financing are adequate to satisfy its
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 and allocate it to the Applied Biosystems group.
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 which
uses or generates such resources.
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001 2002
================================================================================
<S> <C> <C>
Cash and cash equivalents and short-term investments $ 392.5 $ 471.0
Total debt 45.2 0.3
Working capital 505.9 549.8
Debt to total capitalization 4% -%
================================================================================
</TABLE>
During the third quarter of fiscal 2002, the Applied Biosystems group repaid
its yen 3.8 billion, or $29.0 million, loan upon its scheduled maturity.
Cash and cash equivalents in fiscal 2002 increased as cash generated from
operating activities and proceeds from stock issuances were only partially
expended for capital assets, investments, including Boston Probes, debt
repayments and dividends.
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001 2002
================================================================================
<S> <C> <C> <C>
Net cash from operating activities $ 166.9 $ 141.7 $ 300.6
Net cash from investing activities 117.6 (134.1) (152.2)
Net cash from financing activities (98.9) 3.7 (128.2)
================================================================================
</TABLE>
Net cash from operating activities for fiscal 2002 was $158.9 million higher
than the fiscal 2001 level. This increase was primarily due to strong working
capital management, partially offset by lower income-related cash flows.
Working capital benefited from strong receivable collection efforts as
evidenced by the Applied Biosystems group's days sales outstanding of 72 days
at June 30, 2002 compared to 79 days at June 30, 2001, calculated on a
consistent basis. Inventory on hand was 3.3 months at June 30, 2002 compared
to 3.2 months at June 30, 2001.
Accounts payable and other liabilities increased in fiscal 2002 due primarily
to increases in the accruals for compensation and benefits. Accounts payable
and other liabilities decreased in fiscal 2001 due to the timing of income tax
payments and higher compensation costs accrued at the end of fiscal 2000
relating to the acceleration of certain long-term compensation programs.
Capital expenditures, net of disposals, were $88.3 million in fiscal 2002,
$143.7 million in fiscal 2001, and $94.4 million in fiscal 2000. Fiscal 2002
capital expenditures included approximately $47 million for the expansion of
facilities, primarily in Pleasanton, CA and the United Kingdom, as well as
purchases of production and laboratory equipment for these facilities. Fiscal
2001 capital expenditures were primarily due to the purchase of property in
Pleasanton, California for approximately $54 million, capital expenditures for
production equipment related primarily to oligonucleotide manufacturing, and
other capital spending related to the construction of laboratory facilities.
Capital expenditures in fiscal 2000 included $8.6 million related to
improvement of our information technology infrastructure and $21.6 million for
the acquisition of an airplane.
Cash paid in connection with acquisitions and investments in equity interest
of other companies was $37.2 million in fiscal 2002, $5.9 million in fiscal
2001, and $20.7 million in fiscal 2000. The Applied Biosystems group acquired
the remaining 87% of Boston Probes, not previously owned, for approximately
$37 million in fiscal 2002.
The Applied Biosystems group collected the $150 million note resulting from
the sale of the Analytical Instruments business during fiscal 2000.
In fiscal 2002, our company purchased $69.0 million of Applera - Applied
Biosystems stock for treasury, of which $3.0 million was subsequently reissued
for stock plans.
During fiscal 2000, the Applied Biosystems group transferred the $150 million
received on the collection of the promissory note associated with the sale of
the Analytical Instruments business to satisfy the note payable to the Celera
Genomics group. In connection with the Celera Genomics group's acquisition of
Paracel during fiscal 2000, the transfer of the Paracel shares allocated to
the Applied Biosystems group resulted in a $27.3 million cash payment from the
Celera Genomics group, which represented the fair market value of those shares
at the transfer date.
APPLERA CORPORATION Annual Report 2002 25
APPLERA CORPORATION Management's Discussion and Analysis--continued
Celera Genomics Group
Results of Operations--2002 Compared With 2001
<TABLE>
<CAPTION>
% Increase/
(Dollar amounts in millions) 2001 2002 (Decrease)
==================================================================================================
<S> <C> <C> <C>
Net revenues $ 89.4 $ 120.9 35.2%
Cost of sales 43.0 51.9 20.7%
R&D 164.7 132.7 (19.4%)
SG&A expenses 58.3 50.4 (13.6%)
Amortization of goodwill and intangible assets 43.9 7.4 (83.1%)
Other special charges 69.1 25.8 (62.7%)
Acquired research and development 99.0
--------------------------------------------------------------------------------------------------
Operating loss (289.6) (246.3) (15.0%)
Loss on investments, net (6.0)
Interest expense (0.8) (0.6) (25.0%)
Interest income 63.5 31.9 (49.8%)
Other income (expense), net (0.8) (4.6) 475.0%
Loss from joint venture (5.0) (44.7)
--------------------------------------------------------------------------------------------------
Loss before income taxes (232.7) (270.3) 16.2%
Benefit for income taxes 46.5 58.5 25.8%
--------------------------------------------------------------------------------------------------
Net loss $ (186.2) $ (211.8) 13.7%
==================================================================================================
</TABLE>
As previously described in events impacting comparability, fiscal 2002 and
2001 results were impacted by the following pre-tax items:
o $69.1 million in fiscal 2001 and $25.9 million, including $2.9 million
recorded in cost of sales, in fiscal 2002 of charges related to the Paracel
business;
o $99.0 million charge to write-off acquired IPR&D in fiscal 2002;
o $2.8 million charge for restructuring the business in fiscal 2002; and
o $6.0 million charge for other-than-temporary impairment of minority equity
investments in fiscal 2002.
The following table presents the operating results for the Celera Genomics
group excluding these special items from both fiscal years.
<TABLE>
<CAPTION>
% Increase/
(Dollar amounts in millions) 2001 2002 (Decrease)
==================================================================================================
<S> <C> <C> <C>
Net revenues $ 89.4 $ 120.9 35.2%
Cost of sales 43.0 49.0 14.0%
R&D 164.7 132.7 (19.4%)
SG&A expenses 58.3 50.4 (13.6%)
Amortization of goodwill and intangible assets 43.9 7.4 (83.1%)
--------------------------------------------------------------------------------------------------
Operating loss (220.5) (118.6) (46.2%)
Interest expense (0.8) (0.6) (25.0%)
Interest income 63.5 31.9 (49.8%)
Other income (expense), net (0.8) (4.6) 475.0%
Loss from joint venture (5.0) (44.7)
--------------------------------------------------------------------------------------------------
Loss before income taxes (163.6) (136.6) (16.5%)
Benefit for income taxes 44.6 50.5 13.2%
--------------------------------------------------------------------------------------------------
Net loss $ (119.0) $ (86.1) (27.6%)
==================================================================================================
Effective income tax rate 27% 37%
==================================================================================================
</TABLE>
Excluding special charges, the Celera Genomics group's net loss decreased in
fiscal 2002 primarily from operating growth in the Online/Information
Business, the completion of R&D related genome sequencing programs, and the
non-amortization of goodwill during fiscal 2002. Partially offsetting these
factors were recognition of losses from the investment in the Celera
Diagnostics joint venture with the Applied Biosystems group and lower interest
income.
Online/Information Business revenues increased to $72.7 million in fiscal 2002
compared with $48.4 million for fiscal 2001 as a result of increased database
subscription agreements from commercial and academic customers. The remaining
revenue increase resulted primarily from increased genomic services and
collaborations. Revenues during fiscal 2002 were impacted by the Celera
Genomics group's decision to forego new contract sequencing and service
business unrelated to drug discovery and utilize its sequencing capacity to
support the Applera Genomics Initiative.
Excluding the special charge, cost of sales increased primarily due to the
increased use of sequencing capacity for commercial activities.
R&D expenses associated with therapeutic discovery programs, including the
Axys programs, proteomics, and discovery informatics increased in fiscal 2002
in comparison to the prior fiscal year. R&D spending also increased as a
result of increased expenses associated with the Applera Genomics Initiative.
These increases were more than offset by lower R&D expenses for whole genome
sequencing and an increased use of sequencing capacity for commercial activity
in fiscal 2002 as compared to the prior fiscal year. R&D expenses also
decreased due to the transfer of personnel to the Applied Biosystems group
effective July 1, 2001. Refer to Note 14 to our consolidated financial
statements for further information.
SG&A expenses decreased in fiscal 2002 primarily due to a realignment of
activities toward drug discovery and development, partially offset by the
acquisition of Axys during the second quarter of fiscal 2002. Corporate
expenses and administrative shared services were $1.6 million lower for fiscal
2002 compared with fiscal 2001.
Non-cash amortization expenses in both fiscal years related to the
amortization of intangible assets primarily from the Axys and Paracel
acquisitions. Fiscal 2001 expense also included the amortization of goodwill
primarily related to the Paracel acquisition. Effective July 1, 2001, the
Celera Genomics group adopted the provisions of SFAS No. 142, and as a result,
no longer amortizes goodwill.
The decrease in interest income in fiscal 2002 was primarily attributable to
lower average interest rates and lower cash and cash equivalents and short-
term investments balances during fiscal 2002.
26 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
Other income (expense), net in fiscal 2002 consisted primarily of the Celera
Genomics group's share of losses from equity method investments and other non-
operating costs, partially offset by a net gain on the sale of the Celera
Genomics group's AgGen plant and animal genotyping business.
Loss from joint venture reflected the loss recognized by the Celera Genomics
group as a result of its interest in Celera Diagnostics, which was established
in the fourth quarter of fiscal 2001.
The increase in the effective income tax benefit rate in fiscal 2002 was
primarily attributable to the amortization of nondeductible goodwill in fiscal
2001.
Results of Operations--2001 Compared With 2000
As previously described in events impacting comparability, fiscal 2001 results
were impacted by the $69.1 million charge for the impairment of goodwill and
other intangible assets related to the Paracel business. The following table
presents the operating results for the Celera Genomics group excluding this
special item from fiscal 2001.
<TABLE>
<CAPTION>
% Increase/
(Dollar amounts in millions) 2000 2001 (Decrease)
================================================================================================
<S> <C> <C> <C>
Net revenues $ 42.7 $ 89.4 109.4%
Cost of sales 15.0 43.0 186.7%
R&D 148.6 164.7 10.8%
SG&A expenses 43.0 58.3 35.6%
Amortization of goodwill and intangible assets 4.2 43.9 945.2%
------------------------------------------------------------------------------------------------
Operating loss (168.1) (220.5) 31.2%
Interest expense (2.1) (0.8) (61.9%)
Interest income 27.5 63.5 130.9%
Other income (expense), net (0.8)
Loss from joint venture (5.0)
------------------------------------------------------------------------------------------------
Loss before income taxes (142.7) (163.6) 14.6%
Benefit for income taxes 50.0 44.6 (10.8%)
------------------------------------------------------------------------------------------------
Net loss $ (92.7) $(119.0) 28.4%
================================================================================================
Effective income tax rate 35% 27%
================================================================================================
</TABLE>
Excluding the special charge in fiscal 2001, the Celera Genomics group's net
loss increased due primarily to amortization of goodwill and intangibles
primarily caused by the Paracel acquisition, increased investment in research
and development activities, and expansion of sales and marketing capabilities.
These increased expenses were partially offset by higher net revenues and
higher interest income.
The increased revenues for the Celera Genomics group in fiscal 2001 resulted
primarily from database subscription agreements with commercial and academic
customers, as well as revenues from genomic services and collaborations. The
acquisition of Paracel during the fourth quarter of fiscal 2000 also
contributed to the increase in net revenues.
As the Celera Genomics group's activities developed into a commercial
business, costs for activities previously performed as R&D in fiscal 2000 were
appropriately classified as cost of sales during fiscal 2001. The increase in
cost of sales during fiscal 2001 is also due to the inclusion of Paracel in
the Celera Genomics group's results for the entire twelve months in fiscal
2001.
Increased R&D expenses in fiscal 2001 were primarily attributed to the
development of the Celera Genomics group's discovery program and gene
discovery work as well as the acceleration of its capabilities in proteomics
and functional genomics. R&D expenses also increased as a result of the
expansion of scientific and annotation research teams and bioinformatics and
software engineering staff. During the latter half of fiscal 2001, the Celera
Genomics group shifted its research spending to expand its technical
capabilities for therapeutic and diagnostic discovery, as the completion of
major strategic whole genome sequences has resulted in a lower level of R&D
investment being necessary to support the Celera Genomics group's on-line
information business. The acquisition of Paracel during the fourth quarter of
fiscal 2000 also contributed to the increase in R&D expenses. Substantially
offsetting the fiscal 2001 increases in R&D expenses was the change in
classification of the costs of certain activities, previously performed for
R&D purposes, to cost of sales as such activities evolved into commercial
business during fiscal 2001.
SG&A expenses increased in fiscal 2001 primarily due to the acquisition of
Paracel during the fourth quarter of fiscal 2000 and the Celera Genomics
group's expansion of its sales and marketing capabilities. Corporate expenses
and administrative shared services were $9.3 million for fiscal 2001 compared
with $7.5 million for fiscal 2000.
The increase in the amortization of goodwill and other intangibles in fiscal
2001 was primarily due to Paracel, which was acquired during the fourth
quarter of fiscal 2000. During the fourth quarter of fiscal 2001, the Celera
Genomics group recorded a before-tax, non-cash charge of $69.1 million for the
impairment of goodwill and other intangible assets associated with Paracel.
Interest expense in both fiscal years reflected the financing of the purchase
of the Rockville, Maryland facilities. The financing, entered into during the
first quarter of fiscal 2000, was repaid in the second quarter of fiscal 2001.
The increase in interest income in fiscal 2001 was attributable to higher
average cash and cash equivalents and short-term investments during fiscal
2001. Interest income in fiscal 2000 also reflected interest on a $150 million
note receivable from the Applied Biosystems group, which was collected in the
fourth quarter of fiscal 2000.
Excluding amortization expense related to goodwill in both fiscal years and
the special charge for the impairment of goodwill and other intangibles
related to
APPLERA CORPORATION Annual Report 2002 27
APPLERA CORPORATION Management's Discussion and Analysis--continued
Paracel in fiscal 2001, the effective income tax rate for both fiscal years
was 36%.
Discussion of Financial Resources and Liquidity
The Celera Genomics group had cash and cash equivalents and short-term
investments of $888.9 million at June 30, 2002 and $995.6 million at June 30,
2001. Our company maintains a $100 million revolving credit agreement with
four banks that expires on April 20, 2005, under which there are no
outstanding borrowings.
The Celera Genomics group believes that existing funds and existing sources of
debt financing are adequate to satisfy its normal operating cash flow needs
and planned capital expenditure requirements 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
which uses or generates such resources.
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001 2002
================================================================================
<S> <C> <C>
Cash and cash equivalents and
short-term investments $995.6 $888.9
Total debt 18.0
Working capital 945.1 840.3
Debt to total capitalization -% 1.6%
================================================================================
</TABLE>
During fiscal 2002, in connection with the Axys acquisition, our company
assumed $26.0 million of 8% senior secured convertible notes, of which
$10.0 million was repaid. During fiscal 2000, our company obtained financing
of $46 million, specifically for the purchase of the Rockville, Maryland
facilities. This debt was repaid during fiscal 2001.
Cash and cash equivalents in fiscal 2002 decreased as the Celera Genomics
group funded operations, purchased capital assets, invested in short-term
investments, repaid debt, and purchased common stock for treasury. Proceeds
from stock issuances were used to partially fund these expenditures.
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001 2002
================================================================================
<S> <C> <C> <C>
Net cash from operating activities $ (58.3) $ (48.6) $ (49.9)
Net cash from investing activities (572.9) (281.5) (145.1)
Net cash from financing activities 1,129.6 (23.8) 7.8
================================================================================
</TABLE>
Net cash used in operating activities for fiscal 2002 was $1.3 million higher
than the fiscal 2001 level. This increase in cash used was primarily due to
the payment of liabilities assumed in the Axys' acquisition, partially offset
by lower net cash operating losses.
Capital expenditures, net of disposals, were $17.8 million in fiscal 2002,
$33.8 million in fiscal 2001, and $29.5 million in fiscal 2000. Fiscal 2002
capital expenditures included payments for the expansion of laboratories for
therapeutics research and development purposes as well as computer software.
Fiscal 2001 capital expenditures included payments for building improvements
and equipment related to the development of a laboratory to support the Celera
Genomics group's proteomics and discovery capabilities efforts and costs
related to internally developed software. Fiscal 2000 capital expenditures
included payments of $8.1 million for software licenses acquired and
expenditures associated with the continued development of the laboratories,
facilities, and data center at the Celera Genomics group's Rockville, Maryland
facilities.
Cash paid in connection with acquisitions and investments was $48.3 million in
fiscal 2002, $9.6 million in fiscal 2001, and $2.3 million in fiscal 2000.
During fiscal 2002, the Celera Genomics group's cash investments were
primarily related to the Celera Diagnostics joint venture. In fiscal 2001, the
Celera Genomics group invested $5.5 million in the Celera Diagnostics joint
venture and acquired an interest in Hubit Genomix for $4.1 million.
In fiscal 2000, short-term investments were purchased with funds received from
the follow-on public offering of Applera - Celera stock.
In fiscal 2002, our company purchased $0.9 million of Applera - Celera stock
for treasury, which was subsequently reissued for stock plans. In fiscal 2000,
the Celera Genomics group received payment of the $150 million note from the
Applied Biosystems group. In connection with the acquisition of Paracel, the
transfer of the Paracel shares allocated to the Applied Biosystems group
resulted in a $27.3 million cash payment to the Applied Biosystems group,
which represented the fair market value of those shares at the transfer date.
28 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
Celera Diagnostics
Results of Operations--2002 Compared With 2001
<TABLE>
<CAPTION>
Three Months Ended Year Ended
June 30, June 30,
(Dollar amounts in millions) 2001 2002
=====================================================================================
<S> <C> <C>
Net revenues $ 1.6 $ 9.2
Cost of sales 1.0 6.2
R&D 4.5 39.0
SG&A 1.1 8.7
-------------------------------------------------------------------------------------
Operating loss $ (5.0) $ (44.7)
=====================================================================================
</TABLE>
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 tests. The financial results of Celera
Diagnostics for fiscal 2001 included three months of operations.
Revenues for fiscal 2002 increased over an annualized fiscal 2001 basis
primarily due to higher sales of cystic fibrosis reagents. End-user product
sales for fiscal 2002 were $11.6 million. In fiscal 2002, the Applied
Biosystems group distributed Celera Diagnostics' products and recorded end-
user sales.
R&D activities for Celera Diagnostics include the development of diagnostics
products, participation in the Applera Genomics Initiative through disease
gene association studies, and lease payments on instruments and purchases of
consumables from the Applied Biosystems group.
SG&A expenses for fiscal 2002 reflected increased staffing to support its
business objectives.
Celera Diagnostics sold $8.7 million during fiscal 2002 and $1.5 million
during fiscal 2001 of diagnostic products to the Applied Biosystems group
under a distribution arrangement. For fiscal 2002, R&D expenses included
$1.7 million of lease payments on instruments and purchases of consumables
from the Applied Biosystems group.
APPLERA CORPORATION Annual Report 2002 29
APPLERA CORPORATION Management's Discussion and Analysis--continued
Market Risks
We are exposed to potential loss from exposure to market risks represented
principally by changes in foreign exchange rates, interest rates, and equity
prices.
We operate internationally, with manufacturing and distribution facilities in
various countries throughout the world. For fiscal 2002, 2001 and 2000, we
derived approximately 50% of our revenues from countries outside of the United
States while a significant portion of the related costs are based in U.S.
dollars. Results continue to be affected by market risk, including changes in
economic conditions in foreign markets and fluctuations in foreign currency
exchange rates, primarily the euro, Japanese yen, and British pound.
Our foreign currency risk management strategy utilizes derivative instruments
to hedge certain foreign currency forecasted revenues and to offset the impact
of changes in foreign currency exchange rates on certain foreign currency-
denominated receivables and payables. The principal objective of this strategy
is to minimize the risks and/or costs associated with our global financial and
operating activities. We utilize foreign exchange forward, option, and range
forward contracts to manage our foreign currency exposures. Foreign exchange
forward contracts commit us to buy or sell a foreign currency at a contracted
rate on a specified future date. Option contracts grant us the right, but not
the obligation, to buy or sell a foreign currency at a certain rate in
exchange for a fee. Option contracts provide us with an effective hedge
against a negative movement in foreign currencies at a fixed cost. Range
forward contracts consist of simultaneous purchase and sale of options to
create a range in which we can benefit from changes in currency rates. We
generally use foreign exchange forward contracts to offset the impact of
changes in foreign currency-denominated receivables and payables. In hedging
certain foreign currency forecasted revenues where we have functional currency
exposure, we use a combination of foreign exchange forward, option and range
forward contracts in a cost beneficial manner. We do not use derivative
financial instruments for trading or speculative purposes, nor are we a party
to leveraged derivatives.
