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2001APPLERA CORPORATION Annual Report
APPLIED BIOSYSTEMS CELERA GENOMICS 312849_Applera_REVISED0914.qxd 9/17/01 6:42 PM Page 3
Table of CONTENTS
Letter to Stockholders Applera Corporation 3 Applied Biosystems Group 5 Celera Genomics Group 7 Celera Diagnostics 8 Financial Review 10 Directors and Officers 109 Stockholder Information 110
APPLERA CORPORATION Mission: To provide the world’s leading technology and information solutions that help life scientists understand and use the power of biology. Business Groups: Applied Biosystems and Celera Genomics Headquarters: Norwalk, Connecticut
APPLIED BIOSYSTEMS GROUP Profile: A leading provider of technology solutions for life science research and related applications, with customers in over 100 countries. Headquarters: Foster City, California New York Stock Exchange Symbol: ABI CELERA GENOMICS GROUP Profile: A biopharmaceutical business and leading provider of genomic and related medical information, enabling therapeutics discovery using proprietary scientific capabilities for the group’s internal efforts and in partnership with pharmaceutical and biotechnology companies. Headquarters: Rockville, Maryland New York Stock Exchange Symbol: CRA
CELERA DIAGNOSTICS Profile: A joint venture between Applied Biosystems and Celera Genomics that is leveraging capabilities from both businesses to develop new molecular and protein diagnostics. Headquarters: Alameda, California 312849_Applera_REVISED0914.qxd 9/17/01 6:42 PM Page 4
To our stockholders:
Applera Corporation continues to be a leader This should allow us to more effectively in the life science revolution – a revolution many anticipate customers’ needs and bring products believe could define this new century. We enter to market in a more timely manner, while fiscal year 2002 at the threshold of major maintaining the technological innovation that advances in the field of disease diagnosis and has made us a premier provider of life science therapeutics discoveries, made possible in part by tools. At the Celera Genomics Group, we are life science technology from Applera businesses. now organized to build a drug discovery As we go forward, we have the scale, financial business on the strong foundation established strength, and technology leadership required to by our pioneering work on the human genome. remain at the forefront of discovery. And we initiated a new joint venture called In any time of major change, there are Celera Diagnostics, which we believe will help victories to celebrate and challenges to face. In us apply our significant knowledge of genomics fiscal 2001 we experienced both. We published to improved disease diagnosis. the sequence of the human genome in a major At Applied Biosystems, our efforts have been scientific journal – a seminal event in the focused on defining and executing the strategies history of science. We also experienced that should ensure long-term sustainable growth challenges in some markets resulting in after a period of extraordinary sales related to the financial performance that was not up to the sequencing and assembly of the human genome. level of the past several years. But more While sequencing continues to represent a importantly, we completed a comprehensive significant portion of Applied Biosystems’ look at our organizations to determine how best revenue, the investments we have made in to capitalize on the unprecedented sequence detection products and services for opportunities we have to make a difference in analyzing human genetic variation are also the treatment of disease. creating significant opportunities. A significant In late July, we announced a bold step need exists to better characterize specific diseases towards realizing a return on our substantial as well as the genetic profile of each patient. The investment in sequencing the human genome. high-throughput genotyping enabled by our We are moving into the next phase of our multi- sequence detection systems is expected to play year genomics strategy – a comprehensive an important role in answering these challenges. program for commercializing products based on Technologies and services that help discoveries from the genome. The program is researchers determine which human proteins designed to leverage the combined scientific and are present under certain conditions, the commercial expertise of the three Applera function of those proteins, and which ones businesses to discover genetic variations called could be affected by new therapies, make up single nucleotide polymorphisms (SNPs) in genes another critical chapter of the Applied and regulatory regions, to identify disease-related Biosystems story for the future. Although gene associations, to monitor how genes are protein study presents a unique set of expressed and to develop and market products challenges, the Voyager™ TOF/TOF™ Workstation based on those discoveries. Over the next year, has the potential to modernize proteomics in we plan to invest approximately $75 million in much the same way as the ABI PRISM® 3700 DNA this program to capitalize on the discovery Analyzer revolutionized genomics. These foundation we have built. Voyager systems, in combination with a broad Within the Applied Biosystems Group, we spectrum of other proteomics technologies from evolved from a business unit structure to a more Applied Biosystems, form the core of the new integrated marketing and research organization. proteomics facility at Celera Genomics.
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Fiscal 2001 was a year of important many technology sectors, life science included. achievements at Celera Genomics. Celera now For the first time during my tenure, we has information subscription agreements in experienced significant stock price reduction. place with more than 50 academic and Nevertheless, our overall financial status commercial customers. Publishing an accurate remains strong. While down substantially from assembly and initial interpretation of the human last year, our market capitalization has grown genome in February and completing sequencing, from $1.5 billion at fiscal 1995 year-end to $8.1 assembly and annotation of the mouse genome in billion at the end of fiscal 2001, a compound April were both remarkable achievements. Celera annual growth rate of 33 percent. Applera also made its first significant steps to evolve from remains a healthy corporation with numerous a business focused on gene sequencing to one growth prospects and strong technologies. We that uses its genomic information to pursue drug have a committed group of people and discovery. This activity was illustrated in the significant capital resources at our disposal, and proposed acquisition of Axys Pharmaceuticals, a the ability to make investments where we see fit. company focused on biopharmaceutical drug In the coming year, we intend to expand our discovery. position as one of the world’s preeminent The principal element of Celera’s next phase suppliers and developers of technologies and is scale, similar to what was accomplished information solutions for the life sciences. At during Celera’s formation. Going forward, we Applied Biosystems, this means determining intend to leverage our extensive bioinformatics where the market opportunities are and getting infrastructure and unparalleled information there first. At Celera Genomics, this includes resources into drug development and disease building the skill sets needed to create the therapies in an effort to speed medical advances. biopharmaceutical business of the future. The formation of Celera Diagnostics, a joint Ultimately, the goal of our work remains the venture between Applied Biosystems and Celera same: delivering maximum long-term Genomics, is intended to take advantage of stockholder value by providing technology and Celera Genomics’ discovery capabilities and information solutions that help life scientists Applied Biosystems’ broad instrument platforms understand and use the power of biology. Our and technologies. Taken together, these objective is to accelerate the transformation of resources give us a unique competitive healthcare – from the way discoveries are made advantage in molecular diagnostics and the to the way drugs and therapies are developed opportunity to play a significant role in this and delivered. With each passing year, the value new high-growth market, which is predicted to of this mission becomes clearer. grow by 25 to 35 percent annually. Our My confidence in our ongoing ability to development efforts will focus on specific tests develop and realize our vision of innovation that may have the potential to predict and continues to be bolstered by our Applera team, diagnose some of the world’s most devastating over 5,000 strong, around the world. They are health problems. We anticipate that this new one of the major reasons for our great success venture will add to the long-term value of over the past several years and will surely be the Applera. major driver of our future achievements. To lead this effort, we were very pleased to add Kathy Ordoñez, formerly president and chief executive officer of Roche Molecular Systems, to our senior management team. These events and achievements took place Tony L. White Chairman, President and Chief Executive Officer against a backdrop of fluctuating stock values in Applera Corporation
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APPLIED BIOSYSTEMS GROUP to discover sites of sequence diversity that can The past year at Applied Biosystems was be assayed for correlation with medically one of new opportunities as genomic research important traits. This trend has helped to drive evolved and protein research re-emerged as part sales of our ABI PRISM® 3100 Genetic Analyzer, of a broader regimen of biological discovery. which we introduced in 2000 and which These trends were driven in part by the continues to enjoy strong response. We are also publication of the human genome sequence seeing expanded use of the 3700 DNA Analyzer in February. and 3100 Genetic Analyzer for linkage mapping Fiscal 2001 was also a challenging year. and DNA forensic analysis. We also envision Revenues were $1.6 billion, an increase of 17 significant use of the same systems for clinical percent over last year. Earnings per diluted share diagnostics in the future. rose 12 percent, to $0.96. These results reflected Applied Biosystems sequence detection decreases in instrument revenues in the fourth systems (SDS) that incorporate TaqMan®, our quarter of the year, partially due to lower real-time, quantitative PCR chemistry, continue demand from commercial customers due to the to experience strong sales growth. These systems current economic slowdown. Consumables sales have become recognized as a standard for grew strongly throughout the year, reflecting precise, high-throughput assays for expression continued demand for sequencing and sequence of selected genes. They are also becoming detection reagents. To meet this demand, we established as a key component in large-scale continue aggressive reagent development genotyping programs based on single nucleotide programs. Successful introduction of our new polymorphism (SNP) assays. ABI PRISM® BigDye™ Terminator v 3.0 chemistry Functional genomics studies based on gene is one example. Creation of genome-wide assay expression and genotyping represent rapidly sets – which will be used on our sequence expanding business opportunities as researchers detection systems platform under the new worldwide begin to exploit the core sequencing Applera SNP discovery, gene expression, and information generated by various genome gene association program – could represent a sequencing programs. During the past year, we potential business opportunity that may be have ramped up our custom oligonucleotide larger than any Applied Biosystems has manufacturing operation to meet the need for addressed in the past. The first products from real-time PCR probes for both gene expression this program should be available from Applied and genotyping. Biosystems during fiscal 2002. Our second-generation SDS platform, the Our core genetic analysis business continues ABI PRISM® 7900HT Sequence Detection System, to provide a strong foundation for growth and incorporates automation features designed to profitability for two reasons. First, at the meet the throughput and operating cost production-sequencing end of the market, the requirements we anticipate in key segments of public human genome sequencing effort still the gene expression and genotyping markets. has several years of work left to annotate the We expect our sequence detection systems to be complete human genetic sequence. This and a key tool used by Celera Diagnostics. We also other programs, such as the sequencing of foresee exciting new products for the gene model organisms like mouse and rat, continue expression and genotyping markets through to require substantial numbers of our ABI PRISM® our development programs with partners such 3700 DNA Analyzers and sequencing reagents. as Illumina. Second, many small and midsize labs are Sales were strong in both our mass resequencing regions of interest in the genome spectrometry markets: drug metabolism/ with samples from large numbers of individuals pharmacokinetics (DMPK) and proteomics.
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The new API 4000™ LC/MS/MS System, which which complicates research efforts to devise began shipping last spring, has established a effective and safe medical therapies, should new standard in performance for drive increased demand for functional genomics pharmacokinetic applications thanks to its and proteomics tools. tenfold increase in sensitivity. In general, trends in government funding A key proteomics introduction was the for biomedical research in the regions that Voyager™ TOF/TOF™ Workstation to early access contribute most of our sales are favorable. In partners. Developed at our Proteomics Research addition, several recently announced publicly Center (PRC) in Framingham, Mass., in funded local initiatives in both genomics and collaboration with other ABI scientists, this proteomics should add to national-government- tandem time-of-flight technology could provide funded programs. Legislation and funding for the throughput for the identification of DNA forensics has been very encouraging as thousands of proteins per day, as well as states and countries move to establish or expand attamole-range sensitivity. We are planning a their programs to create DNA databases. broader array of mass spectrometry platforms As we move forward, Applied Biosystems based on the technology incorporated in the will continue to set the standard in innovating Voyager workstation. The PRC was launched biology for the next paradigm – the age of late last year as an incubator for new personalized medicine. As always, thanks to our technologies in high-throughput protein stockholders and employees for their support analysis. New licensing collaborations in and confidence in this venture. proteomics that have yielded or are expected to yield commercial products include: • ICAT™ reagents for differential high- throughput protein expression, developed by Ruedi Aebersold, Ph.D., of the Institute for Michael W. Hunkapiller, Ph.D. President Systems Biology, while at the University of Applied Biosystems Group Washington • Next-generation sample preparation consumables for high-throughput proteomics, under development through a strategic alliance with Millipore Corporation • A vacuum deposition interface between MALDI-TOF mass spectrometry and high- resolution biomolecule separations, developed by Barry Karger, Ph.D., and colleagues from Northeastern University In short, the fundamentals of our key product lines and their markets are intact and healthy. Genomics will continue to be the mainstay of our business as it moves toward functional research. Additionally, the finding that the human genome contains only about 30,000 genes means that many genes (and their corresponding proteins) are responsible for several functions and that the functions of several genes overlap. This added complexity,
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CELERA GENOMICS GROUP Diagnostics, Celera Genomics will be making a Fiscal 2001 was an exciting year of transition major contribution to the Applera discovery at Celera Genomics. We made advances in program to identify and develop products based creating our reference information business for on information in the human genome. Celera drug discovery research and have begun the Genomics will use our industrial-scale genomics next stage of Celera’s development as a factory and bioinformatics expertise to major therapeutics discovery business. Our resequence the genes and regulatory regions accomplishments to date have created a from 40 to 50 individuals selected to reveal a set foundation for us to build on in our next bold of SNPs and haplotypes with health-related phase of development. implications. While our database currently When Celera was launched three years ago, contains more than three million SNPs, less we set as our initial aggressive goal the than two percent are found in genes. The new sequencing of the human genome, using initiative focuses on the discovery of SNPs and exciting advances in sequencing, computing haplotypes in genes, which we consider to be power, and computation. With these more important to medicine. We will use this innovations, we delivered to our customers an information in our internal discovery programs updated, assembled and annotated version of for future partner collaborations and as a new the human genome; the completed sequence database product in CDS. and assembly of the mouse genome; and a Based on our success in sequencing reference database of more than three million important genomes, and our automated, unique single nucleotide polymorphisms (SNPs) industrialized scientific approaches, we are now – all within this past 12-month period and all extending our scientific platforms to include all faster than we originally expected. We also of the essential steps required to build a new published our initial findings on the assembled therapeutics business. As we move into high- human genome on February 12, 2001, in the throughput protein sequencing and protein journal Science and offered this version on our expression, RNA expression analysis and genetic Web site to academic researchers worldwide. variation determinations, our ultimate objective During the year, we launched an advanced remains making and helping others to make key version of the Celera Discovery System™ (CDS), scientific advances toward diagnosing and the engine of our online information business. treating human disease. We believe that the More than 50 academic and commercial new era of medical discovery begun by our customers around the world are now using CDS’ sequencing of the human genome will integrated tools and proprietary and public data ultimately impact unmet medical needs. to make and publish their own discoveries. New Initially, our discovery efforts will focus on subscribers this year include American Home one of these needs – cancer – specifically Products, Yamanouchi Pharmaceuticals, pancreatic and lung cancer. researchers at the National Cancer Institute, As a central element of our discovery Harvard University and the University of strategy, we have also built and continue to California system. The expansion of this scale up operations in our industrial-scale subscriber base has continued to validate the proteomics facility. During the year, we took quality of our data and contribute to revenue delivery of several high-throughput, production- growth, leading to fiscal 2001 revenues of $89.4 level mass spectrometry machines built by million, 109 percent higher than the revenues Applied Biosystems. These Voyager™ TOF/TOF™ of $42.7 million last year. Workstations, along with Celera’s proprietary In the coming year, along with our cell separation and fractionation methods, are colleagues at Applied Biosystems and Celera enabling our proteomics team to generate
