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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, 2001
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
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Applera Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 06-1534213
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 Merritt 7, Norwalk, Connecticut 06851-1070
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-840-2000
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Class on Which Registered
Applera Corporation - Applied Biosystems Group New York Stock Exchange
Common 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
Securities registered pursuant to Section 12 (g) of the Act:
Title of Class
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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.
[X] Yes [ ] 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. [ ]
As of September 4, 2001, 211,623,977 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 $5,315,931,298. As of September 4, 2001, 61,950,655 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 $1,652,314,834.
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DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders for Fiscal Year
ended June 30, 2001 - Parts I, II, and IV.
Proxy Statement for Annual Meeting of Stockholders
dated September 18, 2001 - Part III.
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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"). The Company
maintains a corporate staff to provide accounting, tax, treasury, legal,
information technology, human resources, and other internal services.
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 recapizalization, was renamed the "Applied Biosystems Group."
Applied Biosystems is engaged principally in the development,
manufacture, sale, and service of instrument systems and associated consumable
products 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 around
specific technologies to a more integrated marketing and product development
structure.
Celera Genomics is engaged principally in integrating high throughput
technologies to create therapeutic discovery and development capabilities for
internal use and for its customers and collaborators. Celera Genomics'
businesses are its online information business and its therapeutic discovery
business. The online information business is a leading provider of genomic and
related biological and medical information. Pharmaceutical, biotechnology, and
academic customers use this information, along with customized information
technology solutions provided by Celera Genomics, to enhance their capabilities
in the fields of life science research and pharmaceutical and diagnostic
discovery and development. Celera Genomics recently expanded its focus to
include therapeutic discovery and development. Celera Genomics intends to
leverage its capabilities in genomics, proteomics, and bioinformatics, both in
internal programs and through collaborations, to identify drug targets and
diagnostic markers, and to discover and develop novel therapeutic candidates.
Initially, Celera Genomics intends to focus its therapeutic discovery efforts in
the field of oncology. In June 2001, Celera Genomics announced
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the signing of a definitive merger agreement with Axys Pharmaceuticals, Inc.
("Axys"), a small molecule drug discovery and development company. Celera
Genomics believes that Axys' medicinal and structural chemistry and biology
capabilities will accelerate the development of its therapeutic discovery
business. This acquisition is expected to close during the fourth quarter of
calendar 2001.
In April 2001, the Company formed a joint venture between Applied
Biosystems and Celera Genomics in the field of diagnostics ("Celera
Diagnostics"). The Company expects that this joint venture will be focused on
the discovery, development, and commercialization of novel diagnostic tests.
Financial Information About Industry Segments
A summary of net revenues from external customers, operating income
(loss), and total assets attributable to each of the Company's industry segments
for the fiscal years ended June 30, 1999, 2000, and 2001 is incorporated herein
by reference to Note 6 on pages 44-45, Note 6 on page 82, and Note 6 on pages
102-103 of the Company's Annual Report to Stockholders for the fiscal year ended
June 30, 2001.
Narrative Description of Business
Applied Biosystems Group
Overview. Applied Biosystems is engaged principally in the development,
manufacture, sale, and service of instrument systems and associated consumable
products for life science research 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.
During the 2001 fiscal year, Applied Biosystems implemented an
organizational realignment away from a business unit structure organized around
specific technologies to a more integrated marketing and product development
structure. Within this structure, Applied Biosystems' business organization is
comprised of the following operating groups:
o Applications and Products Group. Applied Biosystems'
Applications and Products group has overall responsibility for
all Applied Biosystems product lines. The Applications and
Products group's marketing activities have been assigned
within the group to an applications marketing unit, a platform
marketing unit, a global service unit, and a brand marketing
unit. The applications marketing unit has been established to
focus on the following key product application areas which
have been identified for product development: genomics,
proteomics, high throughput screening, drug metabolism and
pharmacokinetics, and applied genetic analysis in the areas of
human identification, and environmental and food testing. The
platform marketing unit has been established to focus on
development of instrument platform
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products. The global service and solutions marketing group has
been established to focus on Applied Biosystems' service
business. And the brand marketing group is responsible for
communication of the overall Applied Biosystems strategy.
The Applications and Products group also has responsibility
for applications research and development. In addition to the
four marketing units described above, a research and
development unit formed within the Applications and Products
group has responsibility for the development of
application-specific products that are to be used on Applied
Biosystems' instrument and reagent platforms. Examples of this
type of product would include the commercialization of the
content of the human genome into specific assays for
genotyping, gene expression, DNA sequencing, protein
expression, and biochemical screening of biological pathways.
o Platform Products R&D Group. Applied Biosystems' Platform
Products Research and Development group has overall
responsibility for all platform research and development
programs, including all instrument and software development
projects. Platform instruments and software are developed by
this group in collaboration with the Applications and Products
group.
o Global Operations Group. The Global Operations group is
responsible for manufacturing, distribution, and quality
control of all Applied Biosystems products. Applied
Biosystems has sought to optimize manufacturing operations by
establishing discreet units for instruments, consumables, and
its specialized oligonucleotide factory.
The operating activities of these groups are supported by a shared
service organization responsible for the human resources, finance, sales,
communications, legal, intellectual property, and advanced research functions.
As a result of its new integrated marketing and product development structure,
Applied Biosystems expects to be able to bring new products to market in a
timely manner while maintaining the innovation and product quality that have
helped to establish Applied Biosystems as a leading supplier of tools for life
science research. In addition, Applied Biosystems believes this new structure
enables enhanced operating efficiencies in its marketing and development
activities and reduced administrative costs through cross-selling of products to
the same customer base.
In July 2001, the Company announced 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
plans to prioritize and resequence selected genes from 40 to 50 individuals,
which the Company believes will reveal a larger number of single nucleotide
polymorphisms ("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, drug efficiency, and drug toxicity. Celera Genomics intends to use
this SNP data in its internal discovery efforts to improve the predictive
efficacy and toxicity of drug candidates, and as the basis for additional
collaborations. Celera Genomics may also incorporate the data from this program
into its database offerings. It is expected that Applied Biosystems will use
this information to develop new assays for the study of SNPs and other
polymorphisms, and that
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Celera Diagnostics will use this information in genotyping and gene expression
studies ultimately aimed at identifying new diagnostic markers.
Scientific Background. All living organisms contain four basic
biomolecules: nucleic acids, which include DNA and RNA; proteins; carbohydrates;
and lipids. Biomolecules are typically much larger and more complex than common
molecules. These structural differences make the analysis of biomolecules
significantly more complex than the analysis of smaller compounds. Although all
of these biomolecules are critical for a cell to function normally,
historically, key advances in therapeutics have come from an understanding of
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.
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 is between 20,000 and
30,000, 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. This testing 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 frequently involves the
measurement of a drug's binding 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. These efforts are expected to
create a demand for increased automation and efficiency in pharmaceutical and
biotechnology laboratories. Applied Biosystems' products
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are designed to address this demand by combining the detection capabilities of
bioanalytical instruments with advances in automation.
Products for the Genomics Market. Customers in the genomics market need
biosystems for the analysis of nucleic acids for basic research, pharmaceutical
discovery, diagnostic development, and food and environmental testing. Applied
Biosystems has developed technologies and products to support key applications
in sequencing, genotyping, and gene expression studies. 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 amplification instruments,
known as thermal cyclers, include 24, 48, and 96 sample
amplification systems, several combination thermal cyclers and
PCR detection systems, reagents, and software. Applied
Biosystems' dual 384-well sample thermal cycler supports all
key applications in genetic analysis and fills a significant
market need for laboratories conducting high volume genomic
research.
The Sequence Detection Systems product line, introduced in
1996, uses TaqMan(R) chemistry, a unique PCR technology
designed by the Roche Group and developed by Applied
Biosystems. TaqMan(R) chemistry detects the product of PCR
amplification and quantifies the initial sample during the
thermal cycling process. This product line has been widely
accepted in the pharmaceutical discovery research market. The
6700 Automated Nucleic Acid Workstation automates nucleic acid
preparation, including sample filtration and purification,
assay plate set-up, and plate scaling. This instrument is
designed to substantially decrease the labor and cost involved
in preparing DNA for analysis. The newly introduced ABI
PRISM(R) 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 300,000 samples in 24 hours for genotyping.
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 generally support both
DNA sequencing and genotyping.
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 analyzers are used to determine the size,
quantity, or pattern of DNA fragments. Fragment analysis
applications include: gene mapping; forensic typing using
microsatellite markers; SNP analysis; gene expression
analysis; and oligonucleotide ligation assays to detect known
mutations.
Applied Biosystems' DNA sequencing products include a
sequencer with 96 capillaries (Model 3700), a sequencer with
16 capillaries (Model 3100), a one capillary sequencer (Model
310), a slab-gel instrument expandable to 96 lanes
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(Model 377), sequencing reagents, and analysis software. These
products are used to sequence DNA to provide an understanding
of human and other genomes and to analyze DNA fragments for
various applications, including human disease research, food
contamination, forensic analysis, genotyping, and gene
expression studies.
The high throughput Model 3700 DNA Analyzer, which was
introduced in the Company's 1999 fiscal year, is designed to
enable applications requiring analysis of tens of thousands of
samples produced weekly by combining proven capillary
electrophoresis hardware and separation polymer chemistry with
new detection technology and automation. This is an automated
instrument which allows 24 hour unattended operation. The
Model 3700 DNA Analyzer is the principal instrument used by
Celera Genomics for sequencing. 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
3100, which was introduced in the Company's 2000 fiscal year
and was designed for use by academic programs and commercial
laboratories worldwide, incorporates the automated technology
developed for these large-scale programs. Applied Biosystems'
Model 3700 DNA Analyzer accounted for 10.5%, 14.5%, and 9.1%
of the Company's consolidated revenues in fiscal years 1999,
2000, and 2001, respectively.
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.
The needs of multiple markets are met with several models of
synthesizers and supporting reagents marketed by Applied
Biosystems. 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 and various other
applications. PNA resembles DNA in its chemical 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 that are complementary to the probe.
PNA may be used in many areas, including basic research,
pharmaceutical discovery, diagnostic development, and food and
environmental testing.
Products for the Proteomics Market. Customers in the proteomics market
need biosystems for the analysis of proteins for discovery of drug targets,
protein therapeutics, biomarkers, and diagnostics. Applied Biosystems has
developed products for applications including purification, separation, and
identification of proteins and characterization of protein structure and
function. The following is a description of Applied Biosystems' products for the
proteomics market:
o Mass Spectrometry. Recently, mass spectrometry has become very
useful for the analysis of large molecules of biological
importance such as proteins. Analysis of proteins by mass
spectrometry involves the creation of charged particles, or
ions, from a protein sample followed by analysis of their mass
to assist in characterizing the protein. In the past, mass
spectrometry was not useful for this analysis because
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the classical methods for creating ions caused these complex
molecules to disintegrate into many small pieces. This process
resulted in the destruction of the information about the
original large molecule. The mass separation component was
also problematic because it was not possible to distinguish
between large molecules of nearly the same mass. Applied
Biosystems believes that its delayed extraction technology
used in its Matrix-Assisted, Laser Desorption Ionization
Time-of-flight ("MALDI-TOF") mass spectrometer overcomes those
deficiencies for the analysis of proteins and many other large
molecules of biological importance. This technology, along
with planned future enhancements, is expected to satisfy
market needs in the emerging field of proteomics, the study of
proteins expressed by genes, by providing high throughput
systems for the identification and characterization of
proteins.
Since MALDI-TOF instruments are not directly coupled to
separation devices, mixtures are often separated, purified,
and collected before analysis. This process can be
accomplished with Applied Biosystems' purification products
such as the VISION(TM) Workstation, an integrated separation
device which provides rapid separation of proteins or other
large molecules.
o Purification. Due to the emerging growth in the field of
proteomics, Applied Biosystems believes that tens of thousands
of proteins will be analyzed to determine if they may be used
as drug targets or as therapeutics. Effective analysis of
protein samples requires that they be purified. Applied
Biosystems believes that its purification products in general
can be incorporated readily into the development process of
pharmaceutical products and offer productivity advantages,
enabled by high throughput separation, over competitive
product offerings.
Applied Biosystems' patented Perfusion Chromatography(R)
technology uses proprietary flow-through particles and
BioCad(R) Chromatography workstations to reduce the time
necessary for the purification and analysis of biomolecules.
This technology separates biomolecules 10 to 100 times faster
than conventional liquid chromatography or high pressure
liquid chromatography ("HPLC") without compromising resolution
or capacity. Applied Biosystems' Vision(TM) Workstation is
believed to be the first robotic-equipped HPLC platform
introduced to the life science markets 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 particles are designed to increase
throughput and efficiency for the purification of
biomolecules.
o Protein Sequencing and Synthesis. 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 Edman protein sequencing chemistry to sequence a
peptide (a short sequence of amino acids, the building blocks
of proteins), 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' Pioneer(TM) and 433A Peptide Synthesis
systems are designed for the high throughput and quality
synthesis of peptides, peptide analogs, and small proteins.
Applied Biosystems also
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manufactures and sells proprietary synthesis reagents and fine
chemicals for use with these and other products.
High Throughput Screening Products. High throughput screening systems
are important in pharmaceutical development and life sciences research in
applications where large volumes of clinical samples need to be analyzed. The
following is a description of Applied Biosystems' high throughput screening
products:
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 ("FMAT"). 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 to satisfy market needs in pharmaceutical
development for a cell-based, high throughput screening
system.
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 Drug Discovery Services. Applied Biosystems also operates a
facility devoted to drug discovery services for the
pharmaceutical, biotechnology, and agricultural markets. The
services offered by this facility include custom assay
development using proprietary technologies and high throughput
drug screening with a capacity of approximately 100,000 to
400,000 tests per day.
Products for the Drug Metabolism and Pharmacokinetics Market. Applied
Biosystems' mass spectrometry products can be used for the analysis of not only
large molecules such as proteins but also small molecules, including those that
might be used as drugs. Mass spectrometry instruments are especially important
for pharmacokinetics, the measurement of drugs and their metabolites, which are
compounds resulting from the body's acting upon the drug, in bodily fluids such
as blood or urine. This information is required by the U.S. Food and Drug
Administration and other regulatory agencies for the approval of drugs. This
application is very demanding because the amounts of the drugs and their
metabolites are very low and the mixtures are very complex. In order to analyze
this mixture, scientists use LC/MS/MS systems, which consist of HPLC devices
which separate the components of the mixture, usually an extract of blood or
urine, and which are coupled directly to tandem mass spectrometry systems. For
this application, it is important to achieve as much sensitivity and specificity
as possible. This can be done with components which have been developed and
refined by Applied Biosystems/MDS SCIEX Instruments (formerly Perkin-Elmer/SCIEX
Instruments and PE SCIEX Instruments), a joint venture between the Company and
MDS Inc. of Canada (formerly MDS Health Group Limited of Canada) through which
the Company manufactures and sells certain of its mass spectrometry instrument
systems. Applied Biosystems/MDS SCIEX Instruments has developed the MS/MS
(tandem mass spectrometry) technologies which create the sensitivity and
specificity
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required for this demanding application. Under the terms of the joint venture
agreement with MDS Inc., Applied Biosystems has the exclusive worldwide
distribution rights to the LC/MS systems (liquid chromatography devices coupled
with mass spectrometry devices) manufactured for the joint venture by the MDS
SCIEX Division of MDS Inc. for the analytical instruments market.
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 (mainly
forensics), environmental, and food testing.
For example, 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(R) 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.
Also, 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 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.
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 this need.
The size and growth of Applied Biosystems' markets are influenced by a
number of factors, including:
o technological innovation in bioanalytical practice;
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
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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 2004. In July 2000, Applied Biosystems and the Roche Group
agreed to expand the markets each company serves with products
incorporating PCR. This new arrangement will allow both
companies to develop and market products for all potential
uses of PCR. Additionally, Applied Biosystems will continue to
distribute products the Roche Group manufactures for research
and non-diagnostic applications.
o Applied Biosystems also licenses rights under certain patents
assigned to the California Institute of Technology relating to
DNA sequencing. These patents expire between 2006 and 2015.
o Applied Biosystems also licenses rights under certain patents
assigned to the University of Colorado relating to
oligonucleotide synthesis. These patents will expire through
2007.
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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. (See Item 3, Legal Proceedings, on pages 25 and 26 of this
Annual Report on Form 10-K). 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, 2000
was $220.9 million, which included $25.8 million of orders from Celera Genomics.
Applied Biosystems' total recorded backlog at June 30, 2001 was $202.3 million,
which included $5.0 million of orders from Celera Genomics. 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 2002.
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 expenditures for Applied Biosystems totaled $143.6
million in fiscal 1999, $150.6 million in fiscal 2000, and $196.8 million in
fiscal 2001. The Company spent $184.6 million in fiscal 1999, $265.0 million in
fiscal 2000, and $324.5 million in fiscal 2001 on 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
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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 high
throughput technologies to create therapeutic discovery and development
capabilities for internal use and for its customers and collaborators. Celera
Genomics' businesses are its online information business and its therapeutics
discovery business. The online information business is a leading provider of
genomic and related biological and medical information. Pharmaceutical,
biotechnology, and academic customers use this information, along with
customized information technology solutions provided by Celera Genomics, to
enhance their capabilities in the fields of life science research and
pharmaceutical and diagnostic discovery and development. Celera Genomics
recently expanded its focus to include therapeutic discovery and development.
Celera Genomics intends to leverage its capabilities in genomics, proteomics,
and bioinformatics, both in internal programs and through collaborations, to
identify drug targets and diagnostic markers, and to discover and develop novel
therapeutic candidates. Initially, Celera Genomics intends to focus its
therapeutic discovery efforts in the field of oncology. In June 2001, Celera
Genomics announced the signing of a definitive merger agreement with Axys, a
small molecule drug discovery and development company. Celera Genomics believes
that Axys' medicinal and structural chemistry and biology capabilities will
accelerate the development of its therapeutic discovery business.
The Company and Dr. J. Craig Venter, a leading genomic scientist and
founder of The Institute for Genomic Research ("TIGR"), formed the Celera
Genomics business for the purpose of generating and commercializing genomic,
proteomic, and related biological and medical information to accelerate the
understanding of biological processes and to assist pharmaceutical,
biotechnology, and life science research entities in areas of research
including:
o new drugs and improved drug development processes;
o novel genes and factors that regulate and control gene
expression;
o understanding basic biological processes;
o interrelationships between genetic variability, disease, and
drug response; and
o personalized health/medicine.
A key component of Celera Genomics' business strategy is the
development and sale of its Celera Discovery System(TM). The Celera Discovery
System is an online information and discovery system through which users can
access Celera Genomics' genomic and related biological and medical information.
Celera Genomics continues to expand the content and functionality of this
integrated information and discovery system, which Celera Genomics
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believes includes the most comprehensive and integrated databases of genomic and
related biological and medical information currently available. The Celera
Discovery System contains proprietary information from both Celera Genomics and
external sources, as well as publicly available data. Also, Celera Genomics has
developed, and expects to continue developing, software tools that enable users
to view, browse, and analyze data available through the Celera Discovery System
in an integrated way to facilitate the drug discovery process.
Celera Genomics supplements human genome sequence data with other
information to increase the value of its Celera Discovery System. This
additional information includes annotation, comparative genomic information, and
associated tissue-specific gene and protein expression profiles from human and
other model organisms. Comparative genomic information from model organisms,
such as Drosophila (fruit fly) and mouse, are often used as a mechanism to
better analyze specific areas of the genome and develop an understanding of the
interrelationships of the genetic code to disease and drug response. This
information, which facilitates a better understanding of how genes are
controlled by regulatory elements, is expected to have significant implications
for therapeutic discovery and development.
Celera Genomics anticipates that its Celera Discovery System will
continue to be a resource for a wide range of customers, including companies in
the pharmaceutical and biotechnology industries, academic and research
institutions, and ultimately physicians and individuals. In addition, Celera
Genomics expects that the Celera Discovery System will be used internally for,
and will have a significant role in, Celera Genomics' therapeutic discovery
programs.
Scientific progress to date/publication of data. 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
will continue to update its assembly of the human and mouse genomes as it
continues to annotate these genomes. Annotation is the process whereby genes,
sequences of DNA that encode proteins, and their structures, features, protein
expression, and predicted function, are identified and recorded.
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. This is the same technique Celera Genomics used to
sequence and assemble the Drosophila genome in cooperation with the Berkeley
Drosophila Genome Project, Celera Genomics' first sequencing project. Celera
Genomics has used a combination of public and proprietary data to build the
assembled human genome. To build the assembled mouse genome, Celera Genomics
used its own proprietary data. Celera Genomics' customers continue to receive
updated versions of these assembled genomes.
Celera Genomics believes that its shotgun sequencing strategy has
accelerated the generation of genomic information and the discovery of new
genes. This information includes
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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 to Celera Genomics' customers through the Celera Discovery System.
Celera Genomics released a detailed ordered consensus human genome
assembly in the journal Science in February 2001. Celera Genomics makes this
information available to non-commercial entities in a searchable format via its
web site. Celera Genomics believes that this disclosure policy will establish
Celera Genomics' data as the genome reference standard and will encourage
researchers to use its data and ultimately become customers of Celera Genomics.
However, Celera Genomics' disclosure policies are and will continue to be
affected by, among other things, the evolution of intellectual property law and
Celera Genomics' assessment of the likelihood that other commercial
organizations may seek to obtain Celera Genomics' data and resell it to their
own customers in competition with Celera Genomics. Celera Genomics believes that
current efforts by some companies to obtain data made publicly available for the
purpose of private resale may continue, and that the need to protect the value
of its information while carrying out its intention to share this data with the
research community will affect its data disclosure strategy.
Commercial Applications. Celera Genomics expects that the use of the
information it develops and the discoveries it makes will help transform life
sciences research by increasing the understanding of biological processes, thus
enabling scientists to accelerate the discovery and development process. Celera
Genomics also believes that the information it develops will ultimately
facilitate the development of individual genetic profiles that will be used for
personal health planning by the medical market. The commercial markets that
Celera Genomics believes will benefit from its information include
pharmaceutical drug discovery and development, medical, and consumer markets.
Celera Genomics expects that its revenue sources for the foreseeable
future will come from selling access to its information through subscriptions,
genomic services, and research and development collaborations. The structure of
customer subscriptions, including the databases to be offered, functionality of
the system, the access fees to be charged, the intellectual property terms, and
the nature of any services provided to customers, will vary according to
customer requirements and are expected to change over time.
Online Information Business and Related Products and Services. The
Celera Discovery System is the primary platform for Celera Genomics' online
information business. The Celera Discovery System is an online information and
discovery system through which users can access Celera Genomics' genomic and
related biological and medical information. Through the Celera Discovery System,
customers have access, on a subscription basis, to extensive integrated genomic
information systems, including proprietary, public, and third party annotations;
polymorphism information; comparative genomics information; protein information;
and search tools and algorithms. Customers can subscribe to all of the Celera
Discovery System's databases and tools on a bundled basis, or can purchase
access to a selection of features. In addition, subscribers to Celera Genomics'
database offerings may choose forms of data access and delivery other than
through the Celera Discovery System.
The Celera Discovery System provides a bioinformatics infrastructure
designed to enable and support discovery research. Bioinformatics refers to
information technology designed for the management, processing, analysis,
storage, and visualization of large quantities of genomic
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and related information. Celera Genomics' bioinformatics infrastructure includes
software tools that enable users to view, browse, and analyze data available
through the Celera Discovery System. In addition, users can integrate the Celera
Discovery System into their existing software infrastructure. Also, subscribers
to the Celera Discovery System can purchase bioinformatics and related
information technology services, such as data hosting, custom analysis
applications services, and data integration.
All of the information contained in the Celera Discovery System is
integrated through Celera Genomics' bioinformatics infrastructure to enable
analysis across data sets and facilitate users' discovery efforts. Users access
the data using a bioinformatics system that includes a graphical user interface
which enables viewing of data. The Celera Discovery System currently includes
the following databases:
o Genome Reference Database. Celera Genomics' Genome Reference
Database includes Celera Genomics' assembled and annotated
human, mouse, and Drosophila genomes, as well as genomic and
related data from a variety of sources available to the
public. In addition, the Celera Discovery System enables users
to integrate their own data with these data sets. The Celera
Discovery System provides pre-computed relationships among the
data sets integrated into the Genome Reference Database, and
contains computational tools designed to facilitate the
viewing and analysis of gene structure, function, and role,
and protein classifications.
o SNP Reference Database. Celera Genomics' SNP Reference
Database identifies over 3.5 million single nucleotide
polymorphism, or SNP, sites within the human genome. SNPs are
naturally occurring genetic variations within a genome that
scientists believe can be correlated with susceptibility to
disease, disease prognosis, drug efficiency, and drug
toxicity. In addition to the basic SNP data, this database
includes related content such as the identification of
haplotypes, which are sets of SNPs which relate to specific
diseases or other conditions, and is integrated with Celera
Genomics' annotation of the human genome.
Celera Genomics expects to expand the Celera Discovery System to
include comparative genomics tools. Comparative genomics involves the study of
genes of model organisms such as Drosophila (fruit fly) and mouse that
correspond to human genes in order to better analyze specific areas of the
genome and develop an understanding of interrelationships of the genetic code to
disease and drug response. The comparative genomics tools that Celera Genomics
is developing are expected to enable users to identify corresponding genes in
available genomes, facilitate validation of targets in model organisms, and
extend gene function predictions across species. Celera Genomic believes that
this type of information will facilitate a better understanding of how genes are
controlled by regulatory elements and will have significant implications for
therapeutic discovery and development.
Celera Genomics also expects to expand the Celera Discovery System to
include gene expression data and tools. Gene expression is the process by which
proteins are made from the instructions encoded in DNA. Celera Genomics plans to
enhance the Celera Discovery System to include tools to map customer and public
gene expression data, to integrate the Celera Discovery System with third party
gene expression tools, and to integrate gene expression data with Celera
Genomics classification systems. Celera Genomics may also add other product
offerings to the Celera Discovery System in the future, such as literature
annotation, protein function, and protein structure products.
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In addition to the products and services incorporated into the Celera
Discovery System, Celera Genomics provides collaborative products and services
customized to the individual needs of customers. Celera Genomics believes that
the infrastructure it has built in developing its online information business,
including its staff, technology, integrated information systems, and strategic
relationships, can be applied to the individual needs of its customers. These
additional products and services may include: licensing of proprietary
intellectual property rights from its own discovery efforts; collaborative
research and development endeavors; genome services such as sequencing and
assembly of genomes and genotyping services, (i.e., the detection and analysis
of individual genome profiles); and the provision of customized bioinformatics
tools and computer processing capacity.
In July 2001, the Company announced 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
plans to prioritize and resequence selected genes from 40 to 50 individuals,
which the Company believes will reveal a larger number of SNPs with health
related implications than are currently available. Celera Genomics intends to
use this SNP data in its internal discovery efforts to improve the predictive
efficacy and toxicity of drug candidates, and as the basis for additional
collaborations. Celera Genomics may also incorporate the data from this program
into its database offerings. It is expected that Applied Biosystems will use
this information to develop new assays for the study of SNPs and other
polymorphisms, and that Celera Diagnostics will use this information in
genotyping and gene expression studies ultimately aimed at identifying new
diagnostic markers.
Celera Therapeutics. Celera Genomics has recently expanded its focus to
include therapeutic discovery and development. Celera Genomics intends to
leverage its capabilities in genomics, proteomics, and bioinformatics to
identify therapeutic targets and diagnostic markers, and to discover and develop
novel therapeutic candidates. Initially, Celera Genomics intends to focus its
efforts in the field of oncology and has launched programs in pancreatic and
lung cancer, and expects to expand into other areas as its business and
discovery infrastructure develops. Celera Genomics intends to pursue both small
molecule and biologic therapeutics. Small molecule therapeutics are low
molecular weight synthetic pharmaceuticals, whereas biologic therapeutics are
generally large molecular weight protein-based biological compounds, typically
antibodies, vaccines, and replacement proteins. Celera Genomics plans to
commercialize discoveries, either at the target or therapeutic level, through
internal product development, collaboration, or licensing of intellectual
property.
Celera Genomics expects its scientific approach in therapeutic
discovery to be as follows:
o Target and Marker Identification. 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 represent
potential diagnostic markers or points of therapeutic
intervention. In fiscal 2001, Celera Genomics commenced
construction of a proteomics facility to house the high
throughput proteomics technology that Celera Genomics will
need for these studies. Celera Genomics is currently scaling
up the operations of the proteomics
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facility, which is expected to become fully operational during
the Company's 2002 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. Celera
Genomics has designed advanced methods to fractionate 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 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 that
information derived from these protein studies can then be
matched with values calculated from protein sequence
translations of Celera Genomics' assembled human and mouse
genomes using Celera Genomics' proprietary software and
algorithms designed for that purpose.
As a complementary approach to the methods described above,
Celera Genomics intends to also use a gene based approach to
target and marker identification. This approach uses genomics
and bioinformatics capabilities to identify novel genes. As
these novel genes are identified, 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.
o Target and Marker Validation. Celera Genomics expects to use a
variety of methodologies to validate targets. Celera Genomics
intends to use immunohistochemistry (tissue and cellular
localization of proteins using antibody reagents) to refine
its understanding of therapeutic targets of interest and, for
example, to identify expression profiles that would support or
preclude meaningful progression of the drug targets. For
targets of interest, Celera Genomics intends to carry out
assays to determine the relevance of those targets across a
broad range of tissues and diseases. In the same manner,
Celera Genomics intends to use antibody assays to identify
proteins in fluids to refine its understanding of markers
through examination of expression profiles in a range of
patient samples, primarily bodily fluids, to support or
preclude meaningful progression of the markers. Celera
Genomics has obtained and expects to continue accessing
further validation capabilities through collaborations. For
example, in calendar 2001, Celera Genomics entered into
collaborations with Isis Pharmaceuticals, Inc. to access its
antisense technology and SomaLogic, Inc. to access its aptamer
technology.
In June 2001, Celera Genomics announced the signing of a definitive
agreement for the acquisition of Axys, a small molecule drug discovery and
development company. The closing of this transaction is expected to occur in the
fourth quarter of calendar 2001. Celera Genomics believes that if this
acquisition is completed, Axys' medicinal and structural chemistry and biology
capabilities 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
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based validation through hit-based functionation, the
identification of function through interaction with molecules
of known biological activity.
o Also, 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.
o Axys has existing preclinical programs, including a program
directed at the treatment of osteoporosis in collaboration
with Merck & Co., a program directed at the treatment of
rheumatoid arthritis and atherosclerosis in collaboration with
Aventis Pharmaceuticals Products, Inc., and a program directed
at the treatment of asthma in collaboration with Bayer A.G.
Celera Genomics believes that it is uniquely positioned to build a
therapeutics discovery and development business by combining its existing
genomics capabilities with its developing proteomics capabilities and, if the
Axys acquisition is completed, with Axys' medicinal and structural chemistry and
biology capabilities. In addition, Celera Genomics believes that its
bioinformatics infrastructure will contribute to the development of this
business by accelerating the therapeutic discovery process through, for example,
computer-based experimentation and improved decision support. Celera Genomics
expects that the combination of its large scale computing infrastructure with
the development of proprietary algorithms will facilitate 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.
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. Celera Genomics depends
on Applied Biosystems for several critical materials, including reagents and
capillary arrays, required for sequencing. For certain of these materials,
Applied Biosystems is the sole supplier, and for other materials Celera Genomics
believes that Applied Biosystems provides the highest quality materials
available. Any interruption in the availability of these materials could
adversely affect and, in some cases, shut down sequencing operations.
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 proprietary gene
sequence methods, its software technology, the novel genes and proteins it
identifies, and any therapeutic or diagnostic discoveries it makes using a
variety of intellectual property mechanisms. Celera Genomics' commercial success
will be affected by, but is not directly dependent on, the ability to obtain
patent protection on genes, polymorphisms, proteins, disease associations,
therapeutic agents, and diagnostic agents discovered by it and/or by Celera
Genomics' customers on their own behalf and by collaborators. Celera Genomics
has sought and plans to continue seeking
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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 also sought and expects to continue seeking patent
protection for inventions relating to gene, protein, therapeutic, and diagnostic
discoveries. Celera Genomics' current plan is to apply for patent protection
upon the identification of novel genes, proteins, and their biological function
or utility, as well as therapeutic and diagnostic agents it discovers or
develops. Although obtaining patent protection based on genes 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, if Celera Genomics does not receive patents for therapeutic and
diagnostic discoveries it makes in the future, if any, the failure to obtain
such patents could adversely affect the commercial value of such discoveries.
Currently, Celera Genomics has patent applications directed to gene, protein,
therapeutic, and diagnostic discoveries that are pending in the United States
and in foreign jurisdictions and has received one issued United States patent.
Celera Genomics has in the past used and expects to continue using a
combination of strategies to protect its intellectual property assets involving
gene discoveries, proteomics discoveries, SNP discoveries, the underlying
validation, and functional characteristics of these genes, proteins, and SNPs,
as well as any therapeutic or diagnostic agents it discovers. In addition to
seeking patent protection, Celera Genomics may rely on trade secret laws or
confidentiality protections for these 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.
During the sequencing and early assembly phases of the human genome,
Celera Genomics maintained proprietary protection of its genome assembly and SNP
discoveries using a combination of confidential treatment of, and control of
access to, the information, as well as by seeking patent protection where
appropriate. During later stages of assembly and gene annotation, Celera
Genomics has sought and expects to continue seeking broader patent protections
of its discoveries. Such an approach will be utilized to establish commercial
applications and patentable utility for such SNP discoveries.
The granting of patents on genomic and proteomic based discoveries as
well as patents to therapeutic and diagnostic agents is uncertain worldwide and
is currently under review and revision in many countries. Moreover, publication
of information concerning partial gene sequences prior to the time that Celera
Genomics applies for patent protection based on the full-length gene sequences
or different partial gene sequences in the same gene may affect Celera Genomics'
ability to obtain patent protection. Certain court decisions suggest that
disclosure to the applicable agency of a partial sequence may not be sufficient
to support the patentability of a full-length sequence and that 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 an adequate disclosure of a specific and substantial utility, such as
gene function, in order to support the patentability of a gene sequence.
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
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might limit the scope of Celera Genomics' claims or make subsequent discoveries
related to full-length genes unpatentable. While Celera Genomics believes that
the publication of sequence data will not preclude it or others from being
granted patent protection on genes, there can be no assurances that this
publication has not affected and 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. These disclosures might limit the
scope of Celera Genomics' claims or make subsequent discoveries related to
full-length genes and proteins unpatentable. While Celera Genomics believes that
the publication of sequence data will not preclude it or others from being
granted patent protection on genes and proteins, there can be no assurances that
this publication has not affected and 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 taken security measures to protect its databases,
including entering into confidentiality agreements with employees and academic
collaborators who are 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, 2000 was
$24.3 million. Celera Genomics' total recorded backlog at June 30, 2001 was
$66.1 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 2002.
Competition. There is intense competition among entities attempting to
interpret segments of the human genome and identify genes associated with
specific diseases and develop products, services and intellectual property based
on these discoveries. Celera Genomics faces competition in these areas from
genomic, pharmaceutical, biotechnology and diagnostic companies, academic and
research institutions, and government or other publicly-funded
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agencies, both in the United States and abroad. A number of companies, other
institutions, and government-financed entities are engaged in gene and protein
analysis, and some of them are developing databases containing gene, protein,
and related biological information and are marketing or plan to market their
data to pharmaceutical and biotechnology companies and academic and research
institutions.
Additional competitors may attempt to establish databases containing
genomic and related information in the future which are similar to or
competitive with Celera Genomics' databases. In addition, some pharmaceutical
and biotechnology companies may choose to develop or acquire competing
technologies to meet their needs rather than purchase products or services from
Celera Genomics. Celera Genomics has licensed some of its key technology on a
non-exclusive basis from third parties and therefore this technology may be
available for license by competitors of Celera Genomics or pharmaceutical or
biotechnology companies seeking to develop their own databases for their own
use. Also, a customer may use Celera Genomics' services to develop products that
compete with products separately developed by Celera Genomics or its other
customers. Finally, new technologies that improve the gene and protein analysis
and discovery process may emerge over time and could compete with those being
developed by Celera Genomics or otherwise affect its business strategy.
Celera Genomics believes that the competitive position of its online
database business is dependent on the features and ease of use of the Celera
Discovery System and the scope, quality, and pricing (and perceived quality and
value) of the databases and services available through the Celera Discovery
System. Celera Genomics believes that the competitive position of the
therapeutics discovery business will depend upon the discoveries it makes, if
any, and the development of effective therapeutic agents based on those
discoveries.
Research and Development. Celera Genomics is actively engaged in basic
and applied research and development programs designed to develop new products.
Research and development expenditures for Celera Genomics totaled $43.7 million
in fiscal 1999, $148.6 million in fiscal 2000, and $164.7 million in fiscal
2001. The Company spent $184.6 million in fiscal 1999, $265.0 million in fiscal
2000, and $324.5 million in fiscal 2001 on 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 Joint Venture
In November 2000, the Company announced a major initiative in the field
of diagnostics and the appointment of Kathy Ordonez, formerly president of Roche
Molecular Systems, to lead this initiative. In April 2001, the Company formed
Celera Diagnostics, a joint venture between Applied Biosystems and Celera
Genomics to be headed by Ms. Ordonez as its President, to
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pursue this initiative. Celera Diagnostics is in the early stages of developing
its strategy and building its resources, but the Company expects that it will be
focused on the discovery, development, and commercialization of novel diagnostic
tests. The Company believes that Celera Diagnostics will be uniquely positioned
to contribute to the future of diagnostic medicine by leveraging the instrument
and technology expertise of Applied Biosystems with the discovery and
informatics capabilities of Celera Genomics.
In addition, in July 2001, the Company announced 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
plans to prioritize and resequence selected genes from 40 to 50 individuals,
which the Company believes will reveal a larger number of SNPs with health
related implications than are currently available. Celera Genomics intends to
use this SNP data in its internal discovery efforts to improve the predictive
efficacy and toxicity of drug candidates, and as the basis for additional
collaborations. Celera Genomics may also incorporate the data from this program
into its database offerings. It is expected that Applied Biosystems will use
this information to develop new assays for the study of SNPs and other
polymorphisms, and that Celera Diagnostics will use this information in
genotyping and gene expression studies ultimately aimed at identifying new
diagnostic markers.
Employees
As of June 30, 2001, the Company had approximately 5,544 employees
allocated as follows:
Business/Function Number
----------------- ------
Applied Biosystems Group 4,524
Celera Genomics Group 817
Celera Diagnostics 49
Corporate Staff 154
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 1999,
2000, and 2001 is incorporated herein by reference to Note 6 on pages 44 and 45,
Note 6 on page 82, and Note 6 on pages 102
-22-
and 103 of the Company's Annual Report to Stockholders for the fiscal year ended
June 30, 2001.
The Company's consolidated net revenues from external customers in
countries other than the United States for fiscal years 1999, 2000, and 2001
were $607.9 million, $690.0 million,
and $824.8 million, or 50.0%, 50.3%, and 50.2%, 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.
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 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,
substantially all of which are utilized by Applied Biosystems and all of which
are maintained in good working order:
Owned or Leased
Location (Approximate Floor Area in Sq. Ft.) (Expiration Date of Leases)
-------------------------------------------- ---------------------------
Foster City, CA (761,000) Leased (2001-2015)
Hayward, CA (66,000) Leased (2004)
San Jose, CA (81,000) Owned
Bedford, MA (43,000) Leased (2007)
Framingham, MA (140,000) Leased (2009)
Cambridge, MA (10,700) Leased (2006)
Santa Fe, NM (14,000) Leased (2010)
Houston, TX (50,000) Leased (2004)
Warrington, United Kingdom (69,000) Owned
Rotterdam, Netherlands (46,000) Leased (2010)
Singapore (30,000) Leased (2002)
Narita, Japan (24,000) Owned
Applied Biosystems acquired ownership of an 80 acre property in
Pleasanton, California, in September 2000, on which the company intends to
construct a new facility with approximately 600,000 square feet for research and
development, manufacturing, and administrative purposes. Demolition of the
existing facilities on this property and construction of the new facility are
underway and the new facility is currently expected to be completed in 2003.
Also, the Company is currently constructing a new owned facility in Warrington,
United Kingdom with approximately 38,000 square feet, which is expected to be
completed in November 2001. The Company expects to transfer some of its existing
operations in Warrington to this new facility upon its completion and intends to
sell the vacated property. Applied Biosystems also owns undeveloped land in
Vacaville, California, and is evaluating whether to develop this property.
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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 factory 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 in June 2000. The following is a
list of Celera Genomics' principal and other material facilities, substantially
all of which are utilized by Celera Genomics and all of which 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)
Davis, CA (16,000) Leased (2002)
The facility in Rockville, Maryland includes approximately 13 acres of
undeveloped land that the Company believes could be used for the construction of
additional facilities, if necessary.
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:
Owned or Leased
Location (Approximate Floor Area in Sq. Ft.) (Expiration Date of Leases)
-------------------------------------------- ---------------------------
Alameda, CA (48,000) Leased (2003)
Alameda, CA (19,000) Leased (2006)
Currently, Celera Diagnostics is using approximately 50% of the
combined capacity in these facilities, although it expects to be using
substantially all of the capacity by the end of the 2002 fiscal year due to the
expected growth in its operations. These facilities are in good working order,
although they are currently undergoing renovations that are expected to be
completed during the fourth quarter of calendar 2001.
Corporate Facilities
In May 2001, the Company consolidated most of its corporate staff into
a new leased headquarters facility located 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 the Company's corporate headquarters, but is no longer used by
the Company. This facility is being held for sale
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or long term lease. The 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 a party to various legal proceedings, including among
others patent, commercial, and environmental matters, arising from the conduct
of the Company's normal business activities, including those described below.
Amersham
On November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham")
filed a patent infringement action against the Company in the United States
District Court for the Northern District of California. The complaint alleges
that the Company is directly, contributorily, or by inducement infringing U.S.
Patent No. 5,688,648 ("the '648 patent"). Amersham asserts that the Company's
use and sale of DNA analysis reagents and systems that incorporate "BigDye"
fluorescence detection technology infringe the '648 patent, and seeks injunctive
and monetary relief. The Company answered the complaint, alleging that the '648
patent is invalid and unenforceable, and that the Company has not infringed the
'648 patent. In December 2000, the court granted Amersham's motion for summary
judgment in part, finding that certain of the Company's activities infringe the
claims of the '648 patent, but denied Amersham's motion for summary judgment
that the Company induced its customers to infringe the claims of the '648
patent. On April 6, 2001, the court granted the Company's motion for summary
judgment finding that the Company's recently introduced BigDye Version 3.0 dye
technology does not infringe the '648 patent.
On March 13, 1998, the Company filed a patent infringement action
against Amersham and Molecular Dynamics, Inc. in the United States District
Court for the Northern District of California. The Company asserts that one of
its patents (U.S. Patent No. 4,811,218) is infringed by reason of Molecular
Dynamics' and Amersham's sale of certain DNA analysis systems (e.g., the
MegaBACE 1000 System). In response, Amersham has asserted various affirmative
defenses and several counterclaims, including that the Company is infringing two
patents, U.S. Patent No. 5,091,652 ("the '652 patent") and U.S. Patent No.
5,459,325, each owned by or licensed to Molecular Dynamics, by selling certain
ABI PRISM(TM) DNA sequencing systems. In December 2000, the court granted the
Company's motion for summary judgment of non-infringement of the '652 patent.
The trial date previously scheduled for August 6, 2001 was vacated in July 2001.
On May 21, 1998, Amersham filed a patent infringement action against the Company
in the United States District Court for the Southern District of New York. The
complaint alleges that the Company is infringing, contributing to the
infringement of, and inducing the infringement of U.S. Patent No. 4,707,235
("the '235 patent") by reason of the Company's sale of certain ABI PRISM(TM) DNA
sequencing systems. The complaint seeks injunctive and monetary relief. The
Company answered the complaint, alleging that the '235 patent is invalid and
that the Company does not infringe the '235 patent. The matters described in
this paragraph and the immediately preceding paragraph have been consolidated
into a single case to be heard in the United States District Court for the
Northern District of California. In December 2000, the court granted the
Company's motion for summary judgment of non-infringement of the '235 patent.
However, on December 18, 2000, Amersham filed a new complaint alleging that the
Company is infringing the '235 patent by reason of the Company's sale of certain
DNA
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sequencing systems, which allegations were not in the previous suit under the
'235 patent. This action is in the early stages of discovery.
On May 30, 2000, the Company filed a patent infringement action against
Amersham in the United States District Court for the Northern District of
California. The Company asserts that one of its patents (U.S. Patent No.
5,945,526) is infringed by reason of Amersham's sale of DNA analysis reagents
and systems that incorporate ET Terminator fluorescence detection technology.
The claims construction hearing previously scheduled for June 7, 2001 has been
postponed.
On July 10, 2001, United States Judge Charles R. Breyer stayed all
cases in the litigation described above for the purpose of facilitating court
ordered settlement mediation. The stay is scheduled to expire on March 11, 2002.
Securities Litigation
The Company and some of its officers have been 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. The consolidated complaint seeks unspecified
money damages, rescission, costs and expenses, and such 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.
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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.
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 2000 and 2001 is
incorporated herein by reference to Note 12, page 54, of the Company's Annual
Report to Stockholders for the fiscal year ended June 30, 2001.
Holders
On September 4, 2001, the approximate number of holders of Applera
Corporation - Applied Biosystems Group Common Stock was 6,326, and the
approximate number of holders of Applera Corporation - Celera Genomics Group
Common Stock was 6,065. The approximate number of holders is based upon the
actual number of holders registered in the Company's books 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.
Dividends
Information regarding the amount of quarterly dividends during fiscal
years 2000 and 2001 is incorporated herein by reference to Note 12, page 54, of
the Company's Annual Report to Stockholders for the fiscal year ended June 30,
2001.
Sale of Unregistered Securities
The Company has not sold any securities during the fiscal year ended
June 30, 2001, 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," "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
-27-
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 Ceramics 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 the Applied Biosystems Group
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.
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
-28-
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 but unpublished patent applications that cover some aspect of these
technologies. In addition, there are relatively few decided court cases
interpreting the scope of patent claims in these technologies, and Applied
Biosystems' belief that its products do not infringe the technology covered by
valid patents could be successfully challenged by third parties. Also, in the
course of its business, 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 patent litigation described in the next 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.
The Company is currently subject to patent litigation with Amersham
Pharmacia Biotech, Inc. and Molecular Dynamics, Inc. In the litigation, Amersham
and Molecular Dynamics allege that Applied Biosystems has infringed four
Amersham patents as a result of Applied Biosystems' sale of DNA sequencing
instrumentations and reagents. Also in the litigation, the Company has brought
suit against Amersham and Molecular Dynamics alleging that they have infringed
two of the Company's patents as a result of their sale of their DNA sequencing
instrumentations and reagents. At present, these lawsuits are not scheduled for
trial. The sale of DNA sequencing instrumentation and reagents is an important
part of Applied Biosystems' business. If these lawsuits proceed to trial, the
cost of the litigation, and the amount of management time that will be devoted
to the litigation, will be significant. There can be no assurance that this
litigation will be resolved favorably to the Company or either Celera Genomics
or Applied Biosystems, that the Company and both of its groups will not be
enjoined from selling the products in question or other products as a result, or
that any monetary or other damages assessed against the Company will not have a
material adverse effect on the financial condition of the Company, Celera
Genomics, or Applied Biosystems.
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
2001 were derived from sales to customers outside of the United States. The
majority of these sales were based on the relevant customer's local currency. A
significant portion of the related costs for
-29-
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 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.
Electricity shortages and earthquakes could disrupt operations in
California.
The headquarters and principal operations of Applied Biosystems are
located in Foster City, California. The State of California and its principal
electrical utility companies have recently indicated that there is a statewide
electricity shortage and that these utility companies are in poor financial
condition. As a result, California has experienced temporary localized
electricity outages, or rolling blackouts, which may continue or worsen into
blackouts of longer duration in the future. Blackouts in Foster City, even of
modest duration, could impair or cause a temporary suspension of the group's
operations, including the manufacturing and shipment of new products. Power
disruptions of an extended duration or high frequency could have a material
adverse effect on operating results. In addition, Foster City is located near
major California earthquake faults. The ultimate impact of earthquakes on
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.
The Celera Genomics/Applied Biosystems Joint Venture's ability to
develop proprietary diagnostic products is unproven.
The Company has announced the formation of Celera Diagnostics, a joint
venture between Applied Biosystems and Celera Genomics in the field of
diagnostics. Celera Diagnostics faces the difficulties inherent in developing
and commercializing diagnostic tests and in building and operating a commercial
research and development program. Celera Diagnostics' ability to develop
proprietary diagnostic products is unproven, and it is possible that Celera
Diagnostics' discovery process will not result in any commercial products or
services. Even if Celera Diagnostics is able to develop products and services,
it is possible that these products and services may not be commercially viable
or successful due to a variety of reasons, including difficulty obtaining
regulatory approvals, competitive conditions, the inability to obtain necessary
intellectual property protection, the need to build distribution channels,
failure to get adequate reimbursement for these products from insurance or
government payors, or the inability of Celera Diagnostics to recover its
development costs in a reasonable period.
-30-
Risks Relating to the Celera Genomics Group
Celera Genomics has incurred net losses to date and may not achieve
profitability.
Celera Genomics has accumulated net losses of $365.0 million as of June
30, 2001, and expects that it will continue to incur additional net losses for
the foreseeable future. These losses are expected to increase as Celera Genomics
increases its investments in new technology and product development, including
investments for the development of its therapeutics discovery and development
business and investments in Celera Diagnostics, its joint venture with Applied
Biosystems, for the development of Celera Diagnostics' diagnostics business. As
an early stage business, Celera Genomics faces significant challenges in
simultaneously expanding its operations, pursuing key scientific goals and
attracting customers for its information products and services. As a result,
there is a high degree of uncertainty that Celera Genomics will be able to
achieve profitable operations.
Celera Genomics' business plan 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 its assembly of the human
and mouse genomes as it continues to annotate these genomes. Annotation is the
process of assigning features or characteristics to each chromosome. Each gene
on each chromosome is given a name, its structural features are described, and
proteins encoded by genes are classified into possible or known function.
Celera Genomics' ability to retain its existing customers and attract
new customers for its genome database business is heavily dependent upon the
continued assembly and annotation of these genomes. This information is also
essential to the therapeutics discovery and development components of Celera
Genomics' business strategy in which Celera Genomics intends to make substantial
investments in the near future. As a result, failure to update the assembly and
annotation efforts in a timely manner may have a material adverse effect on
Celera Genomics' business.
Celera Genomics' revenue growth depends on retaining existing customers
and adding new customers.
