SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
[tick] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-4389
APPLERA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1534213
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
301 Merritt 7,
Norwalk, Connecticut 06851-0001
(Address of Principal Executive Offices, Including Zip Code)
(203) 840-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No _____
-----
As of the close of business on May 8, 2002, there were 212,383,294 shares of
Applera Corporation - Applied Biosystems Group Common Stock and 69,201,279
shares of Applera Corporation - Celera Genomics Group Common Stock outstanding.
APPLERA CORPORATION
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
A. Applera Corporation Consolidated
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended March 31, 2001 and 2002 1
Condensed Consolidated Statements of Financial Position at
June 30, 2001 and March 31, 2002 2
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2001 and 2002 3
Notes to Unaudited Condensed Consolidated Financial Statements 4-22
B. Applied Biosystems Group
Condensed Combined Statements of Operations for the
Three and Nine Months Ended March 31, 2001 and 2002 23
Condensed Combined Statements of Financial Position at
June 30, 2001 and March 31, 2002 24
Condensed Combined Statements of Cash Flows for the
Nine Months Ended March 31, 2001 and 2002 25
Notes to Unaudited Condensed Combined Financial Statements 26-30
C. Celera Genomics Group
Condensed Combined Statements of Operations for the
Three and Nine Months Ended March 31, 2001 and 2002 31
Condensed Combined Statements of Financial Position at
June 30, 2001 and March 31, 2002 32
Condensed Combined Statements of Cash Flows for the
Nine Months Ended March 31, 2001 and 2002 33
Notes to Unaudited Condensed Combined Financial Statements 34-41
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 42-86
Part II. Other Information 87
APPLERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands except per share amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
2001 2002 2001 2002
------------ ------------- ------------- --------------
Net Revenues $ 447,086 $ 434,437 $ 1,227,765 $ 1,259,457
Cost of sales 210,771 202,951 579,764 595,777
------------ ------------- ------------- --------------
Gross Margin 236,315 231,486 648,001 663,680
Selling, general and administrative 119,288 108,582 331,474 325,011
Research, development and engineering 80,786 103,638 234,387 276,607
Amortization of goodwill and
intangible assets 10,916 2,636 32,965 4,742
Other special charges 22,959 22,959
Acquired research and development 101,181
------------ ------------- ------------- --------------
Operating Income (Loss) 25,325 (6,329) 49,175 (66,820)
Gain (loss) on investments, net (350) 14,985 (350)
Interest expense (288) (500) (1,678) (1,128)
Interest income 19,286 9,797 63,185 36,123
Other income (expense), net (1,175) (3,516) (4,331) (5,244)
------------ ------------- ------------- --------------
Income (Loss) Before Income Taxes 43,148 (898) 121,336 (37,419)
Provision for income taxes 14,822 1,959 41,080 9,886
------------ ------------- ------------- --------------
Net Income (Loss) $ 28,326 $ (2,857) $ 80,256 $ (47,305)
============ ============= ============= ==============
Applied Biosystems Group (see Note 6)
Net Income $ 57,669 $ 49,111 $ 164,767 $ 130,341
Basic per share $ 0.27 $ 0.23 $ 0.78 $ 0.62
Diluted per share $ 0.26 $ 0.23 $ 0.74 $ 0.60
Dividends per share $ 0.0850 $ 0.0425 $ 0.1700 $ 0.1275
Celera Genomics Group (see Note 6)
Net Loss $ (29,087) $ (49,496) $ (84,480) $ (182,998)
Basic and diluted per share $ (0.48) $ (0.72) $ (1.40) $ (2.82)
See accompanying notes to the Applera Corporation unaudited condensed
consolidated financial statements.
1
APPLERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At June 30, At March 31,
2001 2002
--------------- ----------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 608,535 $ 561,651
Short-term investments 779,482 794,640
Accounts receivable, net 400,803 381,339
Inventories, net 149,658 139,511
Prepaid expenses and other current assets 103,006 116,911
--------------- ----------------
Total current assets 2,041,484 1,994,052
Property, plant and equipment, net 435,560 471,866
Other long-term assets 410,814 568,537
--------------- ----------------
Total Assets $ 2,887,858 $ 3,034,455
=============== ================
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 14,678 $ 9,062
Current portion of long-term debt 30,480
Accounts payable 178,264 150,081
Accrued salaries and wages 64,854 84,362
Accrued taxes on income 83,016 96,154
Other accrued expenses 215,823 229,063
--------------- ----------------
Total current liabilities 587,115 568,722
Long-term debt 18,204
Other long-term liabilities 152,432 166,735
--------------- ----------------
Total Liabilities 739,547 753,661
Stockholders' Equity
Capital stock
Applera Corporation - Applied Biosystems Group 2,115 2,128
Applera Corporation - Celera Genomics Group 617 690
Capital in excess of par value 1,832,000 2,066,841
Retained earnings 369,444 295,098
Accumulated other comprehensive loss (55,865) (83,963)
--------------- ----------------
Total Stockholders' Equity 2,148,311 2,280,794
--------------- ----------------
Total Liabilities And Stockholders' Equity $ 2,887,858 $ 3,034,455
=============== ================
See accompanying notes to the Applera Corporation unaudited condensed
consolidated financial statements.
2
APPLERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
Nine months ended March 31,
2001 2002
---------------- ---------------
Operating Activities From Continuing Operations
Net income (loss) $ 80,256 $ (47,305)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 93,995 84,422
Asset impairments 15,563
Provisions for excess lease space and severance costs 10,311
Long-term compensation programs 5,549 5,522
Gain on sale of assets (14,985) (51)
Loss from equity method investees 4,027
Deferred income taxes (3,221) (29,049)
Acquired research and development 101,181
Changes in operating assets and liabilities:
Accounts receivable (73,434) 16,583
Inventories (20,692) 6,240
Prepaid expenses and other assets (33,816) (49,423)
Accounts payable and other liabilities (8,708) 4,374
---------------- ---------------
Net Cash Provided By Operating Activities 24,944 122,395
---------------- ---------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment, net (139,921) (78,005)
Purchases of short-term investments, net (7,249) (15,215)
Investments (8,912) (41,314)
Proceeds from the sale of assets, net 15,498 5,228
---------------- ---------------
Net Cash Used By Investing Activities (140,584) (129,306)
---------------- ---------------
Net Cash From Continuing Operations
Before Financing Activities (115,640) (6,911)
---------------- ---------------
Net Cash Used By Operating Activities
From Discontinued Operations (2,279) (2,230)
---------------- ---------------
Financing Activities
Net change in loans payable 7,830 (14,520)
Principal payments on long-term debt (46,000) (38,973)
Dividends (26,702) (26,984)
Purchases of common stock for treasury (941)
Proceeds from stock issued for stock plans 50,249 36,597
---------------- ---------------
Net Cash Used By Financing Activities (14,623) (44,821)
---------------- ---------------
Effect Of Exchange Rate Changes On Cash (6,043) 7,078
---------------- ---------------
Net Change In Cash And Cash Equivalents (138,585) (46,884)
Cash And Cash Equivalents Beginning Of Period 964,502 608,535
---------------- ---------------
Cash And Cash Equivalents End Of Period $ 825,917 $ 561,651
================ ===============
See accompanying notes to the Applera Corporation unaudited condensed
consolidated financial statements.
3
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The interim condensed consolidated financial statements should be read in
conjunction with the financial statements presented in the Applera Corporation
(the "Company") 2001 Annual Report to Stockholders. Significant accounting
policies disclosed therein have not changed, except for the accounting for
goodwill and other intangible assets discussed in Note 2.
The unaudited condensed consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments that are necessary for a
fair statement of the results for the interim periods. All such adjustments are
of a normal recurring nature. These results are, however, not necessarily
indicative of the results to be expected for a full year. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Certain
amounts in the condensed consolidated financial statements have been
reclassified for comparative purposes.
The Applied Biosystems group's and the Celera Genomics group's condensed
combined financial statements should be read in conjunction with the Company's
condensed consolidated financial statements and related notes thereto.
NOTE 2 - CHANGE IN ACCOUNTING POLICY
Effective July 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." As a result, the Company has reclassified certain other intangible
assets associated with its workforce to goodwill and no longer amortizes
goodwill. The following table provides pro forma information for the three and
nine months ended March 31, 2001 had the provisions of SFAS No. 142 been applied
to the fiscal 2001 financial results:
(Dollar amounts in millions except Three Months Ended Nine Months Ended
per share amounts) March 31, 2001 March 31, 2001
---------------------- ---------------------
Applera Net Income $ 38.8 $ 111.8
Applied Biosystems Group
Net Income $ 58.1 $ 166.1
Basic per share $ 0.28 $ 0.79
Diluted per share $ 0.26 $ 0.75
Celera Genomics Group
Net Loss $ (19.1) $ (54.3)
Basic and diluted per share $ (0.31) $ (0.90)
4
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
NOTE 3 - OTHER SPECIAL CHARGES
During the third quarter of fiscal 2002, the Company recorded a non-recurring
charge of $25.9 million related to the Celera Genomics group's Paracel business.
This charge was comprised of $12.7 million for asset impairments, provisions of
$10.1 million for the estimated cost of excess lease space and $0.2 million for
severance, all included in other special charges. This charge also included
$2.9 million for the impairment of Paracel inventory included in cost of sales.
During the fourth quarter of fiscal 2001, the Company had recorded a charge of
$69.1 million for the impairment of goodwill and other intangible assets
associated with the Paracel business. The charge during fiscal 2001 resulted
from Paracel's substantially lower than originally anticipated performance and
management's future outlook of the business. The charges recorded during the
third quarter of fiscal 2002 resulted from Paracel's unfavorable performance
against the lower profitability outlook for the business established during the
fourth quarter of fiscal 2001 at the time of the initial charge.
The asset impairment charges recorded during the third quarter of fiscal 2002
were for the write-off of the remaining goodwill of $12.1 million, other
intangible assets of $0.5 million, and leasehold improvements of $0.1 million.
These charges were determined by management through a revised assessment of
future cash flows and, as a result, reduced the carrying value of Paracel's net
assets to their estimated fair value. Excess lease costs reflect the estimated
loss associated with the remaining contractual obligations under a
non-cancelable lease arrangement and certain costs associated with the expected
sublease of the portion of the facility not occupied by the Paracel business,
net of estimated sublease income, for the remaining lease term. Severance and
related benefits were granted to 19 employees terminated in the third quarter of
fiscal 2002 and are expected to be paid by the end of the first quarter of
fiscal 2003.
The following table details the major components of the other special charges:
Asset
(Dollar amounts in millions) Impairment Lease Personnel Total
---------------- ----------------- -------------- ------------
Total charges $ 12.7 $ 10.1 $ 0.2 $ 23.0
Non-cash charges 12.7 12.7
---------------- ----------------- -------------- ------------
Accrual balance at March 31, 2002 $ - $ 10.1 $ 0.2 $ 10.3
================ ================= ============== ============
NOTE 4 - ACQUISITIONS
AXYS PHARMACEUTICALS, INC.
On November 16, 2001, the Company acquired 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 application through collaborations with pharmaceutical companies and
has a proprietary product portfolio in oncology. The Company believes that the
acquisition will accelerate the Celera Genomics group's evolution as a drug
discovery and development business.
5
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
The Company issued 5.5 million shares of Applera Corporation - Celera Genomics
Group Common Stock ("Applera - Celera stock") in exchange for all of the
outstanding shares of Axys common stock. The acquisition was accounted for
using the purchase method of accounting. The total purchase price for the
acquisition was $188.4 million, which consisted of Applera - Celera stock valued
at $170.3 million, stock options valued at $8.8 million, warrants valued at $2.8
million and estimated transaction costs of $6.5 million. The purchase price was
calculated using a $31.04 price per share of Applera - Celera stock, based upon
a measurement date of July 17, 2001. This date, determined in accordance with
Emerging Issues Task Force Abstracts Issue 99-12, "Determination of the
Measurement Date for the Market Price of Acquirer Securities Issued in a
Purchase Business Combination," represented the first date on which the exchange
ratio was fixed under the merger agreement. The fair value of the options and
warrants was calculated using the Black-Scholes pricing model.
The purchase price of $188.4 million was allocated to tangible net assets and
intangible assets as follows:
(millions)
-------------
Current assets $ 6.8
Long-term assets 118.7
Current liabilities (34.9)
Long-term liabilities (20.7)
-------------
Tangible net assets acquired, at approximate fair value 69.9
-------------
Acquired in-process research and development 99.0
Existing technology 7.9
Favorable operating leases 11.6
-------------
Total intangible assets 118.5
-------------
Total purchase price $ 188.4
=============
The recorded values of the intangible assets are being amortized over their
expected period of benefit, which on a weighted average basis is 2.8 years.
Included in the long-term assets is a $61.3 million deferred tax asset, recorded
in purchase accounting, for net operating loss carryforwards and other temporary
differences of Axys expected to be utilized by the Company. Current liabilities
included $4.2 million of contractual severance and involuntary termination
costs. As of March 31, 2002, the Company had paid $3.4 million of these
severance costs.
In connection with the acquisition, the Company assumed $26.0 million of 8%
senior secured convertible notes. These notes mature on October 1, 2004.
Interest is payable quarterly and the principal is payable at maturity as a lump
sum. These notes are convertible at any time into 499,009 shares of Applera -
Celera stock at a conversion price of $52.10 per share. Holders of notes having
6
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
an aggregate principal amount of $10 million exercised their right following the
acquisition to require the Company to repurchase such notes, which the Company
did in January 2002. These notes are secured by 6.7 million shares, or
approximately 90%, of the Company's holding of Discovery Partners International,
Inc. ("DPI") common stock. As a result of the acquisition, the Company
received an approximate 30% interest in DPI, as of the acquisition date. The
investment is accounted for under the equity method of accounting.
Additionally, the Company assumed an existing Axys construction loan of $8.4
million related to its medicinal chemistry building located in South San
Francisco, California. The Company repaid this loan during the second quarter
of fiscal 2002 following the acquisition.
In connection with the acquisition of Axys, the Company allocated approximately
$99.0 million of the purchase price to acquired in-process research and
development ("IPR&D"). As of the acquisition date, the technological
feasibility of the related projects had not been established, and it was
determined that the acquired projects had no future alternative uses. The
amounts attributed to acquired IPR&D were based on an independent appraisal and
were developed using an income approach. The in-process technologies were
valued using a discounted cash flow model on a project-by-project basis. This
valuation incorporated a percentage of completion analysis using revenues
allocated to in-process technologies. The risk-adjusted discount rate used to
value the projects at acquisition ranged from 38% to 43%. The discount rates
applied in the discounted cash flow model were risk adjusted, since the assumed
periods of milestone receipts and assumed timing of product launch may vary
significantly from the assumptions. The valuation assumptions were made solely
for the purpose of calculating projected cash flows and valuing the intangible
assets acquired at the date of acquisition.
Below is a brief description of the IPR&D projects.
Valuation Assumptions at
Acquisition Date
------------------------------------
Development Value at
Status at Project's Stage Assumed Period Acquisition
Acquisition of Completion at of Milestone Date
Project Date Acquisition Date Receipts (in millions)
----------------------------------------------------------------------------------------------------------------------------
Cathepsin S: Pre-clinical 90% Years 1 - 7 from $37.7
Collaboration with Aventis Pharmaceuticals studies date of
Products, Inc. with the objective of acquisition
discovery and development of small molecule
drugs that inhibit Cathepsin S, a human
cysteine protease associated with certain
inflammatory and autoimmune diseases, such as
asthma and atherosclerosis
Cathepsin K: Pre-clinical 91% Years 2 - 6 from 26.6
Collaboration with Merck & Co., Inc. to studies date of
develop small molecule inhibitors of Cathepsin acquisition
K for the treatment of osteoporosis
Tryptase: Pre-clinical 89% Years 3 - 8 from 14.9
Collaboration with Bayer A.G. to identify oral studies date of
tryptase inhibitors for the treatment of asthma acquisition
7
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Valuation Assumptions at
Acquisition Date
------------------------------------
Development Value at
Status at Project's Stage Assumed Period Acquisition
Acquisition of Completion at of Milestone Date
Project Date Acquisition Date Receipts (in millions)
----------------------------------------------------------------------------------------------------------------------------
Cathepsin F: Pre-clinical 28% Years 2 - 8 from 8.9
Development of compounds for inflammatory studies date of
diseases such as asthma and rheumatoid acquisition
arthritis
Urokinase: Pre-clinical 50% Years 2 - 8 from 4.7
Oncology program focused on development of studies date of
inhibitors of the protease urokinase to acquisition
interfere with angiogenesis and metastasis
processes
Serm-beta: Pre-clinical 71% Years 3 - 7 from 4.3
Oncology program utilizing licenses granted by studies date of
Celgene Corp. for exclusive rights to acquisition
selective estrogen receptor-beta modulators
Factors VIIa & Xa: Pre-clinical 54% Years 2 - 10 from 1.9
Development of oral and parenteral studies date of
therapeutics for blood clotting disorders, acquisition
such as deep vein thrombosis, stroke, and
myocardial infarction or heart attack
-------------------
$99.0
===================
For valuation purposes, the Company assumed that all projects would be
partnered and the initial material net cash inflows would result from milestone
payments. The Company also assumed there would be cash inflows resulting from
royalties after product launch. Product launches were assumed to occur in five
to nine years after the date of acquisition.
The Celera Genomics group has initiated a review of its unpartnered pre-clinical
programs that may lead to revised prioritization, resourcing and strategy to
move toward clinical trials and commercialization. As a consequence, actual
results may vary from the valuation assumptions outlined above.
8
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
The net assets and results of operations of Axys have been included in the
Company's consolidated financial statements since the date of the acquisition,
and have been allocated to the Celera Genomics group. The following selected
unaudited pro forma information for the Company has been prepared assuming the
acquisition had occurred at the beginning of fiscal 2001 and gives effect to
purchase accounting adjustments:
Three months ended Nine months ended
(Dollar amounts in millions except March 31, March 31,
per share amounts) 2001 2002 2001 2002
----------- ------------- ----------- ------------
Net revenues $ 450.2 $ 434.4 $ 1,234.9 $ 1,262.0
Net income (loss) $ 14.3 $ (2.9) $ 44.9 $ 24.2
Applied Biosystems Group
Net Income $ 57.7 $ 49.1 $ 164.8 $ 130.3
Basic per share $ 0.27 $ 0.23 $ 0.78 $ 0.62
Diluted per share $ 0.26 $ 0.23 $ 0.74 $ 0.60
Celera Genomics group
Net Loss $ (43.1) $ (49.5) $ (119.9) $ (111.4)
Basic and diluted per share $ (0.65) $ (0.72) $ (1.82) $ (1.65)
Upon consummation of the acquisition, the Celera Genomics group recorded a $99.0
million non-cash charge for the value of acquired IPR&D, which has been excluded
from the pro forma results above. Had the acquired IPR&D charge been excluded
from the reported amounts for the nine months ended March 31, 2002, the Company
would have reported net income of $51.7 million, the Celera Genomics group would
have reported a net loss of $(84.0) million and a net loss per share of Applera
- Celera stock of $(1.29).
Included in the results for the nine months ended March 31, 2002, is a non-cash
pretax charge of $10.8 million recorded by Axys, prior to the acquisition date,
for the impairment of an investment accounted for under the cost method.
BOSTON PROBES, INC.
During the second quarter of fiscal 2002, the Company acquired the remaining
shares of Boston Probes, Inc. ("Boston Probes") not previously owned, or
approximately 87% of the outstanding shares, and certain intellectual property
rights related to peptide nucleic acids, for approximately $37 million in cash.
As a result of owning 100% of Boston Probes, the Company recorded goodwill of
$22.7 million, other intangible assets of $21.8 million, and a charge to
write-off the value of acquired IPR&D of $2.2 million. Other intangible assets
are being amortized over their expected period of benefit, which is 7 years.
The acquisition was accounted for using the purchase method of accounting.
Boston Probes develops and commercializes products employing peptide nucleic
acid
9
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
("PNA") probe technology and has developed novel chemistry platforms based
on its PNA technology. The Company expects that this technology will be a key
component of the Applied Biosystems group's Sequence Detection Systems ("SDS"),
a proprietary technology platform for real-time analysis of genetic information.
The net assets and results of operations of Boston Probes have been allocated to
the Applied Biosystems group.
NOTE 5 - COMPREHENSIVE LOSS
Accumulated other comprehensive loss included in stockholders' equity in the
Condensed Consolidated Statements of Financial Position consists of foreign
currency translation adjustments, unrealized gains and losses on foreign
currency and interest rate hedge contracts, unrealized gains and losses on
available-for-sale investments, and minimum pension liability adjustments.
Total comprehensive loss for the three and nine months ended March 31, 2001 and
2002 is presented in the following table:
Three months ended Nine months ended
March 31, March 31,
(Dollar amounts in millions) 2001 2002 2001 2002
----------- -------- ------------- ----------
Net income (loss) $ 28.3 $ (2.9) $ 80.3 $ (47.3)
Other comprehensive loss:
Foreign currency translation adjustments (21.5) (4.6) (26.3) 1.2
Unrealized net gains on hedge contracts,
net of tax 8.2 2.6 17.0 4.7
Reclassification adjustments for net gains on
hedge contracts included in net income,
net of tax (3.8) (4.9) (7.0) (10.3)
Unrealized loss on investments,
net of tax (48.3) (12.0) (130.9) (23.7)
Reclassification adjustments for gains on
investments included in net income (loss),
net of tax (9.7)
----------- -------- ------------- ----------
Other comprehensive loss (65.4) (18.9) (156.9) (28.1)
----------- -------- ------------- ----------
Comprehensive loss $ (37.1) $(21.8) $ (76.6) $ (75.4)
=========== ======== ============= ==========
NOTE 6 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share for each class of common stock is computed by
dividing the earnings or losses allocated to each class of common stock by the
weighted average number of outstanding shares of that class of common stock.
Diluted earnings (loss) per share is computed by dividing the earnings or losses
allocated to each class of common stock by the weighted average number of
10
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
outstanding shares of that class of common stock including the dilutive effect
of common stock equivalents.
The earnings or losses allocated to each class of common stock are determined by
the Company's Board of Directors. This determination is generally based on the
net income or loss amounts of the corresponding group determined in accordance
with accounting principles generally accepted in the United States of America
consistently applied. The Company believes this method of allocation is
systematic and reasonable. The Board can, at its discretion, change the method
of allocating earnings or losses to each class of common stock at any time.