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valuable data. We believe this could lead in the those that we believe are the most promising future to the identification of numerous and exciting. promising protein-based markers and targets for Celera has achieved many significant therapeutic intervention. milestones over the last year. Yet many new Late in the fiscal year, we announced the challenges are now ahead of us. We hope you proposed acquisition of Axys Pharmaceuticals, share the enthusiasm of our Celera team for the Inc., a biopharmaceutical company with small- opportunities and growth prospects in the new molecule therapeutics development and protein fiscal year. The discovery and development of structure expertise. This acquisition is an new therapeutics is a challenging enterprise. important step toward Celera’s goal of becoming However, when done successfully, the rewards a therapeutics business. Axys brings us a highly for patients and investors can be substantial. skilled team of chemists and biologists, combined With Celera’s technologies and novel with exceptional capabilities in chemical libraries approaches to discovery, we believe we can and facilities, high-throughput screening, begin to build a significant biopharmaceutical medicinal chemistry, structural biology and pre- business of the future. clinical development. These capabilities are particularly relevant, as they may facilitate the rapid identification of small-molecule
therapeutics candidates to address novel protein J. Craig Venter, Ph.D. targets discovered through Celera’s proteomics President and Chief Scientific Officer Celera Genomics Group and genomics programs. As we continue to focus on the identification and optimization of therapeutics opportunities, we will evaluate other CELERA DIAGNOSTICS capabilities needed to meet our goals. Celera Diagnostics was established with the The foundation built over the past three ultimate goal of improving human health years has positioned Celera to focus on creating through the discovery, development and a major business in the discovery of new commercialization of novel diagnostic tests. therapeutics. We are excited about the Established as a joint venture between opportunity to work with the team at Celera Applied Biosystems and Celera Genomics, Diagnostics, a joint venture between Celera Celera Diagnostics is uniquely positioned to Genomics and Applied Biosystems, and believe contribute to the future of diagnostic medicine that the combined capabilities of Applera can by leveraging the instrument and technology make major scientific and commercial expertise of Applied Biosystems with the breakthroughs in this field. An integrated discovery and informatics power of Celera research plan being developed with Celera Genomics. These existing Applera proficiencies Diagnostics will focus on commercializing are now complemented by the experience and discoveries with diagnostic applications. capabilities of the team being assembled at We will continue to invest in our online Celera Diagnostics. information business as it grows and becomes a More than 100 scientists and business significant operation, providing critical scientific executives experienced in genetic research and content and product applications for use by diagnostic product development and customers and in our internal therapeutics commercialization have already been assembled research efforts, as well as contributing financial at Celera Diagnostics. This team includes resources to our discovery programs. And while members of the previous Applied Biosystems we cannot pursue every opportunity that our molecular diagnostics (sequencing) group in scientific capabilities bring, we are focusing on Foster City as well as a large number of recently
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hired people working in Alameda. This team Biosystems sequencing platforms, including the provides our new organization with a full range ViroSeq™ HIV Genotyping System. of capabilities – from discovery through Our objective is to create an environment development and GMP manufacturing. that attracts innovative people and provides An immediate focus for our staff is optimal opportunities for all of us to contribute participation with scientists from Celera to the achievement of balanced scientific and Genomics and Applied Biosystems in a business objectives. We are most fortunate to comprehensive discovery project to identify work in this field as the significance and variations in the sequence and expression of function of the human genome are being genes and their association with disease and elucidated and put into practical application therapy. These discoveries will be incorporated through new diagnostic and therapeutic into new molecular diagnostic tests on our approaches to medicine. The new team at Celera instrument platforms. We also intend to validate Diagnostics is eager to participate in a pivotal and prepare protein markers discovered at way in this revolution in healthcare. Celera Genomics for commercialization as diagnostic immunochemistry tests. The fruits of the extensive discovery effort with Applied Biosystems and Celera Genomics are expected to provide a medium-term strategy for our new business. Near term, Celera Kathy Ordoñez Diagnostics will focus on commercialization of President molecular diagnostic tests on Applied Celera Diagnostics
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APPLERA CORPORATION Financial Review
APPLERA CORPORATION APPLIED BIOSYSTEMS GROUP CELERA GENOMICS GROUP
Selected Consolidating Combined Statements of Combined Statements of Financial Data 11 Operations 69 Operations 91
Management’s Discussion and Combined Statements of Combined Statements of Analysis 13 Financial Position 70 Financial Position 92
Forward-Looking Statements 26 Combined Statements of Combined Statements of Cash Flows 71 Cash Flows 93 Consolidated Statements of Operations 33 Combined Statements of Combined Statements of Allocated Net Worth 72 Allocated Net Worth 94 Consolidated Statements of Financial Position 34 Notes to Combined Financial Notes to Combined Financial Statements 73 Statements 95 Consolidated Statements of Cash Flows 35 Report of Management 90 Report of Management 108
Consolidated Statements of Report of Independent Report of Independent Stockholders’ Equity 36 Accountants 90 Accountants 108
Notes to Consolidated Financial Statements 37
Report of Management 67
Report of Independent Accountants 67
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APPLERA CORPORATION Selected Consolidating Financial Data
(Dollar amounts in thousands except per share amounts) Fiscal years ended June 30, 1997 1998 1999 2000 2001 A C
Financial Operations O
Net revenues R Applied Biosystems group $ 767,465 $ 940,095 $ 1,221,691 $ 1,388,100 $ 1,619,495 PO
Celera Genomics group 903 4,211 12,541 42,747 89,385 RATIO Eliminations (17,335) (59,812) (64,754) Applera Corporation 768,368 944,306 1,216,897 1,371,035 1,644,126 Income (loss) from continuing operations Applied Biosystems group $ 132,739 $ 24,009 $ 148,365 $ 186,247 $ 212,391 N Celera Genomics group (30,247) (8,315) (44,894) (92,737) (186,229) Eliminations (6,674) 1,986 1,072 Applera Corporation 102,492 15,694 96,797 95,496 27,234 Per Share Information Applera Corporation Income per share from continuing operations Basic $ 2.16 $ 0.32 Diluted $ 2.07 $ 0.31 Dividends per share $ 0.68 $ 0.68 $ 0.51 Applied Biosystems Group Income per share from continuing operations Basic $ 0.74 $ 0.90 $ 1.01 Diluted $ 0.72 $ 0.86 $ 0.96 Dividends per share $ 0.0425 $ 0.17 $ 0.17 Celera Genomics Group Net loss per share Basic and diluted $ (0.89) $ (1.73) $ (3.07) Other Information Cash and cash equivalents and short-term investments Applied Biosystems group $ 217,222 $ 84,091 $ 236,530 $ 394,608 $ 392,459 Celera Genomics group 71,491 1,111,034 995,558 Eliminations Applera Corporation 217,222 84,091 308,021 1,505,642 1,388,017 Total assets Applied Biosystems group $ 1,003,810 $ 1,128,937 $ 1,347,550 $ 1,698,156 $ 1,677,887 Celera Genomics group 2,983 6,339 344,720 1,413,257 1,220,136 Eliminations (172,963) (28,098) (10,165) Applera Corporation 1,006,793 1,135,276 1,519,307 3,083,315 2,887,858 Long-term debt Applied Biosystems group $ 59,152 $ 33,726 $ 31,452 $ 36,115 Celera Genomics group 46,000 Eliminations Applera Corporation 59,152 33,726 31,452 82,115
The selected financial data should be read with Applera Corporation’s consolidated financial statements, the Applied Biosystems group’s combined financial statements and the Celera Genomic group’s combined financial statements and related notes thereto. The recapitalization of the Company on May 6,1999 resulted in the issuance of two new classes of common stock called Applera Corporation-Applied Biosystems Group Common Stock and Applera Corporation-Celera Genomics Group Common Stock. The Applied Biosystems group per share data and the Celera Genomics group per share data reflect all stock splits.
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APPLERA CORPORATION Selected Consolidating Financial Data continued
A number of items impact the comparability of Applera Corporation’s data from continuing operations. Before-tax amounts include:
ORATION Applied Biosystems Group s Restructuring, other merger costs, and acquisition-related costs of $48.1 million for fiscal 1998, $6.1 million for fiscal 1999, and $2.1 million for fiscal 2000;
ORP s A restructuring reserve adjustment of $9.2 million for fiscal 1999 relating to excess fiscal 1998 restructuring liabilities;
C s Gains on investments of $64.9 million for fiscal 1997, $1.6 million for fiscal 1998, $6.1 million for fiscal 1999, $48.6 million for fiscal 2000, and $15.0 million for fiscal 2001; A s Acquired research and development charges of $28.9 million for fiscal 1998; R s Charges for the impairment of assets of $.7 million for fiscal 1997 and $14.5 million for fiscal 1999; s Tax benefit and valuation allowance reductions of $22.2 million for fiscal 1999;
PLE s A charge of $3.5 million for a donation to the Company’s charitable foundation for fiscal 1999; s A foreign currency hedge contract-related gain of $2.3 million for fiscal 1999;
AP s Charges of $4.6 million for fiscal 1999 relating to the recapitalization of the Company; s Charges relating to the acceleration of certain long-term compensation programs as a result of the attainment of performance targets of $9.1 million for fiscal 1999 and $45.0 million for fiscal 2000; and s A gain of $8.2 million on the sale of real estate for fiscal 2000.
Celera Genomics Group s Acquired research and development charges of $26.8 million for fiscal 1997; s Charges of $4.6 million for fiscal 1999 relating to the recapitalization of the Company; s A charge relating to the acceleration of certain long-term compensation programs as a result of the attainment of performance targets of $1.0 million for fiscal 1999; s A charge for the impairment of goodwill and other intangibles of $69.1 million for fiscal 2001; and s A loss of $5.0 million from the Celera Genomics group’s interest in Celera Diagnostics for fiscal 2001.
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APPLERA CORPORATION Management’s Discussion and Analysis
Management’s Discussion of Operations The aggregate consideration received from the sale was A $425 million, consisting of $275 million in cash and one- Applera Corporation (‘‘Applera’’ or ‘‘our company’’) is C comprised of two separate business segments: the Applied year secured promissory notes in the aggregate principal O Biosystems group and the Celera Genomics group. The amount of $150 million bearing interest at a rate of 5% per R performance of these businesses is reflected separately by two annum. The promissory notes were collected in fiscal 2000. PO In fiscal 1999, we recognized a net gain on disposal of classes of common stock: Applera Corporation – Applied RATIO Biosystems Group Common Stock (‘‘Applera – Applied discontinued operations of $100.2 million, net of $87.8 Biosystems stock’’) and Applera Corporation – Celera million of income taxes. Genomics Group Common Stock (‘‘Applera – Celera Amounts previously reported for Analytical Instruments were stock’’). The Applied Biosystems group is engaged principally reclassified and stated as discontinued operations. See Note N in the development, manufacture, sale, and service of 14 to our company’s consolidated financial statements. instrument systems and associated consumable products for life science research and related applications. Its products are Events Impacting Comparability used in various applications including synthesis, amplification, purification, isolation, analysis, and sequencing of nucleic Acquisitions, Investments, and Dispositions acids, proteins, and other biological molecules. The Celera Genomics group is engaged principally in integrating high Tecan throughput technologies to create therapeutic discovery and The Applied Biosystems group acquired a 14.5% interest, development capabilities for internal use and for its customers and approximately 52% of the voting rights, in Tecan AG and collaborators. The Celera Genomics group’s businesses during the second quarter of fiscal 1998. During the fourth are its online information business and its therapeutics quarter of fiscal 1999, the Applied Biosystems group divested discovery business. The online information business is a its interest in Tecan. A before-tax gain of $1.6 million was leading provider of genomic and related biological and recognized on the sale. medical information. Pharmaceutical, biotechnology, and academic customers use this information, along with Paracel customized information technology solutions provided by the During the fourth quarter of fiscal 2000, the Celera Celera Genomics group, to enhance their capabilities in the Genomics group acquired Paracel, Inc. in a stock-for-stock fields of life science research and pharmaceutical and transaction. Paracel produces advanced genomic and text diagnostic discovery and development. The Celera analysis technologies. Its products include a hardware Genomics group recently expanded its focus to include accelerator for sequence comparison, a hardware accelerator therapeutic discovery and development. The Celera for text search, and sequence analysis software tools. Genomics group intends to leverage its capabilities in Approximately 1.6 million shares of Applera – Celera stock genomics, proteomics, and bioinformatics, both in internal were issued in exchange for the outstanding shares of Paracel programs and through collaborations, to identify drug targets common stock not previously owned by our company. At and diagnostic markers, and to discover and develop novel the time of the acquisition, our company owned 14% of therapeutic candidates. Initially, the Celera Genomics group Paracel. intends to focus its therapeutic discovery efforts in the field of oncology. A discussion of significant acquisitions, investments, and dispositions is provided in Note 2 to our company’s Celera Diagnostics has been established as a joint venture consolidated financial statements. between the Applied Biosystems group and the Celera Genomics group during the fourth quarter of fiscal 2001. Restructuring and Other Special Charges This new venture is focused on discovery, development and During the fourth quarter of fiscal 2001, the Celera commercialization of novel diagnostic tests. Genomics group recognized a before-tax, non-cash charge of You should read this discussion in conjunction with our $69.1 million for the impairment of goodwill and other company’s consolidated financial statements and related intangible assets associated with Paracel. This special charge notes. Historical results and percentage relationships are not reduced the carrying value of the net assets of Paracel to necessarily indicative of operating results for any future their estimated fair value. Management based the need for periods. this assessment on Paracel’s substantially lower than originally anticipated performance and the future outlook of this Throughout the following discussion of operations, we refer business. to the impact on our reported results of the movement in foreign currency exchange rates from one reporting period During fiscal 2000, we incurred $2.1 million of before-tax to another as ‘‘foreign currency translation.’’ costs associated with acquisitions for the Applied Biosystems group which were not consummated. Discontinued Operations In fiscal 1999, non-recurring, before-tax special charges of Effective May 28, 1999, we completed the sale of our $9.2 million were incurred in connection with the Analytical Instruments business to EG&G, Inc. Analytical recapitalization of our company. The Applied Biosystems Instruments, formerly a unit of the Applied Biosystems group and the Celera Genomics group were each allocated group, developed, manufactured, marketed, sold, and 50% of the $9.2 million total recapitalization costs incurred serviced analytical instruments used in a variety of markets.
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APPLERA CORPORATION Management’s Discussion and Analysis continued
by our company. See Note 1 to the consolidated financial million of the fiscal 1999 charge was allocated to the Celera statements for a discussion of the recapitalization. Genomics group. ORATION During fiscal 1998, $48.1 million of before-tax charges were During the fourth quarter of fiscal 2000, the Applied
ORP recorded for restructuring and other merger costs to integrate Biosystems group recorded a gain of $8.2 million in other
C PerSeptive Biosystems, Inc. into the Applied Biosystems income from the sale of real estate. A gain of $2.3 million
A group of our company following the acquisition. The related to foreign currency hedge contracts was recognized
R objectives of the integration plan were to lower PerSeptive’s in other income during the fourth quarter of fiscal 1999 by cost structure by reducing excess manufacturing capacity, the Applied Biosystems group.