The revenues that Celera Genomics expects to receive from its existing
customers will offset only a portion of its expenses. In order to generate
significant additional revenues, Celera Genomics must obtain additional
customers and retain its existing customers. Celera Genomics' ability to retain
existing customers and add new customers depends upon customers' continued
belief that Celera Genomics' products can help accelerate their drug discovery
and development efforts and fundamental discoveries in biology. Although
customer agreements typically have multiple year terms, there can be no
assurance that any will be renewed upon expiration. Celera Genomics' future
revenues are also affected by the extent to which existing customers expand
-31-
their agreements to include new services and database products. In some cases,
Celera Genomics may accept milestone payments or future royalties on products
developed by its customers as consideration for access to Celera Genomics'
databases and products in lieu of a portion of subscription fees. These
arrangements are unlikely to produce revenue for Celera Genomics for a number of
years, if ever, and depend heavily on the research and product development,
sales and marketing and intellectual property protection abilities of the
customer.
Use of genomics information to develop or commercialize products is
unproven.
The development of new drugs and the diagnosis of disease based on
information derived from the study of the genetic material of organisms, or
genomics, is unproven. Few therapeutic or diagnostic products based on genomic
discoveries have been developed and commercialized and to date no one has
developed or commercialized any therapeutic or diagnostic products based on
Celera Genomics' technologies. If Celera Genomics or its customers are
unsuccessful in developing and commercializing products based on the group's
databases or other products or services, customers and Celera Genomics may be
unable to generate sufficient revenues and Celera Genomics' business may suffer
as a result. Development of these products will be subject to risks of failure,
including that these products will be found to be toxic, be found to be
ineffective, fail to receive regulatory approvals, fail to be developed prior to
the successful marketing of similar products by competitors or infringe on
proprietary rights of third parties.
The industry in which Celera Genomics operates is intensely competitive
and evolving.
There is intense competition among entities attempting to interpret
segments of the human genome and identify genes associated with specific
diseases and develop products, services and intellectual property based on these
discoveries. Celera Genomics faces competition in these areas from genomic,
pharmaceutical, biotechnology and diagnostic companies, academic and research
institutions and government or other publicly-funded agencies, both in the
United States and abroad. A number of companies, other institutions and
government-financed entities are engaged in gene and protein analysis, and some
of them are developing databases containing gene, protein, and related
biological information and are marketing or plan to market their data to
pharmaceutical and biotechnology companies and academic and research
institutions. Additional competitors may attempt to establish databases
containing this information in the future. In addition, some pharmaceutical and
biotechnology companies may choose to develop or acquire competing technologies
to meet their needs rather than purchase products or services from Celera
Genomics. Celera Genomics has licensed some of its key technology on a
non-exclusive basis from third parties and therefore this technology may be
available for license by competitors of Celera Genomics or pharmaceutical or
biotechnology companies seeking to develop their own databases for their own
use. Also, a customer of Celera Genomics may use the products or services of
Celera Genomics to develop products or services that compete with products or
services separately developed by Celera Genomics or its customers.
Competitors may also discover and characterize genes or proteins
involved in disease processes, potential candidates for new therapeutics, drug
discovery and development technologies, or drugs in advance of Celera Genomics
or its customers, or which are more effective than those developed by Celera
Genomics or its customers, or may obtain regulatory approvals of their drugs
more rapidly than Celera Genomics or its customers do, any of which
-32-
could have a material adverse effect on any of the similar programs of Celera
Genomics or its customers. Moreover, these competitors may obtain patent
protection or other intellectual property rights that would limit Celera
Genomics' rights or its customers' ability to use Celera Genomics' products to
commercialize therapeutic, diagnostic or agricultural products. In addition, a
customer may use Celera Genomics' services to develop products that compete with
products separately developed by the group or its other customers.
Celera Genomics also faces competition from software providers. A
number of companies have announced their intent to develop and market software
to assist pharmaceutical and biotechnology companies and academic researchers in
managing and analyzing their own genomic data and publicly available data.
Celera Genomics' current and potential customers are primarily from,
and are subject to risks faced by, the pharmaceutical and biotechnology
industries.
Celera Genomics derives a substantial portion of its revenues from fees
for its information products and services paid by pharmaceutical companies and
biotechnology companies engaged in drug discovery and development. These fees
accounted for approximately 70% of Celera Genomics' revenue in fiscal year 2001.
Celera Genomics expects that these companies will continue to be Celera
Genomics' primary source of revenues for the foreseeable future. As a result,
Celera Genomics is subject to risks and uncertainties that affect the
pharmaceutical and biotechnology industries and to reduction and delays in
research and development expenditures by companies in these industries.
In addition, Celera Genomics' future revenues may be adversely affected
by mergers and consolidation in the pharmaceutical and biotechnology industries,
which may reduce the number of the group's existing and potential customers.
Large pharmaceutical and biotechnology customers could also decide to conduct
their own genomics programs or seek other providers instead of using Celera
Genomics' products and services.
Celera Genomics relies on its strategic relationship with Applied
Biosystems.
Celera Genomics believes that its strategic relationship with Applied
Biosystems has provided it with a significant competitive advantage in its
efforts to date to sequence the human and other genomes. Applied Biosystems
leases instruments, sells consumables and project materials and provides
research and development services to Celera Genomics. Celera Genomics paid
Applied Biosystems $17.3 million in fiscal year 1999, $54.4 million in fiscal
year 2000 and $60.1 million in fiscal year 2001 for these products and services.
Celera Genomics' continued development of its database business and successful
extension of its business into therapeutics discovery and development will
depend on Applied Biosystems' ability to continue to provide leading edge,
proprietary technology and products, including advanced technologies for gene
and protein analysis. If Applied Biosystems is unable to supply these
technologies, Celera Genomics will need to obtain access to alternative
technologies, which may not be available, or may only be available on
unfavorable terms. Any change in the relationship with Applied Biosystems that
adversely affects Celera Genomics' access to Applied Biosystems' technology or
failure by Applied Biosystems to continue to develop new technologies or protect
its proprietary technology could adversely affect Celera Genomics' business.
-33-
Introduction of new products may expose Celera Genomics to product
liability claims.
New products developed by Celera Genomics could expose Celera Genomics
to potential product liability risks that are inherent in the testing,
manufacturing and marketing of human therapeutic and diagnostic products.
Product liability claims or product recalls, regardless of the ultimate outcome,
could require Celera Genomics to spend significant time and money in litigation
and to pay significant damages.
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' sales cycle is lengthy and it may spend considerable
resources on unsuccessful sales efforts or may not be able to complete
deals on the schedule anticipated.
Celera Genomics' sales cycle is typically lengthy because the group
needs to educate potential customers and sell the benefits of its products and
services to a variety of constituencies within those companies. In addition,
each agreement involves the negotiation of unique terms. Celera Genomics'
ability to obtain new customers for genomic information products, collaborative
services, and licenses to intellectual property depends on its customers' belief
that Celera Genomics can help accelerate their drug discovery efforts. Celera
Genomics may expend substantial funds and management effort with no assurance
that an agreement will be reached with a potential customer. Actual and proposed
consolidations of pharmaceutical and biotechnology companies have affected and
may in the future affect the timing and progress of Celera Genomics' sales
efforts.
Scientific and management staff has unique expertise which is key to
Celera Genomics' commercial viability and which would be difficult to
replace.
Celera Genomics is highly dependent on the principal members of its
scientific and management staff, particularly J. Craig Venter, its President and
Chief Scientific Officer. Additional members of Celera Genomics' medical,
scientific and information technology staff are important to the implementation
of its business plan. The loss of any of these persons' expertise would be
difficult to replace and could have a material adverse effect on Celera
Genomics' ability to achieve its goals.
Celera Genomics' competitive position may depend on patent and
copyright protection and licenses to the important intellectual
property patented by others, which may not be sufficiently available.
Celera Genomics' ability to compete and to achieve profitability may be
affected by its ability to protect its proprietary technology and other
intellectual property. While Celera Genomics' business is currently primarily
dependent on revenues from access fees to its on-line information system, Celera
Genomics expects that obtaining patent protection may become
-34-
increasingly important to its business as it moves beyond the on-line database
business. Celera Genomics would be able to prevent competitors from making,
using or selling any of its technology for which it obtains a patent. However,
patent law affecting Celera Genomics' business, particularly gene sequences,
gene function and genetic variations, or polymorphisms, is uncertain. As a
result, Celera Genomics is uncertain as to its ability to obtain intellectual
property protection covering its information discoveries sufficient to prevent
competitors from developing similar subject matter. The United States Patent and
Trademark Office has recently adopted new guidelines for use in the review of
the utility of inventions, particularly biotechnology inventions. These
guidelines increased the amount of evidence required to illustrate utility in
order to obtain a patent in the biotechnology field, making patent protection
more difficult 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. In addition,
because patent applications in the United States are maintained in secrecy until
patents issue, third parties may have filed patent applications for technology
used by Celera Genomics or covered by Celera Genomics' pending patent
applications without Celera Genomics being aware of those applications.
The United States Patent and Trademark Office has issued several
patents to third parties covering inventions involving single nucleotide
polymorphisms (SNPs), naturally occurring genetic variations that scientists
believe can be correlated with susceptibility to disease, disease prognosis,
drug efficiency, and drug toxicity. These inventions are subject to the same new
guidelines as other biotechnology inventions. In addition, 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.
Moreover, Celera Genomics may be dependent on protecting, through
copyright law or otherwise, its databases to prevent other organizations from
taking information from those databases and copying and reselling it. Copyright
law currently provides uncertain protection regarding the copying and resale of
factual data. As such, Celera Genomics is uncertain whether it could prevent
that copying or resale. Changes in copyright and patent law could either expand
or reduce the extent to which Celera Genomics and its customers are able to
protect their intellectual property.
Celera Genomics' position may depend on its ability to protect trade
secrets.
Celera Genomics 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 currently protects its information and procedures
as trade secrets. 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.
-35-
Public disclosure of genomics sequence data could jeopardize Celera
Genomics' intellectual property protection and have an adverse effect
on the value of its products and services.
Celera Genomics, the federally funded Human Genome Project and others
engaged in similar research have made and are expected to continue making
available to the public basic human sequence data. These disclosures might limit
the scope of Celera Genomics' claims or make subsequent discoveries related to
full-length genes and proteins unpatentable. While Celera Genomics believes that
the publication of sequence data will not preclude it or others from being
granted patent protection on genes and proteins, there can be no assurance that
the publication has not affected and will not affect the ability to obtain
patent protection. Customers may conclude that uncertainties of that protection
and the fact that the basic human sequence data is available for free decrease
the value of Celera Genomics' information products and services and as a result,
it may be required to reduce the fees it charges for its products and services.
Celera Genomics may infringe the intellectual property rights of third
parties and may become involved in expensive intellectual property
litigation.
The intellectual property rights of biotechnology companies, including
Celera Genomics, are generally uncertain and involve complex legal, scientific
and factual questions. Celera Genomics' success in the therapeutics discovery
and development fields may depend, in part, on its ability to operate without
infringing on the intellectual property rights of others and to prevent others
from infringing on its intellectual property rights.
There has been substantial litigation regarding patents and other
intellectual property rights in the genomics industry. 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, which may include subscribers to Celera Genomics' database information
services. Interference proceedings may be necessary to establish which party was
the first to discover the intellectual property. Celera Genomics may become
involved in patent litigation against third parties to enforce Celera Genomics'
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 an 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.
Celera Genomics' business is dependent on the continuous, effective,
reliable and secure operation of its computer hardware, software and
Internet applications and related tools and functions.
Because 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.
-36-
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' database products are complex and sophisticated, and as such, could
contain data, design or software errors that could be difficult to detect and
correct. Software defects could be found in current or future products. If
Celera Genomics fails to maintain and further develop the necessary computer
capacity and data to support its computational needs and its customers' drug
discovery efforts, it could result in loss of or delay in revenues and market
acceptance. In addition, any sustained disruption in Internet access provided by
third parties could adversely impact Celera Genomics' business.
Celera Genomics' research and product development depends on access to
tissue samples and other biological materials.
Celera Genomics will need access to normal and diseased human and other
tissue samples, other biological materials and related clinical and other
information, which may be in limited supply. Celera Genomics may not be able to
obtain or maintain access to these materials and information on acceptable
terms. In addition, government regulation in the United States and foreign
countries could result in restricted access to, or use of, human and other
tissue samples. If Celera Genomics loses access to sufficient numbers or sources
of tissue samples, or if tighter restrictions are imposed on its use of the
information generated from tissue samples, its business may be harmed.
Ethical, legal and social issues related to the use of genetic
information and genetic testing may cause less demand for Celera
Genomics' products.
Genetic testing has raised issues regarding confidentiality and the
appropriate uses of the resulting information. For example, concerns have been
expressed towards insurance carriers and employers using these tests to
discriminate on the basis of this information, resulting in barriers to the
acceptance of these tests by consumers. This could lead to governmental
authorities calling for limits on or regulation of the use of genetic testing or
prohibiting testing for genetic predisposition to certain diseases, particularly
those that have no known cure. Any of these scenarios could reduce the potential
markets for products of Celera Genomics.
Expected rapid growth in the number of its employees could absorb
valuable management resources and be disruptive to the development of
Celera Genomics' business.
Celera Genomics expects to increase its employee base significantly,
including the addition of Axys' employees. This growth will require substantial
effort to hire new employees and train and integrate them in Celera Genomics'
business and to develop and implement management information systems, financial
controls and facility plans. Celera Genomics' inability to manage growth
effectively would have a material adverse effect on its future operating
results.
-37-
Products and services developed using Celera Genomics group's
databases, and the therapeutic discovery and development business of
Celera Genomics, may be subject to government regulation.
Celera Genomics and its pharmaceutical and biotechnology customers use
Celera Genomics' databases for drug discovery and development, which is subject
to regulation by the United States Food and Drug Administration. Any new drug
developed must undergo an extensive regulatory review and approval process. This
process can take many years and require substantial expense. Celera Genomics and
its customers may also use its databases to develop products or services in the
field of personalized health/medicine. However, current and future patient
privacy and health care laws and regulations issued by the United States Food
and Drug Administration may limit the use of data concerning an individual's
genetic information. To the extent that such regulations restrict or discourage
Celera Genomics or its customers from developing these products and services,
Celera Genomics' business may be adversely affected.
Future acquisitions may absorb significant resources and may be
unsuccessful.
As part of Celera Genomics' strategy, it expects to pursue acquisitions
(in addition to the Axys acquisition), 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, dilutive issuances of equity
securities, and expenses that could have a material effect on Celera Genomics'
financial condition and results of operations. For example, to the extent that
it elects to pay the purchase price for acquisitions in shares of Celera
Genomics common stock, the issuance of additional shares of Celera Genomics
common stock will be dilutive to holders of Celera Genomics common stock.
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 or 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.
-38-
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, including:
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 subject of securities class action litigation. If
litigation was instituted on this basis, it could result in substantial costs
and a diversion of management's attention and resources.
The Company is subject to a purported class action lawsuit relating to
its 2000 offering of shares of Applera Corporation - Celera Genomics
Group Common Stock that may be expensive and time consuming.
The Company and some of its officers have been served in five lawsuits
purportedly on behalf of purchasers of Applera Corporation - Celera Genomics
Group Common Stock in the Company's follow-on public offering of Applera
Corporation - Celera Genomics Group Common Stock completed on March 6, 2000. In
the offering, the Company sold an aggregate of approximately 4.4 million shares
of Applera Corporation - Celera Genomics Group Common Stock at a public offering
price of $225 per share. All of these lawsuits have been consolidated into a
single case and an amended consolidated complaint was filed on August 21, 2001.
The consolidated complaint generally alleges that the prospectus used in
connection with the offering was inaccurate or misleading because it failed to
adequately disclose the alleged opposition of the Human Genome Project and two
of its supporters, the governments of the United States and the United Kingdom,
to providing patent protection to the Company's genomic-based products. The
consolidated complaint seeks unspecified money damages, rescission, costs and
expenses, and other relief as the court deems proper. Although the Company
believes the asserted claims are without merit and intends to defend the case
vigorously, the outcome of this or any other litigation is inherently uncertain.
The defense of this case will require management attention and resources.
-39-
Celera Genomics' ability to develop proprietary therapeutics and the
Celera Genomics/Applied Biosystems Joint Venture's ability to develop
proprietary diagnostic products is unproven.
The development and commercialization of new drugs by determining the
causes of diseases through the study of genes, variations in genes, and the
proteins expressed by genes is unproven. As Celera Genomics expands its efforts
into this new business area, it faces the difficulties inherent in developing
and commercializing therapeutic products, and it has limited experience in
operating a commercial research and development program. In addition, the
Company has announced the formation of Celera Diagnostics, a joint venture
between Applied Biosystems and Celera Genomics in the field of diagnostics.
Celera Diagnostics faces the difficulties inherent in developing and
commercializing diagnostic tests and in building and operating a commercial
research and development program. Given Celera Genomics' unproven ability to
develop proprietary therapeutics and Celera Diagnostics' unproven ability to
develop proprietary diagnostic products, it is possible that Celera Genomics'
and Celera Diagnostics' discovery processes will not result in any commercial
products or services. Even if Celera Genomics or Celera Diagnostics is able to
develop products and services, it is possible that these products and services
may not be commercially viable or successful due to a variety of reasons,
including difficulty obtaining regulatory approvals, competitive conditions, the
inability to obtain necessary intellectual property protection, the need to
build distribution channels, failure to get adequate reimbursement for these
products from insurance or government payors, or the inability of Celera
Genomics or Celera Diagnostics to recover its development costs in a reasonable
period.
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.
-40-
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, 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.
-41-
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 74.7% of the
voting power as of August 24, 2001, the record date for the
Company's 2001 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.
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.
-42-
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 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 31, 2001, 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.
-43-
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 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.
-44-
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 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.
-45-
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.
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. Accordingly, 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:
-46-
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 acquiror 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 result, it might be possible for an acquiror 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
-47-
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 recent
Bush Administration Budget Proposal does 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.
Item 6. SELECTED FINANCIAL DATA
The Company incorporates herein by reference pages 11 and 12 of the
Company's Annual Report to Stockholders for the fiscal year ended June 30, 2001.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company incorporates herein by reference pages 13-25, of the
Company's Annual Report to Stockholders for the fiscal year ended June 30, 2001.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company incorporates herein by reference pages 21 and 22 of the
Company's Annual Report to Stockholders for the fiscal year ended June 30, 2001.
-48-
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, 2001, are incorporated herein by reference: the
Consolidated Financial Statements and the report thereon of
PricewaterhouseCoopers LLP dated July 26, 2001, on pages 33-67 of said Annual
Report, and the combined Financial Statements and the reports thereon of
PricewaterhouseCoopers LLP dated July 26, 2001, on pages 69-90 and 91-108 of
said Annual Report, including Note 12, page 54, Note 12, page 87, and Note 12,
page 107, which contain unaudited quarterly financial information.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
-49-
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Identification and Background of Directors
The Company incorporates herein by reference pages 3 and 4 of the
Company's Proxy Statement dated September 18, 2001, in connection with its
Annual Meeting of Stockholders to be held on October 18, 2001.
Identification of Executive Officers
The following is a list of the Company's executive officers, their
ages, and their positions and offices with the Company, as of September 4, 2001.
<TABLE>
<CAPTION>
Name Age Present Positions and Year First Elected
<S> <C> <C>
Peter Barrett................. 48 Vice President (1998)
Peter Chambre................. 45 Vice President (2000)
Ugo D. DeBlasi................ 39 Assistant Controller (1999)
Michael W. Hunkapiller........ 52 Senior Vice President (1998); President, Applied Biosystems Group
(1994)
Vikram Jog.................... 45 Controller (1999)
Robert C. Jones............... 46 Vice President (2001)
Barbara J. Kerr............... 55 Vice President, Human Resources (2000)
Stephen J. Lombardi........... 46 Vice President (2001)
Kenneth D. Noonan............. 53 Senior Vice President, Corporate Development (2000)
Kathy Ordonez................. 50 Vice President (2000)
Robert P. Ragusa.............. 41 Vice President (2001)
William B. Sawch.............. 46 Senior Vice President and General Counsel (1993)
Deborah A. Smeltzer........... 47 Assistant Controller (1999)
J. Craig Venter............... 54 Senior Vice President and President, Celera Genomics Group (1998)
Tony L. White................. 55 Chairman, President, and Chief Executive Officer (1995)
Dennis L. Winger.............. 53 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 18, 2001,
the date of the next scheduled organizational meeting of the Board of Directors,
unless renewed for another year.
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.
Business Experience
With respect to the 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 18,
2001, in connection with its Annual
-50-
Meeting of Stockholders to be held on October 18, 2001. With respect to the
executive officers of the Company, each such officer 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 Mr. Chambre, Mr. Jog, Ms. Kerr,
Dr. Noonan, Ms. Ordonez, Ms. Smeltzer, Dr. Venter, and Mr. Winger.
Mr. Chambre was elected Vice President of the Company on August 17,
2000. Prior to his employment by the Company in July 2000, Mr. Chambre served as
Chief Executive Officer of Bespak plc, a United Kingdom drug delivery company,
for six years.
Mr. Jog was elected Controller of the Company on August 19, 1999. Prior
to his employment by the Company in July 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.
Dr. Noonan was elected Senior Vice President of the Company on January
4, 2000. Prior to his employment by the Company in January 2000, Dr. Noonan was
a partner in the global life sciences practice of Booz, Allen & Hamilton, Inc.,
an international consulting firm, for three years, and from 1990 to 1996 he was
a partner in The Wilkerson Group, a specialty medical products consulting group.
Ms. Ordonez was elected Vice President of the Company on December 1,
2000. Prior to her employment by the Company in December 2000, Ms. Ordonez was
employed by Hoffmann La-Roche, Inc. 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. 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.
Dr. Venter was elected Senior Vice President of the Company and
President, Celera Genomics Group, on November 19, 1998. Prior to his employment
by the Company in August 1998, Dr. Venter was employed by The Institute for
Genomic Research (TIGR), a non-profit entity which conducts research and
development in genes, where he was founder, Chairman, and President for six
years, and where he remains as Chairman.
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 since 1989.
-51-
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.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
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 18, 2001, in connection with its
Annual Meeting of Stockholders to be held on October 18, 2001.
Item 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference pages 11-21 of the
Company's Proxy Statement dated September 18, 2001, in connection with its
Annual Meeting of Stockholders to be held on October 18, 2001.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
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 18, 2001, in connection with its Annual Meeting of
Stockholders to be held on October 18, 2001.
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 18, 2001, in connection with its Annual Meeting of Stockholders
to be held on October 18, 2001.
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.
-52-
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is incorporated herein by reference to pages 20 and 21 of the Company's Proxy
Statement dated September 18, 2001, in connection with its Annual Meeting of
Stockholders to be held on October 18, 2001.
-53-
PART IV
Item 14. 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 26, 2001, appearing in the Company's
Annual Report to Stockholders for the fiscal year ended June 30, 2001, 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, 2001, is not to be deemed filed as part of this Annual Report on Form 10-K.
Applera Corporation
Annual Report
Page No.
-----------------
Consolidated Statements of Operations
Fiscal years 1999, 2000, and 2001 ......................... 33
Consolidated Statements of Financial Position
At June 30, 2000 and 2001 ................................. 34
Consolidated Statements of Cash Flows
Fiscal years 1999, 2000, and 2001 ......................... 35
Consolidated Statements of Stockholders' Equity
Fiscal years 1999, 2000, and 2001 ......................... 36
Notes to Consolidated Financial Statements ......................... 37-66
Report of Management ............................................... 67
Report of Independent Accountants .................................. 67
-54-
Applied Biosystems Group
Annual Report
Page No.
-----------------
Combined Statements of Operations
Fiscal years 1999, 2000, and 2001 ......................... 69
Combined Statements of Financial Position
At June 30, 2000 and 2001 ................................. 70
Combined Statements of Cash Flows
Fiscal years 1999, 2000, and 2001 ......................... 71
Combined Statements of Allocated Net Worth
Fiscal years 1999, 2000, and 2001 ......................... 72
Notes to Combined Financial Statements ............................. 73-89
Report of Management ............................................... 90
Report of Independent Accountants .................................. 90
Celera Genomics Group
Annual Report
Page No.
-----------------
Combined Statements of Operations
Fiscal years 1999, 2000, and 2001 ......................... 91
Combined Statements of Financial Position
At June 30, 2000 and 2001 ................................. 92
Combined Statements of Cash Flows
Fiscal years 1999, 2000, and 2001 ......................... 93
Combined Statements of Allocated Net Worth
Fiscal years 1999, 2000, and 2001 ......................... 94
Notes to Combined Financial Statements ............................. 95-107
Report of Management ............................................... 108
Report of Independent Accountants .................................. 108
-55-
(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, 2001. 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 ..................................................... 61
Schedule II - Valuation and Qualifying Accounts and
Reserves ..................................................... 62
(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 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 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)).
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)).*
-56-
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 PerSeptive Biosystems, Inc. 1989 Stock Plan, as amended August 1,
1991 (incorporated by reference to Exhibit 10(1) of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1998 (Commission file number 1-4389)).*
10.7 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)).*
10.8 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)).*
10.9 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)).*
10.10 PE 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)).*
10.11 Applera Corporation/Applied Biosystems Group 1999 Stock Incentive
Plan, as amended October 19, 2000 (incorporated by reference to
Appendix A to Schedule 14A, filed September 11, 2000, containing the
Company's definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders (Commission file number 1-4389)).*
10.12 Applera Corporation/Celera Genomics Group 1999 Stock Incentive Plan,
as amended October 19, 2000 (incorporated by reference to Appendix B
to Schedule 14A, filed September 11, 2000, containing the Company's
definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders (Commission file number 1-4389)).*
10.13 Agreement dated 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)).*
10.14 Amendment dated August 17, 2001, to Agreement dated September 12,
1995, between the Company and Tony L. White. *
10.15 Deferred Compensation Contract dated 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)).*
10.16 Change of Control Agreement dated 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)).*
10.17 Employment Agreement dated 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 fiscal year ended
June 30, 1996 (Commission file number 1-4389)).*
10.18 Employment Agreement dated 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)).*
10.19 Employment Agreement dated 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)).*
10.20 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)).*
10.21 Deferred Compensation Contract dated 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)).*
-57-
10.22 Agreement dated April 28, 1999, between the Company and J. Craig
Venter (incorporated by reference to Exhibit 10(20) to Annual Report
on Form 10-K of the Company for the fiscal year ended June 30, 1999
(Commission file number 1-4389)).*
10.23 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)).*
10.24 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)).*
10.25 Third Amendment to The Excess Benefit Plan of The Perkin-Elmer
Corporation effective January 1, 2001. *
10.26 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)).*
10.27 PE Corporation Performance Unit Bonus Plan as amended through
November 18, 1999 (incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q of the Company for the quarter ended
December 31, 1999 (Commission file number 1-4389)).*
10.28 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)).
10.29 The Perkin-Elmer Corporation Deferred Compensation Plan, as amended
and restated effective as of January 1, 1998 (incorporated by
reference to Exhibit 4 to the Company's Registration Statement on
Form S-8 (No. 333-45187)).*
11 Computation of Net Income (Loss) per Share for the three years ended
June 30, 2001 (incorporated by reference to Note 1 to Consolidated
Financial Statements of Annual Report to Stockholders for the fiscal
year ended June 30, 2001).
13 Annual Report to Stockholders for the fiscal year ended June 30, 2001
(to the extent incorporated herein by reference).
21 List of Subsidiaries.
23 Consent of PricewaterhouseCoopers LLP.
* Management plan or compensatory plan or arrangement
(b) Reports on Form 8-K
During the quarter ended June 30, 2001, the Company filed a Current
Report on Form 8-K dated June 12, 2001, and filed June 29, 2001, to report under
Item 5 thereof the signing of a definitive agreement for the acquisition of Axys
Pharmaceuticals, Inc.
-58-
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 26, 2001
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 26, 2001
-------------------------------------------------
Tony L. White
Chairman of the Board of Directors, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ Dennis L. Winger September 26, 2001
-------------------------------------------------
Dennis L. Winger
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Vikram Jog September 26, 2001
-------------------------------------------------
Vikram Jog
Controller
(Principal Accounting Officer)
-59-
/s/ Richard H. Ayers September 26, 2001
-------------------------------------------------
Richard H. Ayers
Director
/s/ Jean-Luc Belingard September 26, 2001
-------------------------------------------------
Jean-Luc Belingard
Director
/s/ Robert H. Hayes September 26, 2001
-------------------------------------------------
Robert H. Hayes
Director
/s/ Arnold J. Levine September 26, 2001
-------------------------------------------------
Arnold J. Levine
Director
/s/ Theodore E. Martin September 26, 2001
-------------------------------------------------
Theodore E. Martin
Director
/s/ Georges C. St. Laurent, Jr. September 26, 2001
-------------------------------------------------
Georges C. St. Laurent, Jr.
Director
/s/ Carolyn W. Slayman September 26, 2001
-------------------------------------------------
Carolyn W. Slayman
Director
/s/ Orin R. Smith September 18, 2001
-------------------------------------------------
Orin R. Smith
Director
/s/ James R. Tobin September 26, 2001
-------------------------------------------------
James R. Tobin
Director
-60-
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Applera Corporation
Our audits of the consolidated financial statements of Applera
Corporation referred to in our report dated July 26, 2001, appearing in the 2001
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 26, 2001
-61-
APPLERA CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED JUNE 30, 1999, 2000, AND 2001
(Amounts in thousands)
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
Balance at June 30, 1998 ...................................... $ 4,783
Charged to income in fiscal year 1999 ......................... 2,101
Deductions from reserve in fiscal year 1999 ................... (2,601)
Divested Business (2) ......................................... (449)
-------
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 (1) .................................. 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
=======
(1) Deducted in the Consolidated Statements of Financial Position from accounts
receivable.
(2) See Note 2 to the Consolidated Financial Statements.
SCHEDULE II
-62-
EXHIBIT INDEX
Exhibit Number
10.14 Amendment dated August 17, 2001, to Employment Agreement dated
September 12, 1995, between the Company and Tony L. White
10.25 Third Amendment to the Excess Benefit Plan of the Perkin-Elmer
Corporation
13 Annual Report to Stockholders for the fiscal year ended June 30, 2001
(to the extent incorporated herein by reference)
21 List of Subsidiaries
23 Consent of Pricewaterhouse Coopers LLP
EXHIBIT 10.14
AMENDMENT
This amendment to the Employment Agreement dated September 12, 1995,
between The Perkin-Elmer Corporation (now named PE Corporation (NY)) (the
"Company") and Tony L. White ("Executive") (the "Agreement") is made this 17th
day of August, 2001.
WHEREAS, Company and Executive mutually desire to modify section 6(d)
and Exhibit A of the Agreement, particularly in view of the need to clarify the
application of certain provisions of the pension plans involved under such
Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Section 6(d) of the Agreement is amended to read as follows:
(d) Supplemental Pension Benefit. It is understood that
Executive has been employed by his prior employer for
a period of twenty-six years ("Prior Service
Period"). In addition to receiving credit under the
Company's qualified defined benefit plan ("Pension
Plan") and the Company's non-qualified Excess Benefit
Plan (the "Non-Qualified Plan") for Executive's
service with the Company under the terms of this
Agreement, the Company shall pay Executive a special
supplemental pension benefit equal to the amount
which he would receive under the Pension Plan and
Non-Qualified Plan if Executive were credited with
his Prior Service Period under the Pension Plan and
the Non-Qualified Plan. Executive's benefit hereunder
shall be calculated in the manner set forth in
Exhibit A hereto, and in the case of retirement
before age 65 shall be based on Executive's prior
employer's pension plan early retirement methodology.
Any benefits payable to Executive hereunder shall be
reduced by $111,528 per year, and shall also be
reduced by any amounts paid to Executive under the
Pension Plan or the Non-Qualified Plan.
2. Exhibit A to the Agreement is replaced by Exhibit A hereto.
3. In all other respects the Agreement is unmodified and remains
in full force and effect.
PE CORPORATION (NY) TONY L. WHITE
By /s/ Barbara J. Kerr /s/ Tony L. White
------------------------------- -------------------------
Barbara J. Kerr
Vice President, Human Resources
Acknowledged:
/s/ William B. Sawch
-------------------------------
William B. Sawch
Senior Vice President and
General Counsel
EXHIBIT 10.25
THIRD AMENDMENT
THE EXCESS BENEFIT PLAN
OF
THE PERKIN-ELMER CORPORATION
WHEREAS, the Applera 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 with the effective date as stipulated below:
1. Effective January 1, 2001, Section 4.2 of the Plan is amended in its
entirety and shall now reads as follows:
"Section 4.2 - Form of Benefit Payment. Benefits payable to or on
behalf of an Employee or his Beneficiary resulting from the provisions
of Section 4.1 shall be payable as follows:
a) A benefit payable under Section 4.1(a) shall be paid in
monthly installments after adjustment in accordance with the
optional form of benefits elected under the Pension Plan.
Notwithstanding, if the lump sum present value of an
Employee's benefit at time of payment is equal to or less than
$5,000, such benefit shall be paid in a lump sum.
b) The form of a benefit payable under Section 4.1(b) shall be
subject to the discretion of the Committee. It may be paid in
the form of a lump sum, a term certain annuity, single life
annuity, joint and survivor annuity or by a combination of
such methods. Notwithstanding, if the Employee's Account at
time of payment is equal to or less than $5,000, such Account
shall be paid in a lump sum."
EXHIBIT 13
APPLERA CORPORATION Annual Report
2001
APPLIED BIOSYSTEMS | CELERA GENOMICS
Table of CONTENTS
Letter to Stockholders
Applera Corporation 3
Applied Biosystems Group 5
Celera Genomics Group 7
Celera Diagnostics 8
Financial Review 10
Directors and Officers 109
Stockholder Information 110
--------------------------------------------------------------------------------
APPLERA CORPORATION
Mission: To provide the world's leading technology and
information solutions that help life scientists 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
science research and related applications, with customers
in over 100 countries.
Headquarters: Foster City, California
New York Stock Exchange Symbol: ABI
CELERA GENOMICS GROUP
Profile: A biopharmaceutical business and leading provider of genomic and
related medical information, enabling therapeutics discovery using proprietary
scientific capabilities for the group's internal efforts and in partnership with
pharmaceutical and biotechnology companies.
Headquarters: Rockville, Maryland
New York Stock Exchange Symbol: CRA
----------
CELERA DIAGNOSTICS
Profile: A joint venture between Applied Biosystems and Celera Genomics that is
leveraging capabilities from both businesses to develop new molecular and
protein diagnostics.
Headquarters: Alameda, California
To our stockholders:
Applera Corporation continues to be a leader in the life science
revolution - a revolution many believe could define this new century. We enter
fiscal year 2002 at the threshold of major advances in the field of disease
diagnosis and therapeutics discoveries, made possible in part by life science
technology from Applera businesses. As we go forward, we have the scale,
financial strength, and technology leadership required to remain at the
forefront of discovery.
In any time of major change, there are victories to celebrate and
challenges to face. In fiscal 2001 we experienced both. We published the
sequence of the human genome in a major scientific journal - a seminal event in
the history of science. We also experienced challenges in some markets resulting
in financial performance that was not up to the level of the past several years.
But more importantly, we completed a comprehensive look at our organizations to
determine how best to capitalize on the unprecedented opportunities we have to
make a difference in the treatment of disease.
In late July, we announced a bold step towards realizing a return on
our substantial investment in sequencing the human genome. We are moving into
the next phase of our multi-year genomics strategy - a comprehensive program for
commercializing products based on discoveries from the genome. The program is
designed to leverage the combined scientific and commercial expertise of the
three Applera businesses to discover genetic variations called single nucleotide
polymorphisms (SNPs) in genes and regulatory regions, to identify
disease-related gene associations, to monitor how genes are expressed and to
develop and market products based on those discoveries. Over the next year, we
plan to invest approximately $75 million in this program to capitalize on the
discovery foundation we have built.
Within the Applied Biosystems Group, we evolved from a business unit
structure to a more integrated marketing and research organization. This should
allow us to more effectively anticipate customers' needs and bring products to
market in a more timely manner, while maintaining the technological innovation
that has made us a premier provider of life science tools. At the Celera
Genomics Group, we are now organized to build a drug discovery business on the
strong foundation established by our pioneering work on the human genome. And we
initiated a new joint venture called Celera Diagnostics, which we believe will
help us apply our significant knowledge of genomics to improved disease
diagnosis.
At Applied Biosystems, our efforts have been focused on defining and
executing the strategies that should ensure long-term sustainable growth after a
period of extraordinary sales related to the sequencing and assembly of the
human genome. While sequencing continues to represent a significant portion of
Applied Biosystems' revenue, the investments we have made in sequence detection
products and services for analyzing human genetic variation are also creating
significant opportunities. A significant need exists to better characterize
specific diseases as well as the genetic profile of each patient. The
high-throughput genotyping enabled by our sequence detection systems is expected
to play an important role in answering these challenges.
Technologies and services that help researchers determine which human
proteins are present under certain conditions, the function of those proteins,
and which ones could be affected by new therapies, make up another critical
chapter of the Applied Biosystems story for the future. Although protein study
presents a unique set of challenges, the Voyager(TM) TOF/TOF(TM) Workstation has
the potential to modernize proteomics in much the same way as the ABI PRISM(R)
3700 DNA Analyzer revolutionized genomics. These Voyager systems, in combination
with a broad spectrum of other proteomics technologies from Applied Biosystems,
form the core of the new proteomics facility at Celera Genomics.
APPLERA CORPORATION Annual Report 2001 | 3
Fiscal 2001 was a year of important achievements at Celera Genomics.
Celera now has information subscription agreements in place with more than 50
academic and commercial customers. Publishing an accurate assembly and initial
interpretation of the human genome in February and completing sequencing,
assembly and annotation of the mouse genome in April were both remarkable
achievements. Celera also made its first significant steps to evolve from a
business focused on gene sequencing to one that uses its genomic information to
pursue drug discovery. This activity was illustrated in the proposed acquisition
of Axys Pharmaceuticals, a company focused on biopharmaceutical drug discovery.
The principal element of Celera's next phase is scale, similar to what
was accomplished during Celera's formation. Going forward, we intend to leverage
our extensive bioinformatics infrastructure and unparalleled information
resources into drug development and disease therapies in an effort to speed
medical advances.
The formation of Celera Diagnostics, a joint venture between Applied
Biosystems and Celera Genomics, is intended to take advantage of Celera
Genomics' discovery capabilities and Applied Biosystems' broad instrument
platforms and technologies. Taken together, these resources give us a unique
competitive advantage in molecular diagnostics and the opportunity to play a
significant role in this new high-growth market, which is predicted to grow by
25 to 35 percent annually. Our development efforts will focus on specific tests
that may have the potential to predict and diagnose some of the world's most
devastating health problems. We anticipate that this new venture will add to the
long-term value of Applera.
To lead this effort, we were very pleased to add Kathy Ordonez,
formerly president and chief executive officer of Roche Molecular Systems, to
our senior management team.
These events and achievements took place against a backdrop of
fluctuating stock values in many technology sectors, life science included. For
the first time during my tenure, we experienced significant stock price
reduction.
Nevertheless, our overall financial status remains strong. While down
substantially from last year, our market capitalization has grown from $1.5
billion at fiscal 1995 year-end to $8.1 billion at the end of fiscal 2001, a
compound annual growth rate of 33 percent. Applera remains a healthy corporation
with numerous growth prospects and strong technologies. We have a committed
group of people and significant capital resources at our disposal, and the
ability to make investments where we see fit.
In the coming year, we intend to expand our position as one of the
world's preeminent suppliers and developers of technologies and information
solutions for the life sciences. At Applied Biosystems, this means determining
where the market opportunities are and getting there first. At Celera Genomics,
this includes building the skill sets needed to create the biopharmaceutical
business of the future.
Ultimately, the goal of our work remains the same: delivering maximum
long-term stockholder value by providing technology and information solutions
that help life scientists understand and use the power of biology. Our objective
is to accelerate the transformation of healthcare - from the way discoveries are
made to the way drugs and therapies are developed and delivered. With each
passing year, the value of this mission becomes clearer.
My confidence in our ongoing ability to develop and realize our vision
of innovation continues to be bolstered by our Applera team, over 5,000 strong,
around the world. They are one of the major reasons for our great success over
the past several years and will surely be the major driver of our future
achievements.
/s/ Tony L. White
Tony L. White
Chairman, President and Chief Executive Officer
Applera Corporation
4 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP
The past year at Applied Biosystems was one of new opportunities as
genomic research evolved and protein research re-emerged as part of a broader
regimen of biological discovery. These trends were driven in part by the
publication of the human genome sequence in February.
Fiscal 2001 was also a challenging year. Revenues were $1.6 billion, an
increase of 17 percent over last year. Earnings per diluted share rose 12
percent, to $0.96. These results reflected decreases in instrument revenues in
the fourth quarter of the year, partially due to lower demand from commercial
customers due to the current economic slowdown. Consumables sales grew strongly
throughout the year, reflecting continued demand for sequencing and sequence
detection reagents. To meet this demand, we continue aggressive reagent
development programs. Successful introduction of our new ABI PRISM(R) BigDye(TM)
Terminator v 3.0 chemistry is one example. Creation of genome-wide assay sets -
which will be used on our sequence detection systems platform under the new
Applera SNP discovery, gene expression, and gene association program - could
represent a potential business opportunity that may be larger than any Applied
Biosystems has addressed in the past. The first products from this program
should be available from Applied Biosystems during fiscal 2002.
Our core genetic analysis business continues to provide a strong
foundation for growth and profitability for two reasons. First, at the
production-sequencing end of the market, the public human genome sequencing
effort still has several years of work left to annotate the complete human
genetic sequence. This and other programs, such as the sequencing of model
organisms like mouse and rat, continue to require substantial numbers of our ABI
PRISM(R) 3700 DNA Analyzers and sequencing reagents.
Second, many small and midsize labs are resequencing regions of
interest in the genome with samples from large numbers of individuals to
discover sites of sequence diversity that can be assayed for correlation with
medically important traits. This trend has helped to drive sales of our ABI
PRISM(R) 3100 Genetic Analyzer, which we introduced in 2000 and which continues
to enjoy strong response. We are also seeing expanded use of the 3700 DNA
Analyzer and 3100 Genetic Analyzer for linkage mapping and DNA forensic
analysis. We also envision significant use of the same systems for clinical
diagnostics in the future.
Applied Biosystems sequence detection systems (SDS) that incorporate
TaqMan(R), our real-time, quantitative PCR chemistry, continue to experience
strong sales growth. These systems have become recognized as a standard for
precise, high-throughput assays for expression of selected genes. They are also
becoming established as a key component in large-scale genotyping programs based
on single nucleotide polymorphism (SNP) assays.
Functional genomics studies based on gene expression and genotyping
represent rapidly expanding business opportunities as researchers worldwide
begin to exploit the core sequencing information generated by various genome
sequencing programs. During the past year, we have ramped up our custom
oligonucleotide manufacturing operation to meet the need for real-time PCR
probes for both gene expression and genotyping.
Our second-generation SDS platform, the ABI PRISM(R) 7900HT Sequence
Detection System, incorporates automation features designed to meet the
throughput and operating cost requirements we anticipate in key segments of the
gene expression and genotyping markets. We expect our sequence detection systems
to be a key tool used by Celera Diagnostics. We also foresee exciting new
products for the gene expression and genotyping markets through our development
programs with partners such as Illumina.
Sales were strong in both our mass spectrometry markets: drug
metabolism/ pharmacokinetics (DMPK) and proteomics.
APPLERA CORPORATION Annual Report 2001 | 5
The new API 4000(TM) LC/MS/MS System, which began shipping last spring, has
established a new standard in performance for pharmacokinetic applications
thanks to its tenfold increase in sensitivity.
A key proteomics introduction was the Voyager(TM) TOF/TOF(TM)
Workstation to early access partners. Developed at our Proteomics Research
Center (PRC) in Framingham, Mass., in collaboration with other ABI scientists,
this tandem time-of-flight technology could provide the throughput for the
identification of thousands of proteins per day, as well as attamole-range
sensitivity. We are planning a broader array of mass spectrometry platforms
based on the technology incorporated in the Voyager workstation. The PRC was
launched late last year as an incubator for new technologies in high-throughput
protein analysis. New licensing collaborations in proteomics that have yielded
or are expected to yield commercial products include:
o ICAT(TM) reagents for differential high-throughput protein expression,
developed by Ruedi Aebersold, Ph.D., of the Institute for Systems
Biology, while at the University of Washington
o Next-generation sample preparation consumables for high-throughput
proteomics, under development through a strategic alliance with
Millipore Corporation
o A vacuum deposition interface between MALDI-TOF mass spectrometry and
high-resolution biomolecule separations, developed by Barry Karger,
Ph.D., and colleagues from Northeastern University
In short, the fundamentals of our key product lines and their markets
are intact and healthy. Genomics will continue to be the mainstay of our
business as it moves toward functional research. Additionally, the finding that
the human genome contains only about 30,000 genes means that many genes (and
their corresponding proteins) are responsible for several functions and that the
functions of several genes overlap. This added complexity, which complicates
research efforts to devise effective and safe medical therapies, should drive
increased demand for functional genomics and proteomics tools.
In general, trends in government funding for biomedical research in the
regions that contribute most of our sales are favorable. In addition, several
recently announced publicly funded local initiatives in both genomics and
proteomics should add to national-government-funded programs. Legislation and
funding for DNA forensics has been very encouraging as states and countries move
to establish or expand their programs to create DNA databases.
As we move forward, Applied Biosystems will continue to set the
standard in innovating biology for the next paradigm - the age of personalized
medicine. As always, thanks to our stockholders and employees for their support
and confidence in this venture.
/s/ Michael W. Hunkapiller
Michael W. Hunkapiller, Ph.D.
President
Applied Biosystems Group
6 | APPLERA CORPORATION Annual Report 2001
CELERA GENOMICS GROUP
Fiscal 2001 was an exciting year of transition at Celera Genomics. We
made advances in creating our reference information business for drug discovery
research and have begun the next stage of Celera's development as a major
therapeutics discovery business. Our accomplishments to date have created a
foundation for us to build on in our next bold phase of development.
When Celera was launched three years ago, we set as our initial
aggressive goal the sequencing of the human genome, using exciting advances in
sequencing, computing power, and computation. With these innovations, we
delivered to our customers an updated, assembled and annotated version of the
human genome; the completed sequence and assembly of the mouse genome; and a
reference database of more than three million unique single nucleotide
polymorphisms (SNPs) - all within this past 12-month period and all faster than
we originally expected. We also published our initial findings on the assembled
human genome on February 12, 2001, in the journal Science and offered this
version on our Web site to academic researchers worldwide.
During the year, we launched an advanced version of the Celera
Discovery System(TM) (CDS), the engine of our online information business. More
than 50 academic and commercial customers around the world are now using CDS'
integrated tools and proprietary and public data to make and publish their own
discoveries. New subscribers this year include American Home Products,
Yamanouchi Pharmaceuticals, researchers at the National Cancer Institute,
Harvard University and the University of California system. The expansion of
this subscriber base has continued to validate the quality of our data and
contribute to revenue growth, leading to fiscal 2001 revenues of $89.4 million,
109 percent higher than the revenues of $42.7 million last year.
In the coming year, along with our colleagues at Applied Biosystems and
Celera Diagnostics, Celera Genomics will be making a major contribution to the
Applera discovery program to identify and develop products based on information
in the human genome. Celera Genomics will use our industrial-scale genomics
factory and bioinformatics expertise to resequence the genes and regulatory
regions from 40 to 50 individuals selected to reveal a set of SNPs and
haplotypes with health-related implications. While our database currently
contains more than three million SNPs, less than two percent are found in genes.
The new initiative focuses on the discovery of SNPs and haplotypes in genes,
which we consider to be more important to medicine. We will use this information
in our internal discovery programs for future partner collaborations and as a
new database product in CDS.
Based on our success in sequencing important genomes, and our
automated, industrialized scientific approaches, we are now extending our
scientific platforms to include all of the essential steps required to build a
new therapeutics business. As we move into high-throughput protein sequencing
and protein expression, RNA expression analysis and genetic variation
determinations, our ultimate objective remains making and helping others to make
key scientific advances toward diagnosing and treating human disease. We believe
that the new era of medical discovery begun by our sequencing of the human
genome will ultimately impact unmet medical needs. Initially, our discovery
efforts will focus on one of these needs - cancer - specifically pancreatic and
lung cancer.
As a central element of our discovery strategy, we have also built and
continue to scale up operations in our industrial-scale proteomics facility.
During the year, we took delivery of several high-throughput, production-level
mass spectrometry machines built by Applied Biosystems. These Voyager(TM)
TOF/TOF(TM) Workstations, along with Celera's proprietary cell separation and
fractionation methods, are enabling our proteomics team to generate
APPLERA CORPORATION Annual Report 2001 | 7
valuable data. We believe this could lead in the future to the identification of
numerous promising protein-based markers and targets for therapeutic
intervention.
Late in the fiscal year, we announced the proposed acquisition of Axys
Pharmaceuticals, Inc., a biopharmaceutical company with small-molecule
therapeutics development and protein structure expertise. This acquisition is an
important step toward Celera's goal of becoming a therapeutics business. Axys
brings us a highly skilled team of chemists and biologists, combined with
exceptional capabilities in chemical libraries and facilities, high-throughput
screening, medicinal chemistry, structural biology and pre-clinical development.
These capabilities are particularly relevant, as they may facilitate the rapid
identification of small-molecule therapeutics candidates to address novel
protein targets discovered through Celera's proteomics and genomics programs. As
we continue to focus on the identification and optimization of therapeutics
opportunities, we will evaluate other capabilities needed to meet our goals.
The foundation built over the past three years has positioned Celera to
focus on creating a major business in the discovery of new therapeutics. We are
excited about the opportunity to work with the team at Celera Diagnostics, a
joint venture between Celera Genomics and Applied Biosystems, and believe that
the combined capabilities of Applera can make major scientific and commercial
breakthroughs in this field. An integrated research plan being developed with
Celera Diagnostics will focus on commercializing discoveries with diagnostic
applications.
We will continue to invest in our online information business as it
grows and becomes a significant operation, providing critical scientific content
and product applications for use by customers and in our internal therapeutics
research efforts, as well as contributing financial resources to our discovery
programs. And while we cannot pursue every opportunity that our scientific
capabilities bring, we are focusing on those that we believe are the most
promising and exciting.
Celera has achieved many significant milestones over the last year. Yet
many new challenges are now ahead of us. We hope you share the enthusiasm of our
Celera team for the opportunities and growth prospects in the new fiscal year.
The discovery and development of new therapeutics is a challenging enterprise.
However, when done successfully, the rewards for patients and investors can be
substantial. With Celera's technologies and novel approaches to discovery, we
believe we can begin to build a significant biopharmaceutical business of the
future.
/s/ J. Craig Venter
J. Craig Venter, Ph.D.
President and Chief Scientific Officer
Celera Genomics Group
--------------------------------------------------------------------------------
CELERA DIAGNOSTICS
Celera Diagnostics was established with the ultimate goal of improving
human health through the discovery, development and commercialization of novel
diagnostic tests.