The following table presents a reconciliation of basic and diluted earnings
(loss) per share for the three months ended March 31:
Applied Biosystems Celera Genomics
Group Group
----------------------------- -----------------------------
(Amounts in thousands except per share amounts) 2001 2002 2001 2002
------------- ------------- ------------ -------------
Weighted average number of common shares
used in the calculation of basic earnings
(loss) per share 210,599 212,289 61,071 68,406
Common stock equivalents 10,896 4,915
------------- ------------- ------------ -------------
Shares used in the calculation of diluted
earnings (loss) per share 221,495 217,204 61,071 68,406
============= ============= ============ =============
Earnings (loss) used in the calculation of
basic and diluted earnings (loss) per share $ 57,669 $ 49,111 $ (29,087) $ (49,496)
============= ============= ============ =============
Earnings (loss) per share
Basic $ 0.27 $ 0.23 $ (0.48) $ (0.72)
Diluted $ 0.26 $ 0.23 $ (0.48) $ (0.72)
11
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
The following table presents a reconciliation of basic and diluted earnings
(loss) per share for the nine months ended March 31:
Applied Biosystems Celera Genomics
Group Group
----------------------------- -----------------------------
(Amounts in thousands except per share amounts) 2001 2002 2001 2002
------------- ------------- ------------ -------------
Weighted average number of common shares
used in the calculation of basic earnings
(loss) per share 209,925 211,802 60,480 64,987
Common stock equivalents 11,771 4,395
Shares used in the calculation of diluted
earnings (loss) per share 221,696 216,197 60,480 64,987
Earnings (loss) used in the calculation of
basic and diluted earnings (loss) per share $ 164,767 $ 130,341 $ (84,480) $ (182,998)
Earnings (loss) per share
Basic $ 0.78 $ 0.62 $ (1.40) $ (2.82)
Diluted $ 0.74 $ 0.60 $ (1.40) $ (2.82)
Options to purchase 6.9 million and 14.0 million shares of Applera Corporation -
Applied Biosystems Group Common Stock were outstanding at March 31, 2001 and
2002, respectively, but were not included in the computation of diluted earnings
per share because the effect was antidilutive. Options and warrants to purchase
14.8 million and 13.4 million shares of Applera - Celera stock were outstanding
at March 31, 2001 and 2002, respectively, but were not included in the
computation of diluted loss per share because the effect was antidilutive.
NOTE 7 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories included the following components:
June 30, March 31,
(Dollar amounts in millions) 2001 2002
--------------- ---------------
Raw materials and supplies $ 58.8 $ 63.6
Work-in-process 12.9 13.6
Finished products 78.0 62.3
--------------- ---------------
Total inventories $ 149.7 $ 139.5
=============== ===============
12
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
Nine months ended
March 31,
(Dollar amounts in millions) 2001 2002
------------ ----------
Tax benefit related to employee stock options $ 53.3 $ 11.6
Dividends declared not paid $ 17.9 $ 9.0
Equity instruments issued in the Axys acquisition $ 181.9
Debt and capital lease obligation assumed in
the Axys acquisition $ 39.1
NOTE 9 - FINANCIAL INSTRUMENTS
CASH FLOW HEDGES
The Company's international sales are typically denominated in the customers'
local (non-U.S. dollar) currencies. The Company uses foreign exchange forward,
option, and range forward contracts to hedge a portion of forecasted
international sales not denominated in U.S. dollars. The Company utilizes
hedge accounting on derivative contracts that are considered highly effective in
offsetting the changes in fair value of the forecasted sales transactions caused
by movements in foreign currency exchange rates. These contracts are designated
as cash flow hedges and the effective portion of the change in the fair value of
these contracts is recorded in other comprehensive income (loss) in the
Condensed Consolidated Statements of Financial Position until the underlying
external forecasted transaction affects earnings. At that time, the gain or
loss on the derivative instrument, which had been deferred in other
comprehensive income (loss), is reclassified to net revenues in the Condensed
Consolidated Statements of Operations. During the three and nine month periods
ended March 31, 2002, the Company recognized net gains of $7.3 million and $15.1
million, respectively, in net revenues from derivative instruments designated as
cash flow hedges of anticipated sales. At March 31, 2002, $8.8 million of
derivative gains ($5.6 million net of deferred taxes) recorded in other
comprehensive income (loss) are expected to be reclassified to earnings during
the next twelve months.
The interest rate swap maintained by the Company in conjunction with a Japanese
yen debt obligation expired coincident with the maturity in March 2002 of the
yen 3.8 billion, or $29.0 million, debt obligation.
NOTE 10 - CONTINGENCIES
Amersham
On February 26, 2002, the Company and Amersham plc announced that they reached a
court-mediated settlement which ended the previously disclosed patent litigation
between the Company and Amersham plc and its affiliates, including Amersham
Pharmacia Biotech, Inc. and Molecular Dynamics, Inc. The settlement, reached
under the auspices of United States Magistrate Judge Edward A. Infante, Northern
District of California, includes a cross-licensing agreement covering all
patents involved in the litigation, and a co-development arrangement for the
joint development, supply and commercialization of certain new DNA analysis
technologies. Both companies' current product offerings will continue to be
available.
13
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
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 consolidated financial statements of the Company.
NOTE 11 - SEGMENT AND CONSOLIDATING INFORMATION
Presented below is the segment and consolidating financial information
reflecting the businesses of the individual groups and Celera Diagnostics, a
joint venture between the Applied Biosystems group and the Celera Genomics
group, including the allocation of expenses between groups in accordance with
the Company's management and 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 have
been determined in accordance with accounting principles generally accepted in
the United States of America.
See Note 1 to both the Applied Biosystems group's and the Celera Genomics
group's combined financial statements in the Company's 2001 Annual Report to
Stockholders for a detailed description of management and allocation policies.
For the three and nine-month periods ended March 31, 2002, the Celera Genomics
group recorded 100% of the losses of Celera Diagnostics in its net loss.
Additionally, the Celera Genomics group recorded the tax benefit associated with
the loss generated by Celera Diagnostics. There is no financial information
presented for Celera Diagnostics for the three and nine-month periods ended
March 31, 2001, since the joint venture was established effective April 1, 2001.
In the following tables, the "Eliminations" column represents the elimination of
intergroup activity and the loss on Celera Diagnostics, which is included twice,
in the "Celera Diagnostics" column and as "Loss from joint venture" within the
"Celera Genomics group" column. See Note 6 to the consolidated financial
statements included in the Company's 2001 Annual Report to Stockholders for a
discussion of the Company's segments.
14
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Operations For the Three Months Ended March 31, 2002
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
----------- ----------- ------------ ------------- --------------
Net revenues from external customers $ 403,831 $ 30,487 $ 119 $ - $ 434,437
Intergroup revenues 5,185 2,528 (7,713)
----------- ----------------------------------------------------------
Net Revenues 409,016 30,487 2,647 (7,713) 434,437
Cost of sales 192,564 15,402 1,887 (6,902) 202,951
----------- -------------------------- -----------------------------
Gross Margin 216,452 15,085 760 (811) 231,486
Selling, general and administrative 83,589 11,693 1,499 11,801 108,582
Corporate allocated expenses 9,382 1,943 476 (11,801)
Research, development and engineering 56,666 37,629 11,138 (1,795) 103,638
Amortization of intangible assets 2,636 2,636
Other special charges 22,959 22,959
----------- ----------- ------------ ------------- --------------
Operating Income (Loss) 66,815 (61,775) (12,353) 984 (6,329)
Loss on investments, net (350) (350)
Interest expense (291) (209) (500)
Interest income 2,992 6,805 9,797
Other income (expense), net 5 (3,521) (3,516)
Loss from joint venture 12,353) 12,353
----------- ----------- ------------ ------------- --------------
Income (Loss) Before Income Taxes 69,171 (71,053) (12,353) 13,337 (898)
Provision (benefit) for income taxes 20,060 (21,557) 3,456 1,959
----------- ----------- ------------ ------------- --------------
Net Income (Loss) $ 49,111 $ (49,496) $ (12,353) $ 9,881 $ (2,857)
=========== =========== ============ ============= ==============
15
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Operations For the Nine Months Ended March 31, 2002
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
----------- ----------- ------------ ------------- --------------
Net revenues from external customers $ 1,166,293 $ 92,815 $ 349 $ - $ 1,259,457
Intergroup revenues 20,464 5,998 (26,462)
----------- ----------------------------------------------------------
Net Revenues 1,186,757 92,815 6,347 (26,462) 1,259,457
Cost of sales 568,729 45,309 4,494 (22,755) 595,777
----------- -------------------------- -----------------------------
Gross Margin 618,028 47,506 1,853 (3,707) 663,680
Selling, general and administrative 249,490 34,426 4,947 36,148 325,011
Corporate allocated expenses 28,870 5,771 1,507 (36,148)
Research, development and engineering 161,649 95,982 25,616 (6,640) 276,607
Amortization of intangible assets 4,742 4,742
Other special charges 22,959 22,959
Acquired research and development 2,200 98,981 101,181
----------- ----------- ------------ ------------- --------------
Operating Income (Loss) 175,819 (215,355) (30,217) 2,933 (66,820)
Loss on investments, net (350) (350)
Interest expense (781) (347) (1,128)
Interest income 9,764 26,359 36,123
Other income (expense), net 26 (5,270) (5,244)
Loss from joint venture (30,217) 30,217
----------- ----------- ------------ ------------- --------------
Income (Loss) Before Income Taxes 184,478 (224,830) (30,217) 33,150 (37,419)
Provision (benefit) for income taxes 54,137 (41,832) (2,419) 9,886
----------- ----------- ------------ ------------- --------------
Net Income (Loss) $ 130,341 $ (182,998) $ (30,217) $ 35,569 $ (47,305)
=========== =========== ============ ============= ==============
16
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Financial Position At March 31, 2002
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
----------- ----------- ------------ ------------- --------------
Assets
Current assets
Cash and cash equivalents $ 447,689 $ 113,962 $ - $ - $ 561,651
Short-term investments 794,640 794,640
Accounts receivable, net 359,987 23,545 100 (2,293) 381,339
Inventories, net 135,784 2,503 1,383 (159) 139,511
Prepaid expenses and other current assets 108,501 7,592 898 (80) 116,911
----------- ----------- ------------ ------------- --------------
Total current assets 1,051,961 942,242 2,381 (2,532) 1,994,052
Property, plant and equipment, net 336,356 131,097 7,199 (2,786) 471,866
Other long-term assets 382,522 184,285 10,250 (8,520) 568,537
----------- ----------- ------------ ------------- --------------
Total Assets $ 1,770,839 $ 1,257,624 $ 19,830 $ (13,838) $ 3,034,455
=========== =========== ============ ============= ==============
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 9,062 $ - $ - $ - $ 9,062
Accounts payable 131,701 17,753 2,920 (2,293) 150,081
Accrued salaries and wages 64,583 16,485 3,294 84,362
Accrued taxes on income 91,613 4,541 96,154
Other accrued expenses 170,298 62,971 415 (4,621) 229,063
----------- ----------- ------------ ------------- --------------
Total current liabilities 467,257 97,209 6,629 (2,373) 568,722
Long-term debt 18,204 18,204
Other long-term liabilities 136,557 30,178 166,735
----------- ----------- ------------ ------------- --------------
Total Liabilities 603,814 145,591 6,629 (2,373) 753,661
----------- ----------- ------------ ------------- --------------
Total Stockholders' Equity 1,167,025 1,112,033 13,201 (11,465) 2,280,794
----------- ----------- ------------ ------------- --------------
Total Liabilities And Stockholders' Equity $ 1,770,839 $ 1,257,624 $ 19,830 $ (13,838) $ 3,034,455
=========== =========== ============ ============= ==============
17
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Cash Flows For the Nine Months Ended March 31, 2002
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
----------- ----------- ------------ ------------- --------------
Operating Activities From Continuing
Operations
Net income (loss) $ 130,341 $(182,998) $ (30,217) $ 35,569 $ (47,305)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization 58,357 26,791 2,198 (2,924) 84,422
Asset impairments 15,563 15,563
Provisions for excess lease space and
severance costs 10,311 10,311
Long-term compensation programs 4,210 1,312 5,522
(Gain) loss on sale of assets 350 (401) (51)
Loss from joint venture and equity
method investees 34,244 (30,217) 4,027
Deferred income taxes (11,249) (15,381) (2,419) (29,049)
Nonreimbursable utilization of
intergroup tax benefits 15,663 (15,663)
Acquired research and development 2,200 98,981 101,181
Changes in operating assets and liabilities:
Accounts receivable 19,500 666 (100) (3,483) 16,583
Inventories 4,037 821 1,391 (9) 6,240
Prepaid expenses and other assets (46,017) (223) 3,263) 80 (49,423)
Accounts payable and other liabilities 7,564 (11,733) 5,140 3,403 4,374
----------- ----------- ------------ ------------- --------------
Net Cash Provided (Used) By Operating
Activities 184,956 (37,710) (24,851) 122,395
----------- ----------- ------------ ------------- --------------
Investing Activities From Continuing
Operations
Additions to property, plant and
equipment, net (57,169) (14,944) (5,892) (78,005)
Purchases of short-term investments, net (15,215) (15,215)
Acquisitions and investments, net (37,993) (34,064) 30,743 (41,314)
Proceeds from the sale of assets, net 5,228 5,228
----------- ----------- ------------ ------------- --------------
Net Cash Used By Investing Activities (89,934) (64,223) (5,892) 30,743 (129,306)
----------- ----------- ------------ ------------- --------------
Net Cash Provided (Used) By Continuing
Operations Before Financing Activities 95,022 (101,933) (30,743) 30,743 (6,911)
----------- ----------- ------------ ------------- --------------
Net Cash Used By Operating Activities
From Discontinued Operations (2,230) (2,230)
----------- ----------- ------------ ------------- --------------
Financing Activities
Net change in loans payable (6,077) (8,443) (14,520)
Principal payments on long-term debt (28,973) (10,000) (38,973)
Dividends (26,984) (26,984)
Net cash funding from groups 30,743 (30,743)
Purchases of common stock for treasury (941) (941)
Proceeds from stock issued for stock plans 17,394 19,203 36,597
----------- ----------- ------------ ------------- --------------
Net Cash Provided (Used) By Financing
Activities (44,640) (181) 30,743 (30,743) (44,821)
----------- ----------- ------------ ------------- --------------
Effect Of Exchange Rate Changes On Cash 7,078 7,078
----------- ----------- ------------ ------------- --------------
Net Change In Cash And Cash Equivalents 55,230 (102,114) (46,884)
Cash And Cash Equivalents Beginning Of
Period 392,459 216,076 608,535
----------- ----------- ------------ ------------- --------------
Cash And Cash Equivalents End Of Period $ 447,689 $ 113,962 $ - $ - $ 561,651
=========== =========== ============ ============= ==============
18
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Operations For the Three Months Ended March 31, 2001
Applied Celera
Biosystems Genomics
(Dollar amounts in thousands) Group Group Eliminations Consolidated
----------- ----------- ------------- --------------
Net revenues from external customers $ 423,711 $ 23,375 $ - $ 447,086
Intergroup revenues 16,070 (16,070)
----------- -------------------------------------------
Net Revenues 439,781 23,375 (16,070) 447,086
Cost of sales 208,595 11,969 (9,793) 210,771
----------- -------------------------------------------
Gross Margin 231,186 11,406 (6,277) 236,315
Selling, general and administrative 91,909 12,477 14,902 119,288
Corporate allocated expenses 12,233 2,669 (14,902)
Research, development and engineering 47,467 40,205 (6,886) 80,786
Amortization of goodwill and
intangible assets 10,916 10,916
----------- ----------- ------------- --------------
Operating Income (Loss) 79,577 (54,861) 609 25,325
Interest expense (288) (288)
Interest income 4,028 15,258 19,286
Other income (expense), net (933) (242) (1,175)
----------- -------------------------------------------
Income (Loss) Before Income Taxes 82,384 (39,845) 609 43,148
Provision (benefit) for income taxes 24,715 (10,758) 865 14,822
----------- ----------- ------------- --------------
Net Income (Loss) $ 57,669 $ (29,087) $ (256) $ 28,326
=========== =========== ============= ==============
19
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Operations For the Nine Months Ended March 31, 2001
Applied Celera
Biosystems Genomics
(Dollar amounts in thousands) Group Group Eliminations Consolidated
-------------- ------------ ----------------- --------------
Net revenues from external customers $1,166,517 $ 61,248 $ - $ 1,227,765
Intergroup revenues 47,857 699 (48,556)
-------------- -----------------------------------------------
Net Revenues 1,214,374 61,947 (48,556) 1,227,765
Cost of sales 576,063 28,155 (24,454) 579,764
-------------- -----------------------------------------------
Gross Margin 638,311 33,792 (24,102) 648,001
Selling, general and administrative 257,736 35,705 38,033 331,474
Corporate allocated expenses 31,200 6,833 (38,033)
Research, development and engineering 135,592 123,508 (24,713) 234,387
Amortization of goodwill and intangible
assets 32,965 32,965
-------------- ------------ ----------------- --------------
Operating Income (Loss) 213,783 (165,219) 611 49,175
Gain on investments, net 14,985 14,985
Interest expense (849) (829) (1,678)
Interest income 12,617 50,568 63,185
Other income (expense), net (4,085) (246) (4,331)
-------------- -----------------------------------------------
Income (Loss) Before Income Taxes 236,451 (115,726) 611 121,336
Provision (benefit) for income taxes 71,684 (31,246) 642 41,080
-------------- ------------ ----------------- --------------
Net Income (Loss) $ 164,767 $ (84,480) $ (31) $ 80,256
============== ============ ================= ==============
20
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Financial Position At June 30, 2001
Applied Celera
Biosystems Genomics Celera
(Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated
--------------- ------------- --------------- --------------- -----------------
Assets
Current assets
Cash and cash equivalents $ 392,459 $ 216,076 $ - $ - $ 608,535
Short-term investments 779,482 779,482
Accounts receivable, net 382,560 24,019 (5,776) 400,803
Inventories, net 140,813 6,239 2,774 (168) 149,658
Prepaid expenses and other current assets 98,124 4,838 44 103,006
--------------- ------------- --------------- --------------- -----------------
Total current assets 1,013,956 1,030,654 2,818 (5,944) 2,041,484
Property, plant and equipment, net 315,356 123,497 2,417 (5,710) 435,560
Other long-term assets 348,575 65,985 8,929 (12,675) 410,814
--------------- ------------- --------------- --------------- -----------------
Total Assets $ 1,677,887 $ 1,220,136 $ 14,164 $ (24,329) $ 2,887,858
=============== ============= =============== =============== =================
Liabilities and Stockholders' Equity
Current liabilities
Loans payable $ 14,678 $ - $ - $ - $ 14,678
Current portion of long-term debt 30,480 30,480
Accounts payable 162,104 21,024 912 (5,776) 178,264
Accrued salaries and wages 49,553 15,088 213 64,854
Accrued taxes on income 82,717 299 83,016
Other accrued expenses 168,552 49,468 364 (2,561) 215,823
--------------- ------------- --------------- --------------- -----------------
Total current liabilities 508,084 85,580 1,489 (8,038) 587,115
Other long-term liabilities 128,592 23,840 152,432
--------------- ------------- --------------- --------------- -----------------
Total Liabilities 636,676 109,420 1,489 (8,038) 739,547
--------------- ------------- --------------- --------------- -----------------
Total Stockholders' Equity 1,041,211 1,110,716 12,675 (16,291) 2,148,311
--------------- ------------- --------------- --------------- -----------------
Total Liabilities and Stockholders' Equity $ 1,677,887 $ 1,220,136 $ 14,164 $ (24,329) $ 2,887,858
=============== ============= =============== =============== =================
21
APPLERA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
continued
Consolidating Statement of Cash Flows For the Nine Months Ended March 31, 2001
Applied Celera
Biosystems Genomics
(Dollar amounts in thousands) Group Group Eliminations Consolidated
-------------- ------------- ---------------- ----------------
Operating Activities From Continuing Operations
Net income (loss) $ 164,767 $ (84,480) $ (31) $ 80,256
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 48,337 48,387 (2,729) 93,995
Long-term compensation programs 4,598 951 5,549
Gain from sales of assets (14,985) (14,985)
Deferred income taxes (1,308) (1,913) (3,221)
Nonreimbursable utilization of intergroup tax benefits 23,270 (23,270)
Changes in operating assets and liabilities:
Tax benefit receivable from the Applied Biosystem Group 16,702 (16,702)
Accounts receivable (73,160) (7,339) 7,065 (73,434)
Inventories (19,900) (1,363) 571 (20,692)
Prepaid expenses and other assets (30,274) (3,542) (33,816)
Accounts payable and other liabilities (51,604) 32,617 10,279 (8,708)
-------------- ------------- ---------------- ----------------
Net Cash Provided (Used) By Operating Activities 49,741 (23,250) (1,547) 24,944
-------------- ------------- ---------------- ----------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment, net (120,062) (21,406) 1,547 (139,921)
Purchases of short-term investments, net (7,249) (7,249)
Acquisitions and investments, net (4,831) (4,081) (8,912)
Proceeds from the sale of assets, net 15,498 15,498
-------------- ------------- ---------------- ----------------
Net Cash Used By Investing Activities (109,395) (32,736) 1,547 (140,584)
-------------- ------------- ---------------- ----------------
Net Cash Used By Continuing Operations Before
Financing Activities (59,654) (55,986) (115,640)
-------------- ------------- ---------------- ----------------
Net Cash Used By Operating Activities
From Discontinued Operations (2,279) (2,279)
-------------- ------------- ---------------- ----------------
Financing Activities
Net change in loans payable 7,830 7,830
Principal payments on long-term debt (46,000) (46,000)
Dividends (26,702) (26,702)
Proceeds from stock issued for stock plans 32,035 18,214 50,249
-------------- ------------- ---------------- ----------------
Net Cash Provided (Used) By Financing Activities 13,163 (27,786) (14,623)
-------------- ------------- ---------------- ----------------
Effect Of Exchange Rate Changes On Cash (6,043) (6,043)
-------------- ------------- ---------------- ----------------
Net Change In Cash And Cash Equivalents (54,813) (83,772) (138,585)
Cash And Cash Equivalents Beginning Of Period 394,608 569,894 964,502
-------------- ------------- ---------------- ----------------
Cash And Cash Equivalents End Of Period $ 339,795 $ 486,122 $ - $ 825,917
============== ============= ================ ================
22
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
2001 2002 2001 2002
-------------- ------------- ---------------- ----------------
Net Revenues $ 439,781 $ 409,016 $ 1,214,374 $ 1,186,757
Cost of sales 208,595 192,564 576,063 568,729
-------------- ------------- ---------------- ----------------
Gross Margin 231,186 216,452 638,311 618,028
Selling, general and administrative 104,142 92,971 288,936 278,360
Research, development and engineering 47,467 56,666 135,592 161,649
Acquired research and development 2,200
-------------- ------------- ---------------- ----------------
Operating Income 79,577 66,815 213,783 175,819
Gain (loss) on investments, net (350) 14,985 (350)
Interest expense (288) (291) (849) (781)
Interest income 4,028 2,992 12,617 9,764
Other income (expense), net (933) 5 (4,085) 26
-------------- ------------- ---------------- ----------------
Income Before Income Taxes 82,384 69,171 236,451 184,478
Provision for income taxes 24,715 20,060 71,684 54,137
-------------- ------------- ---------------- ----------------
Net Income $ 57,669 $ 49,111 $ 164,767 $ 130,341
============== ============= ================ ================
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
23
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At June 30, At March 31,
2001 2002
----------------- --------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 392,459 $ 447,689
Accounts receivable, net 382,560 359,987
Inventories, net 140,813 135,784
Prepaid expenses and other current assets 98,124 108,501
----------------- --------------------
Total current assets 1,013,956 1,051,961
Property, plant and equipment, net 315,356 336,356
Other long-term assets 348,575 382,522
----------------- --------------------
Total Assets $ 1,677,887 $ 1,770,839
================= ====================
Liabilities And Allocated Net Worth
Current liabilities
Loans payable $ 14,678 $ 9,062
Current portion of long-term debt 30,480
Accounts payable 162,104 131,701
Accrued salaries and wages 49,553 64,583
Accrued taxes on income 82,717 91,613
Other accrued expenses 168,552 170,298
----------------- --------------------
Total current liabilities 508,084 467,257
Other long-term liabilities 128,592 136,557
----------------- --------------------
Total Liabilities 636,676 603,814
Allocated Net Worth 1,041,211 1,167,025
----------------- --------------------
Total Liabilities And Allocated Net Worth $ 1,677,887 $ 1,770,839
================= ====================
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
24
APPLIED BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
Nine months ended
March 31,
2001 2002
-------------- --------------
Operating Activities From Continuing Operations
Net income $ 164,767 $ 130,341
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 48,337 58,357
Long-term compensation programs 4,598 4,210
(Gain) loss on assets (14,985) 350
Acquired research and development 2,200
Nonreimbursable utilization of tax benefits generated
by the Celera Genomics group 23,270 15,663
Deferred income taxes (1,308) (11,249)
Changes in operating assets and liabilities:
Accounts receivable (73,160) 19,500
Inventories (19,900) 4,037
Prepaid expenses and other assets (30,274) (46,017)
Accounts payable and other liabilities (51,604) 7,564
-------------- --------------
Net Cash Provided By Operating Activities 49,741 184,956
-------------- --------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment, net (120,062) (57,169)
Investments (4,831) (37,993)
Proceeds from the sale of assets, net 15,498 5,228
-------------- --------------
Net Cash Used By Investing Activities (109,395) (89,934)
-------------- --------------
Net Cash From Continuing Operations
Before Financing Activities (59,654) 95,022
-------------- --------------
Net Cash Used By Operating Activities
From Discontinued Operations (2,279) (2,230)
-------------- --------------
Financing Activities
Net change in loans payable 7,830 (6,077)
Principal payments on long-term debt (28,973)
Dividends (26,702) (26,984)
Proceeds from stock issued for stock plans 32,035 17,394
-------------- --------------
Net Cash Provided (Used) By Financing Activities 13,163 (44,640)
-------------- --------------
Effect Of Exchange Rate Changes On Cash (6,043) 7,078
-------------- --------------
Net Change In Cash And Cash Equivalents (54,813) 55,230
Cash And Cash Equivalents Beginning Of Period 394,608 392,459
-------------- --------------
Cash And Cash Equivalents End Of Period $ 339,795 $ 447,689
============== ==============
See accompanying notes to the Applied Biosystems group unaudited condensed
combined financial statements.