PLE achieve broader worldwide distribution of PerSeptive’s During the fourth quarter of fiscal 1999, the Applied products, and combine sales, marketing, and administrative
AP Biosystems group made a $3.5 million donation to our functions. The charge included: $33.9 million for company’s charitable foundation, which supports educational restructuring the combined operations; $8.6 million for and other charitable programs. The charge was recorded to transaction costs; and $4.1 million of inventory-related selling, general and administrative expenses. write-offs, recorded in cost of sales, associated with the rationalization of certain product lines. Additional merger- The effective income tax rate for fiscal 1999 included certain related period costs of $6.1 million for fiscal 1999 were tax benefit and valuation allowance reductions of $22.2 incurred for training, relocation, and communication in million. See Note 4 to our company’s consolidated financial connection with the integration. statements for a discussion of income taxes. During the fourth quarter of fiscal 1999, we completed the restructuring actions. The costs to implement the program Discussion of Consolidated Operations were $9.2 million below the $48.1 million charge recorded Results of Operations— for fiscal 1998. As a result, during the fourth quarter of fiscal 2001 Compared With 2000 1999, the Applied Biosystems group recorded a $9.2 million reduction of charges required to implement the fiscal 1998 We reported net income of $27.2 million for fiscal 2001 restructuring plan. The reduction in the overall cost of the compared with $95.5 million for fiscal 2000. Net income for program was primarily caused by the sale of a plant, which our company, on a comparable basis excluding the special was originally expected to be abandoned, and the associated items previously described from both fiscal years, decreased reduction of estimated personnel costs related to the facility. 11.3% to $84.7 million for fiscal 2001 compared with $95.5 million for fiscal 2000. The decrease in net income reflected During the fourth quarter of fiscal 1999, we incurred a $14.5 an increased investment in research and development million charge for the impairment of goodwill and other activities, the amortization of goodwill and intangibles intangibles associated with the Applied Biosystems group’s primarily due to Paracel and the negative effects of foreign Molecular Informatics business. This impairment resulted currency. These increased expenses were partially offset by primarily from management’s assessment of a decline in the growth in net revenues, higher interest income, and future cash flows from this business, due to the abandonment lower SG&A as a percentage of net revenues. On a segment of certain product lines, including the SDK software basis excluding the special items from both fiscal years, the platform, in the fourth quarter of fiscal 1999. Applied Biosystems group reported net income of $202.7 million for fiscal 2001 compared with $186.2 million for Gain on Investments fiscal 2000, and the Celera Genomics group reported a net During fiscal 2001 and 2000, the Applied Biosystems group loss of $119.0 million for fiscal 2001 compared with a net recorded before-tax gains of $15.0 million and $48.6 million, loss of $92.7 million for fiscal 2000. respectively, related to the sales of minority equity Net revenues for our company were $1.6 billion for fiscal investments. Fiscal 1999 included before-tax gains of $4.5 2001 compared with $1.4 billion for fiscal 2000, an increase million related to the sale of and release of contingencies on of 19.9%. Geographically, we reported revenue growth in all minority equity investments by the Applied Biosystems regions for fiscal 2001 compared with fiscal 2000. Net group. As previously described, fiscal 1999 also included a revenues increased 20.3% in the United States, 16.1% in before-tax gain of $1.6 million related to the sale of our Europe, 20.9% in Asia Pacific, and 41.9% in Latin America company’s interest in Tecan by the Applied Biosystems and other markets, compared with the prior fiscal year. The group. See Note 2 to our company’s consolidated financial effects of foreign currency reduced net revenues by statements. approximately $46 million, or 3%, compared with the prior year due primarily to weakness in the euro, the British Other Events Impacting Comparability pound and the Japanese yen. On a segment basis, net Fiscal 2000 and 1999 included charges of $45.0 million and revenues for the Applied Biosystems group were $1.6 billion $10.1 million, respectively, to selling, general and for fiscal 2001 compared with $1.4 billion for fiscal 2000. administrative expenses, for costs related to the acceleration The Celera Genomics group reported net revenues of $89.4 of certain long-term compensation programs as a result of million for fiscal 2001 compared with $42.7 million for fiscal the attainment of performance targets. All of the fiscal 2000 2000. charge and $9.1 million of the fiscal 1999 charge were Gross margin as a percentage of net revenues for our allocated to the Applied Biosystems group, while $1.0 company was 52.5% for fiscal 2001 compared with 54.5%
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APPLERA CORPORATION Management’s Discussion and Analysis continued
for fiscal 2000 due primarily to investment in new products decreased 41.2% to $56.0 million for fiscal 2001 compared A and the negative effects of foreign currency. with $95.2 million for fiscal 2000. C
SG&A expenses for our company were $440.1 million for On a segment basis, operating income for the Applied O R
fiscal 2001 compared with $436.9 million for fiscal 2000. On Biosystems group increased to $279.9 million for fiscal 2001 PO a comparable basis excluding the long-term compensation compared with $213.2 million for the prior fiscal year. On a
charge from fiscal 2000, SG&A expenses increased 12.3% in comparable basis, excluding the special items previously RATIO fiscal 2001 as compared with fiscal 2000. This increase was discussed from fiscal 2000, operating income in fiscal 2001 due to higher planned worldwide selling and marketing increased $19.5 million, or 7.5%, compared with fiscal 2000. expenses commensurate with the growth in revenues and The Applied Biosystems group benefited from increased orders. On a segment basis, SG&A expenses for the Applied revenues and lower SG&A expenses as a percentage of net N Biosystems group were $380.7 million and $393.9 million revenues, partially offset by an increase in R&D spending, for fiscal years 2001 and 2000, respectively. SG&A expenses investments in new products, including start-up costs related for the Celera Genomics group were $58.3 million and to oligonucleotide production capacity, and the negative $43.0 million for fiscal years 2001 and 2000, respectively. effect of foreign currency. Excluding the negative effect of foreign currency and the special charge from the prior year, R&D expenses increased $67.8 million for fiscal 2001 to operating income increased approximately 15%. Operating $323.4 million from $255.6 million for fiscal 2000 primarily income as a percentage of net revenues for the Applied due to investment in new products and technologies such as Biosystems group was 17.3% in fiscal 2001 compared with novel, high-throughput instruments for gene and protein 18.8% excluding the long-term compensation charge in fiscal studies and related consumable products, as well as increased 2000. Excluding the effects of foreign currency in fiscal 2001 expenses attributed to the development of the Celera and the long-term compensation charge in fiscal 2000, Genomics group’s discovery program and gene discovery operating income as a percentage of net revenues was 18% work and the acceleration of its capabilities in proteomics for fiscal 2001 compared with 18.8% in the prior fiscal year. and functional genomics. Substantially offsetting the fiscal 2001 increases in R&D expenses was the change in The operating loss for the Celera Genomics group was classification of the costs of certain activities, previously $289.6 million for fiscal 2001 compared with $168.1 million performed for R&D purposes, to cost of sales as such for fiscal 2000. Excluding the special charge in fiscal 2001 for activities evolved into commercial business for the Celera the impairment of goodwill and other intangibles relating to Genomics group during fiscal 2001. On a segment basis, Paracel, the operating loss for fiscal 2001 was $220.5 million. R&D expenses for the Applied Biosystems group were The increase in the Celera Genomics group’s operating loss $184.5 million and $141.2 million for fiscal years 2001 and reflected, in addition to the special charge in fiscal 2001, the 2000, respectively. R&D expenses for the Celera Genomics increased investment in research and development activities, group were $164.7 million and $148.6 million for fiscal years amortization of goodwill and intangibles primarily due to 2001 and 2000, respectively. Paracel, and expansion of sales and marketing capabilities. These increased expenses were partially offset by higher net We recorded non-cash expenses of $43.9 million in fiscal revenues. 2001 compared to $4.2 million in fiscal 2000 relating to the amortization of goodwill and other intangibles, primarily due Interest expense was $2.1 million for fiscal 2001 compared to Paracel, which was acquired during the fourth quarter of with $3.5 million for fiscal 2000. The higher interest expense fiscal 2000. for fiscal 2000 reflected the financing of the purchase of the Celera Genomics group’s Rockville, Maryland facilities. The During the fourth quarter of fiscal 2001, we recorded a financing, entered into during the first quarter of fiscal 2000, before-tax, non-cash charge of $69.1 million for the was repaid in the second quarter of fiscal 2001. Interest impairment of goodwill and other intangible assets associated income was $80.3 million for fiscal 2001 compared with with Paracel. During fiscal 2000, we incurred $2.1 million of $39.4 million for fiscal 2000. This increase was primarily costs associated with acquisitions which were not attributable to higher average cash and cash equivalents and consummated. short-term investments in fiscal 2001. Interest income in Operating Income (Loss) fiscal 2000 included interest on a $150 million note (Dollar amounts in millions) 2000 2001 receivable relating to the sale of the Analytical Instruments business. The note, which was outstanding for most of fiscal Operating income before special items $ 95.2 $ 56.0 2000, was collected in the fourth quarter of fiscal 2000. Asset impairment (69.1) Long-term compensation programs (45.0) For fiscal 2001, other income (expense), net was an expense Acquisition-related costs (2.1) of $6.7 million, which related primarily to our company’s foreign currency management program. For fiscal 2000, Operating income (loss) $ 48.1 $(13.1) other income (expense), net was income of $3.4 million, Operating income (loss) for our company was a loss of $13.1 which related primarily to a gain on the sale of real estate, million for fiscal 2001 compared with income of $48.1 and was partially offset by costs associated with our million for fiscal 2000. On a comparable basis, excluding the company’s foreign currency management program. Our special items previously described, operating income company adopted Statement of Financial Accounting Standards No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities,’’ effective July 1, 2000. See Note 11
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to our consolidated financial statements for further discussion Biosystems group, excluding special items and Tecan, of our company’s policy for financial instruments. increased 20.5% in fiscal 2000 as compared to fiscal 1999. ORATION Our company’s effective income tax rate was 63% for fiscal R&D expenses for our company increased to $255.6 million
ORP 2001 compared with 30% for fiscal 2000. Excluding the for fiscal 2000 compared with $174.6 million for fiscal 1999.
C special items in both fiscal years and the amortization of Excluding Tecan from fiscal 1999, R&D expenses for fiscal
A goodwill primarily relating to Paracel, the effective tax rate 2000 increased 59.4% compared with fiscal 1999, primarily
R was 26% for fiscal 2001 compared with 24% for fiscal 2000. as a result of a full year of sequencing operations in fiscal An analysis of the differences between the federal statutory 2000 and significantly expanded bioinformatics and software
PLE income tax rate and the effective income tax rate is provided development capabilities for the Celera Genomics group. On in Note 4 to our consolidated financial statements. a segment basis, R&D expenses for the Applied Biosystems AP group were $141.2 million for fiscal 2000 compared with Results of Continuing Operations— $133.5 million for fiscal 1999, an increase of 5.7%. The 2000 Compared With 1999 Celera Genomics group’s R&D expenses increased $104.9 Our company reported income from continuing operations million to $148.6 million for fiscal 2000 from $43.7 million of $95.5 million for fiscal 2000 compared with $96.8 million for fiscal 1999. for fiscal 1999. Income from continuing operations for our We recorded non-cash expenses of $4.2 million in fiscal company, on a comparable basis, excluding the special items 2000 relating to the amortization of goodwill and other previously described from both fiscal years and Tecan from intangibles primarily due to Paracel, which was acquired fiscal 1999, increased 4.5%, to $95.5 million for fiscal 2000 during the fourth quarter of fiscal 2000. compared with $91.4 million for fiscal 1999. On a segment basis, the Applied Biosystems group’s income from During fiscal 2000, our company incurred $2.1 million of continuing operations, excluding the special items from both costs associated with acquisitions for the Applied Biosystems fiscal years and Tecan from fiscal 1999, increased 35.4% to group that were not consummated. During the fourth $186.2 million for fiscal 2000 compared with $137.5 million quarter of fiscal 1999, our company recorded a charge of for fiscal 1999. The Celera Genomics group reported a net $14.5 million for the impairment of goodwill and other loss of $92.7 million for fiscal 2000 compared with a net loss intangibles associated with its Molecular Informatics business. of $39.6 million for fiscal 1999, excluding the special items During fiscal 1999, our company incurred merger-related allocated to the group during fiscal 1999. period costs of $6.1 million for training, relocation, and communication in connection with the integration of Net revenues were $1.4 billion for fiscal 2000 compared PerSeptive into the Applied Biosystems group. During the with $1.2 billion for fiscal 1999, an increase of 12.7%. fourth quarter of fiscal 1999, our company completed the Geographically, net revenues increased 11.8% in the United restructuring actions associated with the integration of States, 1.6% in Europe, 30.1% in Asia Pacific, and 47.2% in PerSeptive following the acquisition. The costs to implement Latin America and other markets. Foreign currency the program were $9.2 million below the $48.1 million translation had a negative effect on the growth rate of charge recorded for fiscal 1998. As a result, during the fourth revenues in Europe. On a segment basis, net revenues for quarter of fiscal 1999, the Applied Biosystems group the Applied Biosystems group were $1.4 billion for fiscal recorded a $9.2 million reduction of charges required to 2000 compared with $1.2 billion for fiscal 1999. The Celera implement the fiscal 1998 integration plan. Also during fiscal Genomics group reported net revenues of $42.7 million for 1999, our company recorded a non-recurring charge of $9.2 fiscal 2000 compared with $12.5 million for fiscal 1999. million for costs incurred in connection with the Gross margin as a percentage of net revenues for our recapitalization of our company. On a segment basis, the company was 54.5% for fiscal 2000 compared with 54.9% Applied Biosystems group and the Celera Genomics group for fiscal 1999. Gross margin for the Applied Biosystems were each allocated 50% of the charge. These costs included group as a percentage of net revenues was 54.1% for fiscal investment banking and professional fees. 2000 compared with 55.1% for fiscal 1999. Operating Income (Loss) SG&A expenses for our company were $436.9 million for (Dollar amounts in millions) 1999 2000 fiscal 2000 compared with $364.1 million for fiscal 1999. Operating income before special items $ 142.8 $ 95.2 SG&A expenses, excluding the long-term compensation Asset impairment (14.5) charges for fiscal 2000 and 1999, and Tecan and the $3.5 Long-term compensation programs (10.1) (45.0) million charge for a contribution to our company’s charitable Charitable foundation contribution (3.5) foundation for fiscal 1999, increased 23.8%. This increase Restructuring and other merger was due to higher planned worldwide selling and marketing expenses commensurate with the higher revenue growth. costs, net 3.1 On a segment basis, SG&A expenses were $393.9 million Recapitalization costs (9.2) and $335.9 million for fiscal 2000 and 1999, respectively, for Acquisition-related costs (2.1) the Applied Biosystems group, and $43.0 million and $28.3 Operating income $ 108.6 $ 48.1 million for fiscal 2000 and 1999, respectively, for the Celera Genomics group. SG&A expenses for the Applied Operating income for our company decreased to $48.1 million for fiscal 2000 compared with $108.6 million for fiscal 1999. On a comparable basis, excluding the special
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items previously described, operating income decreased with 25% for fiscal 1999. The effective income tax rate for A 33.3% to $95.2 million for fiscal 2000 compared with $142.8 fiscal 1999 included the release of valuation allowances of C
million for fiscal 1999. $17.4 million. Because the sale of the Analytical Instruments O
business had been completed, the valuation allowance was R
On a segment basis, operating income for the Applied PO reduced as management believed that it was more likely than Biosystems group increased to $213.2 million for fiscal 2000 not that the deferred tax assets to which the valuation compared with $187.9 million for fiscal 1999. On a RATIO allowance related would be realized. An analysis of the comparable basis, excluding the special items previously differences between the federal statutory income tax rate and described from both fiscal years and Tecan from fiscal 1999, the effective income tax rate is provided in Note 4 to our operating income increased 20.2% for fiscal 2000 compared company’s consolidated financial statements. N with fiscal 1999. The Applied Biosystems group benefited from increased revenues as a result of strong worldwide For fiscal 1999, we incurred minority interest expense of demand and lower operating expenses as a percentage of net $13.4 million relating to our company’s 14.5% financial revenues, partially as a result of a slower than planned interest in Tecan. increase in staffing during the fiscal year. Operating income as a percentage of net revenues, excluding the special items Discussion of Segment Operations from both fiscal years and Tecan from fiscal 1999, increased to 18.8% for fiscal 2000 compared with 17.6% for fiscal Applied Biosystems Group 1999. Results of Operations— The operating loss for the Celera Genomics group was 2001 Compared With 2000 $168.1 million for fiscal 2000 compared with $68.8 million The Applied Biosystems group reported net income of for fiscal 1999. The increase in the Celera Genomics group’s $212.4 million for fiscal 2001 compared with $186.2 million operating loss reflected: the increased sequencing activity; for fiscal 2000. On a comparable basis excluding the special increased investment in research and development activities items from both fiscal years, net income increased 8.8% to related to expanded scientific and annotation teams, and $202.7 million for fiscal 2001 compared with $186.2 million bioinformatics staff; and increased operating expenses for fiscal 2000. This increase was primarily attributable to the required to support the expanded product and business growth in net revenues, lower selling, general and development activities. administrative expenses as a percentage of net revenues and lower interest expense, partially offset by higher R&D For fiscal 2000 and 1999, the Applied Biosystems group expenses. The negative effects of foreign currency reduced recorded before-tax gains of $48.6 million and $4.5 million, net income by approximately $18 million, or 10%, as respectively, related to the sale of minority equity compared with fiscal 2000. investments. Fiscal 1999 also included a gain of $1.6 million related to the sale of our interest in Tecan. Net revenues were $1.6 billion for fiscal 2001 compared with $1.4 billion for fiscal 2000, an increase of 16.7%. The Interest expense was $3.5 million for fiscal 2000 compared effects of foreign currency reduced net revenues by with $3.8 million for fiscal 1999. This decrease was primarily approximately $46 million, or 3%, compared with the prior due to lower average interest rates, partially offset by the year due primarily to weakness in the euro, the British financing of the purchase of the Celera Genomics group’s Rockville, MD facilities. Interest income was $39.4 million pound and the Japanese yen. Net revenues to the Celera Genomics group, primarily from leased instruments and for fiscal 2000 compared with $2.9 million for fiscal 1999. consumables shipments, were $64.1 million for fiscal 2001, This increase in interest income during fiscal 2000 was primarily a result of higher average balances of cash and cash or 4.0% of the Applied Biosystems group’s net revenues, and $59.8 million for fiscal 2000, or 4.3%. equivalents and short-term investments, which increased during the third quarter of fiscal 2000 due to a follow-on Geographically, the Applied Biosystems group reported public offering of Applera – Celera stock, as well as interest revenue growth in all regions for fiscal 2001 compared with on the note receivable related to the sale of the Analytical fiscal 2000. Net revenues increased 17.7% in the United Instruments business. States, 11.8% in Europe, 20.9% in Asia Pacific, and 16.2% in Latin America and other markets, compared with the prior Other income (expense), net for fiscal 2000 was income of fiscal year. Excluding the effects of foreign currency, $3.4 million, primarily related to a gain on the sale of real revenues grew approximately 21.1% in Europe and 24.2% in estate, and was partially offset by costs associated with a Asia Pacific. portion of our company’s foreign currency management program. Other income (expense), net was income of $.5 For fiscal year 2001, revenues from instrument sales were million for fiscal 1999, which related primarily to the $813.3 million, an increase of 7.7% from $755.2 million last revaluation of foreign exchange contracts and a legal year. The increase in instrument sales resulted primarily from settlement that were partially offset by the loss on the the introductions of new products for genetic analysis, disposal of certain assets and other non-operating costs. sequence detection, and mass spectrometry. The new instrument introductions included in these product lines that Our company’s effective income tax rate was 30% for fiscal contributed to the growth were the ABI PRISMÒ 3100 2000 compared with 4% for fiscal 1999. Excluding special items in both fiscal years and Tecan in fiscal 1999, the Genetic Analyzer, introduced in the latter part of fiscal 2000, and the ABI PRISMÒ 7900 HT Sequence Detection System effective income tax rate was 24% for fiscal 2000 compared
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and the API 4000Ô LC/MS/MS/ System, both of which operating income increased approximately 15%. Operating were introduced during fiscal 2001. Instrument sales growth income as a percentage of net revenues was 17.3% in fiscal ORATION was restrained in the latter half of fiscal 2001 due to the 2001 compared with 18.8% excluding the long-term economic slowdown that resulted in lower demand from compensation charge in fiscal 2000. Excluding the effects of ORP commercial customers. Consumables sales grew to $592.1 foreign currency in fiscal 2001 and the long-term C million from $473.7 million last year, a 25.0% increase, compensation charge in fiscal 2000, operating income as a A reflecting continued demand for sequencing and sequence percentage of net revenues was 18% for fiscal 2001 R detection reagents. Revenues from other sources, which compared with 18.8% in the prior fiscal year. included service contracts, royalties, licenses, and contract PLE research, increased 34.5% to $214.1 million from $159.2 Fiscal years 2001 and 2000 included before-tax gains of $15.0 million and $48.6 million, respectively, related to the