Established as a joint venture between Applied Biosystems and Celera
Genomics, Celera Diagnostics is uniquely positioned to contribute to the future
of diagnostic medicine by leveraging the instrument and technology expertise of
Applied Biosystems with the discovery and informatics power of Celera Genomics.
These existing Applera proficiencies are now complemented by the experience and
capabilities of the team being assembled at Celera Diagnostics.
More than 100 scientists and business executives experienced in genetic research
and diagnostic product development and commercialization have already been
assembled at Celera Diagnostics. This team includes members of the previous
Applied Biosystems molecular diagnostics (sequencing) group in Foster City as
well as a large number of recently
8 | APPLERA CORPORATION Annual Report 2001
hired people working in Alameda. This team provides our new organization with
a full range of capabilities - from discovery through development and GMP
manufacturing.
An immediate focus for our staff is participation with scientists from
Celera Genomics and Applied Biosystems in a comprehensive discovery project to
identify variations in the sequence and expression of genes and their
association with disease and therapy. These discoveries will be incorporated
into new molecular diagnostic tests on our instrument platforms. We also intend
to validate and prepare protein markers discovered at Celera Genomics for
commercialization as diagnostic immunochemistry tests.
The fruits of the extensive discovery effort with Applied Biosystems
and Celera Genomics are expected to provide a medium-term strategy for our new
business. Near term, Celera Diagnostics will focus on commercialization of
molecular diagnostic tests on Applied Biosystems sequencing platforms, including
the ViroSeq(TM) HIV Genotyping System.
Our objective is to create an environment that attracts innovative
people and provides optimal opportunities for all of us to contribute to the
achievement of balanced scientific and business objectives. We are most
fortunate to work in this field as the significance and function of the human
genome are being elucidated and put into practical application through new
diagnostic and therapeutic approaches to medicine. The new team at Celera
Diagnostics is eager to participate in a pivotal way in this revolution in
healthcare.
/s/ Kathy Ordonez
Kathy Ordonez
President
Celera Diagnostics
APPLERA CORPORATION Annual Report 2001 | 9
APPLERA CORPORATION | Financial Review
APPLERA CORPORATION
Selected Consolidating
Financial Data 11
Management's Discussion and
Analysis 13
Forward-Looking Statements 26
Consolidated Statements of
Operations 33
Consolidated Statements of
Financial Position 34
Consolidated Statements of
Cash Flows 35
Consolidated Statements of
Stockholders' Equity 36
Notes to Consolidated Financial
Statements 37
Report of Management 67
Report of Independent
Accountants 67
APPLIED BIOSYSTEMS GROUP
Combined Statements of
Operations 69
Combined Statements of
Financial Position 70
Combined Statements of
Cash Flows 71
Combined Statements of
Allocated Net Worth 72
Notes to Combined Financial
Statements 73
Report of Management 90
Report of Independent
Accountants 90
CELERA GENOMICS GROUP
Combined Statements of
Operations 91
Combined Statements of
Financial Position 92
Combined Statements of
Cash Flows 93
Combined Statements of
Allocated Net Worth 94
Notes to Combined Financial
Statements 95
Report of Management 108
Report of Independent
Accountants 108
10 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Selected Consolidating Financial Data
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
Fiscal years ended June 30, 1997 1998 1999 2000 2001
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Financial Operations
Net revenues
Applied Biosystems group $ 767,465 $ 940,095 $ 1,221,691 $ 1,388,100 $ 1,619,495
Celera Genomics group 903 4,211 12,541 42,747 89,385
Eliminations (17,335) (59,812) (64,754)
Applera Corporation 768,368 944,306 1,216,897 1,371,035 1,644,126
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
Applied Biosystems group $ 132,739 $ 24,009 $ 148,365 $ 186,247 $ 212,391
Celera Genomics group (30,247) (8,315) (44,894) (92,737) (186,229)
Eliminations (6,674) 1,986 1,072
Applera Corporation 102,492 15,694 96,797 95,496 27,234
-----------------------------------------------------------------------------------------------------------------------------------
Per Share Information
Applera Corporation
Income per share from continuing operations
Basic $ 2.16 $ 0.32
Diluted $ 2.07 $ 0.31
Dividends per share $ 0.68 $ 0.68 $ 0.51
-----------------------------------------------------------------------------------------------------------------------------------
Applied Biosystems Group
Income per share from continuing operations
Basic $ 0.74 $ 0.90 $ 1.01
Diluted $ 0.72 $ 0.86 $ 0.96
Dividends per share $ 0.0425 $ 0.17 $ 0.17
-----------------------------------------------------------------------------------------------------------------------------------
Celera Genomics Group
Net loss per share
Basic and diluted $ (0.89) $ (1.73) $ (3.07)
===================================================================================================================================
Other Information
Cash and cash equivalents and
short-term investments
Applied Biosystems group $ 217,222 $ 84,091 $ 236,530 $ 394,608 $ 392,459
Celera Genomics group 71,491 1,111,034 995,558
Eliminations
Applera Corporation 217,222 84,091 308,021 1,505,642 1,388,017
-----------------------------------------------------------------------------------------------------------------------------------
Total assets
Applied Biosystems group $ 1,003,810 $ 1,128,937 $ 1,347,550 $ 1,698,156 $ 1,677,887
Celera Genomics group 2,983 6,339 344,720 1,413,257 1,220,136
Eliminations (172,963) (28,098) (10,165)
Applera Corporation 1,006,793 1,135,276 1,519,307 3,083,315 2,887,858
-----------------------------------------------------------------------------------------------------------------------------------
Long-term debt
Applied Biosystems group $ 59,152 $ 33,726 $ 31,452 $ 36,115
Celera Genomics group 46,000
Eliminations
Applera Corporation 59,152 33,726 31,452 82,115
===================================================================================================================================
</TABLE>
The selected financial data should be read with Applera Corporation's
consolidated financial statements, the Applied Biosystems group's combined
financial statements and the Celera Genomics group's combined 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.
The Applied Biosystems group per share data and the Celera Genomics group per
share data reflect all stock splits.
APPLERA CORPORATION Annual Report 2001 | 11
APPLERA CORPORATION | Selected Consolidating Financial Data
continued
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 A restructuring reserve adjustment of $9.2 million for fiscal 1999
relating to excess fiscal 1998 restructuring liabilities;
o Gains on investments of $64.9 million for fiscal 1997, $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;
o Acquired research and development charges of $28.9 million for fiscal
1998;
o Charges for the impairment of assets of $.7 million for fiscal 1997 and
$14.5 million for fiscal 1999;
o Tax benefit and valuation allowance reductions of $22.2 million for
fiscal 1999;
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;
o Charges of $4.6 million for fiscal 1999 relating to the recapitalization
of the Company;
o Charges relating 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; and
o A gain of $8.2 million on the sale of real estate for fiscal 2000.
Celera Genomics Group
o Acquired research and development charges of $26.8 million for fiscal
1997;
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 A charge for the impairment of goodwill and other intangibles of $69.1
million for fiscal 2001; and
o A loss of $5.0 million from the Celera Genomics group's interest in
Celera Diagnostics for fiscal 2001.
12 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Management's Discussion and Analysis
Management's Discussion of Operations
Applera Corporation ("Applera" or "our company") is comprised of two separate
business segments: the Applied Biosystems group and the Celera Genomics group.
The performance of these businesses is reflected separately by two classes of
common stock: Applera Corporation - Applied Biosystems Group Common Stock
("Applera - Applied Biosystems stock") and Applera Corporation - Celera
Genomics Group Common Stock ("Applera - Celera stock"). The Applied Biosystems
group is engaged principally in the development, manufacture, sale, and
service of instrument systems and associated consumable products for life
science research 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 Celera Genomics group is engaged principally in integrating
high throughput technologies to create therapeutic discovery and development
capabilities for internal use and for its customers and collaborators. The
Celera Genomics group's businesses are its online information business and its
therapeutics discovery business. The online information business is a leading
provider of genomic and related biological and medical information.
Pharmaceutical, biotechnology, and academic customers use this information,
along with customized information technology solutions provided by the Celera
Genomics group, to enhance their capabilities in the fields of life science
research and pharmaceutical and diagnostic discovery and development. The
Celera Genomics group recently expanded its focus to include therapeutic
discovery and development. The Celera Genomics group intends to leverage its
capabilities in genomics, proteomics, and bioinformatics, both in internal
programs and through collaborations, to identify drug targets and diagnostic
markers, and to discover and develop novel therapeutic candidates. Initially,
the Celera Genomics group intends to focus its therapeutic discovery efforts
in the field of oncology.
Celera Diagnostics has been established as a joint venture between the Applied
Biosystems group and the Celera Genomics group during the fourth quarter of
fiscal 2001. This new venture is focused on discovery, development and
commercialization of novel diagnostic tests.
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 any
future periods.
Throughout the following discussion of operations, we refer to the impact on
our reported results of the movement in foreign currency exchange rates from
one reporting period to another as "foreign currency translation."
Discontinued Operations
Effective May 28, 1999, we completed the sale of our Analytical Instruments
business to EG&G, Inc. Analytical Instruments, formerly a unit of the Applied
Biosystems group, developed, manufactured, marketed, sold, and serviced
analytical instruments used in a variety of markets.
The aggregate consideration received from the sale was $425 million, consisting
of $275 million in cash and one-year secured promissory notes in the aggregate
principal amount of $150 million bearing interest at a rate of 5% per annum. The
promissory notes were collected in fiscal 2000. In fiscal 1999, we recognized a
net gain on disposal of discontinued operations of $100.2 million, net of $87.8
million of income taxes.
Amounts previously reported for Analytical Instruments were reclassified and
stated as discontinued operations. See Note 14 to our company's consolidated
financial statements.
Events Impacting Comparability
Acquisitions, Investments, and Dispositions
Tecan
The Applied Biosystems group acquired a 14.5% interest, and approximately 52%
of the voting rights, in Tecan AG during the second quarter of fiscal 1998.
During the fourth quarter of fiscal 1999, the Applied Biosystems group
divested its interest in Tecan. A before-tax gain of $1.6 million was
recognized on the sale.
Paracel
During the fourth quarter of fiscal 2000, the Celera Genomics group acquired
Paracel, Inc. in a stock-for-stock transaction. Paracel produces advanced
genomic and text analysis technologies. Its products include a hardware
accelerator for sequence comparison, a hardware accelerator for text search,
and sequence analysis software tools. 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 our company. At the time of the
acquisition, our company owned 14% of Paracel.
A discussion of significant acquisitions, investments, and dispositions is
provided in Note 2 to our company's consolidated financial statements.
Restructuring and Other Special Charges
During the fourth quarter of fiscal 2001, the Celera Genomics group recognized
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. 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.
In fiscal 1999, non-recurring, before-tax special charges of $9.2 million were
incurred in connection with the recapitalization of our company. The Applied
Biosystems group and the Celera Genomics group were each allocated 50% of the
$9.2 million total recapitalization costs incurred
APPLERA CORPORATION Annual Report 2001 | 13
APPLERA CORPORATION | Management's Discussion and Analysis
continued
by our company. See Note 1 to the consolidated financial statements for a
discussion of the recapitalization.
During fiscal 1998, $48.1 million of before-tax charges were recorded for
restructuring and other merger costs to integrate PerSeptive Biosystems, Inc.
into the Applied Biosystems group of our company following the acquisition. The
objectives of the integration plan were to lower PerSeptive's cost structure by
reducing excess manufacturing capacity, achieve broader worldwide distribution
of PerSeptive's products, and combine sales, marketing, and administrative
functions. The charge included: $33.9 million for restructuring the combined
operations; $8.6 million for transaction costs; and $4.1 million of
inventory-related write-offs, recorded in cost of sales, associated with the
rationalization of certain product lines. Additional merger-related period costs
of $6.1 million for fiscal 1999 were incurred for training, relocation, and
communication in connection with the integration.
During the fourth quarter of fiscal 1999, we completed the restructuring
actions. The costs to implement the program were $9.2 million below the $48.1
million charge recorded for fiscal 1998. As a result, during the fourth
quarter of fiscal 1999, the Applied Biosystems group recorded a $9.2 million
reduction of charges required to implement the fiscal 1998 restructuring plan.
The reduction in the overall cost of the program was primarily caused by the
sale of a plant, which was originally expected to be abandoned, and the
associated reduction of estimated personnel costs related to the facility.
During the fourth quarter of fiscal 1999, we incurred a $14.5 million charge
for the impairment of goodwill and other intangibles associated with the
Applied Biosystems group's Molecular Informatics business. This impairment
resulted primarily from management's assessment of a decline in future cash
flows from this business, due to the abandonment of certain product lines,
including the SDK software platform, in the fourth quarter of fiscal 1999.
Gain on Investments
During fiscal 2001 and 2000, the Applied Biosystems group recorded before-tax
gains of $15.0 million and $48.6 million, respectively, related to the sales
of minority equity investments. Fiscal 1999 included before-tax gains of $4.5
million related to the sale of and release of contingencies on minority equity
investments by the Applied Biosystems group. As previously described, fiscal
1999 also included a before-tax gain of $1.6 million related to the sale of
our company's interest in Tecan by the Applied Biosystems group. See Note 2 to
our company's consolidated financial statements.
Other Events Impacting Comparability
Fiscal 2000 and 1999 included charges of $45.0 million and $10.1 million,
respectively, 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. All of the fiscal 2000 charge
and $9.1 million of the fiscal 1999 charge were allocated to the Applied
Biosystems group, while $1.0 million of the fiscal 1999 charge was allocated
to the Celera Genomics 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.
A gain of $2.3 million related to foreign currency hedge contracts was
recognized in other income during the fourth quarter of fiscal 1999 by the
Applied Biosystems group.
During the fourth quarter of fiscal 1999, the Applied Biosystems group made a
$3.5 million donation to our company's charitable foundation, which supports
educational and other charitable programs. The charge was recorded to selling,
general and administrative expenses.
The effective income tax rate for fiscal 1999 included certain tax benefit and
valuation allowance reductions of $22.2 million. See Note 4 to our company's
consolidated financial statements for a discussion of income taxes.
Discussion of Consolidated Operations
Results of Operations--
2001 Compared With 2000
We reported net income of $27.2 million for fiscal 2001 compared with $95.5
million for fiscal 2000. Net income for our company, on a comparable basis
excluding the special items previously described from both fiscal years,
decreased 11.3% to $84.7 million for fiscal 2001 compared with $95.5 million
for fiscal 2000. The decrease in net income reflected an 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 the growth in net
revenues, higher interest income, and lower SG&A as a percentage of net
revenues. On a segment basis excluding the special items from both fiscal
years, the Applied Biosystems group reported net income of $202.7 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.
Net revenues for our company were $1.6 billion for fiscal 2001 compared with
$1.4 billion for fiscal 2000, an increase of 19.9%. Geographically, we
reported revenue growth in all regions for fiscal 2001 compared with fiscal
2000. Net revenues increased 20.3% in the United States, 16.1% in Europe,
20.9% 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%, compared with the prior year due
primarily to weakness in the euro, the British pound and the Japanese yen. On
a segment 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 for our company was 52.5% for
fiscal 2001 compared with 54.5%
14 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Management's Discussion and Analysis
continued
for fiscal 2000 due primarily to investment in new products and the negative
effects of foreign currency.
SG&A expenses for our company were $440.1 million for fiscal 2001 compared
with $436.9 million for fiscal 2000. On a comparable basis excluding the long-
term compensation charge from fiscal 2000, SG&A expenses increased 12.3% in
fiscal 2001 as compared with fiscal 2000. This increase was due to higher
planned worldwide selling and marketing expenses commensurate with the growth
in revenues and orders. On a segment basis, SG&A expenses for the Applied
Biosystems group were $380.7 million and $393.9 million for fiscal years 2001
and 2000, respectively. SG&A expenses for the Celera Genomics group were $58.3
million and $43.0 million for fiscal years 2001 and 2000, respectively.
R&D expenses increased $67.8 million for fiscal 2001 to $323.4 million from
$255.6 million for 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 segment basis, R&D expenses for the Applied
Biosystems group were $184.5 million and $141.2 million for fiscal years 2001
and 2000, respectively. R&D expenses for the Celera Genomics group were $164.7
million and $148.6 million for fiscal years 2001 and 2000, respectively.
We recorded non-cash 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.
During the fourth quarter of fiscal 2001, we recorded a before-tax, non-cash
charge of $69.1 million for the impairment of goodwill and other intangible
assets associated with Paracel. During fiscal 2000, we incurred $2.1 million
of costs associated with acquisitions which were not consummated.
Operating Income (Loss)
(Dollar amounts in millions) 2000 2001
===============================================================================
Operating income before special items $ 95.2 $ 56.0
Asset impairment (69.1)
Long-term compensation programs (45.0)
Acquisition-related costs (2.1)
-------------------------------------------------------------------------------
Operating income (loss) $ 48.1 $(13.1)
===============================================================================
Operating income (loss) for our company was a loss of $13.1 million for fiscal
2001 compared with income of $48.1 million for fiscal 2000. On a comparable
basis, excluding the special items previously described, operating income
decreased 41.2% to $56.0 million for fiscal 2001 compared with $95.2 million
for fiscal 2000.
On a segment basis, operating income for the Applied Biosystems group
increased to $279.9 million for fiscal 2001 compared with $213.2 million for
the prior fiscal year. On a comparable basis, excluding the special items
previously discussed from fiscal 2000, operating income in fiscal 2001
increased $19.5 million, or 7.5%, compared with fiscal 2000. The Applied
Biosystems group benefited from increased revenues and lower SG&A expenses as
a percentage of net revenues, partially offset by an increase in R&D spending,
investments in new products, including start-up costs related to
oligonucleotide production capacity, and the negative effect of foreign
currency. Excluding the negative effect of foreign currency and the special
charge from the prior year, operating income increased approximately 15%.
Operating income as a percentage of net revenues for the Applied Biosystems
group was 17.3% in fiscal 2001 compared with 18.8% excluding the long-term
compensation charge in fiscal 2000. Excluding the effects of foreign currency
in fiscal 2001 and the long-term compensation charge in fiscal 2000, operating
income as a percentage of net revenues was 18% for fiscal 2001 compared with
18.8% in the prior fiscal year.
The operating loss for the Celera Genomics group was $289.6 million for fiscal
2001 compared with $168.1 million for fiscal 2000. Excluding the special
charge in fiscal 2001 for the impairment of goodwill and other intangibles
relating to Paracel, the operating loss for fiscal 2001 was $220.5 million.
The increase in the Celera Genomics group's operating loss reflected, in
addition to the special charge in fiscal 2001, the increased investment in
research and development activities, amortization of goodwill and intangibles
primarily due to Paracel, and expansion of sales and marketing capabilities.
These increased expenses were partially offset by higher net revenues.
Interest expense was $2.1 million for fiscal 2001 compared with $3.5 million
for 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 was
$80.3 million for fiscal 2001 compared with $39.4 million for fiscal 2000.
This increase was primarily attributable 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 company's 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 company's foreign currency management
program. Our company adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective
July 1, 2000. See Note 11
APPLERA CORPORATION Annual Report 2001 | 15
APPLERA CORPORATION | Management's Discussion and Analysis
continued
to our consolidated financial statements for further discussion of our
company's policy for financial instruments.
Our company's 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 4 to our consolidated financial
statements.
Results of Continuing Operations--
2000 Compared With 1999
Our company reported income from continuing operations of $95.5 million for
fiscal 2000 compared with $96.8 million for fiscal 1999. Income from
continuing operations for our company, on a comparable basis, excluding the
special items previously described from both fiscal years and Tecan from
fiscal 1999, increased 4.5%, to $95.5 million for fiscal 2000 compared with
$91.4 million for fiscal 1999. On a segment basis, the Applied Biosystems
group's income from continuing operations, excluding the special items from
both fiscal years and Tecan from fiscal 1999, increased 35.4% to $186.2
million for fiscal 2000 compared with $137.5 million for fiscal 1999. The
Celera Genomics group reported a net loss of $92.7 million for fiscal 2000
compared with a net loss of $39.6 million for fiscal 1999, excluding the
special items allocated to the group during fiscal 1999.
Net revenues were $1.4 billion for fiscal 2000 compared with $1.2 billion for
fiscal 1999, an increase of 12.7%. Geographically, net revenues increased
11.8% in the United States, 1.6% in Europe, 30.1% in Asia Pacific, and 47.2%
in Latin America and other markets. Foreign currency translation had a
negative effect on the growth rate of revenues in Europe. On a segment basis,
net revenues for the Applied Biosystems group were $1.4 billion for fiscal
2000 compared with $1.2 billion for fiscal 1999. The Celera Genomics group
reported net revenues of $42.7 million for fiscal 2000 compared with $12.5
million for fiscal 1999.
Gross margin as a percentage of net revenues for our company was 54.5% for
fiscal 2000 compared with 54.9% for fiscal 1999. Gross margin for the Applied
Biosystems group as a percentage of net revenues was 54.1% for fiscal 2000
compared with 55.1% for fiscal 1999.
SG&A expenses for our company were $436.9 million for fiscal 2000 compared
with $364.1 million for fiscal 1999. SG&A expenses, excluding the long-term
compensation charges for fiscal 2000 and 1999, and Tecan and the $3.5 million
charge for a contribution to our company's charitable foundation for fiscal
1999, increased 23.8%. This increase was due to higher planned worldwide
selling and marketing expenses commensurate with the higher revenue growth. On
a segment basis, SG&A expenses were $393.9 million and $335.9 million for
fiscal 2000 and 1999, respectively, for the Applied Biosystems group, and
$43.0 million and $28.3 million for fiscal 2000 and 1999, respectively, for
the Celera Genomics group. SG&A expenses for the Applied Biosystems group,
excluding special items and Tecan, increased 20.5% in fiscal 2000 as compared
to fiscal 1999.
R&D expenses for our company increased to $255.6 million for fiscal 2000
compared with $174.6 million for fiscal 1999. Excluding Tecan from fiscal
1999, R&D expenses for fiscal 2000 increased 59.4% compared with fiscal 1999,
primarily as a result of a full year of sequencing operations in fiscal 2000
and significantly expanded bioinformatics and software development
capabilities for the Celera Genomics group. On a segment basis, R&D expenses
for the Applied Biosystems group were $141.2 million for fiscal 2000 compared
with $133.5 million for fiscal 1999, an increase of 5.7%. The Celera Genomics
group's R&D expenses increased $104.9 million to $148.6 million for fiscal
2000 from $43.7 million for fiscal 1999.
We recorded non-cash expenses of $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.
During fiscal 2000, our company incurred $2.1 million of costs associated with
acquisitions for the Applied Biosystems group that were not consummated.
During the fourth quarter of fiscal 1999, our company recorded a charge of
$14.5 million for the impairment of goodwill and other intangibles associated
with its Molecular Informatics business. During fiscal 1999, our company
incurred merger-related period costs of $6.1 million for training, relocation,
and communication in connection with the integration of PerSeptive into the
Applied Biosystems group. During the fourth quarter of fiscal 1999, our
company completed the restructuring actions associated with the integration of
PerSeptive following the acquisition. The costs to implement the program were
$9.2 million below the $48.1 million charge recorded for fiscal 1998. As a
result, during the fourth quarter of fiscal 1999, the Applied Biosystems group
recorded a $9.2 million reduction of charges required to implement the fiscal
1998 integration plan. Also during fiscal 1999, our company recorded a non-
recurring charge of $9.2 million for costs incurred in connection with the
recapitalization of our company. On a segment basis, the Applied Biosystems
group and the Celera Genomics group were each allocated 50% of the charge.
These costs included investment banking and professional fees.
Operating Income (Loss)
(Dollar amounts in millions) 1999 2000
==============================================================================
Operating income before special items $ 142.8 $ 95.2
Asset impairment (14.5)
Long-term compensation programs (10.1) (45.0)
Charitable foundation contribution (3.5)
Restructuring and other merger costs, net 3.1
Recapitalization costs (9.2)
Acquisition-related costs (2.1)
------------------------------------------------------------------------------
Operating income $ 108.6 $ 48.1
==============================================================================
Operating income for our company decreased to $48.1 million for fiscal 2000
compared with $108.6 million for fiscal 1999. On a comparable basis, excluding
the special
16 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Management's Discussion and Analysis
continued
items previously described, operating income decreased 33.3% to $95.2 million
for fiscal 2000 compared with $142.8 million for fiscal 1999.
On a segment basis, operating income for the Applied Biosystems group
increased to $213.2 million for fiscal 2000 compared with $187.9 million for
fiscal 1999. On a comparable basis, excluding the special items previously
described from both fiscal years and Tecan from fiscal 1999, operating income
increased 20.2% for fiscal 2000 compared with fiscal 1999. The Applied
Biosystems group benefited from increased revenues as a result of strong
worldwide demand and lower operating expenses as a percentage of net revenues,
partially as a result of a slower than planned increase in staffing during the
fiscal year. Operating income as a percentage of net revenues, excluding the
special items from both fiscal years and Tecan from fiscal 1999, increased to
18.8% for fiscal 2000 compared with 17.6% for fiscal 1999.
The operating loss for the Celera Genomics group was $168.1 million for fiscal
2000 compared with $68.8 million for fiscal 1999. The increase in the Celera
Genomics group's operating loss reflected: the increased sequencing activity;
increased investment in research and development activities related to
expanded scientific and annotation teams, and bioinformatics staff; and
increased operating expenses required to support the expanded product and
business development activities.
For fiscal 2000 and 1999, the Applied Biosystems group recorded before-tax
gains of $48.6 million and $4.5 million, respectively, related to the sale of
minority equity investments. Fiscal 1999 also included a gain of $1.6 million
related to the sale of our interest in Tecan.
Interest expense was $3.5 million for fiscal 2000 compared with $3.8 million
for fiscal 1999. This decrease was primarily due to lower average interest
rates, partially offset by the financing of the purchase of the Celera
Genomics group's Rockville, MD facilities. Interest income was $39.4 million
for fiscal 2000 compared with $2.9 million for fiscal 1999. This increase in
interest income during fiscal 2000 was primarily a result of higher average
balances of cash and cash equivalents and short-term investments, which
increased during the third quarter of fiscal 2000 due to a follow-on public
offering of Applera - Celera stock, as well as interest on the note receivable
related to the sale of the Analytical Instruments business.
Other income (expense), net for fiscal 2000 was income of $3.4 million,
primarily related to a gain on the sale of real estate, and was partially
offset by costs associated with a portion of our company's foreign currency
management program. Other income (expense), net was income of $.5 million for
fiscal 1999, which related primarily to the revaluation of foreign exchange
contracts and a legal settlement that were partially offset by the loss on the
disposal of certain assets and other non-operating costs.
Our company's effective income tax rate was 30% for fiscal 2000 compared with
4% for fiscal 1999. Excluding special items in both fiscal years and Tecan in
fiscal 1999, the effective income tax rate was 24% for fiscal 2000 compared
with 25% for fiscal 1999. The effective income tax rate for fiscal 1999
included the release of valuation allowances of $17.4 million. Because the
sale of the Analytical Instruments business had been completed, the valuation
allowance was reduced as management believed that it was more likely than not
that the deferred tax assets to which the valuation allowance related would be
realized. An analysis of the differences between the federal statutory income
tax rate and the effective income tax rate is provided in Note 4 to our
company's consolidated financial statements.
For fiscal 1999, we incurred minority interest expense of $13.4 million
relating to our company's 14.5% financial interest in Tecan.
Discussion of Segment Operations
Applied Biosystems Group
Results of Operations--
2001 Compared With 2000
The Applied Biosystems group reported net income of $212.4 million for fiscal
2001 compared with $186.2 million for fiscal 2000. On a comparable basis
excluding the special items from both fiscal years, net income increased 8.8%
to $202.7 million for fiscal 2001 compared with $186.2 million for fiscal
2000. This increase 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.
Net revenues were $1.6 billion for fiscal 2001 compared with $1.4 billion for
fiscal 2000, an increase of 16.7%. The effects of foreign currency reduced net
revenues by approximately $46 million, or 3%, compared with the prior year due
primarily to weakness in the euro, the British pound and the Japanese yen. Net
revenues to 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
17.7% in the United States, 11.8% in Europe, 20.9% in Asia Pacific, and 16.2%
in Latin America and other markets, compared with the prior fiscal year.
Excluding the effects of foreign currency, revenues grew approximately 21.1%
in Europe and 24.2% in Asia Pacific.
For fiscal year 2001, revenues from instrument sales were $813.3 million, an
increase of 7.7% from $755.2 million last year. The increase in instrument
sales resulted primarily from the introductions of new 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
APPLERA CORPORATION Annual Report 2001 | 17
APPLERA CORPORATION | Management's Discussion and Analysis
continued
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 from $473.7
million last year, a 25.0% increase, reflecting continued demand 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 to 52.2% for fiscal 2001
compared with 54.1% for fiscal 2000 due primarily to investment in new
products, including start-up costs related to product testing and validation
for a substantial expansion in oligonucleotide production capacity. This
expansion is designed to meet expected customer demand for assays for gene
expression and single nucleotide polymorphisms (SNPs). The negative effects of
foreign currency also contributed to the decline in gross margin as a
percentage of net revenues.
SG&A expenses were $380.7 million for fiscal 2001 compared with $393.9 million
for fiscal 2000, a decrease of 3.4%. On a comparable basis, excluding the
long-term compensation charge for fiscal 2000, SG&A expenses increased 9.1%
over the prior year. This increase was due to higher planned worldwide selling
and marketing expenses commensurate with the growth in revenues and orders. As
a percentage of net revenues, SG&A expenses were 23.5% for fiscal 2001
compared with 25.1% for fiscal 2000, excluding the long-term compensation
charge, primarily due to the realization of economies of scale.
R&D expenses were $184.5 million for fiscal 2001 compared with $141.2 million
for fiscal 2000, an increase of 30.7%, 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. As a percentage of net
revenues, R&D expenses were 11.4% for fiscal 2001 compared with 10.2% for the
prior year. 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.
During fiscal 2000, the Applied Biosystems group incurred $2.1 million of
costs associated with acquisitions which were not consummated.
Operating income increased to $279.9 million for fiscal 2001 compared with
$213.2 million for the prior fiscal year. On a comparable basis, excluding the
special items previously discussed from fiscal 2000, operating income in
fiscal 2001 increased $19.5 million, or 7.5%, compared with fiscal 2000. The
Applied Biosystems group benefited from increased revenues and lower SG&A
expenses as a percentage of net revenues, partially offset by an increase in
R&D spending, investments in new products, including start-up costs related to
oligonucleotide production capacity, and the negative effect of foreign
currency. Excluding the negative effect of foreign currency and the special
charge from the prior year, operating income increased approximately 15%.
Operating income as a percentage of net revenues was 17.3% in fiscal 2001
compared with 18.8% excluding the long-term compensation charge in fiscal
2000. Excluding the effects of foreign currency in fiscal 2001 and the long-
term compensation charge in fiscal 2000, operating income as a percentage of
net revenues was 18% for fiscal 2001 compared with 18.8% in the prior fiscal
year.
Fiscal years 2001 and 2000 included before-tax gains of $15.0 million and
$48.6 million, respectively, related to the sales of minority equity
investments.
Interest expense was $1.3 million for fiscal 2001 compared with $8.1 million
for 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. Interest income was $16.8
million for fiscal 2001 compared with $18.6 million for the prior year. The
decrease was primarily due to the collection of the $150 million note
receivable 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.
For fiscal 2001, other income (expense), net was an expense of $5.8 million,
which related primarily to our company's 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 company's foreign currency management
program. The Applied Biosystems group adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective July 1, 2000. See Note 11 to the Applied
Biosystems group's combined financial statements for further discussion of the
Applied Biosystems group's policy for financial instruments.
The effective income tax rate was 30% for fiscal 2001 compared with 32% for
fiscal 2000. Excluding special items in both fiscal years, the effective
income tax rate was 30% for both fiscal 2001 and fiscal 2000. An analysis of
the differences between the federal statutory income tax rate and the
effective income tax rate is provided in Note 4 to the Applied Biosystems
group's combined financial statements.
Results of Continuing Operations--
2000 Compared With 1999
The Applied Biosystems group reported income from continuing operations of
$186.2 million for fiscal 2000 compared with $148.4 million for fiscal 1999.
On a comparable basis, excluding the special items previously described from
both fiscal years and Tecan from fiscal 1999, income from continuing
operations increased 35.4% to $186.2 million for fiscal 2000 compared with
$137.5 million for fiscal 1999. This increase was attributable primarily to
the growth in net revenues and lower operating expenses as a percentage of net
revenues.
Net revenues were $1.4 billion for fiscal 2000 compared with $1.2 billion for
fiscal 1999. Excluding the results of
18 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Management's Discussion and Analysis
continued
Tecan from fiscal 1999, net revenues increased 24.0%. Increased net revenues
for sequence detection systems, including reagents and instrument systems for
gene expression analysis and SNP detection, mass spectrometry products, and
DNA sequencing consumables were contributors. The effects of foreign currency
translation decreased net revenues by approximately $1.8 million compared with
fiscal 1999 as weakness in the euro was essentially offset by strengthening of
the Japanese yen. Net revenues from leased instruments and shipments of
consumables and project materials to the Celera Genomics group were $59.8
million for fiscal 2000, or 4.3% of the Applied Biosystems group's net
revenues. For fiscal 1999, net revenues from leased instruments, shipments of
instruments and consumables, and contracted R&D services to the Celera
Genomics group were $17.3 million and represented less than 2% of the Applied
Biosystems group's net revenues.
Geographically, excluding the net revenues of Tecan for fiscal 1999, the
Applied Biosystems group reported revenue growth in all regions for fiscal
2000 compared with fiscal 1999. Net revenues increased 21.6% in the United
States, 18.5% in Europe, 35.8% in Asia Pacific, and 50.7% in Latin America and
other markets. Excluding the favorable effects of foreign currency translation
in Japan, net revenues increased approximately 23% in Asia Pacific, partly
reflecting increased government funding for genomics-related research.
Excluding the negative effects of foreign currency translation in Europe, net
revenues increased by approximately 27%.
Excluding the effects of Tecan in fiscal 1999, revenues from instrument sales
increased 18.1% to $775.2 in fiscal 2000 from $656.3 million in fiscal 1999.
The increase in instrument sales resulted primarily from higher demand for DNA
sequencers and genetic analyzers, partially caused by introductions of the ABI
PRISM(R) 3700 Genetic Analyzer in the second quarter of fiscal 1999 and the
ABI PRISM(R) 3100 Genetic Analyzer in the fourth quarter of fiscal 2000. PCR
sequencing detection systems experienced increased demand as well as increased
sales from the introduction of the GeneAmp(R) 5700 Sequence Detection System
early in fiscal 2000. Sales from mass spectrometry systems benefited from the
introduction of the API QSTAR(TM) Pulsar Hybrid LC/MS/MS System during the
first half of fiscal 2000. Excluding the effects of Tecan in fiscal 1999,
consumables sales grew to $473.7 million in fiscal 2000 from $334.2 million in
fiscal 1999, a 41.7% increase, reflecting continued demand for sequencing and
sequence detection reagents. Excluding the effects of Tecan in fiscal 1999,
revenues from other sources, which included service contracts, royalties,
licenses, and contract research, increased 23.4% in fiscal 2000 to $159.2
million from $129.0 million in fiscal 1999.
Gross margin as a percentage of net revenues was 54.1% for fiscal 2000
compared with 55.1% for fiscal 1999. Excluding Tecan, gross margin as a
percentage of net revenues was 54.1% for fiscal 1999.
SG&A expenses were $393.9 million for fiscal 2000 compared with $335.9 million
for fiscal 1999, an increase of 17.3%. On a comparable basis, excluding the
long-term compensation charges for fiscal 2000 and 1999, Tecan, and the $3.5
million charge for a contribution to our company's charitable foundation for
fiscal 1999, SG&A expenses for the Applied Biosystems group increased 20.5%.
This increase was due to higher planned worldwide selling and marketing
expenses commensurate with the higher revenue growth. As a percentage of net
revenues, excluding the special charges from both fiscal years and Tecan from
fiscal 1999, SG&A expenses were 25.1% for fiscal 2000 compared with 25.9% for
fiscal 1999.
R&D expenses were $141.2 million for fiscal 2000 compared with $133.5 million
for fiscal 1999, an increase of 5.7%. Excluding Tecan from fiscal 1999, R&D
expenses for fiscal 2000 increased 18.4% compared with fiscal 1999. As a
percentage of net revenues, excluding Tecan from fiscal 1999, R&D expenses
were 10.2% for fiscal 2000 compared with 10.7% for fiscal 1999. R&D expense
for fiscal 1999 was higher as a percentage of net revenues due to the
development of new products released in the second half of fiscal 1999.
During fiscal 2000, the Applied Biosystems group incurred $2.1 million of
costs associated with acquisitions which were not consummated. During the
fourth quarter of fiscal 1999, the Applied Biosystems group recorded a charge
of $14.5 million for the impairment of goodwill and other intangibles
associated with its Molecular Informatics business. Merger-related period
costs of $6.1 million were incurred during fiscal 1999 for training,
relocation, and communication in connection with the integration of PerSeptive
into the Applied Biosystems group. During the fourth quarter of fiscal 1999,
the Applied Biosystems group completed the restructuring actions associated
with the integration of PerSeptive following the acquisition. The costs to
implement the program were $9.2 million below the $48.1 million charge
recorded for fiscal 1998. As a result, during the fourth quarter of fiscal
1999, the Applied Biosystems group recorded a $9.2 million reduction of
charges required to implement the fiscal 1998 integration plan. Also during
fiscal 1999, the Applied Biosystems group was allocated a non-recurring charge
of $4.6 million for costs incurred in connection with the recapitalization of
our company. These costs included investment banking and professional fees.
Operating Income
(Dollar amounts in millions) 1999 2000
================================================================================
Operating income before special items $ 216.5 $ 260.3
Asset impairment (14.5)
Long-term compensation programs (9.1) (45.0)
Charitable foundation contribution (3.5)
Restructuring and other merger costs, net 3.1
Recapitalization costs (4.6)
Acquisition-related costs (2.1)
-------------------------------------------------------------------------------
Operating income $ 187.9 $ 213.2
================================================================================
Operating income increased to $213.2 million for fiscal 2000 compared with
$187.9 million for fiscal 1999. On a comparable basis, excluding the special
items previously described from both fiscal years and Tecan from fiscal 1999,
operating income increased 20.2% for fiscal 2000 compared with fiscal 1999.
The Applied Biosystems group benefited
APPLERA CORPORATION Annual Report 2001 | 19
APPLERA CORPORATION | Management's Discussion and Analysis
continued
from increased revenues as a result of strong worldwide demand and lower
operating expenses as a percentage of net revenues, partially as a result of a
slower than planned increase in staffing during the fiscal year. Operating
income as a percentage of net revenues, excluding the special items from both
fiscal years and Tecan from fiscal 1999, increased to 18.8% for fiscal 2000
compared with 17.6% for fiscal 1999.
Fiscal years 2000 and 1999 included before-tax gains of $48.6 million and $4.5
million, respectively, related to the sale of minority equity investments.
Fiscal 1999 also included a gain of $1.6 million related to the sale of our
company's interest in Tecan.
Interest expense was $8.1 million for fiscal 2000 compared with $4.5 million
for fiscal 1999. This increase was primarily due to the interest on the $150
million note payable to the Celera Genomics group. Interest income was $18.6
million for fiscal 2000, compared with $2.3 million for fiscal 1999. The
increase in interest income during fiscal 2000 was due to the interest on the
note receivable related to the sale of the Analytical Instruments business,
higher balances of cash and cash equivalents, and higher interest rates.
Other income (expense), net for fiscal 2000 was income of $3.4 million,
primarily related to a gain on the sale of real estate, and was partially
offset by costs associated with a portion of our company's foreign currency
management program. Other income (expense), net was income of $.5 million for
fiscal 1999, which related primarily to the revaluation of foreign exchange
contracts and a legal settlement that were partially offset by the loss on the
disposal of certain assets and other non-operating costs.
The effective income tax rate was 32% for fiscal 2000 compared with 16% for
fiscal 1999. Excluding special items in both fiscal years and Tecan in fiscal
1999, the effective income tax rate was 30% for fiscal 2000 compared with 29%
for the prior fiscal year. The effective income tax rate for fiscal 1999
included the release of valuation allowances of $17.4 million. Because the
sale of the Analytical Instruments business had been completed, the valuation
allowance was reduced as management believed that it was more likely than not
that the deferred tax assets to which the valuation allowance related would be
realized. An analysis of the differences between the federal statutory income
tax rate and the effective income tax rate is provided in Note 4 to the
Applied Biosystems group's combined financial statements.
For fiscal 1999, the Applied Biosystems group incurred minority interest
expense of $13.4 million relating to our company's 14.5% financial interest in
Tecan.
Celera Genomics Group
Results of Operations--
2001 Compared With 2000
The Celera Genomics group reported a net loss of $186.2 million for fiscal
2001 compared with a net loss of $92.7 million for fiscal 2000. Excluding the
special charge in fiscal 2001 for the impairment of goodwill and other
intangible assets related to Paracel, the net loss for fiscal 2001 was $119.0
million. The increase in the net loss, in addition to the special charge in
fiscal 2001, reflected the increased investment in research and development
activities, amortization of goodwill and intangibles primarily due to Paracel,
and expansion of sales and marketing capabilities. These increased expenses
were partially offset by higher net revenues and higher interest income.
Net revenues for the Celera Genomics group were $89.4 million for fiscal 2001
compared with $42.7 million for fiscal 2000. The increased revenues 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.
Cost of sales increased $28.0 million to $43.0 million for fiscal 2001 from
$15.0 million in fiscal 2000. As the Celera Genomics group's activities
developed into a commercial business, costs for activities previously
performed as R&D in fiscal 2000 have been 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.
R&D expenses increased $16.1 million to $164.7 million for fiscal 2001 from
$148.6 million in fiscal 2000, after the reclassification of $15.0 million
from R&D expenses to cost of sales for fiscal 2000, primarily relating to non-
sequencing activities. Increased R&D expenses were attributed to the
development of its 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 recent 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 were $58.3 million for fiscal 2001 compared with $43.0 million
for fiscal 2000. The increase was caused primarily by 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 a portion of administrative shared services were $9.3 million for fiscal
2001 compared with $7.5 million for fiscal 2000.
The Celera Genomics group recorded non-cash expenses of $43.9 million in
fiscal 2001 compared to $4.2 million in
20 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Management's Discussion and Analysis
continued
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. 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 was $.8 million for fiscal 2001 compared with $2.1 million
for fiscal 2000. Interest expense in both fiscal years 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 was $63.6 million
for fiscal 2001 compared with $27.5 million for fiscal 2000. The increase 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.
The effective income tax rate was 20% for fiscal 2001 and 35% for 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 Paracel in fiscal 2001, the effective income tax rate for both
fiscal years was 36%. An analysis of the differences between the federal
statutory income tax rate and the effective income tax rate is provided in
Note 4 to the Celera Genomics group's combined financial statements.
Results of Operations--
2000 Compared With 1999
The Celera Genomics group reported a net loss of $92.7 million for fiscal 2000
compared with a net loss of $44.9 million for fiscal 1999. The increase in the
net loss reflected the increased sequencing activity, increased investment in
research and development activities relating to expanded scientific and
annotation teams and bioinformatics staff, and increased operating expenses
required to support the expanded product and business development activities.
Net revenues for the Celera Genomics group were $42.7 million for fiscal 2000
compared with $12.5 million for fiscal 1999. The increased revenues resulted
primarily from database subscription agreements initiated during fiscal 2000
and the second half of fiscal 1999 and an increase in related genomic services
revenues. Revenues for genotyping services remained essentially unchanged for
fiscal 2000 as compared to fiscal 1999.
Cost of sales was $15.0 million for fiscal 2000 compared with $4.7 million for
fiscal 1999. The increase in cost of sales was primarily due to the increase
in revenues from genomic services.
R&D expenses increased $104.9 million to $148.6 million for fiscal 2000 from
$43.7 million for fiscal 1999, primarily as a result of a full year of
sequencing operations and significantly expanded bioinformatics and software
development capabilities. During fiscal 2000, the Celera Genomics group also
continued to expand its scientific and annotation research teams and
bioinformatics and software engineering staff.
SG&A expenses were $43.0 million for fiscal 2000 compared with $28.3 million
for fiscal 1999. The increase was related to the planned scale-up in business
development, marketing, and administrative activities in support of the on-
line information business during fiscal 2000. Corporate expenses and a portion
of administrative shared services were $7.5 million for fiscal 2000 compared
with $5.1 million for fiscal 1999. Fiscal 1999 SG&A expenses included $1.0
million for costs related to the acceleration of certain long-term
compensation programs as a result of the recapitalization of our company and
the attainment of performance targets.
The Celera Genomics group recorded non-cash expenses of $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 Celera Genomics group was allocated a non-recurring pre-tax charge of $4.6
million in fiscal 1999 relating to costs incurred in connection with the
recapitalization of our company. The Celera Genomics group and the Applied
Biosystems group were each allocated 50% of the total recapitalization costs
incurred in fiscal 1999 including investment banking and professional fees.
See Note 1 to the Celera Genomics group's combined financial statements for a
description of the recapitalization.
Interest expense was $2.1 million for fiscal 2000 as a result of financing the
purchase of the Celera Genomics group's Rockville, Maryland facilities.
Interest income was $27.5 million for fiscal 2000 compared with $1.2 million
for fiscal 1999. The increase of $26.3 million was attributable to higher
average balances of cash and cash equivalents and short-term investments
during fiscal 2000, which increased during the third quarter of fiscal 2000
due to a follow-on public offering of Applera - Celera stock as well as
interest income on the $150 million note receivable from the Applied
Biosystems group, which was outstanding for most of fiscal 2000.
The effective income tax rate was 35% for fiscal 2000 and 34% for fiscal 1999.
Excluding amortization expense related to goodwill, the effective income tax
rate for fiscal 2000 was 36%. Excluding the recapitalization costs, the
effective income tax rate for fiscal 1999 was 35%. See Note 1 to the Celera
Genomics group's combined financial statements for a discussion of allocation
of federal and state income taxes.
Market Risk
Our company is exposed to potential loss from exposure to market risks
represented principally by changes in foreign exchange rates, interest rates,
and equity prices.
Our company operates internationally, with manufacturing and distribution
facilities in various countries throughout the world. For fiscal 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
APPLERA CORPORATION Annual Report 2001 | 21
APPLERA CORPORATION | Management's Discussion and Analysis
continued
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 the 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 use an interest rate swap to
manage our interest rate exposure. We do not use derivative financial
instruments for trading purposes, nor are we a party to leveraged derivatives.
We performed a sensitivity analysis as of June 30, 2001. Assuming a
hypothetical adverse change of 10% in foreign exchange rates in relation to
the U.S. dollar as of June 30, 2001, we calculated a hypothetical after-tax
loss of $8.7 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.
Interest rate swaps are used to hedge underlying debt obligations. In fiscal
1997, we executed an interest rate swap in conjunction with our company
entering into a five-year Japanese yen debt obligation. Under the terms of the
swap agreement, we pay a fixed rate of interest at 2.1% and receive a floating
LIBOR interest rate. At June 30, 2001, the notional amount of indebtedness
covered by the interest rate swap was 3.8 billion yen or $30.5 million. The
maturity date of the swap coincides with the maturity of the yen loan in March
2002. A change in interest rates would have no impact on our reported interest
expense and related cash payments because the floating rate debt and fixed
rate swap contract both have the same maturity and are based on the same rate
index.
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 $111.1 million at June 30, 2001.
Management's Discussion of Financial Resources and Liquidity
The following discussion of financial resources and liquidity focuses on our
company's Consolidated Statements of Financial Position and Consolidated
Statements of Cash Flows.
Cash and cash equivalents and short-term investments were $1.4 billion at June
30, 2001 and $1.5 billion at June 30, 2000, with total debt of $45.2 million
at June 30, 2001 and $97.8 million at June 30, 2000. Working capital was $1.5
billion both at June 30, 2001 and 2000. Debt to total capitalization was 2% at
June 30, 2001 and 4% at June 30, 2000.
During the first quarter of fiscal 2000, we obtained financing of $46 million,
specifically for the purchase of the Celera Genomics group's Rockville,
Maryland facilities. This debt was repaid during the second quarter of fiscal
2001. At June 30, 2001, long-term debt consisted of a 3.8 billion yen variable
rate loan that is scheduled to mature in March 2002. Through an interest rate
swap, the effective interest rate for the loan is fixed at 2.1%. See Note 11
of the Applied Biosystems group's combined financial statements for additional
discussion of financial instruments.
Significant Changes in the Consolidated Statements of Financial Position
Accounts receivable increased by $22.2 million to $400.8 million at June 30,
2001 from $378.6 million at June 30, 2000, reflecting the growth in net
revenues.
Prepaid expenses and other current assets increased $19.5 million to $103.0
million at June 30, 2001 from $83.5 million at June 30, 2000, primarily due to
the increase in fair value of financial instruments used for hedging.
Property, plant and equipment, net increased $100.7 million to $435.6 million
at June 30, 2001 from $334.9 million at June 30, 2000, primarily due to the
Applied Biosystems group's purchase of property in Pleasanton, California for
approximately $54 million, capital expenditures for production equipment
related to oligonucleotide manufacturing and other capital spending related to
the construction of laboratory facilities. The Celera Genomics group had
capital expenditures for building improvements and equipment related to the
development of a laboratory to support its proteomics and discovery
capabilities efforts and costs related to internally developed software.
Other long-term assets decreased to $410.8 million at June 30, 2001 from
$622.9 million at June 30, 2000. Our company's minority equity investments
decreased $186.6
22 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Management's Discussion and Analysis
continued
million due to a $178.1 million decrease in the fair value of the investments,
primarily caused by the decline in market prices of the securities of Aclara
Biosciences, Inc., Millennium Pharmaceuticals, Inc., and Hyseq, Inc., and
decreased $11.6 million because of sales of certain investments previously
discussed. These decreases were partially offset by the acquisition of
minority equity investments. Other factors that contributed to the decrease in
other long-term assets were an impairment charge of $69.1 million, recorded
during the fourth quarter of fiscal 2001 to reduce the net assets of Paracel
to their estimated fair value and the amortization of goodwill and other
intangibles also primarily related to Paracel. These decreases were partially
offset by increases in noncurrent deferred tax assets and purchased license
agreements and the acquisitions of minority equity interest in Hubit Genomix,
Inc.
Accrued salaries and wages decreased $24.8 million to $64.9 million at June
30, 2001 from $89.7 million at June 30, 2000. Accrued salaries and wages were
higher at June 30, 2000 primarily due to accruals for costs related to the
acceleration of certain long-term compensation programs during the fourth
quarter of fiscal 2000 as a result of the attainment of performance targets.
This decrease was partially offset by the growth in the number of employees of
the Celera Genomics group during fiscal 2001, primarily due to the Celera
Genomics group's expansion of its sales and marketing team, its scientific and
annotation research teams, its bioinformatics and software engineering teams,
and its proteomics and functional genomics teams.