We performed a sensitivity analysis as of June 30, 2002. Assuming a
hypothetical adverse change of 10% in foreign exchange rates in relation to
the U.S. dollar as of June 30, 2002, we calculated a hypothetical after-tax
loss of $34.3 million. Our analysis included the change in value of the
derivative financial instruments, along with the impact of translation on
foreign currency-denominated assets and liabilities. Our analysis excluded the
impact of translation of foreign currency-denominated forecasted sales. If
foreign currency exchange rates actually change in a manner similar to the
assumed change in the foregoing calculation, the hypothetical loss calculated
would be more than offset by the recognition of higher U.S. dollar equivalent
foreign revenues. Actual gains and losses in the future could, however, differ
materially from this analysis, based on changes in the timing and amount of
foreign currency exchange rate movements and actual exposures and hedges.
In connection with the Axys acquisition in fiscal 2002, we assumed
$26.0 million of 8% senior secured convertible notes, of which $10.0 million
was repaid in January 2002. These notes mature on October 1, 2004.
Also in connection with the Axys acquisition, we assumed a warrant to purchase
200,000 additional shares of Discovery Partners International, Inc. ("DPI")
common stock at $8 per share and a Key Personnel Option Plan. The option plan
gives certain employees rights to purchase a fixed and determinable amount of
DPI common stock at a set exercise price. Options for employees to purchase
371,000 shares of DPI are included in this Plan. Both the warrants and the
options meet the definition of a derivative under SFAS No. 133. As such, the
instruments are marked to market and changes in market value are recorded in
earnings. Assuming a hypothetical adverse change of 10% in the price of DPI
shares as of June 30, 2002, we calculated a hypothetical after-tax loss of
$0.1 million.
We do not hedge our equity positions in other companies or our short-term
investments. Our exposure on these instruments is limited to changes in quoted
market prices. The fair value of our minority equity positions in other
companies was $37.7 million at June 30, 2002.
Impact of Inflation and Changing Prices
Inflation and changing prices are continually monitored. We attempt to
minimize the impact of inflation by improving productivity and efficiency
through continual review of both manufacturing capacity and operating expense
levels. When operating costs and manufacturing costs increase, we attempt to
recover such costs by increasing, over time, the selling price of our products
and services. We believe the effects of inflation have been appropriately
managed and therefore have not had a material impact on our historic
consolidated operations and resulting financial position.
Recently Issued Accounting Standards
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." SFAS No. 146 sets forth various modifications to existing
accounting guidance which prescribes the conditions which must be met in order
for costs associated with contract terminations, facility consolidations,
employee relocations and terminations, including those associated with
restructuring activities, to be accrued and recorded as liabilities in
financial statements. SFAS No. 146 will be
30 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
required for exit or disposal activities initiated after December 31, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 provides new guidance on the
recognition of impairment losses on long-lived assets, excluding goodwill, to
be held and used or to be disposed of and also broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. SFAS No. 144 also requires long-
lived assets to be abandoned to be treated as held for use and depreciated
over their remaining expected lives and broadens the presentation of
discontinued operations in the income statement to a component of an entity
rather than a segment of a business. SFAS No. 144 is effective for fiscal 2003
and will not materially change the methods used by our company to measure
impairment losses on long-lived assets, but may result in more dispositions
being reported as discontinued operations than is permitted under current
accounting principles.
Outlook
Applied Biosystems Group
Forecasting remains extremely challenging amid ongoing market uncertainty and
unpredictable spending patterns in the pharmaceutical and biotechnology
sectors. The Applied Biosystems group expects 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, including the 3730 product
line, Assays-on-Demand(TM) products, Assays-by-Design(SM) services, the 3100-
Avant system, and the Q TRAP(TM) system.
Gross margin in fiscal 2003 is expected to approximate fiscal 2002 levels.
Additionally, the Applied Biosystems group expects selling, general and
administrative expenses to rise somewhat more slowly than revenue during
fiscal 2003.
While the Applied Biosystems group anticipates that the Applera Genomics
Initiative will be largely 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 significantly increased levels of
overall R&D spending during the first two quarters of fiscal 2003. For fiscal
2003, the Applied Biosystems group expects R&D expenses to approximate 14
percent of revenue. This 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 29 percent. 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 expects diluted earnings per share ("EPS") for
fiscal 2003 to be in the range of $0.85 to $0.95. Despite our forecasted
revenue growth, the Applied Biosystems group expects diluted EPS during the
first and second quarters of fiscal 2003 to be approximately flat with the
prior year due to the high levels of R&D spending anticipated during those
periods. The Applied Biosystems group anticipates year-over-year EPS growth in
the second half of fiscal 2003.
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
During fiscal 2003, the Celera Genomics group plans for its therapeutic
programs to generate and identify differentially expressed proteins in lung
cancer, and to validate a number of these proteins as therapeutic targets to
proceed into small molecule screening and/or antibody development. The Celera
Genomics group also intends to initiate a second disease-specific proteomics
program. In addition, the Celera Genomics group expects to select compounds
from its existing unpartnered preclinical programs to advance internally, or
through collaborations.
The Celera Genomics group's cash use in fiscal 2003 is expected to decrease 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 one-time cash receipts of approximately $20 million during fiscal
2003.
The Celera Genomics group anticipates R&D expenses for fiscal 2003 to be in
the range of $130 to $140 million. Approximately 65 percent of R&D expenses
are expected to be associated with drug discovery and development activities.
The discovery R&D outlook includes approximately $12 million of expenses for
the Celera Genomics group's share of the Applera Genomics Initiative, the
majority of which are expected to be incurred in the first half of fiscal
2003. This outlook does not include any potential expenses for downstream pre-
clinical or clinical development programs that may be added in the future.
SG&A expenses are expected to be between $30 and $35 million, at least 30
percent below fiscal 2002 levels. Pre-tax losses related to the Celera
APPLERA CORPORATION Annual Report 2002 31
APPLERA CORPORATION Management's Discussion and Analysis--continued
Diagnostics joint venture are expected to be approximately $50 to $60 million.
The Celera Genomics group anticipates total revenues for fiscal 2003 between
$85 and $95 million, based on its decision not to pursue new service business.
Revenues from CDS subscriptions and for Knowledge Business royalties are
expected to be between $75 and $80 million.
Celera Diagnostics
For fiscal 2003, Celera Diagnostics anticipates end-user sales, including
those from its alliance with Abbott Laboratories, in a range of $18 to
$22 million. Effective October 1, 2002, Abbott Laboratories will assume
distribution from the Applied Biosystems group and will record most end-user
sales. End-user sales include sales of all products included in the alliance
to the user of the product, whether recorded by Celera Diagnostics or Abbott
Laboratories. This outlook assumes continued demand growth, both from new
products and from higher sales of existing products, and successful product
migration into the alliance. Celera Diagnostics plans to introduce new analyte
specific reagents for cystic fibrosis and hepatitis and to complete at least
three additional disease association studies. 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 "believe," "expect," "intend," "anticipate," "should," "plan,"
"estimate," and "potential," among others. These forward-looking statements
are based on our 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, our
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 our 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 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'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.
32 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
A substantial portion of the Applied Biosystems group's sales is to customers
at universities or research laboratories whose funding is dependent on both
the level and timing of funding from government sources. As a result, the
timing and amount of revenues from these sources may vary significantly due to
factors that can be difficult to forecast. Although research funding has
increased during the past several years, grants have, in the past, been frozen
for extended periods or otherwise become unavailable to various institutions,
sometimes without advance notice. Budgetary pressures 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, 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.
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. At
present, only the Promega litigation is scheduled for trial. If any of these
matters does 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.
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
APPLERA CORPORATION Annual Report 2002 33
APPLERA CORPORATION Management's Discussion and Analysis--continued
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.
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
$576.8 million as of June 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 our 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.
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
34 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
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 Celera Genomics 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 below $62.5 million (as well as renewals, if any) 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'
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.
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 or services. 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
APPLERA CORPORATION Annual Report 2002 35
APPLERA CORPORATION Management's Discussion and Analysis--continued
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 development of the Celera Genomics group's
new therapeutics 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:
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 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.
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
36 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
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.
The Celera Genomics group's research and product development, including its
proteomics efforts, depends on access to tissue samples and other biological
materials. The Celera Genomics group will need 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 if tighter restrictions are imposed on its use of the information
generated from tissue samples, its business may be harmed.
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 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.
The Celera Genomics group's business depends on the continuous, effective,
reliable, and secure operation of its computer hardware, software, and
Internet applications and
APPLERA CORPORATION Annual Report 2002 37
APPLERA CORPORATION Management's Discussion and Analysis--continued
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 or technology, 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.
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
38 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
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 unclear whether the Celera Genomics group's trade secrets
will provide adequate protection.
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. As
part of the Celera Genomics group's strategy, it expects to pursue
acquisitions, investments and other strategic relationships and alliances.
Acquisitions, investments and other strategic relationships and alliances may
involve significant cash expenditures, debt incurrence, additional operating
losses, and expenses that could have a material effect on the Celera Genomics
group's financial condition and operating results. Acquisitions involve
numerous other risks, including:
o difficulties integrating acquired technologies and personnel into the
business of the Celera Genomics group;
o diversion of management from daily operations;
o inability to obtain required financing on favorable terms;
o entry into new markets in which the Celera Genomics group has little
previous experience;
o potential loss of key employees, 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.
APPLERA CORPORATION Annual Report 2002 39
APPLERA CORPORATION Management's Discussion and Analysis--continued
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 in the amount 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 highly volatile. The market price of Applera -
Celera stock has been and may continue to be highly volatile due to the risks
and uncertainties described in this section of this annual 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 biotechnology
companies, or the Celera Genomics group's failure to meet market
expectations.
The stock market has from time to time experienced extreme price and volume
fluctuations that are unrelated to the operating performance of particular
companies. In the past, companies that have experienced volatility have
sometimes been the 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. The development of Celera Diagnostics' 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
40 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
products, or may not be successfully marketed, for a number of reasons,
including:
o Celera Diagnostics or its collaborators may not successfully complete any
research and development efforts;
o any diagnostic products 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 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 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-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 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.
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,
APPLERA CORPORATION Annual Report 2002 41
APPLERA CORPORATION Management's Discussion and Analysis--continued
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 and
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.
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 marketing capability in the clinical
diagnostic market. Celera Diagnostics currently does not have a marketing
organization. Accordingly, its ability to successfully sell its products will
depend on its ability to either develop a marketing 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.
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
42 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
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.
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
approvals from the FDA 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 or technology, 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
APPLERA CORPORATION Annual Report 2002 43
APPLERA CORPORATION Management's Discussion and Analysis--continued
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.
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 unclear whether Celera
Diagnostics' trade secrets will provide adequate protection.
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 the 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.
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 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.
44 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Management's Discussion and Analysis--continued
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 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 the 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.
APPLERA CORPORATION Annual Report 2002 45
APPLERA CORPORATION Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 2000 2001 2002
===================================================================================================================================
<S> <C> <C> <C>
Net Revenues $ 1,371,035 $ 1,644,126 $ 1,701,218
Cost of sales 624,099 780,712 798,987
-----------------------------------------------------------------------------------------------------------------------------------
Gross Margin 746,936 863,414 902,231
-----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 436,911 440,059 438,369
Research, development and engineering 255,585 323,417 381,902
Amortization of goodwill and intangible assets 4,166 43,934 7,443
Other special charges 2,142 69,069 25,754
Acquired research and development 101,181
-----------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 48,132 (13,065) (52,418)
Gain (loss) on investments, net 48,603 14,985 (14,496)
Interest expense (3,501) (2,125) (1,461)
Interest income 39,428 80,348 44,968
Other income (expense), net 3,446 (6,671) (5,143)
-----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 136,108 73,472 (28,550)
Provision for income taxes 40,612 46,238 12,031
-----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 95,496 $ 27,234 $ (40,581)
===================================================================================================================================
Applied Biosystems Group (see Note 1)
Net Income $ 186,247 $ 212,391 $ 168,481
Basic per share $ 0.90 $ 1.01 $ 0.80
Diluted per share $ 0.86 $ 0.96 $ 0.78
===================================================================================================================================
Celera Genomics Group (see Note 1)
Net Loss $ (92,737) $ (186,229) $ (211,772)
Basic and diluted per share $ (1.73) $ (3.07) $ (3.21)
===================================================================================================================================
</TABLE>
See accompanying notes to Applera Corporation's consolidated financial
statements.
46 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
(Dollar amounts in thousands except share data)
At June 30, 2001 2002
================================================================================
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 608,535 $ 470,218
Short-term investments 779,482 889,685
Accounts receivable (net of allowances for
doubtful accounts of $5,070 and $10,950,
respectively) 400,803 406,244
Inventories, net 149,658 146,804
Prepaid expenses and other current assets 103,006 99,547
--------------------------------------------------------------------------------
Total current assets 2,041,484 2,012,498
Property, plant and equipment, net 435,560 488,744
Other long-term assets 410,814 574,157
--------------------------------------------------------------------------------
Total Assets $ 2,887,858 $ 3,075,399
================================================================================
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 14,678 $ 299
Current portion of long-term debt 30,480
Accounts payable 178,264 168,218
Accrued salaries and wages 64,854 82,165
Accrued taxes on income 83,016 101,209
Other accrued expenses 215,823 275,348
--------------------------------------------------------------------------------
Total current liabilities 587,115 627,239
Long-term debt 17,983
Other long-term liabilities 152,432 205,234
--------------------------------------------------------------------------------
Total Liabilities 739,547 850,456
--------------------------------------------------------------------------------
Commitments and contingencies (see Note 9)
Stockholders' Equity
Capital stock
Preferred stock
Applera Corporation: $.01 par value; 10,000,000
shares authorized at June 30, 2001 and 2002; no
shares issued and outstanding at June 30, 2001
and 2002
Common stock
Applera Corporation - Applied Biosystems stock:
$.01 par value; 211,473,057 shares and
212,829,871 shares issued at June 30, 2001 and
2002, respectively 2,115 2,128
Applera Corporation - Celera Genomics stock:
$.01 par value; 61,693,504 shares and
70,963,471 shares issued at June 30, 2001 and
2002, respectively 617 710
Capital in excess of par value 1,832,000 2,086,929
Retained earnings 369,444 292,690
Accumulated other comprehensive loss (55,865) (91,574)
Treasury stock, at cost (65,940)
--------------------------------------------------------------------------------
Total Stockholders' Equity 2,148,311 2,224,943
--------------------------------------------------------------------------------
Total Liabilities And Stockholders' Equity $ 2,887,858 $ 3,075,399
================================================================================
</TABLE>
See accompanying notes to Applera Corporation's consolidated financial
statements.
APPLERA CORPORATION Annual Report 2002 47
APPLERA CORPORATION Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 2000 2001 2002
===================================================================================================================================
<S> <C> <C> <C>
Operating Activities From Continuing Operations
Net income (loss) $ 95,496 $ 27,234 $ (40,581)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 80,699 129,151 116,794
Asset impairments 69,069 15,563
Provisions for excess lease space and severance costs 13,106
Long-term compensation programs 10,535 6,082 5,240
Deferred income taxes (26,399) 15,981 (47,535)
(Gains) losses from investments and sales of assets (56,801) (14,985) 14,095
Loss from equity method investees 4,789
Acquired research and development 101,181
Changes in operating assets and liabilities:
Accounts receivable (72,538) (49,299) 15,824
Inventories (2,180) 997 1,257
Prepaid expenses and other assets (22,842) (34,446) (28,719)
Accounts payable and other liabilities 102,234 (63,380) 41,843
-----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 108,204 86,404 212,857
-----------------------------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment (net of disposals of $2,201, $8,526, and $1,629
respectively) (123,614) (177,336) (114,107)
Purchases of short-term investments, net (541,127) (238,115) (108,628)
Acquisitions and investments, net (23,023) (8,912) (41,901)
Proceeds from the sale of assets, net 82,763 15,498 5,228
Proceeds from the collection of notes receivable 150,000
-----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (455,001) (408,865) (259,408)
-----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used By Operating Activities From Discontinued Operations (15,081) (2,860) (2,843)
-----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable 52,701 1,553 (23,721)
Principal payments on long-term debt (46,000) (38,973)
Dividends (26,358) (35,669) (36,020)
Purchases of common stock for treasury (69,891)
Net proceeds from follow-on stock offering 943,303
Proceeds from stock issued for stock plans 61,047 60,074 48,215
-----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Financing Activities 1,030,693 (20,042) (120,390)
-----------------------------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash (12,334) (10,604) 31,467
-----------------------------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents 656,481 (355,967) (138,317)
Cash And Cash Equivalents Beginning Of Year 308,021 964,502 608,535
-----------------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 964,502 $ 608,535 $ 470,218
===================================================================================================================================
</TABLE>
See accompanying notes to Applera Corporation's consolidated financial
statements.
48 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Applera -
Applera - Accumulated Applied
Applied Applera - Capital in Other Biosystems
Biosystems Celera Excess of Retained Comprehensive Treasury
(Dollar amounts and shares in thousands) Stock Stock Par Value Earnings Income (Loss) Stock
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance At June 30, 1999 $ 1,027 $ 257 $ 507,341 $ 317,720 $ (4,820) $ -
Comprehensive income
Net income 95,496
Other comprehensive income:
Foreign currency translation
adjustments (25,196)
Minimum pension liability adjustment (60)
Unrealized gain on investments, net of
reclassification adjustments 155,530
-------------
Other comprehensive income 130,274
Comprehensive income
Cash dividends declared on Applera -
Applied Biosystems stock (35,220)
Issuances under stock plans 23 15 61,009
Issuances under Applera - Celera stock
follow-on stock offering 44 943,259
Tax benefit related to employee stock
options 65,708
Stock compensation 13,266
Celera Genomics group purchase business
combination 16 125,077
Two-for-one stock split 1,037 261 (1,298)
----------------------------------------------------------------------------------------------------------------------------
Balance At June 30, 2000 2,087 593 1,714,362 377,996 125,454
Comprehensive loss
Net income 27,234
Other comprehensive loss:
Foreign currency translation
adjustments (34,203)
Unrealized gain on hedge contracts,
net of reclassification adjustments 11,158
Minimum pension liability adjustment (35,151)
Unrealized loss on investments, net of
reclassification adjustments (123,123)
-------------
Other comprehensive loss (181,319)
Comprehensive loss
Cash dividends declared on Applera -
Applied Biosystems stock (35,786)
Issuances under stock plans 28 24 60,021
Tax benefit related to employee stock
options 51,535
Stock compensation 6,082
----------------------------------------------------------------------------------------------------------------------------
Balance At June 30, 2001 2,115 617 1,832,000 369,444 (55,865)
Comprehensive loss
Net loss (40,581)
Other comprehensive loss:
Foreign currency translation
adjustments 48,425
Unrealized loss on hedge contracts,
net of reclassification adjustments (35,661)
Minimum pension liability adjustment (17,005)
Unrealized loss on investments, net of
reclassification adjustments (31,468)
-------------
Other comprehensive loss (35,709)
Comprehensive loss
Cash dividends declared on Applera -
Applied Biosystems stock (35,972)
Purchase of shares for treasury stock (68,950)
Issuances under stock plans 13 38 52,684 (201) 2,987
Tax benefit related to employee stock
options 15,172
Celera Genomics group purchase business
combination 55 181,856
Stock compensation 5,217 23
----------------------------------------------------------------------------------------------------------------------------
Balance At June 30, 2002 $ 2,128 $ 710 $ 2,086,929 $ 292,690 $ (91,574) $(65,940)
============================================================================================================================
<CAPTION>
Applera -
Celera Total
Treasury Stockholders'
(Dollar amounts and shares in thousands) Stock Equity
=======================================================================
<S> <C> <C>
Balance At June 30, 1999 $ - $ 821,525
Comprehensive income
Net income 95,496
Other comprehensive income:
Foreign currency translation
adjustments
Minimum pension liability adjustment
Unrealized gain on investments, net of
reclassification adjustments
Other comprehensive income 130,274
-------------
Comprehensive income 225,770
-------------
Cash dividends declared on Applera -
Applied Biosystems stock (35,220)
Issuances under stock plans 61,047
Issuances under Applera - Celera stock
follow-on stock offering 943,303
Tax benefit related to employee stock
options 65,708
Stock compensation 13,266
Celera Genomics group purchase business
combination 125,093
Two-for-one stock split
-----------------------------------------------------------------------
Balance At June 30, 2000 2,220,492
Comprehensive loss
Net income 27,234
Other comprehensive loss:
Foreign currency translation
adjustments
Unrealized gain on hedge contracts,
net of reclassification adjustments
Minimum pension liability adjustment
Unrealized loss on investments, net of
reclassification adjustments
Other comprehensive loss (181,319)
-------------
Comprehensive loss (154,085)
-------------
Cash dividends declared on Applera -
Applied Biosystems stock (35,786)
Issuances under stock plans 60,073
Tax benefit related to employee stock
options 51,535
Stock compensation 6,082
-----------------------------------------------------------------------
Balance At June 30, 2001 2,148,311
Comprehensive loss
Net loss (40,581)
Other comprehensive loss:
Foreign currency translation
adjustments
Unrealized loss on hedge contracts,
net of reclassification adjustments
Minimum pension liability adjustment
Unrealized loss on investments, net of
reclassification adjustments
Other comprehensive loss (35,709)
-------------
Comprehensive loss (76,290)
-------------
Cash dividends declared on Applera -
Applied Biosystems stock (35,972)
Purchase of shares for treasury stock (941) (69,891)
Issuances under stock plans 941 56,462
Tax benefit related to employee stock
options 15,172
Celera Genomics group purchase business
combination 181,911
Stock compensation 5,240
-----------------------------------------------------------------------
Balance At June 30, 2002 $ - $ 2,224,943
=======================================================================
</TABLE>
See accompanying notes to Applera Corporation's consolidated financial
statements.