25
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED COMBINED FINANCIAL STATEMENTS
The interim condensed combined financial statements should be read in
conjunction with the financial statements presented in the Applera Corporation
(the "Company") 2001 Annual Report to Stockholders. Significant accounting
policies disclosed therein have not changed, except for the accounting for
goodwill and other intangible assets. Effective July 1, 2001, the Applied
Biosystems group adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," and as a
result, the Applied Biosystems group no longer amortizes goodwill. Amortization
of goodwill in prior year periods was immaterial.
The unaudited condensed combined financial statements reflect, in the opinion of
the Company's management, all adjustments that are necessary for a fair
statement of the results for the interim periods. All such adjustments are of a
normal recurring nature. These results are, however, not necessarily indicative
of the results to be expected for a full year. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Certain amounts in the
condensed combined financial statements have been reclassified for comparative
purposes.
The Applied Biosystems group's condensed combined financial statements should
be read in conjunction with the Company's condensed consolidated financial
statements and related notes thereto.
NOTE 2 - ACQUISITIONS AND OTHER
Boston Probes, Inc.
During the second quarter of fiscal 2002, the Company acquired the remaining
shares of Boston Probes, Inc. ("Boston Probes") not previously owned, or
approximately 87% of the outstanding shares, and certain intellectual property
rights related to peptide nucleic acids, for approximately $37 million in cash.
As a result of owning 100% of Boston Probes, the Applied Biosystems group
recorded goodwill of $22.7 million, other intangible assets of $21.8 million,
and a charge to write-off the value of acquired in-process research and
development ("IPR&D") of $2.2 million. Other intangible assets are being
amortized over their expected period of benefit, which is 7 years. The
acquisition was accounted for using the purchase method of accounting. Boston
Probes develops and commercializes products employing peptide nucleic acid
("PNA") probe technology and has developed novel chemistry platforms based on
its PNA technology. The Applied Biosystems group expects that this technology
will be a key component of its Sequence Detection Systems ("SDS"), a proprietary
technology platform for real-time analysis of genetic information.
Transfer of Business Unit from the Celera Genomics Group
Effective July 1, 2001, the Company transferred the assets, liabilities and
personnel of a business unit from the Celera Genomics group to the Applied
Biosystems group. The Company's Board of Directors determined that the assets of
the business to be transferred and the liabilities of the business
26
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
to be assumed by the Applied Biosystems group constituted fair value for the
transfer. The net assets were transferred at recorded book value as an increase
to the Applied Biosystems group's allocated net worth. The Applied Biosystems
group plans to utilize the resources of this business unit for initiatives that
will include validation of single nucleotide polymorphisms.
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive loss included in allocated net worth in the
Condensed Combined Statements of Financial Position consists of foreign currency
translation adjustments, unrealized gains and losses on foreign currency and
interest rate hedge contracts, unrealized gains and losses on available-for-sale
investments, and minimum pension liability adjustments. Total comprehensive
income (loss) for the three and nine months ended March 31, 2001 and 2002 is
presented in the following table:
Three months ended Nine months ended
March 31, March 31,
(Dollar amounts in millions) 2001 2002 2001 2002
------------- ------------- ------------- -------------
Net income $ 57.7 $ 49.1 $ 164.8 $ 130.3
Other comprehensive loss:
Foreign currency translation adjustments (21.3) (4.7) (26.1) 1.3
Unrealized net gains on hedge contract,
net of tax 8.2 2.6 17.0 4.7
Reclassification adjustments for net gains on
hedge contracts included in net income,
net of tax (3.8) (4.9) (7.0) (10.3)
Unrealized loss on investments,
net of tax (48.2) (9.3) (131.3) (22.9)
Reclassification adjustments for gains on
investments included in net income,
net of tax (9.7)
------------- ------------- ------------- -------------
Other comprehensive loss (65.1) (16.3) (157.1) (27.2)
------------- ------------- ------------- -------------
Comprehensive income (loss) $ (7.4) $ 32.8 $ 7.7 $ 103.1
============= ============= ============= =============
27
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories included the following components:
June 30, March 31,
(Dollar amounts in millions) 2001 2002
------------- -----------
Raw materials and supplies $ 51.8 $ 61.6
Work-in-process 12.2 12.6
Finished products 76.8 61.6
------------- -----------
Total inventories $ 140.8 $ 135.8
============= ===========
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
Nine months ended
March 31,
(Dollar amounts in millions) 2001 2002
-------------- -----------------
Nonreimbursable utilization of tax benefits
generated by the Celera Genomics group $ 23.3 $ 15.7
Tax benefit related to employee stock options $ 40.9 $ 4.1
Dividends declared not paid $ 17.9 $ 9.0
Transfer of business unit from the Celera
Genomics group (Note 2) $ 8.1
NOTE 6 - FINANCIAL INSTRUMENTS
Cash Flow Hedges
The Applied Biosystems group's international sales are typically denominated in
the customers' local (non-U.S. dollar) currencies. The Applied Biosystems group
uses foreign exchange forward, option, and range forward contracts to hedge a
portion of forecasted international sales not denominated in U.S. dollars. The
Applied Biosystems group utilizes hedge accounting on derivative contracts that
are considered highly effective in offsetting the changes in fair value of the
forecasted sales transactions caused by movements in foreign currency exchange
rates. These contracts are designated as cash flow hedges and the effective
portion of the change in the fair value of these contracts is recorded in other
comprehensive income in the Condensed Combined Statements of Financial Position
until the underlying external forecasted transaction affects earnings. At that
time, the gain or loss on the derivative instrument, which had been deferred in
other comprehensive income (loss), is reclassified
28
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
to net revenues in the Condensed Combined Statements of Operations. During the
three and nine month periods ended March 31, 2002, the Applied Biosystems group
recognized net gains of $7.3 million and $15.1 million, respectively, in net
revenues from derivative instruments designated as cash flow hedges of
anticipated sales. At March 31, 2002, $8.8 million of derivative gains ($5.6
million net of deferred taxes) recorded in other comprehensive income (loss) are
expected to be reclassified to earnings during the next twelve months.
The interest rate swap maintained by the Company in conjunction with a Japanese
yen debt obligation expired coincident with the maturity in March 2002 of the
yen 3.8 billion, or $29.0 million, debt obligation.
NOTE 7 - RELATED PARTY TRANSACTIONS
Sales of Products and Services Between Groups and Celera Diagnostics. For the
three and nine month periods ended March 31, 2001, net revenues from leased
instruments, shipments of consumables and project materials, and contracted R&D
services to the Celera Genomics group totaled $16.1 million and $47.9 million,
respectively. For the three and nine month periods ended March 31, 2002, net
revenues from leased instruments, shipments of consumables and project
materials, and contracted R&D services to the Celera Genomics group totaled $4.6
million and $19.5 million, respectively.
For the three and nine month periods ended March 31, 2002, the Applied
Biosystems group purchased $2.5 million and $6.0 million, respectively, of
diagnostics products from Celera Diagnostics under a distribution arrangement.
For the three and nine month periods ended March 31, 2002, the Applied
Biosystems group recorded revenues from leased instruments and shipments of
consumables to Celera Diagnostics of $0.6 million and $1.0 million,
respectively.
Online/Information Business Marketing and Distribution Agreement. Effective
April 1, 2002, the Applied Biosystems group became the exclusive distributor of
the Celera Discovery System ("CDS") operated by the Celera Genomics group. As
a result of this arrangement, the Applied Biosystems group will integrate CDS
and other genomic and biological information into a new Knowledge Business. In
exchange for marketing and distribution rights to CDS and other genomic and
biological information and access to CDS and related content, the Applied
Biosystems group will provide the Celera Genomics group with royalty payments
on revenues generated by sales of certain products of the Knowledge Business
from July 1, 2002 through the end of fiscal 2012. The royalty rate is
progressive, up to a maximum of 5%, with the level of sales through fiscal
2008. The royalty rate becomes a fixed percentage of sales starting in fiscal
2009, and the rate declines each succeeding fiscal year through fiscal 2012.
Assays on DemandTM, Assays by DesignTM, reagents for arrays, and new database
subscriptions sold by the Knowledge Business are the products subject to
royalties.
29
APPLIED BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
The Celera Genomics group will continue to be responsible for the performance
of its obligations under all contracts relating to its information products and
services either existing on the effective date of the marketing and
distribution agreement or which are entered into during a transition period
ending June 30, 2002 (including renewals, if any, of these contracts) and will
receive all revenues and other benefits under, and be responsible for all costs
and expenses associated with, such contracts. The Applied Biosystems group will
reimburse the Celera Genomics group if earnings before interest, taxes,
depreciation, and amortization from these contracts over the next four fiscal
years are below $62.5 million and the shortfall is due to business initiatives
of the Applied Biosystems group and the Celera Genomics group otherwise
continues to perform under its existing contracts.
NOTE 8 - CONTINGENCIES
Amersham
On February 26, 2002, the Company and Amersham plc announced that they reached a
courtmediated settlement which ended the previously disclosed patent litigation
between the Company and Amersham plc and its affiliates, including Amersham
Pharmacia Biotech, Inc. and Molecular Dynamics, Inc. The settlement, reached
under the auspices of United States Magistrate Judge Edward A. Infante, Northern
District of California, includes a cross-licensing agreement covering all
patents involved in the litigation, and a co-development arrangement for the
joint development, supply and commercialization of certain new DNA analysis
technologies. Both companies' current product offerings will continue to be
available.
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 combined financial statements of the Applied
Biosystems group or the consolidated financial statements of the Company.
The holders of Applera Corporation - Applied Biosystems Group Common Stock are
stockholders of the Company and are subject to all risks associated with an
investment in the Company, including any legal proceedings and claims affecting
the Celera Genomics group.
30
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
2001 2002 2001 2002
----------- ------------ ----------- -----------
Net Revenues $ 23,375 $ 30,487 $ 61,947 $ 92,815
Costs and Expenses
Cost of sales 11,969 15,402 28,155 45,309
Research and development 40,205 37,629 123,508 95,982
Selling, general and administrative 15,146 13,636 42,538 40,197
Amortization of goodwill and
intangible assets 10,916 2,636 32,965 4,742
Other special charges 22,959 22,959
Acquired research and development 98,981
----------- ------------ ----------- -----------
Operating Loss (54,861) (61,775) (165,219) (215,355)
Interest expense (209) (829) (347)
Interest income 15,258 6,805 50,568 26,359
Other income (expense), net (242) (3,521) (246) (5,270)
Loss from joint venture (12,353) (30,217)
----------- ------------ ----------- -----------
Loss Before Income Taxes (39,845) (71,053) (115,726) (224,830)
Benefit for income taxes (10,758) (21,557) (31,246) (41,832)
----------- ------------ ----------- -----------
Net Loss $ (29,087) $ (49,496) $ (84,480) $ (182,998)
=========== ============ =========== ============
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
31
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At June 30, At March 31,
2001 2002
--------------- ---------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 216,076 $ 113,962
Short-term investments 779,482 794,640
Accounts receivable, net 24,019 23,545
Inventories, net 6,239 2,503
Prepaid expenses and other current assets 4,838 7,592
--------------- ---------------
Total current assets 1,030,654 942,242
Property, plant and equipment, net 123,497 131,097
Other long-term assets 65,985 184,285
--------------- ---------------
Total Assets $ 1,220,136 $ 1,257,624
=============== ===============
Liabilities And Allocated Net Worth
Current liabilities
Accounts payable $ 21,024 $ 17,753
Accrued salaries and wages 15,088 16,485
Deferred revenues 37,486 41,309
Other accrued expenses 11,982 21,662
--------------- ---------------
Total current liabilities 85,580 97,209
Long-term debt 18,204
Other long-term liabilities 23,840 30,178
--------------- ---------------
Total Liabilities 109,420 145,591
Allocated Net Worth 1,110,716 1,112,033
--------------- ---------------
Total Liabilities And Allocated Net Worth $ 1,220,136 $ 1,257,624
=============== ===============
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
32
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
Nine months ended
March 31,
2001 2002
-------------- --------------
Operating Activities
Net loss $ (84,480) $ (182,998)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 48,387 26,791
Asset impairments 15,563
Provisions for excess lease space and severance costs 10,311
Long-term compensation programs 951 1,312
Gain on sale of assets (401)
Loss from equity method investees 4,027
Deferred income taxes (1,913) (15,381)
Loss from joint venture 30,217
Nonreimbursable utilization of tax benefits by the
Applied Biosystems group (23,270) (15,663)
Acquired research and development 98,981
Changes in operating assets and liabilities:
Tax benefit receivable from the Applied Biosystems group 16,702
Accounts receivable (7,339) 666
Inventories (1,363) 821
Prepaid expenses and other assets (3,542) (223)
Accounts payable and other liabilities 32,617 (11,733)
-------------- --------------
Net Cash Used By Operating Activities (23,250) (37,710)
-------------- --------------
Investing Activities
Additions to property, plant and equipment, net (21,406) (14,944)
Purchases of short-term investments, net (7,249) (15,215)
Investments (4,081) (34,064)
-------------- --------------
Net Cash Used By Investing Activities (32,736) (64,223)
-------------- --------------
Financing Activities
Net change in loans payable (8,443)
Principal payments on long-term debt (46,000) (10,000)
Purchases of common stock for treasury (941)
Proceeds from stock issued for stock plans 18,214 19,203
-------------- --------------
Net Cash Used By Financing Activities (27,786) (181)
-------------- --------------
Net Change In Cash And Cash Equivalents (83,772) (102,114)
Cash And Cash Equivalents Beginning Of Period 569,894 216,076
-------------- --------------
Cash And Cash Equivalents End Of Period $ 486,122 $ 113,962
============== ==============
See accompanying notes to the Celera Genomics group unaudited condensed combined
financial statements.
33
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED COMBINED FINANCIAL STATEMENTS
The interim condensed combined financial statements should be read in
conjunction with the financial statements presented in the Applera Corporation
(the "Company") 2001 Annual Report to Stockholders. Significant
accounting policies disclosed therein have not changed, except for the
accounting for goodwill and other intangible assets discussed in Note 2.
The unaudited condensed combined financial statements reflect, in the opinion of
the Company's management, all adjustments that are necessary for a fair
statement of the results for the interim periods. All such adjustments are of a
normal recurring nature. These results are, however, not necessarily indicative
of the results to be expected for a full year. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Certain amounts in the
condensed combined financial statements have been reclassified for comparative
purposes.
The Celera Genomics group's condensed combined financial statements should be
read in conjunction with the Company's condensed consolidated financial
statements and related notes thereto.
NOTE 2 - CHANGE IN ACCOUNTING POLICY
Effective July 1, 2001, the Celera Genomics group adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets." As a result, the Celera Genomics group has
reclassified certain other intangible assets associated with its workforce to
goodwill and no longer amortizes goodwill. Had the provisions of SFAS No. 142
been applied to the fiscal 2001 financial results, the Celera Genomics
group's net loss would have been $19.1 million and $54.3 million for the
three and nine months ended March 31, 2001, respectively, on a pro forma basis.
NOTE 3 - OTHER SPECIAL CHARGES
During the third quarter of fiscal 2002, the Celera Genomics group recorded a
non-recurring charge of $25.9 million related to its Paracel business. This
charge was comprised of $12.7 million for asset impairments, provisions of $10.1
million for the estimated cost of excess lease space and $0.2 million for
severance, all included in other special charges. This charge also included
$2.9 million for the impairment of Paracel inventory included in cost of sales.
During the fourth quarter of fiscal 2001, the Celera Genomics group had recorded
a charge of $69.1 million for the impairment of goodwill and other intangible
assets associated with the Paracel business. The charge during fiscal 2001
resulted from Paracel's substantially lower than originally anticipated
performance and management's future outlook of the business. The charges
recorded during the third quarter of fiscal 2002 resulted from Paracel's
unfavorable performance against the lower profitability outlook for the business
established during the fourth quarter of fiscal 2001 at the time of the initial
charge.
34
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
The asset impairment charges recorded during the third quarter of fiscal 2002
were for the write-off of the remaining goodwill of $12.1 million, other
intangible assets of $0.5 million, and leasehold improvements of $0.1 million.
These charges were determined by management through a revised assessment of
future cash flows and, as a result, reduced the carrying value of Paracel's net
assets to their estimated fair value. Excess lease costs reflect the estimated
loss associated with the remaining contractual obligations under a
non-cancelable lease arrangement and certain costs associated with the expected
sublease of the portion of the facility not occupied by the Paracel business,
net of estimated sublease income, for the remaining lease term. Severance and
related benefits were granted to 19 employees terminated in the third quarter
of fiscal 2002 and are expected to be paid by the end of the first quarter of
fiscal 2003.
The following table details the major components of the other special charges:
Asset
(Dollar amounts in millions) Impairment Lease Personnel Total
-------------- -------------- ------------ -----------
Total charges $12.7 $10.1 $0.2 $23.0
Non-cash charges 12.7 12.7
-------------- -------------- ------------ -----------
Accrual balance at March 31, 2002 $ - $10.1 $0.2 $10.3
============== ============== ============ ===========
NOTE 4 - ACQUISITIONS AND OTHER
AXYS PHARMACEUTICALS, INC.
On November 16, 2001, the Company acquired 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 application through collaborations with pharmaceutical companies
and has a proprietary product portfolio in oncology. The Company believes that
the acquisition will accelerate the Celera Genomics group's evolution as a drug
discovery and development business.
The Company issued 5.5 million shares of Applera Corporation - Celera Genomics
Group Common Stock ("Applera - Celera stock") in exchange for all of the
outstanding shares of Axys common stock. The acquisition was accounted for
using the purchase method of accounting. The total purchase price for the
acquisition was $188.4 million, which consisted of Applera - Celera stock
valued at $170.3 million, stock options valued at $8.8 million, warrants valued
at $2.8 million and estimated transaction costs of $6.5 million. The purchase
price was calculated using a $31.04 price per share of Applera - Celera stock,
based upon a measurement date of July 17, 2001. This date, determined in
accordance with Emerging Issues Task Force Abstracts Issue 99-12,
"Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in a Purchase Business Combination," represented the first
date on which the exchange ratio was fixed under the merger
35
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
agreement. The fair value of the options and warrants was calculated using the
Black-Scholes pricing model.
The purchase price of $188.4 million was allocated to tangible net assets and
intangible assets as follows:
(millions)
-----------
Current assets $ 6.8
Long-term assets 118.7
Current liabilities (34.9)
Long-term liabilities (20.7)
-----------
Tangible net assets acquired, at approximate fair value 69.9
-----------
Acquired in-process research and development 99.0
Existing technology 7.9
Favorable operating leases 11.6
-----------
Total intangible assets 118.5
-----------
Total purchase price $ 188.4
===========
The recorded values of the intangible assets are being amortized over their
expected period of benefit, which on a weighted average basis is 2.8 years.
Included in the long-term assets is a $61.3 million deferred tax asset,
recorded in purchase accounting, for net operating loss carryforwards and other
temporary differences of Axys expected to be utilized by the Company. Current
liabilities included $4.2 million of contractual severance and involuntary
termination costs. As of March 31, 2002, the Celera Genomics group had paid
$3.4 million of these severance costs.
In connection with the acquisition, the Company assumed $26.0 million of 8%
senior secured convertible notes. These notes mature on October 1, 2004.
Interest is payable quarterly and the principal is payable at maturity as a
lump sum. These notes are convertible at any time into 499,009 shares of
Applera - Celera stock at a conversion price of $52.10 per share. Holders of
notes having an aggregate principal amount of $10 million exercised their right
following the acquisition to require the Company to repurchase such notes,
which the Company did in January 2002. These notes are secured by 6.7 million
shares, or approximately 90%, of the Company's holding of Discovery Partners
International, Inc. ("DPI") common stock. As a result of the acquisition, the
Company received an approximate 30% interest in DPI, as of the acquisition
date. The investment is accounted for under the equity method of accounting.
Additionally, the Company assumed an existing Axys construction loan of $8.4
million related to its medicinal chemistry building located in South San
Francisco, California. The Celera Genomics group repaid this loan during the
second quarter of fiscal 2002 following the acquisition.