Accrued taxes on income decreased $66.6 million to $83.0 million at June 30,
2001 from $149.6 million at June 30, 2000, primarily due to the timing of
income tax payments.
Other accrued expenses increased by $15.7 million to $215.8 million at June
30, 2001 from $200.1 million at June 30, 2000, primarily due to the payments
received by the Celera Genomics group for database subscription and service
agreements, partially offset by revenue recognized under these agreements.
Other long-term liabilities increased $18.2 million to $152.4 million at June
30, 2001 from $134.2 million at June 30, 2000 primarily due to advance
payments received for database subscription agreements for periods beyond
fiscal 2002.
Consolidated Statements of Cash Flows
Operating activities generated $86.4 million of cash for fiscal 2001 compared
with $108.2 million for fiscal 2000 and $69.1 million for fiscal 1999. For
fiscal 2001, compared with fiscal 2000, higher tax-related payments, payments
of certain compensation-related accruals, and higher payments for technology
licenses were only partially offset by higher income-related cash flows, cash
collected on subscription and services agreements for which revenue has been
deferred, and lower increases in accounts receivable balances.
For fiscal 2001, net cash used by investing activities was $408.9 million,
compared with $455.0 million for fiscal 2000. For fiscal 2001, capital
expenditures were $185.9 million, primarily due to the Applied Biosystems
group's 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 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. During fiscal 2001, we realized
$15.5 million in net cash proceeds from the sale of minority equity
investments. Investments during fiscal 2001 included Genomica Corporation and
Hubit Genomix. Also during fiscal 2001, our company had net purchases of
short-term investments of $238.1 million.
For fiscal 2000, net cash used by investing activities from continuing
operations of $455.0 million consisted primarily of short-term investments of
$541.1 million, purchased with funds received from the follow-on public offering
of Applera - Celera stock. Capital expenditures of $125.8 million included $8.6
million related to improvement of our company's 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 acquired during the fourth quarter of fiscal 1999 and expenditures
associated with the continued development of the laboratories, facilities, and
data center at the Celera Genomics group's Rockville, Maryland facilities. We
collected the $150 million note receivable resulting from the sale of the
Analytical Instruments business and realized net cash proceeds of $82.8 million
from the sale of minority equity investments and real estate during fiscal 2000.
In addition, we spent $23.0 million for various investments and acquisitions
during fiscal 2000.
For fiscal 1999, net cash provided by investing activities from continuing
operations was $154.1 million. During fiscal 1999, we generated $325.8 million
in net cash proceeds from the sale of various assets, including $275.0 million
from the sale of the Analytical Instruments business, $30.0 million from the
sale of Tecan, and $20.8 million from the sale of minority equity investments
and certain non-operating assets. The fiscal 1999 proceeds were partially
offset by $176.0 million of capital expenditures, which included $12.9 million
as part of the strategic program to improve our information technology
infrastructure, $17.5 million for the acquisition of an airplane, $46.3
million for the purchase of land and buildings to house the Celera Genomic
group's headquarters in Rockville, Maryland and $22.9 million for improvements
thereon. For fiscal 1999, we spent $5.3 million for various acquisitions and
investments.
Net cash used by financing activities was $20.0 million for fiscal 2001
compared with $1.0 billion provided by financing activities for fiscal 2000.
In fiscal 2001, our company received $60.1 million of proceeds from stock
issued for stock plans compared with $61.0 million in fiscal 2000. Dividends
paid were $35.7 million for fiscal 2001 and $26.4 million for fiscal 2000.
Increases in loans payable provided $1.6 million of cash during fiscal 2001
compared with $52.7
APPLERA CORPORATION Annual Report 2001 | 23
APPLERA CORPORATION | Management's Discussion and Analysis
continued
million during fiscal 2000. During fiscal 2001, our company repaid $46.0
million of its commercial paper borrowing which it had secured in fiscal 2000
specifically for the purchase of the Rockville, Maryland facilities. In March
2000, our company completed a follow-on public offering of Applera - Celera
stock from which net proceeds of $943.3 million were realized.
Net cash provided by financing activities was $43.6 million for fiscal 1999
primarily due to the receipt of $96.4 million of proceeds from stock issued
for stock plans. These cash receipts were offset by a reduction in loans
payable and principal payments on long-term debt of $16.4 million, dividend
payments of $34.2 million, and the purchase of shares of common stock for
treasury for $2.2 million.
Our company maintains a $100 million revolving credit agreement with four
banks that matures on April 20, 2005. There were no borrowings outstanding
under the facility at June 30, 2001, and we also had other unused credit
facilities totaling $122 million.
Our company believes our cash and cash equivalents, short-term investments,
funds generated from operating activities, and available borrowing facilities
are sufficient to provide for our company's anticipated financing needs for at
least the next two years.
Impact of Inflation and Changing Prices
Inflation and changing prices are continually monitored. Our company attempts
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, our company
attempts to recover such costs by increasing, over time, the selling price of
our products and services. Our company believes the effects of inflation have
been appropriately managed and therefore have not had a material impact on our
company's historic operations and resulting financial position.
Euro Conversion
A single currency called the euro was introduced in Europe on January 1, 1999.
Twelve of the fifteen member countries of the European Union agreed to adopt
the euro as their common legal currency on that date. Fixed conversion rates
between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until at least January 1, 2002. During this transition period, parties may
settle transactions using either the euro or a participating country's legal
currency.
Our company is currently taking the necessary actions ensuring that our
company's computer and financial systems as well as the business processes can
deal effectively with the euro and the conversion to the euro. Our company
does not expect this conversion to have a material impact on our results of
operations, financial position, or cash flows.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," which applies to all business combinations initiated after June
30, 2001. The provisions of this statement require business combinations to be
accounted for using the purchase method of accounting. Also in July 2001, the
FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142, goodwill from acquisitions occurring after June 30, 2001 will not be
amortized, and for goodwill existing prior to June 30, 2001, our company
expects to adopt the nonamortization provisions of the statement on July 1,
2001. Goodwill for which the nonamortization provisions are applied will be
required to be reviewed for impairment at least on an annual basis. If an
impairment is found to exist, a charge will be taken against operations. SFAS
No. 142 requires that, upon adoption, goodwill and certain intangible assets
be reviewed for classification and useful life. We expect that, aside from the
nonamortization of goodwill on a prospective basis, the effect upon adoption
of SFAS No. 142 will be immaterial.
Outlook
In July 2001, we announced the next phase of our genomics strategy - a
comprehensive program for commercializing products derived from information
obtained through analysis of the human genome. These products will be based on
the identification of variations in the sequence and expression of genes, and
their association with disease and therapy. This program is being implemented
collaboratively by our company's three businesses - the Applied Biosystems
group, the Celera Genomics group, and Celera Diagnostics. For fiscal 2002, we
plan to invest approximately $75 million in this program to be funded equally
by the businesses. These funds will be used for a resequencing effort to be
completed at the Celera Genomics group, to develop validated reagent sets at
the Applied Biosystems group, and to initiate disease association studies at
Celera Diagnostics.
Applied Biosystems Group
The Applied Biosystems group anticipates lower growth rates for the first
three quarters of fiscal 2002 compared to the strong performance in the
corresponding periods of fiscal 2001. Sales growth rates for the first three
quarters of fiscal 2002 are currently expected to be in the mid-single digits,
rising to double digits in the fourth fiscal quarter and accelerating in the
second half of calendar 2002. For fiscal 2002 overall, the Applied Biosystems
group anticipates sales growth of approximately 7 to 9 percent before the
effects of foreign currency.
The financial impact on the Applied Biosystems group of our company's planned
investment in our genomics strategy is expected to be twofold. First, the
Applied Biosystems group would incur incremental R&D spending of approximately
$20 million to $25 million for this program. Second, the Applied Biosystems
group will not recognize revenue or profits from the Celera Genomics group's
or Celera Diagnostics' share of expenditures related to this program. The
effort is expected to consume a substantial
24 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Management's Discussion and Analysis
continued
portion of the Celera Genomics group's sequencing capacity that in prior years
generated revenues for the Applied Biosystems group. As a result, while sales
from the Applied Biosystems group to the Celera Genomics group totaled
approximately $64 million in fiscal 2001, sales from the Applied Biosystems
group to the Celera Genomics group are anticipated to be approximately only
$25 million in fiscal 2002. This lower level of sales to the Celera Genomics
group is part of the reason for the lower sales growth forecast for the
Applied Biosystems group in fiscal 2002.
We expect diluted earnings per share of Applera - Applied Biosystems stock for
fiscal 2002 to be in the range of $0.95 to $1.00. We anticipate fiscal 2002
R&D expenditures, including the Applied Biosystems group's share of the new
Applera genomics commercialization program, to increase approximately 15 to 17
percent over fiscal 2001 levels. R&D spending should approximate 12 percent of
sales in fiscal 2002 as the Applied Biosytems group increases investment
spending to support the introduction of new products and platforms in this
year and in the future. Selling, general and administrative expenses are
expected to rise somewhat more slowly than revenue during fiscal 2002. The
Applied Biosystems group's capital spending in fiscal 2002 is anticipated to
be approximately $110 million.
The results of our company remain subject to adverse currency effects because
approximately 50% of revenues were derived from regions outside the United
States in fiscal 2001.
Celera Genomics Group
In June 2001, our company signed a definitive merger agreement to acquire Axys
Pharmaceuticals, Inc. ("Axys") in a stock-for-stock transaction. Axys is an
integrated small molecule drug discovery and development company that is
developing products for chronic therapeutic applications through
collaborations with pharmaceutical companies and has a proprietary product
portfolio in oncology.
The transaction, which is subject to customary closing conditions, including
approval by Axys stockholders and regulatory approvals, has been structured as a
tax-free reorganization and will be accounted for under the purchase method.
Under the terms of the merger agreement, Axys shareholders will receive shares
of Applera - Celera stock per Axys share based on an exchange ratio which is
calculated based on the average closing price of Applera - Celera stock over the
10 trading days immediately preceding (but excluding) the second trading day
prior to the closing of the merger. If the closing had occurred at the time the
merger agreement was signed, each share of Axys common stock would have been
exchanged for a fractional share of Applera - Celera stock having an average
closing price during the calculation period equivalent to $4.65 per share of
Axys common stock. Depending on the average closing price of Applera - Celera
stock at the time of the closing of the merger, our company will issue between
3.3 million shares and 5.4 million shares of Applera - Celera stock.
For fiscal 2002, the Celera Genomics group anticipates revenue growth of
approximately 40 to 50 percent over fiscal 2001. This revenue growth is
expected to result from new subscriptions from academic and research
organizations and commercial entities, as well as the signing of additional
academic users under existing subscription agreements. The Celera Genomics
group also expects additional collaborations with commercial partners to
contribute to this growth.
The Celera Genomics group's fiscal 2002 expenses associated with R&D are
estimated to be between $145 million and $160 million. These expenditures are
expected to be directed primarily to internal discovery programs, including
the completion and operation of the proteomics facility, the development of
informatics and algorithms for the management and interpretation of data from
protein analysis, the construction and operation of the biologics laboratory,
which is expected to focus on biological sample acquisition, target validation
and immunotherapeutics, DNA resequencing associated with the next phase of our
company's genomics strategy, and ongoing content development for the on-line
business. This projected R&D spending does not include any effect of the
proposed acquisition of Axys.
Our company believes cash and cash equivalents and short-term investments
allocated to the Celera Genomics group are sufficient to fund the Celera
Genomics group's new R&D activities in therapeutic and diagnostic discovery
and support the efforts of the Celera Diagnostics joint venture. The Celera
Genomics group's actual future capital uses and requirements with respect to
its new activities will depend on many factors, including those referenced
under "Forward-Looking Statements."
APPLERA CORPORATION Annual Report 2001 | 25
APPLERA CORPORATION | Forward-Looking Statements
Forward-Looking Statements
Certain statements contained in this report, including the Outlook section,
are forward-looking and are subject to a variety of risks and uncertainties.
These statements may be identified by the use of forward-looking words or
phrases such as "believe," "expect," "anticipate," "should," "plan,"
"estimate," and "potential," among others. These forward-looking statements
are based on our 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 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.
A significant portion of sales depends on customers' capital spending policies
which may be subject to significant and unexpected decreases. A significant
portion of the Applied Biosystems group's instrument product sales are capital
purchases by its customers. The Applied Biosystems group's customers include
pharmaceutical, environmental, research, biotechnology, and chemical
companies, and the capital spending policies of these companies can have a
significant effect on the demand for the Applied Biosystems group's products.
These policies are based on a wide variety of factors, including the resources
available to make purchases, the spending priorities among various types of
research equipment, and policies regarding capital expenditures during
recessionary periods. Any decrease in capital spending or change in spending
policies of these companies could significantly reduce the demand for the
Applied Biosystems group's products.
A substantial portion of the Applied Biosystems group's sales is to customers
at universities or research laboratories whose funding is dependent on both
the level and timing of funding from government sources. As a result, the
timing and amount of revenues from these sources may vary significantly due to
factors that can be difficult to forecast. Although research funding has
increased 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 has been and could in the future be subject to
claims for infringement of patents and other intellectual property rights. The
Applied Biosystems group's products are based on complex, rapidly developing
technologies. These products could be developed without knowledge of
previously filed but unpublished patent applications that cover some aspect of
these technologies. In addition, there are relatively few decided court cases
interpreting the scope of patent claims in these technologies, and the Applied
Biosystems group's belief that its products do not infringe the technology
covered by valid patents could be successfully challenged by third parties.
Also, in the course of its business, the Applied Biosystems group may from
time to time have access to confidential or proprietary information of third
parties, and such parties could bring a theft of trade secret claim against
the Applied Biosystems group asserting that the Applied Biosystems group's
products improperly use technologies which are not patented but which are
protected as trade secrets. The Applied Biosystems group has been made a party
to litigation regarding intellectual property matters, including the patent
litigation described in the next paragraph, some of which, if determined
adversely, could have a material adverse effect on the Applied Biosystems
group. Due to the fact that the Applied Biosystems group's business depends in
large part on rapidly developing and 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.
Applera is currently subject to patent litigation with Amersham Pharmacia
Biotech, Inc. and Molecular Dynamics, Inc. In the litigation, Amersham and
Molecular Dynamics allege that the Applied Biosystems group has infringed four
Amersham patents as a result of the Applied Biosystems group's sale of certain
DNA sequencing instrumentation and reagents. Also in the litigation, Applera
has brought suit against Amersham and Molecular Dynamics
26 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Forward-Looking Statements
continued
alleging that they have infringed two of Applera's patents
as a result of their sale of their DNA sequencing instrumentation and
reagents. At present, these lawsuits are not scheduled for trial. If they
proceed to trial, the cost of the litigation, and the amount of management
time that will be devoted to the litigation, will be significant. There can be
no assurance that this litigation will be resolved favorably to Applera or
either the Celera Genomics group or the Applied Biosystems group, that Applera
and both of its groups will not be enjoined from selling the products in
question or other products as a result, or that any monetary or other damages
assessed against Applera will not have a material adverse effect on the
financial condition of Applera, the Celera Genomics group, or the Applied
Biosystems group.
Since the Applied Biosystems group's business is dependent on foreign sales,
fluctuating currencies will make revenues and operating results more volatile.
Approximately 50% of the Applied Biosystems group's net revenues during fiscal
2001 were derived from sales to customers outside of the United States. The
majority of these sales were based on the relevant customer's local currency.
A significant portion of the related costs for the Applied Biosystems group
are based on the U.S. dollar. As a result, the Applied Biosystems group's
reported and anticipated operating results and cash flows are subject to
fluctuations due to material changes in foreign currency exchange rates that
are beyond the Applied Biosystems group's control.
Integrating acquired technologies may be costly and may not result in
technological advances. The future growth of the Applied Biosystems group
depends in part on its ability to acquire complementary technologies through
acquisitions and investments. The consolidation of employees, operations, and
marketing and distribution methods could present significant managerial
challenges. For example, the Applied Biosystems group may encounter
operational difficulties in the integration of manufacturing or other
facilities. In addition, technological advances resulting from the integration
of technologies may not be achieved as successfully or rapidly as anticipated,
if at all.
Electricity shortages and earthquakes could disrupt operations in California.
The headquarters and principal operations of the Applied Biosystems group are
located in Foster City, California. The State of California and its principal
electrical utility companies have recently indicated that there is a statewide
electricity shortage and that these utility companies are in poor financial
condition. As a result, California has experienced temporary localized
electricity outages, or rolling blackouts, which may continue or worsen into
blackouts of longer duration in the future. Blackouts in Foster City, even of
modest duration, could impair or cause a temporary suspension of the group's
operations, including the manufacturing and shipment of new products. Power
disruptions of an extended duration or high frequency could have a material
adverse effect on operating results. In addition, Foster City is located near
major California earthquake faults. The ultimate impact of earthquakes on the
Applied Biosystems group, its significant suppliers, and the general
infrastructure is unknown, but operating results could be materially affected
in the event of a major earthquake.
The Celera Genomics/Applied Biosystems Joint Venture's ability to develop
proprietary diagnostic products is unproven. Our Company has announced the
formation of Celera Diagnostics, a joint venture between the Applied
Biosystems group and the Celera Genomics group in the field of diagnostics.
Celera Diagnostics faces the difficulties inherent in developing and
commercializing diagnostic tests and in building and operating a commercial
research and development program. Celera Diagnostics' ability to develop
proprietary diagnostic products is unproven, and it is possible that its
discovery process will not result in any commercial products or services. Even
if Celera Diagnostics is able to develop products and services, it is possible
that these products and services may not be commercially viable or successful
due to a variety of reasons, including difficulty obtaining regulatory
approvals, competitive conditions, the inability to obtain necessary
intellectual property protection, the need to build distribution channels,
failure to get adequate reimbursement for these products from insurance or
government payors, or the inability of Celera Diagnostics to recover its
development costs in a reasonable period.
Factors Relating to the
Celera Genomics Group
The Celera Genomics group has incurred net losses to date and may not achieve
profitability. The Celera Genomics group has accumulated net losses of $365.0
million as of June 30, 2001, and expects that it will continue to incur
additional net losses for the foreseeable future. These losses are expected to
increase as the Celera Genomics group increases its investments in new
technology and product development, including investments for the development
of its therapeutics discovery and development business and investments in
Celera Diagnostics, its joint venture with the Applied Biosystems group, for
the development of Celera Diagnostics' diagnostics business. As an early stage
business, the Celera Genomics group faces significant challenges in
simultaneously expanding its operations, pursuing key scientific goals and
attracting customers for its information products and services. As a result,
there is a high degree of uncertainty that the Celera Genomics group will be
able to achieve profitable operations.
The Celera Genomics group's business plan depends heavily on continued
assembly and annotation of the human and mouse genomes. In June 2000, the
Celera Genomics group and the Human Genome Project each announced the "first
assembly" of the human genome, and in April 2001, the Celera Genomics group
announced the assembly of the mouse genome. Assembly is the process by which
individual fragments of DNA, the molecule that forms the basis of the genetic
material in virtually all living organisms, are pieced together into their
appropriate order and place on each chromosome within the genome. The Celera
Genomics group's first assembly of the human genome covered approximately 95%
of that genome, and its assembly of the mouse genome covered approximately 99%
of that genome. The Celera Genomics group intends to continue updating its
assembly of the human and mouse genomes as it continues to annotate these
genomes. Annotation is the process of assigning features or characteristics to
each chromosome.
APPLERA CORPORATION Annual Report 2001 | 27
APPLERA CORPORATION | Forward-Looking Statements
continued
Each gene on each chromosome is given a name, its structural features are
described, and proteins encoded by the genes are classified into possible or
known function.
The Celera Genomics group's ability to retain its existing customers and
attract new customers for its genome database business is heavily dependent
upon the continued assembly and annotation of these genomes. This information
is also essential to the therapeutics discovery and development components of
the Celera Genomics group's business strategy in which the Celera Genomics
group intends to make substantial investments in the near future. As a result,
failure to update the assembly and annotation efforts in a timely manner may
have a material adverse effect on the Celera Genomics group's business.
The Celera Genomics group's revenue growth depends on retaining existing
customers and adding new customers. The revenues that the Celera Genomics
group expects to receive from its existing customers will offset only a small
portion of its expenses. In order to generate significant additional revenues,
the Celera Genomics group must obtain additional customers and retain its
existing customers. The Celera Genomics group's ability to retain existing
customers and add new customers depends upon customers' continued belief that
the Celera Genomics group's products can help accelerate their drug discovery
and development efforts and fundamental discoveries in biology. Although
customer agreements typically have multiple year terms, there can be no
assurance that any will be renewed upon expiration. The Celera Genomics
group's future revenues are also affected by the extent to which existing
customers expand their agreements to include new services and database
products. In some cases, the Celera Genomics group may accept milestone
payments or future royalties on products developed by its customers as
consideration for access to the Celera Genomics group's databases and products
in lieu of a portion of subscription fees. These arrangements are unlikely to
produce revenue for the Celera Genomics group for a number of years, if ever,
and depend heavily on the research and product development, sales and
marketing and intellectual property protection abilities of the customer.
Use of genomics information to develop or commercialize products is unproven.
The development of new drugs and the diagnosis of disease based on information
derived from the study of genetic material of organisms, or genomics, is
unproven. Few therapeutic or diagnostic products based on genome discoveries
have been developed and commercialized and to date no one has developed or
commercialized any therapeutic or diagnostic products based on the Celera
Genomics group's technologies. If the Celera Genomics group or its customers are
unsuccessful in developing and commercializing products based on the group's
databases or other products or services, customers and the Celera Genomics group
may be unable to generate sufficient revenues and the Celera Genomics group's
business may suffer as a result. Development of these products will be subject
to risks of failure, including that these products will be found to be toxic, be
found to be ineffective, fail to receive regulatory approvals, fail to be
developed prior to the successful marketing of similar products by competitors
or infringe on proprietary rights of third parties.
The industry in which the Celera Genomics group operates is intensely
competitive and evolving. There is intense competition among entities
attempting to interpret segments of the human genome and identify genes
associated with specific diseases and develop products, services and
intellectual property based on these discoveries. The Celera Genomics group
faces competition in these areas from genomic, pharmaceutical, biotechnology
and diagnostic companies, academic and research institutions and government or
other publicly-funded agencies, both in the United States and abroad. A number
of companies, other institutions and government-financed entities are engaged
in gene and protein analysis, and some of them are developing databases
containing gene, protein, and related biological information and are marketing
or plan to market their data to pharmaceutical and biotechnology companies and
academic and research institutions. Additional competitors may attempt to
establish databases containing this information in the future. In addition,
some pharmaceutical and biotechnology companies may choose to develop or
acquire competing technologies to meet their needs rather than purchase
products and services from the Celera Genomics group. The Celera Genomics
group has licensed some of its key technology on a non-exclusive basis from
third parties and therefore this technology may be available for license by
competitors of the Celera Genomics group or pharmaceutical or biotechnology
companies seeking to develop their own databases for their own use. Also, a
customer of the Celera Genomics group may use the products and services of the
Celera Genomics group to develop products or services that compete with the
products or services separately developed by the Celera Genomics group or its
customers.
Competitors may also discover and characterize genes or proteins involved in
disease processes, potential candidates for new therapeutics, drug discovery
and development technologies, or drugs in advance of the Celera Genomics group
or its customers, or which are more effective than those developed by the
Celera Genomics group or its customers, or may obtain regulatory approvals of
their drugs more rapidly than the Celera Genomics group or its customers do,
any of which could have a material adverse effect on any of the similar
programs of the Celera Genomics group or its customers. Moreover, these
competitors may obtain patent protection or other intellectual property rights
that would limit the Celera Genomics group's rights or its customers' ability
to use the Celera Genomics group's products to commercialize therapeutic,
diagnostic or agricultural products. In addition, a customer may use the
Celera Genomics group's services to develop products that compete with
products separately developed by the group or its other customers.
The Celera Genomics group also faces competition from software providers. A
number of companies have announced their intent to develop and market software
to assist pharmaceutical and biotechnology companies and academic researchers
in managing and analyzing their own genomic data and publicly available data.
28 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Forward-Looking Statements
continued
The Celera Genomics group's current and potential customers are primarily
from, and are subject to risks faced by, the pharmaceutical and biotechnology
industries. The Celera Genomics group derives a substantial portion of its
revenues from fees for its information products and services paid by
pharmaceutical companies and biotechnology companies engaged in drug discovery
and development. These fees accounted for approximately 70% of the Celera
Genomics group's revenue in fiscal year 2001. The Celera Genomics group
expects that these companies will continue to be the Celera Genomics group's
primary source of revenues for the foreseeable future. As a result, the Celera
Genomics group is subject to risks and uncertainties that affect the
pharmaceutical and biotechnology industries and to reduction and delays in
research and development expenditures by companies in these industries.
In addition, the Celera Genomics group's future revenues may be adversely
affected by mergers and consolidation in the pharmaceutical and biotechnology
industries, which may reduce the number of the group's existing and potential
customers. Large pharmaceutical and biotechnology customers could also decide
to conduct their own genomics programs or seek other providers instead of
using the Celera Genomics group's products and services.
The Celera Genomics group relies on its strategic relationship with the
Applied Biosystems group. The Celera Genomics group believes that its
strategic relationship with the Applied Biosystems group has provided it with
a significant competitive advantage in its efforts to date to sequence the
human and other genomes. The Applied Biosystems group leases instruments,
sells consumables and project materials and provides research and development
services to the Celera Genomics group. The Celera Genomics group paid the
Applied Biosystems group $17.3 million in fiscal year 1999, $54.4 million in
fiscal year 2000 and $60.1 million in fiscal year 2001 for these products and
services. The Celera Genomics group's continued development and expansion of
its business will depend on the Applied Biosystems group's ability to continue
to provide leading edge, proprietary technology and products, including
advanced technologies for gene and protein analysis. If the Applied Biosystems
group is unable to supply these technologies, the Celera Genomics group will
need to obtain access to alternative technologies, which may not be available,
or may only be available on unfavorable terms. Any change in the relationship
with the Applied Biosystems group that adversely affects the Celera Genomics
group's access to the Applied Biosystems group's technology or failure by the
Applied Biosystems group to continue to develop new technologies or protect
its proprietary technology could adversely affect the Celera Genomics group's
business.
Introduction of new products may expose the Celera Genomics group to product
liability claims. New products developed by the Celera Genomics group could
expose the Celera Genomics group to potential product liability risks that are
inherent in the testing, manufacturing and marketing of human therapeutic and
diagnostic products. Product liability claims or product recalls, regardless
of the ultimate outcome, could require the Celera Genomics group to spend
significant time and money in litigation and to pay significant damages.
The Celera Genomics group could incur liabilities relating to hazardous
materials that it uses in its research and development activities. The Celera
Genomics group's research and development activities involve the controlled
use of hazardous materials, chemicals and various radioactive materials. In
the event of an accidental contamination or injury from these materials, the
Celera Genomics group could be held liable for damages in excess of its
resources.
The Celera Genomics group's sales cycle is lengthy and it may spend
considerable resources on unsuccessful sales efforts or may not be able to
complete deals on the schedule anticipated. The Celera Genomics group's sales
cycle is typically lengthy because the group needs to educate potential
customers and sell the benefits of its products and services to a variety of
constituencies within those companies. In addition, each agreement involves
the negotiation of unique terms. The Celera Genomics group's ability to obtain
new customers for genomic information products, collaborative services, and
licenses to intellectual property depends on its customers' belief that the
Celera Genomics group can help accelerate their drug discovery efforts. The
Celera Genomics group may expend substantial funds and management effort with
no assurance that an agreement will be reached with a potential customer.
Actual and proposed consolidations of pharmaceutical and biotechnology
companies have affected and may in the future affect the timing and progress
of the Celera Genomics group's sales efforts.
Scientific and management staff has unique expertise which is key to the
Celera Genomics group's commercial viability and which would be difficult to
replace. The Celera Genomics group is highly dependent on the principal
members of its scientific and management staff, particularly J. Craig Venter,
its President and Chief Scientific Officer. Additional members of the Celera
Genomics group's medical, scientific and information technology staff are
important to the development of its business plan. The loss of any of these
persons' expertise would be difficult to replace and could have a material
adverse effect on the Celera Genomics group's ability to achieve its goals.
The Celera Genomics group's competitive position may depend on patent and
copyright protection and licenses to the important intellectual property
patented by others, which may not be sufficiently available. The Celera
Genomics group's ability to compete and to achieve profitability may be
affected by its ability to protect its proprietary technology and other
intellectual property. While the Celera Genomics group's business is currently
primarily dependent on revenues from access fees to its on-line information
system, the Celera Genomics group expects that obtaining patent protection may
become increasingly important to its business as it moves beyond the on-line
database business. The Celera Genomics group would be able to prevent
competitors from making, using or selling any of its technology for which it
obtains a patent. However, patent law affecting the Celera Genomics group's
business, particularly gene sequences, gene function, and genetic variations,
or polymorphisms, is uncertain. As a result, the Celera Genomics group is
APPLERA CORPORATION Annual Report 2001 | 29
APPLERA CORPORATION | Forward-Looking Statements
continued
uncertain as to its ability to obtain intellectual property protection
covering its information discoveries sufficient to prevent competitors from
developing similar subject matter. The United States Patent and Trademark
Office has recently adopted new guidelines for use in the review of the
utility of inventions, particularly biotechnology inventions. These guidelines
increased the amount of evidence required to illustrate utility in order to
obtain a patent in the biotechnology field, making patent protection more
difficult to obtain. Although others have been successful in obtaining patents
to biotechnology inventions, since the adoption of these guidelines these
patents have been issued with increasingly less frequency. As a result,
patents may not issue from patent applications that the Celera Genomics group
may own or license if the applicant is unable to satisfy the new guidelines.
In addition, because patent applications in the United States are maintained
in secrecy until patents issue, third parties may have filed patent
applications for technology used by the Celera Genomics group or covered by
the Celera Genomics group's pending patent applications without the Celera
Genomics group being aware of those applications. No patents have been issued
to the Celera Genomics group to date.
The United States Patent and Trademark Office has issued several patents to
third parties covering inventions involving single nucleotide polymorphisms
(SNPs), naturally occurring genetic variations that scientists believe can be
correlated with susceptibility to disease, disease prognosis, drug efficiency,
and drug toxicity. These inventions are subject to the same new guidelines as
other biotechnology inventions. In addition, the Celera Genomics group may
need to obtain rights to patented SNPs in order to develop, use and sell
analyses of the overall human genome or particular full-length genes. These
licenses may not be available to the Celera Genomics group on commercially
acceptable terms, or at all.
Moreover, the Celera Genomics group may be dependent on protecting, through
copyright law or otherwise, its databases to prevent other organizations from
taking information from those databases and copying and reselling it.
Copyright law currently provides uncertain protection regarding the copying
and resale of factual data. As such, the Celera Genomics group is uncertain
whether it could prevent that copying or resale. Changes in copyright and
patent law could either expand or reduce the extent to which the Celera
Genomics group and its customers are able to protect their intellectual
property.
The Celera Genomics group's position may depend on its ability to protect
trade secrets. The Celera Genomics group relies on trade secret protection for
its confidential and proprietary information and procedures, including
procedures related to sequencing genes and to searching and identifying
important regions of genetic information. The Celera Genomics group currently
protects its information and procedures as trade secrets. The Celera Genomics
group protects its trade secrets through recognized practices, including
access control, confidentiality and nonuse agreements with employees,
consultants, collaborators, and customers, and other security measures. These
confidentiality and nonuse agreements may be breached, however, and the Celera
Genomics group may not have adequate remedies for a breach. In addition, the
Celera Genomics group's trade secrets may otherwise become known or be
independently developed by competitors.
Public disclosure of genomics sequence data could jeopardize the Celera
Genomics group's intellectual property protection and have an adverse effect
on the value of its products and services. The Celera Genomics group, the
federally funded Human Genome Project and others engaged in similar research
have made and are expected to continue making available to the public basic
human sequence data. These disclosures might limit the scope of the Celera
Genomics group's claims or make subsequent discoveries related to full-length
genes and proteins unpatentable. While the Celera Genomics group believes that
the publication of sequence data will not preclude it or others from being
granted patent protection on genes and proteins, there can be no assurance
that the publication has not affected and will not affect the ability to
obtain patent protection. Customers may conclude that uncertainties of that
protection and that the basic human sequence data is available for free
decrease the value of the Celera Genomics group's information products and
services and as a result, it may be required to reduce the fees it charges for
its products and services.
The Celera Genomics group may infringe the intellectual property rights of
third parties and may become involved in expensive intellectual property
litigation. The intellectual property rights of biotechnology companies,
including the Celera Genomics group, are generally uncertain and involve
complex legal, scientific and factual questions. The Celera Genomics group's
success in the therapeutic discovery and development fields may depend, in
part, on its ability to operate without infringing on the intellectual
property rights of others and to prevent others from infringing on its
intellectual property rights.
There has been substantial litigation regarding patents and other intellectual
property rights in the genomics industry. The Celera Genomics group may become
a party to patent litigation or proceedings at the United States Patent and
Trademark Office to determine its patent rights with respect to third parties,
which may include subscribers to the Celera Genomics group's database
information services. Interference proceedings may be necessary to establish
which party was the first to discover the intellectual property. The Celera
Genomics group may become involved in patent litigation against third parties
to enforce the Celera Genomics group's patent rights, to invalidate patents
held by the third parties, or to defend against these claims. The cost to the
Celera Genomics group of any patent litigation or similar proceeding could be
substantial, and it may absorb significant management time. If an infringement
litigation against the Celera Genomics group is resolved unfavorably to the
Celera Genomics group, the Celera Genomics group may be enjoined from
manufacturing or selling its products or services without a license from a
third party. The Celera Genomics group may not be able to obtain a license on
commercially acceptable terms, or at all.
30 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Forward-Looking Statements
continued
The Celera Genomics group's business is dependent on the continuous,
effective, reliable and secure operation of its computer hardware, software
and internet applications and related tools and functions. Because the Celera
Genomics group's business requires manipulating and analyzing large amounts of
data, and communicating the results of the analysis to its internal research
personnel and to its customers via the Internet, the Celera Genomics group
depends on the continuous, effective, reliable and secure operation of its
computer hardware, software, networks, Internet servers and related
infrastructure. To the extent that the Celera Genomics group's hardware or
software malfunctions or access to the Celera Genomics group's data by the
Celera Genomics group's internal research personnel or customers through the
Internet is interrupted, its business could suffer.
The Celera Genomics group's computer and communications hardware is protected
through physical and software safeguards. However, it is still vulnerable to
fire, storm, flood, power loss, earthquakes, telecommunications failures,
physical or software break-ins, and similar events. In addition, the Celera
Genomics group's database products are complex and sophisticated, and as such,
could contain data, design or software errors that could be difficult to
detect and correct. Software defects could be found in current or future
products. If the Celera Genomics group fails to maintain and further develop
the necessary computer capacity and data to support its computational needs
and its customers' drug discovery efforts, it could result in loss of or delay
in revenues and market acceptance. In addition, any sustained disruption in
Internet access provided by third parties could adversely impact the Celera
Genomics group's business.
The Celera Genomics group's research and product development depends on access
to tissue samples and other biological materials. The Celera Genomics group
will need access to normal and diseased human and other tissue samples, other
biological materials and related clinical and other information, which may be
in limited supply. The Celera Genomics group may not be able to obtain or
maintain access to these materials and information on acceptable terms. In
addition, government regulation in the United States and foreign countries
could result in restricted access to, or use of, human and other tissue
samples. If the Celera Genomics group loses access to sufficient numbers or
sources of tissue samples, or if tighter restrictions are imposed on its use
of the information generated from tissue samples, its business may be harmed.
Ethical, legal and social issues related to the use of genetic information and
genetic testing may cause less demand for the Celera Genomics group's
products. Genetic testing has raised issues regarding confidentiality and the
appropriate uses of the resulting information. For example, concerns have been
expressed towards insurance carriers and employers using these tests to
discriminate on the basis of this information, resulting in barriers to the
acceptance of these tests by consumers. This could lead to governmental
authorities calling for limits on or regulation of the use of genetic testing
or prohibit testing for genetic predisposition to certain diseases,
particularly those that have no known cure. Any of these scenarios could
reduce the potential markets for products of the Celera Genomics group.
Expected rapid growth in the number of its employees could absorb valuable
management resources and be disruptive to the development of the Celera
Genomics group's business. The Celera Genomics group expects to increase its
employee base significantly, including the addition of Axys' employees. This
growth will require substantial effort to hire new employees and train and
integrate them into the Celera Genomics group's business, and to develop and
implement management information systems, financial controls and facility
plans. The Celera Genomics group's inability to manage growth effectively
would have a material adverse effect on its future operating results.
Products and services developed using the Celera Genomics group's databases
may be subject to government regulation. The Celera Genomics group's
pharmaceutical and biotechnology customers use the Celera Genomics group's
databases primarily for drug discovery and development, which is subject to
regulation by the United States Food and Drug Administration. Any new drug
developed as a result of the use of the Celera Genomics group's databases must
undergo an extensive regulatory review and approval process. This process can
take many years and require substantial expense. The Celera Genomics group's
customers may also use its databases to develop products or services in the
field of personalized health/medicine. However, current and future patient
privacy and health care laws and regulations issued by the United States Food
and Drug Administration may limit the use of data concerning an individual's
genetic information. To the extent that such regulations restrict or
discourage the Celera Genomics group's customers from developing these
products and services, the Celera Genomics group's business may be adversely
affected.
Future acquisitions may absorb significant resources and may be unsuccessful.
As part of the Celera Genomics group's strategy, it expects to pursue
acquisitions (in addition to the Axys acquisition), 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, dilutive issuances
of equity securities, and expenses that could have a material effect on the
Celera Genomics group's financial condition and results of operations. For
example, to the extent that it elects to pay the purchase price for
acquisitions in shares of Applera - Celera stock, the issuance of additional
shares of Applera - Celera stock will be dilutive to holders of Applera -
Celera stock. Acquisitions involve numerous other risks, including:
o difficulties integrating acquired technologies and personnel into the
business of the Celera Genomics group;
o diversion of management from daily operations;
o inability to obtain required financing on favorable terms;
o entry into new markets in which the Celera Genomics group has little
previous experience;
o potential loss of key employees or customers of acquired companies or
from the Celera Genomics group; and
APPLERA CORPORATION Annual Report 2001 | 31
APPLERA CORPORATION | Forward-Looking Statements
continued
o assumption of the liabilities and exposure to unforeseen liabilities of
acquired companies. It may be difficult for the Celera Genomics group to
complete these transactions quickly and to integrate these businesses
efficiently into its current business. Any acquisitions, investments or
other strategic relationships and alliances by the Celera Genomics group
may ultimately have a negative impact on its business and financial
condition.
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, including:
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 the Celera Genomics group's failure
to meet market expectations.
The stock market has from time to time experienced extreme price and volume
fluctuations that are unrelated to the operating performance of particular
companies. In the past, companies that have experienced volatility have
sometimes been the subject of securities class action litigation. If
litigation was instituted on this basis, it could result in substantial costs
and a diversion of management's attention and resources.
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 have been 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. The consolidated complaint seeks unspecified money damages,
rescission, costs and expenses, and other relief as the court deems proper.
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.
The Celera Genomics group's ability to develop proprietary therapeutics and
the Celera Genomics/Applied Biosystems Joint Venture's ability to develop
proprietary diagnostic products is unproven. The development and
commercialization of new drugs by determining the causes of diseases through
the study of genes, variations in genes, and the proteins expressed by genes
is unproven. As the Celera Genomics group expands its efforts into this new
business area, it faces the difficulties inherent in developing and
commercializing therapeutic products, and it has limited experience in
operating a commercial research and development program. In addition, our
company has announced the formation of Celera Diagnostics, a joint venture
between the Applied Biosystems group and the Celera Genomics group in the
field of diagnostics. Celera Diagnostics faces the difficulties inherent in
developing and commercializing diagnostic tests and in building and operating
a commercial research and development program. Given the Celera Genomics
group's unproven ability to develop proprietary therapeutics and Celera
Diagnostics' unproven ability to develop proprietary diagnostic products, it
is possible that the Celera Genomics group's and Celera Diagnostics' discovery
processes will not result in any commercial products or services. Even if the
Celera Genomics group or Celera Diagnostics is able to develop products and
services, it is possible that these products and services may not be
commercially viable or successful due to a variety of reasons, including
difficulty obtaining regulatory approvals, competitive conditions, the
inability to obtain necessary intellectual property protection, the need to
build distribution channels, failure to get adequate reimbursement for these
products from insurance or government payors, or the inability of the Celera
Genomics group or Celera Diagnostics to recover its development costs in a
reasonable period.
32 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1999 2000 2001
=======================================================================================================
<S> <C> <C> <C>
Net Revenues $ 1,216,897 $ 1,371,035 $ 1,644,126
Cost of sales 549,048 624,099 780,712
-------------------------------------------------------------------------------------------------------
Gross Margin 667,849 746,936 863,414
-------------------------------------------------------------------------------------------------------
Selling, general and administrative 364,128 436,911 440,059
Research, development and engineering 174,576 255,585 323,417
Amortization of goodwill and intangibles 4,166 43,934
Restructuring and other special charges 20,580 2,142 69,069
-------------------------------------------------------------------------------------------------------
Operating Income (Loss) 108,565 48,132 (13,065)
Gain on investments 6,126 48,603 14,985
Interest expense (3,783) (3,501) (2,125)
Interest income 2,869 39,428 80,348
Other income (expense), net 522 3,446 (6,671)
-------------------------------------------------------------------------------------------------------
Income Before Income Taxes 114,299 136,108 73,472
Provision for income taxes 4,140 40,612 46,238
Minority interest 13,362
-------------------------------------------------------------------------------------------------------
Income From Continuing Operations 96,797 95,496 27,234
-------------------------------------------------------------------------------------------------------
Discontinued Operations, Net Of Income Taxes
Loss from discontinued operations (21,109)
Gain on disposal of discontinued operations 100,167
-------------------------------------------------------------------------------------------------------
Net Income $ 175,855 $ 95,496 $ 27,234
=======================================================================================================
Applied Biosystems Group (see Note 1)
Income From Continuing Operations $ 148,365 $ 186,247 $ 212,391
Basic per share $ .74 $ .90 $ 1.01
Diluted per share $ .72 $ .86 $ .96
Income From Discontinued Operations $ 79,058
Basic per share $ .39
Diluted per share $ .38
Net Income $ 227,423 $ 186,247 $ 212,391
Basic per share $ 1.13 $ .90 $ 1.01
Diluted per share $ 1.10 $ .86 $ .96
=======================================================================================================
Celera Genomics Group (see Note 1)
Net Loss $ (44,894) $ (92,737) $ (186,229)
Basic and diluted per share $ (.89) $ (1.73) $ (3.07)
=======================================================================================================
</TABLE>
See accompanying notes to Applera Corporation's consolidated financial
statements.
APPLERA CORPORATION Annual Report 2001 | 33
APPLERA CORPORATION | Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
(Dollar amounts in thousands except share data)
At June 30, 2000 2001
================================================================================
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 964,502 $ 608,535
Short-term investments 541,140 779,482
Accounts receivable (net of allowances for
doubtful accounts of $3,965
and $5,070, respectively) 378,593 400,803
Inventories, net 157,827 149,658
Prepaid expenses and other current assets 83,465 103,006
--------------------------------------------------------------------------------
Total current assets 2,125,527 2,041,484
Property, plant and equipment, net 334,855 435,560
Other long-term assets 622,933 410,814
--------------------------------------------------------------------------------
Total Assets $ 3,083,315 $ 2,887,858
================================================================================
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 15,693 $ 14,678
Current portion of long-term debt 30,480
Accounts payable 191,484 178,264
Accrued salaries and wages 89,660 64,854
Accrued taxes on income 149,584 83,016
Other accrued expenses 200,079 215,823
--------------------------------------------------------------------------------
Total current liabilities 646,500 587,115
Long-term debt 82,115
Other long-term liabilities 134,208 152,432
--------------------------------------------------------------------------------
Total Liabilities 862,823 739,547
--------------------------------------------------------------------------------
Commitments and contingencies (see Note 10)
Stockholders' Equity
Capital stock
Preferred stock
Applera Corporation: $.01 par value; 10,000,000
shares authorized at June 30, 2000 and 2001; no
shares issued and outstanding at June 30, 2000 and
2001
Common stock
Applera Corporation - Applied Biosystems stock:
$.01 par value; 500,000,000 shares and 1,000,000,000
shares authorized at June 30, 2000 and 2001,
respectively; 208,651,594 shares and 211,473,057 shares
issued and outstanding at June 30, 2000 and 2001,
respectively 2,087 2,115
Applera Corporation - Celera Genomics stock:
$.01 par value; 225,000,000 shares authorized at
June 30, 2000 and 2001; 59,335,885 shares and
61,693,504 shares issued and outstanding at
June 30, 2000 and 2001, respectively 593 617
Capital in excess of par value 1,714,362 1,832,000
Retained earnings 377,996 369,444
Accumulated other comprehensive income (loss) 125,454 (55,865)
--------------------------------------------------------------------------------
Total Stockholders' Equity 2,220,492 2,148,311
--------------------------------------------------------------------------------
Total Liabilities And Stockholders' Equity $ 3,083,315 $ 2,887,858
================================================================================
</TABLE>
See accompanying notes to Applera Corporation's consolidated financial
statements.
34 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 1999 2000 2001
====================================================================================================================
<S> <C> <C> <C>
Operating Activities From Continuing Operations
Income from continuing operations $ 96,797 $ 95,496 $ 27,234
Adjustments to reconcile income from
continuing operations to net cash provided by
operating activities
Depreciation and amortization 48,066 80,699 129,151
Impairment of goodwill and other intangibles 14,464 69,069
Long-term compensation programs 17,482 10,535 6,082
Deferred income taxes (25,533) (26,399) 15,981
Gains from sales of assets (6,126) (56,801) (14,985)
Provision for restructured operations and other
merger costs (9,200)
Changes in operating assets and liabilities
Increase in accounts receivable (105,093) (72,538) (49,299)
(Increase) decrease in inventories (22,387) (2,180) 997
Increase in prepaid expenses and other assets (46,665) (22,842) (34,446)
Increase (decrease) in accounts payable and other
liabilities 107,259 102,234 (63,380)
--------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 69,064 108,204 86,404
--------------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment
(net of disposals of $9,614, $2,201, and $8,526, respectively) (166,421) (123,614) (177,336)
Purchases of short-term investments, net (541,127) (238,115)
Acquisitions and investments, net (5,261) (23,023) (8,912)
Proceeds from the sale of assets, net 325,766 82,763 15,498
Proceeds from the collection of notes receivable 150,000
--------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Investing Activities 154,084 (455,001) (408,865)
--------------------------------------------------------------------------------------------------------------------
Net Cash From Continuing Operations Before Financing Activities 223,148 (346,797) (322,461)
--------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Net cash used by operating activities (16,297) (15,081) (2,860)
Net cash used by investing activities (26,970)
--------------------------------------------------------------------------------------------------------------------
Net Cash From Discontinued Operations Before Financing Activities (43,267) (15,081) (2,860)
--------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable (9,572) 52,701 1,553
Principal payments on long-term debt (6,843) (46,000)
Dividends (34,156) (26,358) (35,669)
Purchases of common stock for treasury (2,187)
Net proceeds from follow-on stock offering 943,303
Proceeds from stock issued for stock plans 96,379 61,047 60,074
--------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Financing Activities 43,621 1,030,693 (20,042)
--------------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash 1,654 (12,334) (10,604)
--------------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents 225,156 656,481 (355,967)
Cash And Cash Equivalents Beginning Of Year 82,865 308,021 964,502
--------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 308,021 $ 964,502 $ 608,535
====================================================================================================================
</TABLE>
See accompanying notes to Applera Corporation's consolidated financial
statements.
APPLERA CORPORATION Annual Report 2001 | 35
APPLERA CORPORATION | Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Applera Applera -- Accumulated
Corporation Applied Applera -- Capital in Other
(Dollar amounts and (predecessor) Biosystems Celera Excess of Retained Comprehensive
shares in thousands) Stock Stock Stock Par Value Earnings Income (Loss)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance At June 30, 1998 $50,148 $ - $ - $ 379,974 $ 190,966 $ (9,513)
Comprehensive income
Net income 175,855
Other comprehensive income:
Foreign currency
translation adjustments (5,415)
Minimum pension
liability adjustment (1,779)
Unrealized gain on
investments, net of tax 11,887
------
Other comprehensive income 4,693
Comprehensive income
Cash dividends declared on Applera
Corporation stock (25,479)
Cash dividends declared on
Applera - Applied Biosystems stock (8,677)
Issuances under Applera Corporation
stock plans 873 43,323 (14,862)
Recapitalization (May 6, 1999) (51,021) 510 255 50,256
Repurchases of Applera -
Applied Biosystems stock
Issuances under Applera -
Applied Biosystems stock plans 3 17,967 (1,290)
Issuances under Applera -
Celera stock plans 2 1,483
Tax benefit related
to employee stock options 15,735
Stock compensation (883) 1,207
Two-for-one stock split 514 (514)
----------------------------------------------------------------------------------------------------------------------------------
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 tax 155,530
---------
Other comprehensive income 130,274
Comprehensive income
Cash dividends declared on
Applera - Applied Biosystems stock (35,220)
Issuances under Applera -
Applied Biosystems stock plans 23 43,411
Issuances under Applera -
Celera stock plans 15 17,598
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 tax 11,158
Minimum pension liability adjustment (35,151)
Unrealized loss on investments, net of tax (113,382)
Reclassification adjustment for
realized gains included in net income (9,741)
---------
Other comprehensive loss (181,319)
Comprehensive loss
Cash dividends declared on Applera -
Applied Biosystems stock (35,786)
Issuance under Applera - Applied
Biosystems stock plans 28 37,807
Issuances under Applera - Celera stock
plans 24 22,214
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)
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury Treasury Total
(Dollar amounts and Stock Stock Stockholders'
shares in thousands) At Cost Shares Equity
========================================================================================
<S> <C> <C> <C>
Balance At June 30, 1998 $(47,327) (831) $ 564,248
Comprehensive income
Net income 175,855
Other comprehensive income:
Foreign currency translation adjustments
Minimum pension liability adjustment
Unrealized gain on
investments, net of tax
Other comprehensive income 4,693
---------
Comprehensive income 180,548
---------
Cash dividends declared on Applera
Corporation stock (25,479)
Cash dividends declared on
Applera - Applied Biosystems stock (8,677)
Issuances under Applera Corporation
stock plans 45,354 789 74,688
Recapitalization (May 6, 1999)
Repurchases of Applera -
Applied Biosystems stock (2,187) (20) (2,187)
Issuances under Applera -
Applied Biosystems stock plans 2,187 20 18,867
Issuances under Applera -
Celera stock plans 1,485
Tax benefit related
to employee stock options 15,735
Stock compensation 1,973 42 2,297
Two-for-one stock split
---------------------------------------------------------------------------------------
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 tax
Other comprehensive income 130,274
---------
Comprehensive income 225,770
---------
Cash dividends declared on
Applera - Applied Biosystems stock (35,220)
Issuances under Applera -
Applied Biosystems stock plans 43,434
Issuances under Applera -
Celera stock plans 17,613
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 tax
Minimum pension
liability adjustment
Unrealized loss on
investments, net of tax
Reclassification adjustment for
realized gains included in net
income
Other comprehensive loss (181,319)
----------
Comprehensive loss (154,085)
----------
Cash dividends declared on Applera -
Applied Biosystems stock (35,786)
Issuance under Applera - Applied
Biosystems stock plans 37,835
Issuances under Applera - Celera stock
plans 22,238
Tax benefit related to employee stock
options 51,535
Stock compensation 6,082
---------------------------------------------------------------------------------------
Balance At June 30, 2001 $ - $2,148,311
=======================================================================================
</TABLE>
See accompanying notes to Applera Corporation's consolidated financial
statements.