AP million in fiscal 2000. sales of minority equity investments. Gross margin as a percentage of net revenues declined to 52.2% for fiscal 2001 compared with 54.1% for fiscal 2000 Interest expense was $1.3 million for fiscal 2001 compared due primarily to investment in new products, including start- with $8.1 million for fiscal 2000. The higher interest expense up costs related to product testing and validation for a for fiscal 2000 reflected interest on the $150 million note substantial expansion in oligonucleotide production capacity. payable to the Celera Genomics group. The note was paid This expansion is designed to meet expected customer in the fourth quarter of fiscal 2000. Interest income was demand for assays for gene expression and single nucleotide $16.8 million for fiscal 2001 compared with $18.6 million polymorphisms (SNPs). The negative effects of foreign for the prior year. The decrease was primarily due to the currency also contributed to the decline in gross margin as a collection of the $150 million note receivable relating to the percentage of net revenues. sale of the Analytical Instruments business in the fourth quarter of fiscal 2000, substantially offset by larger average SG&A expenses were $380.7 million for fiscal 2001 cash balances and higher average interest rates for fiscal 2001 compared with $393.9 million for fiscal 2000, a decrease of compared with fiscal 2000. 3.4%. On a comparable basis, excluding the long-term compensation charge for fiscal 2000, SG&A expenses For fiscal 2001, other income (expense), net was an expense increased 9.1% over the prior year. This increase was due to of $5.8 million, which related primarily to our company’s higher planned worldwide selling and marketing expenses foreign currency management program. For fiscal 2000, commensurate with the growth in revenues and orders. As a other income (expense), net was income of $3.4 million, percentage of net revenues, SG&A expenses were 23.5% for which related primarily to a gain on the sale of real estate, fiscal 2001 compared with 25.1% for fiscal 2000, excluding and was partially offset by costs associated with our the long-term compensation charge, primarily due to the company’s foreign currency management program. The realization of economies of scale. Applied Biosystems group adopted Statement of Financial Accounting Standards No. 133, ‘‘Accounting for Derivative R&D expenses were $184.5 million for fiscal 2001 compared Instruments and Hedging Activities,’’ effective July 1, 2000. with $141.2 million for fiscal 2000, an increase of 30.7%, as See Note 11 to the Applied Biosystems group’s combined a result of investment in new products and technologies such financial statements for further discussion of the Applied as novel, high-throughput instruments for gene and protein Biosystems group’s policy for financial instruments. studies and related consumable products. As a percentage of net revenues, R&D expenses were 11.4% for fiscal 2001 The effective income tax rate was 30% for fiscal 2001 compared with 10.2% for the prior year. The increase in compared with 32% for fiscal 2000. Excluding special items R&D expenses as a percentage of net revenues was primarily in both fiscal years, the effective income tax rate was 30% due to the investment in new products, as well as the for both fiscal 2001 and fiscal 2000. An analysis of the negative effects of currency on revenues, as R&D costs are differences between the federal statutory income tax rate and predominantly based in U.S. dollars. the effective income tax rate is provided in Note 4 to the Applied Biosystems group’s combined financial statements. During fiscal 2000, the Applied Biosystems group incurred $2.1 million of costs associated with acquisitions which were Results of Continuing Operations— not consummated. 2000 Compared With 1999 Operating income increased to $279.9 million for fiscal 2001 The Applied Biosystems group reported income from compared with $213.2 million for the prior fiscal year. On a continuing operations of $186.2 million for fiscal 2000 comparable basis, excluding the special items previously compared with $148.4 million for fiscal 1999. On a discussed from fiscal 2000, operating income in fiscal 2001 comparable basis, excluding the special items previously increased $19.5 million, or 7.5%, compared with fiscal 2000. described from both fiscal years and Tecan from fiscal 1999, The Applied Biosystems group benefited from increased income from continuing operations increased 35.4% to revenues and lower SG&A expenses as a percentage of net $186.2 million for fiscal 2000 compared with $137.5 million revenues, partially offset by an increase in R&D spending, for fiscal 1999. This increase was attributable primarily to the investments in new products, including start-up costs related growth in net revenues and lower operating expenses as a to oligonucleotide production capacity, and the negative percentage of net revenues. effect of foreign currency. Excluding the negative effect of Net revenues were $1.4 billion for fiscal 2000 compared foreign currency and the special charge from the prior year, with $1.2 billion for fiscal 1999. Excluding the results of
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Tecan from fiscal 1999, net revenues increased 24.0%. charitable foundation for fiscal 1999, SG&A expenses for the A Increased net revenues for sequence detection systems, Applied Biosystems group increased 20.5%. This increase was C
including reagents and instrument systems for gene due to higher planned worldwide selling and marketing O
expression analysis and SNP detection, mass spectrometry expenses commensurate with the higher revenue growth. As R products, and DNA sequencing consumables were a percentage of net revenues, excluding the special charges PO contributors. The effects of foreign currency translation from both fiscal years and Tecan from fiscal 1999, SG&A RATIO decreased net revenues by approximately $1.8 million expenses were 25.1% for fiscal 2000 compared with 25.9% compared with fiscal 1999 as weakness in the euro was for fiscal 1999. essentially offset by strengthening of the Japanese yen. Net R&D expenses were $141.2 million for fiscal 2000 compared revenues from leased instruments and shipments of N with $133.5 million for fiscal 1999, an increase of 5.7%. consumables and project materials to the Celera Genomics Excluding Tecan from fiscal 1999, R&D expenses for fiscal group were $59.8 million for fiscal 2000, or 4.3% of the Applied Biosystems group’s net revenues. For fiscal 1999, net 2000 increased 18.4% compared with fiscal 1999. As a percentage of net revenues, excluding Tecan from fiscal revenues from leased instruments, shipments of instruments 1999, R&D expenses were 10.2% for fiscal 2000 compared and consumables, and contracted R&D services to the Celera with 10.7% for fiscal 1999. R&D expense for fiscal 1999 was Genomics group were $17.3 million and represented less higher as a percentage of net revenues due to the than 2% of the Applied Biosystems group’s net revenues. development of new products released in the second half of Geographically, excluding the net revenues of Tecan for fiscal 1999. fiscal 1999, the Applied Biosystems group reported revenue During fiscal 2000, the Applied Biosystems group incurred growth in all regions for fiscal 2000 compared with fiscal $2.1 million of costs associated with acquisitions which were 1999. Net revenues increased 21.6% in the United States, not consummated. During the fourth quarter of fiscal 1999, 18.5% in Europe, 35.8% in Asia Pacific, and 50.7% in Latin the Applied Biosystems group recorded a charge of $14.5 America and other markets. Excluding the favorable effects million for the impairment of goodwill and other intangibles of foreign currency translation in Japan, net revenues increased approximately 23% in Asia Pacific, partly reflecting associated with its Molecular Informatics business. Merger- related period costs of $6.1 million were incurred during increased government funding for genomics-related research. fiscal 1999 for training, relocation, and communication in Excluding the negative effects of foreign currency translation in Europe, net revenues increased by approximately 27%. connection with the integration of PerSeptive into the Applied Biosystems group. During the fourth quarter of Excluding the effects of Tecan in fiscal 1999, revenues from fiscal 1999, the Applied Biosystems group completed the instrument sales increased 18.1% to $775.2 in fiscal 2000 restructuring actions associated with the integration of from $656.3 million in fiscal 1999. The increase in PerSeptive following the acquisition. The costs to implement instrument sales resulted primarily from higher demand for the program were $9.2 million below the $48.1 million DNA sequencers and genetic analyzers, partially caused by charge recorded for fiscal 1998. As a result, during the fourth introductions of the ABI PRISMÒ 3700 Genetic Analyzer in quarter of fiscal 1999, the Applied Biosystems group the second quarter of fiscal 1999 and the ABI PRISMÒ 3100 recorded a $9.2 million reduction of charges required to Genetic Analyzer in the fourth quarter of fiscal 2000. PCR implement the fiscal 1998 integration plan. Also during fiscal sequencing detection systems experienced increased demand 1999, the Applied Biosystems group was allocated a non- as well as increased sales from the introduction of the recurring charge of $4.6 million for costs incurred in GeneAmpÒ 5700 Sequence Detection System early in fiscal connection with the recapitalization of our company. These 2000. Sales from mass spectrometry systems benefited from costs included investment banking and professional fees. the introduction of the API QSTARÔ Pulsar Hybrid LC/ MS/MS System during the first half of fiscal 2000. Excluding Operating Income the effects of Tecan in fiscal 1999, consumables sales grew to (Dollar amounts in millions) 1999 2000 $473.7 million in fiscal 2000 from $334.2 million in fiscal Operating income before special items $ 216.5 $ 260.3 1999, a 41.7% increase, reflecting continued demand for Asset impairment (14.5) sequencing and sequence detection reagents. Excluding the Long-term compensation programs (9.1) (45.0) effects of Tecan in fiscal 1999, revenues from other sources, Charitable foundation contribution (3.5) which included service contracts, royalties, licenses, and Restructuring and other merger contract research, increased 23.4% in fiscal 2000 to $159.2 million from $129.0 million in fiscal 1999. costs, net 3.1 Recapitalization costs (4.6) Gross margin as a percentage of net revenues was 54.1% for Acquisition-related costs (2.1) fiscal 2000 compared with 55.1% for fiscal 1999. Excluding Operating income $ 187.9 $ 213.2 Tecan, gross margin as a percentage of net revenues was 54.1% for fiscal 1999. Operating income increased to $213.2 million for fiscal 2000 SG&A expenses were $393.9 million for fiscal 2000 compared with $187.9 million for fiscal 1999. On a compared with $335.9 million for fiscal 1999, an increase of comparable basis, excluding the special items previously 17.3%. On a comparable basis, excluding the long-term described from both fiscal years and Tecan from fiscal 1999, compensation charges for fiscal 2000 and 1999, Tecan, and operating income increased 20.2% for fiscal 2000 compared the $3.5 million charge for a contribution to our company’s with fiscal 1999. The Applied Biosystems group benefited
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from increased revenues as a result of strong worldwide $119.0 million. The increase in the net loss, in addition to demand and lower operating expenses as a percentage of net the special charge in fiscal 2001, reflected the increased ORATION revenues, partially as a result of a slower than planned investment in research and development activities, increase in staffing during the fiscal year. Operating income amortization of goodwill and intangibles primarily due to ORP as a percentage of net revenues, excluding the special items Paracel, and expansion of sales and marketing capabilities. C from both fiscal years and Tecan from fiscal 1999, increased These increased expenses were partially offset by higher net A to 18.8% for fiscal 2000 compared with 17.6% for fiscal revenues and higher interest income. R 1999. Net revenues for the Celera Genomics group were $89.4
PLE Fiscal years 2000 and 1999 included before-tax gains of million for fiscal 2001 compared with $42.7 million for fiscal $48.6 million and $4.5 million, respectively, related to the 2000. The increased revenues resulted primarily from AP sale of minority equity investments. Fiscal 1999 also included database subscription agreements with commercial and a gain of $1.6 million related to the sale of our company’s academic customers, as well as revenues from genomic interest in Tecan. services and collaborations. The acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed to the Interest expense was $8.1 million for fiscal 2000 compared increase in net revenues. with $4.5 million for fiscal 1999. This increase was primarily due to the interest on the $150 million note payable to the Cost of sales increased $28.0 million to $43.0 million for Celera Genomics group. Interest income was $18.6 million fiscal 2001 from $15.0 million in fiscal 2000. As the Celera for fiscal 2000, compared with $2.3 million for fiscal 1999. Genomics group’s activities developed into a commercial The increase in interest income during fiscal 2000 was due business, costs for activities previously performed as R&D in to the interest on the note receivable related to the sale of fiscal 2000 have been appropriately classified as cost of sales the Analytical Instruments business, higher balances of cash during fiscal 2001. The increase in cost of sales during fiscal and cash equivalents, and higher interest rates. 2001 is also due to the inclusion of Paracel in the Celera Genomics group’s results for the entire twelve months in Other income (expense), net for fiscal 2000 was income of fiscal 2001. $3.4 million, primarily related to a gain on the sale of real estate, and was partially offset by costs associated with a R&D expenses increased $16.1 million to $164.7 million for portion of our company’s foreign currency management fiscal 2001 from $148.6 million in fiscal 2000, after the program. Other income (expense), net was income of $.5 reclassification of $15.0 million from R&D expenses to cost million for fiscal 1999, which related primarily to the of sales for fiscal 2000, primarily relating to non-sequencing revaluation of foreign exchange contracts and a legal activities. Increased R&D expenses were attributed to the settlement that were partially offset by the loss on the development of its discovery program and gene discovery disposal of certain assets and other non-operating costs. work as well as the acceleration of its capabilities in proteomics and functional genomics. R&D expenses also The effective income tax rate was 32% for fiscal 2000 increased as a result of the expansion of scientific and compared with 16% for fiscal 1999. Excluding special items annotation research teams and bioinformatics and software in both fiscal years and Tecan in fiscal 1999, the effective engineering staff. During the latter half of fiscal 2001, the income tax rate was 30% for fiscal 2000 compared with 29% Celera Genomics group shifted its research spending to for the prior fiscal year. The effective income tax rate for expand its technical capabilities for therapeutic and diagnostic fiscal 1999 included the release of valuation allowances of discovery, as the recent completion of major strategic whole $17.4 million. Because the sale of the Analytical Instruments genome sequences has resulted in a lower level of R&D business had been completed, the valuation allowance was investment being necessary to support the Celera Genomics reduced as management believed that it was more likely than group’s on-line information business. The acquisition of not that the deferred tax assets to which the valuation Paracel during the fourth quarter of fiscal 2000 also allowance related would be realized. An analysis of the contributed to the increase in R&D expenses. Substantially differences between the federal statutory income tax rate and offsetting the fiscal 2001 increases in R&D expenses was the the effective income tax rate is provided in Note 4 to the change in classification of the costs of certain activities, Applied Biosystems group’s combined financial statements. previously performed for R&D purposes, to cost of sales as For fiscal 1999, the Applied Biosystems group incurred such activities evolved into commercial business during fiscal minority interest expense of $13.4 million relating to our 2001. company’s 14.5% financial interest in Tecan. SG&A expenses were $58.3 million for fiscal 2001 compared with $43.0 million for fiscal 2000. The increase was caused Celera Genomics Group primarily by the acquisition of Paracel during the fourth Results of Operations— quarter of fiscal 2000 and the Celera Genomics group’s 2001 Compared With 2000 expansion of its sales and marketing capabilities. Corporate expenses and a portion of administrative shared services were The Celera Genomics group reported a net loss of $186.2 $9.3 million for fiscal 2001 compared with $7.5 million for million for fiscal 2001 compared with a net loss of $92.7 fiscal 2000. million for fiscal 2000. Excluding the special charge in fiscal 2001 for the impairment of goodwill and other intangible The Celera Genomics group recorded non-cash expenses of assets related to Paracel, the net loss for fiscal 2001 was $43.9 million in fiscal 2001 compared to $4.2 million in
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fiscal 2000 relating to the amortization of goodwill and other annotation research teams and bioinformatics and software A intangibles, primarily due to Paracel, which was acquired engineering staff. C
during the fourth quarter of fiscal 2000. During the fourth O SG&A expenses were $43.0 million for fiscal 2000 compared quarter of fiscal 2001, the Celera Genomics group recorded R
with $28.3 million for fiscal 1999. The increase was related PO a before-tax, non-cash charge of $69.1 million for the to the planned scale-up in business development, marketing, impairment of goodwill and other intangible assets associated and administrative activities in support of the on-line RATIO with Paracel. information business during fiscal 2000. Corporate expenses Interest expense was $.8 million for fiscal 2001 compared and a portion of administrative shared services were $7.5 with $2.1 million for fiscal 2000. Interest expense in both million for fiscal 2000 compared with $5.1 million for fiscal fiscal years reflected the financing of the purchase of the 1999. Fiscal 1999 SG&A expenses included $1.0 million for N Celera Genomics group’s Rockville, Maryland facilities. The costs related to the acceleration of certain long-term financing, entered into during the first quarter of fiscal 2000, compensation programs as a result of the recapitalization of was repaid in the second quarter of fiscal 2001. Interest our company and the attainment of performance targets. income was $63.6 million for fiscal 2001 compared with $27.5 million for fiscal 2000. The increase was attributable to The Celera Genomics group recorded non-cash expenses of $4.2 million in fiscal 2000 relating to the amortization of higher average cash and cash equivalents and short-term goodwill and other intangibles primarily due to Paracel, investments during fiscal 2001. Interest income in fiscal 2000 which was acquired during the fourth quarter of fiscal 2000. also reflected interest on a $150 million note receivable from the Applied Biosystems group, which was collected in the The Celera Genomics group was allocated a non-recurring fourth quarter of fiscal 2000. pre-tax charge of $4.6 million in fiscal 1999 relating to costs incurred in connection with the recapitalization of our The effective income tax rate was 20% for fiscal 2001 and company. The Celera Genomics group and the Applied 35% for fiscal 2000. Excluding amortization expense related Biosystems group were each allocated 50% of the total to goodwill in both fiscal years and the special charge for the recapitalization costs incurred in fiscal 1999 including impairment of goodwill and other intangibles related to investment banking and professional fees. See Note 1 to the Paracel in fiscal 2001, the effective income tax rate for both Celera Genomics group’s combined financial statements for a fiscal years was 36%. An analysis of the differences between description of the recapitalization. the federal statutory income tax rate and the effective income tax rate is provided in Note 4 to the Celera Interest expense was $2.1 million for fiscal 2000 as a result of Genomics group’s combined financial statements. financing the purchase of the Celera Genomics group’s Rockville, Maryland facilities. Interest income was $27.5 Results of Operations— million for fiscal 2000 compared with $1.2 million for fiscal 2000 Compared With 1999 1999. The increase of $26.3 million was attributable to The Celera Genomics group reported a net loss of $92.7 higher average balances of cash and cash equivalents and million for fiscal 2000 compared with a net loss of $44.9 short-term investments during fiscal 2000, which increased million for fiscal 1999. The increase in the net loss reflected during the third quarter of fiscal 2000 due to a follow-on the increased sequencing activity, increased investment in public offering of Applera – Celera stock as well as interest research and development activities relating to expanded income on the $150 million note receivable from the scientific and annotation teams and bioinformatics staff, and Applied Biosystems group, which was outstanding for most increased operating expenses required to support the of fiscal 2000. expanded product and business development activities. The effective income tax rate was 35% for fiscal 2000 and Net revenues for the Celera Genomics group were $42.7 34% for fiscal 1999. Excluding amortization expense related million for fiscal 2000 compared with $12.5 million for fiscal to goodwill, the effective income tax rate for fiscal 2000 was 1999. The increased revenues resulted primarily from 36%. Excluding the recapitalization costs, the effective database subscription agreements initiated during fiscal 2000 income tax rate for fiscal 1999 was 35%. See Note 1 to the and the second half of fiscal 1999 and an increase in related Celera Genomics group’s combined financial statements for a genomic services revenues. Revenues for genotyping services discussion of allocation of federal and state income taxes remained essentially unchanged for fiscal 2000 as compared to fiscal 1999. Market Risk Our company is exposed to potential loss from exposure to Cost of sales was $15.0 million for fiscal 2000 compared market risks represented principally by changes in foreign with $4.7 million for fiscal 1999. The increase in cost of exchange rates, interest rates, and equity prices. sales was primarily due to the increase in revenues from genomic services. Our company operates internationally, with manufacturing and distribution facilities in various countries throughout the R&D expenses increased $104.9 million to $148.6 million world. For fiscal 2001 and 2000, we derived approximately for fiscal 2000 from $43.7 million for fiscal 1999, primarily 50% of our revenues from countries outside of the United as a result of a full year of sequencing operations and States while a significant portion of the related costs are significantly expanded bioinformatics and software based in U.S. dollars. Results continue to be affected by development capabilities. During fiscal 2000, the Celera market risk, including changes in economic conditions in Genomics group also continued to expand its scientific and
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foreign markets and fluctuations in foreign currency payments because the floating rate debt and fixed rate swap exchange rates, primarily the euro, Japanese yen, and contract both have the same maturity and are based on the ORATION British pound. same rate index.