APPLERA CORPORATION Annual Report 2002 49
APPLERA CORPORATION Notes to Consolidated Financial Statements
Note 1--Accounting Policies And Practices
Principles of Consolidation
The consolidated financial statements include the accounts of all majority-
owned subsidiaries of Applera Corporation ("Applera" or "the Company"). All
significant intracompany transactions and balances have been eliminated in
consolidation. Certain prior year amounts in the consolidated financial
statements and notes have been reclassified to conform to the current year
presentation.
Use of Estimates
The preparation of the consolidated financial statements and related
disclosures 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.
Recapitalization
The recapitalization of the Company on May 6, 1999 resulted in the issuance of
two new classes of common stock called Applera Corporation - Applied
Biosystems Group Common Stock ("Applera - Applied Biosystems stock") and
Applera Corporation - Celera Genomics Group Common Stock ("Applera - Celera
stock"). Applera - Applied Biosystems stock is intended to reflect the
relative performance of the Applied Biosystems business ("Applied Biosystems
group"), and Applera - Celera stock is intended to reflect the relative
performance of the Celera Genomics business ("Celera Genomics group").
Holders of Applera - Applied Biosystems stock and Applera - Celera stock are
stockholders of the Company. The Applied Biosystems group and the Celera
Genomics group (individually referred to as a "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 the Company and all of its businesses,
assets, and liabilities.
Financial effects arising from one group that affect the Company's
consolidated results of operations or consolidated financial condition could,
if significant, affect the results of operations or financial condition of the
other group and the per share market price of the class of common stock
relating to the other group. Any net losses of the Applied Biosystems group or
the Celera Genomics group and dividends or distributions on, or repurchases
of, Applera - Applied Biosystems stock or Applera - Celera stock or
repurchases of preferred stock of the Company will reduce the assets of the
Company legally available for payment of dividends.
Recently Issued Accounting Standards
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Exit or Disposal Activities." SFAS No. 146 sets forth various modifications to
existing accounting guidance which prescribes the conditions which must be met
in order for costs associated with contract terminations, facility
consolidations, employee relocations and terminations, including those
associated with restructuring activities, to be accrued and recorded as
liabilities in financial statements. SFAS No. 146 will be required for exit or
disposal activities initiated after December 31, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 provides new guidance on the
recognition of impairment losses on long-lived assets, excluding goodwill, to
be held and used or to be disposed of and also broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. SFAS No. 144 also requires long-
lived assets to be abandoned to be treated as held for use and depreciated
over their remaining expected lives and broadens the presentation of
discontinued operations in the income statement to a component of an entity
rather than a segment of a business. SFAS No. 144 is effective for the
Company's fiscal 2003 and will not materially change the methods used by the
Company to measure impairment losses on long-lived assets, but may result in
more dispositions being reported as discontinued operations than is permitted
under current accounting principles.
Earnings per Share
Basic earnings per share for each class of common stock is computed by
dividing the earnings allocated to each class of common stock by the weighted
average number of outstanding shares of that class of common stock. Diluted
earnings per share is computed by dividing the earnings 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 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 to each class of common stock at any
time.
50 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
The following table presents a reconciliation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Applied Biosystems Group Celera Genomics Group
---------------------------------- ------------------------------------
(Amounts in thousands except per share amounts)
For the years ended June 30, 2000 2001 2002 2000 2001 2002
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Weighted average number of common shares used in the
calculation of basic earnings (loss) per share 207,010 210,188 211,626 53,725 60,718 66,047
Common stock equivalents 10,006 10,288 3,816
-----------------------------------------------------------------------------------------------------------------------------------
Shares used in the calculation of diluted earnings
(loss) per share 217,016 220,476 215,442 53,725 60,718 66,047
===================================================================================================================================
Net income (loss) used in the calculation of basic
and diluted earnings (loss) per share $ 186,247 $ 212,391 $ 168,481 $ (92,737) $ (186,229) $ (211,772)
Net income (loss) per share
Basic $ 0.90 $ 1.01 $ 0.80 $ (1.73) $ (3.07) $ (3.21)
Diluted $ 0.86 $ 0.96 $ 0.78 $ (1.73) $ (3.07) $ (3.21)
===================================================================================================================================
</TABLE>
Options to purchase 5.9 million, 9.1 million, and 27.8 million shares of
Applera - Applied Biosystems stock were outstanding at June 30, 2000, 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 12.3 million, 14.7 million, and 13.1 million shares of Applera -
Celera stock were outstanding at June 30, 2000, 2001, and 2002, respectively,
but were not included in the computation of diluted earnings per share because
the effect was antidilutive.
All Applera - Applied Biosystems stock and Applera - Celera stock share and
per share data reflects all stock splits.
Foreign Currency
Assets and liabilities of foreign operations, where the functional currency is
the local currency, are translated into U.S. dollars at the fiscal year-end
exchange rates. The related translation adjustments are recorded as a separate
component of accumulated other comprehensive income (loss) in the consolidated
statements of financial position. Foreign currency revenues and expenses are
translated using exchange rates prevailing during the fiscal year. Foreign
currency transaction gains and losses are included in net income. Transaction
gains and losses occur from fluctuations in exchange rates when assets and
liabilities are denominated in currencies other than the functional currency
of an entity. Net transaction gains (losses) for the fiscal years ended
June 30, 2000, 2001, and 2002 were $(0.1) million, $(1.3) million, and
$0.7 million, respectively. The net transaction gains and losses for fiscal
2001 and 2002 included the gains and losses on the revaluation of non-
functional currency-denominated net assets offset by the losses and gains,
respectively, on non-qualified hedges on these positions. See Note 10 for
further information on the Company's hedging program.
Derivative Financial Instruments
The Company uses derivative financial instruments to offset exposure to market
risks arising from changes in foreign currency exchange rates. Derivative
financial instruments currently utilized by the Company include foreign
exchange forward, option and range forward contracts (see Note 10).
Cash and Cash Equivalents and Short-Term Investments
Cash equivalents consist of highly liquid debt instruments, time deposits, and
certificates of deposit with original maturities of three months or less at
the date of purchase.
Short-term investments, that are classified as available-for-sale, have
maturities of less than one year and are carried at fair value with unrealized
gains and losses included as a separate component of stockholders' equity, net
of any related tax effect. The specific identification method is used to
determine the cost of securities disposed of, with realized gains and losses
recorded to other income, net.
The fair value of short-term investments at June 30, 2001 and 2002 was as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001 2002
================================================================================
<S> <C> <C>
Certificates of deposit and time deposits $ 151.5 $ 107.8
Commercial paper 141.4 66.2
U.S. government and agency obligations 194.8 582.1
Corporate bonds 109.2 79.0
Asset backed securities 113.0 44.0
Foreign debt 69.6 10.6
--------------------------------------------------------------------------------
Total short-term investments $ 779.5 $ 889.7
================================================================================
</TABLE>
At June 30, 2001, gross unrealized gains on short-term investments were
$2.1 million and gross unrealized losses were $1.9 million. At June 30, 2002,
gross unrealized gains on short-term investments were $1.9 million and gross
unrealized losses were
APPLERA CORPORATION Annual Report 2002 51
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
$0.1 million. Gross realized gains and losses were less than $1 million for
the fiscal years ended June 30, 2001 and 2002.
The Company also held trading securities at June 30, 2001 and 2002, which were
recorded at fair value with realized and unrealized gains and losses included
in income. During fiscal 2001 and 2002, $1.4 million and $1.3 million,
respectively, of unrealized net losses were included in income.
Investments
Investments in business entities in which the Company has the ability to
exercise significant influence over operating and financial policies
(generally 20% to 50% ownership) are accounted for using the equity method of
accounting. Under the equity method of accounting, investments are recorded at
cost and adjusted for dividends and undistributed earnings and losses.
Non-marketable equity instruments for which the Company does not have the
ability to exercise significant influence ("minority equity investments") are
accounted for using the cost method of accounting. Minority equity investments
in public companies are generally classified as available-for-sale and carried
at market value in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The specific identification method
is used to determine the cost of securities disposed of. Under the cost method
of accounting, investments in equity securities are carried at cost and are
adjusted only for other-than-temporary declines in fair value, distributions
of earnings and additional investments.
In the fourth quarter of fiscal 2002, the Company recorded a $14.2 million
pretax charge for an other-than-temporary impairment of minority equity
investments.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market. Inventories at June 30, 2001 and 2002 included the following
components:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001 2002
================================================================================
<S> <C> <C>
Raw materials and supplies $ 58.8 $ 71.3
Work-in-process 12.9 11.1
Finished products 78.0 64.4
--------------------------------------------------------------------------------
Total inventories, net $ 149.7 $ 146.8
================================================================================
</TABLE>
During fiscal 2002, the Company recorded a charge of $2.9 million to cost of
sales for the impairment of inventory related to the Celera Genomics group's
Paracel business.
Property, Plant and Equipment, and Depreciation
Property, plant and equipment are recorded at cost and consisted of the
following at June 30, 2001 and 2002:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001 2002
================================================================================
<S> <C> <C>
Land $ 77.1 $ 77.4
Buildings and leasehold improvements 220.5 285.2
Machinery and equipment 279.8 329.7
Computer software and related licenses 95.2 103.9
--------------------------------------------------------------------------------
Property, plant and equipment, at cost 672.6 796.2
Accumulated depreciation and amortization 237.0 307.5
--------------------------------------------------------------------------------
Property, plant and equipment, net $435.6 $488.7
================================================================================
</TABLE>
Major renewals and improvements that significantly add to productive capacity
or extend the life of an asset are capitalized. Repairs, maintenance, and
minor renewals and improvements are expensed as incurred. The cost of assets
and related depreciation is removed from the related accounts on the balance
sheet when such assets are disposed of, and any related gains or losses are
reflected in current earnings.
Provisions for depreciation of owned property, plant and equipment are based
upon the expected useful lives of the assets and computed primarily using the
straight-line method. Leasehold improvements are amortized over their
estimated useful lives or the term of the applicable lease, whichever is less,
using the straight-line method. Useful lives are generally 30 to 40 years for
buildings and three to seven years for machinery and equipment. Capitalized
internal-use software costs are amortized primarily over the expected useful
lives, not to exceed seven years. Depreciation expense for property, plant and
equipment was $61.4 million, $72.2 million, and $88.7 million for the fiscal
years ended June 30, 2000, 2001, and 2002, respectively.
Capitalized Software
Software development costs, for software used in the Company's products, which
are incurred from the time technological feasibility of the software is
established until the software is ready for its intended use, are capitalized
and included in other long-term assets. These costs are amortized using the
straight-line method over a maximum of three years or the expected life of the
product, whichever is less. At June 30, 2001 and 2002, capitalized software
costs, net of accumulated amortization, were $27.9 million and $28.7 million,
respectively. Research and development costs and other computer software
maintenance costs related to software development are expensed as incurred.
52 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Intangible Assets
Intangible assets are amortized using the straight-line method over their
expected useful lives. Intangible assets subject to amortization at June 30,
2002 included the following:
<TABLE>
<CAPTION>
Gross
Carrying Accumulated
(Dollar amounts in millions) Amount Amortization Net
==================================================================================
<S> <C> <C> <C>
Patents $ 33.1 $ 8.6 $ 24.5
Acquired technology 66.2 28.1 38.1
Favorable operating leases 11.6 1.8 9.8
----------------------------------------------------------------------------------
Total $ 110.9 $ 38.5 $ 72.4
==================================================================================
</TABLE>
Aggregate amortization expense for the fiscal year ended June 30, 2002 was
$17.0 million. Estimated aggregate 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 June 30, 2002 is as follows:
<TABLE>
<CAPTION>
Applied Celera
(Dollar amounts Biosystems Genomics Celera Consol-
in millions) Group Group Diagnostics idated
==================================================================================
<S> <C> <C> <C> <C>
2003 $ 9.5 $ 5.9 $ 1.9 $ 17.3
2004 9.1 2.9 1.9 13.9
2005 8.8 2.9 1.9 13.6
2006 8.5 1.1 1.9 11.5
2007 7.6 1.8 9.4
==================================================================================
</TABLE>
Goodwill
Goodwill, representing the excess purchase price over the net asset value of
companies acquired, was amortized using the straight-line method over periods
not exceeding 20 years. Effective July 1, 2001, the Company adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." As a
result, the Company has reclassified certain other intangible assets
associated with its workforce to goodwill and no longer amortizes goodwill.
Instead, goodwill is tested for impairment at the reporting unit level, at
least annually, by determining the fair value of the reporting unit and
comparing it with its book value. A reporting unit is the lowest level of an
entity that is a business and can be distinguished from other activities,
operations, and assets of the entity. If, during the annual impairment review,
the book value of the reporting unit exceeds the fair value, the implied fair
value of the reporting unit's goodwill is compared with the carrying amount of
the unit's goodwill. If the carrying amount exceeds the implied fair value,
goodwill is written down to its implied fair value. SFAS No. 142 requires
management to estimate the fair value of each reporting unit, as well as the
fair value of the assets and liabilities of each reporting unit, other than
goodwill. The implied fair value of goodwill is determined as the difference
between the fair value of a reporting unit, taken as a whole, and the fair
value of the assets and liabilities of such reporting unit.
The changes in the carrying amount of goodwill for the fiscal year ended
June 30, 2002 were as follows:
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Consol-
(Dollar amounts in millions) Group Group idated
==========================================================================================
<S> <C> <C> <C>
Balance as of June 30, 2001 $14.0 $ 10.4 $ 24.4
Goodwill acquired 22.7 2.2 24.9
Impairment losses (12.1) (12.1)
Adjustment due to reclass of workforce to goodwill 2.2 2.2
------------------------------------------------------------------------------------------
Balance as of June 30, 2002 $36.7 $ 2.7 $ 39.4
==========================================================================================
</TABLE>
The following selected pro forma information for fiscal 2000 and 2001 assumes
the provisions of SFAS No. 142 had been applied at the beginning of each of
these fiscal years:
<TABLE>
<CAPTION>
(Dollar amounts in millions
except per share amounts) 2000 2001
================================================================================
<S> <C> <C>
Applera net income $ 100.8 $ 69.2
--------------------------------------------------------------------------------
Applied Biosystems Group
Net income $ 188.1 $ 214.2
Basic per share $ 0.91 $ 1.02
Diluted per share $ 0.87 $ 0.97
--------------------------------------------------------------------------------
Celera Genomics Group
Net loss $ (89.2) $ (146.1)
Basic and diluted per share $ (1.66) $ (2.41)
================================================================================
</TABLE>
Impairment of Long-Lived Assets
Other long-lived assets are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Events which could trigger an impairment review include, among
others, a decrease in the market value of an asset, the asset's inability to
generate income from operations and positive cash flow in future periods, a
decision to change the manner in which an asset is used, a physical change to
the asset or a change in business climate. The Company calculates estimated
future undiscounted cash flows, before interest and taxes, of the related
operation and compares it to the carrying value of the asset in determining
whether impairment potentially exists. If a potential impairment exists, a
calculation is performed to determine the fair value of the long-lived asset.
This calculation is based upon a valuation model and discount rate
commensurate with the risks involved. Third party appraised values may also be
used in determining whether impairment potentially exists.
During fiscal 2001 and 2002, the Company recorded charges of $69.1 million and
$12.7 million, respectively, to other special charges for the impairment of
long-lived assets associated with the Celera Genomics group's Paracel business
(see Note 13).
Revenues
Revenues are generally recorded at the time of shipment of products or
performance of services. Revenue is not
APPLERA CORPORATION Annual Report 2002 53
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
recognized at the time of shipment of products in situations where risks and
rewards of ownership are transferred to the customer at a point other than
shipment due to either the shipping terms or the existence of an acceptance
clause.
Subscription fees for access to the Company's on-line information databases
are recognized ratably over the contracted period.
Revenue and profit on long-term contracts is recognized in accordance with the
percentage-of-completion method. Under this method, revenue is recognized
based on either the costs incurred compared to total costs expected to be
incurred as work is performed or on the relative costs for a completed phase
compared to the estimate of total expected contract costs when delivery and/or
acceptance provisions are present. Revenue on short-term contracts is
recognized upon completion. The percentage-of-completion method relies on
estimates of total expected contract revenues and costs. Material changes in
estimated costs to complete could have a material impact on the profitability
of such long-term contracts in future periods.
Research, Development and Engineering
Research, development and engineering costs are expensed as incurred.
Supplemental Cash Flow Information
Cash paid for interest and income taxes and significant non-cash investing and
financing activities for the following fiscal years were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001 2002
==============================================================================
<S> <C> <C> <C>
Interest $ 3.0 $ 1.8 $ 2.1
Income taxes $ 49.3 $95.2 $ 33.2
Significant non-cash investing
and financing activities:
Tax benefit related to
employee stock options $ 65.7 $51.5 $ 15.2
Dividends declared not paid $ 8.9 $ 9.0 $ 8.9
Equity instruments
issued in business
combinations $125.1 $181.9
Debt and capital
lease obligation
assumed in the
Axys acquisition $ 39.1
Stock issued for
which proceeds
were in-transit $ 8.2
==============================================================================
</TABLE>
Note 2--Acquisitions, Investments, and Dispositions
Paracel, Inc.
During the fourth quarter of fiscal 2000, the Company acquired Paracel, Inc.
in a stock-for-stock transaction. Paracel produces advanced genomic and text
analysis technologies. The net assets and results of operations of Paracel
were included in the Company's consolidated financial statements from the date
of acquisition, and were allocated to the Celera Genomics group. See Note 13
for a discussion of impairment and other special charges related to Paracel
recorded by the Company.
Axys Pharmaceuticals, Inc.
During the second quarter of fiscal 2002, the Company acquired Axys
Pharmaceuticals, Inc. in a stock-for-stock transaction. Axys is an integrated
small molecule drug discovery and development company that was developing
products for chronic therapeutic application through collaborations with
pharmaceutical companies and had a proprietary product portfolio in oncology.
The Company believes that the acquisition will accelerate the Celera Genomics
group's evolution as a drug discovery and development business.
The Company issued 5.5 million shares of Applera - Celera stock in exchange
for all of the outstanding shares of Axys common stock. The acquisition was
accounted for under the purchase method of accounting. The total purchase
price for the acquisition was $188.4 million, which consisted of Applera -
Celera stock valued at $170.3 million, stock options valued at $8.8 million,
warrants valued at $2.8 million and transaction costs of $6.5 million. The
purchase price was calculated using a $31.04 price per share of Applera -
Celera stock, based upon a measurement date of July 17, 2001. This date,
determined in accordance with Emerging Issues Task Force Abstracts Issue 99-
12, "Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in a Purchase Business Combination," represented the first
date on which the exchange ratio was fixed under the merger agreement. The
fair value of the options and warrants was calculated using the Black-Scholes
pricing model.
The purchase price of $188.4 million was allocated to tangible net assets and
intangible assets as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
================================================================================
<S> <C>
Current assets $ 6.8
Long-term assets 118.7
Current liabilities (34.9)
Long-term liabilities (20.7)
--------------------------------------------------------------------------------
Tangible net assets acquired, at approximate fair value 69.9
Acquired in-process research and development 99.0
Existing technology 7.9
Favorable operating leases 11.6
--------------------------------------------------------------------------------
Total intangible assets 118.5
--------------------------------------------------------------------------------
Total purchase price $ 188.4
================================================================================
</TABLE>
54 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
The recorded values of the intangible assets, other than the acquired in-
process research and development ("IPR&D"), are being amortized over their
expected period of benefit, which on a weighted average basis is 2.8 years.