36 | APPLERA CORPORATION Annual Report 2001
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 amounts in the consolidated financial statements and
notes have been reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. 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 separately
the performance of the Applied Biosystems business ("Applied Biosystems
group"), and Applera - Celera stock is intended to reflect separately the
performance of the Celera Genomics business ("Celera Genomics group"). As part
of the recapitalization, each share of common stock of The Perkin-Elmer
Corporation ("predecessor common stock") was converted into one share of
Applera - Applied Biosystems stock and 0.5 of a share of Applera - Celera
stock, prior to giving effect to the stock splits since May 6, 1999.
The name of the Company was changed from PE Corporation to Applera Corporation
and the name of the PE Biosystems group was changed to the Applied Biosystems
group effective November 30, 2000.
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. As a result, stockholders 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 combined results of operations or combined 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.
The Company has presented combined financial statements of each group in
addition to the Company's consolidated financial information in order to
assist investors in making informed financial decisions. The Applied
Biosystems group's and the Celera Genomics group's combined financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto.
Discontinued Operations
The Company's consolidated financial statements were restated to reflect the
net assets and operating results of the Analytical Instruments business as
discontinued operations (see Note 14). The operating results are reflected in
the Consolidated Statements of Operations as loss from discontinued operations
for fiscal 1999. The accompanying notes, except Note 14, relate only to
continuing operations.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," which applies to all business combinations initiated after June
30, 2001. The provisions of this statement require business combinations to be
accounted for using the purchase method of accounting. Also in July 2001, the
FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142, goodwill from acquisitions occurring after June 30, 2001 will not be
amortized, and for goodwill existing prior to June 30, 2001, the Company
expects to adopt the nonamortization provisions of the statement on July 1,
2001. Goodwill for which the nonamortization provisions are applied will be
required to be reviewed for impairment at least on an annual basis. If an
impairment is found to exist, a charge will be taken against operations. SFAS
No. 142 requires that, upon adoption, goodwill and certain intangible assets
be reviewed for classification and useful life. The Company expects that,
aside from the nonamortization of goodwill on a prospective basis, the effect
upon adoption of SFAS No. 142 will be immaterial.
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.
The earnings allocated to each class of common stock is determined by the
Company's Board of Directors. This determination is generally based on the net
income or loss amounts of the corresponding group determined in accordance
with generally accepted accounting principles consistently applied. The
Company believes this method of allocation is systematic and reasonable. The
Board of
APPLERA CORPORATION Annual Report 2001 | 37
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Directors can, at its discretion, change the method of allocating earnings to
each class of common stock at any time.
The following table presents a reconciliation of basic and diluted earnings
(loss) per share from continuing operations:
<TABLE>
<CAPTION>
(Amounts in thousands Applied Biosystems Group
except per share amounts) -----------------------------------
For the years ended June 30, 1999 2000 2001
========================================================================================================
<S> <C> <C> <C>
Weighted average number of common shares
used in the calculation of basic earnings per
share from continuing operations 200,811 207,010 210,188
Common stock equivalents 5,398 10,006 10,288
--------------------------------------------------------------------------------------------------------
Shares used in the calculation of diluted
earnings per share from continuing operations 206,209 217,016 220,476
========================================================================================================
Income from continuing operations used in the
calculation of basic and diluted earnings per
share from continuing operations $ 148,365 $ 186,247 $ 212,391
Income per share from continuing operations
Basic $ .74 $ .90 $ 1.01
Diluted $ .72 $ .86 $ .96
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(Amounts in thousands Celera Genomics Group
except per share amounts) -----------------------------------
For the years ended June 30, 1999 2000 2001
========================================================================================================
<S> <C> <C> <C>
Weighted average number of common shares used in
the calculation of basic loss per share 50,200 53,725 60,718
Common stock equivalents
--------------------------------------------------------------------------------------------------------
Shares used in the calculation of diluted loss per share 50,200 53,725 60,718
========================================================================================================
Net loss used in the calculation of
basic and diluted loss per share $ (44,894) $ (92,737) $ (186,229)
Net loss per share
Basic and diluted $ (.89) $ (1.73) $ (3.07)
========================================================================================================
</TABLE>
Options to purchase 40,000, 5.9 million, and 9.1 million shares of Applera -
Applied Biosystems stock were outstanding at June 30, 1999, 2000, and 2001,
respectively, but were not included in the computation of diluted earnings per
share because the effect was antidilutive. Options and warrants to purchase
11.2 million, 12.3 million, and 14.7 million shares of Applera - Celera stock
were outstanding at June 30, 1999, 2000, and 2001, 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 stockholders' equity. Foreign currency revenues and expenses are
translated using monthly average exchange rates prevailing during the 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 losses for the fiscal years ended June
30, 1999, 2000, and 2001 were $5.6 million, $.1 million, and $1.3 million,
respectively. The net transaction loss for fiscal year 2001 included the gains
and losses on the revaluation of non-functional currency- denominated net
assets offset by the losses and gains on non-qualified hedges on these
positions. See Note 11 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 and interest
rates. Derivative financial instruments currently utilized by the Company
include foreign currency forward and range forward contracts, foreign currency
options, and an interest rate swap (see Note 11).
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.
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 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.
38 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
The fair value of short-term investments at June 30, 2000 and 2001 was as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
=================================================================
<S> <C> <C>
Certificates of deposit $ 107.3 $ 151.5
Commercial paper 364.5 141.4
U.S. government notes and bonds 49.2 194.8
Corporate bonds 20.1 109.2
Asset backed securities 113.0
Foreign debt 69.6
-----------------------------------------------------------------
Total short-term investments $ 541.1 $ 779.5
=================================================================
</TABLE>
Gross unrealized gains and losses on short-term investments were immaterial at
June 30, 2000 and 2001. Realized gains and losses were less than $.1 million
for both fiscal 2000 and 2001.
The Company also holds trading securities at June 30, 2001, which are recorded
at fair value with realized and unrealized gains and losses included in
income. During fiscal 2001, $1.4 million of unrealized net losses were
included in income.
Investments
The equity method of accounting is used for investments in joint ventures that
are 20% to 50% owned and the cost method of accounting is used for investments
that are less than 20% owned. Minority equity investments 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.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market. Inventories at June 30, 2000 and 2001 included the following
components:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
============================================================
<S> <C> <C>
Raw materials and supplies $ 53.1 $ 58.8
Work-in-process 6.3 12.9
Finished products 98.4 78.0
------------------------------------------------------------
Total inventories $ 157.8 $ 149.7
============================================================
</TABLE>
Property, Plant and Equipment, and Depreciation
Property, plant and equipment are recorded at cost and consisted of the
following at June 30, 2000 and 2001:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
======================================================================
<S> <C> <C>
Land $ 23.5 $ 77.1
Buildings and leasehold improvements 185.1 220.5
Machinery and equipment 311.6 375.0
----------------------------------------------------------------------
Property, plant and equipment,
at cost 520.2 672.6
Accumulated depreciation and amortization 185.3 237.0
----------------------------------------------------------------------
Property, plant and equipment, net $ 334.9 $ 435.6
======================================================================
</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 when 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 by 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 three years. Depreciation expense for property, plant and
equipment was $42.5 million, $61.4 million, and $72.2 million for the fiscal
years ended June 30, 1999, 2000, and 2001, respectively.
Machinery and equipment, at cost, included capitalized internal-use software
primarily related to the Company's worldwide information technology
infrastructure of $61.8 million and $65.8 million at June 30, 2000 and 2001,
respectively. Net of accumulated amortization, capitalized internal-use
software was $43.5 million and $38.2 million at June 30, 2000 and 2001,
respectively.
Capitalized Software
Internal software development costs, for software 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, 2000 and 2001, capitalized software
costs, net of accumulated amortization, were $21.3 million and $27.9 million,
respectively. Research and development costs and other computer software
maintenance costs related to software development are expensed as incurred.
Intangible Assets
The excess of purchase price over the net asset value of companies acquired is
amortized using a straight-line method over periods not exceeding 20 years.
Patents and trademarks are amortized using the straight-line method over their
expected useful lives. At June 30, 2000 and 2001, other long-term assets
included goodwill, net of accumulated amortization, of $128.7 million and
$24.4 million, respectively. Accumulated amortization of goodwill was $11.7
million and $52.2 million at June 30, 2000 and 2001, respectively.
Asset Impairment
The Company reviews long-lived assets and goodwill for impairment, in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," whenever events or
APPLERA CORPORATION Annual Report 2001 | 39
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
circumstances indicate that the carrying amount of an asset may not be
recoverable. The assessment of possible impairment is based on the Company's
ability to recover the carrying value of the asset from the estimated future
undiscounted cash flows, before interest and taxes, of the related operations.
If these cash flows are less than the carrying value of such asset, an
impairment loss is recognized for the difference between estimated fair value
and carrying value. During fiscal 1999, the Company recorded a $14.5 million
charge to other special charges for the impairment of assets associated with
the Molecular Informatics business and during fiscal 2001, the Company
recorded a $69.1 million charge to other special charges for the impairment of
assets associated with the Paracel business (see Note 2).
Revenues
Revenues are generally recorded at the time of shipment of products or
performance of services. When contractual acceptance clauses exist, revenue is
recognized upon satisfaction of such clauses. Revenues from service contracts
are recorded as deferred service contract revenues and reflected in net
revenues over the term of the contract, generally one year. Subscription fees
for access to the Company's on-line information databases are recognized
ratably over the contracted period in accordance with the provisions of the
contract. Contract research service revenues are earned and recognized in
accordance with contract provisions. Revenues may be recognized on a
percentage of completion basis, as contract research costs are incurred, or
may be contingent upon the achievement of certain milestones. Amounts received
in advance of performance or acceptance are recorded as deferred revenue.
Research, Development and Engineering
Research, development and engineering costs are expensed when incurred.
Supplemental Cash Flow Information
Cash paid for interest and income taxes and significant non-cash investing and
financing activities for the following periods were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
==========================================================================================
<S> <C> <C> <C>
Interest $ 3.4 $ 3.0 $ 1.8
Income taxes $ 30.3 $ 49.3 $ 95.2
Significant non-cash investing and financing activities:
Capital expenditures liability $ 8.9
Tax benefit related to employee stock options $ 15.7 $ 65.7 $ 51.5
Dividends declared not paid $ 8.9 $ 9.0
Equity instruments issued in Paracel acquisition $ 125.1
==========================================================================================
</TABLE>
Note 2--Acquisitions, Investments, and Dispositions
Tecan AG
During the fourth quarter of fiscal 1999, the Company divested its interest in
Tecan, a developer and manufacturer of automated sample processors, liquid
handling systems, and microplate photometry, through a public offering in
Switzerland and private sales outside of Switzerland. Net cash proceeds from
the divestiture were $30.0 million. The Company recognized a before-tax gain
of $1.6 million on the divestiture.
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. Its products include a hardware accelerator for
sequence comparison, a hardware accelerator for text search, and sequence
analysis software tools.
The Company issued approximately 1.6 million shares of Applera - Celera stock
in exchange for all the outstanding shares of Paracel common stock not
previously owned by the Company. At the time of the acquisition, the Company
owned 14% of Paracel. The acquisition of the shares of Paracel not previously
owned by the Company was valued at $125.6 million and was accounted for under
the purchase method of accounting. In connection with the acquisition, $115.2
million was allocated to goodwill, including $5.3 million of deferred taxes,
and $13.6 million was allocated to other intangible assets. The goodwill and
the other intangible assets were being amortized on a straight-line method
over 3 years.
The net assets and results of operations of Paracel were included in the
Company's consolidated financial statements from the date of acquisition. The
following selected unaudited pro forma information for the Company assumes the
acquisition had occurred at the beginning of fiscal 1999 and fiscal 2000, and
gives effect to purchase accounting adjustments:
<TABLE>
<CAPTION>
(Dollar amounts in millions
except per share amounts) 1999 2000
================================================================================
<S> <C> <C>
Net revenues $ 1,226.8 $ 1,379.4
Net income $ 130.3 $ 47.7
================================================================================
Applied Biosystems Group
Net income per share
Basic $ 1.13 $ .90
Diluted $ 1.10 $ .86
================================================================================
Celera Genomics Group
Net loss per share
Basic and diluted $ (1.75) $ (2.54)
================================================================================
</TABLE>
The 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 1999 or at the beginning of fiscal
2000 or of the future operations of the combined companies.
40 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
In fiscal 2001, the Company recorded a $69.1 million charge, before taxes, to
other special charges for the impairment of goodwill and other intangibles
associated with Paracel. 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 intangibles.
Millennium Pharmaceuticals, Inc.
In fiscal 2000, the Company recognized a before-tax gain 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. During fiscal 1999,
the Company recorded a before-tax gain of $1.9 million in connection with the
release of previously existing contingencies on shares of Millennium common
stock.
Other Acquisitions
During fiscal years 1999, 2000, and 2001, the Company acquired various equity
interests in companies that were individually insignificant. The total amounts
paid in fiscal years 1999, 2000, and 2001 were $5.3 million, $23.8 million,
and $8.9 million, respectively, for these investments.
Other Dispositions
In fiscal years 1999, 2000, and 2001, the Company recognized before-tax gains
of $2.6 million, $7.6 million, and $15.0 million, respectively, from the sale
of its equity interest in various companies. Net cash proceeds from these
sales were $7.8 million in fiscal 1999, $10.7 million in 2000, and $15.5
million in fiscal 2001.
Pending Acquisition
Axys Pharmaceuticals, Inc.
In June 2001, the Company signed a definitive merger agreement to acquire Axys
Pharmaceuticals, Inc. ("Axys") in a stock-for-stock transaction. Axys is an
integrated small molecule drug discovery and development company that is
developing products for chronic therapeutic applications through
collaborations with pharmaceutical companies and has a proprietary product
portfolio in oncology.
The transaction, which is subject to customary closing conditions, including
approval by Axys stockholders and regulatory approvals, has been structured as
a tax-free reorganization and will be accounted for under the purchase method.
Under the terms of the merger agreement, Axys shareholders will receive shares
of Applera - Celera stock per Axys share based on an exchange ratio which is
calculated based on the average closing price of Applera - Celera stock over
the 10 trading days immediately preceding (but excluding) the second trading
day prior to the closing of the merger. If the closing had occurred at the
time the merger agreement was signed, each share of Axys common stock would
have been exchanged for a fractional share of
Applera - Celera stock having an average closing price during the calculation
period equivalent to $4.65 per share of Axys common stock. Depending on the
average closing price of Applera - Celera stock at the time of the closing of
the merger, the Company will issue between 3.3 million shares and 5.4 million
shares of Applera - Celera stock.
Note 3--Debt And Lines Of Credit
Short-term debt and long-term debt at June 30, 2000 and 2001 are summarized as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
====================================================================
<S> <C> <C>
Short-Term Debt
Short-term loans $ 15.7 $ 14.7
Current portion of long-term debt (yen loan) 30.5
--------------------------------------------------------------------
Total short-term debt $ 15.7 $ 45.2
====================================================================
Long-Term Debt
Commercial paper $ 46.0 $ -
Yen loan 36.1
--------------------------------------------------------------------
Total long-term debt $ 82.1 $ -
====================================================================
</TABLE>
The weighted average interest rates at June 30, 2000 and 2001 for short-term
loans payable were .6% and .5%, respectively.
Long-term debt consisted of a 3.8 billion yen variable rate loan that is
scheduled to mature in March 2002. Through an interest rate swap (see Note
11), the effective interest rate for the loan is fixed at 2.1%. There are no
maturities of long-term debt subsequent to fiscal 2002.
Long-term debt at June 30, 2000 included $46.0 million of commercial paper
with an average interest rate of 6.84%. These borrowings were classified as
noncurrent at June 30, 2000 because it was the Company's intent to refinance
these obligations on a long-term basis. However, the Company repaid this debt
during the second quarter of fiscal 2001.
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, 2000 or 2001.
At June 30, 2001, in addition to the $100 million revolving credit facility,
the Company had $122 million of unused credit facilities for short-term
borrowings from domestic and foreign banks in various currencies. These credit
facilities consist of uncommitted overdraft credit lines that are provided at
the discretion of various local banks. An Applera Corporation guarantee is
usually required if a local unit borrows funds.
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, 2001.
APPLERA CORPORATION Annual Report 2001 | 41
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Note 4--Income Taxes
Income (loss) before income taxes from continuing operations for fiscal 1999,
2000, and 2001 is summarized in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
========================================================================
<S> <C> <C> <C>
United States $ (41.6) $ (46.5) $ (86.8)
Foreign 155.9 182.6 160.2
------------------------------------------------------------------------
Total $ 114.3 $ 136.1 $ 73.4
========================================================================
</TABLE>
The Company's provision for income taxes from continuing operations for fiscal
1999, 2000, and 2001 consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
=======================================================================
<S> <C> <C> <C>
Currently Payable
Domestic $ 6.1 $ 18.4 $ 7.4
Foreign 23.5 48.6 22.8
-----------------------------------------------------------------------
Total currently payable 29.6 67.0 30.2
-----------------------------------------------------------------------
Deferred
Domestic (29.1) (14.0) 12.1
Foreign 3.6 (12.4) 3.9
-----------------------------------------------------------------------
Total deferred (25.5) (26.4) 16.0
-----------------------------------------------------------------------
Total provision for income taxes
from continuing operations $ 4.1 $ 40.6 $ 46.2
=======================================================================
</TABLE>
Significant components of deferred tax assets and liabilities from continuing
operations at June 30, 2000 and 2001 are summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
=======================================================================
<S> <C> <C>
Deferred Tax Assets
Inventories $ 4.0 $ 4.3
Postretirement and
postemployment benefits 31.4 50.7
Other accruals 11.9 12.8
Tax credit and loss carryforwards 162.6 134.0
Capitalized R&D expense 67.2
-----------------------------------------------------------------------
Subtotal 209.9 269.0
Valuation allowance (37.2) (45.5)
-----------------------------------------------------------------------
Total deferred tax assets 172.7 223.5
-----------------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 15.8 16.0
Other accruals 4.9 1.4
Intangibles 4.6 1.1
Unrealized gains on investments 89.2 29.6
-----------------------------------------------------------------------
Total deferred tax liabilities 114.5 48.1
-----------------------------------------------------------------------
Total deferred tax assets, net $ 58.2 $ 175.4
=======================================================================
</TABLE>
A reconciliation of the federal statutory tax to the Company's continuing tax
provision for fiscal 1999, 2000, and 2001 is set forth in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
=======================================================================
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
=======================================================================
Tax at federal statutory rate $ 40.0 $ 47.6 $ 25.7
State income taxes (net of federal
benefit) .4 .4 .3
Effect on income taxes from foreign
operations (25.0) (6.3) (12.9)
Effect on income taxes from foreign
sales corporation (4.9) (7.1) (10.3)
Reorganization, restructuring
and other costs 7.9
Nondeductible goodwill 1.2 .5 35.3
R&D tax credit (11.4) (3.4)
Valuation allowance (13.8) .1 9.5
Long-term compensation 8.7
Recapitalization costs 3.3
Other 2.9 .2 2.0
-----------------------------------------------------------------------
Total provision for income taxes
from continuing operations $ 4.1 $ 40.6 $ 46.2
=======================================================================
</TABLE>
The valuation allowance was increased in fiscal 2001 principally as a result
of foreign tax credits generated by the Company that management believes 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
believes 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. The reduction in the valuation allowance in fiscal 1999,
which was partially offset by an increase due to foreign loss carryforwards,
was caused by management's belief that once the sale of the Analytical
Instruments business was completed, it was more likely than not that the
deferred tax assets to which the valuation allowance related would be
realized.
At June 30, 2001, the Company's worldwide valuation allowance of $45.5 million
principally related to foreign tax loss carryforwards and domestic tax credit
carryforwards.
The Company has a consolidated domestic loss carryforward of approximately
$201.4 million and consolidated domestic credit carryforwards of $50 million
that will expire between the fiscal years 2003 and 2021, and loss
carryforwards of approximately $37 million in various foreign countries with
varying expiration dates.
U.S. income taxes were not provided on approximately $406 million of net
unremitted earnings from foreign subsidiaries since the Company either intends
to permanently reinvest substantially all of such earnings outside the U.S.,
or expects the effect of any remittance after considering available tax
credits and amounts previously accrued, not to be significant to the results
of operations. These earnings include income
42 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
from manufacturing operations in Singapore, which is tax-exempt through fiscal
2004.
Note 5--Retirement and Other Benefits
Pension Plans, Retiree Healthcare, and Life Insurance Benefits
The Company maintains or sponsors pension plans that cover a portion of all
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. During fiscal 1999, the plan was amended to terminate the accrual
of benefits as of June 30, 2004 and to improve the benefit for participants
who retire between the ages of 55 and 60. The pension plan is not available to
employees hired on or after July 1, 1999.
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
1999, 2000, and 2001 are set forth in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
=============================================================================
<S> <C> <C> <C>
Pension
Service cost $ 5.2 $ 7.7 $ 8.0
Interest cost 38.7 44.1 48.7
Expected return on plan assets (38.6) (45.7) (50.5)
Amortization of transition asset (1.9) (2.4) (.2)
Amortization of prior service cost (.4) (.4) (.5)
Amortization of losses .5 .2 .1
Curtailments and settlements .1
-----------------------------------------------------------------------------
Net periodic expense $ 3.6 $ 3.5 $ 5.6
=============================================================================
Postretirement Benefit
Service cost $ .2 $ .3 $ .2
Interest cost 4.8 4.6 4.8
Amortization of gains (1.5) (1.8) (1.7)
-----------------------------------------------------------------------------
Net periodic expense $ 3.5 $ 3.1 $ 3.3
=============================================================================
</TABLE>
The following tables set forth the changes in the benefit obligations and the
plan assets, the funded status of the plans, and the amounts recognized in the
Company's Consolidated Statements of Financial Position at June 30, 2000 and
2001:
<TABLE>
<CAPTION>
Pension Postretirement
----------------- -----------------
(Dollar amounts in millions) 2000 2001 2000 2001
=======================================================================================
<S> <C> <C> <C> <C>
Change In Benefit
Obligation
Benefit obligation, beginning of year $ 594.1 $ 607.9 $ 62.5 $ 61.9
Service cost 7.7 8.0 .3 .2
Interest cost 44.1 48.7 4.6 4.8
Benefits paid (36.7) (37.1) (5.4) (5.6)
Actuarial (gain) loss 7.9 35.1 (.1) 5.0
Variable annuity unit value change (12.9) (70.5)
Addition of plan 3.9
Foreign currency translation (.2) (1.1)
Other (.8)
---------------------------------------------------------------------------------------
Benefit obligation $ 607.9 $ 590.2 $ 61.9 $ 66.3
=======================================================================================
Change In Plan Assets
Fair value of plan assets,
beginning of year $ 600.6 $ 615.0 $ - $ -
Actual return on plan assets 47.9 (23.5)
Company contributions .8 5.4 5.6
Benefits paid (34.3) (34.7) (5.4) (5.6)
Addition of plan 1.0
Foreign currency translation (.2) (.5)
Other (.1)
---------------------------------------------------------------------------------------
Fair value of plan assets $ 615.0 $ 557.0 $ - $ -
=======================================================================================
Funded Status Reconciliation
Funded status $ 7.1 $ (33.2) $ (61.9) $ (66.3)
Unrecognized prior service gain (2.0) (1.9)
Unrecognized transition
asset .9 .9
Unrecognized (gains) losses 29.6 66.6 (21.5) (14.7)
---------------------------------------------------------------------------------------
Net amount recognized $ 35.6 $ 32.4 $ (83.4) $ (81.0)
---------------------------------------------------------------------------------------
Amounts Recognized
In The Statement Of
Financial Position
Prepaid benefit cost $ 47.4 $ - $ - $ -
Accrued benefit liability (15.8) (25.6) (83.4) (81.0)
Intangible asset .6 .6
Minimum pension liability adjustment 3.4 57.4
---------------------------------------------------------------------------------------
Net amount recognized $ 35.6 $ 32.4 $ (83.4) $ (81.0)
=======================================================================================
</TABLE>
A minimum pension liability adjustment is required when the actuarial present
value of accumulated benefits exceeds plan assets and accrued pension
liabilities. The projected benefit obligation and accumulated benefit
obligation for the
APPLERA CORPORATION Annual Report 2001 | 43
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
pension plans with accumulated benefit obligations in excess of plan assets
were $14.0 million and $12.8 million, respectively, at June 30, 2000, with no
corresponding plan assets. 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 following actuarial assumptions were used for the pension and
postretirement plans:
<TABLE>
<CAPTION>
2000 2001
===========================================================================
<S> <C> <C>
Domestic Plans
Discount rate 8% 7 1/2%
Compensation increase 6% 6%
Expected rate of return 8 - 9 1/4% 7 1/2 - 9 1/4%
===========================================================================
Foreign Plans
Discount rate 3 - 5 3/4% 3%
Compensation increase 2 - 4% 2%
Expected rate of return 4 - 9% 4%
===========================================================================
</TABLE>
As part of the divestiture of the Analytical Instruments business in fiscal
1999, the Company guaranteed the pension benefits for employees of a former
German subsidiary. These benefits were not transferable to the buyer under
German law. The guarantee, which approximated $41.2 million and $35.4 million
at June 30, 2000 and 2001, respectively, is not expected to have a material
adverse effect on the Company's financial position or results of operations.
For measurement purposes, an 11% annual rate of increase in the per capita
cost of covered healthcare benefits was assumed for plan year 2002, 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 $ .4 $ (.4)
Effect on postretirement benefit
obligation $ 5.0 $ (4.8)
===========================================================================
</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 $8.5
million, $12.1 million, and $16.3 million for fiscal 1999, 2000, and 2001,
respectively. The Company recorded expenses for foreign defined contribution
plans of $1.1 million, $1.3 million, and $1.8 million in fiscal 1999, 2000,
and 2001, 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 6--Segment, Geographic, and Customer Information
Business Segments
The Company operates in the life science industry through two reportable
segments, the Applied Biosystems group and the Celera Genomics group. The
Applied Biosystems group is engaged principally in the development,
manufacture, sale, and service of instrument systems and associated consumable
products for life science research 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 Celera Genomics group is engaged
principally in integrating high throughput technologies to create therapeutic
discovery and development capabilities for internal use and for its customers
and collaborators. The Celera Genomics group's businesses are its online
information business and its therapeutics discovery business. The online
information business is a leading provider of genomic and related biological
and medical information. Pharmaceutical, biotechnology, and academic customers
use this information, along with customized information technology solutions
provided by the Celera Genomics group, to enhance their capabilities in the
fields of life science research and pharmaceutical and diagnostic discovery
and development. The Celera Genomics group recently expanded its focus to
include therapeutic discovery and development. The Celera Genomics group
intends to leverage its capabilities in genomics, proteomics, and
bioinformatics, both in internal programs and through collaborations, to
identify drug targets and diagnostic markers, and to discover and develop
novel therapeutic candidates. Initially, the Celera Genomics group intends to
focus its therapeutic discovery efforts in the field of oncology.
Segment operating income (loss) excludes other income (expense), gain on
investments, net interest income, provision (benefit) for income taxes, and
minority interest. The accounting policies of the operating segments are the
same as those described in Note 1. Sales of products and services between
segments are based on terms that would be available from third parties in
commercial transactions. "Other" consists of the elimination of intersegment
activity and the results of the Celera Diagnostics business. Other total
assets of $173.0 million for fiscal 1999 included the $150 million Celera
Genomics group note receivable from the Applied Biosystems group.
44 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Segment information follows:
<TABLE>
<CAPTION>
Applied Celera
(Dollar amounts in Biosystems Genomics Consol-
millions) Group Group Other idated
==========================================================================
<S> <C> <C> <C> <C>
1999
Net revenues from
external customers $ 1,204.4 $ 12.5 $ - $ 1,216.9
Intersegment revenues 17.3 (17.3)
--------------------------------------------------------------------------
Total revenues $ 1,221.7 $ 12.5 $ (17.3) $ 1,216.9
==========================================================================
Operating income (loss) $ 187.9 $ (68.8) $ (10.5) $ 108.6
Depreciation and
amortization expense $ 44.3 $ 3.8 $ 48.1
Capital expenditures $ 92.0 $ 94.5 $ (10.5) $ 176.0
Total assets $ 1,347.6 $ 344.7 $(173.0) $ 1,519.3
--------------------------------------------------------------------------
2000
Net revenues from
external customers $ 1,328.3 $ 42.7 $ - $ 1,371.0
Intersegment revenues 59.8 (59.8)
--------------------------------------------------------------------------
Total revenues $ 1,388.1 $ 42.7 $ (59.8) $ 1,371.0
==========================================================================
Operating income (loss) $ 213.2 $ (168.1) $ 3.0 $ 48.1
Depreciation and
amortization expense $ 54.5 $ 29.6 $ (3.4) $ 80.7
Capital expenditures $ 95.5 $ 30.7 $ (.4) $ 125.8
Total assets $ 1,698.2 $ 1,413.3 $ (28.2) $ 3,083.3
==========================================================================
2001
Net revenues from
external customers $ 1,555.4 $ 88.7 $ - $ 1,644.1
Intersegment revenues 64.1 .7 (64.8)
--------------------------------------------------------------------------
Total revenues $ 1,619.5 $ 89.4 $ (64.8) $ 1,644.1
==========================================================================
Operating income (loss) $ 279.9 $ (289.6) $ (3.4) $ (13.1)
Depreciation and
amortization expense $ 66.8 $ 65.5 $ (3.1) $ 129.2
Capital expenditures $ 152.2 $ 33.8 $ (.1) $ 185.9
Total assets $ 1,677.9 $ 1,220.1 $ (10.1) $ 2,887.9
==========================================================================
</TABLE>
Events Impacting Comparability
Applied Biosystems Group
Fiscal 1999 operating income included $9.1 million for costs related to the
acceleration of certain long-term compensation programs as a result of the
attainment of performance targets; $4.6 million of charges related to the
recapitalization of the Company; $6.1 million of other merger costs; a $14.5
million charge for the impairment of assets; a $3.5 million donation to the
Company's charitable foundation; and a $9.2 million reduction of charges
required to implement the fiscal 1998 restructuring plan. Fiscal 2000
operating income included a charge of $45.0 million related to the
acceleration of certain long-term compensation programs as a result of the
attainment of performance targets and $2.1 million of acquisition-related
costs.
Celera Genomics Group
Fiscal 1999 operating loss included costs of $5.6 million related to the
recapitalization and transformation of the Company. Fiscal 2001 operating loss
included a $69.1 million charge for the impairment of goodwill and other
intangible assets.
Geographic Areas
Information concerning principal geographical areas for fiscal 1999, 2000, and
2001 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
=============================================================================
<S> <C> <C> <C>
Net Revenues From
External Customers
United States $ 609.0 $ 681.0 $ 819.3
Europe 370.1 376.0 436.6
Japan 154.8 213.6 251.2
Other Asian Pacific countries 56.1 60.8 80.8
Latin America and other 26.9 39.6 56.2
-----------------------------------------------------------------------------
Consolidated $ 1,216.9 $ 1,371.0 $ 1,644.1
=============================================================================
</TABLE>
Net revenues are attributable to geographic areas based on the region of
destination.
Information concerning long-lived assets at June 30, 2000 and 2001 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
==================================================================
<S> <C> <C>
Long-Lived Assets
United States $ 302.2 $ 403.4
Europe 15.3 17.5
Japan 18.1 14.6
Other Asian Pacific countries 2.1 3.1
Latin America and other .8 .6
------------------------------------------------------------------
Consolidated $ 338.5 $ 439.2
==================================================================
</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 1999, 2000,
and 2001.
APPLERA CORPORATION Annual Report 2001 | 45
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Note 7--Stockholders' Equity
The Applera - Applied Biosystems stock was split two-for-one in July 1999 and
February 2000. The 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's authorized capital stock consists 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.
In March 2000, the Company completed a follow-on public offering of Applera -
Celera stock. In this offering, 4.4 million shares of Applera - Celera stock
were sold, resulting in net proceeds of $943.3 million.
Treasury Stock
Common stock repurchases have been made in support of the Company's various
stock plans and as part of a general share repurchase authorization. During
fiscal 1999, 20,000 shares of Applera - Applied Biosystems stock, before
giving effect to the stock splits, were repurchased to support various stock
plans. There were no repurchases of common stock during fiscal 2000 or fiscal
2001.
Stock Purchase Warrants
As a result of the Company's acquisition of PerSeptive Biosystems, Inc. in
January 1998, each outstanding warrant for shares of PerSeptive common stock
was converted into warrants issued by the Company for the number of shares of
the Company's (predecessor) common stock that would have been received by the
holder if such warrants had been exercised immediately prior to the effective
time of the merger.
As a result of the recapitalization of the Company and stock splits, each
outstanding warrant for shares of PerSeptive common stock was further
converted into warrants to acquire .7704 share of Applera - Applied Biosystems
stock and .1926 share of Applera - Celera stock. The warrants
are not separately exercisable into solely shares of
Applera - Applied Biosystems stock or Applera - Celera stock. The exercise
price and expiration date of each warrant were not affected by the
recapitalization or the stock splits.
At June 30, 2001, there were 279,300 warrants outstanding at an exercise price
of $12.66. Upon exercise of all of the warrants, the holders would receive
approximately 215,000 shares of Applera - Applied Biosystems stock and
approximately 54,000 shares of Applera - Celera stock. The warrants expire in
September 2003.
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 8--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. Prior to the recapitalization
46 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
of the Company, most option grants had a two-year vesting schedule, whereby
50% of the option grant vested at the end of each year from the date of grant.
The Company's Board of Directors has extended that schedule for most options
granted subsequent to the recapitalization whereby 25% will vest annually,
resulting in 100% vesting after four years. Options generally expire ten years
from the date of grant. At June 30, 2001, 27.6 million shares of Applera -
Applied Biosystems stock and 14.2 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 Corporation (predecessor)
---------------------------------
Weighted
Number of Average
Options Exercise Price
=========================================================================
<S> <C> <C>
Fiscal 1999
Outstanding at June 30, 1998 5,216,964 $ 55.51
Granted 37,000 $ 86.61
Exercised 1,549,364 $ 45.74
Cancelled 108,914 $ 67.92
-------------------------------------------------------------------------
Outstanding at May 5, 1999 3,595,686 $ 60.23
Exercisable at May 5, 1999 2,639,696 $ 55.43
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Applera - Applied Biosystems
Stock
---------------------------------
Weighted
Number of Average
Options Exercise Price
========================================================================
<S> <C> <C>
Fiscal 1999
Outstanding at May 6, 1999 14,382,744 $ 13.67
Granted 5,896,092 $ 27.35
Exercised 1,374,632 $ 13.25
Cancelled 480,958 $ 16.38
------------------------------------------------------------------------
Outstanding at June 30, 1999 18,423,246 $ 17.99
Exercisable at June 30, 1999 8,698,906 $ 12.34
========================================================================
Fiscal 2000
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
========================================================================
</TABLE>
<TABLE>
<CAPTION>
Applera - Celera Stock
---------------------------------
Weighted
Number of Average
Options Exercise Price
========================================================================
<S> <C> <C>
Fiscal 1999
Outstanding at May 6, 1999 3,595,686 $ 5.52
Granted 7,952,036 $ 8.72
Exercised 281,788 $ 5.25
Cancelled 132,606 $ 6.67
------------------------------------------------------------------------
Outstanding at June 30, 1999 11,133,328 $ 7.81
Exercisable at June 30, 1999 3,636,232 $ 6.39
========================================================================
Fiscal 2000
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
-------------------------------------------------------------------------
</TABLE>
As a result of the recapitalization of the Company, each outstanding stock
option under the Company's stock option plans was converted into separately
exercisable options to acquire one share of Applera - Applied Biosystems stock
and 0.5 of a share of Applera - Celera stock prior to giving effect to the
Applera - Applied Biosystems stock splits and the Applera - Celera stock split.
The exercise price for the resulting Applera - Applied Biosystems stock options
and Applera - Celera stock options was calculated by multiplying the exercise
price under the original option from which they were converted by a fraction,
the numerator of which was the opening price of Applera - Applied Biosystems
stock or Applera - Celera stock, as the case may be, on May 6, 1999 (the first
date such stocks were traded on the New York Stock Exchange) and the denominator
of which was the sum of such Applera - Applied Biosystems stock and Applera -
Celera stock prices. However, the aggregate intrinsic value of the options was
not increased, and the ratio of the exercise price per option to the market
value per share was not reduced. In addition, the vesting provisions and option
periods of the original grants remained the same on conversion.
In connection with the acquisition of Paracel, the Company assumed Paracel's
stock option plans. Options granted to Paracel employees and directors in
exchange for their Paracel options at the acquisition date have been included
in the Applera - Celera stock options granted amount for fiscal 2000.
APPLERA CORPORATION Annual Report 2001 | 47
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
The following tables summarize information regarding options outstanding and
exercisable at June 30, 2001:
<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 7,231,559 $ 13.75 5.5
At $20.01 - $ 26.00 6,323,738 $ 25.54 9.6
At $26.01 - $ 60.00 6,986,065 $ 32.26 7.8
At $60.01 - $110.00 7,380,386 $ 95.33 8.6
==========================================================================================
Options Exercisable
At $ 1.82 - $ 20.00 6,555,559 $ 14.02
At $20.01 - $ 26.00 42,988 $ 21.09
At $26.01 - $ 60.00 2,210,415 $ 28.12
At $60.01 - $110.00 1,880,288 $ 88.84
==========================================================================================
==========================================================================================
Applera - Celera Stock
Options Outstanding
At $ 0.74 - $ 8.50 1,776,552 $ 5.74 5.6
At $ 8.51 - $ 10.00 6,069,878 $ 8.56 7.5
At $10.01 - $ 75.00 3,697,792 $ 27.55 8.5
At $75.01 - $135.00 1,568,014 $ 110.25 8.2
==========================================================================================
Options Exercisable
At $ 0.74 - $ 8.50 1,580,112 $ 5.83
At $ 8.51 - $ 10.00 2,635,775 $ 8.56
At $10.01 - $ 75.00 638,025 $ 14.98
At $75.01 - $135.00 315,854 $ 111.59
==========================================================================================
</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 1999, 2000, and 2001 totaled 98,000 shares, 161,000
shares, and 250,000 shares, respectively. Applera - Celera stock issued under
the employee stock purchase plans during fiscal 1999, 2000, and 2001 totaled
24,000 shares, 303,000 shares, and 269,000 shares, respectively. Common stock
issued under the employee stock purchase plans during fiscal 1999 totaled
168,000 shares of Applera Corporation (predecessor) common stock.
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, 2001, the Company had approximately 335,000 shares
of Applera - Applied Biosystems stock and approximately 84,000 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, which may vary depending on the
estimated achievement of performance goals.
As a result of the recapitalization of the Company, each share of restricted
stock held was redesignated as one share of Applera - Applied Biosystems stock
and 0.5 of a share of Applera - Celera stock prior to giving effect to the
Applera - Applied Biosystems stock splits and the Applera - Celera stock split.
Restricted stock granted to employees and non-employee directors totaled 3,600
shares of Applera - Applied Biosystems stock and 900 shares of Applera - Celera
stock during fiscal 2000 and 255,225 shares of Applera - Applied Biosystems
stock and 63,900 shares of Applera - Celera stock during fiscal 2001. Restricted
stock granted prior to the recapitalization to employees and non-employee
directors during fiscal 1999 totaled 42,900 shares of the Applera Corporation
(predecessor) common stock. Compensation expense of continuing operations
recognized by the Company for these awards was $2.3 million, $6.5 million, and
$6.1 million for fiscal 1999, 2000, and 2001, respectively. Unearned
compensation included in capital
48 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
surplus within stockholders' equity was $16.6 million at June 30, 2001. 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. As of June 30, 2000, three series of
performance units were granted under the plan. Compensation expense recognized
under the plan for fiscal 1999 and 2000 was $14.8 million and $53.1 million,
respectively. Fiscal 1999 and 2000 compensation expense included $10.1 million
and $45.0 million, respectively, 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. No
compensation expense pertaining to the plan was recognized in fiscal 2001.
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.
Accounting for Stock-Based Compensation
APB 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 a Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
For the years ended June 30, 1999 2000 2001
=========================================================================
<S> <C> <C> <C>
Applied Biosystems Group
Dividend yield .63% .17% .62%
Volatility 34.40% 52.68% 71.91%
Risk-free interest rate 5.25% 5.88% 6.53%
Expected option life in years 5.23 4.12 4
=========================================================================
Celera Genomics Group
Dividend yield -% -% -%
Volatility 34.40% 99.30% 101.66%
Risk-free interest rate 5.00% 6.21% 6.53%
Expected option life in years 5.23 3.5 3.5
=========================================================================
Applera Corporation
(predecessor)
Dividend yield .62%
Volatility 34.40%
Risk-free interest rate 4.71%
Expected option life in years 5.23
=========================================================================
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of the options
is amortized to expense over the options' vesting period.
The Company's pro forma information for the years ended June 30, 1999, 2000,
and 2001 is presented below:
<TABLE>
<CAPTION>
Applied Biosystems Group
----------------------------
(Dollar amounts in millions
except per share amounts) 1999 2000 2001
======================================================================
<S> <C> <C> <C>
Income from
continuing operations
As reported $ 148.4 $ 186.2 $ 212.4
Pro forma $ 127.9 $ 140.2 $ 115.6
Basic earnings
from continuing
operations per share
As reported $ .74 $ .90 $ 1.01
Pro forma $ .64 $ .68 $ .55
Diluted earnings
from continuing
operations per share
As reported $ .72 $ .86 $ .96
Pro forma $ .62 $ .65 $ .52
======================================================================
</TABLE>
APPLERA CORPORATION Annual Report 2001 | 49
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
<TABLE>
<CAPTION>
Celera Genomics Group
------------------------------
(Dollar amounts in millions
except per share amounts) 1999 2000 2001
==============================================================================
<S> <C> <C> <C>
Loss from continuing operations
As reported $ (44.9) $ (92.7) $ (186.2)
Pro forma $ (47.5) $ (106.6) $ (223.3)
Basic loss from continuing
operations per share
As reported $ (.89) $ (1.73) $ (3.07)
Pro forma $ (.95) $ (1.98) $ (3.68)
Diluted loss from continuing
operations per share
As reported $ (.89) $ (1.73) $ (3.07)
Pro forma $ (.95) $ (1.98) $ (3.68)
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Applera Corporation
------------------------------
(Dollar amounts in millions
except per share amounts) 1999 2000 2001
------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from
continuing operations
As reported $ 96.8 $ 95.5 $ 27.2
Pro forma $ 73.7 $ 35.6 $ (106.6)
------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of Applera Corporation (predecessor) stock
options granted was $33.54 per share for fiscal 1999. The weighted average fair
value of Applera - Applied Biosystems stock options granted was $10.12, $38.00,
and $19.94 for fiscal 1999, 2000, and 2001, respectively. The weighted average
fair value of Applera - Celera stock options granted was $4.13, $46.41, and
$32.79 for fiscal 1999, 2000, and 2001, respectively.
Note 9--Additional Information
Selected Accounts
The following table provides the major components of selected accounts of the
Consolidated Statements of Financial Position at June 30, 2000 and 2001:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
<S> <C> <C>
=================================================================
Other Long-Term Assets
Minority equity investments $ 297.7 $ 111.1
Goodwill 129.2 24.4
Noncurrent deferred tax asset 52.8 166.6
Other 143.2 108.7
-----------------------------------------------------------------
Total other long-term assets $ 622.9 $ 410.8
=================================================================
Other Accrued Expenses
Deferred revenues $ 70.9 $ 92.5
Other 129.2 123.3
-----------------------------------------------------------------
Total other accrued expenses $ 200.1 $ 215.8
=================================================================
Other Long-Term Liabilities
Accrued postretirement benefits $ 77.9 $ 75.5
Other 56.3 76.9
-----------------------------------------------------------------
Total other long-term liabilities $ 134.2 $ 152.4
=================================================================
</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 $256.1 million
and $.1 million, respectively, at June 30, 2000 and $69.9 million and $3.8
million, respectively, at June 30, 2001.
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 model using a
volatility assumption of 40%, an expected option life assumption of two years,
and a risk-free interest rate of 5.75%. As of June 30, 2001, TIGR held
approximately 1.4 million of these options. The President of the Celera
Genomics group is also the current Chairman of the Board of Trustees of TIGR.
Also, an immediate family member of the President of the Celera Genomics group
currently serves as TIGR's President and is on TIGR's Board of Trustees.
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, the Applied Biosystems group recognized revenues of $7.0 million from
TIGR, of which $1.8 million was receivable as of June 30, 2001.
50 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Note 10--Commitments and Contingencies
Future minimum payments at June 30, 2001 under non-cancelable operating leases
for real estate and equipment were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
===================================================
<S> <C>
2002 $ 54.5
2003 39.4
2004 28.3
2005 21.1
2006 16.0
2007 and thereafter 58.7
---------------------------------------------------
Total $ 218.0
===================================================
</TABLE>
Rental expense was $43.1 million for fiscal 1999, $45.2 million for fiscal
2000, and $65.2 million for fiscal 2001.
Amersham
On November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a
patent infringement action against the Company in the United States District
Court for the Northern District of California. The complaint alleges that the
Company is directly, contributorily, or by inducement infringing U.S. Patent
No. 5,688,648 ("the `648 patent"). Amersham asserts that the Company's use and
sale of DNA analysis reagents and systems that incorporate "BigDye"
fluorescence detection technology infringe the `648 patent, and seeks
injunctive and monetary relief. The Company answered the complaint, alleging
that the `648 patent is invalid and unenforceable, and that the Company has
not infringed the '648 patent. In December 2000, the court granted Amersham's
motion for summary judgment in part, finding that certain of the Company's
activities infringe the claims of the `648 patent, but denied Amersham's
motion for summary judgment that the Company induced its customers to infringe
the claims of the `648 patent. On April 6, 2001, the court granted the
Company's motion for summary judgment finding that the Company's recently
introduced BigDye Version 3.0 dye technology does not infringe the `648
patent.
On March 13, 1998, the Company filed a patent infringement action against
Amersham and Molecular Dynamics, Inc. in the United States District Court for
the Northern District of California. The Company asserts that one of its
patents (U.S. Patent No. 4,811,218) is infringed by reason of Molecular
Dynamics' and Amersham's sale of certain DNA analysis systems (e.g., the
MegaBACE 1000 System). In response, Amersham has asserted various affirmative
defenses and several counterclaims, including that the Company is infringing
two patents, U.S. Patent No. 5,091,652 ("the `652 patent") and U.S. Patent No.
5,459,325, each owned by or licensed to Molecular Dynamics, by selling certain
ABI PRISM(TM) DNA sequencing systems. In December 2000, the court granted the
Company's motion for summary judgment of non-infringement of the `652 patent.
The trial date previously scheduled for August 6, 2001 was vacated in July
2001.
On May 21, 1998, Amersham filed a patent infringement action against the
Company in the United States District Court for the Southern District of New
York. The complaint alleges that the Company is infringing, contributing to
the infringement of, and inducing the infringement of U.S. Patent No.
4,707,235 ("the `235 patent") by reason of the Company's sale of certain ABI
PRISM(TM) DNA sequencing systems. The complaint seeks injunctive and monetary
relief. The Company answered the complaint, alleging that the `235 patent is
invalid and that the Company does not infringe the `235 patent. The matters
described in this paragraph and the immediately preceding paragraph have been
consolidated into a single case to be heard in the United States District
Court for the Northern District of California. In December 2000, the court
granted the Company's motion for summary judgment of non-infringement of the
`235 patent. However, on December 18, 2000, Amersham filed a new complaint
alleging that the Company is infringing the `235 patent by reason of the
Company's sale of certain DNA sequencing systems, which allegations were not
in the previous suit under the `235 patent. This action is in the early stages
of discovery.
On May 30, 2000, the Company filed a patent infringement action against
Amersham in the United States District Court for the Northern District of
California. The Company asserts that one of its patents (U.S. Patent No.
5,945,526) is infringed by reason of Amersham's sale of DNA analysis reagents
and systems that incorporate ET Terminator fluorescence detection technology.
The claims construction hearing previously scheduled for June 7, 2001 has been
postponed.
On July 10, 2001, United States Judge Charles R. Breyer stayed all cases in
the litigation described above for the purpose of facilitating court ordered
settlement mediation. The stay is scheduled to expire on March 11, 2002.
The Company believes that the claims asserted by Amersham and Molecular
Dynamics in the foregoing cases are without merit and intends to defend the
cases vigorously. However, the outcome of this or any other litigation is
inherently uncertain, and the Company cannot be sure that it will prevail in
any of these matters. An adverse determination in any of the actions brought
by Amersham could have a material adverse effect on the financial statements
of the Company.
Other
The Company has been named as a defendant in several other legal actions,
including patent, commercial, and environmental, arising from the conduct of
normal business activities. Although the amount of any liability that might
arise with respect to any of these matters cannot be accurately predicted, the
resulting liability, if any, will not in the opinion of management have a
material adverse effect on the financial statements of the Company.
APPLERA CORPORATION Annual Report 2001 | 51
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Note 11--Financial Instruments
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," amended in June 2000 by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." 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 driven 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, and an interest rate swap to manage its interest
rate exposure. The Company does not use derivative financial instruments for
trading 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. The fair
value of the interest rate swap is recorded in other long-term liabilities.
Cash Flow Hedges
The Company's international sales are typically denominated in the customers'
local (non-U.S. dollar) currency. The Company uses foreign exchange forward,
option, and range forward contracts to hedge a portion of forecasted
international sales not denominated in U.S. dollars. The Company utilizes
hedge accounting on derivative contracts which are considered highly effective
in offsetting the changes in fair value of the forecasted sales transactions
caused by movements in foreign currency exchange rates. These contracts are
designated as cash flow hedges and the effective portion of the change in the
fair value of these contracts is recorded in other comprehensive income (loss)
in the Consolidated Statements of Financial Position until the underlying
external forecasted transaction affects earnings. At that time, the gain or
loss on the derivative instrument, which had been deferred in other
comprehensive income (loss), is reclassified to net revenues in the
Consolidated Statements of Operations. During fiscal 2001, the Company
recognized net gains of $17.8 million in net revenues from derivative
instruments designated as cash flow hedges of anticipated sales. At June 30,
2001, $17.8 million of derivative gains ($11.2 million net of deferred taxes)
recorded in other comprehensive income (loss) are expected to be reclassified
to earnings during the next twelve months. During the fourth quarter of fiscal
2001, the Financial Accounting Standards Board'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.