ORP Our foreign currency risk management strategy utilizes We do not hedge our equity positions in other companies or
C derivative instruments to hedge certain foreign currency our short-term investments. Our exposure on these
A forecasted revenues and to offset the impact of changes in instruments is limited to changes in quoted market prices.
R foreign currency exchange rates on certain foreign currency- The fair value of our minority equity positions in other denominated receivables and payables. The principal companies was $111.1 million at June 30, 2001.
PLE objective of this strategy is to minimize the risks and/or costs associated with our global financial and operating activities. Management’s Discussion of Financial Resources AP We utilize foreign exchange forward, option, and range and Liquidity forward contracts to manage our foreign currency exposures. The following discussion of financial resources and liquidity Foreign exchange forward contracts commit us to buy or sell focuses on our company’s Consolidated Statements of a foreign currency at a contracted rate on a specified future Financial Position and Consolidated Statements of Cash date. Option contracts grant us the right, but not the Flows. obligation, to buy or sell a foreign currency at a certain rate in exchange for a fee. Option contracts provide us with an Cash and cash equivalents and short-term investments were effective hedge against a negative movement in foreign $1.4 billion at June 30, 2001 and $1.5 billion at June 30, currencies at a fixed cost. Range forward contracts consist 2000, with total debt of $45.2 million at June 30, 2001 and of the simultaneous purchase and sale of options to create a $97.8 million at June 30, 2000. Working capital was $1.5 range in which we can benefit from changes in currency billion both at June 30, 2001 and 2000. Debt to total rates. We generally use foreign exchange forward contracts capitalization was 2% at June 30, 2001 and 4% at June 30, to offset the impact of changes in foreign currency- 2000. denominated receivables and payables. In hedging certain foreign currency forecasted revenues where we have During the first quarter of fiscal 2000, we obtained financing of $46 million, specifically for the purchase of the Celera functional currency exposure, we use a combination of Genomics group’s Rockville, Maryland facilities. This debt foreign exchange forward, option and range forward contracts in a cost beneficial manner. We use an interest rate was repaid during the second quarter of fiscal 2001. At June 30, 2001, long-term debt consisted of a 3.8 billion yen swap to manage our interest rate exposure. We do not use variable rate loan that is scheduled to mature in March 2002. derivative financial instruments for trading purposes, nor are Through an interest rate swap, the effective interest rate for we a party to leveraged derivatives. the loan is fixed at 2.1%. See Note 11 of the Applied We performed a sensitivity analysis as of June 30, 2001. Biosystems group’s combined financial statements for Assuming a hypothetical adverse change of 10% in foreign additional discussion of financial instruments. exchange rates in relation to the U.S. dollar as of June 30, 2001, we calculated a hypothetical after-tax loss of $8.7 Significant Changes in the Consolidated million. Our analysis included the change in value of the Statements of Financial Position derivative financial instruments, along with the impact of Accounts receivable increased by $22.2 million to $400.8 translation on foreign currency denominated assets and million at June 30, 2001 from $378.6 million at June 30, liabilities. Our analysis excluded the impact of translation of 2000, reflecting the growth in net revenues. foreign currency denominated forecasted sales. If foreign currency exchange rates actually change in a manner similar Prepaid expenses and other current assets increased $19.5 to the assumed change in the foregoing calculation, the million to $103.0 million at June 30, 2001 from $83.5 hypothetical loss calculated would be more than offset by the million at June 30, 2000, primarily due to the increase in fair recognition of higher U.S. dollar equivalent foreign value of financial instruments used for hedging. revenues. Actual gains and losses in the future could, Property, plant and equipment, net increased $100.7 million however, differ materially from this analysis, based on to $435.6 million at June 30, 2001 from $334.9 million at changes in the timing and amount of foreign currency June 30, 2000, primarily due to the Applied Biosystems exchange rate movements and actual exposures and hedges. group’s purchase of property in Pleasanton, California for Interest rate swaps are used to hedge underlying debt approximately $54 million, capital expenditures for obligations. In fiscal 1997, we executed an interest rate swap production equipment related to oligonucleotide in conjunction with our company entering into a five-year manufacturing and other capital spending related to the Japanese yen debt obligation. Under the terms of the swap construction of laboratory facilities. The Celera Genomics agreement, we pay a fixed rate of interest at 2.1% and group had capital expenditures for building improvements receive a floating LIBOR interest rate. At June 30, 2001, the and equipment related to the development of a laboratory to notional amount of indebtedness covered by the interest rate support its proteomics and discovery capabilities efforts and swap was 3.8 billion yen or $30.5 million. The maturity date costs related to internally developed software. of the swap coincides with the maturity of the yen loan in March 2002. A change in interest rates would have no Other long-term assets decreased to $410.8 million at June 30, 2001 from $622.9 million at June 30, 2000. Our impact on our reported interest expense and related cash company’s minority equity investments decreased $186.6
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million due to a $178.1 million decrease in the fair value of purchase of property in Pleasanton, California for A the investments, primarily caused by the decline in market approximately $54 million, capital expenditures for C
prices of the securities of Aclara Biosciences, Inc., production equipment related primarily to oligonucleotide O
Millennium Pharmaceuticals, Inc., and Hyseq, Inc., and manufacturing, and other capital spending related to the R decreased $11.6 million because of sales of certain construction of laboratory facilities for the Applied PO investments previously discussed. These decreases were Biosystems group. Fiscal 2001 capital expenditures also RATIO partially offset by the acquisition of minority equity included payments for building improvements and investments. Other factors that contributed to the decrease in equipment related to the development of a laboratory to other long-term assets were an impairment charge of $69.1 support the Celera Genomics group’s proteomics and
million, recorded during the fourth quarter of fiscal 2001 to discovery capabilities efforts and costs related to internally N reduce the net assets of Paracel to their estimated fair value developed software. During fiscal 2001, we realized $15.5 and the amortization of goodwill and other intangibles also million in net cash proceeds from the sale of minority equity primarily related to Paracel. These decreases were partially investments. Investments during fiscal 2001 included offset by increases in noncurrent deferred tax assets and Genomica Corporation and Hubit Genomix. Also during purchased license agreements and the acquisitions of minority fiscal 2001, our company had net purchases of short-term equity interest in Hubit Genomix, Inc. investments of $238.1 million. Accrued salaries and wages decreased $24.8 million to $64.9 For fiscal 2000, net cash used by investing activities from million at June 30, 2001 from $89.7 million at June 30, continuing operations of $455.0 million consisted primarily 2000. Accrued salaries and wages were higher at June 30, of short-term investments of $541.1 million, purchased with 2000 primarily due to accruals for costs related to the funds received from the follow-on public offering of acceleration of certain long-term compensation programs Applera – Celera stock. Capital expenditures of $125.8 during the fourth quarter of fiscal 2000 as a result of the million included $8.6 million related to improvement of our attainment of performance targets. This decrease was partially company’s information technology infrastructure and $21.6 offset by the growth in the number of employees of the million for the acquisition of an airplane. Fiscal 2000 capital Celera Genomics group during fiscal 2001, primarily due to expenditures also included payments of $8.1 million for the Celera Genomics group’s expansion of its sales and software licenses acquired during the fourth quarter of fiscal marketing team, its scientific and annotation research teams, 1999 and expenditures associated with the continued its bioinformatics and software engineering teams, and its development of the laboratories, facilities, and data center at proteomics and functional genomics teams. the Celera Genomics group’s Rockville, Maryland facilities. We collected the $150 million note receivable resulting from Accrued taxes on income decreased $66.6 million to $83.0 the sale of the Analytical Instruments business and realized million at June 30, 2001 from $149.6 million at June 30, net cash proceeds of $82.8 million from the sale of minority 2000, primarily due to the timing of income tax payments. equity investments and real estate during fiscal 2000. In Other accrued expenses increased by $15.7 million to $215.8 addition, we spent $23.0 million for various investments and million at June 30, 2001 from $200.1 million at June 30, acquisitions during fiscal 2000. 2000, primarily due to the payments received by the Celera For fiscal 1999, net cash provided by investing activities from Genomics group for database subscription and service continuing operations was $154.1 million. During fiscal agreements, partially offset by revenue recognized under 1999, we generated $325.8 million in net cash proceeds from these agreements. the sale of various assets, including $275.0 million from the Other long-term liabilities increased $18.2 million to $152.4 sale of the Analytical Instruments business, $30.0 million million at June 30, 2001 from $134.2 million at June 30, from the sale of Tecan, and $20.8 million from the sale of 2000 primarily due to advance payments received for minority equity investments and certain non-operating assets. database subscription agreements for periods beyond fiscal The fiscal 1999 proceeds were partially offset by $176.0 2002. million of capital expenditures, which included $12.9 million as part of the strategic program to improve our information Consolidated Statements of Cash Flows technology infrastructure, $17.5 million for the acquisition of an airplane, $46.3 million for the purchase of land and Operating activities generated $86.4 million of cash for fiscal buildings to house the Celera Genomic group’s headquarters 2001 compared with $108.2 million for fiscal 2000 and in Rockville, Maryland and $22.9 million for improvements $69.1 million for fiscal 1999. For fiscal 2001, compared with thereon. For fiscal 1999, we spent $5.3 million for various fiscal 2000, higher tax-related payments, payments of certain acquisitions and investments. compensation-related accruals, and higher payments for technology licenses were only partially offset by higher Net cash used by financing activities was $20.0 million for income-related cash flows, cash collected on subscription and fiscal 2001 compared with $1.0 billion provided by financing services agreements for which revenue has been deferred, activities for fiscal 2000. In fiscal 2001, our company and lower increases in accounts receivable balances. received $60.1 million of proceeds from stock issued for stock plans compared with $61.0 million in fiscal 2000. For fiscal 2001, net cash used by investing activities was Dividends paid were $35.7 million for fiscal 2001 and $26.4 $408.9 million, compared with $455.0 million for fiscal million for fiscal 2000. Increases in loans payable provided 2000. For fiscal 2001, capital expenditures were $185.9 $1.6 million of cash during fiscal 2001 compared with $52.7 million, primarily due to the Applied Biosystems group’s
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APPLERA CORPORATION Management’s Discussion and Analysis continued
million during fiscal 2000. During fiscal 2001, our company Recently Issued Accounting Standards repaid $46.0 million of its commercial paper borrowing ORATION In July 2001, the Financial Accounting Standards Board which it had secured in fiscal 2000 specifically for the (‘‘FASB’’) issued Statement of Financial Accounting Standards purchase of the Rockville, Maryland facilities. In March (‘‘SFAS’’) No. 141, ‘‘Business Combinations,’’ which applies ORP 2000, our company completed a follow-on public offering of
C to all business combinations initiated after June 30, 2001. Applera – Celera stock from which net proceeds of $943.3
A The provisions of this statement require business million were realized. R combinations to be accounted for using the purchase method Net cash provided by financing activities was $43.6 million of accounting. Also in July 2001, the FASB issued SFAS No.