Included in long-term assets is a $61.3 million deferred tax asset, recorded
in purchase accounting, for net operating loss carryforwards and other
temporary differences of Axys expected to be utilized by the Company. Current
liabilities included $4.2 million of contractual severance and involuntary
termination costs, all of which has been paid prior to June 30, 2002.
In connection with the acquisition, the Company assumed $26.0 million of 8%
senior secured convertible notes (see Note 8). These notes are secured by
approximately 6.7 million shares, or approximately 90%, of the Company's
holding of Discovery Partners International, Inc. ("DPI") common stock. The
Company received an approximate 30% interest in DPI, as of the acquisition
date. This investment is accounted for under the equity method of accounting.
Additionally, the Company assumed an existing Axys construction loan of
$8.4 million related to its medicinal chemistry building located in South San
Francisco, California (see Note 8). Subsequent to the acquisition, the Company
repaid the construction loan and $10 million of the convertible notes.
In connection with the acquisition of Axys, the Company allocated
approximately $99.0 million of the purchase price to IPR&D. 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 amounts attributed to acquired IPR&D were based
on an independent appraisal and were developed using an income approach. The
in-process technologies were valued using a discounted cash flow model on a
project-by-project basis. This valuation incorporated a percentage of
completion analysis using revenues allocated to in-process technologies. The
risk-adjusted discount rate used to value the projects at acquisition ranged
from 38% to 43%. The discount rates applied in the discounted cash flow model
were risk adjusted, since the assumed periods of milestone receipts and
assumed timing of product launch may vary significantly from the assumptions.
The valuation assumptions were made solely for the purpose of calculating
projected cash flows and valuing the intangible assets acquired at the date of
acquisition.
APPLERA CORPORATION Annual Report 2002 55
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
The following table briefly describes the IPR&D projects.
<TABLE>
<CAPTION>
Valuation Assumptions at Acquisition Date
------------------------------------------
Development
Status at Project's Stage of Value at
Acquisition Completion at Assumed Period Acquisition
Project Date Acquisition Date of Milestone Receipts Date
==================================================================================================================================
(Dollar amounts
in millions)
<S> <C> <C> <C> <C>
Cathepsin S:
Collaboration with Aventis Pre-clinical studies 90% Years 1 - 7 from $ 37.7
Pharmaceuticals Products, Inc. with the date of acquisition
objective of discovery and development
of small molecule drugs that inhibit
Cathepsin S, a human cysteine protease
associated with certain inflammatory and
autoimmune diseases, such as asthma and
atherosclerosis
Cathepsin K:
Collaboration with Merck & Co., Inc. to Pre-clinical studies 91% Years 2 - 6 from 26.6
develop small molecule inhibitors of date of acquisition
Cathepsin K for the treatment of
osteoporosis
Tryptase:
Collaboration with Bayer AG to identify Pre-clinical studies 89% Years 3 - 8 from 14.9
oral tryptase inhibitors for the date of acquisition
treatment of asthma
Cathepsin F:
Development of compounds for inflammatory Pre-clinical studies 28% Years 2 - 8 from 8.9
diseases such as asthma and rheumatoid date of acquisition
arthritis
Urokinase:
Oncology program focused on development Pre-clinical studies 50% Years 2 - 8 from 4.7
of inhibitors of the protease urokinase date of acquisition
to interfere with angiogenesis and
metastasis processes
Serm-beta:
Oncology program utilizing licenses Pre-clinical studies 71% Years 3 - 7 from 4.3
granted by Celgene Corp. for exclusive date of acquisition
rights to selective estrogen receptor-
beta modulators
Factors VIIa & Xa:
Development of oral and parenteral Pre-clinical studies 54% Years 2 - 10 from 1.9
therapeutics for blood clotting date of acquisition
disorders, such as deep vein thrombosis,
stroke, and myocardial infarction or
heart attack
----------------------------------------------------------------------------------------------------------------------------------
$ 99.0
==================================================================================================================================
</TABLE>
56 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
For valuation purposes, the Company assumed that all projects would be
partnered and the initial material net cash inflows would result from
milestone payments. The Company also assumed there would be cash inflows
resulting from royalties after product launch. Product launches were assumed
to occur in five to nine years after the date of acquisition.
The Celera Genomics group has initiated a review of the unpartnered pre-
clinical programs that 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 above.
The net assets and results of operations of Axys have been included in the
Company's consolidated financial statements since the date of the acquisition,
and have been allocated to the Celera Genomics group. The following selected
unaudited pro forma information for the Company has been prepared assuming the
acquisition had occurred at the beginning of fiscal 2001 and gives effect to
purchase accounting adjustments:
<TABLE>
<CAPTION>
(Dollar amounts in millions
except per share amounts) 2001 2002
================================================================================
<S> <C> <C>
Net revenues $ 1,652.1 $ 1,703.8
Net loss $ (18.5) $ (63.4)
================================================================================
Applied Biosystems Group
Net revenues $ 1,619.5 $ 1,604.0
Net income $ 212.4 $ 168.5
Basic per share $ 1.01 $ 0.80
Diluted per share $ 0.96 $ 0.78
================================================================================
Celera Genomics Group
Net revenues $ 97.3 $ 123.4
Net loss $ (232.0) $ (234.6)
Basic and diluted per share $ (3.50) $ (3.44)
================================================================================
</TABLE>
Upon consummation of the acquisition, the Celera Genomics group recorded a
$99.0 million non-cash charge to write-off the value of acquired IPR&D, which
has been excluded from the pro forma results above. Had the acquired IPR&D
charge been excluded from the reported amounts for fiscal 2002, the Company
would have reported net income of $58.4 million, the Celera Genomics group
would have reported a net loss of $(112.8) million and a net loss per share of
Applera - Celera stock of $(1.71).
Included in the unaudited pro forma results for fiscal 2002 is a non-cash
pretax charge of $10.8 million recorded by Axys, prior to the acquisition
date, for the impairment of an investment accounted for under the cost method
of accounting.
This unaudited pro forma data is for informational purposes only and may not
be indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of fiscal 2001 and fiscal 2002
or of the future operations of the combined companies.
Boston Probes, Inc.
During the second quarter of fiscal 2002, the Company acquired the remaining
shares of Boston Probes, Inc. not previously owned, or approximately 87% of
the outstanding shares, and certain intellectual property rights related to
peptide nucleic acids, for approximately $37 million in cash. As a result of
owning 100% of Boston Probes, the Company recorded goodwill of $22.7 million,
other intangible assets of $21.8 million, and a charge to write-off the value
of acquired IPR&D of $2.2 million. Other intangible assets are being amortized
over their expected period of benefit, which is 7 years. The acquisition was
accounted for under the purchase method of accounting. Boston Probes develops
and commercializes products employing peptide nucleic acid ("PNA") probe
technology and has developed novel chemistry platforms based on its PNA
technology. The Company expects that this technology will be a key component
of the Applied Biosystems group's Sequence Detection Systems, a proprietary
technology platform for real-time analysis of genetic information. The net
assets and results of operations of Boston Probes have been allocated to the
Applied Biosystems group.
Other Dispositions
In fiscal 2000, the Company recognized before-tax gains of $41.0 million from
the sale of a portion of its equity interest in Millennium Pharmaceuticals,
Inc. Net cash proceeds from the sale were $48.0 million in fiscal 2000.
APPLERA CORPORATION Annual Report 2002 57
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Note 3--Income Taxes
Income (loss) before income taxes for fiscal 2000, 2001, and 2002 is
summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001 2002
===============================================================================
<S> <C> <C> <C>
United States $(46.5) $(86.7) $(257.5)
Foreign 182.6 160.2 228.9
-------------------------------------------------------------------------------
Total $136.1 $ 73.5 $ (28.6)
===============================================================================
</TABLE>
The Company's provision for income taxes for fiscal 2000, 2001, and 2002
consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001 2002
===============================================================================
<S> <C> <C> <C>
Currently Payable
Domestic $ 18.4 $ 7.4 $ 36.5
Foreign 48.6 22.8 23.0
-------------------------------------------------------------------------------
Total currently payable 67.0 30.2 59.5
-------------------------------------------------------------------------------
Deferred
Domestic (14.0) 12.1 (53.4)
Foreign (12.4) 3.9 5.9
-------------------------------------------------------------------------------
Total deferred (26.4) 16.0 (47.5)
-------------------------------------------------------------------------------
Total provision for income taxes $ 40.6 $ 46.2 $ 12.0
===============================================================================
</TABLE>
Significant components of deferred tax assets and liabilities at June 30, 2001
and 2002 are summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001 2002
===============================================================================
<S> <C> <C>
Deferred Tax Assets
Inventories $ 4.3 $ 7.3
Postretirement and postemployment benefits 50.7 59.4
Unrealized losses on investments 12.4
Other accruals 12.8 36.5
Tax credit and loss carryforwards 134.0 116.9
Capitalized R&D expense 67.2 175.7
--------------------------------------------------------------------------------
Subtotal 269.0 408.2
Valuation allowance (45.5) (42.7)
--------------------------------------------------------------------------------
Total deferred tax assets 223.5 365.5
--------------------------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 16.0 23.0
Other accruals 1.4 11.6
Intangible assets 1.1 11.4
Unrealized gains on investments 29.6
--------------------------------------------------------------------------------
Total deferred tax liabilities 48.1 46.0
--------------------------------------------------------------------------------
Total deferred tax assets, net $ 175.4 $ 319.5
===============================================================================
</TABLE>
A reconciliation of the federal statutory tax to the Company's, the Applied
Biosystems group's and the Celera Genomics group's tax provisions for fiscal
2000, 2001, and 2002 are set forth in the following table:
<TABLE>
<CAPTION>
Applied Biosystems Group Celera Genomics Group
---------------------------- ----------------------------
(Dollar amounts in millions) 2000 2001 2002 2000 2001 2002
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate 35% 35% 35% 35% 35% 35%
=============================================================================================================
Tax at federal statutory rate $ 96.5 $ 106.6 $ 83.1 $ (49.9) $ (81.4) $ (94.6)
State income taxes (net of
federal benefit) 0.2 0.1 0.4 0.2 0.2 0.5
Effect on income taxes from foreign
operations (6.3) (12.9) 3.0 0.1
Effect on income taxes from export
operations (7.1) (10.3) (10.0)
Reorganization, restructuring and
other costs 6.5 1.4
Nondeductible goodwill and intangibles 0.3 0.4 1.1 0.2 34.9 38.0
R&D tax credit (6.0) (0.5) (1.1) (5.4) (2.9) (5.1)
Valuation allowance 0.1 6.7 (4.1) 2.8
Long-term compensation 8.7
Other (3.4) 2.0 (3.4) 3.6 2.6
-------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 89.5 $ 92.1 $ 69.0 $ (49.9) $ (46.4) $ (58.5)
=============================================================================================================
<CAPTION>
Consolidated
-----------------------------
2000 2001 2002
=============================
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
=============================
Tax at federal statutory rate $ 47.6 $ 25.7 $ (10.0)
State income taxes (net of
federal benefit) 0.4 0.3 0.9
Effect on income taxes from foreign
operations (6.3) (12.9) 3.1
Effect on income taxes from export
operations (7.1) (10.3) (10.0)
Reorganization, restructuring and
other costs 7.9
Nondeductible goodwill and intangibles 0.5 35.3 39.1
R&D tax credit (11.4) (3.4) (6.2)
Valuation allowance 0.1 9.5 (4.1)
Long-term compensation 8.7
Other 0.2 2.0 (0.8)
-----------------------------------------------------------------------------
Total provision for income taxes $ 40.6 $ 46.2 $ 12.0
=============================================================================
</TABLE>
58 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
The valuation allowance decrease in fiscal 2002 was due to the Company's
ability to realize a portion of its federal tax credit and foreign loss
carryforward benefits. The valuation allowance was increased in fiscal 2001
principally as a result of foreign tax credits generated by the Company that
management believed may not be realized before the end of the statutory
carryforward period, due to significant domestic tax loss carryforwards. The
fiscal 2001 increase in the valuation allowance was also due to foreign loss
carryforwards that management believed may not be realized because the Company
will not generate sufficient taxable income in each of the respective foreign
countries to utilize the tax loss carryforwards. While a portion of the
carryforward benefit was realized in fiscal 2002, management believes that the
remaining carryforwards may not be realized before the end of the carryforward
period.
At June 30, 2002, the Company's worldwide valuation allowance of $42.7 million
principally related to foreign tax loss carryforwards and domestic tax credit
carryforwards.
The Company has domestic loss carryforwards as a result of various
acquisitions of approximately $89.3 million that will expire between the
fiscal years 2008 and 2022. The amount of these net operating loss
carryforwards that can be utilized annually to offset future taxable income or
tax liability has been limited under the Internal Revenue Code as a result of
these acquisitions. The Company also has domestic credit carryforwards of
$69.0 million that will expire between fiscal 2004 and 2022, and loss
carryforwards of approximately $37.1 million in various foreign countries with
varying expiration dates.
United States income taxes were not provided on approximately $417.1 million
of net unremitted earnings from foreign subsidiaries since the Company intends
to permanently reinvest substantially all of such earnings outside the U.S.
However, if some portion of these earnings is remitted, the Company expects
the effect of any remittance after considering available tax credits and
amounts previously accrued not to be significant to the consolidated results
of operations. These earnings include income from manufacturing operations in
Singapore, which is tax-exempt through fiscal 2004.
Note 4--Retirement and Other Benefits
Pension Plans, Retiree Healthcare, and Life Insurance Benefits
The Company maintains or sponsors pension plans that cover a portion of
worldwide employees. Pension benefits earned are generally based on years of
service and compensation during active employment. However, the level of
benefits and terms of vesting may vary among plans. Pension plan assets are
administered by trustees and are principally invested in equity and fixed
income securities. The funding of pension plans is determined in accordance
with statutory funding requirements.
The Company's domestic pension plan covers a substantial portion of U.S.
employees. The pension plan is not available to employees hired on or after
July 1, 1999 and the accrual of future service benefits will terminate as of
June 30, 2004.
The postretirement benefit plan provides certain healthcare and life insurance
benefits to domestic employees hired prior to January 1, 1993, who retire and
satisfy certain service and age requirements. Generally, medical coverage pays
a stated percentage of most medical expenses, reduced for any deductible and
for payments made by Medicare or other group coverage. The cost of providing
these benefits is shared with retirees. The plan is unfunded.
The components of net pension and postretirement benefit expenses for fiscal
2000, 2001, and 2002 are set forth in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001 2002
=============================================================================
<S> <C> <C> <C>
Pension
Service cost $ 7.7 $ 8.0 $ 10.0
Interest cost 44.1 48.7 42.4
Expected return on plan assets (45.7) (50.5) (44.2)
Amortization of transition asset (2.4) (0.2) 0.4
Amortization of prior service cost (0.4) (0.5) (0.5)
Amortization of losses 0.2 0.1 0.5
-----------------------------------------------------------------------------
Net periodic expense $ 3.5 $ 5.6 $ 8.6
=============================================================================
Postretirement Benefit
Service cost $ 0.3 $ 0.2 $ 0.2
Interest cost 4.6 4.8 4.8
Amortization of gains (1.8) (1.7) (1.0)
-----------------------------------------------------------------------------
Net periodic expense $ 3.1 $ 3.3 $ 4.0
=============================================================================
</TABLE>
APPLERA CORPORATION Annual Report 2002 59
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
The following tables set forth the changes in the benefit obligations and the
plan assets, the funded status of the plans, and the amounts recorded in the
Company's Consolidated Statements of Financial Position at June 30, 2001 and
2002:
<TABLE>
<CAPTION>
Pension Postretirement
------------------ -------------------
(Dollar amounts in millions) 2001 2002 2001 2002
==============================================================================================
<S> <C> <C> <C> <C>
Change In Benefit Obligation
Benefit obligation, beginning of year $ 607.9 $ 590.2 $ 61.9 $ 66.3
Service cost 8.0 9.9 0.2 0.2
Interest cost 48.7 42.4 4.8 4.8
Participants' contributions 0.2
Benefits paid (37.1) (35.5) (5.6) (6.9)
Actuarial (gain) loss 35.1 (0.6) 5.0 2.3
Variable annuity unit value change (70.5) (30.6)
Addition of plan 6.2
Foreign currency translation (1.1) 1.8
Other (0.8)
----------------------------------------------------------------------------------------------
Benefit obligation $ 590.2 $ 584.0 $ 66.3 $ 66.7
==============================================================================================
Change In Plan Assets
Fair value of plan assets, beginning of year $ 615.0 $ 557.0 $ - $ -
Actual return on plan assets (23.5) (14.9)
Participants' contributions 0.2
Company contributions 0.8 3.0 5.6 6.9
Benefits paid (34.7) (33.9) (5.6) (6.9)
Addition of plan 3.2
Foreign currency translation (0.5) 0.7
Other (0.1)
----------------------------------------------------------------------------------------------
Fair value of plan assets $ 557.0 $ 515.3 $ - $ -
==============================================================================================
Funded Status Reconciliation
Funded status $ (33.2) $ (68.7) $ (66.3) $ (66.7)
Unrecognized prior service gain (1.9) (1.4)
Unrecognized transition asset 0.9 0.6
Unrecognized (gains) losses 66.6 93.6 (14.7) (11.4)
----------------------------------------------------------------------------------------------
Net amount recognized $ 32.4 $ 24.1 $ (81.0) $ (78.1)
==============================================================================================
Amounts Recognized In The Consolidated Statements
Of Financial Position
Prepaid benefit cost $ - $ 0.4 $ - $ -
Accrued benefit liability (25.6) (60.5) (81.0) (78.1)
Intangible asset 0.6 0.6
Minimum pension liability adjustment 57.4 83.6
----------------------------------------------------------------------------------------------
Net amount recognized $ 32.4 $ 24.1 $ (81.0) $ (78.1)
==============================================================================================
</TABLE>
A minimum pension liability adjustment is required when the actuarial present
value of accumulated plan benefits exceeds plan assets and accrued pension
liabilities. The projected benefit obligation and the accumulated benefit
obligation for the pension plans with accumulated benefit obligations in
excess of plan assets were $582.5 million and $575.5 million, respectively, at
June 30, 2001, with corresponding net plan assets having a fair value of
$553.2 million. The projected benefit obligation and the accumulated benefit
obligation for the pension plans with accumulated benefit obligations in
excess of plan assets were $564.6 million and $557.2 million, respectively, at
June 30, 2002, with corresponding net plan assets having a fair value of
$506.6 million.
The following actuarial assumptions were used for the pension and
postretirement plans:
<TABLE>
<CAPTION>
2001 2002
================================================================================
<S> <C> <C>
Domestic Plans
Discount rate 7 1/2% 7 1/4%
Compensation increase 6% 5%
Expected rate of return 7 1/2 - 9 1/4% 7 1/4 - 9%
================================================================================
Foreign Plans
Discount rate 3% 2 1/2 - 5 3/4%
Compensation increase 2% 1 1/2 - 4 1/4%
Expected rate of return 4% 2 - 6 1/2%
================================================================================
</TABLE>
60 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
For measurement purposes, a 10% annual rate of increase in the per capita cost
of covered healthcare benefits was assumed for plan year 2003, gradually
reducing to 5.5% in 2011 and thereafter. A one-percentage-point change in
assumed healthcare cost trend rates would have the following effects on
postretirement benefits:
<TABLE>
<CAPTION>
One-Percentage- One-Percentage-
(Dollar amounts in millions) Point Increase Point Decrease
================================================================================
<S> <C> <C>
Effect on the total of service and
interest cost components $ 0.4 $ (0.4)
Effect on postretirement benefit
obligation $ 5.3 $ (4.6)
================================================================================
</TABLE>
Savings Plans
The Company provides a 401(k) savings plan, for domestic employees, with
automatic Company contributions of 2% of eligible compensation and a dollar-
for-dollar matching contribution of up to 4% of eligible compensation.
Employees not eligible for the employee pension plan receive an extra 2%
Company contribution in addition to the automatic 2% Company contribution
through June 30, 2004, while pension plan participants continue to receive the
automatic 2% contribution. The Company's contributions to this plan were
$12.1 million, $16.3 million, and $19.3 million for fiscal 2000, 2001, and
2002, respectively. The Company recorded expenses for foreign defined
contribution plans of $1.3 million, $1.8 million, and $2.0 million in fiscal
2000, 2001, and 2002, respectively.
Postemployment Benefits
The Company provides certain postemployment benefits to eligible employees.
These benefits generally include severance, disability, and medical-related
costs paid after employment but before retirement.
Note 5--Stockholders' Equity
Applera - Applied Biosystems stock was split two-for-one in July 1999 and
February 2000. Applera - Celera stock was split two-for-one in February 2000.