36
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
In connection with the acquisition of Axys, the Celera Genomics group allocated
approximately $99.0 million of the purchase price to acquired in-process
research and development ("IPR&D"). As of the acquisition date, the
technological feasibility of the related projects had not been established, and
it was determined that the acquired projects had no future alternative uses. The
amounts attributed to acquired IPR&D were based on an independent appraisal and
were developed using an income approach. The in-process technologies were
valued using a discounted cash flow model on a project-by-project basis. This
valuation incorporated a percentage of completion analysis using revenues
allocated to in-process technologies. The risk-adjusted discount rate used to
value the projects at acquisition ranged from 38% to 43%. The discount rates
applied in the discounted cash flow model were risk adjusted, since the assumed
periods of milestone receipts and assumed timing of product launch may vary
significantly from the assumptions. The valuation assumptions were made solely
for the purpose of calculating projected cash flows and valuing the intangible
assets acquired at the date of acquisition.
Below is a brief description of the IPR&D projects.
Valuation Assumptions at
Acquisition Date
----------------------------------------------------------
Development Value at
Status at Project's Stage Assumed Period Acquisition
Acquisition of Completion at of Milestone Date
Project Date Acquisition Date Receipts (in millions)
----------------------------------------------------------------------------------------------------------------------------
Cathepsin S: Pre-clinical 90% Years 1 - 7 from $37.7
Collaboration with Aventis Pharmaceuticals studies date of
Products, Inc. with the objective of acquisition
discovery and development of small molecule
drugs that inhibit Cathepsin S, a human
cysteine protease associated with certain
inflammatory and autoimmune diseases, such as
asthma and athersclerosis
Cathepsin K: Pre-clinical 91% Years 2 - 6 from 26.6
Collaboration with Merck & Co., Inc. to studies date of
develop small molecule inhibitors of Cathepsin acquisition
K for the treatment of osteoporosis
Tryptase: Pre-clinical 89% Years 3 - 8 from 14.9
Collaboration with Bayer A.G. to identify oral studies date of
tryptase inhibitors for the treatment of asthma acquisition
Cathepsin F: Pre-clinical 28% Years 2 - 8 from 8.9
Development of compounds for inflammatory studies date of
diseases such as asthma and rheumatoid acquisition
arthritis
Urokinase: Pre-clinical 50% Years 2 - 8 from 4.7
Oncology program focused on development of studies date of
inhibitors of the protease urokinase to acquisition
interfere with angiogenesis and metastasis
processes
37
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
Valuation Assumptions at
Acquisition Date
----------------------------------------------------------
Development Value at
Status at Project's Stage Assumed Period Acquisition
Acquisition of Completion at of Milestone Date
Project Date Acquisition Date Receipts (in millions)
----------------------------------------------------------------------------------------------------------------------------
Serm-beta: Pre-clinical 71% Years 3 - 7 from 4.3
Oncology program utilizing licenses granted by studies date of
Celgene Corp. for exclusive rights to acquisition
selective estrogen receptor-beta modulators
Factors VIIa & Xa: Pre-clinical 54% Years 2 - 10 1.9
Development of oral and parenteral studies from date of
therapeutics for blood clotting disorders, acquisition
such as deep vein thrombosis, stroke, and
myocardial infarction or heart attack
-------------------
$99.0
===================
For valuation purposes, the Celera Genomics group assumed that all projects
would be partnered and the initial material net cash inflows would result from
milestone payments. The Celera Genomics group also assumed there would be cash
inflows resulting from royalties after product launch. Product launches were
assumed to occur in five to nine years after the date of acquisition.
The Celera Genomics group has initiated a review of its unpartnered
pre-clinical programs that may lead to revised prioritization, resourcing and
strategy to move toward clinical trials and commercialization. As a
consequence, actual results may vary from the valuation assumptions outlined
above.
The net assets and results of operations of Axys have been included in the
Celera Genomics group's combined financial statements since the date of the
acquisition. The following selected unaudited pro forma information for the
Celera Genomics group has been prepared assuming the acquisition had occurred at
the beginning of fiscal 2001 and gives effect to purchase accounting
adjustments:
Three months ended Nine months ended
March 31, March 31,
(Dollar amounts in millions) 2001 2002 2001 2002
----------- ---------- ------------ ----------
Net revenues $ 26.4 $ 30.5 $ 69.1 $ 95.4
Net loss $ (43.1) $ (49.5) $ (119.9) $ (111.4)
Upon consummation of the acquisition, the Celera Genomics group recorded a $99.0
million non cash charge for the value of acquired IPR&D, which has been excluded
from the pro forma results above. Had the acquired IPR&D charge been excluded
from the reported amounts for the nine
38
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
months ended March 31, 2002, the Celera Genomics group would have reported a net
loss of $84.0 million.
Included in the results for the nine months ended March 31, 2002, is a non-cash
pretax charge of $10.8 million recorded by Axys, prior to the acquisition date,
for the impairment of an investment accounted for under the cost method.
TRANSFER OF BUSINESS UNIT TO THE APPLIED BIOSYSTEMS GROUP
Effective July 1, 2001, the Company transferred the assets, liabilities and
personnel of a business unit from the Celera Genomics group to the Applied
Biosystems group. The Company's Board of Directors determined that the assets
of the business to be transferred and the liabilities of the business to be
assumed by the Applied Biosystems group constituted fair value for the
transfer. The net assets were transferred at recorded book value as a charge
to the Celera Genomics group's allocated net worth.
NOTE 5 - COMPREHENSIVE LOSS
Accumulated other comprehensive income (loss) included in allocated net worth
in the Condensed Combined Statements of Financial Position consists of foreign
currency translation adjustments and unrealized gains and losses on
available-for-sale investments. Total comprehensive loss for the three and nine
months ended March 31, 2001 and 2002 is presented in the following table:
Three months ended Nine months ended
March 31, March 31,
(Dollar amounts in millions) 2001 2002 2001 2002
--------- -------- -------- --------
Net loss $ (29.1) $ (49.5) $ (84.5) $ (183.0)
Other comprehensive income (loss):
Foreign currency translation adjustments (0.2) 0.1 (0.2) (0.1)
Unrealized gain (loss) on investments,
net of tax (0.1) (2.7) 0.4 (0.8)
--------- -------- -------- ---------
Other comprehensive income (loss) (0.3) (2.6) 0.2 (0.9)
--------- -------- -------- ---------
Comprehensive loss $ (29.4) $ (52.1) $ (84.3) $ (183.9)
========= ======== ======== =========
39
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 6 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories included the following components:
June 30, March 31,
(Dollar amounts in millions) 2001 2002
--------------- ---------------
Raw materials and supplies $ 4.9 $ 1.1
Work-in-process 0.6 1.0
Finished products 0.7 0.4
--------------- ---------------
Total inventories $ 6.2 $ 2.5
=============== ===============
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash financing activities were as follows:
Nine months ended
March 31,
(Dollar amounts in millions) 2001 2002
------------- -------------
Nonreimbursable utilization of tax benefits by
the Applied Biosystems group $ (23.3) $ 15.7
Tax benefit related to employee stock options $ 12.4 $ 7.5
Transfer of business unit to the Applied
Biosystems group (Note 4) $ 8.1
Applera - Celera stock issued in the Axys
acquisition $181.9
Debt and capital lease obligation assumed in
the Axys acquisition $ 39.1
NOTE 8 - RELATED PARTY TRANSACTIONS
Sales of Products and Services Between Groups. For the three and nine months
ended March 31, 2001, cost of sales and research and development expenses
included $14.5 million and $45.1 million, respectively, for lease payments on
instruments, the purchase of consumables and project materials, and services
contracted from the Applied Biosystems group. For the three and nine months
ended March 31, 2002, cost of sales and research and development expenses
included $4.6 million and $19.5 million, respectively, for lease payments on
instruments, the purchase of consumables, and services contracted from the
Applied Biosystems group.
Online/Information Business Marketing and Distribution Agreement. Effective
April 1, 2002, the Applied Biosystems group became the exclusive distributor of
the Celera Discovery System ("CDS") operated by the Celera Genomics group. As a
result of this arrangement, the Applied Biosystems group will integrate CDS and
other genomic and biological information into a new Knowledge Business. In
exchange for marketing and distribution rights to CDS and other genomic and
biological information and access to CDS and related content, the Applied
Biosystems group will provide the Celera Genomics group with royalty payments
on revenues generated by sales of certain products of the Knowledge Business
from July 1, 2002 through the end of fiscal 2012. The royalty rate is
progressive, up to a maximum of 5%, with the level of sales
40
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
through fiscal 2008. The royalty rate becomes a fixed percentage of sales
starting in fiscal 2009, and the rate declines each succeeding fiscal year
through fiscal 2012. Assays on DemandTM, Assays by DesignTM, reagents for
arrays, and new database subscriptions sold by the Knowledge Business are the
products subject to royalties.
The Celera Genomics group will continue to be responsible for the performance
of its obligations under all contracts relating to its information products and
services either existing on the effective date of the marketing and
distribution agreement or which are entered into during a transition period
ending June 30, 2002 (including renewals, if any, of these contracts) and will
receive all revenues and other benefits under, and be responsible for all costs
and expenses associated with, such contracts. The Applied Biosystems group
will reimburse the Celera Genomics group if earnings before interest, taxes,
depreciation, and amortization from these contracts over the next four fiscal
years are below $62.5 million and the shortfall is due to business initiatives
of the Applied Biosystems group and the Celera Genomics group otherwise
continues to perform under its existing contracts.
NOTE 9 - CONTINGENCIES
Amersham
On February 26, 2002, the Company and Amersham plc announced that they reached
a court-mediated settlement which ended the previously disclosed patent
litigation between the Company and Amersham plc and its affiliates, including
Amersham Pharmacia Biotech, Inc. and Molecular Dynamics, Inc. The settlement,
reached under the auspices of United States Magistrate Judge Edward A. Infante,
Northern District of California, includes a cross-licensing agreement covering
all patents involved in the litigation, and a co-development arrangement for
the joint development, supply and commercialization of certain new DNA analysis
technologies. Both companies' current product offerings will continue to be
available.
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 combined financial statements of the Celera
Genomics group or the consolidated financial statements of the Company.
The holders of Applera - Celera stock are stockholders of the Company and are
subject to all risks associated with an investment in the Company, including
any legal proceedings and claims affecting the Applied Biosystems group.
41
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion of Operations
The purpose of the following management's discussion and analysis is to provide
an overview of the business of Applera Corporation ("Applera" or the
"Company"), to help facilitate the understanding of significant factors
influencing the historical operating results, financial condition and cash
flows and also to convey management's expectations of the potential impact of
known trends, events or uncertainties that may impact future results. This
discussion should be read in conjunction with the consolidated and combined
financial statements and related notes included in this report and in the
Company's 2001 Annual Report to Stockholders. Historical results and percentage
relationships are not necessarily indicative of operating results for future
periods.
Overview
The Company is comprised of two operating groups: the Applied Biosystems group
and the Celera Genomics group (collectively referred to as "groups").
The Applied Biosystems group develops and markets instrument-based systems,
reagents, software, and contract services to the life science industry and
research community. Customers use these tools to analyze nucleic acids ("DNA"
and "RNA") and proteins to make scientific discoveries, develop new
pharmaceuticals, and conduct standardized testing.
The Celera Genomics group is engaged principally in integrating advanced
technologies to discover and develop new therapeutics. The Celera Genomics
group intends to leverage its genomic and proteomic technology platforms to
identify drug targets and diagnostic marker candidates and to discover novel
therapeutic candidates. Its Celera Discovery SystemTM ("CDS") online platform,
to be marketed exclusively through the new Knowledge Business of the Applied
Biosystems group, is an integrated source of information based on the human
genome and other biological and medical sources.
Celera Diagnostics was established in 2001 as a joint venture between the
Applied Biosystems group and the Celera Genomics group. This venture is focused
on the discovery, development and commercialization of novel diagnostics tests.
In 1999, following a recapitalization, the Company created two classes of
stock referred to as "tracking" stocks. Tracking stock is a class of stock of
a corporation intended to "track" or reflect the performance of a specific
business within the corporation.
Applera Corporation - Applied Biosystems Group Common Stock ("Applera - Applied
Biosystems stock") is listed on the New York Stock Exchange under the ticker
symbol "ABI" and is intended to reflect the relative performance of the Applied
Biosystems group. Applera Corporation - Celera Genomics Group Common Stock
("Applera - Celera stock") is listed on the New York Stock Exchange under the
ticker symbol "CRA" and is intended to reflect the relative performance of the
Celera Genomics group. There is no single security that represents the
performance of Applera Corporation as a whole, nor is there a separate security
traded for Celera Diagnostics.
42
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Holders of Applera - Applied Biosystems stock and Applera - Celera stock are
stockholders of Applera. The Applied Biosystems group and the Celera Genomics
group are not separate legal entities, and holders of these stocks are
stockholders of a single company, Applera. As a result, holders of these
stocks are subject to all of the risks associated with an investment in Applera
and all of its businesses, assets, and liabilities.
The Applied Biosystems group and the Celera Genomics group do not have separate
Boards of Directors. Applera has one Board of Directors, which will make any
decision in accordance with its good faith business judgment that the decision
is in the best interests of Applera and all of its stockholders as a whole.
This quarterly report on Form 10-Q includes combined financial statements for
both the Applied Biosystems group and the Celera Genomics group, in addition to
the consolidated financial statements of Applera. The Company's fiscal year
ends on June 30. The following discussion is presented in two parts;
consolidated operations followed by the groups' operations.
During the current fiscal year, the following noteworthy developments have
occurred at the Company:
Applied Biosystems Group
o In November 2001, the Applied Biosystems group completed the acquisition
of Boston Probes, Inc. ("Boston Probes"). The Boston Probes acquisition
furthers the development of the Applied Biosystems group's platform for
analysis of genetic information.
o In March 2002, the Applied Biosystems group and MDS Inc. announced a
favorable ruling in a patent infringement lawsuit against Micromass.
o In February 2002, the Applied Biosystems group and Amersham plc announced
a court-mediated settlement in patent litigation between the parties.
o Effective April 1, 2002, the Applied Biosystems group and the Celera
Genomics group entered into an agreement in which the Applied Biosystems
group will become the exclusive distributor of CDS operated by the Celera
Genomics group. The Applied Biosystems group plans to integrate CDS and
other genomic and biological information into a new Knowledge Business to
include genomic assays and related content, as well as other
information-rich products, services, and analytical tools to meet the needs
of its customers.
o During the third quarter of fiscal 2002, the Applied Biosystems group
introduced the commercial version of the 4700 Proteomics Analyzer with
TOF/TOFTM Optics for high-throughput proteomics.
o In April 2002, the Applied Biosystems group introduced the ABI 3730 and
ABI 3730XL DNA Analyzers, which are expected to allow for cost-effective,
large-scale genome sequencing programs.
43
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Celera Genomics Group
o In November 2001, the Celera Genomics group completed the acquisition of
Axys Pharmaceuticals, Inc. ("Axys"). The Axys acquisition was intended to
accelerate the Celera Genomics group's evolution as a drug discovery and
development business.
o In January 2002, J. Craig Venter, Ph.D. stepped down as President of the
Celera Genomics group.
o In April 2002, Kathy Ordonez was appointed President of the Celera
Genomics group in addition to her role as President of Celera Diagnostics.
o Effective April 1, 2002, the Celera Genomics group and the Applied
Biosystems group entered into an agreement in which the Applied Biosystems
group will become the exclusive distributor of CDS.
o The Celera Genomics group sold its plant and animal genotyping businesses.
Critical Accounting Policies
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions. The Company believes that, of
the significant accounting policies discussed in Note 1 to the consolidated
financial statements and Note 1 to the combined financial statements of both
the Applied Biosystems group and the Celera Genomics group included in the 2001
Annual Report to Stockholders, the following accounting policies require
management's most difficult, subjective or complex judgments:
o Revenue recognition;
o Asset impairment;
o Allocation of purchase price to acquired assets and liabilities in
business combinations;
o Restructuring;
o Allocations to the Applied Biosystems group, the Celera Genomics group,
and Celera Diagnostics; and
o Related party transactions.
REVENUE RECOGNITION
The Applied Biosystems group records revenue generally at the time of shipment
of products or performance of services. Concurrently, it records provisions
for warranty, returns, and installation based on historical experience and
anticipated product performance. Revenue is not recognized at the time of
shipment of products in situations where risks and rewards of ownership are
transferred to the customer at a point other than shipping due to either the
stated shipping terms or the existence of an acceptance clause.
The Celera Genomics group recognizes revenue on subscription fees for access to
the Online/Information business databases ratably over the contracted period.
The Celera Genomics group recognizes revenue and profit on long-term contracts
in accordance with the percentage-of-completion method. Under this method,
revenue is recognized based on either the
44
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
costs incurred compared to total costs expected to be incurred as work is
performed or on the relative costs for a completed phase compared to the
estimate of total expected contract costs when delivery and/or acceptance
provisions are present. Shorter term contracts are recognized upon completion.
The percentage-of-completion method relies on estimates of total expected
contract revenues and costs. Material changes in estimated costs to complete
could have a material impact on the profitability of such long-term contracts
in future periods.
ASSET IMPAIRMENT
Inventory
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market. Reserves for obsolescence and excess inventory are provided
based on historical experience and estimates of future product demand. If
actual demand is less favorable than the Company's estimates, additional
inventory write-downs may be required.
Deferred tax asset
The Company records a valuation allowance against the deferred tax asset for
foreign tax loss carryforwards and domestic tax credit carryforwards if it is
more likely than not that the Company will not be able to utilize these
carryforwards to offset future taxes. This valuation allowance is based on
estimates of future taxable profits and losses and tax planning strategies.
Subsequent revisions to estimates of future taxable profits and losses and tax
planning strategies could change the amount of the deferred tax asset the
Company would be able to realize in the future, and therefore could increase or
decrease the valuation allowance.
Long-lived assets, including goodwill
In July 2001, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," and as a result no
longer amortizes goodwill. Instead, goodwill must be tested for impairment at
the reporting unit level, at least annually, by determining the fair value of
the reporting unit and comparing it with its book value. A reporting unit is
the lowest level of an entity that is a business and can be distinguished from
other activities, operations, and assets of the entity. If, during the annual
impairment review, the book value of the reporting unit exceeds the fair value,
the implied fair value of the reporting unit's goodwill is compared with the
carrying amount of the unit's goodwill. If the carrying amount exceeds the
implied fair value, goodwill is written down to its implied fair value. SFAS
No. 142 requires management to estimate the fair value of each reporting unit,
as well as the fair value of the assets and liabilities of each reporting unit,
other than goodwill. The implied fair value of goodwill is determined as the
difference between the fair value of a reporting unit, taken as a whole, and
the fair value of the assets and liabilities of such reporting unit.
Other long-lived assets are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Events which could trigger an impairment review include, among
others, a decrease in the market value of an asset, the asset's inability to
45
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
generate income from operations and positive cash flow in future periods, a
decision to change the manner in which an asset is used, a physical change to
the asset or a change in business climate. The Company calculates estimated
future undiscounted cash flows of the related operation and compares it to the
carrying value of the asset in determining whether impairment potentially
exists. This calculation is based upon a valuation model and discount rate
commensurate with the risks involved.
Future adverse changes in market conditions or poor operating results of a
related reporting unit may require the Company to record an impairment charge
in the future.
ALLOCATION OF PURCHASE PRICE TO ACQUIRED ASSETS AND LIABILITIES IN BUSINESS
COMBINATIONS
The cost of an acquired business is assigned to the tangible and identifiable
intangible assets acquired and liabilities assumed on the basis of their fair
values at the date of acquisition. The Company assesses fair value by a
variety of methods, including the use of independent appraisers, present value
models, and estimation of current selling prices and replacement values.
Amounts recorded as intangible assets, including acquired in-process research
and development ("IPR&D"), are based upon assumptions and estimates regarding
the amount and timing of projected revenues and costs, appropriate
risk-adjusted discount rates, as well as assessing the competition's ability to
commercialize products prior to the Company. Also, upon acquisition, the
Company determines the estimated economic lives of the acquired intangible
assets for amortization purposes. Actual results may vary from projected
results.
RESTRUCTURING
From time to time, the Company may undertake special actions to improve
profitability and cash flow performance as appropriate. Upon approval of a
restructuring plan by management, the Company will expense costs related to the
plan that do not benefit future periods. These costs could include estimates
of severance and termination benefits, facility-related expenses, elimination
or reduction of product lines, asset-related write-offs, and termination of
contractual obligations, among other items. The Company will periodically
review these cost estimates and adjust the restructuring liability, as
appropriate.
During the third quarter of fiscal 2002, the Celera Genomics group recorded a
liability based on management's estimates related to sublease activities for
office space associated with its Paracel business. The Company will evaluate
the commercial real estate market conditions periodically to determine if
estimates of the amount and timing of future sublease income are reasonable
based on current and expected commercial real estate market conditions and
actual sublease activity. If the Company determines that the estimates for
sublease proceeds have significantly changed, an adjustment to the liability
would be recognized in the period in which such determination was made.
46
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
ALLOCATIONS TO THE APPLIED BIOSYSTEMS GROUP, THE CELERA GENOMICS GROUP, AND
CELERA DIAGNOSTICS
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 and Celera Diagnostics. Where specific identification is not
practical, other methods and criteria, which require the use of judgments and
estimates, are used that the Company 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 the portion of corporate overhead
expenses attributable to each of the businesses. The Company allocates such
corporate overhead expenses primarily based upon headcount, total expenses, and
revenues attributable to each business.
During the fourth quarter of fiscal 2001, Celera Diagnostics was established as
a joint venture between the Applied Biosystems group and the Celera Genomics
group. Refer to Note 2 in the Combined Financial Statements of The Applied
Biosystems group or The Celera Genomics group in the 2001 Annual Report to
Stockholders for more information regarding Celera Diagnostics. 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, up to
$300 million, in its income statement as loss from joint venture. Losses
incurred by Celera Diagnostics in excess of $300 million will be shared equally
by the Celera Genomics group and the Applied Biosystems group. Celera
Diagnostics has accumulated net losses of $35.2 million through March 31, 2002.
Celera Diagnostics' profits, if any, will be shared in the ratio of 65 percent
to the Celera Genomics group and 35 percent to the Applied Biosystems group
until the cumulative profits of Celera Diagnostics equal the initial losses.
Once cumulative profits exceed initial losses up to $300 million, Celera
Diagnostics' profits will be shared equally between the groups.
To determine earnings per share, the earnings allocated to each class of common
stock 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 in the
United States, consistently applied.
The management and allocation policies applicable to the attribution of assets,
liabilities, revenues and expenses to the businesses may be modified or
rescinded, or additional policies may be adopted, at the sole discretion of the
Company's Board of Directors at any time without stockholder approval. The
Company's Board of Directors would make any decision in accordance with its
good faith business judgment that its decision is in the best interests of the
Company and all of its stockholders as a whole.
A decision to modify or rescind the management and allocation policies, or
adopt additional policies, could have different effects on holders of Applera -
Applied Biosystems stock and holders of
47
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Applera - Celera stock or could result in a benefit or detriment to one class
of stockholders compared to the other class.
RELATED PARTY TRANSACTIONS
The Applied Biosystems group is a supplier of instruments and consumables to
the Celera Genomics group and Celera Diagnostics. The Celera Genomics group
makes its genomic information and bioinformatic tools available to the Applied
Biosystems group and Celera Diagnostics.