Interest Rate Risk Management
The Company maintains an interest rate swap in conjunction with a five-year
Japanese yen debt obligation (see Note 3). The interest rate swap involves the
payment of a fixed rate of interest and the receipt of a floating rate of
interest without the exchange of the underlying notional loan principal
amount. Under the terms of this contract, the Company will make fixed interest
payments of 2.1% while receiving interest at a LIBOR floating rate. No other
cash payments will be made unless the contract is terminated prior to
maturity, in which case the amount to be paid or received in settlement will
be established by agreement at the time of termination. The agreed upon amount
would usually represent the net present value at current interest rates of the
remaining obligation to exchange payments under the terms of the contract.
At June 30, 2001, the Company had a liability of $.5 million which represented
the fair value of the interest rate swap. Changes in the fair value of the
interest rate swap are recognized in other comprehensive income. A change in
interest rates would have no impact on the Company's reported interest expense
and related cash payments because the floating rate debt and fixed rate
interest swap have the same maturity and are based on the same interest rate
index.
Concentration of Credit Risk
The forward contracts, options, and swap used by the Company in managing its
foreign currency and interest rate 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
52 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
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 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. 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, 2000 and 2001:
<TABLE>
<CAPTION>
2000 2001
------------------ ------------------
Carrying Fair Carrying Fair
(Dollar amounts in millions) Amount Value Amount Value
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 964.5 $ 964.5 $ 608.5 $ 608.5
Short-term investments $ 541.1 $ 541.1 $ 779.3 $ 779.5
Currency forwards and options $ 3.7 $ 3.0 $ 2.6 $ 20.3
Interest rate swap $ - $ (1.0) $ - $ (.5)
Other investments $ - $ - $ 9.0 $ 9.0
Minority equity investments $ 42.5 $ 297.7 $ 45.0 $ 111.1
Short-term debt $ 15.7 $ 15.7 $ 45.2 $ 45.2
Long-term debt $ 82.1 $ 82.1 $ - $ -
---------------------------------------------------------------------------------
</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.
APPLERA CORPORATION Annual Report 2001 | 53
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Note 12--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) 2000 2001 2000 2001 2000 2001 2000 2001
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 288.8 $ 367.4 $ 327.4 $ 413.3 $ 363.1 $ 447.1 $ 391.7 $ 416.3
Gross margin 153.5 198.2 175.9 213.5 201.2 236.3 216.3 215.4
Net income (loss) 10.1 24.4 19.2 27.5 32.8 28.3 33.4 (53.0)
-------------------------------------------------------------------------------------------------------------------------------
Applied Biosystems Group
Dividends per share $ .0425 $ .0425 $ .0425 $ .0425 $ .085 $ .085
Net income per share
Basic $ .14 $ .23 $ .21 $ .28 $ .27 $ .27 $ .27 $ .23
Diluted .14 .22 .20 .26 .26 .26 .26 .22
-------------------------------------------------------------------------------------------------------------------------------
Celera Genomics Group
Net loss per share
Basic and diluted $ (.38) $ (.43) $ (.47) $ (.49) $ (.45) $ (.48) $ (.43) $ (1.66)
-------------------------------------------------------------------------------------------------------------------------------
Price range of common stock
Applied Biosystems Group
High $ 38 5/16 $ 126 3/4 $62 15/16 $133 5/16 $ 160 $ 94 1/4 $ 111 7/16 $36 15/100
Low $ 26 9/16 $ 64 3/4 $ 30 5/8 $ 75 $ 50 $18 49/100 $ 42 13/16 $ 24 1/2
Celera Genomics Group
High $26 29/32 $118 9/16 $96 13/32 $ 100 1/2 $ 276 $ 54 9/10 $ 151 $ 49 9/10
Low $ 7 7/8 $ 80 3/16 $ 15 3/16 $ 29 1/4 $ 73 $ 24 $ 50 3/16 $ 26 2/10
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no dividends on Applera - Celera stock for the periods presented.
Events Impacting Comparability
Fiscal 2000 - Second and fourth quarter results included before-tax gains of
$25.8 million and $22.8 million, respectively, in non-recurring gains
primarily related to the sale of a portion of the Company's minority equity
investments. Second and fourth quarter results included before-tax charges of
$21.6 million and $23.4 million, respectively, related to the acceleration of
certain long-term compensation programs. Fourth quarter results included
$2.1 million of acquisition-related before-tax costs and a before-tax gain of
$8.2 million from the sale of real estate. There was no aggregate after-tax
effect of the above items for the second and fourth quarters.
Fiscal 2001 - First and second quarter results 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 included a before-tax charge of $69.1 million for the impairment of
goodwill and other intangibles related to Paracel.
54 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Note 13--Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss), net of tax, for fiscal 1999,
2000, and 2001 was as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Foreign Minimum Accumulated
Gain Gain on Currency Pension Other
(Loss) on Hedge Translation Liability Comprehensive
(Dollar amounts in millions) Investments Contracts Adjustments Adjustment Income (Loss)
==============================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ (1.4) $ - $ (7.8) $ (.4) $ (9.6)
Activity 11.9 (5.4) (1.7) 4.8
--------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 10.5 (13.2) (2.1) (4.8)
Activity 155.6 (25.2) (.1) 130.3
--------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 166.1 (38.4) (2.2) 125.5
Activity (123.2) 11.2 (34.2) (35.2) (181.4)
--------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $ 42.9 $ 11.2 $ (72.6) $ (37.4) $ (55.9)
==============================================================================================================
</TABLE>
Information regarding the income tax effects for items of other comprehensive
income (loss) are as follows:
<TABLE>
<CAPTION>
Before- Tax After-
Tax Benefit Tax
(Dollar amounts in millions) Amount (Expense) Amount
==================================================================================================================
<S> <C> <C> <C>
For the Year Ended
June 30, 2000
Unrealized gains on investments $ 293.5 $ (106.3) $ 187.2
Less: Reclassification adjustments for gains realized
in net income 48.6 (17.0) 31.6
------------------------------------------------------------------------------------------------------------------
Net unrealized gains on investments 244.9 (89.3) 155.6
Foreign currency translation adjustment (25.2) (25.2)
Minimum pension liability adjustment (1.3) 1.2 (.1)
------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 218.4 $ (88.1) $ 130.3
==================================================================================================================
For the Year Ended
June 30, 2001
Unrealized losses on investments $ (174.6) $ 61.1 $ (113.5)
Less: Reclassification adjustments for gains realized in net income 14.9 (5.2) 9.7
------------------------------------------------------------------------------------------------------------------
Net unrealized losses on investments (189.5) 66.3 (123.2)
Unrealized gains on hedge contracts 35.1 (12.4) 22.7
Less: Reclassification adjustments for gains realized in net income 17.8 (6.3) 11.5
------------------------------------------------------------------------------------------------------------------
Net unrealized gains on hedge contracts 17.3 (6.1) 11.2
Foreign currency translation adjustment (34.2) (34.2)
Minimum pension liability adjustment (54.1) 18.9 (35.2)
------------------------------------------------------------------------------------------------------------------
Other comprehensive loss $ (260.5) $ 79.1 $ (181.4)
==================================================================================================================
</TABLE>
The currency translation adjustments are not currently adjusted for income
taxes as they relate to indefinite investments in non-U.S. subsidiaries.
Note 14--Discontinued Operations
Effective May 28, 1999, the Company completed the sale of its Analytical
Instruments business to EG&G, Inc. Analytical Instruments, formerly a unit of
the Applied Biosystems group, developed, manufactured, marketed, sold, and
serviced analytical instruments used in a variety of markets.
The aggregate consideration received by the Company was $425 million,
consisting of $275 million in cash and one-year secured promissory notes in
the aggregate principal amount of $150 million bearing an interest rate of 5%
per annum. The promissory notes were collected in fiscal 2000. In fiscal 1999,
the Company recognized a net gain on disposal of discontinued operations of
$100.2 million, net of $87.8 million of income taxes.
Amounts previously reported for Analytical Instruments were reclassified and
stated as discontinued operations. There were no remaining assets,
liabilities, or operations within discontinued operations at or for the fiscal
years ended June 30, 2000 and 2001. Summary results for the eleven months
ended May 28, 1999 prior to discontinuance were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999
====================================================================
<S> <C>
Net revenues $ 479.4
Total costs and expenses 509.7
Provision (benefit) for income taxes (9.2)
--------------------------------------------------------------------
Income (loss) from discontinued operations $ (21.1)
====================================================================
</TABLE>
Income Taxes
Income (loss) before income taxes of discontinued operations for the eleven
months ended May 28, 1999 consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999
==================================================================
<S> <C>
United States $ (36.2)
Foreign 5.9
------------------------------------------------------------------
Total $ (30.3)
==================================================================
</TABLE>
APPLERA CORPORATION Annual Report 2001 | 55
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
The components of the provision (benefit) for income taxes of discontinued
operations for the eleven months ended May 28, 1999 consisted of the
following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999
================================================================================
<S> <C>
Currently Payable
Domestic $ (13.7)
Foreign 4.5
--------------------------------------------------------------------------------
Provision (benefit) for income taxes from discontinued operations $ (9.2)
================================================================================
</TABLE>
For the eleven months ended May 28, 1999, the effective tax rate for
discontinued operations was 30%. The difference between the effective tax rate
and the statutory tax rate of 35% was mainly attributed to benefits from the
use of U.S. alternative minimum tax credit carryforwards, benefits from the
use of a foreign sales corporation and federal research tax credits, and
restructuring charges.
Note 15--Consolidating Information
Presented below is the consolidating financial information reflecting the
businesses of the individual groups, including the allocation of expenses
between groups in accordance with the Company's allocation policies, as well
as other related party transactions, such as sales of products between groups
and interest income and expense on intercompany borrowings. Earnings
attributable to each group has been determined in accordance with accounting
principles generally accepted in the U.S.
The management and allocation policies applicable to the attribution of
assets, liabilities, revenues and expenses to the Applied Biosystems group and
the Celera Genomics group 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 the stockholders as a whole.
The attribution of the assets, liabilities, revenues and expenses to each
group is primarily based on specific identification of the businesses included
in each group. Where specific identification was not practical, other methods
and criteria were used that management believes are equitable and provide a
reasonable estimate of the assets, liabilities, revenues and expenses
attributable to each group. It is not practical to specifically identify a
portion of corporate overhead expenses attributable to each of the groups. The
Company allocates such corporate overhead expenses primarily based upon
headcount, total expenses, and revenues attributable to each group.
Sales of products and services from one group to another group within Applera
Corporation are recorded as intergroup revenues. These sales are made on terms
that would be available from third parties in commercial transactions.
The Company's shared corporate services and related balance sheet amounts
(such as executive management, human resources, legal, accounting, auditing,
tax, treasury, strategic planning and environmental services) have been
allocated to the Applied Biosystems group or the Celera Genomics group based
upon identification of such services specifically benefiting each group. 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. Management
believes that the allocation methods developed are reasonable and have been
consistently applied.
The federal income taxes of the Company and its subsidiaries which 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." 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. Intergroup transactions are taxed as if each group
were a stand-alone company. Tax benefits that cannot be used by the group
generating those benefits, but can be used on a consolidated basis, are
transferred to the group that can utilize such benefits. Existing tax benefits
acquired by either group in a business combination which 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.
If the Company allocates debt for a particular financing in its entirety to
one group, that debt will bear interest at the 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.
56 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
During fiscal 2001, the Company formed Celera Diagnostics, a joint venture of
the Applied Biosystems group and the Celera Genomics group. Refer to Note 2 of
the Applied Biosystems group combined financial statements and Note 2 of the
Celera Genomics group combined financial statements for a description of the
Celera Diagnostics joint venture. As part of the formation of the joint
venture, the Applied Biosystems group will reimburse 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.
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.
See Note 1 to the Applied Biosystems group's and the Celera Genomics group's
combined financial statements for a detailed description of allocation
policies.
In the following tables, the "other" column represents the elimination of
intergroup activity and the results of the Celera Diagnostics joint venture in
fiscal year 2001. Other total assets of $173.0 million for fiscal 1999
included the $150 million Celera Genomics group note receivable from the
Applied Biosystems group.
APPLERA CORPORATION Annual Report 2001 | 57
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 Eliminations/
(Dollar amounts in millions) Group Group Other Consolidated
=============================================================================================================
<S> <C> <C> <C> <C>
Net revenues from external customers $ 1,555.4 $ 88.7 $ - $ 1,644.1
Intergroup revenues 64.1 .7 (64.8)
-------------------------------------------------------------------------------------------------------------
Net Revenues 1,619.5 89.4 (64.8) 1,644.1
Cost of sales 774.5 43.0 (36.8) 780.7
-------------------------------------------------------------------------------------------------------------
Gross Margin 845.0 46.4 (28.0) 863.4
-------------------------------------------------------------------------------------------------------------
Selling, general and administrative 337.8 49.0 53.3 440.1
Corporate allocated expenses 42.8 9.3 (52.1)
Research, development and engineering 184.5 164.7 (25.8) 323.4
Amortization of goodwill and other intangibles 43.9 43.9
Restructuring and other special charges 69.1 69.1
-------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 279.9 (289.6) (3.4) (13.1)
Gain on investments 15.0 15.0
Interest expense (1.3) (.8) (2.1)
Interest income 16.8 63.5 80.3
Other income (expense), net (5.9) (5.8) 5.0 (6.7)
-------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 304.5 (232.7) 1.6 73.4
Provision (benefit) for income taxes 92.1 (46.5) .6 46.2
-------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 212.4 $ (186.2) $ 1.0 $ 27.2
=============================================================================================================
</TABLE>
58 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Consolidating Statement of Financial Position At June 30, 2001
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Eliminations/
(Dollar amounts in millions) Group Group Other Consolidated
==================================================================================================================
<S> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 392.4 $ 216.1 $ - $ 608.5
Short-term investments 779.5 779.5
Accounts receivable, net 382.5 24.0 (5.7) 400.8
Inventories 140.8 6.2 2.7 149.7
Prepaid expenses and other current assets 98.2 4.8 103.0
------------------------------------------------------------------------------------------------------------------
Total current assets 1,013.9 1,030.6 (3.0) 2,041.5
Property, plant and equipment, net 315.4 123.5 (3.3) 435.6
Other long-term assets 348.6 66.0 (3.8) 410.8
------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,677.9 $ 1,220.1 $ (10.1) $ 2,887.9
==================================================================================================================
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 14.7 $ - $ - $ 14.7
Current portion of long-term debt 30.5 30.5
Accounts payable 162.1 21.0 (4.8) 178.3
Accrued salaries and wages 49.5 15.1 .3 64.9
Accrued taxes on income 82.7 2.6 (2.3) 83.0
Other accrued expenses 168.6 46.9 .3 215.8
------------------------------------------------------------------------------------------------------------------
Total current liabilities 508.1 85.6 (6.5) 587.2
Other long-term liabilities 128.6 23.8 152.4
------------------------------------------------------------------------------------------------------------------
Total Liabilities 636.7 109.4 (6.5) 739.6
------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Applera Corporation--Applied Biosystems stock 2.1 2.1
Applera Corporation--Celera Genomics stock .6 .6
Other stockholders' equity 1,041.2 1,110.7 (6.3) 2,145.6
------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,041.2 1,110.7 (3.6) 2,148.3
------------------------------------------------------------------------------------------------------------------
Total Liabilities And Stockholders' Equity $ 1,677.9 $ 1,220.1 $ (10.1) $ 2,887.9
==================================================================================================================
</TABLE>
APPLERA CORPORATION Annual Report 2001 | 59
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 Eliminations/
(Dollar amounts in millions) Group Group Other Consolidated
==================================================================================================================================
<S> <C> <C> <C> <C>
Operating Activities From Continuing Operations
Net income (loss) $ 212.4 $ (186.2) $ 1.0 $ 27.2
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Depreciation and amortization 66.8 65.5 (3.1) 129.2
Impairment of goodwill and other intangibles 69.1 69.1
Long-term compensation programs 4.5 1.6 6.1
Deferred income taxes 20.5 (8.5) 4.0 16.0
Gains from sales of assets (15.0) (15.0)
Loss from joint venture 5.0 (5.0)
Nonreimbursable utilization of tax benefits generated by the Celera
Genomics group 32.2 (32.2)
Changes in operating assets and liabilities
Decrease in tax benefit receivable from the Applied Biosystems group 16.7 (16.7)
Increase in accounts receivable (42.3) (9.1) 2.1 (49.3)
(Increase) decrease in inventories 4.2 (2.9) (.4) .9
Increase in prepaid expenses and other assets (34.3) (.2) .1 (34.4)
Increase (decrease) in accounts payable and other liabilities (107.3) 32.6 11.3 (63.4)
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Operating Activities 141.7 (48.6) (6.7) 86.4
----------------------------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment, net (143.6) (33.8) .1 (177.3)
Purchases of short-term investments, net (238.1) (238.1)
Acquisitions and investments, net (5.9) (9.6) 6.6 (8.9)
Proceeds from the sale of assets, net 15.4 15.4
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (134.1) (281.5) 6.7 (408.9)
----------------------------------------------------------------------------------------------------------------------------------
Net Cash From Continuing Operations Before Financing Activities 7.6 (330.1) (322.5)
----------------------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Net cash used by operating activities (2.9) (2.9)
----------------------------------------------------------------------------------------------------------------------------------
Net Cash From Discontinued Operations Before
Financing Activities (2.9) (2.9)
----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable 1.6 1.6
Principal payments on long-term debt (46.0) (46.0)
Dividends (35.7) (35.7)
Proceeds from stock issued for stock plans 37.8 22.3 60.1
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) For Financing Activities 3.7 (23.7) (20.0)
----------------------------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash (10.6) (10.6)
----------------------------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents (2.2) (353.8) (356.0)
Cash And Cash Equivalents Beginning Of Year 394.6 569.9 964.5
----------------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 392.4 $ 216.1 $ - $ 608.5
==================================================================================================================================
</TABLE>
60 | APPLERA CORPORATION Annual Report 2001
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 Eliminations/
(Dollar amounts in millions) Group Group Other Consolidated
===============================================================================================================
<S> <C> <C> <C> <C>
Net revenues from external customers $ 1,328.3 $ 42.7 $ - $ 1,371.0
Intergroup revenues 59.8 (59.8)
---------------------------------------------------------------------------------------------------------------
Net Revenues 1,388.1 42.7 (59.8) 1,371.0
Cost of sales 637.7 15.0 (28.6) 624.1
---------------------------------------------------------------------------------------------------------------
Gross Margin 750.4 27.7 (31.2) 746.9
---------------------------------------------------------------------------------------------------------------
Selling, general and administrative 348.0 35.5 53.4 436.9
Corporate allocated expenses 45.9 7.5 (53.4)
Research, development and engineering 141.2 148.6 (34.2) 255.6
Amortization of goodwill and intangibles 4.2 4.2
Restructuring and other special charges 2.1 2.1
---------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 213.2 (168.1) 3.0 48.1
Gain on investments 48.6 48.6
Interest expense (1.4) (2.1) (3.5)
Intergroup interest expense (6.7) 6.7
Interest income 18.6 20.8 39.4
Intergroup interest income 6.7 (6.7)
Other income (expense), net 3.4 .1 3.5
---------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 275.7 (142.7) 3.1 136.1
Provision (benefit) for income taxes 89.5 (50.0) 1.1 40.6
---------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 186.2 $ (92.7) $ 2.0 $ 95.5
===============================================================================================================
</TABLE>
APPLERA CORPORATION Annual Report 2001 | 61
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Consolidating Statement of Financial Position At June 30, 2000
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Eliminations/
(Dollar amounts in millions) Group Group Other Consolidated
=========================================================================================================================
<S> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 394.6 $ 569.9 $ - $ 964.5
Short-term investments 541.1 541.1
Tax benefit receivable from the Applied Biosystems group 16.7 (16.7)
Accounts receivable, net 367.4 14.9 (3.7) 378.6
Inventories 154.5 3.3 157.8
Prepaid expenses and other current assets 81.4 2.4 (.3) 83.5
-------------------------------------------------------------------------------------------------------------------------
Total current assets 997.9 1,148.3 (20.7) 2,125.5
Property, plant and equipment, net 230.9 111.4 (7.4) 334.9
Other long-term assets 469.4 153.6 (.1) 622.9
-------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,698.2 $ 1,413.3 $ (28.2) $ 3,083.3
=========================================================================================================================
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 15.7 $ - $ - $ 15.7
Tax benefit payable to Celera Genomics group 16.7 (16.7)
Accounts payable 173.7 21.5 (3.8) 191.4
Accrued salaries and wages 79.4 10.3 89.7
Accrued taxes on income 149.5 2.9 (2.8) 149.6
Other accrued expenses 167.7 32.5 (.1) 200.1
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 602.7 67.2 (23.4) 646.5
Long-term debt 36.1 46.0 82.1
Other long-term liabilities 125.0 9.2 134.2
-------------------------------------------------------------------------------------------------------------------------
Total Liabilities 763.8 122.4 (23.4) 862.8
-------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Applera Corporation--Applied Biosystems stock 2.1 2.1
Applera Corporation--Celera Genomics stock .6 .6
Other stockholders' equity 934.4 1,290.9 (7.5) 2,217.8
-------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 934.4 1,290.9 (4.8) 2,220.5
-------------------------------------------------------------------------------------------------------------------------
Total Liabilities And Stockholders' Equity $ 1,698.2 $ 1,413.3 $ (28.2) $ 3,083.3
=========================================================================================================================
</TABLE>
62 | APPLERA CORPORATION Annual Report 2001
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 Eliminations/
(Dollar amounts in millions) Group Group Other Consolidated
==================================================================================================================================
<S> <C> <C> <C> <C>
Operating Activities From Continuing Operations
Net income (loss) $ 186.2 $ (92.7) $ 2.0 $ 95.5
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation and amortization 54.5 29.6 (3.4) 80.7
Long-term compensation programs 9.7 .8 10.5
Deferred income taxes (19.4) (7.0) (26.4)
Gains from sales of assets (56.8) (56.8)
Changes in operating assets and liabilities
Increase in tax benefit receivable from the Applied
Biosystems group (6.8) 6.8
Increase in accounts receivable (62.2) (11.6) 1.3 (72.5)
(Increase) decrease in inventories (2.8) .6 (2.2)
Increase in prepaid expenses and other assets (22.4) (.4) (22.8)
Increase in accounts payable and other liabilities 80.0 29.2 (7.0) 102.2
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Operating Activities 166.8 (58.3) (.3) 108.2
----------------------------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment, net (94.5) (29.5) .3 (123.7)
Purchases of short-term investments, net (541.1) (541.1)
Acquisitions and investments, net (20.7) (2.3) (23.0)
Proceeds from the sale of assets, net 82.8 82.8
Proceeds from the collection of notes receivable 150.0 150.0
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Investing Activities 117.6 (572.9) .3 (455.0)
----------------------------------------------------------------------------------------------------------------------------------
Net Cash From Continuing Operations Before Financing Activities 284.4 (631.2) (346.8)
----------------------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Net cash used by operating activities (15.1) (15.1)
----------------------------------------------------------------------------------------------------------------------------------
Net Cash From Discontinued Operations Before Financing Activities (15.1) (15.1)
----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable 6.7 46.0 52.7
Dividends (26.3) (26.3)
Net proceeds from follow-on stock Offering 943.3 943.3
Proceeds from stock issued for stock plans 43.4 17.6 61.0
(Collection) payment of note (receivable) payable (150.0) 150.0
Net cash allocated (to) from groups 27.3 (27.3)
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) For Financing Activities (98.9) 1,129.6 1,030.7
----------------------------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash (12.3) (12.3)
----------------------------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents 158.1 498.4 656.5
Cash And Cash Equivalents Beginning Of Year 236.5 71.5 308.0
----------------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 394.6 $ 569.9 $ - $ 964.5
==================================================================================================================================
</TABLE>
APPLERA CORPORATION Annual Report 2001 | 63
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Consolidating Statement of Operations For the Year Ended June 30, 1999
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Eliminations/
(Dollar amounts in millions) Group Group Other Consolidated
===================================================================================================================
<S> <C> <C> <C> <C>
Net revenues from external customers $ 1,204.4 $ 12.5 $ - $ 1,216.9
Intergroup revenues 17.3 (17.3)
-------------------------------------------------------------------------------------------------------------------
Net Revenues 1,221.7 12.5 (17.3) 1,216.9
Cost of sales 548.4 4.7 (4.0) 549.1
-------------------------------------------------------------------------------------------------------------------
Gross Margin 673.3 7.8 (13.3) 667.8
-------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 302.2 23.1 38.8 364.1
Corporate allocated expenses 33.7 5.1 (38.8)
Research, development and engineering 133.5 43.7 (2.7) 174.5
Restructuring and other special charges 16.0 4.6 20.6
-------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 187.9 (68.7) (10.6) 108.6
Gain on investments 6.1 6.1
Interest expense (3.8) (3.8)
Intergroup interest expense (.7) .7
Interest income 2.4 .5 2.9
Intergroup interest income .7 (.7)
Other income (expense), net .5 .5
-------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 192.4 (67.5) (10.6) 114.3
Provision (benefit) for income taxes 30.7 (22.6) (4.0) 4.1
Minority interest 13.3 13.3
-------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations 148.4 (44.9) (6.6) 96.9
-------------------------------------------------------------------------------------------------------------------
Discontinued Operations, Net Of Income Taxes
Loss from discontinued operations (21.1) (21.1)
Gain on disposal of discontinued operations 100.1 100.1
-------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 227.4 $ (44.9) $ (6.6) $ 175.9
===================================================================================================================
</TABLE>
64 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Consolidating Statement of Financial Position At June 30, 1999
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Eliminations/
(Dollar amounts in millions) Group Group Other Consolidated
===================================================================================================================================
<S> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 236.5 $ 71.5 $ - $ 308.0
Note receivable 150.0 150.0
Note receivable from the Applied Biosystems group 150.0 (150.0)
Tax benefit receivable from the Applied Biosystems group 9.9 (9.9)
Accounts receivable, net 306.2 3.3 (2.4) 307.1
Inventories 149.7 149.7
Prepaid expenses and other current assets 75.9 3.5 (.2) 79.2
----------------------------------------------------------------------------------------------------------------------------------
Total current assets 918.3 238.2 (162.5) 994.0
Property, plant and equipment, net 182.2 104.2 (10.6) 275.8
Other long-term assets 247.1 2.3 .1 249.5
----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,347.6 $ 344.7 $ (173.0) $ 1,519.3
===================================================================================================================================
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 3.9 $ - $ - $ 3.9
Note payable to the Celera Genomics group 150.0 (150.0)
Tax benefit payable to the Celera Genomics group 9.9 (9.9)
Accounts payable 147.7 19.8 (2.5) 165.0
Accrued salaries and wages 43.3 4.2 47.5
Accrued taxes on income 132.2 (3.9) 128.3
Other accrued expenses 156.6 21.3 177.9
----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 643.6 45.3 (166.3) 522.6
Long-term debt 31.5 31.5
Other long-term liabilities 138.2 5.5 143.7
----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 813.3 50.8 (166.3) 697.8
----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Applera Corporation--Applied Biosystems stock 1.0 1.0
Applera Corporation--Celera Genomics stock .3 .3
Other stockholders' equity 534.3 293.9 (8.0) 820.2
----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 534.3 293.9 (6.7) 821.5
----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities And Stockholders' Equity $ 1,347.6 $ 344.7 $ (173.0) $ 1,519.3
===================================================================================================================================
</TABLE>
APPLERA CORPORATION Annual Report 2001 | 65
APPLERA CORPORATION | Notes to Consolidated Financial Statements
continued
Consolidating Statement of Cash Flows For the Year Ended June 30, 1999
<TABLE>
<CAPTION>
Applied Celera
Biosystems Genomics Eliminations/
(Dollar amounts in millions) Group Group Other Consolidated
==================================================================================================================================
<S> <C> <C> <C> <C>
Operating Activities From Continuing Operations
Income (loss) from continuing operations $ 148.4 $ (44.9) $ (6.6) $ 96.9
Adjustments to reconcile income (loss) from continuing operations to net
cash provided by operating activities
Depreciation and amortization 44.3 3.8 48.1
Long-term compensation programs 14.7 2.8 17.5
Deferred income taxes (25.5) (25.5)
Gains from sales of assets (6.1) (6.1)
Provision for restructured operations and other merger costs (9.2) (9.2)
Asset impairment 14.5 14.5
Changes in operating assets and liabilities
Increase in tax benefit receivable from the Applied Biosystems group (9.9) 9.9
Increase in accounts receivable (105.0) (2.5) 2.4 (105.1)
Increase in inventories (22.4) (22.4)
Increase in prepaid expenses and other assets (43.3) (3.5) (46.8)
Increase in accounts payable and other liabilities 92.0 31.4 (16.3) 107.1
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Operating Activities 102.4 (22.8) (10.6) 69.0
----------------------------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment, net (82.5) (94.5) 10.6 (166.4)
Acquisitions and investments, net (4.0) (1.3) (5.3)
Proceeds from the sale of assets, net 325.8 325.8
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Investing Activities 239.3 (95.8) 10.6 154.1
----------------------------------------------------------------------------------------------------------------------------------
Net Cash From Continuing Operations Before Financing Activities 341.7 (118.6) 223.1
----------------------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Net cash used by operating activities (16.3) (16.3)
Net cash used by investing activities (27.0) (27.0)
----------------------------------------------------------------------------------------------------------------------------------
Net Cash From Discontinued Operations Before Financing Activities (43.3) (43.3)
----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable (9.6) (9.6)
Principal payments on long-term debt (6.8) (6.8)
Dividends (34.2) (34.2)
Purchases of common stock for treasury (2.2) (2.2)
Proceeds from stock issued for stock plans 94.9 1.5 96.4
Net cash allocated (to) from groups (188.6) 188.6
----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) For Financing Activities (146.5) 190.1 43.6
----------------------------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash 1.7 1.7
----------------------------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents 153.6 71.5 225.1
Cash And Cash Equivalents Beginning Of Year 82.9 82.9
----------------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 236.5 $ 71.5 $ - $ 308.0
==================================================================================================================================
</TABLE>
66 | APPLERA CORPORATION Annual Report 2001
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 generally accepted
accounting principles. In preparing the financial statements, it is necessary
for management to make informed judgments and estimates which it believes are
in accordance with accounting principles generally accepted in the United
States 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,
2001 and 2000, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended June 30, 2001 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
July 26, 2001
APPLERA CORPORATION Annual Report 2001 | 67
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68 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP | Combined Statements of Operations
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 1999 2000 2001
===================================================================================================
<S> <C> <C> <C>
Net Revenues $ 1,221,691 $ 1,388,100 $ 1,619,495
Cost of sales 548,403 637,693 774,475
---------------------------------------------------------------------------------------------------
Gross Margin 673,288 750,407 845,020
---------------------------------------------------------------------------------------------------
Selling, general and administrative 335,873 393,889 380,668
Research, development and engineering 133,525 141,194 184,491
Restructuring and other special charges 15,964 2,142
---------------------------------------------------------------------------------------------------
Operating Income 187,926 213,182 279,861
Gain on investments 6,126 48,603 14,985
Interest expense (4,503) (8,126) (1,296)
Interest income 2,344 18,620 16,767
Other income (expense), net 522 3,446 (5,832)
---------------------------------------------------------------------------------------------------
Income Before Income Taxes 192,415 275,725 304,485
Provision for income taxes 30,688 89,478 92,094
Minority interest 13,362
---------------------------------------------------------------------------------------------------
Income From Continuing Operations 148,365 186,247 212,391
---------------------------------------------------------------------------------------------------
Discontinued Operations, Net Of Income Taxes
Loss from discontinued operations (21,109)
Gain on disposal of discontinued operations 100,167
---------------------------------------------------------------------------------------------------
Net Income $ 227,423 $ 186,247 $ 212,391
===================================================================================================
</TABLE>
See accompanying notes to the Applied Biosystems group's combined financial
statements.
APPLERA CORPORATION Annual Report 2001 | 69
APPLIED BIOSYSTEMS GROUP | Combined Statements of Financial Position
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
At June 30, 2000 2001
================================================================================
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 394,608 $ 392,459
Accounts receivable (net of allowances for
doubtful accounts of $3,965 and $4,740,
respectively) 367,370 382,560
Inventories, net 154,491 140,813
Prepaid expenses and other current assets 81,338 98,124
--------------------------------------------------------------------------------
Total current assets 997,807 1,013,956
Property, plant and equipment, net 230,940 315,356
Other long-term assets 469,409 348,575
--------------------------------------------------------------------------------
Total Assets $ 1,698,156 $ 1,677,887
================================================================================
Liabilities And Allocated Net Worth
Current liabilities
Loans payable $ 15,693 $ 14,678
Current portion of long-term debt 30,480
Tax benefit payable to the Celera Genomics group
(see Note 1) 16,702
Accounts payable 173,631 162,104
Accrued salaries and wages 79,409 49,553
Accrued taxes on income 149,505 82,717
Other accrued expenses 167,718 168,552
--------------------------------------------------------------------------------
Total current liabilities 602,658 508,084
Long-term debt 36,115
Other long-term liabilities 125,019 128,592
--------------------------------------------------------------------------------
Total Liabilities 763,792 636,676
--------------------------------------------------------------------------------
Commitments and contingencies (see Note 10)
Allocated Net Worth 934,364 1,041,211
--------------------------------------------------------------------------------
Total Liabilities And Allocated Net Worth $ 1,698,156 $ 1,677,887
================================================================================
</TABLE>
See accompanying notes to the Applied Biosystems group's combined financial
statements.
70 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP | Combined Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 1999 2000 2001
===================================================================================================================
<S> <C> <C> <C>
Operating Activities From Continuing Operations
Income from continuing operations $ 148,365 $ 186,247 $ 212,391
Adjustments to reconcile income from continuing
operations to net cash provided by
operating activities
Depreciation and amortization 44,309 54,513 66,794
Impairment of goodwill and other intangibles 14,464
Long-term compensation programs 14,680 9,652 4,477
Deferred income taxes (25,533) (19,428) 20,488
Gains from sales of assets (6,126) (56,801) (14,985)
Nonreimbursable utilization of tax benefits
generated by the Celera Genomics group 32,197
Provision for restructured operations and other
merger costs (9,200)
Changes in operating assets and liabilities
Increase in accounts receivable (105,018) (62,186) (42,279)
(Increase) decrease in inventories (22,387) (2,795) 4,231
Increase in prepaid expenses and other assets (43,207) (22,396) (34,327)
Increase (decrease) in accounts payable and other
liabilities 92,052 80,061 (107,315)
-------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 102,399 166,867 141,672
-------------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment
(net of disposals of $9,614, $1,026, and $8,524, respectively) (82,463) (94,449) (143,663)
Acquisitions and investments, net (4,025) (20,748) (5,912)
Proceeds from the sale of assets, net 325,766 82,763 15,498
Proceeds from the collection of notes receivable 150,000
-------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Investing Activities 239,278 117,566 (134,077)
-------------------------------------------------------------------------------------------------------------------
Net Cash From Continuing Operations Before Financing Activities 341,677 284,433 7,595
-------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Net cash used by operating activities (16,297) (15,081) (2,860)
Net cash used by investing activities (26,970)
-------------------------------------------------------------------------------------------------------------------
Net Cash From Discontinued Operations Before Financing Activities (43,267) (15,081) (2,860)
-------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable (9,572) 6,701 1,553
Principal payments on long-term debt (6,843)
Dividends (34,156) (26,358) (35,669)
Purchases of common stock for treasury (2,187)
Proceeds from stock issued for stock plans 94,894 43,434 37,836
Payment of note payable to the Celera Genomics group (150,000)
Net cash allocated (to) from the Celera Genomics group (188,535) 27,283
-------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Financing Activities (146,399) (98,940) 3,720
-------------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash 1,654 (12,334) (10,604)
-------------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents 153,665 158,078 (2,149)
Cash And Cash Equivalents Beginning Of Year 82,865 236,530 394,608
-------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 236,530 $ 394,608 $ 392,459
===================================================================================================================
</TABLE>
See accompanying notes to the Applied Biosystems group's combined financial
statements.
APPLERA CORPORATION Annual Report 2001 | 71
APPLIED BIOSYSTEMS GROUP | Combined Statements of Allocated Net Worth
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive Allocated
(Dollar amounts in thousands) Other Earnings Income (Loss) Net Worth
=========================================================================================================================
<S> <C> <C> <C> <C>
Balance At June 30, 1998 $ 342,903 $ 232,117 $ (9,513) $ 565,507
Comprehensive income
Net income 227,423 227,423
Other comprehensive income:
Foreign currency translation adjustments (5,415)
Minimum pension liability adjustment (1,779)
Unrealized gain on investments, net of tax 11,887
----------
Other comprehensive income 4,693 4,693
-----------
Comprehensive income 232,116
-----------
Cash dividends declared on Applera Corporation stock (25,479) (25,479)
Cash dividends declared on Applera - Applied Biosystems stock (8,677) (8,677)
Issuances under Applera Corporation stock plans 89,550 (14,862) 74,688
Issuances under Applera - Applied Biosystems stock plans 20,157 (1,290) 18,867
Repurchases of Applera - Applied Biosystems stock (2,187) (2,187)
Tax benefit related to employee stock options 15,735 15,735
Stock compensation 1,090 1,207 2,297
Allocated capital to the Celera Genomics group (338,535) (338,535)
-------------------------------------------------------------------------------------------------------------------------
Balance At June 30, 1999 128,713 410,439 (4,820) 534,332
Comprehensive income
Net income 186,247 186,247
Other comprehensive income:
Foreign currency translation adjustments (25,196)
Minimum pension liability adjustment (60)
Unrealized gain on investments, net of tax 155,522
----------
Other comprehensive income 130,266 130,266
-----------
Comprehensive income 316,513
-----------
Cash dividends declared on Applera - Applied Biosystems stock (35,220) (35,220)
Issuances under common stock plans 43,434 43,434
Tax benefit related to employee stock options 44,618 44,618
Stock compensation 5,190 5,190
Net cash allocated from the Celera Genomics group 27,283 27,283
Allocation of investment to the Celera Genomics group (1,786) (1,786)
-------------------------------------------------------------------------------------------------------------------------
Balance At June 30, 2000 247,452 561,466 125,446 934,364
Comprehensive income
Net income 212,391 212,391
Other comprehensive loss:
Foreign currency translation adjustments (33,973)
Unrealized gain on hedge contracts, net of tax 11,158
Minimum pension liability adjustment (35,151)
Unrealized loss on investments, net of tax (113,527)
Reclassification adjustment for realized gains
included in net income (9,741)
----------
Other comprehensive loss (181,234) (181,234)
-----------
Comprehensive income 31,157
-----------
Cash dividends declared on Applera - Applied Biosystems stock (35,786) (35,786)
Issuances under common stock plans 37,835 37,835
Tax benefit related to employee stock options 36,967 36,967
Stock compensation 4,477 4,477
Nonreimbursible utilization of tax benefits
generated by the Celera Genomics group 32,197 32,197
-------------------------------------------------------------------------------------------------------------------------
Balance At June 30, 2001 $ 358,928 $ 738,071 $ (55,788) $ 1,041,211
=========================================================================================================================
</TABLE>
See accompanying notes to the Applied Biosystems group's combined financial
statements.
72 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
Note 1--Accounting Policies And Practices
Basis of Presentation
Applera Corporation ("Applera" or "the Company") is comprised of two separate
business segments: the Applied Biosystems group and the Celera Genomics group.
The Applied Biosystems group is engaged principally in the development,
manufacture, sale, and service of instrument systems and associated consumable
products for life science research 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 name of the Company was changed from PE
Corporation to Applera Corporation and the name of the PE Biosystems group was
changed to the Applied Biosystems group effective November 30, 2000. The
Celera Genomics group is engaged principally in integrating high throughput
technologies to create therapeutic discovery and development capabilities for
internal use and for its customers and collaborators. The Celera Genomics
group recently expanded its focus to include therapeutic discovery and
development.
Celera Diagnostics has been established as a joint venture between the Applied
Biosystems group and the Celera Genomics group during the fourth quarter of
fiscal 2001. This new venture is focused on discovery, development and
commercialization of novel diagnostic tests.
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 separately
the performance of the Applied Biosystems business ("Applied Biosystems
group"), and Applera - Celera stock is intended to reflect separately the
performance of the Celera Genomics business ("Celera Genomics group"). As part
of the recapitalization, each share of common stock of The Perkin-Elmer
Corporation ("predecessor common stock") was converted into one share of
Applera - Applied Biosystems stock and 0.5 of a share of Applera - Celera
stock, prior to giving effect to the stock splits since May 6, 1999.
The combined financial statements of the Applied Biosystems group and the
Celera Genomics group (individually referred to as a "group") comprise all of
the accounts included in the corresponding consolidated financial statements
of the Company. Intergroup transactions between the Applied Biosystems group
and the Celera Genomics group have not been eliminated in the Applied
Biosystems group's combined financial statements but have been eliminated in
the Company's consolidated financial statements. The Applied Biosystems
group's combined financial statements have been prepared on a basis that
management believes to be reasonable and appropriate, and reflect (1) the
financial position, results of operations, and cash flows of businesses that
comprise the Applied Biosystems group, with all significant intragroup
transactions and balances eliminated and (2) all other corporate assets and
liabilities and related transactions of the Company, including allocated
portions of the Company's cash, debt, and selling, general and administrative
costs.
Holders of Applera - Applied Biosystems stock and Applera - Celera stock are
stockholders of the Company. The Applied Biosystems group and the Celera
Genomics group are not separate legal entities. As a result, stockholders are
subject to all of the risks associated with an investment in the Company and all
of its businesses, assets, and liabilities. The issuance of Applera - Applied
Biosystems stock and Applera - Celera stock and the allocations of assets and
liabilities between the Applied Biosystems group and the Celera Genomics group
did not result in a distribution or spin- off of any assets or liabilities of
the Company or otherwise affect ownership of any assets or responsibility for
the liabilities of the Company or any of its subsidiaries. The assets the
Company attributes to one group could be subject to the liabilities of the other
group, whether such liabilities arise from lawsuits, contracts, or indebtedness
attributable to the other group. If the Company is unable to satisfy one group's
liabilities out of assets attributed to it, the Company may be required to
satisfy these liabilities with assets attributed to the other group.
Financial effects arising from one group that affect the Company's consolidated
results of operations or consolidated financial condition could, if significant,
affect the combined results of operations or combined 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.
The management and allocation policies applicable to the preparation of the
combined financial statements of the Applied Biosystems group and the Celera
Genomics group 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 prior approval of the stockholders. 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 the stockholders
as a whole.
The Applied Biosystems group's combined financial statements reflect the
application of management and allocation policies adopted by the Company's
Board of Directors to various corporate activities, as described below. The
Applied Biosystems group's combined financial statements should be read in
conjunction with the Company's consolidated financial statements and
notes thereto.
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
APPLERA CORPORATION Annual Report 2001 | 73
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
repayment of short-term and long-term debt, and the issuance and repayment of
any preferred stock. As the financing activities of the Celera Genomics group
were not significant for any of the periods prior to the recapitalization of
the Company, all historical cash and debt balances for those periods presented
were allocated to the Applied Biosystems group.
The Company's Board of Directors has adopted the following financing policy
that affects the combined financial statements of the Applied Biosystems group
and the Celera Genomics group.
The Company allocates the Company's debt between the Applied Biosystems group
and the Celera Genomics group ("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 group financial statement purposes at a rate
equal to the weighted average interest rate of the debt 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 group financial statement purposes 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 group financial statement purposes
at the 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.
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.
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.
Allocation of Corporate Overhead and Administrative Shared Services
A portion of the Company's corporate overhead (such as executive management,
human resources, legal, accounting, auditing, tax, treasury, strategic
planning, and environmental services) has been allocated to the Applied
Biosystems group based upon identification of such services specifically
benefiting each group. 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 the
Applied Biosystems group. The totals for these allocations were $33.7 million,
$45.9 million, and $42.8 million for fiscal 1999, 2000, and 2001,
respectively. It is not practicable to provide a detailed estimate of the
expenses which would be recognized if the Applied Biosystems group were a
separate legal entity. Management believes that the allocation methods
developed are reasonable and have been consistently applied.
Joint Transactions Between Groups
The groups may from time to time engage in transactions jointly, including
with third parties. Research and development and other services performed by
one group for a joint venture or other collaborative arrangement will be
charged at fair value, as determined by the Company's Board of Directors.
Allocation of Federal and State Income Taxes
The federal income taxes of the Company and its subsidiaries which own assets
allocated between the groups are determined on a consolidated basis using the
asset and liability approach prescribed by SFAS No. 109, "Accounting for
Income Taxes." 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
74 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
negative) to the Company's consolidated federal taxable income, tax liability
and tax credit position.
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 which 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.
During fiscal 2001, the Company formed Celera Diagnostics, a joint venture of
the Applied Biosystems group and the Celera Genomics group (see Note 2). As
part of the formation of the joint venture, the Applied Biosystems group will
reimburse 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, as of June 30, 2001, the
Celera Genomics group generated cumulative tax benefits of $32.2 million 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 in the Applied Biosystems group's Combined 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 will be 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.
The discussion of the Applied Biosystems group's income taxes (see Note 4)
should be read in conjunction with the Company's consolidated financial
statements and notes thereto.
Transfers of Assets Between Groups
Transfers of assets can be made between groups without prior 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.
Dividends
For purposes of the historical (periods prior to the recapitalization)
combined financial statements of the Applied Biosystems group and the Celera
Genomics group, all dividends declared and paid by the Company were allocated
to the Applied Biosystems group.
Principles of Combination
The Applied Biosystems group's combined financial statements have been
prepared in accordance with accounting principles generally accepted in the
U.S. and, taken together with the Celera Genomics group's combined financial
statements, comprise all the accounts included in the corresponding
consolidated financial statements of the Company. Intergroup transactions
between the Applied Biosystems group and the Celera Genomics group have not
been eliminated in the Applied Biosystems group's combined financial
statements but have been eliminated in the Company's consolidated financial
statements. The combined financial statements of each group reflect the
financial condition, results of operations, and cash flows of the businesses
included therein. The combined financial statements of the Applied Biosystems
group include the assets and liabilities of the Company specifically
identified with or allocated to the Applied Biosystems group. Certain amounts
in the combined financial statements and notes have been reclassified to
conform to the current year's presentation.
Use of Estimates
The preparation of the combined financial statements in conformity with
accounting principles generally accepted in the U.S. 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.
Discontinued Operations
The Applied Biosystems group's combined financial statements were restated to
reflect the net assets and operating results of the Analytical Instruments
business as discontinued operations (see Note 14). The operating results are
reflected in the Combined Statements of Operations as loss from discontinued
operations for fiscal 1999. The accompanying notes, except Note 14, relate
only to continuing operations.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," which applies to all business combinations initiated after June
30, 2001. The provisions of this statement require business combinations to be
accounted for using the purchase method of accounting. Also in July 2001, the
FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142, goodwill from acquisitions occurring after June 30, 2001 will not be
amortized, and for goodwill existing prior to June 30, 2001, the Company
expects to adopt the nonamortization provisions of the statement on July 1,
2001. Goodwill for which the nonamortization provisions are applied will be
required to be reviewed for impairment at least on an annual basis. If an
impairment is found to exist, a charge will be taken against operations. SFAS
No. 142 requires that, upon adoption, goodwill and certain intangible assets
be reviewed for classification and useful life. The
APPLERA CORPORATION Annual Report 2001 | 75
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
Applied Biosystems group expects that, aside from the nonamortization of
goodwill on a prospective basis, the effect upon adoption of SFAS No. 142 will
be immaterial.
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 allocated net worth. Foreign currency revenues and expenses are
translated using monthly average exchange rates prevailing during the 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 losses for the fiscal years ended June
30, 1999, 2000, and 2001 were $5.6 million, $.1 million, and $1.3 million,
respectively. The net transaction loss for fiscal year 2001 included the gains
and losses on the revaluation of non-functional currency-denominated net
assets offset by the losses and gains on non-qualified hedges on these
positions. See Note 11 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 and interest
rates. Derivative financial instruments currently utilized by the Company
include foreign currency forward and range forward contracts, foreign currency
options, and an interest rate swap (see Note 11). All of the Company's
derivative financial instruments have been allocated to the Applied Biosystems
group.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments, time deposits, and
certificates of deposit with original maturities of three months or less.
Investments
The equity method of accounting is used for investments in joint ventures that
are 20% to 50% owned and the cost method of accounting is used for investments
that are less than 20% owned. Minority equity investments 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. Trading securities are recorded at fair value with
realized and unrealized gains and losses included in income. During fiscal
2001, $1.4 million of unrealized net losses were included in income.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market. Inventories at June 30, 2000 and 2001 included the following
components:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
================================================================================
<S> <C> <C>
Raw materials and supplies $ 51.2 $ 51.8
Work-in-process 6.3 12.2
Finished products 97.0 76.8
--------------------------------------------------------------------------------
Total inventories $ 154.5 $ 140.8
================================================================================
</TABLE>
Property, Plant and Equipment, and Depreciation
Property, plant and equipment are recorded at cost and consisted of the
following at June 30, 2000 and 2001:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
================================================================================
<S> <C> <C>
Land $ 13.5 $ 67.1
Buildings and leasehold improvements 115.3 143.6
Machinery and equipment 267.8 303.8
--------------------------------------------------------------------------------
Property, plant and equipment, at cost 396.6 514.5
Accumulated depreciation and amortization 165.7 199.1
--------------------------------------------------------------------------------
Property, plant and equipment, net $ 230.9 $ 315.4
================================================================================
</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 when 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 by 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 three years. Depreciation expense for property, plant and
equipment was $38.7 million, $49.1 million, and $53.9 million for the fiscal
years ended June 30, 1999, 2000, and 2001, respectively.
Machinery and equipment, at cost, included capitalized internal-use software
primarily related to the Company's worldwide information technology
infrastructure of $61.8 million and $65.8 million at June 30, 2000 and 2001,
respectively. Net of accumulated amortization, capitalized internal- use
software was $43.5 million and $38.2 million at June 30, 2000 and 2001,
respectively.
76 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
Capitalized Software
Internal software development costs, for software used in the Applied
Biosystems group'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, 2000
and 2001, capitalized software costs, net of accumulated amortization, were
$21.3 million and $27.9 million, respectively. Research and development costs
and other computer software maintenance costs related to software development
are expensed as incurred.
Intangible Assets
The excess of purchase price over the net asset value of companies acquired is
amortized using a straight-line method over periods not exceeding 20 years.