PLE for fiscal 1999 primarily due to the receipt of $96.4 million 142, ‘‘Goodwill and Other Intangible Assets.’’ Under SFAS of proceeds from stock issued for stock plans. These cash No. 142, goodwill from acquisitions occurring after June 30, AP receipts were offset by a reduction in loans payable and 2001 will not be amortized, and for goodwill existing prior principal payments on long-term debt of $16.4 million, to June 30, 2001, our company expects to adopt the dividend payments of $34.2 million, and the purchase of nonamortization provisions of the statement on July 1, 2001. shares of common stock for treasury for $2.2 million. Goodwill for which the nonamortization provisions are applied will be required to be reviewed for impairment at Our company maintains a $100 million revolving credit least on an annual basis. If an impairment is found to exist, a agreement with four banks that matures on April 20, 2005. charge will be taken against operations. SFAS No. 142 There were no borrowings outstanding under the facility at requires that, upon adoption, goodwill and certain intangible June 30, 2001, and we also had other unused credit facilities assets be reviewed for classification and useful life. We totaling $122 million. expect that, aside from the nonamortization of goodwill on a Our company believes our cash and cash equivalents, short- prospective basis, the effect upon adoption of SFAS No. 142 term investments, funds generated from operating activities, will be immaterial. and available borrowing facilities are sufficient to provide for our company’s anticipated financing needs for at least the Outlook next two years. In July 2001, we announced the next phase of our genomics strategy – a comprehensive program for commercializing Impact of Inflation and Changing Prices products derived from information obtained through analysis Inflation and changing prices are continually monitored. Our of the human genome. These products will be based on the company attempts to minimize the impact of inflation by identification of variations in the sequence and expression of improving productivity and efficiency through continual genes, and their association with disease and therapy. This review of both manufacturing capacity and operating program is being implemented collaboratively by our expense levels. When operating costs and manufacturing company’s three businesses – the Applied Biosystems group, costs increase, our company attempts to recover such costs the Celera Genomics group, and Celera Diagnostics. For by increasing, over time, the selling price of our products fiscal 2002, we plan to invest approximately $75 million in and services. Our company believes the effects of inflation this program to be funded equally by the businesses. These have been appropriately managed and therefore have not had funds will be used for a resequencing effort to be completed a material impact on our company’s historic operations and at the Celera Genomics group, to develop validated reagent resulting financial position. sets at the Applied Biosystems group, and to initiate disease association studies at Celera Diagnostics. Euro Conversion Applied Biosystems Group A single currency called the euro was introduced in Europe The Applied Biosystems group anticipates lower growth rates on January 1, 1999. Twelve of the fifteen member countries for the first three quarters of fiscal 2002 compared to the of the European Union agreed to adopt the euro as their strong performance in the corresponding periods of fiscal common legal currency on that date. Fixed conversion rates 2001. Sales growth rates for the first three quarters of fiscal between these participating countries’ existing currencies (the 2002 are currently expected to be in the mid-single digits, ‘‘legacy currencies’’) and the euro were established as of that rising to double digits in the fourth fiscal quarter and date. The legacy currencies are scheduled to remain legal accelerating in the second half of calendar 2002. For fiscal tender as denominations of the euro until at least January 1, 2002 overall, the Applied Biosystems group anticipates sales 2002. During this transition period, parties may settle growth of approximately 7 to 9 percent before the effects of transactions using either the euro or a participating country’s foreign currency. legal currency. The financial impact on the Applied Biosystems group of Our company is currently taking the necessary actions our company’s planned investment in our genomics strategy ensuring that our company’s computer and financial systems is expected to be twofold. First, the Applied Biosystems as well as the business processes can deal effectively with the group would incur incremental R&D spending of euro and the conversion to the euro. Our company does not approximately $20 million to $25 million for this program. expect this conversion to have a material impact on our Second, the Applied Biosystems group will not recognize results of operations, financial position, or cash flows. revenue or profits from the Celera Genomics group’s or Celera Diagnostics’ share of expenditures related to this program. The effort is expected to consume a substantial
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APPLERA CORPORATION Management’s Discussion and Analysis continued
portion of the Celera Genomics group’s sequencing capacity based on the average closing price of Applera – Celera stock A that in prior years generated revenues for the Applied over the 10 trading days immediately preceding (but C
Biosystems group. As a result, while sales from the Applied excluding) the second trading day prior to the closing of the O
Biosystems group to the Celera Genomics group totaled merger. If the closing had occurred at the time the merger R approximately $64 million in fiscal 2001, sales from the agreement was signed, each share of Axys common stock PO Applied Biosystems group to the Celera Genomics group are would have been exchanged for a fractional share of RATIO anticipated to be approximately only $25 million in fiscal Applera – Celera stock having an average closing price 2002. This lower level of sales to the Celera Genomics during the calculation period equivalent to $4.65 per share of group is part of the reason for the lower sales growth Axys common stock. Depending on the average closing
forecast for the Applied Biosystems group in fiscal 2002. price of Applera – Celera stock at the time of the closing of N the merger, our company will issue between 3.3 million We expect diluted earnings per share of Applera – Applied shares and 5.4 million shares of Applera – Celera stock. Biosystems stock for fiscal 2002 to be in the range of $0.95 to $1.00. We anticipate fiscal 2002 R&D expenditures, For fiscal 2002, the Celera Genomics group anticipates including the Applied Biosystems group’s share of the new revenue growth of approximately 40 to 50 percent over Applera genomics commercialization program, to increase fiscal 2001. This revenue growth is expected to result from approximately 15 to 17 percent over fiscal 2001 levels. R&D new subscriptions from academic and research organizations spending should approximate 12 percent of sales in fiscal and commercial entities, as well as the signing of additional 2002 as the Applied Biosytems group increases investment academic users under existing subscription agreements. The spending to support the introduction of new products and Celera Genomics group also expects additional collaborations platforms in this year and in the future. Selling, general and with commercial partners to contribute to this growth. administrative expenses are expected to rise somewhat more slowly than revenue during fiscal 2002. The Applied The Celera Genomics group’s fiscal 2002 expenses associated Biosystems group’s capital spending in fiscal 2002 is with R&D are estimated to be between $145 million and anticipated to be approximately $110 million. $160 million. These expenditures are expected to be directed primarily to internal discovery programs, including the The results of our company remain subject to adverse completion and operation of the proteomics facility, the currency effects because approximately 50% of revenues development of informatics and algorithms for the were derived from regions outside the United States in fiscal management and interpretation of data from protein analysis, 2001. the construction and operation of the biologics laboratory, which is expected to focus on biological sample acquisition, Celera Genomics Group target validation and immunotherapeutics, DNA In June 2001, our company signed a definitive merger resequencing associated with the next phase of our agreement to acquire Axys Pharmaceuticals, Inc. (‘‘Axys’’) in company’s genomics strategy, and ongoing content a stock-for-stock transaction. Axys is an integrated small development for the on-line business. This projected R&D molecule drug discovery and development company that is spending does not include any effect of the proposed developing products for chronic therapeutic applications acquisition of Axys. through collaborations with pharmaceutical companies and Our company believes cash and cash equivalents and short- has a proprietary product portfolio in oncology. term investments allocated to the Celera Genomics group are The transaction, which is subject to customary closing sufficient to fund the Celera Genomics group’s new R&D conditions, including approval by Axys stockholders and activities in therapeutic and diagnostic discovery and support regulatory approvals, has been structured as a tax-free the efforts of the Celera Diagnostics joint venture. The reorganization and will be accounted for under the purchase Celera Genomics group’s actual future capital uses and method. Under the terms of the merger agreement, Axys requirements with respect to its new activities will depend shareholders will receive shares of Applera – Celera stock per on many factors, including those referenced under ‘‘Forward- Axys share based on an exchange ratio which is calculated Looking Statements.’’
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APPLERA CORPORATION Forward-Looking Statements
Forward-Looking Statements A substantial portion of the Applied Biosystems group’s sales is to customers at universities or research laboratories whose funding is ORATION Certain statements contained in this report, including the Outlook section, are forward-looking and are subject to a dependent on both the level and timing of funding from government variety of risks and uncertainties. These statements may be sources. As a result, the timing and amount of revenues from ORP these sources may vary significantly due to factors that can
C identified by the use of forward-looking words or phrases be difficult to forecast. Although research funding has
A such as ‘‘believe,’’ ‘‘expect,’’ ‘‘anticipate,’’ ‘‘should,’’ ‘‘plan,’’ increased during the past several years, grants have, in the R ‘‘estimate,’’ and ‘‘potential,’’ among others. These forward- looking statements are based on our company’s current past, been frozen for extended periods or otherwise become unavailable to various institutions, sometimes without
PLE expectations. The Private Securities Litigation Reform Act of 1995 provides a ‘‘safe harbor’’ for such forward-looking advance notice. Budgetary pressures may result in reduced
AP statements. In order to comply with the terms of the safe allocations to government agencies that fund research and harbor, our company notes that a variety of factors could development activities. If government funding necessary to cause actual results and experience to differ materially from purchase the Applied Biosystems group’s products were to the anticipated results or other expectations expressed in such become unavailable to researchers for any extended period of forward-looking statements. The risks and uncertainties that time, or if overall research funding were to decrease, the may affect the operations, performance, development, and business of the Applied Biosystems group could be adversely results of our businesses include, but are not limited to: affected. The Applied Biosystems group has been and could in the future be Factors Relating to the subject to claims for infringement of patents and other intellectual Applied Biosystems Group property rights. The Applied Biosystems group’s products are Rapidly changing technology in life sciences could make the Applied based on complex, rapidly developing technologies. These Biosystems group’s product line obsolete unless it continues to products could be developed without knowledge of improve existing products, develop new products, and pursue new previously filed but unpublished patent applications that market opportunities. A significant portion of the net revenues cover some aspect of these technologies. In addition, there for the Applied Biosystems group each year is derived from are relatively few decided court cases interpreting the scope products that did not exist in the prior year. The Applied of patent claims in these technologies, and the Applied Biosystems group’s future success depends on its ability to Biosystems group’s belief that its products do not infringe the continually improve its current products, develop and technology covered by valid patents could be successfully introduce, on a timely and cost-effective basis, new products challenged by third parties. Also, in the course of its business, that address the evolving needs of its customers, and pursue the Applied Biosystems group may from time to time have new market opportunities that develop as a result of access to confidential or proprietary information of third technological and scientific advances in life sciences. The parties, and such parties could bring a theft of trade secret Applied Biosystems group’s products are based on complex claim against the Applied Biosystems group asserting that the technology which is subject to rapid change as new Applied Biosystems group’s products improperly use technologies are developed and introduced in the technologies which are not patented but which are protected marketplace. Unanticipated difficulties or delays in replacing as trade secrets. The Applied Biosystems group has been existing products with new products could adversely affect made a party to litigation regarding intellectual property the Applied Biosystems group’s future operating results. The matters, including the patent litigation described in the next pursuit of new market opportunities will add further paragraph, some of which, if determined adversely, could complexity and require additional management attention and have a material adverse effect on the Applied Biosystems resources as these markets are addressed. group. Due to the fact that the Applied Biosystems group’s business depends in large part on rapidly developing and A significant portion of sales depends on customers’ capital spending dynamic technologies, there remains a constant risk of policies which may be subject to significant and unexpected decreases. intellectual property litigation affecting the group. The A significant portion of the Applied Biosystems group’s Applied Biosystems group has from time to time been instrument product sales are capital purchases by its notified that it may be infringing patents and other customers. The Applied Biosystems group’s customers intellectual property rights of others. It may be necessary or include pharmaceutical, environmental, research, desirable in the future to obtain licenses relating to one or biotechnology, and chemical companies, and the capital more products or relating to current or future technologies, spending policies of these companies can have a significant and the Applied Biosystems group cannot be assured that it effect on the demand for the Applied Biosystems group’s will be able to obtain these licenses or other rights on products. These policies are based on a wide variety of commercially reasonable terms. factors, including the resources available to make purchases, the spending priorities among various types of research Applera is currently subject to patent litigation with equipment, and policies regarding capital expenditures during Amersham Pharmacia Biotech, Inc. and Molecular recessionary periods. Any decrease in capital spending or Dynamics, Inc. In the litigation, Amersham and Molecular change in spending policies of these companies could Dynamics allege that the Applied Biosystems group has significantly reduce the demand for the Applied Biosystems infringed four Amersham patents as a result of the Applied group’s products. Biosystems group’s sale of certain DNA sequencing instrumentation and reagents. Also in the litigation, Applera has brought suit against Amersham and Molecular Dynamics
26 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 27 of 67 Time: 18:17:51, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Forward-Looking Statements continued
alleging that they have infringed two of Applera’s patents The Celera Genomics/Applied Biosystems Joint Venture’s ability to A as a result of their sale of their DNA sequencing develop proprietary diagnostic products is unproven. Our Company C
instrumentation and reagents. At present, these lawsuits are has announced the formation of Celera Diagnostics, a joint O
not scheduled for trial. If they proceed to trial, the cost of venture between the Applied Biosystems group and the R the litigation, and the amount of management time that will Celera Genomics group in the field of diagnostics. Celera PO be devoted to the litigation, will be significant. There can be Diagnostics faces the difficulties inherent in developing and RATIO no assurance that this litigation will be resolved favorably to commercializing diagnostic tests and in building and Applera or either the Celera Genomics group or the Applied operating a commercial research and development program. Biosystems group, that Applera and both of its groups will Celera Diagnostics’ ability to develop proprietary diagnostic
not be enjoined from selling the products in question or products is unproven, and it is possible that its discovery N other products as a result, or that any monetary or other process will not result in any commercial products or damages assessed against Applera will not have a material services. Even if Celera Diagnostics is able to develop adverse effect on the financial condition of Applera, the products and services, it is possible that these products and Celera Genomics group, or the Applied Biosystems group. services may not be commercially viable or successful due to a variety of reasons, including difficulty obtaining regulatory Since the Applied Biosystems group’s business is dependent on approvals, competitive conditions, the inability to obtain foreign sales, fluctuating currencies will make revenues and operating necessary intellectual property protection, the need to build results more volatile. Approximately 50% of the Applied distribution channels, failure to get adequate reimbursement Biosystems group’s net revenues during fiscal 2001 were for these products from insurance or government payors, or derived from sales to customers outside of the United States. the inability of Celera Diagnostics to recover its development The majority of these sales were based on the relevant costs in a reasonable period. 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 Factors Relating to the and anticipated operating results and cash flows are subject to Celera Genomics Group fluctuations due to material changes in foreign currency The Celera Genomics group has incurred net losses to date and may exchange rates that are beyond the Applied Biosystems not achieve profitability. The Celera Genomics group has group’s control. accumulated net losses of $365.0 million as of June 30, 2001, and expects that it will continue to incur additional net losses Integrating acquired technologies may be costly and may not result in for the foreseeable future. These losses are expected to technological advances. The future growth of the Applied increase as the Celera Genomics group increases its Biosystems group depends in part on its ability to acquire investments in new technology and product development, complementary technologies through acquisitions and including investments for the development of its therapeutics investments. The consolidation of employees, operations, and discovery and development business and investments in marketing and distribution methods could present significant Celera Diagnostics, its joint venture with the Applied managerial challenges. For example, the Applied Biosystems Biosystems group, for the development of Celera group may encounter operational difficulties in the Diagnostics’ diagnostics business. As an early stage business, integration of manufacturing or other facilities. In addition, the Celera Genomics group faces significant challenges in technological advances resulting from the integration of simultaneously expanding its operations, pursuing key technologies may not be achieved as successfully or rapidly as scientific goals and attracting customers for its information anticipated, if at all. products and services. As a result, there is a high degree of Electricity shortages and earthquakes could disrupt operations in uncertainty that the Celera Genomics group will be able to California. The headquarters and principal operations of the achieve profitable operations. Applied Biosystems group are located in Foster City, The Celera Genomics group’s business plan depends heavily on California. The State of California and its principal electrical continued assembly and annotation of the human and mouse utility companies have recently indicated that there is a genomes. In June 2000, the Celera Genomics group and the statewide electricity shortage and that these utility companies Human Genome Project each announced the ‘‘first assembly’’ are in poor financial condition. As a result, California has of the human genome, and in April 2001, the Celera experienced temporary localized electricity outages, or rolling Genomics group announced the assembly of the mouse blackouts, which may continue or worsen into blackouts of genome. Assembly is the process by which individual longer duration in the future. Blackouts in Foster City, even fragments of DNA, the molecule that forms the basis of the of modest duration, could impair or cause a temporary genetic material in virtually all living organisms, are pieced suspension of the group’s operations, including the together into their appropriate order and place on each manufacturing and shipment of new products. Power chromosome within the genome. The Celera Genomics disruptions of an extended duration or high frequency could group’s first assembly of the human genome covered have a material adverse effect on operating results. In approximately 95% of that genome, and its assembly of the addition, Foster City is located near major California mouse genome covered approximately 99% of that genome. earthquake faults. The ultimate impact of earthquakes on the The Celera Genomics group intends to continue updating its Applied Biosystems group, its significant suppliers, and the assembly of the human and mouse genomes as it continues general infrastructure is unknown, but operating results could to annotate these genomes. Annotation is the process of be materially affected in the event of a major earthquake. assigning features or characteristics to each chromosome.