The Applied Biosystems group, the Celera Genomics group or Celera Diagnostics
may sell or lease products to or perform services for one another at fair value
to be used in the purchasing business' commercial activities. The selling
business records revenues on these transactions when the product is shipped, as
the service is performed, or over the term of the lease.
The Applera businesses also may jointly undertake a project, such as the
Applera genomics initiative, where the total costs and benefits of the project
are shared. Shipments of products or performance of services related to such
joint projects are not recorded as revenue by any of the businesses, but
instead are included, at cost, in the total project costs that are shared based
on each business' expected benefit.
The Applera businesses may perform services for one another, which are not
directly attributable to either businesses' revenue generating activities. The
business performing such services charges the benefiting business the cost of
performing the services, including overhead.
Effective April 1, 2002, the Applied Biosystems group became the exclusive
distributor of CDS operated by the Celera Genomics group. As a result of this
arrangement, the Applied Biosystems group will integrate CDS and other genomic
and biological information into a new Knowledge Business. In exchange for
marketing and distribution rights to CDS and other genomic and biological
information and access to CDS and related content, the Applied Biosystems group
will provide the Celera Genomics group with royalty payments on revenues
generated by sales of certain products of the Knowledge Business from July 1,
2002 through the end of fiscal 2012. The royalty rate is progressive, up to a
maximum of 5%, with the level of sales through fiscal 2008. The royalty rate
becomes a fixed percentage of sales starting in fiscal 2009, and the rate
declines each succeeding fiscal year through fiscal 2012. Assays on DemandTM,
Assays by DesignTM, reagents for arrays, and new database subscriptions sold by
the Knowledge Business are the products subject to royalties.
The Celera Genomics group will continue to be responsible for the performance
of its obligations under all contracts relating to its information products and
services either existing on the effective date of the marketing and
distribution agreement or which are entered into during a transition period
ending June 30, 2002 (including renewals, if any, of these contracts) and will
receive all revenues and other benefits under, and be responsible for all costs
and expenses associated with, such contracts. The Applied Biosystems group
will reimburse the Celera Genomics group if earnings before interest, taxes,
depreciation, and amortization from these contracts over the next four fiscal
years are below $62.5 million, and the shortfall is due to
48
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
business initiatives of the Applied Biosystems group and the Celera Genomics
group otherwise continues to perform under its existing contracts.
Events Impacting Comparability
Acquisitions. The Company acquired Axys and Boston Probes during the second
quarter of fiscal 2002. The results of operations for the above acquisitions,
which were accounted for using the purchase method of accounting, have been
included in the consolidated financial statements since the date of
acquisition. The net assets and results of operations of Axys have been
allocated to the Celera Genomics group. The net assets and results of
operations of Boston Probes have been allocated to the Applied Biosystems
group. A discussion of these acquisitions is provided in Note 4 to the
Company's condensed consolidated financial statements.
Acquired research and development. During the first nine months of fiscal
2002, the Company recorded charges to write-off the value of acquired IPR&D in
connection with the Axys and Boston Probes acquisitions. The Applied
Biosystems group recorded a charge of $2.2 million relating to Boston Probes
during the second quarter of fiscal 2002 and the Celera Genomics group recorded
a charge of $99.0 million relating to Axys during the second quarter of fiscal
2002. As of the acquisition date, the technological feasibility of the related
projects had not been established, and it was determined that the acquired
projects had no future alternative uses.
The amounts attributed to acquired IPR&D were based on an independent appraisal
and were developed using an income approach. The in-process technologies were
valued using a discounted cash flow model on a project-by-project basis.
The Axys projects acquired as part of the acquisition are in various stages of
research and development and will require additional research and development
efforts by the Company or its collaborators before any eventual products can be
marketed, if ever. These efforts include extensive pre-clinical and clinical
testing and are subject to lengthy regulatory review and approval by the United
States Food and Drug Administration. The nature and timing of these remaining
efforts are dependent upon successful testing and approval of the products as
well as maintaining the existing collaborative relationships and entering into
new collaborative relationships. If collaboration partners terminate or elect
to cancel their agreements or otherwise fail to conduct their collaborative
activities in a timely manner, the development or commercialization process may
be delayed or abandoned.
Following is a brief description of the IPR&D projects.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
--------------------------------------------------------------------------------------------------------------------------
Development Development Status & Value at
Status at Nature/Timing of Remaining Acquisition
Project Acquisition Efforts at March 31, 2002 Date
--------------------------------------------------------------------------------------------------------------------------
(in millions)
Partnered Projects:
Cathepsin S: Pre-clinical Investigational new drug $37.7
Collaboration with Aventis Pharmaceuticals Products, studies ("IND") enabling studies
Inc. with the objective of discovery and development of announced in January 2002;
small molecule drugs that inhibit Cathepsin S, a human Expect to complete
cysteine protease associated with certain inflammatory pre-clinical studies during
and autoimmune diseases, such as asthma and calendar 2002.
athersclerosis Applera's portion of
collaboration completed in
April 2002.
Cathepsin K: Pre-clinical Expect to identify additional 26.6
Collaboration with Merck & Co., Inc. to develop small studies safety assessment
molecule inhibitors of Cathepsin K for the treatment of candidate(s) and carry out
osteoporosis further pre-clinical
efficacy, safety and
toxicology studies during
calendar 2002.
Applera's portion of
collaboration expected to be
completed in December 2002.
Tryptase: Pre-clinical Expect to complete 14.9
Collaboration with Bayer A.G. to identify oral tryptase studies pre-clinical studies during
inhibitors for the treatment of asthma calendar 2002.
Applera's portion of
collaboration completed in
January 2002.
-------------
Total for partnered projects $79.2
-------------
Unpartnered Projects:
Cathepsin F: Pre-clinical Expect to continue 8.9
Development of compounds for inflammatory diseases such studies pre-clinical studies through
as asthma and rheumatoid arthritis calendar 2002. IND enabling
studies expected in calendar
2003.
Urokinase: Pre-clinical Project is no longer being 4.7
Oncology program focused on development of inhibitors of studies pursued.
the protease urokinase to interfere with angiogenesis
and metastasis processes
Serm-beta: Pre-clinical Expect to complete 4.3
Oncology program utilizing licenses granted by Celgene studies pre-clinical studies during
Corp. for exclusive rights to selective estrogen calendar 2002.
receptor-beta modulators
Factors VIIa & Xa: Pre-clinical Expect to complete 1.9
Development of oral and parenteral therapeutics for studies pre-clinical studies during
blood clotting disorders, such as deep vein thrombosis, calendar 2002.
stroke, and myocardial infarction or heart attack
-------------
Total for unpartnered projects $19.8
-------------
$99.0
=============
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APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
As of March 31, 2002, the Company's portion of the estimated costs to complete
the partnered projects is not deemed material. The costs to complete the
unpartnered programs are dependent on decisions of how to commercialize, such
as whether to partner the program, and at what stage to partner. The Celera
Genomics group has initiated a review of the unpartnered pre-clinical programs
that may lead to revised prioritization, resourcing and strategy to move toward
clinical trials and commercialization. As a consequence, actual results may
vary from the valuation assumptions outlined in Note 4 to the condensed
consolidated financial statements and Note 4 to the Celera Genomics group's
condensed combined financial statements.
Other special charges. During the quarter ended March 31, 2002, the Company
recorded a non-recurring charge of $25.9 million related to the Celera Genomics
group's Paracel business. This charge was comprised of $23.0 million recorded
in other special charges primarily for the impairment of goodwill and other
intangible assets and a provision for the estimated cost of excess lease space.
Additionally, the Company recorded a charge of $2.9 million in cost of sales
for the impairment of Paracel inventory. Refer to the Discussion of
Consolidated Operations for the three months ended March 31, 2002 for a further
discussion of the other special charges.
Gain on Investments. The first nine months of fiscal 2001 included pretax
gains of $15.0 million, or $9.7 million on an after-tax basis, related to the
sales of minority equity investments. These sales occurred during the first
and second quarters of fiscal 2001.
Discussion of Consolidated Operations
Results of Operations--The Three Months Ended March 31, 2002 Compared With The
Three Months Ended March 31, 2001
The Company reported a net loss of $2.9 million for the third quarter of fiscal
2002 compared with net income of $28.3 million for the third quarter of fiscal
2001. Excluding the special charges of $21.0 million on an after-tax basis,
net income for the third quarter of fiscal 2002 was $18.2 million. The
decrease in net income reflected lower net revenues and interest income and
higher R&D expenses, which were partially offset by lower SG&A expenses and
amortization of goodwill and other intangible assets. On a segment basis, the
Applied Biosystems group reported net income of $49.1 million for the third
quarter of fiscal 2002 compared with $57.7 million for the prior year period.
Excluding the non-recurring special charges, the Celera Genomics group reported
a net loss of $28.5 million for the third quarter of fiscal 2002 compared with
a net loss of $29.1 million for the third quarter of fiscal 2001.
Net revenues for the Company were $434.4 million for the third quarter of
fiscal 2002 compared with $447.1 million for the third quarter of fiscal 2001,
a decrease of 2.8%. On a segment basis, net revenues for the Applied
Biosystems group were $409.0 million for the third quarter of fiscal 2002
compared with $439.8 million for the third quarter of fiscal 2001, a decrease
of 7.0%. The Celera
51
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Genomics group reported net revenues of $30.5 million for the third quarter of
fiscal 2002 compared with $23.4 million for the third quarter of fiscal 2001,
an increase of 30.4%.
Gross margin, as a percentage of net revenues for the Company, was 53.3% for
the third quarter of fiscal 2002 compared with 52.9% for the third quarter of
fiscal 2001. Third quarter fiscal 2002 gross margin included $2.9 million of
inventory-related write-offs related to the Paracel business, as further
described below. Excluding the special charge, gross margin increased to 54.0%
of revenues. The higher gross margin percentage in fiscal 2002 was due
primarily to increased subscription revenues for the Celera Genomics group,
changes in customer mix, and price increases in certain product lines of the
Applied Biosystems group implemented in early fiscal 2002, partially offset by
the negative effects of foreign currency.
SG&A expenses for the Company were $108.6 million for the third quarter of
fiscal 2002 compared with $119.3 million for the third quarter of fiscal 2001.
As a percentage of net revenues, SG&A expenses decreased to 25.0% for the third
quarter of fiscal 2002 compared with 26.7% for the third quarter of fiscal 2001
primarily due to the Company's efforts to restrain discretionary spending. On a
segment basis, SG&A expenses for the Applied Biosystems group were $93.0
million and $104.1 million for the third quarters of fiscal 2002 and 2001,
respectively. SG&A expenses for the Celera Genomics group were $13.6 million
and $15.1 million for the third quarters of fiscal 2002 and 2001, respectively.
R&D expenses increased $22.8 million for the third quarter of fiscal 2002 to
$103.6 million from $80.8 million for the third quarter of fiscal 2001
primarily due to spending on: diagnostics programs associated with the Celera
Diagnostics business; the Company's genomics initiative for commercializing
products from information obtained through analysis of the human genome, which
is a collaboration for which expenses have been shared equally among the
Company's businesses; the continued development of new products and
technologies by the Applied Biosystems group; and therapeutic discovery
programs by the Celera Genomics group. On a segment basis, R&D expenses for the
Applied Biosystems group were $56.7 million and $47.5 million for the third
quarters of fiscal 2002 and 2001, respectively. R&D expenses for the Celera
Genomics group were $37.6 million and $40.2 million for the third quarters of
fiscal 2002 and 2001, respectively. R&D expenses for Celera Diagnostics were
$11.1 million for the third quarter of fiscal 2002.
The Company recorded non-cash amortization expenses of $2.6 million in the
third quarter of fiscal 2002 compared to $10.9 million in the third quarter of
fiscal 2001 relating to the amortization of goodwill and other intangible
assets. Effective July 1, 2001, the Company adopted the provisions of SFAS No.
142, and as a result, no longer amortizes goodwill. Refer to Note 2 of the
Company's condensed consolidated financial statements for a further discussion.
During the third quarter of fiscal 2002, the Company recorded a non-recurring
charge of $25.9 million related to the Celera Genomics group's Paracel
business. This charge was comprised of
52
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
$12.7 million for asset impairments, provisions of $10.1 million for the
estimated cost of excess lease space and $0.2 million for severance, all
included in other special charges. This charge also included $2.9 million for
the impairment of Paracel inventory included in cost of sales. During the
fourth quarter of fiscal 2001, the Company had recorded a charge of $69.1
million for the impairment of goodwill and other intangible assets associated
with the Paracel business. The charge during fiscal 2001 resulted from
Paracel's substantially lower than originally anticipated performance and
management's future outlook of the business. The charges recorded during the
third quarter of fiscal 2002 resulted from Paracel's unfavorable performance
against the lower profitability outlook for the business established during the
fourth quarter of fiscal 2001 at the time of the initial charge.
The asset impairment charges recorded during the third quarter of fiscal 2002
were for the write-off of the remaining goodwill of $12.1 million, other
intangible assets of $0.5 million, and leasehold improvements of $0.1 million.
These charges were determined by management through a revised assessment of
future cash flows and, as a result, reduced the carrying value of Paracel's net
assets to their estimated fair value. Excess lease costs reflect the estimated
loss associated with the remaining contractual obligations under a
non-cancelable lease arrangement and certain costs associated with the expected
sublease of the portion of the facility not occupied by the Paracel business,
net of estimated sublease income, for the remaining lease term. Severance and
related benefits were granted to 19 employees terminated in the third quarter
of fiscal 2002 and are expected to be paid by the end of the first quarter of
fiscal 2003.
Operating loss for the Company was $6.3 million for the third quarter of fiscal
2002 compared with operating income of $25.3 million for the third quarter of
fiscal 2001. Excluding the non-recurring special charges, operating income for
the Company was $19.5 million in the third quarter of fiscal 2002. On a
segment basis, operating income for the Applied Biosystems group decreased to
$66.8 million for the third quarter of fiscal 2002 from $79.6 million for the
third quarter of fiscal 2001. This decrease in operating income was caused
primarily by lower net revenues and higher R&D expenses, in large part due to
continued development of new products and technologies as further described in
the Applied Biosystems group's discussion of operations, partially offset by
higher gross margin as a percentage of net revenues, resulting from changes in
customer mix and price increases in certain product lines, and lower SG&A
expenses due to restraints on discretionary spending. Operating income as a
percentage of net revenues for the Applied Biosystems group was 16.3% in the
third quarter of fiscal 2002 compared with 18.1% in the third quarter of fiscal
2001.
Excluding the special charges in the third quarter of fiscal 2002, operating
loss for the Celera Genomics group was $35.9 million compared with $54.9
million for the third quarter of fiscal 2001. The decrease in the Celera
Genomics group's operating loss reflected continued growth in subscription
revenues, lower R&D expenses, and lower amortization of goodwill and other
intangible assets. Including the special charge, the Celera Genomics group's
operating loss for the third quarter of fiscal 2002 was $61.8 million.
53
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Interest income was $9.8 million for the third quarter of fiscal 2002 compared
with $19.3 million for the third quarter of fiscal 2001. This decrease was
primarily attributable to lower average interest rates during the third quarter
of fiscal 2002 as compared to the third quarter of fiscal 2001.
Excluding the special charges, the effective income tax rate was 27% for the
third quarter of fiscal 2002 compared with 34% for the third quarter of fiscal
2001. The lower effective income tax rate in fiscal 2002 was primarily due to
the discontinued amortization of nondeductible goodwill, resulting from the
adoption of SFAS No. 142, and the implementation of certain tax planning
strategies.
Results of Operations--The Nine Months Ended March 31, 2002 Compared With The
Nine Months Ended March 31, 2001
The Company reported a net loss of $47.3 million for the first nine months of
fiscal 2002 compared with net income of $80.3 million for the first nine months
of fiscal 2001. Net income for the Company, on a comparable basis excluding
the acquired IPR&D and other special charges during fiscal 2002 and the gain
from the sale of investments during fiscal 2001 previously described, increased
6.2% to $74.9 million for the first nine months of fiscal 2002 compared with
$70.5 million for the first nine months of fiscal 2001. The increase in net
income reflected increased net revenues and lower SG&A expenses and
amortization of goodwill and other intangible assets, which were partially
offset by lower interest income and higher R&D expenses. On a segment basis,
excluding the special items, the Applied Biosystems group reported net income
of $132.5 million for the first nine months of fiscal 2002 compared with $155.0
million for the first nine months of fiscal 2001 and the Celera Genomics group
reported a net loss of $63.0 million for the first nine months of fiscal 2002
compared with a net loss of $84.5 million for the first nine months of fiscal
2001.
Net revenues for the Company were $1,259.5 million for the first nine months of
fiscal 2002 compared with $1,227.8 million for the first nine months of fiscal
2001, an increase of 2.6%. On a segment basis, net revenues for the Applied
Biosystems group were $1,186.8 million and $1,214.4 million for the first nine
months of fiscal 2002 and fiscal 2001, respectively. The Celera Genomics group
reported net revenues of $92.8 million for the first nine months of fiscal 2002
compared with $61.9 million for the first nine months of fiscal 2001.
Gross margin, as a percentage of net revenues for the Company, was 52.7% for
the first nine months of fiscal 2002 compared with 52.8% for the first nine
months of fiscal 2001. Fiscal 2002 gross margin included $2.9 million of
inventory-related write-offs related to the Paracel business. Excluding the
special charge, gross margin increased to 52.9% of revenues. The slightly
higher gross margin percentage for the first nine months in fiscal 2002 was due
primarily to increased subscription revenues for the Celera Genomics group,
changes in product and customer mix, and price increases in certain product
lines of the Applied Biosystems group, partially offset by lower margins from
increased revenue generated by contract sequencing and the negative effects of
foreign currency.
54
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
SG&A expenses for the Company were $325.0 million for the first nine months of
fiscal 2002 compared with $331.5 million for the first nine months of fiscal
2001. As a percentage of net revenues, SG&A expenses decreased to 25.8% for
the first nine months of fiscal 2002 compared with 27.0% for the first nine
months of fiscal 2001 primarily due to the Company's efforts to restrain
discretionary spending. On a segment basis, SG&A expenses for the Applied
Biosystems group were $278.4 million and $288.9 million for the first nine
months of fiscal 2002 and 2001, respectively. SG&A expenses for the Celera
Genomics group were $40.2 million and $42.5 million for the first nine months
of fiscal 2002 and 2001, respectively.
R&D expenses increased $42.2 million for the first nine months of fiscal 2002
to $276.6 million from $234.4 million for the first nine months of fiscal 2001
due primarily to spending on: diagnostics programs associated with the Celera
Diagnostics business; the Company's genomics initiative for commercializing
products from information obtained through analysis of the human genome, which
is a collaboration for which expenses have been shared equally among the
Company's businesses; the continued development of new products and
technologies by the Applied Biosystems group; and therapeutic discovery
programs by the Celera Genomic group. These increases were partially offset by
lower R&D expenses associated with the shotgun phase of certain whole genome
sequencing programs conducted by the Celera Genomics group. On a segment
basis, R&D expenses for the Applied Biosystems group were $161.6 million and
$135.6 million for the first nine months of fiscal 2002 and 2001, respectively.
R&D expenses for the Celera Genomics group were $96.0 million and $123.5
million for the first nine months of fiscal 2002 and 2001, respectively. R&D
expenses for Celera Diagnostics were $25.6 million for the first nine months of
fiscal 2002.
The Company recorded non-cash amortization expenses of $4.7 million in the
first nine months of fiscal 2002 compared to $33.0 million in the first nine
months of fiscal 2001 relating to the amortization of goodwill and other
intangible assets. Effective July 1, 2001, the Company adopted the provisions
of SFAS No. 142, and as a result, no longer amortizes goodwill. Refer to Note
2 of the Company's condensed consolidated financial statement for a further
discussion.
Operating loss for the Company was $66.8 million for the first nine months of
fiscal 2002 compared with operating income of $49.2 million for the first nine
months of fiscal 2001. Operating income, on a comparable basis, excluding the
acquired IPR&D and Paracel related charges in fiscal 2002, increased 22.4% to
$60.2 million for the first nine months of fiscal 2002. On a segment basis,
operating income for the Applied Biosystems group decreased to $178.0 million
for the first nine months of fiscal 2002, excluding the acquired IPR&D charge,
from $213.8 million for the first nine months of fiscal 2001. This decrease in
operating income was caused primarily by lower net revenues and higher R&D
expenses due primarily to continued development of new products and
technologies as further described in the Applied Biosystems group's discussion
of operations.
Operating loss for the Celera Genomics group was $90.5 million for the first
nine months of fiscal 2002, excluding the acquired IPR&D and Paracel related
charges, compared with $165.2 million for
55
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
the first nine months of fiscal 2001. The decrease in the Celera Genomics
group's operating loss reflected growth in revenues, lower R&D expenses, and
lower amortization of goodwill and other intangible assets.
Interest income was $36.1 million for the first nine months of fiscal 2002
compared with $63.2 million for the first nine months of fiscal 2001. This
decrease was primarily attributable to lower average interest rates during the
first nine months of fiscal 2002 as compared to the first nine months of fiscal
2001.
Other income (expense), net was expense of $5.2 million for the first nine
months of fiscal 2002, which consisted primarily of the Company's share of
losses from equity method investments and other nonoperating costs, partially
offset by a net gain on the sale of the Celera Genomics group's AgGen plant
genotyping business. Other income (expense), net was expense of $4.3 million
for the first nine months of fiscal 2001, which was primarily related to costs
associated with the Company's foreign currency risk management program.
Excluding the special items, the effective income tax rate was 16% for the
first nine months of fiscal 2002 compared with 34% for the first nine months of
fiscal 2001. The lower effective income tax rate in fiscal 2002 was primarily
due to the discontinued amortization of nondeductible goodwill, due to the
adoption of SFAS No. 142, and the implementation of certain tax planning
strategies allowing for the use of foreign tax credits.
Discussion of Segment Operations
Applied Biosystems Group
Results of Operations--The Three Months Ended March 31, 2002 Compared With The
Three Months Ended March 31, 2001
The Applied Biosystems group reported net income of $49.1 million for the third
quarter of fiscal 2002 compared with $57.7 million for the third quarter of
fiscal 2001, a decrease of 14.8%. This decrease was primarily attributable to
a decline in sales volume and higher R&D expenses, partially offset by lower
SG&A expenses during the third quarter of fiscal 2002. The negative effects of
foreign currency reduced net income by approximately $3 million, or 5%, as
compared with the third quarter of fiscal 2001.
Net revenues were $409.0 million for the third quarter of fiscal 2002 compared
with $439.8 million for the third quarter of fiscal 2001. Net revenues from the
Celera Genomics group, primarily from leased instruments and consumables
shipments, were $4.6 million for the third quarter of fiscal 2002, or 1.1% of
the Applied Biosystems group's net revenues, and $16.1 million for the third
quarter of fiscal 2001, or 3.7%.
56
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Revenue growth was adversely impacted by the biotechnology sector's limited
access to capital, both in the U.S. and Europe. It also appears that
pharmaceutical companies have lengthened or altered their purchasing cycles.