All such splits were in the form of stock dividends. Except for treasury stock
data, all Applied Biosystems group and Celera Genomics group share data
reflect these splits.
Capital Stock
The Company has two classes of common stock:
Applera - Applied Biosystems stock and Applera - Celera stock. Applera -
Applied Biosystems stock is intended to reflect the relative performance of
the Applied Biosystems group, and Applera - Celera stock is intended to
reflect the relative performance of the Celera Genomics group. Holders of
Applera - Applied Biosystems stock and Applera - Celera stock are stockholders
of the Company. The groups 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 the Company and all of its businesses, assets, and liabilities.
At June 30, 2001 and 2002, the Company's authorized capital stock consisted of
one billion shares of a class of common stock designated as Applera
Corporation - Applied Biosystems Group Common Stock, 225 million shares of a
class of common stock designated as Applera Corporation - Celera Genomics
Group Common Stock, and 10 million shares of preferred stock. Of the 10 million
authorized shares of preferred stock, the Company had designated 80,000 shares
of two series of participating junior preferred stock in connection with the
Company's Stockholder Protection Rights Agreement as described below.
Treasury Stock
Common stock repurchases have been made in support of the Company's various
stock plans.
The following table provides transactions relating to the Company's common
stocks:
<TABLE>
<CAPTION>
Applera - Applied Applera - Celera
Biosystems Stock Stock
----------------------- ---------------------
Treasury Treasury
Issued stock Issued stock
shares shares shares shares
========================================================================================================
<S> <C> <C> <C> <C>
Beginning balance at June 30, 2001 211,473,057 61,693,504
Issuances of shares for business combination 5,494,715
Purchases of shares for treasury stock 3,868,000 47,700
Issuances of shares under stock plans 1,321,002 (173,556) 3,767,515 (47,700)
Issuances of shares for warrant exercises 35,812 7,737
--------------------------------------------------------------------------------------------------------
Ending balance at June 30, 2002 212,829,871 3,694,444 70,963,471
========================================================================================================
</TABLE>
Stock Purchase Warrants
As a result of the Company's acquisition of PerSeptive Biosystems, Inc. in
1998, the Company had approximately 230,000 warrants outstanding at June 30,
2002 at an exercise price of $12.66. Upon exercise of all of the warrants, the
holders would receive approximately 177,000 shares of Applera - Applied
Biosystems stock and approximately 44,000 shares of Applera - Celera stock.
The warrants expire in September 2003.
In connection with the acquisition of Axys, each outstanding warrant for
shares of Axys common stock was converted into warrants issued by the Company
for the number of shares of Applera - Celera stock that would have been
received by the holder if such warrants had been exercised immediately prior
to the effective date of the merger. At June 30, 2002, there were
APPLERA CORPORATION Annual Report 2002 61
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
approximately 262,000 warrants outstanding at exercise prices ranging from
$29.96 to $93.63, with a weighted average exercise price of $72.27 per share.
These warrants expire at various dates during fiscal 2005.
Stockholder Protection Rights Agreement
In connection with the recapitalization of the Company, a Stockholder
Protection Rights Agreement (the "Rights Agreement") was adopted to protect
stockholders against abusive takeover tactics. Under the Rights Agreement, the
Company will issue one right for every four shares of Applera - Applied
Biosystems stock (an "Applera - Applied Biosystems Right"), which will allow
holders to purchase one-thousandth of a share of Series A participating junior
preferred stock of the Company at a purchase price of $425, subject to
adjustment (the "Series A Purchase Price"), and one right for every two shares
of Applera - Celera stock (an "Applera - Celera Right"), which will allow
holders to purchase one-thousandth of a share of Series B participating junior
preferred stock of the Company at a purchase price of $125, subject to
adjustment (the "Series B Purchase Price").
An Applera - Applied Biosystems Right or an Applera - Celera Right will be
exercisable only if a person or group ("Acquiring Person"): (a) acquires 15%
or more of the shares of Applera - Applied Biosystems stock then outstanding
or 15% or more of the shares of Applera - Celera stock then outstanding or (b)
commences a tender offer that would result in such person or group owning such
number of shares.
If any person or group becomes an Acquiring Person, each Applera - Applied
Biosystems Right and each Applera - Celera Right will entitle its holder to
purchase, for the Series A Purchase Price or the Series B Purchase Price, as
applicable, a number of shares of the related class of common stock of the
Company having a market value equal to twice such purchase price.
If following the time a person or group becomes an Acquiring Person, the
Company is acquired in a merger or other business combination transaction and
the Company is not the surviving corporation; any person consolidates or
merges with the Company and all or part of the common stock is converted or
exchanged for securities, cash, or property of any other person; or 50% or
more of the Company's assets or earnings power is sold or transferred, each
Applera - Applied Biosystems Right and each Applera - Celera Right will
entitle its holder to purchase, for the Series A Purchase Price or Series B
Purchase Price, as applicable, a number of shares of common stock of the
surviving entity in any such merger, consolidation, or business combination or
the purchaser in any such sale or transfer having a market value equal to
twice the Series A Purchase Price or Series B Purchase Price.
The rights are redeemable at the Company's option at one cent per right prior
to a person or group becoming an Acquiring Person.
Note 6--Stock Plans
Stock Option Plans
Under the Company's stock option plans, officers, directors, and other
employees may be granted options, each of which allows for the purchase of
shares of existing classes of common stock at a price of not less than 100% of
fair market value at the date of grant. Most options vest 25% annually,
resulting in 100% vesting after four years, and generally expire ten years
from the date of grant. At June 30, 2002, 37.6 million shares of Applera -
Applied Biosystems stock and 17.4 million shares of Applera - Celera stock
were authorized for grant of options.
Transactions relating to the stock option plans of the Company follow:
<TABLE>
<CAPTION>
Applera -- Applied
Biosystems Stock
---------------------------
Weighted
Number of Average
Options Exercise Price
================================================================================
<S> <C> <C>
Fiscal 2000
Outstanding at June 30, 1999 18,423,246 $ 17.99
Granted 9,000,611 $ 86.06
Exercised 3,146,903 $ 12.37
Cancelled 661,236 $ 26.68
--------------------------------------------------------------------------------
Outstanding at June 30, 2000 23,615,718 $ 44.04
Exercisable at June 30, 2000 9,879,917 $ 15.53
================================================================================
Fiscal 2001
Granted 7,815,288 $ 32.69
Exercised 2,410,166 $ 14.10
Cancelled 1,099,092 $ 62.41
--------------------------------------------------------------------------------
Outstanding at June 30, 2001 27,921,748 $ 42.61
Exercisable at June 30, 2001 10,689,250 $ 30.12
================================================================================
Fiscal 2002
Granted 9,170,325 $ 21.72
Exercised 1,133,789 $ 11.44
Cancelled 1,917,820 $ 53.65
--------------------------------------------------------------------------------
Outstanding at June 30, 2002 34,040,464 $ 37.40
Exercisable at June 30, 2002 14,142,628 $ 36.41
================================================================================
</TABLE>
62 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
<TABLE>
<CAPTION>
Applera -- Celera Stock
---------------------------
Weighted
Number of Average
Options Exercise Price
================================================================================
<S> <C> <C>
Outstanding at June 30, 1999 11,133,328 $ 7.81
Granted 2,838,848 $ 77.55
Exercised 1,392,069 $ 6.44
Cancelled 311,266 $ 11.04
--------------------------------------------------------------------------------
Outstanding at June 30, 2000 12,268,841 $ 20.49
Exercisable at June 30, 2000 3,945,450 $ 7.47
================================================================================
Fiscal 2001
Granted 2,445,678 $ 45.23
Exercised 1,298,815 $ 7.70
Cancelled 303,468 $ 60.43
--------------------------------------------------------------------------------
Outstanding at June 30, 2001 13,112,236 $ 25.69
Exercisable at June 30, 2001 5,169,766 $ 14.81
================================================================================
Fiscal 2002
Granted 3,479,808 $ 19.74
Exercised 3,320,895 $ 8.62
Cancelled 1,975,306 $ 48.86
--------------------------------------------------------------------------------
Outstanding at June 30, 2002 11,295,843 $ 25.40
Exercisable at June 30, 2002 5,451,116 $ 21.55
================================================================================
</TABLE>
In connection with the acquisitions of Paracel in fiscal 2000 and Axys in
fiscal 2002, the Company assumed Paracel's and Axys' stock option plans.
Options granted to Paracel employees and directors prior to the acquisition of
Paracel and assumed by the Company on the acquisition date have been included
in the Applera - Celera stock options granted amount for fiscal 2000. Options
granted to Axys employees and directors prior to the acquisition of Axys and
assumed by the Company on the acquisition date have been included in the
Applera - Celera stock options granted amount for fiscal 2002.
The following tables summarize information regarding options outstanding and
exercisable at June 30, 2002:
<TABLE>
<CAPTION>
Weighted Average
----------------------
Contractual
Life
Number of Exercise Remaining
(Option prices per share) Options Price in Years
========================================================================================
<S> <C> <C> <C>
Applera -- Applied Biosystems Stock
Options Outstanding
At $ 1.82 - $ 20.00 6,471,918 $ 14.49 4.7
At $20.01 - $ 25.00 8,177,663 $ 21.10 9.5
At $25.01 - $ 30.00 10,798,264 $ 26.45 7.6
At $30.01 - $110.00 8,592,619 $ 83.91 7.4
========================================================================================
Options Exercisable
At $ 1.82 - $ 20.00 5,978,218 $ 14.74
At $20.01 - $ 25.00 42,788 $ 21.14
At $25.01 - $ 30.00 4,686,827 $ 26.79
At $30.01 - $110.00 3,434,795 $ 87.45
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Weighted Average
----------------------
Contractual
Life
Number of Exercise Remaining
(Option prices per share) Options Price in Years
========================================================================================
<S> <C> <C> <C>
Applera -- Celera Stock
Options Outstanding
At $ 0.74 - $ 10.00 4,303,307 $ 7.48 5.5
At $10.01 - $ 20.00 2,953,776 $ 16.67 8.1
At $20.01 - $ 50.00 2,829,536 $ 29.91 6.9
At $50.01 - $135.00 1,209,224 $ 99.92 7.3
========================================================================================
Options Exercisable
At $ 0.74 - $ 10.00 3,345,569 $ 7.52
At $10.01 - $ 20.00 635,106 $ 12.26
At $20.01 - $ 50.00 938,729 $ 30.45
At $50.01 - $135.00 531,712 $105.25
========================================================================================
</TABLE>
1999 Stock Incentive Plans
The Applera Corporation/Applied Biosystems Group 1999 Stock Incentive Plan
(the "Applera - Applied Biosystems Group Plan") and the Applera Corporation/
Celera Genomics Group 1999 Stock Incentive Plan (the "Applera - Celera Group
Plan") were first approved in April 1999. The Applera - Applied Biosystems
Group Plan authorizes grants of stock options, stock awards, and performance
shares with respect to Applera - Applied Biosystems stock. The Applera -
Celera Group Plan authorizes grants of stock options, stock awards, and
performance shares with respect to Applera - Celera stock. Directors, certain
officers, and key employees with responsibilities involving both the Applied
Biosystems group and the Celera Genomics group may be granted awards under
both incentive plans in a manner which reflects their responsibilities. The
Company's Board of Directors believes that granting awards tied to the
performance of the group in which the participants work and, in certain cases
the other group, is in the best interests of the Company and its stockholders.
Employee Stock Purchase Plans
The Company's employee stock purchase plans offer U.S. and certain non-U.S.
employees the right to purchase shares of Applera - Applied Biosystems stock
and/or Applera - Celera stock. The purchase price in the U.S. is equal to the
lower of 85% of the average market price of the applicable class of common
stock on the offering date or 85% of the average market price of such class of
common stock on the last day of the purchase period. Provisions of the plan
for employees in countries outside the U.S. vary according to local practice
and regulations.
Applera - Applied Biosystems stock issued under the employee stock purchase
plans during fiscal 2000, 2001, and 2002 totaled 161,000 shares, 250,000
shares, and 451,000 shares, respectively. Applera - Celera stock issued under
the employee stock purchase plans during fiscal 2000, 2001, and 2002 totaled
303,000 shares, 269,000 shares, and 443,000 shares, respectively.
APPLERA CORPORATION Annual Report 2002 63
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Director Stock Purchase and Deferred Compensation Plan
The Company has a Director Stock Purchase and Deferred Compensation Plan that
requires non-employee directors of the Company to apply at least 50% of their
annual retainer to the purchase of common stock. Purchases of Applera -
Applied Biosystems stock and Applera - Celera stock are made in a ratio
approximately equal to the number of shares of Applera - Applied Biosystems
stock and Applera - Celera stock outstanding. The purchase price is the fair
market value on the date of purchase. At June 30, 2002, the Company had
approximately 328,000 shares of Applera - Applied Biosystems stock and
approximately 82,000 shares of Applera - Celera stock available for issuance
under this plan.
Restricted Stock
As part of the Company's stock incentive plans, employees may be, and non-
employee directors are, granted shares of restricted stock that will vest when
certain continuous employment/service restrictions and/or specified
performance goals are achieved. The fair value of shares granted is generally
expensed over the restricted periods. The periods may vary depending on the
estimated achievement of performance goals.
Restricted stock granted to employees and non-employee directors totaled
255,225 shares of Applera - Applied Biosystems stock and 63,900 shares of
Applera - Celera stock during fiscal 2001 and 31,100 shares of Applera -
Applied Biosystems stock and 91,700 shares of Applera - Celera stock during
fiscal 2002. Compensation expense recognized by the Company for these awards
was $6.5 million, $6.1 million, and $4.6 million for fiscal 2000, 2001, and
2002, respectively. Unearned compensation included in capital in excess of par
value within stockholders' equity was $16.6 million at June 30, 2001 and
$14.8 million at June 30, 2002. There was no unearned compensation included in
stockholders' equity at June 30, 2000.
Performance Unit Bonus Plan
The Company adopted a Performance Unit Bonus Plan in fiscal 1997. The plan
utilized stock options and a performance unit bonus pool. Performance units
granted under the plan represented the right to receive a cash or stock
payment from the Company at a specified date in the future. The amount of the
payment was determined on the date of the grant. The performance units vested
upon shares of the Company's common stock attaining and maintaining specified
price levels for a specified period. In fiscal 2000, three series of
performance units were granted under the plan and compensation expense of
$53.1 million was recognized. Fiscal 2000 compensation expense included
$45.0 million related to the acceleration of payments under the plan's three
series as a result of the attainment of the performance targets. The vesting
of the related stock options was not accelerated.
The plan was modified in fiscal 2000 to replace the performance units with
performance stock options. Performance stock options vest in equal portions
upon the earlier of the shares of Applera - Applied Biosystems stock attaining
and maintaining specified price levels for a specified period of time or after
a specified future date upon attainment of performance targets and/or service
requirements.
The plan was further modified in fiscal 2002 to reinstate the issuance of
performance units with the right to receive cash at a specified date in the
future upon attainment of performance targets and/or service requirements. In
fiscal 2002, seven series of performance units were granted under the plan and
compensation expense of $0.9 million was recognized. No compensation expense
pertaining to the plan was recognized in fiscal 2001.
Accounting for Stock-Based Compensation
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and FASB Interpretation No. 44 ("FIN No. 44"), "Accounting for
Certain Transactions Involving Stock Compensation - An Interpretation of
Accounting Principles Board Opinion No. 25" are applied in accounting for
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for stock option and employee stock purchase plans, as all options
have been issued at fair market value.
Pro forma net income and earnings per share information, as required by SFAS
No. 123, "Accounting for Stock-Based Compensation," have been determined for
employee stock plans under the statement's fair value method. The fair value
of the options was estimated at grant date using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
For the years ended June 30, 2000 2001 2002
===============================================================================
<S> <C> <C> <C>
Applied Biosystems Group
Dividend yield .17% .62% .92%
Volatility 52.68% 71.91% 77.85%
Risk-free interest rate 5.88% 6.53% 3.58%
Expected option life in years 4.12 4 4
===============================================================================
Celera Genomics Group
Dividend yield -% -% -%
Volatility 99.30% 101.66% 101.17%
Risk-free interest rate 6.21% 6.53% 3.71%
Expected option life in years 3.5 3.5 3.5
===============================================================================
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of the options
is amortized to expense over the options' vesting period.
64 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
The Company's pro forma information for the fiscal years ended June 30, 2000,
2001, and 2002 is presented below:
<TABLE>
<CAPTION>
Applied Biosystems Group Celera Genomics Group
--------------------------- ------------------------------
(Dollar amounts in millions
except per share amounts) 2000 2001 2002 2000 2001 2002
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)
As reported $ 186.2 $212.4 $168.5 $ (92.7) $ (186.2) $ (211.8)
Pro forma $ 140.2 $115.6 $ 67.4 $ (106.6) $ (223.3) $ (242.3)
Basic earnings (loss) per share
As reported $ 0.90 $ 1.01 $ 0.80 $ (1.73) $ (3.07) $ (3.21)
Pro forma $ 0.68 $ 0.55 $ 0.32 $ (1.98) $ (3.68) $ (3.67)
Diluted earnings (loss) per share
As reported $ 0.86 $ 0.96 $ 0.78 $ (1.73) $ (3.07) $ (3.21)
Pro forma $ 0.65 $ 0.52 $ 0.31 $ (1.98) $ (3.68) $ (3.67)
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Applera Corporation
----------------------------
(Dollar amounts in millions) 2000 2001 2002
===============================================================================
<S> <C> <C> <C>
Net income (loss)
As reported $ 95.5 $ 27.2 $ (40.6)
Pro forma $ 35.6 $ (106.6) $ (172.2)
===============================================================================
</TABLE>
The weighted average fair value of Applera - Applied Biosystems stock options
granted was $38.00, $19.94, and $12.36 for fiscal 2000, 2001, and 2002,
respectively. The weighted average fair value of Applera - Celera stock
options granted was $46.41, $32.79, and $13.84 for fiscal 2000, 2001, and
2002, respectively.
Note 7--Additional Information
Selected Accounts
The following table provides the major components of selected accounts of the
Consolidated Statements of Financial Position at June 30, 2001 and 2002:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001 2002
================================================================================
<S> <C> <C>
Other Long-Term Assets
Minority equity investments $ 111.1 $ 87.3
Goodwill 24.4 39.4
Noncurrent deferred tax asset 166.6 311.0
Other 108.7 136.5
--------------------------------------------------------------------------------
Total other long-term assets $ 410.8 $ 574.2
================================================================================
Other Accrued Expenses
Deferred revenues $ 92.5 $ 115.3
Foreign currency hedge contracts 1.1 32.6
Other 122.2 127.4
--------------------------------------------------------------------------------
Total other accrued expenses $ 215.8 $ 275.3
================================================================================
Other Long-Term Liabilities
Accrued postretirement benefits $ 75.5 $ 74.9
Accrued pension benefits 20.9 52.6
Other 56.0 77.7
--------------------------------------------------------------------------------
Total other long-term liabilities $ 152.4 $ 205.2
================================================================================
</TABLE>
Minority equity investments consist of common stock in publicly-traded
companies and common stock and preferred stock in privately-held companies.
Unrealized gains and losses on publicly-traded companies were $69.9 million
and $3.8 million, respectively, at June 30, 2001 and $16.0 million and
$0.2 million, respectively, at June 30, 2002.
Related Party Transactions
In June 1999, the Company granted fully vested options to purchase 2.6 million
shares of Applera - Celera stock at a price of $6.42 per share to The
Institute of Genomic Research ("TIGR") and entered into a one-year non-compete
agreement with such party. The fair value of such options approximated
$7.2 million and was amortized over the life of the non-compete agreement. The
fair value of these options were determined under the Black-Scholes pricing
model using a volatility assumption of 40%, an expected option life of two
years, and a risk-free interest rate of 5.75%. As of June 30, 2002, TIGR held
approximately 1.4 million of these options. The former President of the Celera
Genomics group through January 2002 was also the Chairman of the Board of
Trustees of TIGR. Also, an immediate family member of the former President of
the Celera Genomics group serves as TIGR's President and is on TIGR's Board of
Trustees.
During fiscal 2001, the Celera Genomics group entered into an agreement to
perform sequencing services for TIGR and recognized revenues and collected
cash of $7.0 million related to such services. Additionally, during fiscal
2001 and 2002, the Applied Biosystems group recognized revenues of $7.0 million
and $4.7 million from TIGR, of which $1.5 million was receivable as of June 30,
2002.