Patents and trademarks are amortized using the straight-line method over their
expected useful lives. At June 30, 2000 and 2001, other long-term assets
included goodwill, net of accumulated amortization, of $15.8 million and $14.0
million, respectively. Accumulated amortization of goodwill was $8.4 million
and $10.1 million at June 30, 2000 and 2001, respectively.
Asset Impairment
The Applied Biosystems group reviews long-lived assets and goodwill for
impairment, in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," whenever
events or circumstances indicate that the carrying amount of an asset may not
be recoverable. The assessment of possible impairment is based on the
Company's ability to recover the carrying value of the asset from the
estimated future undiscounted cash flows, before interest and taxes, of the
related operations. If these cash flows are less than the carrying value of
such asset, an impairment loss is recognized for the difference between
estimated fair value and carrying value. During fiscal 1999, the Applied
Biosystems group recorded a $14.5 million charge to other special charges for
the impairment of assets associated with the Molecular Informatics business
(see Note 2).
Revenues
Revenues are generally recorded at the time of shipment of products or
performance of services. When contractual acceptance clauses exist, revenue is
recognized upon satisfaction of such clauses. Revenues from service contracts
are recorded as deferred service contract revenues and reflected in net
revenues over the term of the contract, generally one year.
Research, Development and Engineering
Research, development and engineering costs are expensed when incurred.
Supplemental Cash Flow Information
Cash paid for interest and income taxes and significant
non-cash investing and financing activities for the following periods were as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
========================================================================================
<S> <C> <C> <C>
Interest $ 3.4 $ .9 $ 1.0
Interest paid to the Celera Genomics group $ .2 $ 6.8
Income taxes $ 30.3 $ 48.2 $ 92.4
Tax benefits paid to the Celera Genomics group $ 12.7 $ 39.1 $ 24.9
Significant non-cash investing and financing activities:
Note payable to the Celera Genomics group $ 150.0
Tax benefit related to employee stock options $ 15.7 $ 44.6 $ 37.0
Dividends declared not paid $ 8.9 $ 9.0
Nonreimbursable utilization of tax benefits
generated by the Celera Genomics group $ 32.2
========================================================================================
</TABLE>
Note 2--Acquisitions, Investments, and Dispositions
Tecan AG
During the fourth quarter of fiscal 1999, the Company divested its interest in
Tecan, a developer and manufacturer of automated sample processors, liquid
handling systems, and microplate photometry, through a public offering in
Switzerland and private sales outside of Switzerland. Net cash proceeds from
the divestiture were $30.0 million. The Company recognized a before-tax gain
of $1.6 million on the divestiture.
Paracel, Inc.
In the fourth quarter of fiscal 2000, the Company issued approximately 1.6
million shares of Applera - Celera stock in exchange for all the outstanding
shares of Paracel common stock not previously owned by the Company. At the
time of the acquisition, the Company owned 14% of Paracel, which was allocated
to the Applied Biosystems group. The transfer of the Paracel shares to the
Celera Genomics 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. The Celera Genomics group recorded the previously owned
investment at the Company's original cost value. The transfer of the original
cost value and the $27.3 million cash payment was recorded as an adjustment to
allocated net worth in the Applied Biosystems group's Combined Statements of
Financial Position and the Celera Genomics group's Combined Statements of
Financial Position.
APPLERA CORPORATION Annual Report 2001 | 77
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
Celera Diagnostics
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. This new venture is focused on discovery, development and
commercialization of novel diagnostic tests. The Company anticipates that
Celera Diagnostics will leverage the instrument and technology expertise of
the Applied Biosystems group with the discovery and informatics expertise of
the Celera Genomics group in order to contribute to the future of diagnostic
medicine.
The Applied Biosystems group has contributed to Celera Diagnostics its
existing molecular diagnostics business. The Celera Genomics group will
provide access to its genome databases and will 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, would be shared equally by
the Celera Genomics group and the Applied Biosystems group. Celera
Diagnostics' profits 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 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 Celera Genomics group and the Applied Biosystems
group. 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.
The Celera Genomics group and the Applied Biosystems group will 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.
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 Applied Biosystems group and the Celera Genomics group
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 Celera Genomics group would be allocated a preference on the
liquidation proceeds in an amount equal to 65 percent of the Celera Genomics
group's funding of initial losses. If liquidation proceeds and the Celera
Genomics group's share of profits generated by Celera Diagnostics exceed 65
percent of the Celera Genomics group's funding of initial losses, the excess
liquidation proceeds would be allocated equally to the Celera Genomics group
and the Applied Biosystems group.
Millennium Pharmaceuticals, Inc.
In fiscal 2000, the Applied Biosystems group recognized a before-tax gain of
$41.0 million from the sale of a portion of the Company's equity interest in
Millennium Pharmaceuticals, Inc. Net cash proceeds from the sale were $48.0
million. During fiscal 1999, the Company recorded a before-tax gain of $1.9
million in connection with the release of previously existing contingencies on
shares of Millennium common stock.
Other Acquisitions
During fiscal years 1999, 2000, and 2001, the Company acquired various equity
interests in companies that were individually insignificant. The total amounts
paid in fiscal years 1999, 2000, and 2001 were $4.0 million, $20.7 million,
and $4.8 million, respectively, for these investments.
Other Dispositions
In fiscal years 1999, 2000, and 2001, the Applied Biosystems group recognized
before-tax gains of $2.6 million, $7.6 million, and $15.0 million,
respectively, from the sale of its equity interest in various companies. Net
cash proceeds from these sales were $7.8 million in fiscal 1999, $10.7 million
in 2000, and $15.5 million in fiscal 2001.
Note 3--Debt And Lines Of Credit
Allocated Debt Activity
Short-term debt and long-term debt at June 30, 2000 and 2001 are summarized as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
================================================================================
<S> <C> <C>
Short-Term Debt
Short-term loans $ 15.7 $ 14.7
Current portion of long-term debt
(yen loan) 30.5
--------------------------------------------------------------------------------
Total short-term debt $ 15.7 $ 45.2
================================================================================
Long-Term Debt
Yen loan $ 36.1 $ -
================================================================================
</TABLE>
The weighted average interest rates at June 30, 2000 and 2001 for short-term
loans payable were .6% and .5%, respectively.
Long-term debt consisted of a 3.8 billion yen variable rate loan that is
scheduled to mature in March 2002. Through an interest rate swap (see Note
11), the effective interest rate for the loan is fixed at 2.1%. There are no
maturities of long-term debt subsequent to 2002.
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, 2000 or 2001.
At June 30, 2001, in addition to the $100 million revolving credit facility,
the Company had $122 million of unused credit facilities for short-term
borrowings from domestic and foreign banks in various currencies. These credit
facilities consist of uncommitted overdraft credit lines that are provided at
the discretion of various local banks. An Applera Corporation guarantee is
usually required if a local unit borrows funds.
78 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
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, 2001.
Note Payable to the Celera Genomics Group
At September 30, 1998, the Company allocated to the Celera Genomics group a
$330 million note payable of the Applied Biosystems group. The $330 million
note represented an allocation of the Company's capital to the Celera Genomics
group and did not result in the Applied Biosystems group holding a residual
interest in the allocated net worth attributed to the Celera Genomics group.
Accordingly, no interest was ascribed to the note. This allocation of capital
represented management's decision to allocate a portion of the Company's
capital to the Celera Genomics group and the remaining capital to the Applied
Biosystems group prior to the effective date of the recapitalization. The
group combined financial statements do not include any residual interests in
the allocated net worth of one group by the other group. The note payable was
liquidated on May 28, 1999 in exchange for a portion of the proceeds received
from the sale of the Analytical Instruments business and a new note payable to
the Celera Genomics group for $150 million. The new note payable, which was
for a term of one year, bearing an interest rate of 5% per annum and payable
on demand without penalty, was paid during fiscal 2000.
Note 4--Income Taxes
Income before income taxes from continuing operations for fiscal 1999, 2000,
and 2001 is summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
====================================================================
<S> <C> <C> <C>
United States $ 36.5 $ 93.1 $ 143.7
Foreign 155.9 182.6 160.8
--------------------------------------------------------------------
Total $ 192.4 $ 275.7 $ 304.5
====================================================================
</TABLE>
The provision for income taxes from continuing operations includes the Applied
Biosystems group's allocated portion of income taxes currently payable and
those deferred because of differences between the financial statement and tax
bases of assets and liabilities. The Applied Biosystems group's provision for
income taxes from continuing operations for fiscal 1999, 2000, and 2001
consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
=============================================================================
<S> <C> <C> <C>
Currently Payable
Domestic $ 6.2 $ 60.3 $ 48.8
Foreign 23.5 48.6 22.8
-----------------------------------------------------------------------------
Total currently payable 29.7 108.9 71.6
-----------------------------------------------------------------------------
Deferred
Domestic (2.5) (7.0) 16.6
Foreign 3.5 (12.4) 3.9
-----------------------------------------------------------------------------
Total deferred 1.0 (19.4) 20.5
-----------------------------------------------------------------------------
Total provision for income
taxes from continuing operations $ 30.7 $ 89.5 $ 92.1
=============================================================================
</TABLE>
Significant components of deferred tax assets and liabilities from continuing
operations at June 30, 2000 and 2001 are summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
================================================================================
<S> <C> <C>
Deferred Tax Assets
Inventories $ 4.0 $ 4.3
Postretirement and
postemployment benefits 31.4 50.7
Other accruals 9.7 9.6
Tax credit and loss carryforwards 136.1 101.8
Capitalized R&D expense 50.4
--------------------------------------------------------------------------------
Subtotal 181.2 216.8
Valuation allowance (37.2) (42.7)
--------------------------------------------------------------------------------
Total deferred tax assets 144.0 174.1
--------------------------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 14.5 13.6
Other accruals 4.9 1.4
Unrealized gains on investments 89.2 29.5
--------------------------------------------------------------------------------
Total deferred tax liabilities 108.6 44.5
--------------------------------------------------------------------------------
Total deferred tax assets, net $ 35.4 $ 129.6
================================================================================
</TABLE>
A reconciliation of the federal statutory tax to the Applied Biosystems
group's continuing tax provision for fiscal 1999, 2000, and 2001 is set forth
in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
=========================================================================================
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
=========================================================================================
Tax at federal statutory rate $ 67.3 $ 96.5 $ 106.6
State income taxes (net of federal benefit) .4 .2 .1
Effect on income taxes from foreign operations (25.0) (6.3) (12.9)
Effect on income taxes from foreign sales corporation (4.8) (7.1) (10.3)
Reorganization, restructuring and other costs 6.5
Nondeductible goodwill 2.1 .3 .4
R&D tax credit (6.0) (.5)
Valuation allowance (13.8) .1 6.7
Long-term compensation 8.7
Recapitalization costs 1.6
Other 2.9 (3.4) 2.0
-----------------------------------------------------------------------------------------
Total provision for income taxes from continuing operations $ 30.7 $ 89.5 $ 92.1
=========================================================================================
</TABLE>
As described in Note 1, the Company presents the income taxes allocated to the
groups under the consolidated return approach in accordance with SFAS No. 109.
If management had utilized the separate return basis of accounting, the tax
provision of the Applied Biosystems group would not have changed.
APPLERA CORPORATION Annual Report 2001 | 79
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
The valuation allowance was increased in fiscal 2001 principally as a result
of foreign tax credits generated by the Company that management believes 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
believes 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. The reduction in the valuation allowance in fiscal 1999,
which was partially offset by an increase due to foreign loss carryforwards,
was caused by management's belief that once the sale of the Analytical
Instruments business was completed, it was more likely than not that the
deferred tax assets to which the valuation allowance related would be
realized.
At June 30, 2001, the Applied Biosystems group's allocated portion of the
Company's worldwide valuation allowance of $42.7 million related to foreign
tax loss carryforwards and domestic tax credit carryforwards.
The Applied Biosystems group has been allocated a consolidated domestic loss
carryforward of $144.4 million and domestic tax credit carryforwards of $38
million that will expire between the fiscal years 2003 and 2021, and loss
carryforwards of approximately $37 million in various foreign countries with
varying expiration dates.
U.S. income taxes were not provided on approximately $406 million of net
unremitted earnings from foreign subsidiaries since the Company either intends
to permanently reinvest substantially all of such earnings outside the U.S.,
or expects the effect of any remittance after considering available tax
credits and amounts previously accrued, not to be significant to the results
of operations. These earnings include income from manufacturing operations in
Singapore, which is tax-exempt through fiscal 2004.
Note 5--Retirement and Other Benefits
Pension Plans, Retiree Healthcare, and Life Insurance Benefits
The Company maintains or sponsors pension plans that cover a portion of all
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. During fiscal 1999, the plan was amended to terminate the accrual
of benefits as of June 30, 2004 and to improve the benefit for participants
who retire between the ages of 55 and 60. The pension plan is not available to
employees hired on or after July 1, 1999.
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.
As the pension and postretirement activity attributable to the Celera Genomics
group was not material for the fiscal year ended June 30, 1999, all pension
and postretirement amounts recognized in the Company's Consolidated Statements
of Financial Position were allocated to the Applied Biosystems group.
The components of net pension and postretirement benefit expenses for fiscal
1999, 2000, and 2001 are set forth in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
=========================================================================
<S> <C> <C> <C>
Pension
Service cost $ 5.2 $ 7.4 $ 7.7
Interest cost 38.7 44.0 48.5
Expected return on plan assets (38.6) (45.6) (50.3)
Amortization of transition asset (1.9) (2.4) (.2)
Amortization of prior service cost (.4) (.4) (.5)
Amortization of losses .5 .2 .1
Curtailments and settlements .1
-------------------------------------------------------------------------
Net periodic expense $ 3.6 $ 3.2 $ 5.3
=========================================================================
Postretirement Benefit
Service cost $ .2 $ .3 $ .2
Interest cost 4.8 4.6 4.8
Amortization of gains (1.5) (1.8) (1.7)
-------------------------------------------------------------------------
Net periodic expense $ 3.5 $ 3.1 $ 3.3
=========================================================================
</TABLE>
80 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP | Notes to Combined 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 recognized in the
Applied Biosystems group's Combined Statements of Financial Position at
June 30, 2000 and 2001:
<TABLE>
<CAPTION>
Pension Postretirement
----------------- -----------------
(Dollar amounts in millions) 2000 2001 2000 2001
==========================================================================================
<S> <C> <C> <C> <C>
Change In Benefit Obligation
Benefit obligation, beginning of year $ 594.1 $ 607.5 $ 62.5 $ 61.9
Service cost 7.4 7.7 .3 .2
Interest cost 44.0 48.5 4.6 4.8
Benefits paid (36.7) (37.1) (5.4) (5.6)
Actuarial (gain) loss 7.9 35.1 (.1) 5.0
Variable annuity unit value change (12.9) (70.5)
Addition of plan 3.9
Foreign currency translation (.2) (1.1)
Other (.8)
------------------------------------------------------------------------------------------
Benefit obligation $ 607.5 $ 589.3 $ 61.9 $ 66.3
==========================================================================================
Change In Plan Assets
Fair value of plan assets,
beginning of year $ 600.6 $ 615.0 $ - $ -
Actual return on plan assets 47.9 (23.5)
Company contributions .8 5.4 5.6
Benefits paid (34.3) (34.7) (5.4) (5.6)
Addition of plan 1.0
Foreign currency translation (.2) (.5)
Other (.1)
------------------------------------------------------------------------------------------
Fair value of plan assets $ 615.0 $ 557.0 $ - $ -
==========================================================================================
Funded Status Reconciliation
Funded status $ 7.5 $ (32.3) $ (61.9) $ (66.3)
Unrecognized prior service gain (2.0) (1.9)
Unrecognized transition asset .9 .9
Unrecognized (gains) losses 29.6 66.6 (21.5) (14.7)
------------------------------------------------------------------------------------------
Net amount recognized $ 36.0 $ 33.3 $ (83.4) $ (81.0)
==========================================================================================
Amounts Recognized
In The Statement Of
Financial Position
Prepaid benefit cost $ 47.4 $ - $ - $ -
Accrued benefit liability (15.4) (24.7) (83.4) (81.0)
Intangible asset .6 .6
Minimum pension liability adjustment 3.4 57.4
------------------------------------------------------------------------------------------
Net amount recognized $ 36.0 $ 33.3 $ (83.4) $ (81.0)
==========================================================================================
</TABLE>
A minimum pension liability adjustment is required when the actuarial present
value of accumulated benefits exceeds plan assets and accrued pension
liabilities. The projected benefit obligation and accumulated benefit
obligation for the pension plans with accumulated benefit obligations in
excess of plan assets were $14.0 million and $12.8 million, respectively, at
June 30, 2000, with no corresponding plan assets. 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 following actuarial assumptions were used for the pension and
postretirement plans:
<TABLE>
<CAPTION>
2000 2001
=============================================================
<S> <C> <C>
Domestic Plans
Discount rate 8% 7 1/2%
Compensation increase 6% 6%
Expected rate of return 8 - 9 1/4% 7 1/2 - 9 1/4%
=============================================================
Foreign Plans
Discount rate 3 - 5 3/4% 3%
Compensation increase 2 - 4% 2%
Expected rate of return 4 - 9% 4%
=============================================================
</TABLE>
As part of the divestiture of the Analytical Instruments business in fiscal
1999, the Company guaranteed the pension benefits for employees of a former
German subsidiary. These benefits were not transferable to the buyer under
German law. The guarantee, which approximated $41.2 million and $35.4 million
at June 30, 2000 and 2001, respectively, is not expected to have a material
adverse effect on the Company's financial position or results of operations.
For measurement purposes, an 11% annual rate of increase in the per capita
cost of covered healthcare benefits was assumed for plan year 2002, 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>
(Dollar amounts in One-Percentage- One-Percentage-
millions) Point Increase Point Decrease
======================================================================
<S> <C> <C>
Effect on the total of service
and interest cost components $ .4 $ ( .4)
Effect on postretirement
benefit obligation $ 5.0 $ (4.8)
======================================================================
</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 allocated to the
Applied Biosystems group were $8.0 million, $10.2 million, and $12.5 million
for fiscal 1999, 2000, and 2001, respectively. The Company recorded expenses
for foreign defined contribution plans of $1.1 million, $1.3
APPLERA CORPORATION Annual Report 2001 | 81
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
million, and $1.8 million in fiscal 1999, 2000, and 2001, 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 6--Segment, Geographic, and Customer Information
Business Segments
The Applied Biosystems group, which operates in one business segment, is
engaged principally in the development, manufacture, sale, and service of
instrument systems and associated consumable products for life science
research 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.
Geographic Areas
Information concerning principal geographical areas for fiscal 1999, 2000, and
2001 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
========================================================================
<S> <C> <C> <C>
Net Revenues From
External Customers
United States $ 596.5 $ 638.3 $ 757.4
Europe 370.1 376.0 419.9
Japan 154.8 213.6 251.2
Other Asian Pacific
countries 56.1 60.8 80.8
Latin America and other 26.9 39.6 46.1
------------------------------------------------------------------------
Combined $ 1,204.4 $ 1,328.3 $ 1,555.4
========================================================================
</TABLE>
Net revenues are attributable to geographic areas based on the region of
destination.
Information concerning long-lived assets at June 30, 2000 and 2001 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
====================================================================
<S> <C> <C>
Long-Lived Assets
United States $ 198.3 $ 283.1
Europe 15.3 17.5
Japan 18.1 14.6
Other Asian Pacific countries 2.1 3.1
Other countries .8 .6
--------------------------------------------------------------------
Combined $ 234.6 $ 318.9
====================================================================
</TABLE>
Long-lived assets exclude goodwill and other intangible
assets.
Customer Information
The Applied Biosystems group has a large and diverse customer base. No single
customer accounted for more than 10% of total net revenues during fiscal 1999,
2000, and 2001.
Note 7--Allocated Net Worth
Applera - Applied Biosystems stock represents a separate class of the
Company's common stock. Additional shares of Applera - Applied Biosystems
stock may be issued from time to time upon exercise of stock options or at the
discretion of the Company's Board of Directors. Transactions in
Applera - Applied Biosystems stock are attributed to the Applied Biosystems
group's allocated net worth and transactions in Applera - Celera stock are
attributed to the Celera Genomics group's allocated net worth.
The Company's authorized capital stock consists 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 has designated 80,000 shares of two series of participating
junior preferred stock in connection with the Company's Stockholder Protection
Rights Agreement. See Note 7 to the Applera Corporation Consolidated Financial
Statements for information regarding the stockholders' equity of the Company.
Common stock repurchases have been made in support of the Company's various
stock plans. During fiscal 1999, 20,000 shares of Applera - Applied Biosystems
stock, before giving effect to the stock splits, were repurchased to support
various stock plans. There were no repurchases of
Applera - Applied Biosystems stock during fiscal 2000 or fiscal 2001.
Note 8--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. Prior to the recapitalization of the
Company, most option grants had a two-year vesting schedule, whereby 50% of
the option grant vested at the end of each year from the date of grant. The
Company's Board of Directors has extended that schedule for most options
granted subsequent to the recapitalization whereby 25% will vest annually,
resulting in 100% vesting after four years. Options generally expire ten years
from the date of grant. At June 30, 2001, 27.6 million shares of Applera -
Applied Biosystems stock were authorized for grant of options. See Note 8 to
the Applera Corporation Consolidated Financial Statements for information
regarding transactions related to the Company's stock option plans and a
summary of options outstanding and exercisable at June 30, 2001.
82 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
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 Plan
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 1999, 2000, and 2001 totaled 98,000 shares, 161,000
shares, and 250,000 shares, respectively. Applera - Celera stock issued under
the employee stock purchase plans during fiscal 1999, 2000, and 2001 totaled
24,000 shares, 303,000 shares, and 269,000 shares, respectively. Common stock
issued under the employee stock purchase plans during fiscal 1999 totaled
168,000 shares of Applera Corporation (predecessor) common stock.
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, 2001, the Company had approximately 335,000 shares
of Applera - Applied Biosystems stock and approximately 84,000 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, which may vary depending on the
estimated achievement of performance goals.
As a result of the recapitalization of the Company, each share of restricted
stock held was redesignated as one share of Applera - Applied Biosystems stock
and 0.5 of a share of Applera - Celera stock prior to giving effect to the
Applera - Applied Biosystems stock splits and the Applera - Celera stock split.
Restricted stock granted to employees and non- employee directors totaled 3,600
shares of Applera - Applied Biosystems stock and 900 shares of Applera - Celera
stock during fiscal 2000 and 255,225 shares of Applera - Applied Biosystems
stock and 63,900 shares of Applera - Celera stock during fiscal 2001. Restricted
stock granted prior to the recapitalization to employees and non-employee
directors during fiscal 1999 totaled 42,900 shares of the Applera Corporation
(predecessor) common stock. Compensation expense of continuing operations
recognized by the Applied Biosystems group for these awards was $2.3 million,
$5.5 million, and $4.8 million for fiscal 1999, 2000, and 2001, respectively.
Unearned compensation included in allocated net worth was $14.0 million at June
30, 2001. There was no unearned compensation included in allocated net worth 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. As of June 30, 2000, three series of
performance units were granted under the plan. Compensation expense recognized
under the plan for fiscal 1999 and 2000 was $13.5 million and $53.1 million,
respectively. Fiscal 1999 and 2000 compensation expense included $9.1 million
and $45.0 million, respectively, 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. No
compensation expense pertaining to the plan was recognized in fiscal 2001.
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.
APPLERA CORPORATION Annual Report 2001 | 83
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
Accounting for Stock-Based Compensation
APB 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 as required by SFAS No. 123, "Accounting for Stock-Based
Compensation," has been determined for employee stock plans under the
statement's fair value method. For purposes of pro forma disclosure, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
Pro forma information for the years ended June 30, 1999, 2000, and 2001 is
presented below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
=========================================================================
<S> <C> <C> <C>
Income from
continuing operations
As reported $ 148.4 $ 186.2 $ 212.4
Pro forma $ 127.9 $ 140.2 $ 115.6
=========================================================================
</TABLE>
Note 8 to the Applera Corporation Consolidated Financial Statements contains
the information regarding the assumptions made in calculating pro forma
compensation expense in accordance with SFAS No. 123.
Note 9--Additional Information
Selected Accounts
The following table provides the major components of selected accounts of the
Combined Statements of Financial Position at June 30, 2000 and 2001:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
===============================================================
<S> <C> <C>
Other Long-Term Assets
Minority equity investments $ 297.7 $ 111.1
Noncurrent deferred tax asset 29.8 121.9
Other 141.9 115.6
---------------------------------------------------------------
Total other long-term assets $ 469.4 $ 348.6
===============================================================
Other Accrued Expenses
Deferred service contract revenues $ 46.7 $ 55.0
Other 121.0 113.6
---------------------------------------------------------------
Total other accrued expenses $ 167.7 $ 168.6
===============================================================
Other Long-Term Liabilities
Accrued postretirement benefits $ 77.9 $ 75.5
Other 47.1 53.1
---------------------------------------------------------------
Total other long-term liabilities $ 125.0 $ 128.6
===============================================================
</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 $256.1 million
and $.1 million, respectively, at June 30, 2000 and $69.9 million and $3.8
million, respectively, at June 30, 2001.
Related-Party Information
Sales of Products and Services Between Groups
A group will sell products or services to the other group 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 1999,
2000, and 2001, net revenues from leased instruments, shipments of consumables
and project materials, and contracted R&D services to the Celera Genomics
group were $17.3 million, $59.8 million, and $64.1 million, respectively.
Access to Technology and Know-How
Each group has free access to all Company technology and know-how (excluding
products and services of the other group) that may be useful in that group'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
groups consult with each other on a regular basis concerning technology issues
that affect both groups. The costs of developing technology remain in the
group responsible for its development.
Institute of Genomic Research ("TIGR")
During fiscal 2001, the Applied Biosystems group recognized revenues of $7.0
million from TIGR, of which $1.8 million was receivable as of June 30, 2001.
The President of the Celera Genomics group is the current Chairman of the
Board of Trustees of TIGR. Also, an immediate family member of the President
of the Celera Genomics group currently serves as TIGR's President and is on
TIGR's Board of Trustees. Additionally, as of June 30, 2001, TIGR owned fully
vested options to purchase approximately 1.4 million shares of Applera -
Celera stock.
Celera Diagnostics Joint Venture
During fiscal 2001, the Applied Biosystems group funded
$.9 million and $.2 million for capital expenditures and working capital
needs, respectively, for the Celera Diagnostics joint venture (see Note 2).
Note 10--Commitments and Contingencies
Future minimum payments at June 30, 2001 under non-cancelable operating leases
for real estate and equipment were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
=============================================
<S> <C>
2002 $ 39.9
2003 31.8
2004 24.3
2005 17.1
2006 12.4
2007 and thereafter 45.6
---------------------------------------------
Total $ 171.1
=============================================
</TABLE>
Rental expense was $34.6 million for fiscal 1999, $35.6 million for fiscal
2000, and $52.7 million for fiscal 2001.
84 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
Amersham
On November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a
patent infringement action against the Company in the United States District
Court for the Northern District of California. The complaint alleges that the
Company is directly, contributorily, or by inducement infringing U.S. Patent
No. 5,688,648 ("the `648 patent"). Amersham asserts that the Company's use and
sale of DNA analysis reagents and systems that incorporate "BigDye"
fluorescence detection technology infringe the `648 patent, and seeks
injunctive and monetary relief. The Company answered the complaint, alleging
that the `648 patent is invalid and unenforceable, and that the Company has
not infringed the `648 patent. In December 2000, the court granted Amersham's
motion for summary judgment in part, finding that certain of the Company's
activities infringe the claims of the `648 patent, but denied Amersham's
motion for summary judgment that the Company induced its customers to infringe
the claims of the `648 patent. On April 6, 2001, the court granted the
Company's motion for summary judgment finding that the Company's recently
introduced BigDye Version 3.0 dye technology does not infringe the `648
patent.
On March 13, 1998, the Company filed a patent infringement action against
Amersham and Molecular Dynamics, Inc. in the United States District Court for
the Northern District of California. The Company asserts that one of its
patents (U.S. Patent No. 4,811,218) is infringed by reason of Molecular
Dynamics' and Amersham's sale of certain DNA analysis systems (e.g., the
MegaBACE 1000 System). In response, Amersham has asserted various affirmative
defenses and several counterclaims, including that the Company is infringing
two patents, U.S. Patent No. 5,091,652 ("the `652 patent") and U.S. Patent No.
5,459,325, each owned by or licensed to Molecular Dynamics, by selling certain
ABI PRISM(TM) DNA sequencing systems. In December 2000, the court granted the
Company's motion for summary judgment of non-infringement of the `652 patent.
The trial date previously scheduled for August 6, 2001 was vacated in July
2001.
On May 21, 1998, Amersham filed a patent infringement action against the
Company in the United States District Court for the Southern District of New
York. The complaint alleges that the Company is infringing, contributing to
the infringement of, and inducing the infringement of U.S. Patent No.
4,707,235 ("the `235 patent") by reason of the Company's sale of certain ABI
PRISM(TM) DNA sequencing systems. The complaint seeks injunctive and monetary
relief. The Company answered the complaint, alleging that the `235 patent is
invalid and that the Company does not infringe the `235 patent. The matters
described in this paragraph and the immediately preceding paragraph have been
consolidated into a single case to be heard in the United States District
Court for the Northern District of California. In December 2000, the court
granted the Company's motion for summary judgment of non-infringement of the
`235 patent. However, on December 18, 2000, Amersham filed a new complaint
alleging that the Company is infringing the `235 patent by reason of the
Company's sale of certain DNA sequencing systems, which allegations were not
in the previous suit under the `235 patent. This action is in the early stages
of discovery.
On May 30, 2000, the Company filed a patent infringement action against
Amersham in the United States District Court for the Northern District of
California. The Company asserts that one of its patents (U.S. Patent No.
5,945,526) is infringed by reason of Amersham's sale of DNA analysis reagents
and systems that incorporate ET Terminator fluorescence detection technology.
The claims construction hearing previously scheduled for June 7, 2001 has been
postponed.
On July 10, 2001, United States Judge Charles R. Breyer stayed all cases in
the litigation described above for the purpose of facilitating court ordered
settlement mediation. The stay is scheduled to expire on March 11, 2002.
The Company believes that the claims asserted by Amersham and Molecular
Dynamics in the foregoing cases are without merit and intends to defend the
cases vigorously. However, the outcome of this or any other litigation is
inherently uncertain, and the Company cannot be sure that it will prevail in
any of these matters. An adverse determination in any of the actions brought
by Amersham could have a material adverse effect on the financial statements
of the Applied Biosystems group and the Company.
Other
The Company has been named as a defendant in several other legal actions,
including patent, commercial, and environmental, arising from the conduct of
normal business activities. Although the amount of any liability that might
arise with respect to any of these matters cannot be accurately predicted, the
resulting liability, if any, will not in the opinion of management have a
material adverse effect on the financial statements of the Applied Biosystems
group or the Company.
The holders of Applera - Applied Biosystems stock are stockholders of the
Company and will continue to be subject to all risks associated with an
investment in the Company, including any legal proceedings and claims
affecting the Celera Genomics group.
Note 11--Financial Instruments
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," amended in June 2000 by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." 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 driven by the intended use of the derivative
and the resulting designation. The Applied Biosystems group adopted these
statements effective July 1, 2000. The cumulative effect of adoption resulted
in an immaterial adjustment to the combined financial statements.
The Company's foreign currency risk management strategy utilizes derivative
instruments to hedge certain foreign
APPLERA CORPORATION Annual Report 2001 | 85
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
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, and an
interest rate swap to manage its interest rate exposure. The Company does not
use derivative financial instruments for trading 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. The fair
value of the interest rate swap is recorded in other long-term liabilities.
Cash Flow Hedges
The Applied Biosystems group's international sales are typically denominated
in the customers' local (non-U.S. dollar) currency. The Applied Biosystems
group uses foreign exchange forward, option, and range forward contracts to
hedge a portion of forecasted international sales not denominated in U.S.
dollars. The Company utilizes hedge accounting on derivative contracts which
are considered highly effective in offsetting the changes in fair value of the
forecasted sales transactions caused by movements in foreign currency exchange
rates. These contracts are designated as cash flow hedges and the effective
portion of the change in the fair value of these contracts is recorded in
other comprehensive income (loss) in the Combined Statements of Financial
Position until the underlying external forecasted transaction affects
earnings. At that time, the gain or loss on the derivative instrument, which
had been deferred in other comprehensive income (loss), is reclassified to net
revenues in the Combined Statements of Operations. During fiscal 2001, the
Applied Biosystems group recognized net gains of $17.8 million in net revenues
from derivative instruments designated as cash flow hedges of anticipated
sales. At June 30, 2001, $17.8 million of derivative gains ($11.2 million net
of deferred taxes) recorded in other comprehensive income (loss) are expected
to be reclassified to earnings during the next twelve months. During the
fourth quarter of fiscal 2001, the Financial Accounting Standards Board'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 Applied Biosystems group 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 Applied Biosystems
group recognized expense of $3.4 million included in other income (expense),
net in the Combined Statements of Operations, which represented the change in
the time value component of the fair value of option contracts designated as
cash flow hedges.
Other Foreign Currency Derivatives
The Applied Biosystems group also uses derivative financial instruments to
hedge against the adverse effects that foreign currency exchange rate
fluctuations may have on its foreign currency-denominated net asset positions.
The gains and losses on these derivatives are expected to largely offset
transaction losses and gains, respectively, on the underlying foreign
currency-denominated assets and liabilities, both of which are recorded in
other income (expense), net in the Combined Statements of Operations.
Interest Rate Risk Management
The Company maintains an interest rate swap in conjunction with a five-year
Japanese yen debt obligation (see Note 3). The interest rate swap involves the
payment of a fixed rate of interest and the receipt of a floating rate of
interest without the exchange of the underlying notional loan principal
amount. Under the terms of this contract, the Company will make fixed interest
payments of 2.1% while receiving interest at a LIBOR floating rate. No other
cash payments will be made unless the contract is terminated prior to
maturity, in which case the amount to be paid or received in settlement will
be established by agreement at the time of termination. The agreed upon amount
would usually represent the net present value at current interest rates of the
remaining obligation to exchange payments under the terms of the contract.
At June 30, 2001, the Company had a liability of $.5 million which represented
the fair value of the interest rate swap. Changes in the fair value of the
interest rate swap are recognized in other comprehensive income. A change in
interest rates would have no impact on the Company's reported interest expense
and related cash payments because the floating rate debt and fixed rate
interest swap have the same maturity and are based on the same interest rate
index.
Concentration of Credit Risk
The forward contracts, options, and swap used by the Company in managing its
foreign currency and interest rate 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 and accounts receivable. The
Company minimizes the risk related to cash and cash equivalents 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.
86 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
Concentration of credit risk with respect to accounts receivable is limited
due to the Applied Biosystems group's large and diverse customer base, which
is dispersed over differing geographic areas. Allowances are maintained for
potential credit losses and such losses have 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. Cash and cash equivalents
approximate their carrying amount. The fair value of minority equity
investments is 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 Applied Biosystems group's significant
financial instruments at June 30, 2000 and 2001:
<TABLE>
<CAPTION>
2000 2001
------------------ ---------------
Carrying Fair Carrying Fair
(Dollar amounts in millions) Amount Value Amount Value
========================================================================
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 394.6 $ 394.6 $ 392.5 $ 392.5
Currency forwards and options $ 3.7 $ 3.0 $ 2.6 $ 20.3
Interest rate swap $ - $ (1.0) $ - $ (.5)
Other investments $ - $ - $ 9.0 $ 9.0
Minority equity investments $ 42.5 $ 297.7 $ 45.0 $ 111.1
Short-term debt $ 15.7 $ 15.7 $ 45.2 $ 45.2
Long-term debt $ 36.1 $ 36.1 $ - $ -
========================================================================
</TABLE>
Net unrealized gains and losses on minority equity investments are reported as
a separate component of accumulated other comprehensive income (loss) as part
of allocated net worth in the Combined Statements of Financial Position.
Note 12--Quarterly Financial Information (Unaudited)
The following is a summary of quarterly financial results:
<TABLE>
<CAPTION>
First Quarter Second Quarter
----------------- -----------------
(Dollar amounts in millions) 2000 2001 2000 2001
==============================================================================
<S> <C> <C> <C> <C>
Net revenues $ 292.3 $ 363.6 $ 335.9 $ 411.0
Gross margin 154.8 193.9 180.7 213.2
Net income 29.7 49.1 43.8 58.0
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Third Quarter Fourth Quarter
----------------- -----------------
(Dollar amounts in millions) 2000 2001 2000 2001
=============================================================================
<S> <C> <C> <C> <C>
Net revenues $ 368.1 $ 439.8 $ 391.8 $ 405.1
Gross margin 202.3 231.2 212.6 206.7
Net income 56.1 57.7 56.6 47.6
=============================================================================
</TABLE>
Events Impacting Comparability
Fiscal 2000 - Second and fourth quarter results included before-tax gains of
$25.8 million and $22.8 million, respectively, in non-recurring gains primarily
related to the sale of a portion of the Company's minority equity investments.
Second and fourth quarter results included before-tax charges of $21.6 million
and $23.4 million, respectively, related to the acceleration of certain
long-term compensation programs. Fourth quarter results included $2.1 million of
acquisition-related before-tax costs and a before-tax gain of $8.2 million from
the sale of real estate. There was no aggregate after-tax effect of the above
items for the second and fourth quarters.
Fiscal 2001 - First and second quarter results 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.
APPLERA CORPORATION Annual Report 2001 | 87
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
Note 13--Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss), net of tax, for fiscal 1999,
2000, and 2001 was as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Foreign Minimum Accumulated
Gain Gain on Currency Pension Other
(Loss) on Hedge Translation Liability Comprehensive
(Dollar amounts in millions) Investments Contracts Adjustments Adjustment Income (Loss)
=====================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ (1.4) $ - $ (7.8) $ (.4) $ (9.6)
Activity 11.9 (5.4) (1.7) 4.8
-----------------------------------------------------------------------------------------------------
Balance at June 30, 1999 10.5 (13.2) (2.1) (4.8)
Activity 155.5 (25.2) (.1) 130.2
-----------------------------------------------------------------------------------------------------
Balance at June 30, 2000 166.0 (38.4) (2.2) 125.4
Activity (123.2) 11.2 (34.0) (35.2) (181.2)
-----------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $ 42.8 $ 11.2 $ (72.4) $ (37.4) $ (55.8)
=====================================================================================================
</TABLE>
Information regarding the income tax effects for items of other comprehensive
income (loss) are as follows:
<TABLE>
<CAPTION>
Before- Tax After-
Tax Benefit Tax
(Dollar amounts in millions) Amount (Expense) Amount
=============================================================================================================
<S> <C> <C> <C>
For the Year Ended
June 30, 2000
Unrealized gains on investments $ 293.3 $ (106.2) $ 187.1
Less: Reclassification adjustments for gains realized
in net income 48.6 (17.0) 31.6
-------------------------------------------------------------------------------------------------------------
Net unrealized gains on investments 244.7 (89.2) 155.5
Foreign currency translation adjustment (25.2) (25.2)
Minimum pension liability adjustment (1.3) 1.2 (.1)
-------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 218.2 $ (88.0) $ 130.2
=============================================================================================================
For the Year Ended
June 30, 2001
Unrealized losses on investments $ (174.7) $ 61.2 $ (113.5)
Less: Reclassification adjustments for gains realized in net income 14.9 (5.2) 9.7
-------------------------------------------------------------------------------------------------------------
Net unrealized losses on investments (189.6) 66.4 (123.2)
Unrealized gains on hedge contracts 35.1 (12.4) 22.7
Less: Reclassification adjustments for gains realized in net income 17.8 (6.3) 11.5
-------------------------------------------------------------------------------------------------------------
Net unrealized gains on hedge contracts 17.3 (6.1) 11.2
Foreign currency translation adjustment (34.0) (34.0)
Minimum pension liability adjustment (54.1) 18.9 (35.2)
-------------------------------------------------------------------------------------------------------------
Other comprehensive loss $ (260.4) $ 79.2 $ (181.2)
=============================================================================================================
</TABLE>
The foreign currency translation adjustments are not currently adjusted for
income taxes as they relate to indefinite investments in non-U.S.
subsidiaries.
Note 14--Discontinued Operations
Effective May 28, 1999, the Company completed the sale of its Analytical
Instruments business to EG&G, Inc. Analytical Instruments, formerly a unit of
the Applied Biosystems group, developed, manufactured, marketed, sold, and
serviced analytical instruments used in a variety of markets.
The aggregate consideration received by the Company was $425 million,
consisting of $275 million in cash and one-year secured promissory notes in
the aggregate principal amount of $150 million bearing an interest rate of 5%
per annum. The promissory notes were collected in fiscal 2000. In fiscal 1999,
the Company recognized a net gain on disposal of discontinued operations of
$100.2 million, net of $87.8 million of income taxes.
Amounts previously reported for Analytical Instruments were reclassified and
stated as discontinued operations. There were no remaining assets,
liabilities, or operations within discontinued operations at or for the fiscal
years ended June 30, 2000 and 2001. Summary results for the eleven months
ended May 28, 1999 prior to discontinuance were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999
=========================================================
<S> <C>
Net revenues $ 479.4
Total costs and expenses 509.7
Provision (benefit) for income taxes (9.2)
---------------------------------------------------------
Income (loss) from discontinued operations $ (21.1)
=========================================================
</TABLE>
88 | APPLERA CORPORATION Annual Report 2001
APPLIED BIOSYSTEMS GROUP | Notes to Combined Financial Statements
continued
Income Taxes
Income (loss) before income taxes of discontinued operations for the eleven
months ended May 28, 1999 consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999
=================================================
<S> <C>
United States $ (36.2)
Foreign 5.9
-------------------------------------------------
Total $ (30.3)
=================================================
</TABLE>
The components of the provision (benefit) for income taxes of discontinued
operations for the eleven months ended May 28, 1999 consisted of the
following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999
========================================================
<S> <C>
Currently Payable
Domestic $ (13.7)
Foreign 4.5
--------------------------------------------------------
Provision (benefit) for income taxes
from discontinued operations $ (9.2)
========================================================
</TABLE>
For the eleven months ended May 28, 1999, the effective tax rate for
discontinued operations was 30%. The difference between the effective tax rate
and the statutory tax rate of 35% was mainly attributed to benefits from the
use of U.S. alternative minimum tax credit carryforwards, benefits from the
use of a foreign sales corporation and federal research tax credits, and
restructuring charges.
APPLERA CORPORATION Annual Report 2001 | 89
APPLIED BIOSYSTEMS GROUP | Report of Management and
Report of Independent Accountants
Report of Management
To the Stockholders of
Applera Corporation
Management is responsible for the accompanying combined financial statements,
which have been prepared in conformity with generally accepted accounting
principles. In preparing the financial statements, it is necessary for
management to make informed judgments and estimates which it believes are in
accordance with accounting principles generally accepted in the United States
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/ Dennis L. Winger
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 combined statements of financial position and
the related combined statements of operations, of allocated net worth, and of
cash flows present fairly, in all material respects, the financial position of
the Applied Biosystems group of Applera Corporation at June 30, 2001 and 2000,
and the results of its operations and its cash flows for each of the three
fiscal years in the period ended June 30, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the management of Applera Corporation;
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 described above and more fully in Note 1 to the Applied Biosystems group's
combined financial statements, the Applied Biosystems group is a group of
Applera Corporation; accordingly, the combined financial statements of the
Applied Biosystems group should be read in conjunction with the audited
financial statements of Applera Corporation.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
July 26, 2001
90 | APPLERA CORPORATION Annual Report 2001
CELERA GENOMICS GROUP | Combined Statements of Operations
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 1999 2000 2001
=======================================================================================
<S> <C> <C> <C>
Net Revenues $ 12,541 $ 42,747 $ 89,385
---------------------------------------------------------------------------------------
Costs And Expenses
Cost of sales 4,699 15,045 42,990
Research and development 43,749 148,620 164,693
Selling, general and administrative 28,255 43,022 58,314
Amortization of goodwill and intangibles 4,166 43,934
Other special charges 4,616 69,069
---------------------------------------------------------------------------------------
Operating Loss (68,778) (168,106) (289,615)
Interest expense (2,115) (829)
Interest income 1,245 27,548 63,581
Other expense, net (839)
Loss from joint venture (4,960)
---------------------------------------------------------------------------------------
Loss Before Income Taxes (67,533) (142,673) (232,662)
Benefit for income taxes 22,639 49,936 46,433
---------------------------------------------------------------------------------------
Net Loss $ (44,894) $ (92,737) $ (186,229)
=======================================================================================
</TABLE>
See accompanying notes to the Celera Genomics group's combined financial
statements.
APPLERA CORPORATION Annual Report 2001 | 91
CELERA GENOMICS GROUP | Combined Statements of Financial Position
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
At June 30, 2000 2001
================================================================================
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 569,894 $ 216,076
Short-term investments 541,140 779,482
Tax benefit receivable from the Applied
Biosystems group (see Note 1) 16,702
Accounts receivable (net of allowances for
doubtful accounts of $2 and $330, respectively) 14,936 24,019
Inventories, net 3,336 6,239
Prepaid expenses and other current assets 2,283 4,838
--------------------------------------------------------------------------------
Total current assets 1,148,291 1,030,654
Property, plant and equipment, net 111,442 123,497
Other long-term assets 153,524 65,985
--------------------------------------------------------------------------------
Total Assets $ 1,413,257 $ 1,220,136
================================================================================
Liabilities And Allocated Net Worth
Current liabilities
Accounts payable $ 21,566 $ 21,024
Accrued salaries and wages 10,251 15,088
Deferred revenues 24,169 37,486
Other accrued expenses 11,266 11,982
--------------------------------------------------------------------------------
Total current liabilities 67,252 85,580
Long-term debt 46,000
Other long-term liabilities 9,189 23,840
--------------------------------------------------------------------------------
Total Liabilities 122,441 109,420
--------------------------------------------------------------------------------
Commitments and contingencies (see Note 10)
Allocated Net Worth 1,290,816 1,110,716
--------------------------------------------------------------------------------
Total Liabilities And Allocated Net Worth $ 1,413,257 $ 1,220,136
================================================================================
</TABLE>
See accompanying notes to the Celera Genomics group's combined financial
statements.
92 | APPLERA CORPORATION Annual Report 2001
CELERA GENOMICS GROUP | Combined Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 1999 2000 2001
===================================================================================================================================
<S> <C> <C> <C>
Operating Activities
Net loss $ (44,894) $ (92,737) $ (186,229)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization 3,757 29,575 65,503
Impairment of goodwill and other intangibles 69,069
Long-term compensation programs 2,802 883 1,605
Loss from joint venture 4,960
Deferred income taxes (6,971) (8,449)
Nonreimbursable utilization of tax benefits by the Applied Biosystems group (32,197)
Changes in operating assets and liabilities
(Increase) decrease in tax benefit receivable from the Applied Biosystems group (9,935) (6,767) 16,702
Increase in accounts receivable (2,520) (11,620) (9,083)
(Increase) decrease in inventories 615 (2,903)
Increase in prepaid expenses and other assets (3,458) (446) (158)
Increase in accounts payable and other liabilities 31,496 29,138 32,629
-----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used By Operating Activities (22,752) (58,330) (48,551)
-----------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Additions to property, plant and equipment
(net of disposals of $-, $1,175, and $5, respectively) (94,541) (29,498) (33,817)
Purchases of short-term investments, net (541,127) (238,115)
Acquisitions and investments, net (1,236) (2,275) (9,573)
-----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (95,777) (572,900) (281,505)
-----------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in debt 46,000 (46,000)
Net proceeds from follow-on stock offering 943,303
Proceeds from stock issued for stock plans 1,485 17,613 22,238
Proceeds from the collection of note receivable from
the Applied Biosystems group 150,000
Net cash allocated (to) from the Applied Biosystems group 188,535 (27,283)
-----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Financing Activities 190,020 1,129,633 (23,762)
-----------------------------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents 71,491 498,403 (353,818)
Cash And Cash Equivalents Beginning Of Year 71,491 569,894
-----------------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 71,491 $ 569,894 $ 216,076
===================================================================================================================================
</TABLE>
See accompanying notes to the Celera Genomics group's combined financial
statements.
APPLERA CORPORATION Annual Report 2001 | 93
CELERA GENOMICS GROUP | Combined Statements of Allocated Net Worth
<TABLE>
<CAPTION>
Accumulated
Other Allocated
Accumulated Comprehensive Net Worth
(Dollar amounts in thousands) Other Deficit Income (Loss) (Deficit)
===================================================================================================================================
<S> <C> <C> <C> <C>
Balance At June 30, 1998 $ 39,892 $ (41,151) $ - $ (1,259)
Net loss (44,894) (44,894)
Issuances under stock plans 1,485 1,485
Net cash allocated from the Applied Biosystems group 8,535 8,535
Allocated capital from the Applied Biosystems group 330,000 330,000
-----------------------------------------------------------------------------------------------------------------------------------
Balance At June 30, 1999 379,912 (86,045) 293,867
Comprehensive loss
Net loss (92,737) (92,737)
Other comprehensive income:
Unrealized gain on investments, net of tax 8
----------
Other comprehensive income 8 8
-----------
Comprehensive loss (92,729)
-----------
Issuances under stock plans 17,613 17,613
Tax benefit related to employee stock options 21,090 21,090
Stock compensation 8,076 8,076
Issuances under follow-on stock offering 943,303 943,303
Purchase business combination 125,093 125,093
Net cash allocated to the Applied Biosystems group (27,283) (27,283)
Allocation of investment from the Applied Biosystems group 1,786 1,786
-----------------------------------------------------------------------------------------------------------------------------------
Balance At June 30, 2000 1,469,590 (178,782) 8 1,290,816
Comprehensive loss
Net loss (186,229) (186,229)
Other comprehensive loss:
Foreign currency translation adjustment (230)
Unrealized gain on investments, net of tax 145
----------
Other comprehensive loss (85) (85)
-----------
Comprehensive loss (186,314)
-----------
Issuances under stock plans 22,238 22,238
Tax benefit related to employee stock options 14,568 14,568
Stock compensation 1,605 1,605
Nonreimbursible utilization of tax benefits by the Applied
Biosystems group (32,197) (32,197)
-----------------------------------------------------------------------------------------------------------------------------------
Balance At June 30, 2001 $ 1,475,804 $ (365,011) $ (77) $ 1,110,716
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the Celera Genomics group's combined financial
statements.
94 | APPLERA CORPORATION Annual Report 2001
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
Note 1--Accounting Policies And Practices
Basis of Presentation
Applera Corporation ("Applera" or "the Company") is comprised of two separate
business segments: the Celera Genomics group and the Applied Biosystems group.
The Celera Genomics group is engaged principally in integrating high
throughput technologies to create therapeutic discovery and development
capabilities for internal use and for its customers and collaborators. The
Celera Genomics group's businesses are its online information business and its
therapeutics discovery business. The online information business is a leading
provider of genomic and related biological and medical information.