Additionally, many academic customers have been slow to receive funds from the
fiscal 2002 National Institutes of Health ("NIH") budget, and the NIH has been
deliberating on how best to distribute the significant portion of its fiscal
2002 budget increase that has been earmarked to fight bio-terrorism.
Geographically, during the third quarter of fiscal 2002, net revenues decreased
9.9% in the United States, 8.2% in Asia Pacific, and 16.5% in Latin America and
other markets, and increased 1.0% in Europe compared with the prior fiscal year
period. Excluding the effects of foreign currency, revenues grew approximately
5% in Europe and decreased approximately 4% in Asia Pacific compared to the
prior year period.
For the third quarter of fiscal 2002, revenues from instrument sales were
$201.3 million, a decrease of 12.2% from $229.2 million in the prior year
period. The decrease in instrument sales was due primarily to lower sales of
the 3700 DNA Analyzer, which declined approximately 61% compared with the prior
year quarter. During the current fiscal year quarter, the Applied Biosystems
group observed some decline in market share in the low- and mid-throughput DNA
sequencer segment believed to be due to a price gap in product lines between
the models 310 and 3100 DNA Analyzers. The Applied Biosystems group has
recently introduced the Model 3100 Avant with the intention of filling this
price gap between product lines. While DNA sequencer sales were weaker in the
quarter, sales of mass spectrometer instruments were strong, increasing
approximately 28% year-over-year as a result of strong demand in the drug
metabolism and pharmacokinetics market. This increase was driven by strength
in the API 4000 LC/MS/MS product and by the recently released 4700 Proteomics
Analyzer with TOF/TOFTM Optics. Sequence detection system ("SDS") instruments
sales increased 5% over the prior year quarter.
Consumables sales were $149.1 million in the third quarter of fiscal 2002
compared to $159.0 million in the third quarter of fiscal 2001, a decrease of
6.2%. The decline in consumables sales was due largely to a lower rate of
growth in the Applied Biosystems group's installed sequencer base and a
decrease in sales of DNA sequencing consumables to the Celera Genomics group
and five large academic genome labs. Consumable sales to the Celera Genomics
group and five large academic genome labs decreased from $31.3 million during
the third quarter of fiscal 2001 to $12.5 million during the third quarter of
fiscal 2002. Excluding sales to these six customers, consumables revenues
increased 7% during the third quarter of fiscal 2002 compared to the prior year
quarter. Reagent dilution, a shift of much of the Celera Genomics group's
sequencing capacity to the Applera genomics initiative, for which the Applied
Biosystems group does not recognize revenue, and a winding down of the
sequencing phase of the Japanese Millennium Project have driven this decline.
57
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Revenues from other sources, which included service contracts, royalties,
licenses, and contract research, increased 13.6% to $58.6 million in the third
quarter of fiscal 2002 from $51.6 million in the third quarter of fiscal 2001.
Gross margin, as a percentage of net revenues, increased to 52.9% for the third
quarter of fiscal 2002 from 52.6% for the third quarter of fiscal 2001 due
primarily to changes in customer mix and previously implemented price increases
in certain product lines, partially offset by the negative effects of currency.
SG&A expenses were $93.0 million for the third quarter of fiscal 2002 compared
with $104.1 million for the third quarter of fiscal 2001, a decrease of 10.7%.
SG&A expenses have decreased due to a focused effort to lower discretionary
spending in response to lower sales growth rates.
R&D expenses were $56.7 million for third quarter of fiscal 2002 compared with
$47.5 million for the third quarter of fiscal 2001, an increase of 19.4%. As a
percentage of net revenues, R&D expenses were 13.9% for the third quarter of
fiscal 2002 compared with 10.8% for the third quarter of fiscal 2001. The
increase in R&D expenses was primarily a result of the funding of the Applera
genomics initiative and support for new products in development, including the
3730 product line and Assays on Demand(TM).
Interest income was $3.0 million for the third quarter of fiscal 2002 compared
with $4.0 million for the third quarter of fiscal 2001. The decrease was
primarily due to lower average interest rates partially offset by larger
average cash balances for the third quarter of fiscal 2002 compared with the
third quarter of fiscal 2001.
The effective income tax rate was 29% for the third quarter of fiscal 2002 and
30% for the third quarter of fiscal 2001. The decrease in the effective income
tax rate was due to the implementation of certain tax planning strategies
allowing for the utilization of foreign tax credits. See Note 1 to the Applied
Biosystems group's combined financial statements in the Company's 2001 Annual
Report to Stockholders for a discussion of allocations of federal and state
income taxes.
Results of Operations--The Nine Months Ended March 31, 2002 Compared With The
Nine Months Ended March 31, 2001
The Applied Biosystems group reported net income of $130.3 million for the
first nine months of fiscal 2002 compared with $164.8 million for the first
nine months of fiscal 2001. On a comparable basis excluding the special items
from the first nine months of fiscal 2002 and fiscal 2001 previously described,
net income decreased 14.5% to $132.5 million compared with $155.0 million for
the first nine months of fiscal 2001. This decrease was primarily attributable
to lower revenues and higher R&D expenses, partially offset by restraints on
discretionary spending. The negative effects of foreign currency reduced net
income by approximately $5 million, or 3%, as compared with the first nine
months of fiscal 2001.
58
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Net revenues were $1,186.8 million and $1,214.4 million for the first nine
months of fiscal 2002 and 2001, respectively. Net revenues from the Celera
Genomics group, primarily from leased instruments and consumables shipments,
were $19.5 million for the first nine months of fiscal 2002, or 1.6% of the
Applied Biosystems group's net revenues, and $47.9 million for the same period
in fiscal 2001, or 3.9% of net revenues.
Geographically, during the first nine months of fiscal 2002, net revenues
decreased 5.6% in the United States and 11.0% in Latin America and other
markets, and increased 2.5% in Europe and 0.7% in Asia Pacific, compared with
the first nine months of the prior fiscal year. Excluding the effects of
foreign currency, revenues grew approximately 3% in Europe and 5% in Asia
Pacific during the first nine months of fiscal 2002 compared to the prior year
period.
For the first nine months of fiscal 2002, revenues from instrument sales were
$563.3 million, a decrease of 9.4% from $621.9 million in the first nine months
of the prior year. The decrease in instrument sales was caused primarily by
weakened economic and equity market conditions, as well as the comparison with
a strong first nine months in fiscal 2001 resulting in part from numerous
placements of the ABI PRISM(R) 3700 DNA Analyzer at large genome centers. Sales
of ABI PRISM(R) 3700 DNA Analyzers declined approximately 66% in the first nine
months of fiscal 2002 compared to the levels in the first nine months of fiscal
2001. These factors, which contributed to the decrease in instrument sales,
were partially offset by significant increases in sales of SDS instruments, for
gene expression and single nucleotide polymorphism ("SNP") analysis, and strong
increases in revenues from mass spectrometry systems in the first nine months
of fiscal 2002 compared to the first nine months of fiscal 2001, led by the API
4000 triple-quadrupole mass spectrometer for studies of drug metabolism and
pharmacokinetics, which began shipping in the fourth quarter of fiscal 2001.
Excluding sales of the ABI PRISM(R) 3700 DNA Analyzers, instrument sales
increased approximately 6% in the first nine months of fiscal 2002 as compared
to the prior year period.
Consumables sales increased to $448.5 million in the first nine months of
fiscal 2002 from $433.8 million in the first nine months of fiscal 2001, an
increase of 3.4%. Sales of consumables were strong in TaqMan(R) reagents for
gene expression and SNP analysis. DNA sequencing consumables sales declined
largely due to a lower rate of growth in our installed sequencer base and a
decrease in sales of DNA sequencing consumables to the Celera Genomics group
and five large academic genome labs. Reagent dilution, a shift of much of the
Celera Genomics group's sequencing capacity to the Applera genomics initiative,
for which the Applied Biosystems group does not recognize revenue, and a
winding down of the sequencing phase of the Japanese Millennium Project have
driven this decline.
59
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Revenues from other sources, which included service contracts, royalties,
licenses, and contract research, increased 10.3% to $175.0 million in the first
nine months of fiscal 2002 from $158.7 million in the first nine months of
fiscal 2001.
Additionally, the following table sets forth the Applied Biosystems group's
revenues by product categories for the nine-month periods ended March 31:
(Dollar amounts in millions) 2002 2001 % Change
---------------- --------------- ---------------
DNA sequencing products $ 455 $ 559 (18%)
% of total revenues 38% 46%
SDS and other applied genomics products 234 190 23%
% of total revenues 20% 16%
Mass Spectrometry 206 166 24%
% of total revenues 18% 14%
Core DNA synthesis and PCR products 180 189 (5%)
% of total revenues 15% 15%
Other 111 110 1%
% of total revenues 9% 9%
---------------- ---------------
Total $1,186 $1,214 (2%)
================ ===============
Gross margin, as a percentage of net revenues, declined to 52.1% for the first
nine months of fiscal 2002 from 52.6% for the first nine months of fiscal 2001
due primarily to lower license fee income in the first nine months of fiscal
2002 as compared to the prior year and the negative effects of foreign
currency, partially offset by price increases in certain product lines and
changes in customer mix.
SG&A expenses of $278.4 million for the first nine months of fiscal 2002
decreased 3.7% from the prior year amount of $288.9 million due to restraints
on discretionary spending in response to lower sales growth rates.
R&D expenses were $161.6 million for first nine months of fiscal 2002 compared
with $135.6 million for the first nine months of fiscal 2001, an increase of
19.2%. As a percentage of net revenues, R&D expenses were 13.6% for the first
nine months of fiscal 2002 compared with 11.2% for the same period in fiscal
2001. The increase in R&D expenses was primarily a result of continued
development of new products and technologies such as novel, high-throughput
instruments for gene and protein studies and related consumable products,
including the ABI 3730 and ABI 3730XL DNA Analyzers, SDS systems, and the 4700
Proteomics Analyzer with TOF/TOF(TM) Optics introduced during fiscal 2002, as
well as the Applied Biosystems group's participation in the Applera genomics
initiative shared among the Company's businesses.
60
APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Interest income was $9.8 million for the first nine months of fiscal 2002
compared with $12.6 million for the first nine months of fiscal 2001. The
decrease was primarily due to lower average interest rates, partially offset by
larger average cash balances during the first nine months of fiscal 2002
compared with the first nine months of fiscal 2001. Other income (expense),
net was expense of $4.1 million for the first nine months of fiscal 2001, and
was primarily related to the Applied Biosystems group's foreign currency risk
management program.
The effective income tax rate was 29% for the first nine months of fiscal 2002
compared with 30% for the first nine months of fiscal 2001. The decrease in
the effective income tax rate was due to the implementation of certain tax
planning strategies allowing for the utilization of foreign tax credits. See
Note 1 to the Applied Biosystems group's combined financial statements in the
Company's 2001 Annual Report to Stockholders for a discussion of allocations of
federal and state income taxes.
Celera Genomics Group
Results of Operations--The Three Months Ended March 31, 2002 Compared With The
Three Months Ended March 31, 2001
The Celera Genomics group reported a net loss of $49.5 million for the third
quarter of fiscal 2002 compared with a net loss of $29.1 million for the third
quarter of fiscal 2001. On a comparable basis excluding the non-recurring
special charges from fiscal 2002 previously described, the net loss decreased
2.1% to $28.5 million. The lower net loss primarily resulted from operating
growth in the Online/Information business, lower amortization of goodwill, and
lower R&D spending. Partially offsetting these factors were continued
investment in the Celera Diagnostics joint venture with the Applied Biosystems
group, lower interest income and losses recognized from equity method
investments.
Net revenues for the Celera Genomics group were $30.5 million for the third
quarter of fiscal 2002 compared with $23.4 million for the third quarter of
fiscal 2001. Online/Information business revenues for the quarter were $18.5
million, compared to $12.4 million in the third quarter of fiscal 2001. The
increased revenues resulted primarily from new database subscription agreements
with commercial and academic customers signed over the last twelve months.
Cost of sales increased $3.4 million to $15.4 million for the third quarter of
fiscal 2002 from $12.0 million in the third quarter of the prior year. The
increase in cost of sales was substantially due to the $2.9 million of Paracel
inventory-related write-offs as further described below.
R&D expenses decreased $2.6 million to $37.6 million for the third quarter of
fiscal 2002 from $40.2 million in the third quarter of the prior year. R&D
expenses associated with therapeutic discovery programs, including the Axys
programs, proteomics, and discovery informatics increased in
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comparison to the same quarter last year. R&D spending also increased as a
result of the Celera Genomics group's participation in the Applera genomics
initiative. These increases were more than offset by lower R&D expenses for
whole genome sequencing and an increased use of sequencing capacity for
commercial activity in the third quarter of fiscal 2002 as compared to the
prior year. R&D expenses also decreased due to the transfer of personnel to
the Applied Biosystems group effective July 1, 2001. See Note 4 to the Celera
Genomics group's condensed combined financial statements for a further
discussion.
The Celera Genomics group recorded non-cash amortization expenses of $2.6
million in the third quarter of fiscal 2002 compared with $10.9 million in the
third quarter of fiscal 2001 relating to the amortization of goodwill and other
intangible assets primarily from the Axys acquisition. Effective July 1, 2001,
the Celera Genomics group adopted the provisions of SFAS No. 142, and as a
result, no longer amortizes goodwill. Refer to Note 2 of the Celera Genomics
group's condensed combined financial statements for a further discussion.
During the third quarter of fiscal 2002, the Celera Genomics group recorded a
non-recurring charge of $25.9 million related to its Paracel business. This
charge was comprised of $12.7 million for asset impairments, provisions of
$10.1 million for the estimated cost of excess lease space and $0.2 million for
severance, all included in other special charges. This charge also included
$2.9 million for the impairment of Paracel inventory included in cost of sales.
During the fourth quarter of fiscal 2001, the Celera Genomics group had
recorded a charge of $69.1 million for the impairment of goodwill and other
intangible assets associated with the Paracel business. The charge during
fiscal 2001 resulted from Paracel's substantially lower than originally
anticipated performance and management's future outlook of the business. The
charges recorded during the third quarter of fiscal 2002 resulted from
Paracel's unfavorable performance against the lower profitability outlook for
the business established during the fourth quarter of fiscal 2001 at the time
of the initial charge.
The asset impairment charges recorded during the third quarter of fiscal 2002
were for the write-off of the remaining goodwill of $12.1 million, other
intangible assets of $0.5 million, and leasehold improvements of $0.1 million.
These charges were determined by management through a revised assessment of
future cash flows and, as a result, reduced the carrying value of Paracel's net
assets to their estimated fair value. Excess lease costs reflect the estimated
loss associated with the remaining contractual obligations under a
non-cancelable lease arrangement and certain costs associated with the expected
sublease of the portion of the facility not occupied by the Paracel business,
net of estimated sublease income, for the remaining lease term. Severance and
related benefits were granted to 19 employees terminated in the third quarter
of fiscal 2002 and are expected to be paid by the end of the first quarter of
fiscal 2003.
Interest income was $6.8 million for the third quarter of fiscal 2002 compared
with $15.3 million for the third quarter of fiscal 2001. The decrease was
primarily attributable to lower average interest rates and lower average cash
balances during fiscal 2002 compared to the prior year.
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Other income (expense), net was expense of $3.5 million in the third quarter of
fiscal 2002 and consisted of the Celera Genomics group's share of losses from
equity method investments and other non-operating costs.
Loss from joint venture of $12.4 million in the third quarter of fiscal 2002
reflected the loss recognized by the Celera Genomics group as a result of its
interest in Celera Diagnostics, a joint venture with the Applied Biosystems
group. Refer to Note 2 of the Celera Genomics group's Combined Financial
Statements included in the Company's 2001 Annual Report for a further
discussion of this joint venture.
The effective income tax benefit rate was 30% for the third quarter of fiscal
2002 and 27% for the third quarter of fiscal 2001. Excluding the non-recurring
special charges, the income tax benefit rate was 37% during the third quarter
of fiscal 2002. The income tax benefit rate was lower in fiscal 2001 due to the
amortization of nondeductible goodwill. As previously discussed, the Celera
Genomics group no longer amortizes goodwill due to the adoption of SFAS No. 142.
Results of Operations--The Nine Months Ended March 31, 2002 Compared With The
Nine Months Ended March 31, 2001
The Celera Genomics group reported a net loss of $183.0 million for the first
nine months of fiscal 2002 compared with a net loss of $84.5 million for the
first nine months of fiscal 2001. On a comparable basis excluding the acquired
IPR&D and other special charges from fiscal 2002, the net loss decreased 25.4%
to $63.0 million during fiscal 2002. The decrease in the net loss primarily
resulted from operating growth in the Online/Information business, the
completion of R&D related genome sequencing programs, and lower amortization of
goodwill. Partially offsetting these factors were recognition of losses from
the investment in the Celera Diagnostics joint venture with the Applied
Biosystems group and lower interest income.
Net revenues for the Celera Genomics group were $92.8 million for the first
nine months of fiscal 2002 compared with $61.9 million for the first nine
months of fiscal 2001, an increase of 49.8%. Online/Information business
revenues increased to $52.8 million in the first nine months of fiscal 2002
compared with $34.3 million for the same period in fiscal 2001 as a result of
increased database subscription agreements from commercial and academic
customers. The remaining revenue increase resulted primarily from increased
genomic services and collaborations.
Cost of sales increased $17.1 million to $45.3 million for the first nine
months of fiscal 2002 from $28.2 million in the first nine months of fiscal
2001. Fiscal 2002 cost of sales included $2.9 million of inventory-related
write-offs related to the Paracel business. Excluding the special charge, cost
of sales increased $14.2 million. This increase was primarily due to the
increased use of sequencing capacity for commercial activities.
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R&D expenses decreased $27.5 million to $96.0 million for the first nine months
of fiscal 2002 from $123.5 million for the first nine months of fiscal 2001.
R&D expenses associated with therapeutic discovery programs, including the Axys
programs, proteomics, and discovery informatics increased in comparison to the
same period last year. R&D spending also increased for the Celera Genomics
group's participation in the Applera genomics initiative. These increases were
more than offset by lower R&D expenses for whole genome sequencing and an
increased use of sequencing capacity for commercial activity in the first nine
months of fiscal 2002 as compared to the prior year. R&D expenses decreased
due to the transfer of personnel to the Applied Biosystems group effective July
1, 2001. See Note 4 to the Celera Genomics group's condensed combined
financial statements for a further discussion.
The Celera Genomics group recorded non-cash amortization expenses of $4.7
million in the first nine months of fiscal 2002 compared with $33.0 million in
the first nine months of fiscal 2001 relating to the amortization of goodwill
and other intangible assets primarily from the Axys acquisition. Effective July
1, 2001, the Celera Genomics group adopted the provisions of SFAS No. 142, and
as a result, no longer amortizes goodwill. Refer to Note 2 of the Celera
Genomics group's condensed combined financial statements for a further
discussion.
Interest income was $26.4 million for the first nine months of fiscal 2002
compared with $50.6 million for the first nine months of fiscal 2001. The
decrease was primarily attributable to lower average interest rates during the
first nine months of fiscal 2002.
Other income (expense), net was expense of $5.3 million for the first nine
months of fiscal 2002, which consisted primarily of the Celera Genomics group's
share of losses from equity method investments and other non-operating costs,
partially offset by a net gain on the sale of the Celera Genomics group's AgGen
plant genotyping business.
Loss from joint venture of $30.2 million for the first nine months of fiscal
2002 reflects the loss recognized by the Celera Genomics group as a result of
its interest in Celera Diagnostics, a joint venture with the Applied Biosystems
group. Refer to Note 2 of the Celera Genomics group's Combined Financial
Statements included in the Company's 2001 Annual Report.
The effective income tax benefit rate was 19% for the first nine months of
fiscal 2002 and 27% for the first nine months of fiscal 2001. Excluding the
acquired IPR&D and other special charges, the effective income tax benefit rate
was 37% for fiscal 2002. The income tax benefit rate was lower in fiscal 2001
primarily due to the amortization of nondeductible goodwill. As discussed
previously, the Celera Genomics group no longer amortizes goodwill due to the
adoption of SFAS No. 142.
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Management's Discussion of Condensed Consolidated Financial Resources and
Liquidity
The Company had cash and cash equivalents and short-term investments of $1.4
billion at March 31, 2002 and June 30, 2001. The Company maintains a $100
million revolving credit agreement with four banks that expires on April 20,
2005, under which there are no outstanding borrowings. Cash provided by
operating activities has been and is expected to continue to be the Company's
primary source of funds.
The Company believes that existing funds, cash generated from operations, and
existing sources of debt financing are adequate to satisfy its normal operating
cash flow needs, planned capital expenditure requirements, and dividends.
However, the Company may raise additional capital from time to time.
The Company manages the investment of surplus cash and the issuance and
repayment of short-term and long-term debt for the Applied Biosystems group and
the Celera Genomics group and allocates activity within these balances to the
group that uses or generates such resources.
The following discussion of financial resources and liquidity focuses on the
Company's Condensed Consolidated Statements of Financial Position and Condensed
Consolidated Statements of Cash Flows, the Applied Biosystems group's Condensed
Combined Statements of Financial Position and Condensed Combined Statements of
Cash Flows, and the Celera Genomics group's Condensed Combined Statements of
Financial Position and Condensed Combined Statements of Cash Flows.
Significant Changes in the Condensed Consolidated Statements of Financial
Position
Working capital was $1.4 billion at March 31, 2002 and $1.5 billion at June 30,
2001. Debt to total capitalization was 1% at March 31, 2002 and 2% at June 30,
2001. During the second quarter of fiscal 2002, in connection with the Axys
acquisition, the Company assumed $26.0 million of 8% senior secured convertible
notes, of which $10.0 million was repaid in the third quarter of fiscal 2002
and an $8.4 million short-term loan, which was repaid during the second quarter
of fiscal 2002. Also during the third quarter of fiscal 2002, the Company
repaid its yen 3.8 billion, or $29.0 million, loan upon its scheduled maturity.
Accounts receivable decreased by $19.5 million to $381.3 million at March 31,
2002 from $400.8 million at June 30, 2001, primarily due to the strong
collection efforts by the Applied Biosystems group.
Prepaid expenses and other current assets increased $13.9 million to $116.9
million at March 31, 2002 from $103.0 million at June 30, 2001, primarily due
to a change in investments used to fund a deferred compensation plan.
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Property, plant and equipment, net increased $36.3 million to $471.9 million at
March 31, 2002, from $435.6 million at June 30, 2001 primarily due to assets
acquired as part of the acquisitions of Axys and Boston Probes.
Other long-term assets increased $157.7 million to $568.5 million at March 31,
2002 from $410.8 million at June 30, 2001 primarily due to the acquisitions of
Axys and Boston Probes. In connection with these acquisitions, the Company
recorded approximately $23 million of goodwill, $41 million of other intangible
assets, and net deferred tax assets of $57 million for net operating loss
carryforwards and other temporary differences. As a result of these
acquisitions, the Company also received investments in equity securities of
approximately $32 million. Non-current deferred tax assets increased
approximately $50 million in addition to the acquired tax assets, and the
Company spent approximately $27 million relating to purchased licensed
technology and prepaid supply agreements during fiscal 2002. Partially
offsetting these increases was a decrease in the fair value of the Company's
minority equity investments of approximately $44 million primarily caused by
the decline in market values of the securities, as well as the $12.7 million
charge for the impairment of goodwill and other intangible assets related to
the Celera Genomics group's Paracel business.