Note 8--Debt And Lines Of Credit
Short-term debt and long-term debt at June 30, 2001 and 2002 are summarized as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001 2002
================================================================================
<S> <C> <C>
Short-Term Debt
Loans payable $ 14.7 $ 0.3
Current portion of long-term debt 30.5
--------------------------------------------------------------------------------
Total short-term debt $ 45.2 $ 0.3
================================================================================
Long-Term Debt
Other debt $ - $ 18.0
--------------------------------------------------------------------------------
Total long-term debt $ - $ 18.0
================================================================================
</TABLE>
The weighted average interest rates at June 30, 2001 and 2002 for short-term
loans payable were 0.5% and 3.4%, respectively.
APPLERA CORPORATION Annual Report 2002 65
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
The Company repaid its yen 3.8 billion, or $29.0 million, loan upon its
scheduled maturity in March 2002.
In connection with its acquisition of Axys, the Company assumed $26.0 million
of 8% senior secured convertible notes. These notes mature on October 1, 2004.
Interest is payable quarterly and the principal is payable at maturity as a
lump sum. Holders of notes having an aggregate principal amount of $10 million
exercised their right following the acquisition to require the Company to
repurchase such notes, which the Company did in January 2002. The remaining
notes are convertible at any time into 307,101 shares of Applera - Celera
stock at a conversion price of $52.10 per share. These notes are secured by
6.7 million shares, or approximately 90%, of the Company's holding of DPI
common stock, which was received as part of the acquisition. Additionally, the
Company assumed an existing Axys construction loan of $8.4 million related to
its medicinal chemistry building located in South San Francisco, California,
which was subsequently repaid following the acquisition.
The Company maintains a $100 million revolving credit agreement with four
banks that expires on April 20, 2005. Commitment and facility fees are based
on public debt ratings, or net worth and leverage ratios. Interest rates on
amounts borrowed vary depending on whether borrowings are undertaken in the
domestic or eurodollar markets. There were no outstanding borrowings under the
facility at June 30, 2001 or 2002.
Under various debt and credit agreements, the Company is required to maintain
certain minimum net worth and leverage ratios. The Company was in compliance
with all such covenants as of June 30, 2002.
Note 9--Commitments and Contingencies
Future minimum payments at June 30, 2002 under non-cancelable operating leases
for real estate and equipment were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
==========================================================================
<S> <C>
2003 $ 51.8
2004 42.1
2005 29.1
2006 21.2
2007 15.8
2008 and thereafter 67.3
--------------------------------------------------------------------------
Total $ 227.3
==========================================================================
</TABLE>
Rental expense was $45.2 million for fiscal 2000, $65.2 million for fiscal
2001, and $68.2 million for fiscal 2002. During fiscal 2002, the Company
recorded provisions of $10.1 million for the estimated cost of excess lease
space associated with the Celera Genomics group's Paracel business (see Note
13).
Pension benefits
As part of the divestiture of the Analytical Instruments business in fiscal
1999, the pension benefits for employees of a former German subsidiary are
being paid by the purchaser of the Analytical Instruments business. However,
the Company has guaranteed payment of these pension benefits should the
purchaser fail to do so, as these benefits were not transferable to the buyer
under German law. The guaranteed payment obligation, which approximated
$41.9 million at June 30, 2002, is not expected to have a material adverse
effect on the Company's consolidated financial position or results of
operations.
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.
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
66 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
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. The trial in this case is currently scheduled for
November 18, 2002.
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.
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.
Note 10--Financial Instruments
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," amended in June 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities." These statements require the recognition of all derivative
financial instruments as either assets or liabilities in the statement of
financial position and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative is determined by the
intended use of the derivative and the resulting designation. The Company
adopted these statements effective July 1, 2000. The cumulative effect of
adoption resulted in an immaterial adjustment to the consolidated financial
statements.
The Company's foreign currency risk management strategy utilizes derivative
instruments to hedge certain foreign currency forecasted revenues and to
offset the impact of changes in foreign currency exchange rates on certain
foreign currency-denominated receivables and payables. The principal objective
of this strategy is to minimize the risks and/or costs associated with the
Company's global financing and operating activities. The Company utilizes
foreign exchange forward, option, and range forward contracts to manage its
foreign currency exposures. The Company does not use derivative financial
instruments for trading or speculative purposes or for activities other than
risk management, nor is it a party to leveraged derivatives.
The fair value of foreign currency derivative contracts is recorded in either
prepaid expenses and other current assets or other accrued expenses in the
Consolidated Statements of Financial Position.
Cash Flow Hedges
The Company's international sales are typically denominated in the customers'
local (non-U.S. dollar) currency. The Company uses foreign exchange forward,
option, and range forward contracts to hedge a portion of forecasted
international sales not denominated in U.S. dollars. The Company utilizes
hedge accounting on derivative contracts that are considered highly effective
in offsetting the changes in fair value of the forecasted sales transactions
caused by the 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
APPLERA CORPORATION Annual Report 2002 67
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
other comprehensive income (loss) in the 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 Consolidated Statements of Operations.
During fiscal 2001 and 2002, the Company recognized net gains of $17.8 million
and $17.4 million, respectively, in net revenues from derivative instruments
designated as cash flow hedges of anticipated sales. At June 30, 2002,
$29.3 million of net derivative losses ($24.5 million net of deferred taxes)
recorded in accumulated other comprehensive income (loss) are expected to be
reclassified to earnings during the next twelve months.
During the fourth quarter of fiscal 2001, the FASB's Derivative Implementation
Group ("DIG") issued guidance that would allow a company to defer in other
comprehensive income, all or part of the changes in the option's time value
for option-based hedging strategies that are perfectly or highly effective.
The Company changed its methodology of accounting for currency options during
the fourth quarter of fiscal 2001 based on this new guidance from the DIG.
Prior to this new guidance, any changes in the time value component of a
currency option were recognized in earnings in the period in which they
occurred. For fiscal 2001, the Company recognized expense of $3.4 million
included in other income (expense), net in the Consolidated Statements of
Operations, which represented the change in the time value component of the
fair value of option contracts designated as cash flow hedges.
Other Foreign Currency Derivatives
The Company also uses derivative financial instruments to hedge against the
adverse effects that foreign currency exchange rate fluctuations may have on
its foreign currency-denominated net asset positions. The gains and losses on
these derivatives are expected to largely offset transaction losses and gains,
respectively, on the underlying foreign currency-denominated assets and
liabilities, both of which are recorded in other income (expense), net in the
Consolidated Statement of Operations.
Concentration of Credit Risk
The forward contracts and options used by the Company in managing its foreign
currency exposures contain an element of risk in that the counterparties may
be unable to meet the terms of the agreements. However, the Company minimizes
this risk by limiting the counterparties to a diverse group of highly-rated
major domestic and international financial institutions with which the Company
has other financial relationships. The Company is exposed to potential losses
in the event of non-performance by these counterparties; however, the Company
does not expect to record any losses as a result of counterparty default. The
Company does not require and is not required to place collateral for these
financial instruments. Other financial instruments that potentially subject
the Company to concentrations of credit risk are cash and cash equivalents,
short-term investments, and accounts receivable. The Company minimizes the
risk related to cash and cash equivalents and short-term investments by
utilizing highly-rated financial institutions that invest in a broad and
diverse range of financial instruments. The Company has established guidelines
relative to credit ratings and maturities that seek to maintain safety and
liquidity.
Concentration of credit risk with respect to accounts receivable is limited
due to the Company's large and diverse customer base, which is dispersed over
differing geographic areas. Allowances are maintained for potential credit
losses and such losses have historically been within management's
expectations.
Fair Value
The fair value of significant financial instruments held or owned by the
Company is estimated using various methods. Fair values of cash and cash
equivalents approximate their carrying amount. The fair values of short-term
investments and minority equity investments are estimated based on quoted
market prices, if available, or quoted market prices of financial instruments
with similar characteristics. The fair value of debt is based on the current
rates offered to the Company for debt of similar remaining maturities. The
following table presents the carrying amounts and fair values of the Company's
significant financial instruments at June 30, 2001 and 2002:
68 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
<TABLE>
<CAPTION>
2001 2002
----------------- -----------------
Carrying Fair Carrying Fair
(Dollar amounts in millions) Amount Value Amount Value
===========================================================================================
<S> <C> <C> <C> <C>
Cash and cash equivalents $608.5 $ 608.5 $470.2 $470.2
Short-term investments $779.3 $ 779.5 $887.9 $889.7
Currency forwards and options $ 2.6 $ 20.3 $ (4.7) $(29.2)
Interest rate swap $ - $ (0.5) $ - $ -
Other investments $ 9.0 $ 9.0 $ 17.1 $ 17.1
Minority equity investments $ 45.0 $ 111.1 $ 21.9 $ 37.7
Short-term debt $(45.2) $ (44.7) $ (0.3) $ (0.3)
Long-term debt $ - $ - $(18.0) $(18.0)
===========================================================================================
</TABLE>
Net unrealized gains and losses on short-term investments and minority equity
investments are reported as a separate component of accumulated other
comprehensive income (loss) in the Consolidated Statements of Financial
Position.
Note 11--Quarterly Financial Information (Unaudited)
The following is a summary of quarterly financial results:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
(Dollar amounts in millions ------------------- ------------------- ------------------- -------------------
except per share amounts) 2001 2002 2001 2002 2001 2002 2001 2002
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated
Net revenues $ 367.4 $ 387.9 $ 413.3 $ 437.2 $ 447.1 $ 434.4 $ 416.3 $ 441.7
Gross margin 198.2 201.3 213.5 230.9 236.3 231.5 215.4 238.5
Net income (loss) 24.4 17.0 27.5 (61.4) 28.3 (2.9) (53.0) 6.7
=======================================================================================================================
Applied Biosystems Group
Net revenues $ 363.6 $ 366.6 $ 411.0 $ 411.1 $ 439.8 $ 409.0 $ 405.1 $ 417.3
Gross margin 193.9 187.2 213.2 214.4 231.2 216.4 206.7 217.5
Net income 49.1 32.2 58.0 49.0 57.7 49.1 47.6 38.2
Dividends per share $ .0425 $ .0425 $ .0425 $ .0425 $ .085 $ .0425 $ .0425
Net income per share
Basic $ 0.23 $ 0.15 $ 0.28 $ 0.23 $ 0.27 $ 0.23 $ 0.23 $ 0.18
Diluted 0.22 0.15 0.26 0.23 0.26 0.23 0.22 0.18
=======================================================================================================================
Celera Genomics Group
Net revenues $ 18.3 $ 27.3 $ 20.3 $ 35.0 $ 23.4 $ 30.5 $ 27.4 $ 28.1
Net loss (25.7) (15.6) (29.7) (117.9) (29.1) (49.5) (101.7) (28.8)
Net loss per share
Basic and diluted $ (0.43) $ (0.25) $ (0.49) $ (1.82) $ (0.48) $ (0.72) $ (1.66) $ (0.42)
=======================================================================================================================
Celera Diagnostics
Net revenues $ 1.8 $ 1.9 $ 2.6 $ 1.6 $ 2.9
Net loss $ (9.4) $ (8.5) $ (12.4) $ (5.0) $ (14.5)
=======================================================================================================================
Price range of common stock
Applied Biosystems Group
High $ 126.75 $ 30.45 $ 133.31 $ 40.42 $ 94.25 $ 39.28 $ 36.15 $ 23.99
Low $ 64.75 $ 20.20 $ 75.00 $ 23.41 $ 18.49 $ 19.05 $ 24.50 $ 15.00
Celera Genomics Group
High $ 118.56 $ 39.95 $ 100.50 $ 30.93 $ 54.90 $ 27.00 $ 49.90 $ 20.70
Low $ 80.19 $ 19.30 $ 29.25 $ 23.00 $ 24.00 $ 19.45 $ 26.20 $ 10.82
=======================================================================================================================
</TABLE>
There were no dividends on Applera - Celera stock for the periods presented.
APPLERA CORPORATION Annual Report 2002 69
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Events Impacting Comparability
Fiscal 2001 First and second quarter results of the Applied Biosystems group
included before-tax non-recurring gains of $12.0 million and $3.0 million,
respectively, primarily related to the sale of the Company's minority equity
investments. The fourth quarter results of the Celera Genomics group included
a before-tax charge of $69.1 million for the impairment of goodwill and other
intangibles related to Paracel.
Fiscal 2002 Second quarter results included a charge of $99.0 million for the
immediate write-off of the value of acquired IPR&D related to the Celera
Genomics group's acquisition of Axys. Second quarter results also included a
charge of $2.2 million for the immediate write-off of the value of acquired
IPR&D related to the Applied Biosystems group's acquisition of Boston Probes.
The third quarter results of the Celera Genomics group included a before-tax
charge of $25.9 million related to Paracel. The fourth quarter results of the
Applied Biosystems group included before-tax losses on investments of
$8.2 million. The fourth quarter results of the Celera Genomics group included
before-tax losses on investments of $6.0 million and a before-tax charge of
$2.8 million for severance.
Note 12--Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss), net of tax, for fiscal 2000,
2001, and 2002 was as follows:
<TABLE>
<CAPTION>
Unrealized
Unrealized Gain Foreign Accumulated
Gain (Loss) on Currency Minimum Other
(Loss) on Hedge Translation Pension Comprehensive
(Dollar amounts in millions) Investments Contracts Adjustments Liability Income (Loss)
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1999 $ 10.5 $ - $ (13.2) $ (2.1) $ (4.8)
Change in net unrealized gains on
investments, net of tax expense of
$106.3 187.2 187.2
Net unrealized gains reclassified into
earnings, net of tax expense of $17.0 (31.6) (31.6)
Foreign currency translation adjustment (25.2) (25.2)
Minimum pension liability adjustment, net
of tax benefit of $1.2 (0.1) (0.1)
-------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 166.1 (38.4) (2.2) 125.5
-------------------------------------------------------------------------------------------------------------------
Change in net unrealized losses on
investments, net of tax benefit of $61.1 (113.5) (113.5)
Net unrealized gains reclassified into
earnings, net of tax expense of $5.2 (9.7) (9.7)
Change in net unrealized gains on hedge
contracts, net of tax expense of $12.4 22.7 22.7
Net unrealized gains reclassified into
earnings, net of tax expense of $6.3 (11.5) (11.5)
Foreign currency translation adjustment (34.2) (34.2)
Minimum pension liability adjustment, net
of tax benefit of $18.9 (35.2) (35.2)
-------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 42.9 11.2 (72.6) (37.4) (55.9)
-------------------------------------------------------------------------------------------------------------------
Change in net unrealized losses on
investments, net of tax benefit of $21.7 (40.3) (40.3)
Net unrealized losses reclassified into
earnings, net of tax benefit of $4.8 8.9 8.9
Change in net unrealized losses on hedge
contracts, net of tax benefit of $5.8 (23.9) (23.9)
Net unrealized gains reclassified into
earnings, net of tax expense of $5.6 (11.8) (11.8)
Foreign currency translation adjustment 48.4 48.4
Minimum pension liability adjustment, net
of tax benefit of $9.2 (17.0) (17.0)
-------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 11.5 $ (24.5) $ (24.2) $ (54.4) $ (91.6)
===================================================================================================================
</TABLE>
70 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
The currency translation adjustments are not currently adjusted for income
taxes as they relate to indefinite investments in non-U.S. subsidiaries.
Note 13--Other Special Charges
In fiscal 2001, the Celera Genomics group recorded a $69.1 million charge to
other special charges for the impairment of goodwill and other intangible
assets associated with Paracel, a business acquired during the fourth quarter
of fiscal 2000. Due to Paracel's substantially lower than originally
anticipated performance and the future outlook of this business, management
performed an assessment of future cash flows and determined that it was
necessary to record an impairment charge to reduce the carrying value of
Paracel's net assets to their estimated fair value. This charge included
$63.7 million for the write-down of goodwill and $5.4 million for the write-
down of other intangible assets.
In fiscal 2002, the Celera Genomics group recorded an additional $25.9 million
charge related to Paracel. This charge was comprised of $12.7 million for
asset impairments, provisions of $10.1 million for the estimated cost of
excess lease space and $0.2 million for severance costs, all included in other
special charges. The charge also included $2.9 million for impairment of
Paracel inventory included in cost of sales. These charges resulted from
Paracel's unfavorable performance against the lowered profitability outlook
for the business established during fiscal 2001 at the time of the initial
charge.
The asset impairment charges recorded during fiscal 2002 were for the write-
off of the remaining goodwill of $12.1 million, other intangible assets of
$0.5 million, and leasehold improvements of $0.1 million. These charges were
determined by management through a revised assessment of future cash flows
and, as a result, reduced the carrying value of Paracel's net assets to their
estimated fair value. Excess lease costs reflect the estimated loss associated
with the remaining contractual obligations under a non-cancelable lease
arrangement and certain costs associated with the expected sublease of the
portion of the facility not occupied by the Paracel business, net of estimated
sublease income, for the remainder of the lease, which expires in fiscal 2011.
Cash payments associated with the excess lease were $0.4 million during fiscal
2002. Severance and related benefits, granted to 19 employees terminated
during fiscal 2002, have substantially been paid as of June 30, 2002.
During the fourth quarter of fiscal 2002, the Celera Genomics group recorded a
restructuring charge of $2.8 million 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 were $0.7 million during fiscal 2002. The remaining
cash payments are expected to be paid during fiscal 2003.
Note 14--Segment, Geographic, Customer And Consolidating Information
Business Segments
The Company is organized based on the products and services that it offers.
The Company operates in the life science industry through three reportable
segments: the Applied Biosystems group, the Celera Genomics group, and Celera
Diagnostics. The Applied Biosystems group and the Celera Genomics group are
collectively referred to as the groups. 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") and proteins to make
scientific discoveries, develop new pharmaceuticals, and to 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 capabilities in proteomics,
bioinformatics, and genomics to identify and validate drug targets and
diagnostic marker candidates, and to discover novel therapeutic candidates.
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 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 tests.
Refer to the consolidating information section of this note for additional
information regarding the segments.
APPLERA CORPORATION Annual Report 2002 71
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Geographic Areas
Information concerning principal geographical areas for fiscal 2000, 2001, and
2002 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001 2002
======================================================================================
<S> <C> <C> <C>
Net Revenues From
External Customers
United States $ 681.0 $ 810.2 $ 855.8
Europe 376.0 436.6 440.6
Japan 213.6 260.3 272.0
Other Far East countries 60.8 80.8 86.0
Latin America and other 39.6 56.2 46.8
--------------------------------------------------------------------------------------
Consolidated $ 1,371.0 $ 1,644.1 $ 1,701.2
======================================================================================
</TABLE>
Net revenues are attributable to geographic areas based on the region of
destination.
Information concerning long-lived assets at June 30, 2001 and 2002 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001 2002
================================================================================
<S> <C> <C>
Long-Lived Assets
United States $ 403.4 $ 439.8
Europe 17.5 34.2
Japan 14.6 14.8
Other Far East countries 3.1 3.0
Latin America and other 0.6 0.5
--------------------------------------------------------------------------------
Consolidated $ 439.2 $ 492.3
================================================================================
</TABLE>
Long-lived assets exclude goodwill and other intangible assets.
Customer Information
The Company has a large and diverse customer base. No single customer
accounted for more than 10% of total net revenues during fiscal 2000, 2001,
and 2002.
Consolidating Information
Presented below is the Company's 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 and interest income
and expense on intercompany borrowings. 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.
The management and allocation policies applicable to the attribution of
assets, liabilities, revenues and expenses to the segments may be modified or
rescinded, or additional policies may be adopted, at the sole discretion of
the Company's Board of Directors at any time without stockholder approval. The
Board of Directors would make any decision in accordance with its good faith
business judgment that its decision is in the best interests of the Company
and all of its stockholders as a whole.
The attribution of the assets, liabilities, revenues and expenses to each
segment is primarily based on specific identification of the businesses
included in each segment. Where specific identification is not practical,
other methods and criteria are used that management believes are equitable and
provide a reasonable estimate of the assets, liabilities, revenues and
expenses attributable to each segment.
Intersegment Revenues
Sales of products and services from one segment to another within the Company
are recorded as intersegment revenues and are eliminated in determining
consolidated net revenues of the Company. These sales are made on terms that
would be available from third parties in commercial transactions. If terms for
such transactions are not available, the purchasing group will pay fair value
as determined by the Company's Board of Directors for such products and
services or at the cost (including overhead) of the selling group.
For fiscal 2000, 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
$59.8 million, $64.1 million, and $22.4 million, respectively.
For fiscal 2001 and 2002, the Applied Biosystems group purchased $1.5 million
and $8.7 million, respectively, of diagnostics products from Celera
Diagnostics under a distribution arrangement. During fiscal 2002, the Applied
Biosystems group recorded revenues from leased instruments and shipments of
consumables to Celera Diagnostics of $1.7 million.