Pharmaceutical, biotechnology, and academic customers use this information,
along with customized information technology solutions provided by the Celera
Genomics group, to enhance their capabilities in the fields of life science
research and pharmaceutical and diagnostic discovery and development. The
Celera Genomics group recently expanded its focus to include therapeutic
discovery and development. The Celera Genomics group intends to leverage its
capabilities in genomics, proteomics, and bioinformatics, both in internal
programs and through collaborations, to identify drug targets and diagnostic
markers, and to discover and develop novel therapeutic candidates. Initially,
the Celera Genomics group intends to focus its therapeutic discovery efforts
in the field of oncology. The Applied Biosystems group is engaged principally
in the development, manufacture, sale and service of instrument systems and
associated consumable products for life science research and related
applications. The name of the Company was changed from PE Corporation to
Applera Corporation and the name of the PE Biosystems group was changed to the
Applied Biosystems group effective November 30, 2000.
Celera Diagnostics has been established as a joint venture between the Celera
Genomics group and the Applied Biosystems group during the fourth quarter of
fiscal 2001. This new venture is focused on discovery, development and
commercialization of novel diagnostic tests.
Recapitalization
The recapitalization of the Company on May 6, 1999 resulted in the issuance of
two new classes of common stock called Applera Corporation - Celera Genomics
Group Common Stock ("Applera - Celera stock") and Applera Corporation - Applied
Biosystems Group Common Stock ("Applera - Applied Biosystems stock"). Applera -
Celera stock is intended to reflect separately the performance of the Celera
Genomics business ("Celera Genomics group"), and Applera - Applied Biosystems
stock is intended to reflect separately the performance of the Applied
Biosystems business ("Applied Biosystems group"). As part of the
recapitalization, each share of common stock of The Perkin-Elmer Corporation
("predecessor common stock") was converted into 0.5 of a share of Applera -
Celera stock and one share of Applera - Applied Biosystems stock, prior to
giving effect to the stock splits since May 6, 1999.
The combined financial statements of the Celera Genomics group and the Applied
Biosystems group (individually referred to as a "group") comprise all of the
accounts included in the corresponding consolidated financial statements of
the Company. Intergroup transactions between the Celera Genomics group and the
Applied Biosystems group have not been eliminated in the Celera Genomics
group's combined financial statements but have been eliminated in the
Company's consolidated financial statements. The Celera Genomics group's
combined financial statements have been prepared on a basis that management
believes to be reasonable and appropriate, and reflect (1) the financial
position, results of operations, and cash flows of businesses that comprise
the Celera Genomics group, with all significant intragroup transactions and
balances eliminated and (2) all other corporate assets and liabilities and
related transactions of the Company, including allocated portions of the
Company's cash, debt, and selling, general and administrative costs.
Holders of Applera - Celera stock and Applera - Applied Biosystems stock are
stockholders of the Company. The Celera Genomics group and the Applied
Biosystems group are not separate legal entities. As a result, stockholders
are subject to all the risks associated with an investment in the Company and
all of its businesses, assets, and liabilities. The issuance of Applera -
Celera stock and Applera - Applied Biosystems stock and the allocations of
assets and liabilities between the Celera Genomics group and the Applied
Biosystems group did not result in a distribution or spin-off of any assets or
liabilities of the Company or otherwise affect ownership of any assets or
responsibility for the liabilities of the Company or any of its subsidiaries.
The assets the Company attributes to one group could be subject to the
liabilities of the other group, whether such liabilities arise from lawsuits,
contracts, or indebtedness attributable to the other group. If the Company is
unable to satisfy one group's liabilities out of assets attributed to it, the
Company may be required to satisfy these liabilities with assets attributed to
the other group.
Financial effects arising from one group that affect the Company's
consolidated results of operations or consolidated financial condition could,
if significant, affect the combined results of operations or combined
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
Celera Genomics group or the Applied Biosystems group and dividends or
distributions on, or repurchases of, Applera - Celera stock or Applera - Applied
Biosystems stock or repurchases of preferred stock of the Company will reduce
the assets of the Company legally available for payment of dividends.
The management and allocation policies applicable to the preparation of the
combined financial statements of the Celera Genomics group and the Applied
Biosystems group 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 prior approval of the stockholders. 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 the stockholders
as a whole.
APPLERA CORPORATION Annual Report 2001 | 95
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
The Celera Genomics group's combined financial statements reflect the
application of management and allocation policies adopted by the Company's
Board of Directors to various corporate activities, as described below. The
Celera Genomics group's combined financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto.
Financing Activities
As a matter of policy, the Company manages most financing activities of the
Celera Genomics group and the Applied Biosystems group on a centralized basis.
These activities include the investment of surplus cash, the issuance and
repayment of short-term and long-term debt, and the issuance and repayment of
any preferred stock. As the financing activities of the Celera Genomics group
were not significant for any of the periods prior to the recapitalization of
the Company, all historical cash and debt balances for those periods presented
were allocated to the Applied Biosystems group.
The Company's Board of Directors has adopted the following financing policy
that affects the combined financial statements of the Celera Genomics group
and the Applied Biosystems group.
The Company allocates the Company's debt between the Celera Genomics group and
the Applied Biosystems group ("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 group financial statement purposes at a rate
equal to the weighted average interest rate of the debt 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 group financial statement purposes 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 group financial statement purposes
at the 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.
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.
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
Genomics 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.
Allocation of Corporate Overhead and Administrative Shared Services
A portion of the Company's corporate overhead (such as executive management,
human resources, legal, accounting, auditing, tax, treasury, strategic
planning, and environmental services) has been allocated to the Celera
Genomics group based upon identification of such services specifically
benefiting each group. 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 the
Celera Genomics group. The totals for these allocations were $5.1 million,
$7.5 million, and $9.3 million for fiscal 1999, 2000, and 2001, respectively.
It is not practicable to provide a detailed estimate of the expenses which
would be recognized if the Celera Genomics group were a separate legal entity.
Management believes that the allocation methods developed are reasonable and
have been consistently applied.
96 | APPLERA CORPORATION Annual Report 2001
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
Joint Transactions Between Groups
The groups may from time to time engage in transactions jointly, including
with third parties. Research and development and other services performed by
one group for a joint venture or other collaborative arrangement will be
charged at fair value, as determined by the Company's Board of Directors.
Allocation of Federal and State Income Taxes
The federal income taxes of the Company and its subsidiaries which own assets
allocated between the groups are determined on a consolidated basis using the
asset and liability approach prescribed by SFAS No. 109, "Accounting for
Income Taxes." 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.
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 which 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.
During fiscal 2001, the Company formed Celera Diagnostics, a joint venture of
the Celera Genomics group and the Applied Biosystems group (see Note 2). As
part of the formation of the joint venture, the Applied Biosystems group will
reimburse 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, as of June 30, 2001, the
Celera Genomics group generated cumulative tax benefits of $32.2 million 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 in the Celera Genomics group's Combined 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 will be 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.
The discussion of the Celera Genomics group's income taxes (see Note 4) should
be read in conjunction with the Company's consolidated financial statements
and notes thereto.
Transfers of Assets Between Groups
Transfers of assets can be made between groups without prior 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.
Dividends
For purposes of the historical (periods prior to the recapitalization)
combined financial statements of the Celera Genomics group and the Applied
Biosystems group, all dividends declared and paid by the Company were
allocated to the Applied Biosystems group.
Principles of Combination
The Celera Genomics group's combined financial statements have been prepared
in accordance with accounting principles generally accepted in the U.S. and,
taken together with the Applied Biosystems group's combined financial
statements, comprise all the accounts included in the corresponding
consolidated financial statements of the Company. Intergroup transactions
between the Celera Genomics group and the Applied Biosystems group have not
been eliminated in the Celera Genomics group's combined financial statements
but have been eliminated in the Company's consolidated financial statements.
The combined financial statements of each group reflect the financial
condition, results of operations, and cash flows of the businesses included
therein. The combined financial statements of the Celera Genomics group
include the assets and liabilities of the Company specifically identified with
or allocated to the Celera Genomics group. Certain amounts in the combined
financial statements and notes have been reclassified to conform to the
current year's presentation.
Use of Estimates
The preparation of the combined financial statements in conformity with
accounting principles generally accepted in the U.S. 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.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," which applies to all business combinations initiated after June
30, 2001. The provisions of this statement require business combinations to be
accounted for using the purchase method of accounting. Also in July 2001, the
FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142, goodwill from acquisitions occurring after June 30, 2001 will not be
amortized, and for goodwill existing prior to June 30, 2001, the Company
expects to adopt the
APPLERA CORPORATION Annual Report 2001 | 97
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
nonamortization provisions of the statement on July 1, 2001. Goodwill for
which the nonamortization provisions are applied will be required to be
reviewed for impairment at least on an annual basis. If an impairment is found
to exist, a charge will be taken against operations. SFAS No. 142 requires
that, upon adoption, goodwill and certain intangible assets be reviewed for
classification and useful life. The Celera Genomics group expects that, aside
from the nonamortization of goodwill on a prospective basis, the effect upon
adoption of SFAS No. 142 will be immaterial.
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.
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 allocated net worth, 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, 2000 and 2001 was as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
==============================================================
<S> <C> <C>
Certificates of deposit $ 107.3 $ 151.5
Commercial paper 364.5 141.4
U.S. government notes and bonds 49.2 194.8
Corporate bonds 20.1 109.2
Asset backed securities 113.0
Foreign debt 69.6
--------------------------------------------------------------
Total short-term investments $ 541.1 $ 779.5
==============================================================
</TABLE>
Gross unrealized gains and losses on short-term investments were immaterial at
June 30, 2000 and 2001. Realized gains and losses were less than $.1 million
for both fiscal 2000 and 2001.
Investments
The Celera Genomics group's allocated investments in Shanghai GeneCore
BioTechnologies Co., Ltd., Agrogene S.A., HuBit Genomix, Inc., and the Celera
Diagnostics joint venture are accounted for under the equity method of
accounting.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market. Inventories at June 30, 2000 and 2001 included the following
components:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
===============================================================
<S> <C> <C>
Raw materials and supplies $ 1.9 $ 4.9
Work-in-process .6
Finished products 1.4 .7
---------------------------------------------------------------
Total inventories $ 3.3 $ 6.2
===============================================================
</TABLE>
Property, Plant and Equipment, and Depreciation
Property, plant and equipment are recorded at cost and consisted of the
following at June 30, 2000 and 2001:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
================================================================================
<S> <C> <C>
Land $ 10.0 $ 10.0
Buildings and leasehold improvements 69.8 76.9
Machinery and equipment 54.6 79.6
--------------------------------------------------------------------------------
Property, plant and equipment, at cost 134.4 166.5
Accumulated depreciation and amortization 23.0 43.0
--------------------------------------------------------------------------------
Property, plant and equipment, net $ 111.4 $ 123.5
================================================================================
</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 when 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 by 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 three years. Depreciation expense for property, plant and
equipment was $3.8 million, $15.7 million, and $21.8 million for the fiscal
years ended June 30, 1999, 2000, and 2001, respectively.
Machinery and equipment, at cost, included $13.4 million and $17.1 million of
software licenses at June 30, 2000 and 2001, respectively. At June 30, 2001,
machinery and equipment also included capitalized internal-use software of
$7.1 million, net of accumulated amortization of $1.4 million.
Intangible Assets
The excess of purchase price over the net asset value of companies acquired is
amortized using a straight-line method over periods not exceeding 3 years.
Other intangible assets, which included patents and purchased technology
rights, are amortized using the straight-line method over their expected
useful lives, not to exceed 15 years.
At June 30, 2000 and 2001, other long-term assets included goodwill, net of
accumulated amortization, of $112.9 million and $10.4 million, respectively.
Accumulated amortization of goodwill was $3.3 million and $42.1 million at
June 30, 2000 and 2001, respectively.
98 | APPLERA CORPORATION Annual Report 2001
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
At June 30, 2000 and 2001, other long-term assets included other intangible
assets, net of accumulated amortization, of $14.5 million and $4.4 million,
respectively. Accumulated amortization was $.9 million and $5.7 million at
June 30, 2000 and 2001, respectively.
Asset Impairment
The Celera Genomics group reviews long-lived assets and goodwill for
impairment, in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," whenever
events or circumstances indicate that the carrying amount of an asset may not
be recoverable. The assessment of possible impairment is based on the
Company's ability to recover the carrying value of the asset from the
estimated future undiscounted cash flows, before interest and taxes, of the
related operations. If these cash flows are less than the carrying value of
such asset, an impairment loss is recognized for the difference between
estimated fair value and carrying value. During fiscal 2001, the Celera
Genomics group recorded a $69.1 million charge to other special charges for
the impairment of assets associated with the Paracel business (see Note 2).
Revenues
Subscription fees for access to the Company's on-line information databases
are recognized ratably over the contracted period in accordance with the
provisions of the contract. Contract research service revenues are earned and
recognized in accordance with contract provisions. Revenue may be recognized
on a percentage of completion basis, as contract research costs are incurred,
or may be contingent upon the achievement of certain milestones. Amounts
received in advance of performance or acceptance are recorded as deferred
revenue. Revenues derived from equipment sales are generally recorded at the
time of shipment.
Research and Development
Costs incurred for internal, contract, and grant-sponsored research and
development are expensed when incurred.
Supplemental Cash Flow Information
Cash paid for interest and income taxes and significant non-cash investing and
financing activities for the following periods were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
========================================================================================
<S> <C> <C> <C>
Interest $ 2.1 $ .8
Income taxes $ 1.1 $ 2.8
Significant non-cash investing and financing activities:
Capital expenditures liability $ 8.9
Note receivable from the Applied Biosystems group $ 150.0
Equity instruments issued in Paracel acquisition $ 125.1
Tax benefit related to employee stock options $ 21.1 $ 14.6
Nonreimbursable utilization of tax benefits by the
Applied Biosystems group $ 32.2
========================================================================================
</TABLE>
Note 2--Acquisitions and Investments
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. Its products include a hardware accelerator for
sequence comparison, a hardware accelerator for text search, and sequence
analysis software tools.
The Company issued approximately 1.6 million shares
of Applera - Celera stock in exchange for all the outstanding shares of
Paracel common stock not previously owned by the Company. At the time of the
acquisition, the Company owned 14% of Paracel, which was allocated to the
Applied Biosystems group. The transfer of the Paracel shares to the Celera
Genomics 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. The Celera Genomics group recorded the previously owned
investment at the Company's original cost value. The transfer of the original
cost value and the $27.3 million cash payment were recorded as an adjustment
to allocated net worth in the Celera Genomics group's Combined Statements of
Financial Position and the Applied Biosystems group's Combined Statements of
Financial Position.
The acquisition of the shares of Paracel not previously owned by the Company
was valued at $125.6 million and was accounted for under the purchase method
of accounting. In connection with the acquisition, $115.2 million was
allocated to goodwill, including $5.3 million of deferred taxes, and $13.6
million was allocated to other intangible assets. The goodwill and the other
intangible assets were being amortized on a straight-line method over 3 years.
APPLERA CORPORATION Annual Report 2001 | 99
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
The net assets and results of operations of Paracel were included in the
Celera Genomics group's combined financial statements from the date of
acquisition. The following selected unaudited pro forma information for the
Celera Genomics group assumes the acquisition had occurred at the beginning of
fiscal 1999 and fiscal 2000, and gives effect to purchase accounting
adjustments:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
===========================================================
<S> <C> <C>
Net revenues $ 22.7 $ 51.1
Net loss $ (90.4) $ (140.5)
===========================================================
</TABLE>
The 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 1999 or at the beginning of fiscal
2000 or of the future operations of the combined companies.
In fiscal 2001, the Company recorded a $69.1 million charge, before taxes, to
other special charges for the impairment of goodwill and other intangibles
associated with Paracel. 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 intangibles.
Celera Diagnostics
During the fourth quarter of fiscal 2001, Celera Diagnostics was established
as a joint venture between the Celera Genomics group and the Applied
Biosystems group. This new venture is focused on discovery, development and
commercialization of novel diagnostic tests. The Company anticipates that
Celera Diagnostics will leverage the discovery and informatics expertise of
the Celera Genomics group with the instrument and technology expertise of the
Applied Biosystems group in order to contribute to the future of diagnostic
medicine.
The Applied Biosystems group has contributed to Celera Diagnostics its
existing molecular diagnostics business. The Celera Genomics group will
provide access to its genome databases and will 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, would be shared equally by
the Celera Genomics group and the Applied Biosystems group. Celera
Diagnostics' profits 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 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 Celera Genomics group and the Applied Biosystems
group. 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.
The Celera Genomics group and the Applied Biosystems group will 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.
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 Applied Biosystems group and the Celera Genomics group
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 Celera Genomics group would be allocated a preference on the
liquidation proceeds in an amount equal to 65 percent of the Celera Genomics
group's funding of initial losses. If liquidation proceeds and the Celera
Genomics group's share of profits generated by Celera Diagnostics exceed 65
percent of the Celera Genomics group's funding of initial losses, the excess
liquidation proceeds would be allocated equally to the Celera Genomics group
and the Applied Biosystems group.
Other Acquisitions
During fiscal years 1999, 2000, and 2001, the Company acquired various equity
interests in companies that were individually insignificant. The total amounts
paid in fiscal years 1999, 2000, and 2001 were $1.3 million, $3.1 million, and
$4.1 million, respectively, for these investments.
Pending Acquisition
Axys Pharmaceuticals, Inc.
In June 2001, the Company signed a definitive merger agreement to acquire Axys
Pharmaceuticals, Inc. ("Axys") in a stock-for-stock transaction. Axys is an
integrated small molecule drug discovery and development company that is
developing products for chronic therapeutic applications through
collaborations with pharmaceutical companies and has a proprietary product
portfolio in oncology.
The transaction, which is subject to customary closing conditions, including
approval by Axys stockholders and regulatory approvals, has been structured as a
tax-free reorganization and will be accounted for under the purchase method.
Under the terms of the merger agreement, Axys shareholders will receive shares
of Applera - Celera stock per Axys share based on an exchange ratio which is
calculated based on the average closing price of Applera - Celera stock over the
10 trading days immediately preceding (but excluding) the second trading day
prior to the closing of the merger. If the closing had occurred at the time the
merger agreement was signed, each share of Axys common stock would have been
exchanged for a fractional share of Applera - Celera stock having an average
closing price during the calculation period equivalent to $4.65 per share of
Axys common stock. Depending on the average closing price of Applera - Celera
stock at the time of the closing of the merger, the Company will issue between
3.3 million shares and 5.4 million shares of Applera - Celera stock.
100 | APPLERA CORPORATION Annual Report 2001
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
Note 3--Debt And Lines Of Credit
Allocated Debt Activity
Long-term debt at June 30, 2000 consisted of $46.0 million of commercial paper
with an average interest rate of 6.84%. These borrowings were classified as
noncurrent at June 30, 2000 because it was the Company's intent to refinance
these obligations on a long-term basis. However, the Company repaid this debt
during the second quarter of fiscal 2001.
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, 2000 or 2001.
At June 30, 2001, in addition to the $100 million revolving credit facility,
the Company had $122 million of unused credit facilities for short-term
borrowings from domestic and foreign banks in various currencies. These credit
facilities consist of uncommitted overdraft credit lines that are provided at
the discretion of various local banks. An Applera Corporation guarantee is
usually required if a local unit borrows funds.
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, 2001.
Note 4--Income Taxes
Loss before income taxes for fiscal 1999, 2000, and 2001 primarily relates to
operations in the United States.
The benefit for income taxes includes the Celera Genomics group's allocated
portion of income taxes currently payable and those deferred because of
differences between the financial statement and tax bases of assets and
liabilities. The Celera Genomics group's benefit for income taxes for fiscal
1999, 2000, and 2001 consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
============================================================================
<S> <C> <C> <C>
Currently receivable $ 22.6 $ 42.9 $ 41.9
Deferred 7.0 4.5
----------------------------------------------------------------------------
Total benefit for income taxes $ 22.6 $ 49.9 $ 46.4
============================================================================
</TABLE>
Significant components of deferred tax assets and liabilities at June 30, 2000
and 2001 are summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
============================================================================
<S> <C> <C>
Deferred Tax Assets
Accruals $ 2.2 $ 3.0
Tax credit and loss carryforwards 26.5 32.2
Research and development expense 16.8
----------------------------------------------------------------------------
Subtotal 28.7 52.0
Valuation allowance (2.8)
----------------------------------------------------------------------------
Total deferred tax assets 28.7 49.2
----------------------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 1.3 2.4
Intangibles 4.6 1.1
----------------------------------------------------------------------------
Total deferred tax liabilities 5.9 3.5
----------------------------------------------------------------------------
Total deferred tax assets, net $ 22.8 $ 45.7
----------------------------------------------------------------------------
</TABLE>
A reconciliation of the federal statutory tax to the Celera Genomics group's
benefit for income taxes for fiscal 1999, 2000, and 2001 is set forth in the
following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
============================================================================
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
============================================================================
Tax at federal statutory rate $ (23.6) $ (49.9) $ (81.4)
State income taxes (net of
federal benefit) .2 .2
Reorganization, restructuring
and other costs 1.4
Nondeductible goodwill .2 34.9
R&D tax credit (5.4) (2.9)
Valuation allowance 2.8
Recapitalization costs 1.6
Other (.6) 3.6
----------------------------------------------------------------------------
Total benefit from income taxes $ (22.6) $ (49.9) $ (46.4)
============================================================================
</TABLE>
As described in Note 1, the Company presents the income taxes allocated to the
groups under the consolidated return approach in accordance with SFAS No. 109.
If management had utilized the separate return basis of accounting, management
would have determined that it was more likely than not a significant valuation
allowance would have been required for the Celera Genomics group's tax
benefits associated with losses and credits. The following pro forma
presentation indicates the results of the Celera Genomics group had the
separate return basis of accounting been applied.
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
----------------------------------------------------------------------------
<S> <C> <C> <C>
Loss before income taxes $ (67.5) $ (142.7) $ (232.7)
Provision for income taxes .2 2.8 3.0
----------------------------------------------------------------------------
Net loss $ (67.7) $ (145.5) $ (235.7)
----------------------------------------------------------------------------
</TABLE>
APPLERA CORPORATION Annual Report 2001 | 101
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
At June 30, 2001, the Celera Genomics group was allocated a valuation
allowance of $2.8 million related to domestic tax credit carryforwards.
The Celera Genomics group was allocated a consolidated domestic loss
carryforward of $57 million and domestic credit carryforward of $12 million,
which will expire between the fiscal years 2005 and 2021.
Note 5--Retirement and Other Benefits
Pension Plan
The Company maintains or sponsors a pension plan that covers certain employees
of the Celera Genomics group. Pension benefits earned are generally based on
years of service and compensation during active employment. Pension plan
assets are administered by a trustee and are principally invested in equity
and fixed-income securities. The funding of the pension plan is determined in
accordance with statutory funding requirements.
The Company's domestic pension plan covers a substantial portion of U.S.
employees. During fiscal 1999, the plan was amended to terminate the accrual
of benefits as of June 30, 2004 and to improve the benefit for participants
who retire between the ages of 55 and 60. The pension plan is not available to
employees hired on or after July 1, 1999.
Pension expense, consisting primarily of service cost allocated to the Celera
Genomics group, was less than $.1 million for fiscal 1999 and $.3 million for
both fiscal 2000 and 2001.
Retiree Healthcare and Life Insurance Benefits
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
postretirement benefit expense allocated to the Celera Genomics group was not
material for fiscal 1999, 2000, and 2001. Amounts allocated to the Celera
Genomics group were less than $.1 million for all periods presented.
Savings Plan
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 allocated to the Celera
Genomics group were $.5 million, $1.9 million, and $3.8 million for fiscal
1999, 2000, and 2001, 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 6--Segment, Geographic, and Customer Information
Business Segments
The Celera Genomics group, which operates in one business segment, is engaged
principally in integrating high throughput technologies to create therapeutic
discovery and development capabilities for internal use and for its customers
and collaborators. The Celera Genomics group's businesses are its online
information business and its therapeutics discovery business. The online
information business is a leading provider of genomic and related biological
and medical information. Pharmaceutical, biotechnology, and academic customers
use this information, along with customized information technology solutions
provided by the Celera Genomics group, to enhance their capabilities in the
fields of life science research and pharmaceutical and diagnostic discovery
and development. The Celera Genomics group recently expanded its focus to
include therapeutic discovery and development. The Celera Genomics group
intends to leverage its capabilities in genomics, proteomics, and
bioinformatics, both in internal programs and through collaborations, to
identify drug targets and diagnostic markers, and to discover and develop
novel therapeutic candidates. Initially, the Celera Genomics group intends to
focus its therapeutic discovery efforts in the field of oncology.
Geographic Areas
Information concerning principal geographic areas for fiscal 2001 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2001
====================================================
<S> <C>
Net Revenues From
External Customers
United States $ 62.0
Europe 16.6
Other 10.1
---------------------------------------------------
Combined $ 88.7
====================================================
</TABLE>
Revenues prior to fiscal 2001 were attributable to the United States. Net
revenues are attributable to geographic areas based on the region of
destination. Long-lived assets are located in the United States.
Customer Information
The Celera Genomics group has a small number of customers and derives a
substantial portion of its revenues from fees paid by multinational
pharmaceutical companies and larger biotechnology companies. During fiscal
1999, one customer accounted for approximately 24% of the Celera Genomics
group's net revenues. During fiscal 2000, five customers that were
individually greater than 10% of net revenues accounted for approximately 70%
of the Celera
102 | APPLERA CORPORATION Annual Report 2001
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
Genomics group's net revenues in the aggregate. During fiscal 2001, one
customer accounted for approximately 10% of the Celera Genomics group's net
revenues.
Note 7--Allocated Net Worth
Applera - Celera stock represents a separate class of the Company's common
stock. Additional shares of Applera - Celera stock may be issued from time to
time upon exercise of stock options or at the discretion of the Company's Board
of Directors. Transactions in Applera - Celera stock are attributed to the
Celera Genomics group's allocated net worth and transactions in Applera -
Applied Biosystems stock are attributed to the Applied Biosystems group's
allocated net worth. There were no repurchases of Applera - Celera stock for
fiscal 1999, fiscal 2000, and fiscal 2001.
The Company's authorized capital stock consists of 225 million shares of a
class of common stock designated as Applera Corporation - Celera Genomics
Group Common Stock, one billion shares of a class of common stock designated
as Applera Corporation - Applied Biosystems Group Common Stock, and 10 million
shares of preferred stock. Of the 10 million authorized shares of preferred
stock, the Company has designated 80,000 shares of two series of participating
junior preferred stock in connection with the Company's Stockholder Protection
Rights Agreement. See Note 7 to the Applera Corporation Consolidated Financial
Statements for information regarding the stockholders' equity of the Company.
In March 2000, the Company completed a follow-on public offering of Applera -
Celera stock. In this offering, 4.4 million shares of Applera - Celera stock
were sold, resulting in net proceeds of $943.3 million.
Note Receivable from the Applied Biosystems group
The initial capitalization of the Celera Genomics group included a $330
million short-term note receivable from the Applied Biosystems group
established at September 30, 1998. The $330 million note represented an
allocation of the Company's capital to the Celera Genomics group and did not
result in the Applied Biosystems group holding a residual interest in the
allocated net worth attributed to the Celera Genomics group. Accordingly, no
interest was ascribed to the note. This allocation of capital represented
management's decision to allocate a portion of the Company's capital to the
Celera Genomics group and the remaining capital to the Applied Biosystems
group prior to the effective date of the recapitalization. The group combined
financial statements do not include any residual interests in the allocated
net worth of one group by the other group. The note receivable was liquidated
on May 28, 1999 in exchange for a portion of the proceeds received from the
sale of the Analytical Instruments business and a new note receivable from the
Applied Biosystems group for $150 million. The new note receivable, which was
for a term of one year, bearing an interest rate of 5% per annum and payable
on demand without penalty, was paid during fiscal 2000.
Tax Benefit Receivable from the Applied Biosystems group
The Applied Biosystems group reimbursed the Celera Genomics group for tax
benefits generated, which were utilized on a consolidated basis. These
reimbursements were intended to provide additional cash resources to the
Celera Genomics group up to a maximum of $75 million, excluding tax benefits
generated by Celera Diagnostics. As of June 30, 2001, the Celera Genomics
group had generated cumulative tax benefits of $32.2 million 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 in the
Celera Genomics group's Combined Statements of Financial Position. The tax
benefit receivable of $16.7 million at June 30, 2000 was reimbursed to the
Celera Genomics group in fiscal 2001.
Third-Party Equity Transaction
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 for Genomic Research ("TIGR") and entered into a one-year non-
compete agreement with such party. The fair value of such option 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 model
using a volatility assumption of 40%, an expected option life assumption of
two years, and a risk-free interest rate of 5.75%. See Note 9 for further
discussions of transactions with TIGR.
Note 8--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. Prior to the recapitalization of the
Company, most option grants had a two-year vesting schedule, whereby 50% of
the option grant vested at the end of each year from the date of grant. The
Company's Board of Directors has extended that schedule for most options
granted subsequent to the recapitalization whereby 25% will vest annually,
resulting in 100% vesting after four years. Options generally expire ten years
from the date of grant. At June 30, 2001, 14.2 million shares of Applera -
Celera stock were authorized for grant of options. See Note 8 to the Applera
Corporation Consolidated Financial Statements for information regarding
transactions related to the Company's stock option plans and a summary of
options outstanding and exercisable at June 30, 2001.
1999 Stock Incentive Plans
The Applera Corporation/Celera Genomics Group 1999 Stock Incentive Plan (the
"Applera - Celera Group Plan") and the Applera Corporation/Applied Biosystems
Group 1999 Stock Incentive Plan (the "Applera - Applied Biosystems Group
Plan") were first approved in April 1999.
APPLERA CORPORATION Annual Report 2001 | 103
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
The Applera - Celera Group Plan authorizes grants of stock options, stock
awards, and performance shares with respect to Applera - Celera stock. The
Applera - Applied Biosystems Group Plan authorizes grants of stock options,
stock awards, and performance shares with respect to Applera - Applied
Biosystems stock. Directors, certain officers, and key employees with
responsibilities involving both 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 Plan
The Company's employee stock purchase plans offer U.S. and certain non-U.S.
employees the right to purchase shares of Applera - Celera stock and/or
Applera - Applied Biosystems 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 - Celera stock issued under the employee stock purchase plans during
fiscal 1999, 2000, and 2001 totaled 24,000 shares, 303,000 shares, and 269,000
shares, respectively. Applera - Applied Biosystems stock issued under the
employee stock purchase plans during fiscal 1999, 2000, and 2001 totaled
98,000 shares, 161,000 shares, and 250,000 shares, respectively. Common stock
issued under the employee stock purchase plans during fiscal 1999 totaled
168,000 shares of Applera Corporation (predecessor) common stock.
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 - Celera
stock and Applera - Applied Biosystems stock are made in a ratio approximately
equal to the number of shares of Applera - Celera stock and Applera - Applied
Biosystems stock outstanding. The purchase price is the fair market value on the
date of purchase. At June 30, 2001, the Company had approximately 84,000 shares
of Applera - Celera stock and approximately 335,000 shares of the Applera -
Applied Biosystems 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, which may vary depending on the
estimated achievement of performance goals.
As a result of the recapitalization of the Company, each share of restricted
stock held was redesignated as 0.5 of a share of Applera - Celera stock and one
share of Applera - Applied Biosystems stock prior to giving effect to the
Applera - Celera stock split and the Applera - Applied Biosystems stock splits.
Restricted stock granted to employees and non-employee directors totaled 900
shares of Applera - Celera stock and 3,600 shares of Applera - Applied
Biosystems stock during fiscal 2000 and 63,900 shares of Applera - Celera stock
and 255,225 shares of Applera - Applied Biosystems stock during fiscal 2001.
Restricted stock granted prior to recapitalization to employees and non-employee
directors during fiscal 1999 totaled 42,900 shares of the Applera Corporation
(predecessor) common stock. Compensation expense recognized by the Celera
Genomics group for these awards was $1.0 million and $1.3 million for fiscal
2000 and 2001, respectively. Unearned compensation included in allocated net
worth was $2.6 million at June 30, 2001. There was no unearned compensation
included in allocated net worth 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. As of June 30, 2000, three series of
performance units were granted under the plan. Certain members of the Celera
Genomics group's senior management participated in the first series of the
plan, which was prior to the recapitalization. Compensation expense,
pertaining to the first series, for the Celera Genomics group was $1.3 million
for fiscal 1999. Fiscal 1999 compensation expense included $1.0 million
related to the acceleration of payments under the plan as a result of the
attainment of the performance targets. The vesting of the related stock
options was not accelerated. No compensation expense pertaining to the plan
was recognized in fiscal 2000 or 2001.
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. Members of the Celera Genomics group are not
participants in this modified plan.
Accounting for Stock-Based Compensation
APB 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
104 | APPLERA CORPORATION Annual Report 2001
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
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 as required by SFAS No. 123, "Accounting for Stock-Based
Compensation," has been determined for employee stock plans under the
statement's fair value method. For purposes of pro forma disclosure, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
Pro forma information for the years ended June 30, 1999, 2000, and 2001 is
presented below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000 2001
==========================================================================
<S> <C> <C> <C>
Net loss
As reported $ (44.9) $ (92.7) $ (186.2)
Pro forma $ (47.5) $ (106.6) $ (223.3)
==========================================================================
</TABLE>
Note 8 to the Applera Corporation Consolidated Financial Statements contains
the information regarding the assumptions made in calculating pro forma
compensation expense in accordance with SFAS No. 123.
Note 9--Additional Information
Selected Accounts
The following table provides the major components of selected accounts of the
Combined Statements of Financial Position at June 30, 2000 and 2001:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000 2001
==========================================================================
<S> <C> <C>
Other Long-Term Liabilities
Deferred service contract revenues $ 3.7 $ 18.3
Other 5.5 5.5
-------------------------------------------------------------------------
Total other long-term liabilities $ 9.2 $ 23.8
==========================================================================
</TABLE>
Related-Party Information
Sales of Products and Services Between Groups
A group will sell products or services to the other group 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 1999,
2000, and 2001, R&D expenses included $17.3 million, $54.4 million, and $60.1
million, respectively, for lease payments on instruments, the purchase of
consumables and project materials, and contracted R&D services from the
Applied Biosystems group.
Access to Technology and Know-How
Each group has free access to all Company technology and know-how (excluding
products and services of the other group) that may be useful in that group'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
groups consult with each other on a regular basis concerning technology issues
that affect both groups. The costs of developing technology remain in the
group responsible for its development.
TIGR
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. The President of the Celera
Genomics group is the current Chairman of the Board of Trustees of TIGR. Also,
an immediate family member of the President of the Celera Genomics group
currently serves as TIGR's President and is on TIGR's Board of Trustees.
Additionally, as of June 30, 2001, TIGR owned fully vested options to purchase
approximately 1.4 million shares of Applera - Celera stock.
Celera Diagnostics Joint Venture
During fiscal 2001, the Celera Genomics group funded $4.4 million of operating
losses, $.9 million for capital expenditures and $.2 million for working
capital needs related to the Celera Diagnostics joint venture (see Note 2).
Note 10--Commitments and Contingencies
Future minimum payments at June 30, 2001 under non-cancelable operating leases
for real estate and equipment were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
========================================================
<S> <C>
2002 $ 22.2
2003 10.7
2004 2.6
2005 2.6
2006 2.6
2007 and thereafter 13.1
--------------------------------------------------------
Total $ 53.8
========================================================
</TABLE>
Rental expense was $8.5 million for fiscal 1999, $30.5 million for fiscal
2000, and $41.0 million for fiscal 2001.
Amersham
On November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a
patent infringement action against the Company in the United States District
Court for the Northern District of California. The complaint alleges that the
Company is directly, contributorily, or by inducement infringing U.S. Patent
No. 5,688,648 ("the `648 patent"). Amersham asserts that the Company's use and
sale of DNA analysis reagents and systems that incorporate "BigDye"
fluorescence detection technology infringe the `648 patent, and seeks
injunctive and monetary relief. The Company answered the complaint, alleging
that the `648 patent is invalid and unenforceable, and that the Company has
not infringed the `648 patent. In December 2000, the court granted Amersham's
motion for summary judgment in part, finding that certain of the Company's
activities infringe the claims of the `648 patent, but denied Amersham's
motion for summary judgment that the Company induced its customers to infringe
the claims of the `648 patent. On April 6, 2001, the court granted the
Company's motion for summary judgment finding that the Company's recently
introduced
APPLERA CORPORATION Annual Report 2001 | 105
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
BigDye Version 3.0 dye technology does not infringe the `648 patent.
On March 13, 1998, the Company filed a patent infringement action against
Amersham and Molecular Dynamics, Inc. in the United States District Court for
the Northern District of California. The Company asserts that one of its
patents (U.S. Patent No. 4,811,218) is infringed by reason of Molecular
Dynamics' and Amersham's sale of certain DNA analysis systems (e.g., the
MegaBACE 1000 System). In response, Amersham has asserted various affirmative
defenses and several counterclaims, including that the Company is infringing
two patents, U.S. Patent No. 5,091,652 ("the `652 patent") and U.S. Patent No.
5,459,325, each owned by or licensed to Molecular Dynamics, by selling certain
ABI PRISM(TM) DNA sequencing systems. In December 2000, the court granted the
Company's motion for summary judgment of non-infringement of the `652 patent.
The trial date previously scheduled for August 6, 2001 was vacated in July
2001.
On May 21, 1998, Amersham filed a patent infringement action against the
Company in the United States District Court for the Southern District of New
York. The complaint alleges that the Company is infringing, contributing to
the infringement of, and inducing the infringement of U.S. Patent No.
4,707,235 ("the `235 patent") by reason of the Company's sale of certain ABI
PRISM(TM) DNA sequencing systems. The complaint seeks injunctive and monetary
relief. The Company answered the complaint, alleging that the `235 patent is
invalid and that the Company does not infringe the `235 patent. The matters
described in this paragraph and the immediately preceding paragraph have been
consolidated into a single case to be heard in the United States District
Court for the Northern District of California. In December 2000, the court
granted the Company's motion for summary judgment of non-infringement of the
`235 patent. However, on December 18, 2000, Amersham filed a new complaint
alleging that the Company is infringing the `235 patent by reason of the
Company's sale of certain DNA sequencing systems, which allegations were not
in the previous suit under the `235 patent. This action is in the early stages
of discovery.
On May 30, 2000, the Company filed a patent infringement action against
Amersham in the United States District Court for the Northern District of
California. The Company asserts that one of its patents (U.S. Patent No.
5,945,526) is infringed by reason of Amersham's sale of DNA analysis reagents
and systems that incorporate ET Terminator fluorescence detection technology.
The claims construction hearing previously scheduled for June 7, 2001 has been
postponed.
On July 10, 2001, United States Judge Charles R. Breyer stayed all cases in
the litigation described above for the purpose of facilitating court ordered
settlement mediation. The stay is scheduled to expire on March 11, 2002.
The Company believes that the claims asserted by Amersham and Molecular
Dynamics in the foregoing cases are without merit and intends to defend the
cases vigorously. However, the outcome of this or any other litigation is
inherently uncertain, and the Company cannot be sure that it will prevail in
any of these matters. An adverse determination in any of the actions brought
by Amersham could have a material adverse effect on the financial statements
of the Celera Genomics group and the Company.
Other
The Company has been named as a defendant in several other legal actions,
including patent, commercial, and environmental, arising from the conduct of
normal business activities. Although the amount of any liability that might
arise with respect to any of these matters cannot be accurately predicted, the
resulting liability, if any, will not in the opinion of management have a
material adverse effect on the financial statements of the Celera Genomics
group or the Company.
The holders of Applera - Celera stock are stockholders of the Company and will
continue to be subject to all risks associated with an investment in the
Company, including any legal proceedings and claims affecting the Applied
Biosystems group.
Note 11--Financial Instruments
Concentration of Credit Risk
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.
Accounts receivable balances are with a small number of customers, primarily
multinational pharmaceutical companies and larger biotechnology companies.
Allowances are maintained for potential credit losses and such losses have
been within management's expectations.
106 | APPLERA CORPORATION Annual Report 2001
CELERA GENOMICS GROUP | Notes to Combined Financial Statements
continued
Fair Value
The fair value of significant financial instruments held or owned by the
Company is estimated using various methods. Cash and cash equivalents
approximate their carrying amount. The fair value of short-term investments is
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,
2000 and 2001:
<TABLE>
<CAPTION>
2000 2001
------------------ ------------------
Carrying Fair Carrying Fair
(Dollar amounts in millions) Amount Value Amount Value
================================================================================
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 569.9 $ 569.9 $ 216.1 $ 216.1
Short-term investments $ 541.1 $ 541.1 $ 779.3 $ 779.5
Long-term debt $ 46.0 $ 46.0
================================================================================
</TABLE>
Net unrealized gains and losses on short-term investments are reported as a
separate component of accumulated other comprehensive income (loss) as part of
allocated net worth in the Combined Statements of Financial Position.
Note 12--Quarterly Financial Information (Unaudited)
The following is a summary of quarterly financial results:
<TABLE>
<CAPTION>
First Quarter Second Quarter
----------------- -----------------
(Dollar amounts in millions) 2000 2001 2000 2001
===========================================================================
<S> <C> <C> <C> <C>
Net revenues $ 8.3 $ 18.3 $ 8.3 $ 20.3
Cost of sales 2.8 5.8 4.2 10.4
Research and development 29.4 41.0 34.0 42.3
Operating loss (32.3) (52.6) (39.3) (57.7)
Net loss (19.4) (25.7) (24.3) (29.7)
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Third Quarter Fourth Quarter
----------------- -----------------
(Dollar amounts in millions) 2000 2001 2000 2001
=============================================================================
<S> <C> <C> <C> <C>
Net revenues $ 11.1 $ 23.4 $ 15.0 $ 27.4
Cost of sales 3.3 12.0 4.7 14.8
Research and development 40.1 40.2 45.1 41.2
Operating loss (42.9) (54.9) (53.6) (124.4)
Net loss (24.1) (29.1) (24.9) (101.7)
=============================================================================
</TABLE>
Events Impacting Comparability
Fiscal 2001 - The fourth quarter results included a before-tax charge of $69.1
million for the impairment of goodwill and other intangibles related to
Paracel. The fourth quarter results also included a loss of $5.0 million from
the Celera Genomics group's interest in Celera Diagnostics.
Note 13--Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of tax, for fiscal 2001 was as
follows:
<TABLE>
<CAPTION>
Foreign Accumulated
Unrealized Currency Other
(Dollar amounts in Gain on Translation Comprehensive
millions) Investments Adjustments Loss
=======================================================================
<S> <C> <C> <C>
Balance at June 30, 2000 $ - $ - $ -
Activity .1 (.2) (.1)
-----------------------------------------------------------------------
Balance at June 30, 2001 $ .1 $ (.2) $ (.1)
=======================================================================
</TABLE>
Amounts recorded in accumulated other comprehensive income prior to fiscal
2001 were less than $0.1 million.
Information regarding the income tax effects for items of other comprehensive
loss are as follows:
<TABLE>
<CAPTION>
(Dollar amounts in Before-Tax Tax After-Tax
millions) Amount Expense Amount
=======================================================================
<S> <C> <C> <C>
For the Year Ended
June 30, 2001
Unrealized gains on
investments $ .2 $ (.1) $ .1
Foreign currency translation
adjustment (.2) (.2)
-----------------------------------------------------------------------
Other comprehensive loss $ - $ (.1) $ (.1)
=======================================================================
</TABLE>
The foreign currency translation adjustment is not currently adjusted for
income taxes as it relates to indefinite investments in non-U.S. subsidiaries.
APPLERA CORPORATION Annual Report 2001 | 107
CELERA GENOMICS GROUP | Report of Management and
Report of Independent Accountants
Report of Management
To the Stockholders of
Applera Corporation
Management is responsible for the accompanying combined financial statements,
which have been prepared in conformity with generally accepted accounting
principles. In preparing the financial statements, it is necessary for
management to make informed judgments and estimates which it believes are in
accordance with accounting principles generally accepted in the United States
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 combined statements of financial position and
the related combined statements of operations, of allocated net worth, and of
cash flows present fairly, in all material respects, the financial position of
the Celera Genomics group of Applera Corporation at June 30, 2001 and 2000,
and the results of its operations and its cash flows for each of the three
fiscal years in the period ended June 30, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the management of Applera Corporation;
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 described above and more fully in Note 1 to the Celera Genomics group's
combined financial statements, the Celera Genomics group is a group of Applera
Corporation; accordingly, the combined financial statements of the Celera
Genomics group should be read in conjunction with the audited financial
statements of Applera Corporation.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
July 26, 2001
108 | APPLERA CORPORATION Annual Report 2001
APPLERA CORPORATION | Directors and Officers
BOARD OF DIRECTORS
Tony L. White
Chairman, President and
Chief Executive Officer
Applera Corporation
Director since 1995
(1,4)
Richard H. Ayers
Retired Chairman and
Chief Executive Officer
The Stanley Works
Director since 1988
(1,2)
Jean-Luc Belingard
Chief Executive Officer
bioMerieux-Pierre
Fabre 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.
President and Chief
Executive Officer
Rockefeller University
Director since 1999
(2,5)
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 Committee
5 Technology Advisory Committee
CORPORATE OFFICERS
Tony L. White*
Chairman, President and
Chief Executive Officer
Peter Barrett, Ph.D.
Vice President
Celera Genomics
Samuel E. Broder, M.D.
Vice President
Celera Genomics
Peter Chambre*
Chief Operating Officer
Celera Genomics
Ugo D. DeBlasi
Finance
Celera Genomics
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
Thomas P. Livingston
Secretary
Stephen J. Lombardi
Vice President
Applied Biosystems
Joseph E. Malandrakis
Vice President
Applied Biosystems
Robert A. Millman
Intellectual Property
Celera Genomics
Kenneth D. Noonan, Ph.D.*
Senior Vice President
Corporate Development
Kathy Ordonez*
Vice President
and President
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
Finance
Applied Biosystems
Joseph H. Smith
Intellectual Property
Applied Biosystems
J. Craig Venter, Ph.D.*
Senior Vice President and President
Celera Genomics
Dennis L. Winger*
Senior Vice President and
Chief Financial Officer
* Member, Management
Executive Committee
APPLERA CORPORATION Annual Report 2001 | 109
APPLERA CORPORATION | Stockholder Information
PRINCIPAL OFFICES
Applera Corporation
301 Merritt 7
Norwalk, CT 06851
T 203.840.2000
www.applera.com
Mailing Address:
Applera Corporation
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.applera.com
STOCKHOLDER RESPONSE CENTER
Fleet National Bank, the stockholder services and transfer agent, will gladly
answer questions about your accounts, certificates, and dividends. Please phone
toll free: 800.730.4001 or write to:
Fleet National Bank
c/o EquiServe
P.O. Box 8040
Boston, MA 02266-8040
http://www.equiserve.com
DIVIDEND REINVESTMENT
The Applied Biosystems Dividend Reinvestment Plan provides owners of
Applera-Applied Biosystems common stock with a convenient, automatic, and
inexpensive way to purchase additional shares. For information and an enrollment
form, contact Fleet National Bank at the address above.
STOCKHOLDER PUBLICATIONS
Applera Corporation information, including quarterly earnings releases, is
available by phoning 800.762.6923. This menu-driven system allows callers to
receive specific news releases by fax within minutes of a request. You may also
leave a message to have corporate publications, including the annual report,
proxy statement, and Securities and Exchange Commission filings (Forms 10-K,
10-Q, etc.), mailed to you directly.
STOCK EXCHANGE LISTINGS
The Applera-Applied Biosystems and Applera-Celera Genomics common 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, through the following address:
http://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 18, 2001,
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), Applera, API 4000, BigDye, Celera, Celera Diagnostics,
Celera Discovery System, Celera Genomics, the Celera Spirit, TOF/TOF, ViroSeq,
and Voyager are trademarks and ABI PRISM and Applied Biosystems are registered
trademarks of Applera Corporation or its subsidiaries in the US and certain
other countries. 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.
Copyright (C) 2001 Applera Corporation
110 | APPLERA CORPORATION Annual Report 2001
Applera
Corporation
Applera Corporation
301 Merritt 7
Norwalk, CT 06851
tel 203.840.2000
www.applera.com
0604-AR-01
EXHIBIT 21
LIST OF SUBSIDIARIES
SUBSIDIARIES OF APPLERA CORPORATION
-----------------------------------
<TABLE>
<CAPTION>
State or Jurisdiction
Name of Incorporation or Organization
--------- --------------------------------
<S> <C>
PE Corporation (NY) (New York, USA)
Applera Overseas Corporation (New York, USA)
Applied Biosystems Pty Ltd. (Australia)
Applied Biosystems (Canada) Limited (Canada)
Applied Biosystems/MDS Sciex Instruments* (Canada)
Applied Biosystems Taiwan Corporation (Delaware, USA)
Applied Biosystems (Thailand) Limited (Thailand)
Applera AG (Switzerland)
Applera France S.A. (France)
PE (Sweden) AB (Sweden)
Perkin-Elmer 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)
Applera Limited (UK)
Applera Polska Sp.zo.o. (Poland)
Applera Magyarorszag Kft (Hungary)
PE Czech Republic s.r.o. (Czech Republic)
Agrogene S.A.** (France)
PE Genscope GmbH (Switzerland)
Spartan Ltd.*** (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)
Bodenseewerk Perkin-Elmer 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 (Korea)
</TABLE>
SUBSIDIARIES OF APPLERA CORPORATION
-----------------------------------
<TABLE>
<CAPTION>
State or Jurisdiction
Name of Incorporation or Organization
--------- --------------------------------
<S> <C>
PE Corporation (NY), cont'd.
Applera International, Inc. (Delaware, USA)
Applied Biosystems Korea Corporation (Korea)
Applied Biosystems de Mexico S. de R.L. de C.V. (Mexico)
Perkin-Elmer Overseas Ltd. (Inactive) (Cayman Islands)
Applera Insurance Company Limited (Bermuda)
Applied Biosystems China, Inc. (Delaware, USA)
PE FSC, Inc. (U.S.Virgin Islands)
Applera Hispania SA (Spain)
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 + (Delaware, USA)
Shanghai GeneCore Biotechnologies Company, Ltd. (China)
Paracel, Inc. (California, USA)
</TABLE>
-----------
Note: Persons directly owned by subsidiaries of Applera Corporation are indented
and listed below their immediate parent.
* 50% ownership
** 49% ownership
*** 51% ownership by Applera Overseas Corporation, 49% by Applera Europe BV
+ 95% ownership
Note: 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's wholly owned subsidiaries may
from time to time conduct business under the names of these business units.
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 and 333-92225) 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, and 333-51648) of Applera Corporation of our
reports dated July 26, 2001 relating to the combined financial statements of the
Applied Biosystems group, the combined financial statements of the Celera
Genomics group and the consolidated financial statements of Applera Corporation,
which appear 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 26, 2001 relating to the financial statement schedule,
which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
September 26, 2001