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APPLERA CORPORATION Forward-Looking Statements continued
Each gene on each chromosome is given a name, its successful marketing of similar products by competitors or structural features are described, and proteins encoded by the infringe on proprietary rights of third parties. ORATION genes are classified into possible or known function. The industry in which the Celera Genomics group operates is
ORP The Celera Genomics group’s ability to retain its existing intensely competitive and evolving. There is intense competition
C customers and attract new customers for its genome database among entities attempting to interpret segments of the
A business is heavily dependent upon the continued assembly human genome and identify genes associated with specific
R and annotation of these genomes. This information is also diseases and develop products, services and intellectual essential to the therapeutics discovery and development property based on these discoveries. The Celera Genomics
PLE components of the Celera Genomics group’s business group faces competition in these areas from genomic, strategy in which the Celera Genomics group intends to pharmaceutical, biotechnology and diagnostic companies, AP make substantial investments in the near future. As a result, academic and research institutions and government or other failure to update the assembly and annotation efforts in a publicly-funded agencies, both in the United States and timely manner may have a material adverse effect on the abroad. A number of companies, other institutions and Celera Genomics group’s business. government-financed entities are engaged in gene and protein analysis, and some of them are developing databases The Celera Genomics group’s revenue growth depends on retaining containing gene, protein, and related biological information existing customers and adding new customers. The revenues that and are marketing or plan to market their data to the Celera Genomics group expects to receive from its pharmaceutical and biotechnology companies and academic existing customers will offset only a small portion of its and research institutions. Additional competitors may attempt expenses. In order to generate significant additional revenues, to establish databases containing this information in the the Celera Genomics group must obtain additional customers future. In addition, some pharmaceutical and biotechnology and retain its existing customers. The Celera Genomics companies may choose to develop or acquire competing group’s ability to retain existing customers and add new technologies to meet their needs rather than purchase customers depends upon customers’ continued belief that the products and services from the Celera Genomics group. The Celera Genomics group’s products can help accelerate their Celera Genomics group has licensed some of its key drug discovery and development efforts and fundamental technology on a non-exclusive basis from third parties and discoveries in biology. Although customer agreements therefore this technology may be available for license by typically have multiple year terms, there can be no assurance competitors of the Celera Genomics group or pharmaceutical that any will be renewed upon expiration. The Celera or biotechnology companies seeking to develop their own Genomics group’s future revenues are also affected by the databases for their own use. Also, a customer of the Celera extent to which existing customers expand their agreements Genomics group may use the products and services of the to include new services and database products. In some cases, Celera Genomics group to develop products or services that the Celera Genomics group may accept milestone payments compete with the products or services separately developed or future royalties on products developed by its customers as by the Celera Genomics group or its customers. consideration for access to the Celera Genomics group’s databases and products in lieu of a portion of subscription Competitors may also discover and characterize genes or fees. These arrangements are unlikely to produce revenue for proteins involved in disease processes, potential candidates for the Celera Genomics group for a number of years, if ever, new therapeutics, drug discovery and development and depend heavily on the research and product technologies, or drugs in advance of the Celera Genomics development, sales and marketing and intellectual property group or its customers, or which are more effective than protection abilities of the customer. those developed by the Celera Genomics group or its customers, or may obtain regulatory approvals of their drugs Use of genomics information to develop or commercialize products is more rapidly than the Celera Genomics group or its unproven. The development of new drugs and the diagnosis customers do, any of which could have a material adverse of disease based on information derived from the study of effect on any of the similar programs of the Celera Genomics genetic material of organisms, or genomics, is unproven. group or its customers. Moreover, these competitors may Few therapeutic or diagnostic products based on genome obtain patent protection or other intellectual property rights discoveries have been developed and commercialized and to that would limit the Celera Genomics group’s rights or its date no one has developed or commercialized any customers’ ability to use the Celera Genomics group’s therapeutic or diagnostic products based on the Celera products to commercialize therapeutic, diagnostic or Genomics group’s technologies. If the Celera Genomics agricultural products. In addition, a customer may use the group or its customers are unsuccessful in developing and Celera Genomics group’s services to develop products that commercializing products based on the group’s databases or compete with products separately developed by the group or other products or services, customers and the Celera its other customers. Genomics group may be unable to generate sufficient revenues and the Celera Genomics group’s business may The Celera Genomics group also faces competition from suffer as a result. Development of these products will be software providers. A number of companies have announced subject to risks of failure, including that these products will their intent to develop and market software to assist be found to be toxic, be found to be ineffective, fail to pharmaceutical and biotechnology companies and academic receive regulatory approvals, fail to be developed prior to the researchers in managing and analyzing their own genomic data and publicly available data.
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APPLERA CORPORATION Forward-Looking Statements continued
The Celera Genomics group’s current and potential customers are require the Celera Genomics group to spend significant time A primarily from, and are subject to risks faced by, the pharmaceutical and money in litigation and to pay significant damages. C
and biotechnology industries. The Celera Genomics group O The Celera Genomics group could incur liabilities relating to derives a substantial portion of its revenues from fees for its R information products and services paid by pharmaceutical hazardous materials that it uses in its research and development PO companies and biotechnology companies engaged in drug activities. The Celera Genomics group’s research and RATIO discovery and development. These fees accounted for development activities involve the controlled use of approximately 70% of the Celera Genomics group’s revenue hazardous materials, chemicals and various radioactive in fiscal year 2001. The Celera Genomics group expects that materials. In the event of an accidental contamination or injury from these materials, the Celera Genomics group these companies will continue to be the Celera Genomics N group’s primary source of revenues for the foreseeable future. could be held liable for damages in excess of its resources. As a result, the Celera Genomics group is subject to risks The Celera Genomics group’s sales cycle is lengthy and it may and uncertainties that affect the pharmaceutical and spend considerable resources on unsuccessful sales efforts or may not biotechnology industries and to reduction and delays in be able to complete deals on the schedule anticipated. The Celera research and development expenditures by companies in Genomics group’s sales cycle is typically lengthy because the these industries. group needs to educate potential customers and sell the In addition, the Celera Genomics group’s future revenues benefits of its products and services to a variety of may be adversely affected by mergers and consolidation in constituencies within those companies. In addition, each the pharmaceutical and biotechnology industries, which may agreement involves the negotiation of unique terms. The reduce the number of the group’s existing and potential Celera Genomics group’s ability to obtain new customers for customers. Large pharmaceutical and biotechnology genomic information products, collaborative services, and customers could also decide to conduct their own genomics licenses to intellectual property depends on its customers’ programs or seek other providers instead of using the Celera belief that the Celera Genomics group can help accelerate Genomics group’s products and services. their drug discovery efforts. The Celera Genomics group may expend substantial funds and management effort with The Celera Genomics group relies on its strategic relationship with no assurance that an agreement will be reached with a the Applied Biosystems group. The Celera Genomics group potential customer. Actual and proposed consolidations of believes that its strategic relationship with the Applied pharmaceutical and biotechnology companies have affected Biosystems group has provided it with a significant and may in the future affect the timing and progress of the competitive advantage in its efforts to date to sequence the Celera Genomics group’s sales efforts. human and other genomes. The Applied Biosystems group leases instruments, sells consumables and project materials and Scientific and management staff has unique expertise which is key to provides research and development services to the Celera the Celera Genomics group’s commercial viability and which would Genomics group. The Celera Genomics group paid the be difficult to replace. The Celera Genomics group is highly Applied Biosystems group $17.3 million in fiscal year 1999, dependent on the principal members of its scientific and $54.4 million in fiscal year 2000 and $60.1 million in fiscal management staff, particularly J. Craig Venter, its President year 2001 for these products and services. The Celera and Chief Scientific Officer. Additional members of the Genomics group’s continued development and expansion of Celera Genomics group’s medical, scientific and information its business will depend on the Applied Biosystems group’s technology staff are important to the development of its ability to continue to provide leading edge, proprietary business plan. The loss of any of these persons’ expertise technology and products, including advanced technologies would be difficult to replace and could have a material for gene and protein analysis. If the Applied Biosystems adverse effect on the Celera Genomics group’s ability to group is unable to supply these technologies, the Celera achieve its goals. Genomics group will need to obtain access to alternative The Celera Genomics group’s competitive position may depend on technologies, which may not be available, or may only be patent and copyright protection and licenses to the important available on unfavorable terms. Any change in the intellectual property patented by others, which may not be relationship with the Applied Biosystems group that sufficiently available. The Celera Genomics group’s ability to adversely affects the Celera Genomics group’s access to the compete and to achieve profitability may be affected by its Applied Biosystems group’s technology or failure by the ability to protect its proprietary technology and other Applied Biosystems group to continue to develop new intellectual property. While the Celera Genomics group’s technologies or protect its proprietary technology could business is currently primarily dependent on revenues from adversely affect the Celera Genomics group’s business. access fees to its on-line information system, the Celera Introduction of new products may expose the Celera Genomics group Genomics group expects that obtaining patent protection to product liability claims. New products developed by the may become increasingly important to its business as it Celera Genomics group could expose the Celera Genomics moves beyond the on-line database business. The Celera group to potential product liability risks that are inherent in Genomics group would be able to prevent competitors from the testing, manufacturing and marketing of human making, using or selling any of its technology for which it therapeutic and diagnostic products. Product liability claims obtains a patent. However, patent law affecting the Celera or product recalls, regardless of the ultimate outcome, could Genomics group’s business, particularly gene sequences, gene function, and genetic variations, or polymorphisms, is uncertain. As a result, the Celera Genomics group is
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APPLERA CORPORATION Forward-Looking Statements continued
uncertain as to its ability to obtain intellectual property be breached, however, and the Celera Genomics group may protection covering its information discoveries sufficient to not have adequate remedies for a breach. In addition, the ORATION prevent competitors from developing similar subject matter. Celera Genomics group’s trade secrets may otherwise The United States Patent and Trademark Office has recently become known or be independently developed by ORP adopted new guidelines for use in the review of the utility of competitors. C inventions, particularly biotechnology inventions. These A guidelines increased the amount of evidence required to Public disclosure of genomics sequence data could jeopardize the R illustrate utility in order to obtain a patent in the Celera Genomics group’s intellectual property protection and have an biotechnology field, making patent protection more difficult adverse effect on the value of its products and services. The Celera PLE to obtain. Although others have been successful in obtaining Genomics group, the federally funded Human Genome Project and others engaged in similar research have made
AP patents to biotechnology inventions, since the adoption of these guidelines these patents have been issued with and are expected to continue making available to the public increasingly less frequency. As a result, patents may not issue basic human sequence data. These disclosures might limit the from patent applications that the Celera Genomics group scope of the Celera Genomics group’s claims or make may own or license if the applicant is unable to satisfy the subsequent discoveries related to full-length genes and new guidelines. In addition, because patent applications in proteins unpatentable. While the Celera Genomics group the United States are maintained in secrecy until patents believes that the publication of sequence data will not issue, third parties may have filed patent applications for preclude it or others from being granted patent protection technology used by the Celera Genomics group or covered on genes and proteins, there can be no assurance that the by the Celera Genomics group’s pending patent applications publication has not affected and will not affect the ability to without the Celera Genomics group being aware of those obtain patent protection. Customers may conclude that applications. No patents have been issued to the Celera uncertainties of that protection and that the basic human Genomics group to date. sequence data is available for free decrease the value of the Celera Genomics group’s information products and services The United States Patent and Trademark Office has issued and as a result, it may be required to reduce the fees it several patents to third parties covering inventions involving charges for its products and services. single nucleotide polymorphisms (SNPs), naturally occurring genetic variations that scientists believe can be correlated The Celera Genomics group may infringe the intellectual property with susceptibility to disease, disease prognosis, drug rights of third parties and may become involved in expensive efficiency, and drug toxicity. These inventions are subject to intellectual property litigation. The intellectual property rights of the same new guidelines as other biotechnology inventions. biotechnology companies, including the Celera Genomics In addition, the Celera Genomics group may need to obtain group, are generally uncertain and involve complex legal, rights to patented SNPs in order to develop, use and sell scientific and factual questions. The Celera Genomics analyses of the overall human genome or particular full- group’s success in the therapeutic discovery and development length genes. These licenses may not be available to the fields may depend, in part, on its ability to operate without Celera Genomics group on commercially acceptable terms, infringing on the intellectual property rights of others and to or at all. prevent others from infringing on its intellectual property rights. Moreover, the Celera Genomics group may be dependent on protecting, through copyright law or otherwise, its There has been substantial litigation regarding patents and databases to prevent other organizations from taking other intellectual property rights in the genomics industry. information from those databases and copying and reselling The Celera Genomics group may become a party to patent it. Copyright law currently provides uncertain protection litigation or proceedings at the United States Patent and regarding the copying and resale of factual data. As such, the Trademark Office to determine its patent rights with respect Celera Genomics group is uncertain whether it could to third parties, which may include subscribers to the Celera prevent that copying or resale. Changes in copyright and Genomics group’s database information services. Interference patent law could either expand or reduce the extent to proceedings may be necessary to establish which party was which the Celera Genomics group and its customers are able the first to discover the intellectual property. The Celera to protect their intellectual property. Genomics group may become involved in patent litigation against third parties to enforce the Celera Genomics group’s The Celera Genomics group’s position may depend on its ability to patent rights, to invalidate patents held by the third parties, protect trade secrets. The Celera Genomics group relies on or to defend against these claims. The cost to the Celera trade secret protection for its confidential and proprietary Genomics group of any patent litigation or similar information and procedures, including procedures related to proceeding could be substantial, and it may absorb significant sequencing genes and to searching and identifying important management time. If an infringement litigation against the regions of genetic information. The Celera Genomics group Celera Genomics group is resolved unfavorably to the Celera currently protects its information and procedures as trade Genomics group, the Celera Genomics group may be secrets. The Celera Genomics group protects its trade secrets enjoined from manufacturing or selling its products or through recognized practices, including access control, services without a license from a third party. The Celera confidentiality and nonuse agreements with employees, Genomics group may not be able to obtain a license on consultants, collaborators, and customers, and other security commercially acceptable terms, or at all. measures. These confidentiality and nonuse agreements may
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APPLERA CORPORATION Forward-Looking Statements continued
The Celera Genomics group’s business is dependent on the these scenarios could reduce the potential markets for A continuous, effective, reliable and secure operation of its computer products of the Celera Genomics group. C