Access to Technology and Know-How
Each segment has free access to all of the Company's technology and know-how
(excluding products and services of the other group) that may be useful in
that segment's business, subject to obligations and limitations applicable to
the Company and to such exceptions that the Company's Board of Directors may
determine. The segments consult with each other on a regular basis concerning
technology issues that affect each segment. The costs of developing technology
remain in the segment responsible for its development.
Allocation of Corporate Overhead and Administrative Shared Services
The Company's shared corporate services (such as executive management, human
resources, legal, accounting, auditing, tax, treasury, strategic planning and
environmental services) and related balance sheet amounts have been allocated
to the segments based
72 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
upon identification of such services specifically benefiting each segment. A
portion of the Company's costs of administrative shared services (such as
information technology services) has been allocated in a similar manner. Where
determination based on specific usage alone is not practical, other methods
and criteria were used that management believes are equitable and provide a
reasonable estimate of the cost attributable to each group. It is not
practical to specifically identify a portion of corporate overhead expenses
attributable to each of the segments. As a result, the Company allocates such
corporate overhead expenses primarily based upon headcount, total expenses,
and revenues attributable to each business. Management believes that the
allocation methods developed are reasonable and have been consistently
applied.
Joint Transactions Between Segments
The segments may from time to time engage in transactions jointly, including
with third parties. Research and development and other services performed by
one segment for a joint venture or other collaborative arrangement will be
charged at fair value, as determined by the Company's Board of Directors. The
Applera businesses also may jointly undertake a project, such as the Applera
Genomics Initiative, where the total costs and benefits of the project are
shared.
Allocation of Federal and State Income Taxes
The federal income taxes of the Company and its subsidiaries that own assets
allocated between the groups are determined on a consolidated basis using the
asset and liability approach prescribed by SFAS No. 109, "Accounting for
Income Taxes." If management had utilized the separate return basis of
accounting for taxes, the tax provision for the Applied Biosystems group would
not have changed, but more likely than not, a significant valuation allowance
would have been recorded by the Celera Genomics group. The federal income tax
provisions and related tax payments or refunds are allocated between the
groups based on a consolidated return approach taking into account each
group's relative contribution (positive or negative) to the Company's
consolidated federal taxable income, tax liability and tax credit position.
Intersegment transactions are taxed as if each segment were a stand-alone
company. Tax benefits that cannot be used by the group generating those
benefits, but can be used on a consolidated basis, are transferred to the
group that can utilize such benefits. Existing tax benefits acquired by either
group in a business combination that are utilized by the other group will be
reimbursed to the group that acquired such benefits. Tax benefits generated by
the Celera Genomics group commencing July 1, 1998, which could be utilized on
a consolidated basis, were reimbursed by the Applied Biosystems group to the
Celera Genomics group up to a limit of $75 million.
Pursuant to the terms of the Celera Diagnostics joint venture, the Applied
Biosystems group reimburses the Celera Genomics group for tax benefits
generated by Celera Diagnostics to the extent such tax benefits are utilized
by the Applied Biosystems group. These tax benefits are not subject to the
$75 million limit described above.
As a result of the above tax allocation policy, during fiscal 2001 and 2002,
the Celera Genomics group generated tax benefits of $32.2 million and
$19.0 million, respectively, that were utilized by the Applied Biosystems
group with no reimbursement to the Celera Genomics group. The amounts utilized
by the Applied Biosystems group that were not reimbursed to the Celera
Genomics group were recorded to allocated net worth of each group in the
following Consolidating Statements of Financial Position.
Depending on the tax laws of the respective jurisdictions, state and local
income taxes are calculated on either a separate, consolidated, or combined
basis. State and local income tax provisions and related tax payments or
refunds are allocated between the groups in a manner designed to reflect the
respective contributions of the groups to the Company's state or local taxable
income.
Financing Activities
As a matter of policy, the Company manages most financing activities of the
Applied Biosystems group and the Celera Genomics group on a centralized basis.
These activities include the investment of surplus cash, the issuance and
repayment of short-term and long-term debt, treasury stock repurchases, and
the issuance and repayment of any preferred stock.
The Company's Board of Directors has adopted the following financing policy
that affects the financial results of the Applied Biosystems group and the
Celera Genomics group.
The Company allocates the Company's debt between the groups ("pooled debt")
or, if the Company so determines, in its entirety to a particular group. The
Company will allocate preferred stock, if issued, in a similar manner.
Cash allocated to one group that is used to repay pooled debt or redeem pooled
preferred stock decreases such group's allocated portion of the pooled debt or
preferred stock. Cash or other property allocated to one group that is
transferred to the other group, if so determined by the Company's Board of
Directors, decreases the transferring group's allocated portion of the pooled
debt or preferred stock and, correspondingly, increases the recipient group's
allocated portion of the pooled debt or preferred stock.
Pooled debt bears interest for the groups at a rate equal to the weighted
average interest rate of the debt
APPLERA CORPORATION Annual Report 2002 73
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
calculated on a quarterly basis and applied to the average pooled debt balance
during the period. Preferred stock, if issued and if pooled in a manner
similar to the pooled debt, will bear dividends for the groups at a rate based
on the weighted average dividend rate of the preferred stock similarly
calculated and applied. Any expense related to increases in pooled debt or
preferred stock will be reflected in the weighted average interest or dividend
rate of such pooled debt or preferred stock as a whole.
If the Company allocates debt for a particular financing in its entirety to
one group, that debt will bear interest for that group at a rate determined by
the Company's Board of Directors. If the Company allocates preferred stock in
its entirety to one group, the Company will charge the dividend cost to that
group in a similar manner. If the interest or dividend cost is higher than the
Company's actual cost, the other group will receive a credit for an amount
equal to the difference as compensation for the use of the Company's credit
capacity. Any expense related to debt or preferred stock of the Company that
is allocated in its entirety to a group will be allocated in whole to that
group.
Cash or other property that the Company allocates to one group that is
transferred to the other group could, if so determined by the Company's Board
of Directors, be accounted for either as a short-term loan or as a long-term
loan. Short-term loans bear interest at a rate equal to the weighted average
interest rate of the Company's pooled debt. If the Company does not have any
pooled debt, the Company's Board of Directors will determine the rate of
interest for such loan. The Company's Board of Directors establishes the terms
on which long-term loans between the groups will be made, including interest
rate, amortization schedule, maturity, and redemption terms.
In addition, cash allocated to the Applied Biosystems group may be reallocated
to the Celera Genomics group in exchange for Celera Genomics Designated Shares
as provided under the Company's Certificate of Incorporation. The number of
Celera Genomics Designated Shares issued would be determined by dividing the
amount of cash reallocated by the average market value of Applera - Celera
stock over the 20-trading day period immediately prior to the date of the
reallocation. As a result of such a reallocation, a relative percentage of
future earnings or losses of the Celera Genomics group would be attributed to
the Applied Biosystems group.
Although the Company may allocate its debt and preferred stock between the
groups, the debt and preferred stock remain obligations of the Company and all
stockholders of the Company are subject to the risks associated with those
obligations.
Transfers of Assets Between Groups
Transfers of assets can be made between groups without stockholder approval.
Such transfers will be made at fair value, as determined by the Company's
Board of Directors. The consideration for such transfers may be paid by one
group to the other in cash or other consideration, as determined by the
Company's Board of Directors.
Celera Diagnostics
The Applied Biosystems group contributed its existing molecular diagnostics
business to Celera Diagnostics as part of its initial contribution to the
joint venture. The Celera Genomics group contributed, among other things,
access to its genome databases and agreed to fund all of the cash operating
losses of Celera Diagnostics up to a maximum of $300 million ("initial
losses"), after which, operating losses, if any, will be shared equally by the
groups. Celera Diagnostics' profits, if any, will be shared in the ratio of 65
percent to the Celera Genomics group and 35 percent to the Applied Biosystems
group until the cumulative profits of Celera Diagnostics equal the initial
losses. Subsequently, profits and losses and cash flows would be shared
equally. Capital expenditures and working capital requirements of the joint
venture will be funded equally by the groups. The Applied Biosystems group
will reimburse the Celera Genomics group for all tax benefits generated by
Celera Diagnostics to the extent such tax benefits are utilized by the Applied
Biosystems group. During fiscal 2001 and 2002, the Applied Biosystems group
paid $1.7 million and $15.7 million, respectively, to the Celera Genomics
group for the utilization of tax benefits generated by Celera Diagnostics.
The groups account for their investments in Celera Diagnostics under the
equity method of accounting, with the Celera Genomics group recording 100
percent of the initial losses in its income statement as loss from joint
venture. For fiscal 2001 and 2002, the Celera Genomics group recorded 100% of
the losses of Celera Diagnostics in its net loss. Additionally, the Celera
Genomics group recorded the tax benefit associated with the loss generated by
Celera Diagnostics. During fiscal 2001 and 2002, the Celera Genomics group
funded $4.4 million and $41.3 million, respectively, of operating losses of
Celera Diagnostics. During fiscal 2001 and 2002, the groups each funded
$1.1 million and $2.3 million, respectively, for capital expenditures and
working capital needs related to Celera Diagnostics. There is no financial
information presented for Celera Diagnostics for fiscal 2000, since the joint
venture was established effective April 1, 2001.
In the event of liquidation of the assets attributable to Celera Diagnostics,
including sale of such assets, the proceeds upon liquidation would be
distributed to the
74 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
groups based on a proportion similar to their relative investment accounts. If
the proceeds upon liquidation are in excess of the groups' combined investment
accounts, the excess liquidation proceeds would be shared in the ratio of 65
percent to the Celera Genomics group and 35 percent to the Applied Biosystems
group until the cumulative amount of the distributed excess proceeds equals
the initial losses funded by the Celera Genomics group. Any additional
liquidation proceeds would be allocated equally to the Celera Genomics group
and the Applied Biosystems group.
Online Marketing and Distribution Agreement
Effective April 1, 2002, the Applied Biosystems group entered into an agreement
to become the exclusive distributor of the Celera Discovery System(TM) ("CDS")
online platform operated by the Celera Genomics group. As a result of this
arrangement, the Applied Biosystems group is integrating CDS and other genomic
and biological information into its Knowledge Business. In exchange for
marketing and distribution rights to CDS and other genomic and biological
information and access to CDS and related content, the Applied Biosystems group
will provide the Celera Genomics group with royalty payments on revenues
generated by sales of certain products of the Knowledge Business from July 1,
2002 through the end of fiscal 2012. The royalty rate is progressive, up to a
maximum of 5%, with the level of sales through fiscal 2008. The royalty rate
becomes a fixed percentage of sales starting in fiscal 2009, and the rate
declines each succeeding fiscal year through fiscal 2012. Assays-on-Demand(TM),
Assays-by-Design(SM), certain reagents for arrays, and new database
subscriptions sold by the Knowledge Business are the products subject to
royalties.
The Celera Genomics group will continue to be responsible for the performance
of its obligations under all contracts relating to its information products
and services either existing on the effective date of the marketing and
distribution agreement or which are entered into during a transition period
ended June 30, 2002 (as well as renewals, if any, of these contracts) and will
receive all revenues and other benefits under, and be responsible for all
costs and expenses associated with, such contracts. Assuming the Celera
Genomics group continues to perform under its existing contracts, the Applied
Biosystems group will reimburse the Celera Genomics group if earnings before
interest, taxes, depreciation, and amortization from these contracts during
the four fiscal years ending with fiscal year 2006 are below $62.5 million and
the shortfall is due to business initiatives of the Applied Biosystems group.
Transfer of Business Unit from the Celera Genomics Group to the Applied
Biosystems Group
Effective July 1, 2001, the Company transferred the assets, liabilities and
personnel of a business unit from the Celera Genomics group to the Applied
Biosystems group. The Company's Board of Directors determined that the assets
of the business transferred and the liabilities of the business assumed by the
Applied Biosystems group constituted fair value for the transfer. The net
assets were transferred at recorded book value as an increase to the Applied
Biosystems group's allocated net worth and a decrease to the Celera Genomics
group's allocated net worth. The Applied Biosystems group is utilizing the
resources of this business unit for initiatives, including validation of
single nucleotide polymorphisms, among others.
In the following tables, the "Eliminations" column represents the elimination
of intergroup activity and the loss on Celera Diagnostics, which is included
once, in the "Celera Diagnostics" column, and again net within the "Celera
Genomics group" column as "Loss from joint venture."
APPLERA CORPORATION Annual Report 2002 75
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Consolidating Statement of Operations For the Year Ended June 30, 2002
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Net revenues from external customers $ 1,579,907 $ 120,837 $ 474 $ - $ 1,701,218
Intersegment revenues 24,112 49 8,732 (32,893)
---------------------------------------------------------------------------------------------------------------
Net Revenues 1,604,019 120,886 9,206 (32,893) 1,701,218
Cost of sales 768,516 51,898 6,230 (27,657) 798,987
---------------------------------------------------------------------------------------------------------------
Gross Margin 835,503 68,988 2,976 (5,236) 902,231
---------------------------------------------------------------------------------------------------------------
Selling, general and administrative 340,561 42,768 6,644 48,396 438,369
Corporate allocated expenses 38,648 7,675 2,073 (48,396)
Research, development and engineering 219,630 132,655 39,022 (9,405) 381,902
Amortization of intangible assets 7,443 7,443
Other special charges 25,754 25,754
Acquired research and development 2,200 98,981 101,181
---------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 234,464 (246,288) (44,763) 4,169 (52,418)
Loss on investments, net (8,536) (5,960) (14,496)
Interest expense (886) (575) (1,461)
Interest income 13,063 31,905 44,968
Other income (expense), net (601) (4,542) (5,143)
Loss from joint venture (44,763) 44,763
---------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 237,504 (270,223) (44,763) 48,932 (28,550)
Provision (benefit) for income taxes 69,023 (58,451) 1,459 12,031
---------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 168,481 $ (211,772) $ (44,763) $ 47,473 $ (40,581)
===============================================================================================================
</TABLE>
76 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Consolidating Statement of Financial Position At June 30, 2002
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
====================================================================================================================
<S> <C> <C> <C> <C> <C>
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
====================================================================================================================
</TABLE>
APPLERA CORPORATION Annual Report 2002 77
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Consolidating Statement of Cash Flows For the Year Ended June 30, 2002
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Operating Activities From Continuing
Operations
Net income (loss) $ 168,481 $ (211,772) $ (44,763) $ 47,473 $ (40,581)
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 81,184 36,499 3,259 (4,148) 116,794
Asset impairments 15,563 15,563
Provisions for excess lease space and
severance costs 13,106 13,106
Long-term compensation programs 3,799 1,441 5,240
Deferred income taxes (12,431) (26,700) (8,404) (47,535)
Losses from investments and sales of
assets 8,536 5,559 14,095
Loss from joint venture and equity
method investees 49,552 (44,763) 4,789
Nonreimbursable utilization of
intergroup tax benefits 18,994 (18,994)
Acquired research and development 2,200 98,981 101,181
Changes in operating assets and
liabilities:
Accounts receivable 27,258 (5,739) (177) (5,518) 15,824
Inventories (455) 1,174 559 (21) 1,257
Prepaid expenses and other assets (27,460) 1,962 (3,279) 58 (28,719)
Accounts payable and other liabilities 30,515 (10,501) 6,506 15,323 41,843
------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Operating
Activities 300,621 (49,869) (37,895) 212,857
------------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing
Operations
Additions to property, plant and
equipment, net (88,274) (17,809) (8,024) (114,107)
Purchases of short-term investments, net (29,653) (78,975) (108,628)
Acquisitions and investments, net (39,473) (48,347) 45,919 (41,901)
Proceeds from the sale of assets, net 5,228 5,228
------------------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (152,172) (145,131) (8,024) 45,919 (259,408)
------------------------------------------------------------------------------------------------------------------
Net Cash Used By Operating Activities
From Discontinued Operations (2,843) (2,843)
------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable (15,278) (8,443) (23,721)
Principal payments on long-term debt (28,973) (10,000) (38,973)
Dividends (36,020) (36,020)
Net cash funding from groups 45,919 (45,919)
Purchases of common stock for treasury (68,950) (941) (69,891)
Proceeds from stock issued for stock
plans 21,017 27,198 48,215
------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Financing
Activities (128,204) 7,814 45,919 (45,919) (120,390)
------------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash 31,467 31,467
------------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents 48,869 (187,186) (138,317)
Cash And Cash Equivalents Beginning Of
Year 392,459 216,076 608,535
------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 441,328 $ 28,890 $ - $ - $ 470,218
===================================================================================================================
</TABLE>
78 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Consolidating Statement of Operations For the Year Ended June 30, 2001
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Net revenues from external customers $ 1,555,346 $ 88,680 $ 100 $ - $ 1,644,126
Intersegment revenues 64,149 705 1,487 (66,341)
-------------------------------------------------------------------------------------------------------------------
Net Revenues 1,619,495 89,385 1,587 (66,341) 1,644,126
Cost of sales 774,475 42,990 986 (37,739) 780,712
-------------------------------------------------------------------------------------------------------------------
Gross Margin 845,020 46,395 601 (28,602) 863,414
-------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 337,871 49,057 1,077 52,054 440,059
Corporate allocated expenses 42,797 9,257 (52,054)
Research, development and engineering 184,491 164,693 4,484 (30,251) 323,417
Amortization of goodwill and intangible
assets 43,934 43,934
Other special charges 69,069 69,069
-------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 279,861 (289,615) (4,960) 1,649 (13,065)
Gain on investments, net 14,985 14,985
Interest expense (1,296) (829) (2,125)
Interest income 16,767 63,581 80,348
Other income (expense), net (5,832) (839) (6,671)
Loss from joint venture (4,960) 4,960
-------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 304,485 (232,662) (4,960) 6,609 73,472
Provision (benefit) for income taxes 92,094 (46,433) 577 46,238
-------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 212,391 $ (186,229) $ (4,960) $ 6,032 $ 27,234
===================================================================================================================
</TABLE>
APPLERA CORPORATION Annual Report 2002 79
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Consolidating Statement of Financial Position At June 30, 2001
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
====================================================================================================================
<S> <C> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 392,459 $ 216,076 $ - $ - $ 608,535
Short-term investments 779,482 779,482
Accounts receivable, net 382,560 24,019 (5,776) 400,803
Inventories, net 140,813 6,239 2,774 (168) 149,658
Prepaid expenses and other current
assets 98,124 4,838 44 103,006
--------------------------------------------------------------------------------------------------------------------
Total current assets 1,013,956 1,030,654 2,818 (5,944) 2,041,484
Property, plant and equipment, net 315,356 123,497 2,417 (5,710) 435,560
Other long-term assets 348,575 65,985 8,929 (12,675) 410,814
--------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,677,887 $ 1,220,136 $ 14,164 $ (24,329) $ 2,887,858
====================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Loans payable $ 14,678 $ - $ - $ - $ 14,678
Current portion of long-term debt 30,480 30,480
Accounts payable 162,104 21,024 912 (5,776) 178,264
Accrued salaries and wages 49,553 15,088 213 64,854
Accrued taxes on income 82,717 2,561 (2,262) 83,016
Other accrued expenses 168,552 46,907 364 215,823
--------------------------------------------------------------------------------------------------------------------
Total current liabilities 508,084 85,580 1,489 (8,038) 587,115
Other long-term liabilities 128,592 23,840 152,432
--------------------------------------------------------------------------------------------------------------------
Total Liabilities 636,676 109,420 1,489 (8,038) 739,547
--------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,041,211 1,110,716 12,675 (16,291) 2,148,311
--------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $ 1,677,887 $ 1,220,136 $ 14,164 $ (24,329) $ 2,887,858
====================================================================================================================
</TABLE>
80 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Consolidating Statement of Cash Flows For the Year Ended June 30, 2001
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Operating Activities From Continuing
Operations
Net income (loss) $ 212,391 $ (186,229) $ (4,960) $ 6,032 $ 27,234
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 66,794 65,503 549 (3,695) 129,151
Asset impairments 69,069 69,069
Long-term compensation programs 4,477 1,605 6,082
Deferred income taxes 20,488 (8,449) 3,942 15,981
Gains from sales of assets (14,985) (14,985)
Loss from joint venture 4,960 (4,960)
Nonreimbursable utilization of
intergroup tax benefits 32,197 (32,197)
Changes in operating assets and
liabilities:
Tax benefit receivable from the Applied
Biosystems group 16,702 (16,702)
Accounts receivable (42,279) (9,083) 2,063 (49,299)
Inventories 4,231 (2,903) (499) 168 997
Prepaid expenses and other assets (34,327) (158) 39 (34,446)
Accounts payable and other liabilities (107,315) 32,629 32 11,274 (63,380)
------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Operating
Activities 141,672 (48,551) (4,839) (1,878) 86,404
------------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing
Operations
Additions to property, plant and
equipment, net (143,663) (33,817) (1,734) 1,878 (177,336)
Purchases of short-term investments, net (238,115) (238,115)
Acquisitions and investments, net (5,912) (9,573) 6,573 (8,912)
Proceeds from the sale of assets, net 15,498 15,498
------------------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (134,077) (281,505) (1,734) 8,451 (408,865)
------------------------------------------------------------------------------------------------------------------
Net Cash Used By Operating Activities
From Discontinued Operations (2,860) (2,860)
------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable 1,553 1,553
Principal payments on long-term debt (46,000) (46,000)
Dividends (35,669) (35,669)
Net cash funding from groups 6,573 (6,573)
Proceeds from stock issued for stock
plans 37,836 22,238 60,074
------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Financing
Activities 3,720 (23,762) 6,573 (6,573) (20,042)
------------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash (10,604) (10,604)
------------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents (2,149) (353,818) (355,967)
Cash And Cash Equivalents Beginning Of
Year 394,608 569,894 964,502
------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 392,459 $ 216,076 $ - $ - $ 608,535
==================================================================================================================
</TABLE>
APPLERA CORPORATION Annual Report 2002 81
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Consolidating Statement of Operations For the Year Ended June 30, 2000
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics
(Dollar amounts in thousands) Group Group Eliminations Consolidated
=====================================================================================================
<S> <C> <C> <C> <C>
Net revenues from external customers $ 1,328,288 $ 42,747 $ - $ 1,371,035
Intersegment revenues 59,812 (59,812)
-----------------------------------------------------------------------------------------------------
Net Revenues 1,388,100 42,747 (59,812) 1,371,035
Cost of sales 637,693 15,045 (28,639) 624,099
-----------------------------------------------------------------------------------------------------
Gross Margin 750,407 27,702 (31,173) 746,936
-----------------------------------------------------------------------------------------------------
Selling, general and administrative 348,037 35,553 53,321 436,911
Corporate allocated expenses 45,852 7,469 (53,321)
Research, development and engineering 141,194 148,620 (34,229) 255,585
Amortization of goodwill and intangible
assets 4,166 4,166
Other special charges 2,142 2,142
-----------------------------------------------------------------------------------------------------
Operating Income (Loss) 213,182 (168,106) 3,056 48,132
Gain on investments, net 48,603 48,603
Interest expense (1,386) (2,115) (3,501)
Interest income 18,620 20,808 39,428
Intergroup interest income (expense) (6,740) 6,740
Other income (expense), net 3,446 3,446
-----------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 275,725 (142,673) 3,056 136,108
Provision (benefit) for income taxes 89,478 (49,936) 1,070 40,612
-----------------------------------------------------------------------------------------------------
Net Income (Loss) $ 186,247 $ (92,737) $ 1,986 $ 95,496
=====================================================================================================
</TABLE>
82 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Consolidating Statement of Cash Flows For the Year Ended June 30, 2000
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics
(Dollar amounts in thousands) Group Group Eliminations Consolidated
=====================================================================================================
<S> <C> <C> <C> <C>
Operating Activities From Continuing
Operations
Net income (loss) $ 186,247 $ (92,737) $ 1,986 $ 95,496
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 54,513 29,575 (3,389) 80,699
Long-term compensation programs 9,652 883 10,535
Deferred income taxes (19,428) (6,971) (26,399)
Gains from sales of assets (56,801) (56,801)
Changes in operating assets and
liabilities:
Tax benefit receivable from the Applied
Biosystems group (6,767) 6,767
Accounts receivable (62,186) (11,620) 1,268 (72,538)
Inventories (2,795) 615 (2,180)
Prepaid expenses and other assets (22,396) (446) (22,842)
Accounts payable and other liabilities 80,061 29,138 (6,965) 102,234
-----------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Operating
Activities 166,867 (58,330) (333) 108,204
-----------------------------------------------------------------------------------------------------
Investing Activities From Continuing
Operations
Additions to property, plant and
equipment, net (94,449) (29,498) 333 (123,614)
Purchases of short-term investments, net (541,127) (541,127)
Acquisitions and investments, net (20,748) (2,275) (23,023)
Proceeds from the sale of assets, net 82,763 82,763
Proceeds from the collection of notes
receivable 150,000 150,000
-----------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Investing
Activities 117,566 (572,900) 333 (455,001)
-----------------------------------------------------------------------------------------------------
Net Cash Used By Operating Activities
From Discontinued Operations (15,081) (15,081)
-----------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable 6,701 46,000 52,701
Dividends (26,358) (26,358)
Net proceeds from follow-on stock
offering 943,303 943,303
Proceeds from stock issued for stock
plans 43,434 17,613 61,047
Payment of intergroup note (150,000) 150,000
Net cash allocated (to) from the groups 27,283 (27,283)
-----------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Financing
Activities (98,940) 1,129,633 1,030,693
-----------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash (12,334) (12,334)
-----------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents 158,078 498,403 656,481
Cash And Cash Equivalents Beginning Of
Year 236,530 71,491 308,021
-----------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 394,608 $ 569,894 $ - $ 964,502
=====================================================================================================
</TABLE>
APPLERA CORPORATION Annual Report 2002 83
APPLERA CORPORATION Report of Management and
Report of Independent Accountants
Report of Management
To the Stockholders of
Applera Corporation
Management is responsible for the accompanying consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. In preparing the financial
statements, it is necessary for management to make informed judgments and
estimates which it believes are appropriate under the circumstances. Financial
information presented elsewhere in this annual report is consistent with that
in the financial statements.