Accounts payable decreased to $150.1 million at March 31, 2002 from $178.3
million at June 30, 2001. The decrease was primarily related to the timing of
vendor payments and management of inventory on hand.
Accrued taxes on income increased $13.2 million to $96.2 million at March 31,
2002 from $83.0 million at June 30, 2001, primarily due to the timing of income
tax payments.
Discussion of the Condensed Consolidated Statements of Cash Flows
Operating activities generated $122.4 million of cash for the first nine months
of fiscal 2002 compared with $24.9 million for the same period in fiscal 2001.
For the first nine months of fiscal 2002 compared with the first nine months of
fiscal 2001, strong working capital management and lower compensation-related
payments were only partially offset by lower income-related cash flows.
During the first nine months of fiscal 2002, net cash used by investing
activities was $129.3 million, compared with $140.6 million for the first nine
months of fiscal 2001. Capital expenditures, net of disposals, were $78.0
million for the first nine months of fiscal 2002 compared with $139.9 million
in the prior year period. Capital expenditures were higher during the first
nine months of fiscal 2001 primarily due to the Applied Biosystems group's
purchase of additional property in Pleasanton, California. During the first
nine months of fiscal 2002, the Company had net purchases of short-term
investments of $15.2 million compared with $7.2 million during the prior year.
The Company realized $5.2 million and $15.5 million in net cash proceeds from
the sale of minority equity investments during the first nine months of fiscal
2002 and 2001, respectively. The Company acquired the remaining 87% of Boston
Probes, not previously owned, for approximately $37 million
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in the second quarter of fiscal 2002 as described in Note 4 of the Company's
condensed consolidated financial statements.
Net cash used by financing activities was $44.8 million for the first nine
months of fiscal 2002 compared with $14.6 million for the first nine months of
fiscal 2001. The Company made net payments of $14.5 million on loans payable
during the first nine months of fiscal 2002 compared with net proceeds of $7.8
million during the first nine months of fiscal 2001. Subsequent to the
acquisition of Axys, the Company repaid $8.4 million of short-term debt and
$10.0 million of long-term debt assumed in the Axys acquisition. Also during
fiscal 2002, the Company repaid a yen 3.8 billion, or $29.0 million, loan on
its scheduled maturity date. During fiscal 2001, the Company repaid $46.0
million of its commercial paper borrowing, which it secured specifically for
the purchase of the Celera Genomics group's Rockville, Maryland facilities.
During the first nine months of fiscal 2002, the Company received $36.6 million
of proceeds from stock issued for stock plans compared with $50.2 million for
the first nine months of fiscal 2001. Dividends paid on Applera - Applied
Biosystems stock were $27.0 million during the first nine months of fiscal 2002
compared with $26.7 million for the first nine months of fiscal 2001. During
the first nine months of fiscal 2002, the Company also purchased $0.9 million
of Applera - Celera stock for treasury, which was subsequently reissued for
stock plans.
Discussion of Segment Financial Resources and Liquidity
Applied Biosystems Group
Significant Changes in the Applied Biosystems Group's Condensed Combined
Statements of Financial Position
Cash and cash equivalents were $447.7 million at March 31, 2002 and $392.5
million at June 30, 2001, with total debt of $9.1 million at March 31, 2002 and
$45.2 million at June 30, 2001. Working capital was $584.7 million at March
31, 2002 and $505.9 million at June 30, 2001. Debt to total capitalization
decreased to 1% at March 31, 2002 from 4% at June 30, 2001.
Accounts receivable decreased $22.6 million to $360.0 million at March 31, 2002
from $382.6 million at June 30, 2001, primarily due to the strong collection
efforts as evidenced by the improvement in days sales outstanding to 68 days at
March 31, 2002 from 79 days at June 30, 2001, calculated on a consistent basis.
Prepaid expenses and other current assets increased $10.4 million to $108.5
million at March 31, 2002 from $98.1 million at June 30, 2001, primarily due to
a change in investments used to fund a deferred compensation plan.
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Other long-term assets increased $33.9 million to $382.5 million at March 31,
2002 from $348.6 million at June 30, 2001, primarily due to the acquisition of
Boston Probes. In conjunction with this acquisition, the Applied Biosystems
group recorded approximately $23 million of goodwill and $22 million of other
intangible assets. Also, during fiscal 2002, non-current deferred tax assets
increased approximately $18 million and the Applied Biosystems group spent
approximately $27 million relating to purchased licensed technology and supply
agreements. Partially offsetting these increases was a decrease in the fair
value of minority equity investments by approximately $44 million primarily
caused by the decline in market values of the securities.
Accounts payable decreased to $131.7 million at March 31, 2002 from $162.1
million at June 30, 2001 primarily due to the timing of vendor payments and
management of inventory on hand.
Accrued taxes on income increased $8.9 million to $91.6 million at March 31,
2002 from $82.7 million at June 30, 2001 primarily due to the timing of income
tax payments.
Discussion of the Applied Biosystems Group's Condensed Combined Statements of
Cash Flows
Operating activities generated $185.0 million of cash for the first nine months
of fiscal 2002 compared with $49.7 million during the first nine months of
fiscal 2001. For the first nine months of fiscal 2002 compared with the same
period of fiscal 2001, strong working capital management and lower
compensation-related payments were only partially offset by lower
income-related cash flows. Calculated on a consistent basis, the Applied
Biosystems group's days sales outstanding was 68 days at March 31, 2002
compared to 79 days at March 31, 2001 and there were 3.4 months of inventory on
hand at March 31, 2002 compared to 3.2 months on hand at June 30, 2001.
For the first nine months of fiscal 2002, net cash used by investing activities
was $89.9 million, compared with $109.4 million for the first nine months of
fiscal 2001. Capital expenditures, net of disposals, were $57.2 million for the
first nine months of fiscal 2002 compared with $120.1 million in the prior year
period. Capital expenditures were higher during the first nine months of
fiscal 2001 primarily due to the Applied Biosystems group's purchase of
property in Pleasanton, California for approximately $54 million. During the
first nine months of fiscal 2002, the Applied Biosystems group acquired the
remaining shares of Boston Probes that it did not already own for approximately
$37 million and realized proceeds of $5.2 million from the sale of investments.
During the first nine months of fiscal 2001, the Applied Biosystems group
realized $15.5 million in net cash proceeds from the sales of minority equity
investments and invested $4.8 million in other minority equity investments.
Net cash used by financing activities was $44.6 million for the first nine
months of fiscal 2002 compared with net cash provided by financing activities
of $13.2 million for the first nine months of fiscal 2001. During the first
nine months of fiscal 2002, the Applied Biosystems group received $17.4 million
of proceeds from stock issued for stock plans compared with $32.0 million
during the
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first nine months of fiscal 2001. Dividends paid on Applera - Applied
Biosystems stock were $27.0 million during the first nine months of fiscal 2002
compared with $26.7 million for the first nine months of fiscal 2001. Also
during the first nine months of fiscal 2002, the Company repaid a yen 3.8
billion, or $29.0 million, loan on its scheduled maturity date. The Applied
Biosystems group made net payments of $6.1 million on loans payable during the
first nine months of fiscal 2002 compared with net proceeds of $7.8 million
from loans during the first nine months of fiscal 2001.
Celera Genomics Group
Significant Changes in the Celera Genomics Group's Condensed Combined
Statements of Financial Position
Cash and cash equivalents and short-term investments were $908.6 million at
March 31, 2002 compared with $995.6 million at June 30, 2001. During the
second quarter of fiscal 2002, in connection with the Axys acquisition, the
Company assumed $26.0 million of 8% senior secured convertible notes, of which
$10.0 million was repaid in the third quarter of fiscal 2002, and an $8.4
million short-term loan, which was repaid during the second quarter of fiscal
2002. Working capital was $845.0 million at March 31, 2002 and $945.1 million
at June 30, 2001.
Property, plant and equipment, net increased $7.6 million to $131.1 million at
March 31, 2002, from $123.5 million at June 30, 2001 primarily related to
assets received in the acquisition of Axys.
Other long-term assets increased by $118.3 million to $184.3 million at March
31, 2002 from $66.0 million at June 30, 2001, primarily as a result of the
acquisition of Axys. In conjunction with this acquisition, the Celera Genomics
group recorded $19.5 million of intangible assets and $61.3 million of deferred
tax assets for deductible net operating loss carryforwards and other temporary
differences. The Celera Genomics group also received approximately $32 million
of equity investments as a result of this acquisition. Non-current deferred
tax assets increased $23 million in addition to the acquired tax assets.
Partially offsetting these increases was the $12.7 million charge for the
impairment of goodwill and other intangible assets related to the Paracel
business.
Deferred revenues increased $3.8 million to $41.3 million at March 31, 2002
from $37.5 million at June 30, 2001 due to the timing of subscriptions received
for database agreements and payments received on contract sequencing agreement
offsets by revenue recognized under these agreements.
Other accrued expenses increased $9.7 million to $21.7 million at March 31,
2002 from $12.0 million at June 30, 2001, primarily due to other accruals
associated with the acquisition of Axys and an increase in accrued rent for the
short-term portion of the provision for Paracel's estimated loss associated
with the excess lease costs.
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Other long-term liabilities increased $6.4 million to $30.2 million at March
31, 2002 from $23.8 million at June 30, 2001, primarily due to an increase in
accrued rent for the long-term portion of the provision for Paracel's estimated
loss associated with the excess lease costs.
Discussion of the Celera Genomics Group's Condensed Combined Statements of Cash
Flows
Operating activities used $37.7 million of cash during the first nine months of
fiscal 2002 compared with $23.3 million for the first nine months of fiscal
2001. The increase in cash used by operating activities during the first nine
months of fiscal 2002 compared with the first nine months of fiscal 2001 was
primarily due to the payment of compensation and other liabilities assumed in
the Axys' acquisition and a decrease in reimbursable tax benefits of the Celera
Genomics group utilized by the Applied Biosystems group, partially offset by
lower net cash operating losses and management of receivables. During the
first quarter of fiscal 2001, the Applied Biosystems group began utilizing tax
benefits in excess of the maximum reimbursable amount. See Note 1 to the
Celera Genomics group's combined financial statements in the Company's 2001
Annual Report to Stockholders for a discussion of allocations of federal and
state income taxes.
For the first nine months of fiscal 2002, net cash used by investing activities
was $64.2 million, compared with $32.7 million for the first nine months of
fiscal 2001. Capital expenditures, net of disposals, were $14.9 million for
the first nine months of fiscal 2002 compared to $21.4 million for the first
nine months of fiscal 2001. Capital expenditures for the first nine months of
fiscal 2001 included $2.9 million of purchases from the Applied Biosystems
group. During the first nine months of fiscal 2002, the Celera Genomics group
had net purchases of short-term investments of $15.2 million compared with $7.2
million during the prior year period. Also during the first nine months of
fiscal 2002, the Celera Genomics group made investments of $34.1 million, which
were primarily related to the Celera Diagnostics joint venture. During the
first nine months of fiscal 2001, the Celera Genomics group acquired an
interest in Hubit Genomix for $4.1 million.
Net cash used by financing activities was $0.2 million during the first nine
months of fiscal 2002 compared with $27.8 million for the first nine months of
fiscal 2001. During the first nine months of fiscal 2002, the Celera Genomics
group received $19.2 million of proceeds from stock issued for stock plans
compared with $18.2 million during the prior year period. During the first
nine months of fiscal 2002, the Company purchased $0.9 million of Applera -
Celera Stock for treasury, which was subsequently reissued for stock plans.
During the first nine months of fiscal 2002, the Celera Genomics group repaid
$8.4 million of short-term debt and $10.0 million of long-term debt assumed in
the acquisition of Axys. During the comparable prior year period, the Company
repaid $46.0 million of its commercial paper borrowing attributed to the Celera
Genomics group.
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Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations", which will be effective for
the Company beginning in fiscal year 2003. SFAS No. 143 addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Company has not yet determined the impact of adopting SFAS No. 143
on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 provides new guidance on the
recognition of impairment losses on long-lived assets to be held and used or to
be disposed of and also broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to
be measured and presented. SFAS No. 144 is effective for the Company's fiscal
year 2003 and is not expected to materially change the methods used by the
Company to measure impairment losses on long-lived assets, but may result in
more dispositions being reported as discontinued operations than is permitted
under current accounting principles.
Outlook
Applied Biosystems Group
The continued market uncertainty makes forecasting operations extremely
difficult. The Applied Biosystems group expects that revenues for the fourth
quarter of fiscal 2002 will be approximately equal to or slightly above the
prior year period. The Applied Biosystems group expects diluted earnings per
share for Applera - Applied Biosystems stock for the fourth fiscal quarter to
be in a range of $0.18 to $0.21.
The Applied Biosystems group expects that growth in fiscal 2003 will be heavily
influenced by the adoption of new products. At this time, on a preliminary
basis, the Applied Biosystems group anticipates that fiscal 2003 revenue
percentage growth will be in the high-single-digits to low-teens. Given the
confidence in the long-term prospects of the business, the Applied Biosystems
group anticipates maintaining its commitment to investment in R&D. After
further analysis of the projected adoption rate of its new products, the
Applied Biosystems group will provide additional revenue, expense and EPS
guidance for fiscal 2003 in July 2002 in conjunction with its fourth fiscal
quarter earnings release.
Celera Genomics Group
Consistent with the Celera Genomics group's transformation into a drug
discovery business, management believes that revenues for the remainder of the
fiscal year attributable to low-margin
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services and collaborations will be lower than previously anticipated. As a
result, revenues for the fiscal fourth quarter of 2002 are expected to be
between $27 million and $29 million, including approximately $20 million in
Online/Information business revenues. Total revenues for fiscal 2002 are
expected to be between $119 million and $121 million, including approximately
$73 million in Online/Information business revenues. Revenue for CDS
subscriptions and for Knowledge Business royalties for fiscal 2003 is expected
to be between $75 million and $80 million. The Celera Genomics group
anticipates total revenues during fiscal 2003 to be between $85 million and $95
million, based upon its new focus on cash flow and the decision not to pursue
new service business.
The Celera Genomics group expects R&D expenses to be in the range of $135
million to $140 million. The outlook for SG&A expenses has been lowered to a
range of $50 million to $55 million. Pre-tax losses related to the Celera
Diagnostics joint venture are now expected to be approximately $50 million.
The Celera Genomics group's fiscal 2002 net cash use expectation has been
reduced by approximately $35 million since the update provided in the Quarterly
Report on Form 10-Q for the period ended December 31, 2001, to between $110
million and $120 million. The lower expected cash use is primarily due to
lower R&D expenses and related capital expenditures, lower development expenses
within Celera Diagnostics, and higher than anticipated cash receipts from the
exercise of stock options.
Applera Genomics Initiative
The Applera genomics initiative, which includes the resequencing of genes and
regulatory regions at the Celera Genomics group, validation of SNP's at the
Applied Biosystems group, and disease gene association studies at Celera
Diagnostics, commenced during the first quarter of fiscal 2002 and is expected
to be substantially completed by the end of the second quarter of fiscal 2003.
Expenses associated with this initiative amounted to $33.0 million through the
nine months ended March 31, 2002 and have been shared equally by the Company's
three businesses. Costs, including those which will be capitalized as
inventory, for this initiative are anticipated to total approximately $70
million in fiscal 2002. The initiative has been expanded to include gene
validation and expression. The total anticipated costs associated with the
Applera genomics initiative, including costs capitalized as inventory, are
expected to be approximately $100 million. The portion of the costs being
capitalized are primarily associated with the production of the Applied
Biosystems group's Assays On Demand(TM).
Forward-Looking Statements
Certain statements contained in this report, including the Outlook section, are
forward-looking and are subject to a variety of risks and uncertainties. These
statements may be identified by the use of forward-looking words or phrases
such as "expect," "anticipate," "should," "plan," "estimate," and
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"potential," among others. These forward-looking statements are based on the
Company's current expectations. The Private Securities Litigation Reform Act
of 1995 provides a "safe harbor" for such forward-looking statements. In order
to comply with the terms of the safe harbor, the Company notes that a variety
of factors could cause actual results and experience to differ materially from
the anticipated results or other expectations expressed in such forward-looking
statements. The risks and uncertainties that may affect the operations,
performance, development and results of the Company's businesses include, but
are not limited to:
Factors Relating to the Applied Biosystems Group
Rapidly changing technology in life sciences could make the Applied Biosystems
group's product line obsolete unless it continues to improve existing products,
develop new products, and pursue new market opportunities. A significant
portion of the net revenues for the Applied Biosystems group each year is
derived from products that did not exist in the prior year. The Applied
Biosystems group's future success depends on its ability to continually improve
its current products, develop and introduce, on a timely and cost-effective
basis, new products that address the evolving needs of its customers, and
pursue new market opportunities that develop as a result of technological and
scientific advances in life sciences. The Applied Biosystems group's products
are based on complex technology which is subject to rapid change as new
technologies are developed and introduced in the marketplace. Unanticipated
difficulties or delays in replacing existing products with new products could
adversely affect the Applied Biosystems group's future operating results. The
pursuit of new market opportunities will add further complexity and require
additional management attention and resources as these markets are addressed.
The Applied Biosystems group's new Knowledge Business is unproven and may not
be successful. In April 2002, the Applied Biosystems group became the
exclusive distributor of the Celera Genomics group's Celera Discovery System
and related human genomic and other biological and medical information under
the terms of a 10 year marketing and distribution agreement. The Applied
Biosystems group expects to integrate the Celera Discovery System and the
Celera Genomics group's related information into a new Knowledge Business that
combines current Applied Biosystems assay products with new biological
information content and analytical tools. The Knowledge Business is an emerging
business and is unproven, and the Applied Biosystems group believes that in
order for it to be successful the Applied Biosystems group may have to devote a
significant amount of resources to researching and developing additional
products and services which combine the Celera Genomics group's information
with the Applied Biosystems group's assays and tools, and in marketing and
distributing these products and services. The market for these products and
services is intensely competitive, and there can be no assurance that there
will be market acceptance of the utility and value of the product and service
offerings of the Knowledge Business.
A significant portion of sales depends on customers' capital spending policies
that may be subject to significant and unexpected decreases. A significant
portion of the Applied Biosystems group's
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instrument product sales are capital purchases by its customers. The Applied
Biosystems group's customers include pharmaceutical, environmental, research,
biotechnology, and chemical companies, and the capital spending policies of
these companies can have a significant effect on the demand for the Applied
Biosystems group's products. These policies are based on a wide variety of
factors, including the resources available to make purchases, the spending
priorities among various types of research equipment, and policies regarding
capital expenditures during recessionary periods. Any decrease in capital
spending or change in spending policies of these companies could significantly
reduce the demand for the Applied Biosystems group's products.
A substantial portion of the Applied Biosystems group's sales is to customers
at universities or research laboratories whose funding is dependent on both the
level and timing of funding from government sources. As a result, the timing
and amount of revenues from these sources may vary significantly due to factors
that can be difficult to forecast. Although research funding has increased
during the past several years, grants have, in the past, been frozen for
extended periods or otherwise become unavailable to various institutions,
sometimes without advance notice. Budgetary pressures may result in reduced
allocations to government agencies that fund research and development
activities. If government funding necessary to purchase the Applied Biosystems
group's products were to become unavailable to researchers for any extended
period of time, or if overall research funding were to decrease, the business
of the Applied Biosystems group could be adversely affected.
The Applied Biosystems group is currently and could in the future be subject to
claims for infringement of patents and other intellectual property rights. The
Applied Biosystems group's products are based on complex, rapidly developing
technologies. These products could be developed without knowledge of
previously filed patent applications that mature into patents that cover some
aspect of these technologies. In addition, there are relatively few decided
court cases interpreting the scope of patent claims in these technologies, and
the Applied Biosystems group's belief that its products do not infringe the
technology covered by valid and enforceable patents could be successfully
challenged by third parties. Also, in the course of its business, the Applied
Biosystems group may from time to time have access to confidential or
proprietary information of third parties, and these parties could bring a theft
of trade secret claim against the Applied Biosystems group asserting that the
Applied Biosystems group's products improperly use technologies which are not
patented but which are protected as trade secrets. The Applied Biosystems
group has been made a party to litigation regarding intellectual property
matters, and 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.
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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.
Celera Diagnostics' ability to develop proprietary diagnostic products is
unproven. Celera Diagnostics faces the difficulties inherent in developing and
commercializing diagnostic tests. Celera Diagnostics' ability to develop
proprietary diagnostic and products is unproven, and it is possible that Celera
Diagnostics' discovery and development efforts will not result in any
commercial products or services. Even if Celera Diagnostics is able to
discover potential products and services, development of these products and
services would be subject to various risks, including that they may be found to
be ineffective or that they may fail to receive necessary regulatory approvals.
Furthermore, products that are developed may not be commercially viable or
successful due to a variety of reasons, including 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
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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 $548.0
million as of March 31, 2002, and expects that it will continue to incur
additional net losses for the foreseeable future. These cumulative losses are
expected to increase as the Celera Genomics group continues to make investments
in new technology and product development, including its investments in its
therapeutics business and the Company's genomics initiative for commercializing
products from information obtained through the analysis of the human genome, as
well as investments in diagnostics through Celera Diagnostics, its joint
venture with the Applied Biosystems group. The Celera Genomics group will
record all initial operating losses of Celera Diagnostics up to a maximum of
$300 million, after which any additional operating losses would be shared
equally by the Celera Genomics group and the Applied Biosystems group. As an
early stage business, the Celera Genomics group faces significant challenges in
expanding its operations into the therapeutics research and development
business. As a result, there is a high degree of uncertainty that the Celera
Genomics group will be able to achieve profitable operations.
The Celera Genomics group has entered into an exclusive arrangement with the
Applied Biosystems group to distribute the Celera Discovery System and related
information as part of the Applied Biosystems group's new Knowledge Business,
and the revenue that the Celera Genomics Group receives from the Applied
Biosystems group will depend heavily on the Applied Biosystems group's ability
to market and distribute its Knowledge Business products. Effective April
2002, the Applied Biosystems group became the exclusive distributor of Celera
Discovery System and the Celera Genomics group's related human genomic and
other biological and medical information under the terms of a ten-year
marketing and distribution agreement. The Celera Genomics group expects that
the Applied Biosystems group will integrate the Celera Discovery System and the
related information into a new Knowledge Business that combines current Applied
Biosystems assay products with new biological information content and
analytical tools. Under the terms of the agreement, the Applied Biosystems
group is obligated to pay a royalty to the Celera Genomics group based on
sales, if any, of certain Knowledge Business products after July 1, 2002.