In meeting its responsibility for preparing reliable financial statements, the
Company maintains a system of internal accounting controls designed to provide
reasonable assurance that assets are safeguarded and transactions are properly
recorded and executed in accordance with corporate policy and management
authorization. The Company believes its accounting controls provide reasonable
assurance that errors or irregularities which could be material to the
financial statements are prevented or would be detected within a timely
period. In designing such control procedures, management recognizes judgments
are required to assess and balance the costs and expected benefits of a system
of internal accounting controls. Adherence to these policies and procedures is
reviewed through a coordinated audit effort of the Company's internal audit
staff and independent accountants.
The Audit/Finance Committee of the Board of Directors is comprised solely of
outside directors and is responsible for overseeing and monitoring the quality
of the Company's accounting and auditing practices. The independent
accountants and internal auditors have full and free access to the Audit/
Finance Committee and meet periodically with the committee to discuss
accounting, auditing, and financial reporting matters.
/s/ Dennis L. Winger
--------------------------------
Dennis L. Winger
Senior Vice President and
Chief Financial Officer
/s/ Tony L. White
--------------------------------
Tony L. White
Chairman, President, and
Chief Executive Officer
Report of Independent Accountants
To the Stockholders and Board of Directors of
Applera Corporation
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of stockholders'
equity, and of cash flows present fairly, in all material respects, the
financial position of Applera Corporation and its subsidiaries at June 30,
2002 and 2001, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended June 30, 2002 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" in fiscal 2002.
/s/ PricewaterhouseCoopers LLP
--------------------------------
PricewaterhouseCoopers LLP
Stamford, Connecticut
July 25, 2002
84 APPLERA CORPORATION Annual Report 2002
APPLERA CORPORATION Directors and Officers
BOARD OF DIRECTORS
Tony L. White
Chairman, President, and Chief
Executive Officer
Applera Corporation
Director since 1995
(1)
Richard H. Ayers
Retired Chairman and Chief
Executive Officer
The Stanley Works
Director since 1988
(1,2)
Jean-Luc Belingard
President
Beaufour Ipsen Group
Director since 1993
(3,4,5)
Robert H. Hayes, Ph.D.
Philip Caldwell Professor,
Emeritus
Harvard Business School
Director since 1985
(1,2,5)
Arnold J. Levine, Ph.D.
Visiting Professor
Institute for Advanced
Studies
Director since 1999
(3,4,5)
Theodore E. Martin
Retired President and Chief
Executive Officer
Barnes Group Inc.
Director since 1999
(2)
Carolyn W. Slayman, Ph.D.
Sterling Professor and
Deputy Dean
Yale University School of
Medicine
Director since 1994
(1,3,4,5)
Orin R. Smith
Retired Chairman and Chief
Executive Officer
Engelhard Corporation
Director since 1995
(3,4)
Georges C. St. Laurent, Jr.
Principal
St. Laurent Properties
Former Chief Executive
Officer
Western Bank
Director since 1996
(3,4,5)
James R. Tobin
President and
Chief Executive Officer
Boston Scientific
Corporation
Director since 1999
(2)
Committee Memberships:
1 Executive Committee
2 Audit/Finance Committee
3 Management Resources
Committee
4 Nominating/Corporate
Governance Committee
5 Technology Advisory
Committee
CORPORATE OFFICERS
Tony L. White*
Chairman, President, and Chief
Executive Officer
David S. Block, M.D.
Vice President
Celera Genomics
Robert F.G. Booth, Ph.D.
Vice President
Celera Genomics
Samuel E. Broder, M.D.
Vice President
Celera Genomics
Patrick T. Carroll
Vice President
Applied Biosystems
Ugo D. DeBlasi
Finance
Celera Genomics
Paul D. Grossman
Intellectual Property
Applied Biosystems
Michael W. Hunkapiller, Ph.D.*
Senior Vice President and
President
Applied Biosystems
Vikram Jog
Corporate Controller
Robert C. Jones
Vice President
Applied Biosystems
Barbara J. Kerr*
Vice President Human
Resources
Victor K. Lee
Intellectual Property
Celera Diagnostics
Thomas P. Livingston
Secretary
Wayne W. Montgomery
Intellectual Property
Celera Genomics
Sandeep Nayyar
Finance
Applied Biosystems
Tama Olver
Vice President and
Chief Information Officer
Kathy Ordonez*
Senior Vice President and
President
Celera Genomics and Celera
Diagnostics
John S. Ostaszewski
Treasurer
Robert P. Ragusa
Vice President
Applied Biosystems
William B. Sawch*
Senior Vice President and
General Counsel
Deborah A. Smeltzer
Vice President
Applied Biosystems
Thomas J. White, Ph.D.
Vice President
Celera Diagnostics
Dennis L. Winger*
Senior Vice President and Chief
Financial Officer
* Member, Management
Executive Committee
APPLERA CORPORATION Annual Report 2002 85
APPLERA CORPORATION Stockholder Information
PRINCIPAL OFFICES
Applera Corporation
301 Merritt 7
Norwalk, CT 06851-1070
T 203.840.2000
www.applera.com
Mailing Address:
Applera Corporation
301 Merritt 7
P.O. Box 5435
Norwalk, CT 06856-5435
Applied Biosystems
850 Lincoln Centre Drive
Foster City, CA 94404
T 650.570.6667
www.appliedbiosystems.com
Celera Genomics
45 West Gude Drive
Rockville, MD 20850
T 240.453.3000
www.celera.com
Celera Diagnostics
1401 Harbor Bay Parkway
Alameda, CA 94502
T 510.749.4200
www.celeradiagnostics.com
STOCKHOLDER RESPONSE CENTER
EquiServe Trust Company, N.A., the stockholder services and
transfer agent, will answer questions about accounts,
certificates, and dividends. Please call toll-free:
800.730.4001 or write to:
EquiServe Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
www.equiserve.com
DIVIDEND REINVESTMENT
The Applied Biosystems Dividend Reinvestment Plan provides owners of
Applera-Applied Biosystems stock with a convenient, automatic, and inexpensive
way to purchase additional shares. For information and an enrollment form,
contact EquiServe Trust Company at the address above.
STOCKHOLDER PUBLICATIONS
Applera Corporation information, including quarterly earnings releases, is
available by calling 800.762.6923. This menu-driven system allows callers to
receive specific news releases by fax within minutes of a request. Corporate
publications, including the annual report, proxy statement, and Securities and
Exchange Commission filings (Forms 10-K, 10-Q, etc.), may also be requested and
will be sent by mail.
STOCK EXCHANGE LISTINGS
The Applera-Applied Biosystems and Applera-Celera Genomics stocks are listed on
the New York and Pacific exchanges under the symbols ABI and CRA, respectively.
FORM 10-K
A copy of the annual report to the Securities and Exchange Commission on Form
10-K may be obtained without charge by writing to the Secretary at the 301
Merritt 7 corporate address.
INFORMATION VIA INTERNET
Internet users can access information on Applera Corporation,
its public announcements, including press releases, quarterly
conference calls, products, and services, and other items of
interest, at the following address:
www.applera.com
Alternatively, you may request this information by writing to:
Applera Corporation
Corporate Communications
850 Lincoln Centre Drive
Foster City, CA 94404
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Thursday, October 17, 2002,
at 9:30 a.m. at 301 Merritt 7, Norwalk, CT 06851.
INVESTOR RELATIONS
Vice President, Investor Relations
Peter Dworkin
Investment professionals should call 650.554.2449.
CORPORATE COMMUNICATIONS
Vice President, Corporate Communications
Carolyn E. Christenson
News media representatives and others seeking general information should call
650.554.2636.
TRADEMARKS
AB (Design), API 4000, Applera, Assays-by-Design, Assays-on-Demand, Celera,
Celera Diagnostics, Celera Discovery System, Celera Genomics, the Celera Spirit,
and ViroSeq are trademarks and ABI PRISM, Applied Biosystems, BigDye are
registered trademarks of Applera Corporation or its subsidiaries in the United
States and certain other countries. Q TRAP is a trademark of Applied
Biosystems/MDS SCIEX Instruments MDS Inc. TaqMan is a registered trademark of
Roche Molecular Systems, Inc. ICAT is a trademark of the University of
Washington, exclusively licensed to the Applied Biosystems Group of Applera
Corporation.
EQUAL EMPLOYMENT OPPORTUNITY AND AFFIRMATIVE ACTION
Applera Corporation has long been committed to Equal Employment Opportunity and
Affirmative Action. A policy of positive action is the foundation of this
commitment and is typified at Applera Corporation by programs directed toward
responsible community involvement.
(c)2002 Applera Corporation
86 APPLERA CORPORATION Annual Report 2002
Applera Corporation
301 Merritt 7
[Applera Corporation Logo] Norwalk, CT 06851
tel 203.840.2000
www.applera.com
121PU05-01
EXHIBIT 21
SUBSIDIARIES OF APPLERA CORPORATION
AS OF JUNE 30, 2002
<TABLE>
<CAPTION>
State or Jurisdiction
Name of Incorporation or Organization
---- --------------------------------
<S> <C>
Applera Overseas Corporation (New York, USA)
Applied Biosystems Pty Ltd. (Australia)
Applied Biosystems (Canada) Limited (Canada)
Applied Biosystems/MDS SCIEX Instruments (1) (Canada)
Applied Biosystems (Thailand) Limited (Thailand)
PE AG (Switzerland)
Applera France S.A. (France)
PE (Sweden) AB (Sweden)
PE Stockholm AB (Sweden)
Applied Biosystems OY (Finland)
Applera Holding BV (The Netherlands)
Applera Finance BV (The Netherlands)
Nelson Analytical GmbH (Germany)
Applera Europe BV (The Netherlands)
Applied Biosystems Holdings Limited (UK)
Perkin-Elmer (UK) Pension Trustees Limited (UK)
Applied Biosystems Ltd (UK)
PE GB Ltd. (UK)
Applera Polska Sp.zo.o. (Poland)
Applera Magyarorszag Kft (Hungary)
Applera Czech Republic s.r.o. (Czech Republic)
Agrogene S.A. (2) (France)
PE Genscope GmbH (Switzerland)
Spartan Ltd. (3) (Channel Isles)
Listronagh Company (Ireland)
Applied Biosystems Asia Pte. Ltd. (Singapore)
Applied Biosystems Malaysia Sdn. Bhd. (Malaysia)
Applera Holding GmbH (Germany)
Applera South Africa (PTY) Limited (South Africa)
PE Manufacturing GmbH (Germany)
AB Manufacturing GmbH (Germany)
Applera Austria Handels GmbH (Austria)
Applied Biosystems Hong Kong, Ltd. (Hong Kong)
Applied Biosystems do Brasil Ltda. (Brazil)
PE Biosystems ZAO (Russia)
Applied Biosystems Korea LLC (4) (Korea)
PE Corporation (NY) (New York, USA)
Applied Biosystems de Mexico S. de R.L. de C.V. (8) (Mexico)
Applera Insurance Company Limited (8) (Bermuda)
PE FSC, Inc. (8) (U.S.Virgin Islands)
Applera Hispania SA (8) (Spain)
Applera International, Inc. (Delaware, USA)
PE Korea Corporation (Delaware, USA))
Applied Biosystems Taiwan Corporation (Delaware, USA)
PE Overseas Ltd. (Cayman Islands)
Applied Biosystems China, Inc. (Delaware, USA)
</TABLE>
<TABLE>
<CAPTION>
State or Jurisdiction
Name of Incorporation or Organization
---- --------------------------------
<S> <C>
GenScope, Inc. (Delaware, USA)
PE AgGen, Inc. (Utah, USA)
PerSeptive Biosystems, Inc. (Delaware, USA)
Applera Deutschland GmbH (Germany)
Applied Biosystems Japan, Ltd. (Japan)
PerSeptive Biosystems (UK) Ltd. (UK)
PerSeptive Biosystems (Canada) Ltd. (Canada)
GC Biotechnologies LLC (5) (Delaware, USA)
Shanghai GeneCore Biotechnologies Company, Ltd. (China)
PNA Diagnostics ApS (Denmark)
Boston Probes, Inc. (6) (Delaware, USA)
Procera Science, Inc. (Delaware, USA)
Paracel, Inc. (California, USA)
Paracel Limited (UK)
Axys Pharmaceuticals, Inc. (Delaware, USA)
Genos Biosciences, Inc. (1) (Delaware, USA)
Foster City Holdings, LLC (Delaware, USA)
Celera Diagnostics, LLC (7) (Delaware, USA)
Rockville Holdings, LLC (Delaware, USA)
Celera Diagnostics, LLC (7) (Delaware, USA)
</TABLE>
----------------
Note: Entities directly owned by subsidiaries of Applera Corporation are
indented and listed below their immediate parent. Ownership is 100% unless
otherwise indicated.
(1) 50.0% ownership
(2) 49.0% ownership
(3) 51.0% ownership by Applera Overseas Corporation, and 49% by Applera
Europe BV (indirectly wholly owned by Applera Corporation)
(4) 80.0% ownership by Applera Overseas Corporation, and 20% by PE
Corporation (NY) (indirectly wholly owned by Applera Corporation)
(5) 98.0% ownership
(6) 72.4% ownership by PE Corporation (NY), 15.1% by PNA Diagnostics ApS,
and 12.5% by Applera Corporation (indirectly wholly owned by Applera
Corporation)
(7) 50.0% ownership by Foster City Holdings, LLC and 50% ownership by
Rockville Holdings, LLC (indirectly wholly owned by Applera Corporation)
(8) Applera Corporation consummated an internal reorganization of certain
of its assets effective as of the end of its 2002 fiscal year. As part
of this reorganization, ownership of these entities has been
transferred by PE Corporation (NY) to Applera Corporation subject to
obtaining necessary governmental clearances.
Applera Corporation conducts its business through its Applied Biosystems Group,
its Celera Genomics Group, and its Celera Diagnostics joint venture between
these two groups. Applera Corporation and its direct and indirect wholly owned
subsidiaries conduct business under the names of these businesses and variants
thereof. In addition, Boston Probes, Inc., Paracel, Inc., and Axys
Pharmaceuticals, Inc. may from time to time conduct business under their
respective corporate names and variants thereof.
Applied Biosystems/MDS SCIEX Instruments and Agrogene S.A. conduct business
under their respective company names and variants thereof. GC Biotechnologies
LLC and its subsidiary Shanghai GeneCore Biotechnologies Company, Ltd. conduct
business under both of their company names and variants thereof.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-39549, 333-92225, and 333-72858) and Form S-8
(Nos. 33-25218, 33-50847, 33-50849, 33-58778, 333-15189, 333-15259, 333-38713,
333-38881, 333-42683, 333-68147, 333-82679, 333-82677, 333-91771, 333-91951,
333-91955, 333-35080, 333-51644, 333-51648, 333-73980, 333-74252, and 333-74254)
of Applera Corporation of our report dated July 25, 2002 relating to the
consolidated financial statements which appears in the Annual Report to
Stockholders, which is incorporated in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report dated July 25, 2002
relating to the financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
September 26, 2002
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Applera Corporation (the
"Company") on Form 10-K for the year ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Tony L.
White, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Tony L. White
-----------------------------
Chief Executive Officer
Date: September 27, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Applera Corporation (the
"Company") on Form 10-K for the year ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Dennis
L. Winger, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Dennis L. Winger
----------------------------
Chief Financial Officer
Date: September 27, 2002