Whether the Celera Genomics group actually receives any royalties from the
Applied Biosystems group under this agreement, and the amount of these
royalties, depends on the Applied Biosystems group's ability to successfully
commercialize Knowledge Business products. The Knowledge Business is an
emerging business and is unproven, and the Celera Genomics group believes that
in order for it to be successful the Applied Biosystems group may have to
devote a significant amount of its resources to researching and developing
additional products which combine the Celera Genomics group's information with
the Applied Biosystems group's assays and tools, and in marketing and
distributing these products. However, the Celera Genomics group has no control
over the amount and timing of the Applied Biosystems group's use of its
resources. In addition, the market for these products is intensely
competitive, and there can be no assurance that there will be market acceptance
of the utility and value of the product offerings of the Knowledge Business.
The Celera Genomics group does not intend to seek any new customers for its
Celera Discovery System and related information products and services after
June 30, 2002, and therefore its future revenues from these products and
services will be limited. Under the terms of the marketing and distribution
agreement between the Celera Genomics group and the Applied Biosystems group,
the Celera Genomics group will receive all revenues under Celera Discovery
System and related information contracts that were in effect on April 1, 2002,
the effective date of the agreement, or which are entered into during a
three-month transition period ending June 30, 2002 (including renewals of these
contracts, if any). In addition, the Applied Biosystems group has agreed to
reimburse the Celera Genomics group for any shortfall in earnings before
interest, taxes, depreciation, and amortization from these contracts below
$62.5 million (including renewals, if any) if the shortfall is due to changes
made to Celera Discovery System products by or at the request of the Applied
Biosystems group, provided the Celera Genomics group otherwise satisfies its
obligations under these contracts. However, during the term of the marketing
and distribution agreement (other than the transition period), the Celera
Genomics group will not be marketing Celera Discovery System products and
services to, and will not be
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contracting with, new customers. Accordingly, except for the anticipated
revenue under existing Celera Discovery System contracts (or contracts expected
during the transition period) and renewals of these contracts, if any, and the
Applied Biosystems' corresponding reimbursement obligation, the Celera Genomics
group does not expect any revenues from Celera Discovery System and related
products and services other than the potential royalty payments from the
Applied Biosystems group under the marketing and distribution agreement.
Although under certain contracts with existing Celera Discovery System
customers the Celera Genomics group is entitled to milestone payments or future
royalties based on products developed by its customers, the Celera Genomics
group believes these arrangements are unlikely to produce any significant
revenue for the group.
The Celera Genomics group's ability to maintain its relationships with existing
Celera Discovery System customers depends heavily on continued assembly and
annotation of the human and mouse genomes. In June 2000, the Celera Genomics
group and the Human Genome Project each announced the "first assembly" of the
human genome, and in April 2001, the Celera Genomics group announced the
assembly of the mouse genome. Assembly is the process by which individual
fragments of DNA, the molecule that forms the basis of the genetic material in
virtually all living organisms, are pieced together into their appropriate
order and place on each chromosome within the genome. The Celera Genomics
group's first assembly of the human genome covered approximately 95% of that
genome, and its assembly of the mouse genome covered approximately 99% of that
genome. The Celera Genomics group intends to continue updating the assembly of
the human and mouse genomes as it continues to annotate these genomes.
Annotation is the process of assigning features or characteristics to each
chromosome. Each gene on each chromosome is given a name, its structural
features are described, and proteins encoded by genes are classified into
possible or known function. The Celera Genomics group's ability to maintain
its relationship with the existing Celera Discovery System customers depends
heavily upon the continued assembly and annotation of these genomes. Failure
to continue to update the assembly and annotation efforts in a timely manner
may have a material adverse effect on the Celera Genomics group's business.
The Celera Genomics group's ability to develop proprietary therapeutics and
Celera Diagnostics' ability to develop proprietary diagnostics are unproven.
As the Celera Genomics group expands its therapeutic discovery and development
business, it faces the difficulties inherent in developing and commercializing
therapeutic products. Similarly, Celera Diagnostics faces the difficulties
inherent in developing and commercializing diagnostic tests. 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
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Diagnostics' discovery and development efforts will not result in any
commercial products or services. Even if the Celera Genomics group or Celera
Diagnostics were able to discover potential therapeutic or diagnostic products
and services, development of these products and services would be subject to
various risks, including that they may be found to be toxic or ineffective, or
that they may fail to receive necessary regulatory approvals. Furthermore,
products that are developed may not be commercially viable or successful for a
variety of reasons, including competitive conditions, the inability to get
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.
If the Celera Genomics group or its collaborators fail to discover or develop
or are delayed in the development of therapeutics, the Celera Genomics group's
business and results of operations will be adversely affected. All of the
Celera Genomics group's potential therapeutic products, including those
projects acquired in the acquisition of Axys, are in various stages of research
and development and will require significant additional research and
development efforts by the Celera Genomics group or its collaborators before
these products can be marketed. These efforts include extensive preclinical
and clinical testing and lengthy regulatory review and approval by the United
States Food and Drug Administration. The development of the Celera Genomics
group's new therapeutics products is highly uncertain and subject to a number
of significant risks. To date, the Celera Genomics group has not developed a
commercial therapeutic and the Celera Genomics group does not expect any of its
therapeutics to be commercially available for a number of years, if ever.
Therapeutics that appear to be promising at early stages of development may not
reach the market for a number of reasons, including:
o the Celera Genomics group or its collaborators may not successfully
complete any research and development efforts;
o any therapeutics the Celera Genomics group or its collaborators
develop may be found to be ineffective or to cause harmful side
effects during preclinical testing or clinical trials;
o the Celera Genomics group or its collaborators may fail to obtain
required regulatory approvals for any products it develops;
o the Celera Genomics group or its collaborators may be unable to
manufacture enough of any potential products at an acceptable cost
and with appropriate quality;
o the Celera Genomics group's or its collaborator's products may not be
competitive with other existing or future products; and
o proprietary rights of third parties may prevent the Celera Genomics
group or its collaborators from commercializing its products.
If the Celera Genomics group fails to maintain its existing collaborative
relationships and enter into new collaborative relationships, or if
collaboration partners do not perform under collaboration agreements,
development of its therapeutic products could be delayed. The Celera Genomics
group's
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strategy for the development, clinical testing, manufacturing and
commercialization of most of its therapeutic product candidates includes
entering into collaborations with partners. Although the Celera Genomics group
has expended, and continues to expend, time and money on internal research and
development programs, the Celera Genomics group may be unsuccessful in creating
therapeutic product candidates that would enable it to form additional
collaborations and receive milestone and/or royalty payments from collaborators.
All of the Celera Genomics group's existing collaboration agreements may be
canceled under certain circumstances. In addition, the amount and timing of
resources to be devoted to research, development, eventual clinical trials and
commercialization activities by the Celera Genomics group's collaborators are
not within the Celera Genomics group's control. The Celera Genomics group
cannot guarantee that its partners will perform their obligations as expected.
If any of the Celera Genomics group's collaborators terminate or elect to
cancel their agreements or otherwise fail to conduct their collaborative
activities in a timely manner, the development or commercialization of
therapeutic products may be delayed. If in some cases the Celera Genomics group
assumes responsibilities for continuing unpartnered programs after cancellation
of a collaboration, the Celera Genomics group may be required to devote
additional resources to product development and commercialization or the Celera
Genomics group may cancel certain development programs.
If the Celera Genomics group fails to satisfy regulatory requirements for any
therapeutic product, the Celera Genomics group will be unable to complete the
development and commercialization of that product. The Celera Genomics group
does not currently have the internal capability to move potential products
through clinical testing, manufacturing and the approval processes of the United
States Food and Drug Administration and comparable agencies in other countries.
In the United States, either the Celera Genomics group or its collaborators must
show through preclinical studies and clinical trials that each of the Celera
Genomics group's therapeutics is safe and effective in humans for each
indication before obtaining regulatory clearance from the United States Food and
Drug Administration for the commercial sale of that therapeutic. In other
countries, the regulatory requirements vary from country to country. If the
Celera Genomics group or its collaborator fails to adequately show the safety
and effectiveness of a therapeutic, regulatory approval could be delayed or
denied. The results from preclinical studies and early clinical trials are often
different than the results that are obtained in large-scale testing. The Celera
Genomics group cannot be certain that it will show sufficient safety and
effectiveness in its clinical trials to allow it to obtain the needed regulatory
approval. A number of companies in the therapeutic industry, including
biotechnology companies, have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials.
Even if the Celera Genomics group obtains regulatory approval, the Celera
Genomics group may be subject to certain risks and uncertainties relating to
regulatory compliance, including: post approval Phase IV clinical studies and
inability to meet the compliance requirements of the Good Manufacturing
Practices regulations. In addition, identification of certain side effects
after a therapeutic is on the market or the occurrence of manufacturing
problems could cause subsequent withdrawal of approval, reformulation of a
therapeutic, additional preclinical testing or clinical trials
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and changes in labeling of the product. This could delay or prevent the Celera
Genomics group from generating revenues from the sale of that therapeutic, or
cause the Celera Genomics group's revenues to decline.
The Celera Genomics group's research and product development, including its
proteomics efforts, depends on access to tissue samples and other biological
materials. To carry out a portion of its current business plan, 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.
The industries in which the Celera Genomics group operates are intensely
competitive and evolving. There is intense competition among pharmaceutical,
biotechnology, and diagnostic companies attempting to discover potential
candidates for new diagnostic and therapeutic products. These companies may:
o develop new diagnostic or therapeutic products in advance of the
Celera Genomics group or its customers;
o develop diagnostic or therapeutic products which are more effective
than those developed by the Celera Genomics group or its customers;
o obtain regulatory approvals of their diagnostic or therapeutic
products more rapidly than the Celera Genomics group or its customers;
or
o 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 develop and
commercialize therapeutic or diagnostic products.
Introduction of new products may expose the Celera Genomics group to product
liability claims. New products developed by the Celera Genomics group or its
partners could expose the Celera Genomics group to potential product liability
risks that are inherent in the testing, manufacturing, marketing and sale 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. Although the Celera Genomics group expects to seek product liability
insurance to cover claims relating to the testing and use of therapeutic and
diagnostic products, there can be no assurance that such insurance will be
available on commercially reasonable terms, if at all, or that the amount of
coverage obtained will be adequate to cover losses from any particular claim.
The therapeutic discovery and development business is highly technical, and
there is a shortage of personnel with the necessary expertise to develop and
expand the Celera Genomics group's therapeutics business. The Celera Genomics
group believes that in order to develop and commercialize therapeutic products,
it will need to recruit and retain scientific and management personnel having
specialized training or advanced degrees, or otherwise having the technical
background, necessary for an understanding of therapeutic products. There is a
shortage of qualified scientific and management who possess this technical
background. The Celera Genomics group competes for these personnel with other
pharmaceutical and biotechnology companies, academic institutions and
government entities. If the Celera Genomics group is unable to retain and
attract qualified scientific and management personnel, the growth of the
group's therapeutic discovery and development business could be delayed or
curtailed.
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The Celera Genomics group could incur liabilities relating to hazardous
materials that it uses in its research and development activities. The Celera
Genomics group's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive materials. In the
event of an accidental contamination or injury from these materials, the Celera
Genomics group could be held liable for damages in excess of its resources.
The Celera Genomics group's business depends on the continuous, effective,
reliable and secure operation of its computer hardware, software and Internet
applications and 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 on-line 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' therapeutic discovery and research 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 affect
the Celera Genomics group's business.
The Celera Genomics group's competitive position depends on maintaining its
trade secrets, the patent and copyright protection it obtains for itself, and
licenses to intellectual property it may need to obtain from others, which
licenses may not always be available. The Celera Genomics group's ability to
compete and to achieve and maintain profitability will be affected by its
ability to protect its proprietary technology, in large part, through obtaining
and enforcing patent rights, obtaining copyright protection, maintaining its
trade secrets, and operating without infringing the intellectual property
rights of others. The Celera Genomics group's ability to obtain patent
protection for the intellectual property it creates is uncertain. The
patentability of biotechnology and pharmaceutical inventions involves complex
factual and legal questions. As a result, it is difficult to predict whether
patents will issue or the breadth of claims that will be allowed in
biotechnology and pharmaceutical patents. This may be particularly true with
regard to the patenting of gene sequences, gene functions, and genetic
variations. In this regard, the United States Patent and Trademark Office
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
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obtain a patent in the biotechnology field, making patent protection more
difficult to obtain. Although others have been successful in obtaining patents
to biotechnology inventions, since the adoption of these guidelines, these
patents have been issued with increasingly less frequency. As a result, patents
may not issue from patent applications that the Celera Genomics group may own
or license if the applicant is unable to satisfy the new guidelines.
The United States Patent and Trademark Office has issued several patents to
third parties covering inventions involving single nucleotide polymorphisms
("SNPs"), naturally occurring genetic variations that scientists believe can be
correlated with susceptibility to disease, disease prognosis, therapeutic
efficiency, and therapeutic toxicity. These inventions are subject to the same
new guidelines as other biotechnology inventions. In addition, the Celera
Genomics group may need to obtain rights to patented SNPs in order to develop,
use and sell analyses of the overall human genome or particular full-length
genes. These licenses may not be available to the Celera Genomics group on
commercially acceptable terms, or at all.
In some instances, patent applications in the United States are maintained in
secrecy until a patent issues. In most instances, the content of domestic and
international patent applications is made available to the public within 18
months of the application's filing date. As a result, the Celera Genomics group
cannot be certain that others have not filed patent applications for technology
covered by the Celera Genomics group's patent applications or that the Celera
Genomic group inventors were the first to invent the technology. Accordingly,
the Celera Genomics group's patent applications may be preempted or the Celera
Genomics group may have to participate in interference proceedings declared by
the United States Patent and Trademark Office. These proceedings determine the
priority of invention and the right to a patent for the claimed technology in
the United States.
Furthermore, lawsuits may be necessary to enforce any patents issued to the
Celera Genomics group or to determine the scope and validity of the rights of
third parties. Lawsuits and interference proceedings, even if they are
successful, are expensive to pursue, and the Celera Genomics group could use a
substantial amount of its financial resources in either case. An adverse
outcome could subject the Celera Genomics group to significant liabilities to
third parties and require the Celera Genomics group to license disputed rights
from third parties or to cease using the technology.
The Celera Genomics group may be dependent on protecting its proprietary
databases through copyright law to prevent other organizations from taking
information from those databases and copying and reselling it. Copyright law
currently provides uncertain protection regarding the copying and resale of
factual data. Changes in copyright law could either expand or reduce the
extent to which the Celera Genomics group and its customers are able to protect
their intellectual property. Accordingly, the Celera Genomics group is
uncertain as to whether it can prevent such copying or resale through copyright
law.
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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 protects its trade secrets
through recognized practices, including access control, confidentiality and
nonuse agreements with employees, consultants, collaborators and customers, and
other security measures. These confidentiality and nonuse agreements may be
breached, however, and the Celera Genomics group may not have adequate remedies
for a breach. In addition, the Celera Genomics group's trade secrets may
otherwise become known or be independently developed by competitors.
Accordingly, it is unclear whether the Celera Genomics group's trade secrets
will provide useful protection.
Disputes may arise in the future with regard to the ownership of rights to any
technology developed with collaborators. These and other possible
disagreements with collaborators could lead to delays in the achievement of
milestones or receipt of royalty payments or in research, development and
commercialization of the Celera Genomics group's technology. In addition,
these disputes could require or result in lawsuits or arbitration. Lawsuits
and arbitration are time-consuming and expensive. Even if the Celera Genomics
group wins, the cost of these proceedings could adversely affect its business,
financial condition and results of operations.
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 therapeutic and diagnostic discovery and development 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 and pharmaceutical industries. The Celera
Genomics group may become a party to patent litigation or proceedings at the
United States Patent and Trademark Office to determine its patent rights with
respect to third parties, which may include subscribers to the Celera Genomics
group's on-line products. 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
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Ethical, legal and social issues related to the use of genetic information and
genetic testing may cause less demand for the Celera Genomics group's products.
Genetic testing has raised issues regarding confidentiality and the appropriate
uses of the resulting information. For example, concerns have been expressed
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 products
of the Celera Genomics group.
Use of genomics and proteomics information to develop or commercialize
therapeutic and diagnostic products is unproven. Both the Celera Genomics
group, its collaborators and its customers are, among other things, seeking to
develop new therapeutic and the diagnostic products based on information
derived from the study of the genetic material of organisms, or genomics, and
the study of proteins, or proteomics. This method is unproven, as few
therapeutic or diagnostic products based on genomic or proteomic 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. Furthermore, even if therapeutic or diagnostic
products are developed in this manner, therapeutic and some diagnostic products
are subject to regulation by the United States Food and Drug Administration and
must undergo an extensive regulatory review and approval process. This process
can take many years and require substantial expense and may not be successful.
Also, 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. If the Celera Genomics
group or its existing Celera Discovery System customers are not successful in
developing and commercializing products using the Celera Genomics group's
genomics databases, or if regulations restrict or discourage the Celera
Genomics group or its customers from developing these products, the Celera
Genomics group's revenues may be adversely affected and the Celera Genomics
group's business may suffer as a result.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Future acquisitions and other transactions may absorb significant resources,
may be unsuccessful and could dilute the holders of Applera - Celera stock. As
part of the Celera Genomics group's strategy, it expects to pursue
acquisitions, investments and other strategic relationships and alliances.
Acquisitions, investments and other strategic relationships and alliances may
involve significant cash expenditures, debt incurrence, additional operating
losses, and expenses that could have a material effect on the Celera Genomics
group's financial condition and results of operations. Acquisitions involve
numerous other risks, including:
o difficulties integrating acquired technologies and personnel into the
business of the Celera Genomics group;
o diversion of management from daily operations;
o inability to obtain required financing on favorable terms;
o entry into new markets in which the Celera Genomics group has little
previous experience;
o potential loss of key employees, key contractual relationships,
or key customers of acquired companies or of the Celera Genomics
group; and
o assumption of the liabilities and exposure to unforeseen liabilities
of acquired companies.
It may be difficult for the Celera Genomics group to complete these
transactions quickly and to integrate these businesses efficiently into its
current business. Any acquisitions, investments or other strategic
relationships and alliances by the Celera Genomics group may ultimately have a
negative impact on its business and financial condition. For example, future
acquisitions may not be as successful as originally anticipated and may result
in special charges, such as the charges for impairment of Paracel goodwill,
intangibles and other assets in the amount of $69.1 million during fiscal 2001
and $25.9 million during fiscal 2002 and for the Molecular Informatics business
in the amount of $14.5 million during fiscal 1999.
In addition, acquisitions and other transactions may involve the issuance of a
substantial amount of Applera - Celera stock without the approval of the
holders of Applera - Celera stock. Any issuances of this nature will be
dilutive to holders of Applera - Celera stock.
Applera - Celera stock price is highly volatile. The market price of Applera -
Celera stock has been and may continue to be highly volatile due to the risks
and uncertainties described in this section of this Form 10-Q, as well as other
factors that may have affected or may in the future affect the market price,
such as:
o conditions and publicity regarding the genomics, biotechnology,
pharmaceutical, or life sciences industries generally;
o price and volume fluctuations in the stock market at large which
do not relate to the Celera Genomics group's operating performance;
and
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APPLERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
o comments by securities analysts or government officials, including
with regard to the viability or profitability of the biotechnology
sector generally or with regard to intellectual property rights of
biotechnology companies, or the Celera Genomics group's failure to
meet market expectations.
The stock market has from time to time experienced extreme price and volume
fluctuations that are unrelated to the operating performance of particular
companies. In the past, companies that have experienced volatility have
sometimes been the subjects of securities class action litigation. If
litigation was instituted on this basis, it could result in substantial costs
and a diversion of management's attention and resources.
The 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. The Company and some of its officers have been served in five
lawsuits purportedly on behalf of purchasers of Applera - Celera stock in the
Company's follow-on public offering of Applera - Celera stock completed on
March 6, 2000. In the offering, the Company sold an aggregate of approximately
4.4 million shares of Applera - Celera stock at a public offering price of $225
per share. All of these lawsuits have been consolidated into a single case and
an amended consolidated complaint was filed on August 21, 2001. The
consolidated complaint generally alleges that the prospectus used in connection
with the offering was inaccurate or misleading because it failed to adequately
disclose the alleged opposition of the Human Genome Project and two of its
supporters, the governments of the United States and the United Kingdom, to
providing patent protection to the Company's genomic-based products. Although
the Celera Genomics group has never sought, or intended to seek, a patent on
the basic human genome sequence data, the complaint also alleges that the
Company did not adequately disclose the risk that it would not be able to
patent this data. The consolidated complaint seeks unspecified money damages,
rescission, costs and expenses, and other relief as the court deems proper.
The Company and the other defendants have filed a motion to dismiss the case,
which motion is pending before the court. Although the Company believes the
asserted claims are without merit and intends to defend the case vigorously,
the outcome of this or any other litigation is inherently uncertain. The
defense of this case will require management attention and resources.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On February 26, 2002, the Company and Amersham plc announced that they reached
a court-mediated settlement which ended the previously disclosed patent
litigation between the Company and Amersham plc and its affiliates, including
Amersham Pharmacia Biotech, Inc. and Molecular Dynamics, Inc. The settlement,
reached under the auspices of United States Magistrate Judge Edward A. Infante,
Northern District of California, includes a cross-licensing agreement covering
all patents involved in the litigation, and a co-development arrangement for
the joint development, supply and commercialization of certain new DNA analysis
technologies. Both companies' current product offerings will continue to be
available.
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K.
During the quarter ended March 31, 2002, the Company filed the
following Current Reports on Form 8-K:
(1) Current Report on Form 8-K dated January 10, 2002 to
incorporate under Item 5 thereof the text of the Company's
press release issued January 3, 2002, in which the Company
announced a meeting with the investment community on January
10, 2002 to discuss the Company's Applied Biosystems group
and Celera Diagnostics, a joint venture between the
Company's Applied Biosystems Group and Celera Genomics group,
and the text of the Company's presentations intended to be
made at the meeting.
(2) Current Report on Form 8-K dated January 22, 2002 to
incorporate under Item 5 thereof the text of the Company's
press releases issued January 22, 2002 in which the Company
announced that Dr. J. Craig Venter has stepped down as
President of the Company's Celera Genomics group.
(3) Current Report on Form 8-K/A dated November 16, 2001 to
report under Item 7 thereof an amendment to Item 7 of the
Company's Current Report on Form 8-K/A dated November 16,
2001 and filed November 29, 2001 in order to include the
financial statements and pro forma financial information
with respect to the Company's acquisition of Axys
Pharmaceuticals, Inc. required by Item 7(a) and Item 7(b) of
Form 8-K.
(4) Current Report on Form 8-K dated February 26, 2002 to
incorporate under Item 5 thereof the text of the Company's
press release issued February 26, 2002, in which the
Company announced that the Company and Amersham plc reached
a court-mediated settlement which ends the previously
disclosed patent litigation between the two companies.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPLERA CORPORATION
By: /s/ Dennis L. Winger
--------------------------
Dennis L. Winger
Senior Vice President and
Chief Financial Officer
By: /s/ Vikram Jog
--------------------------
Vikram Jog
Corporate Controller
(Chief Accounting Officer)
Dated: May 15, 2002
88