hardware, software and internet applications and related tools and O Expected rapid growth in the number of its employees could absorb functions. Because the Celera Genomics group’s business R requires manipulating and analyzing large amounts of data, valuable management resources and be disruptive to the development PO and communicating the results of the analysis to its internal of the Celera Genomics group’s business. The Celera Genomics RATIO research personnel and to its customers via the Internet, the group expects to increase its employee base significantly, Celera Genomics group depends on the continuous, including the addition of Axys’ employees. This growth will effective, reliable and secure operation of its computer require substantial effort to hire new employees and train and integrate them into the Celera Genomics group’s hardware, software, networks, Internet servers and related N infrastructure. To the extent that the Celera Genomics business, and to develop and implement management group’s hardware or software malfunctions or access to the information systems, financial controls and facility plans. The Celera Genomics group’s data by the Celera Genomics Celera Genomics group’s inability to manage growth group’s internal research personnel or customers through the effectively would have a material adverse effect on its future Internet is interrupted, its business could suffer. operating results. The Celera Genomics group’s computer and communications Products and services developed using the Celera Genomics group’s hardware is protected through physical and software databases may be subject to government regulation. The Celera safeguards. However, it is still vulnerable to fire, storm, flood, Genomics group’s pharmaceutical and biotechnology power loss, earthquakes, telecommunications failures, physical customers use the Celera Genomics group’s databases or software break-ins, and similar events. In addition, the primarily for drug discovery and development, which is Celera Genomics group’s database products are complex and subject to regulation by the United States Food and Drug sophisticated, and as such, could contain data, design or Administration. Any new drug developed as a result of the software errors that could be difficult to detect and correct. use of the Celera Genomics group’s databases must undergo Software defects could be found in current or future an extensive regulatory review and approval process. This products. If the Celera Genomics group fails to maintain and process can take many years and require substantial expense. further develop the necessary computer capacity and data to The Celera Genomics group’s customers may also use its support its computational needs and its customers’ drug databases to develop products or services in the field of discovery efforts, it could result in loss of or delay in revenues personalized health/medicine. However, current and future and market acceptance. In addition, any sustained disruption patient privacy and health care laws and regulations issued by in Internet access provided by third parties could adversely the United States Food and Drug Administration may limit impact the Celera Genomics group’s business. the use of data concerning an individual’s genetic information. To the extent that such regulations restrict or The Celera Genomics group’s research and product development discourage the Celera Genomics group’s customers from depends on access to tissue samples and other biological materials. developing these products and services, the Celera Genomics The Celera Genomics group will need access to normal and group’s business may be adversely affected. diseased human and other tissue samples, other biological materials and related clinical and other information, which Future acquisitions may absorb significant resources and may be may be in limited supply. The Celera Genomics group may unsuccessful. As part of the Celera Genomics group’s strategy, not be able to obtain or maintain access to these materials it expects to pursue acquisitions (in addition to the Axys and information on acceptable terms. In addition, acquisition), investments and other strategic relationships and government regulation in the United States and foreign alliances. Acquisitions, investments and other strategic countries could result in restricted access to, or use of, relationships and alliances may involve significant cash human and other tissue samples. If the Celera Genomics expenditures, debt incurrence, additional operating losses, group loses access to sufficient numbers or sources of tissue dilutive issuances of equity securities, and expenses that could samples, or if tighter restrictions are imposed on its use of have a material effect on the Celera Genomics group’s the information generated from tissue samples, its business financial condition and results of operations. For example, to may be harmed. the extent that it elects to pay the purchase price for acquisitions in shares of Applera – Celera stock, the issuance Ethical, legal and social issues related to the use of genetic of additional shares of Applera – Celera stock will be dilutive information and genetic testing may cause less demand for the Celera to holders of Applera – Celera stock. Acquisitions involve Genomics group’s products. Genetic testing has raised issues numerous other risks, including: regarding confidentiality and the appropriate uses of the s resulting information. For example, concerns have been difficulties integrating acquired technologies and personnel expressed towards insurance carriers and employers using into the business of the Celera Genomics group; these tests to discriminate on the basis of this information, s diversion of management from daily operations; resulting in barriers to the acceptance of these tests by consumers. This could lead to governmental authorities s inability to obtain required financing on favorable terms; calling for limits on or regulation of the use of genetic s entry into new markets in which the Celera Genomics testing or prohibit testing for genetic predisposition to certain group has little previous experience; diseases, particularly those that have no known cure. Any of s potential loss of key employees or customers of acquired companies or from the Celera Genomics group; and
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APPLERA CORPORATION Forward-Looking Statements continued
s assumption of the liabilities and exposure to unforeseen adequately disclose the alleged opposition of the Human liabilities of acquired companies. It may be difficult for the Genome Project and two of its supporters, the governments ORATION Celera Genomics group to complete these transactions of the United States and the United Kingdom, to providing quickly and to integrate these businesses efficiently into its patent protection to our company’s genomic-based products. ORP current business. Any acquisitions, investments or other The consolidated complaint seeks unspecified money C strategic relationships and alliances by the Celera Genomics damages, rescission, costs and expenses, and other relief as A group may ultimately have a negative impact on its the court deems proper. Although our company believes the R business and financial condition. asserted claims are without merit and intends to defend the case vigorously, the outcome of this or any other litigation is PLE Applera – Celera stock price is highly volatile. The market price inherently uncertain. The defense of this case will require of Applera – Celera stock has been and may continue to be
AP management attention and resources. highly volatile due to the risks and uncertainties described in this section of this annual report, as well as other factors, The Celera Genomics group’s ability to develop proprietary including: therapeutics and the Celera Genomics/Applied Biosystems Joint Venture’s ability to develop proprietary diagnostic products is s conditions and publicity regarding the genomics, unproven. The development and commercialization of new biotechnology, pharmaceutical, or life sciences industries drugs by determining the causes of diseases through the generally; study of genes, variations in genes, and the proteins s price and volume fluctuations in the stock market at large expressed by genes is unproven. As the Celera Genomics which do not relate to the Celera Genomics group’s group expands its efforts into this new business area, it faces operating performance; and the difficulties inherent in developing and commercializing therapeutic products, and it has limited experience in s comments by securities analysts, or the Celera Genomics operating a commercial research and development program. group’s failure to meet market expectations. In addition, our company has announced the formation of The stock market has from time to time experienced Celera Diagnostics, a joint venture between the Applied extreme price and volume fluctuations that are unrelated to Biosystems group and the Celera Genomics group in the the operating performance of particular companies. In the field of diagnostics. Celera Diagnostics faces the difficulties past, companies that have experienced volatility have inherent in developing and commercializing diagnostic tests sometimes been the subject of securities class action and in building and operating a commercial research and litigation. If litigation was instituted on this basis, it could development program. Given the Celera Genomics group’s result in substantial costs and a diversion of management’s unproven ability to develop proprietary therapeutics and attention and resources. Celera Diagnostics’ unproven ability to develop proprietary diagnostic products, it is possible that the Celera Genomics Our company is subject to a purported class action lawsuit relating to group’s and Celera Diagnostics’ discovery processes will not its 2000 offering of shares of Applera – Celera stock that may be result in any commercial products or services. Even if the expensive and time consuming. Our company and some of its Celera Genomics group or Celera Diagnostics is able to officers have been served in five lawsuits purportedly on develop products and services, it is possible that these behalf of purchasers of Applera – Celera stock in our products and services may not be commercially viable or company’s follow-on public offering of Applera – Celera successful due to a variety of reasons, including difficulty stock completed on March 6, 2000. In the offering, our obtaining regulatory approvals, competitive conditions, the company sold an aggregate of approximately 4.4 million inability to obtain necessary intellectual property protection, shares of Applera – Celera stock at a public offering price of the need to build distribution channels, failure to get $225 per share. All of these lawsuits have been consolidated adequate reimbursement for these products from insurance or into a single case, and an amended consolidated complaint government payors, or the inability of the Celera Genomics was filed on August 21, 2001. The consolidated complaint group or Celera Diagnostics to recover its development costs generally alleges that the prospectus used in connection with in a reasonable period. the offering was inaccurate or misleading because it failed to
32 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 33 of 67 Time: 18:17:58, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Consolidated Statements of Operations
(Dollar amounts in thousands except per share amounts) For the years ended June 30, 1999 2000 2001 A C
Net Revenues $ 1,216,897 $ 1,371,035 $ 1,644,126 O
Cost of sales 549,048 624,099 780,712 R Gross Margin 667,849 746,936 863,414 PO
Selling, general and administrative 364,128 436,911 440,059 RATIO Research, development and engineering 174,576 255,585 323,417 Amortization of goodwill and intangibles 4,166 43,934 Restructuring and other special charges 20,580 2,142 69,069 Operating Income (Loss) 108,565 48,132 (13,065) N Gain on investments 6,126 48,603 14,985 Interest expense (3,783) (3,501) (2,125) Interest income 2,869 39,428 80,348 Other income (expense), net 522 3,446 (6,671) Income Before Income Taxes 114,299 136,108 73,472 Provision for income taxes 4,140 40,612 46,238 Minority interest 13,362 Income From Continuing Operations 96,797 95,496 27,234 Discontinued Operations, Net Of Income Taxes Loss from discontinued operations (21,109) Gain on disposal of discontinued operations 100,167 Net Income $ 175,855 $ 95,496 $ 27,234 Applied Biosystems Group (see Note 1) Income From Continuing Operations $ 148,365 $ 186,247 $ 212,391 Basic per share $ .74 $ .90 $ 1.01 Diluted per share $ .72 $ .86 $ .96 Income From Discontinued Operations $ 79,058 Basic per share $ .39 Diluted per share $ .38 Net Income $ 227,423 $ 186,247 $ 212,391 Basic per share $ 1.13 $ .90 $ 1.01 Diluted per share $ 1.10 $ .86 $ .96 Celera Genomics Group (see Note 1) Net Loss $ (44,894) $ (92,737) $ (186,229) Basic and diluted per share $ (.89) $ (1.73) $ (3.07)
See accompanying notes to Applera Corporation’s consolidated financial statements.
APPLERA CORPORATION Annual Report 2001 33 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 34 of 67 Time: 15:15:09, Date: 09/18/01, BL: 0
APPLERA CORPORATION Consolidated Statements of Financial Position
(Dollar amounts in thousands except share data) At June 30, 2000 2001 ORATION Assets Current assets ORP Cash and cash equivalents $ 964,502 $ 608,535 C Short-term investments 541,140 779,482 A
R Accounts receivable (net of allowances for doubtful accounts of $3,965 and $5,070, respectively) 378,593 400,803 Inventories, net 157,827 149,658 PLE Prepaid expenses and other current assets 83,465 103,006
AP Total current assets 2,125,527 2,041,484 Property, plant and equipment, net 334,855 435,560 Other long-term assets 622,933 410,814 Total Assets $ 3,083,315 $ 2,887,858
Liabilities And Stockholders’ Equity Current liabilities Loans payable $ 15,693 $ 14,678 Current portion of long-term debt 30,480 Accounts payable 191,484 178,264 Accrued salaries and wages 89,660 64,854 Accrued taxes on income 149,584 83,016 Other accrued expenses 200,079 215,823 Total current liabilities 646,500 587,115 Long-term debt 82,115 Other long-term liabilities 134,208 152,432 Total Liabilities 862,823 739,547 Commitments and contingencies (see Note 10) Stockholders’ Equity Capital stock Preferred stock Applera Corporation: $.01 par value; 10,000,000 shares authorized at June 30, 2000 and 2001; no shares issued and outstanding at June 30, 2000 and 2001 Common stock Applera Corporation – Applied Biosystems stock: $.01 par value; 500,000,000 shares and 1,000,000,000 shares authorized at June 30, 2000 and 2001, respectively; 208,651,594 shares and 211,473,057 shares issued and outstanding at June 30, 2000 and 2001, respectively 2,087 2,115 Applera Corporation – Celera Genomics stock: $.01 par value; 225,000,000 shares authorized at June 30, 2000 and 2001; 59,335,885 shares and 61,693,504 shares issued and outstanding at June 30, 2000 and 2001, respectively 593 617 Capital in excess of par value 1,714,362 1,832,000 Retained earnings 377,996 369,444 Accumulated other comprehensive income (loss) 125,454 (55,865) Total Stockholders’ Equity 2,220,492 2,148,311 Total Liabilities And Stockholders’ Equity $ 3,083,315 $ 2,887,858
See accompanying notes to Applera Corporation’s consolidated financial statements.
34 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 35 of 67 Time: 18:18:02, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Consolidated Statements of Cash Flows
(Dollar amounts in thousands) For the years ended June 30, 1999 2000 2001 A C
Operating Activities From Continuing Operations O
Income from continuing operations $ 96,797 $ 95,496 $ 27,234 R Adjustments to reconcile income from continuing operations to PO
net cash provided by operating activities RATIO Depreciation and amortization 48,066 80,699 129,151 Impairment of goodwill and other intangibles 14,464 69,069 Long-term compensation programs 17,482 10,535 6,082 Deferred income taxes (25,533) (26,399) 15,981 N Gains from sales of assets (6,126) (56,801) (14,985) Provision for restructured operations and other merger costs (9,200) Changes in operating assets and liabilities Increase in accounts receivable (105,093) (72,538) (49,299) (Increase) decrease in inventories (22,387) (2,180) 997 Increase in prepaid expenses and other assets (46,665) (22,842) (34,446) Increase (decrease) in accounts payable and other liabilities 107,259 102,234 (63,380) Net Cash Provided By Operating Activities 69,064 108,204 86,404 Investing Activities From Continuing Operations Additions to property, plant and equipment (net of disposals of $9,614, $2,201, and $8,526, respectively) (166,421) (123,614) (177,336) Purchases of short-term investments, net (541,127) (238,115) Acquisitions and investments, net (5,261) (23,023) (8,912) Proceeds from the sale of assets, net 325,766 82,763 15,498 Proceeds from the collection of notes receivable 150,000 Net Cash Provided (Used) By Investing Activities 154,084 (455,001) (408,865) Net Cash From Continuing Operations Before Financing Activities 223,148 (346,797) (322,461) Discontinued Operations Net cash used by operating activities (16,297) (15,081) (2,860) Net cash used by investing activities (26,970) Net Cash From Discontinued Operations Before Financing Activities (43,267) (15,081) (2,860) Financing Activities Net change in loans payable (9,572) 52,701 1,553 Principal payments on long-term debt (6,843) (46,000) Dividends (34,156) (26,358) (35,669) Purchases of common stock for treasury (2,187) Net proceeds from follow-on stock offering 943,303 Proceeds from stock issued for stock plans 96,379 61,047 60,074 Net Cash Provided (Used) By Financing Activities 43,621 1,030,693 (20,042) Effect Of Exchange Rate Changes On Cash 1,654 (12,334) (10,604) Net Change In Cash And Cash Equivalents 225,156 656,481 (355,967) Cash And Cash Equivalents Beginning Of Year 82,865 308,021 964,502 Cash And Cash Equivalents End Of Year $ 308,021 $ 964,502 $ 608,535
See accompanying notes to Applera Corporation’s consolidated financial statements.
APPLERA CORPORATION Annual Report 2001 35 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 36 of 67 Time: 18:18:07, Date: 09/17/01, BL: 0
APPLERA CORPORATION Consolidated Statements of Stockholders’ Equity
Applera Applera – Accumulated Corporation Applied Applera – Capital in Other Treasury Treasury Total (predecessor) Biosystems Celera Excess of Retained Comprehensive Stock Stock Stockholders’ ORATION (Dollar amounts and shares in thousands) Stock Stock Stock Par Value Earnings Income (Loss) At Cost Shares Equity Balance At June 30, 1998 $ 50,148 $ – $ – $ 379,974 $ 190,966 $ (9,513) $ (47,327) (831) $ 564,248 Comprehensive income ORP Net income 175,855 175,855 C Other comprehensive income: A Foreign currency translation adjustments (5,415) R Minimum pension liability adjustment (1,779) Unrealized gain on investments, net of tax 11,887 PLE Other comprehensive income 4,693 4,693 Comprehensive income 180,548 AP Cash dividends declared on Applera Corporation stock (25,479) (25,479) Cash dividends declared on Applera – Applied Biosystems stock (8,677) (8,677) Issuances under Applera Corporation stock plans 873 43,323 (14,862) 45,354 789 74,688 Recapitalization (May 6, 1999) (51,021) 510 255 50,256 Repurchases of Applera – Applied Biosystems stock (2,187) (20) (2,187) Issuances under Applera – Applied Biosystems stock plans 3 17,967 (1,290) 2,187 20 18,867 Issuances under Applera – Celera stock plans 2 1,483 1,485 Tax benefit related to employee stock options 15,735 15,735 Stock compensation (883) 1,207 1,973 42 2,297 Two-for-one stock split 514 (514) Balance At June 30, 1999 1,027 257 507,341 317,720 (4,820) 821,525 Comprehensive income Net income 95,496 95,496 Other comprehensive income: Foreign currency translation adjustments (25,196) Minimum pension liability adjustment (60) Unrealized gain on investments, net of tax 155,530 Other comprehensive income 130,274 130,274 Comprehensive income 225,770 Cash dividends declared on Applera – Applied Biosystems stock (35,220) (35,220) Issuances under Applera – Applied Biosystems stock plans 23 43,411 43,434 Issuances under Applera – Celera stock plans 15 17,598 17,613 Issuances under Applera – Celera stock follow-on stock offering 44 943,259 943,303 Tax benefit related to employee stock options 65,708 65,708 Stock compensation 13,266 13,266 Celera Genomics group purchase business combination 16 125,077 125,093 Two-for-one stock split 1,037 261 (1,298) Balance At June 30, 2000 2,087 593 1,714,362 377,996 125,454 2,220,492 Comprehensive loss Net income 27,234 27,234 Other comprehensive loss: Foreign currency translation adjustments (34,203) Unrealized gain on hedge contracts, net of tax 11,158 Minimum pension liability adjustment (35,151) Unrealized loss on investments, net of tax (113,382) Reclassification adjustment for realized gains included in net income (9,741) Other comprehensive loss (181,319) (181,319) Comprehensive loss (154,085) Cash dividends declared on Applera – Applied Biosystems stock (35,786) (35,786) Issuances under Applera – Applied Biosystems stock plans 28 37,807 37,835 Issuances under Applera – Celera stock plans 24 22,214 22,238 Tax benefit related to employee stock options 51,535 51,535 Stock compensation 6,082 6,082 Balance At June 30, 2001 $ – $ 2,115 $ 617 $ 1,832,000 $ 369,444 $ (55,865) $ – $ 2,148,311
See accompanying notes to Applera Corporation’s consolidated financial statements.
36 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 37 of 67 Time: 18:18:08, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Notes to Consolidated Financial Statements
Note 1—Accounting Policies And Practices reduce the assets of the Company legally available for A payment of dividends. Principles of Consolidation C The Company has presented combined financial statements O
The consolidated financial statements include the accounts of R
all majority-owned subsidiaries of Applera Corporation of each group in addition to the Company’s consolidated PO (‘‘Applera’’ or ‘‘the Company’’). All significant intracompany financial information in order to assist investors in making transactions and balances have been eliminated in informed financial decisions. The Applied Biosystems group’s RATIO consolidation. Certain amounts in the consolidated financial and the Celera Genomics group’s combined financial statements and notes have been reclassified to conform to the statements should be read in conjunction with the current year’s presentation. Company’s consolidated financial statements and notes thereto. N Use of Estimates Discontinued Operations The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in The Company’s consolidated financial statements were the U.S. requires management to make estimates and restated to reflect the net assets and operating results of the assumptions that affect the reported amounts of assets and Analytical Instruments business as discontinued operations liabilities, disclosure of contingent assets and liabilities at the (see Note 14). The operating results are reflected in the date of the financial statements, and the reported amounts of Consolidated Statements of Operations as loss from revenues and expenses during the reporting periods. Actual discontinued operations for fiscal 1999. The accompanying results could differ from those estimates. notes, except Note 14, relate only to continuing operations. Recapitalization Recently Issued Accounting Standards The recapitalization of the Company on May 6, 1999 In July 2001, the Financial Accounting Standards Board resulted in the issuance of two new classes of common stock (‘‘FASB’’) issued Statement of Financial Accounting Standards called Applera Corporation – Applied Biosystems Group (‘‘SFAS’’) No. 141, ‘‘Business Combinations,’’ which applies Common Stock (‘‘Applera – Applied Biosystems stock’’) and to all business combinations initiated after June 30, 2001. Applera Corporation – Celera Genomics Group Common The provisions of this statement require business Stock (‘‘Applera – Celera stock’’). Applera – Applied combinations to be accounted for using the purchase method Biosystems stock is intended to reflect separately the of accounting. Also in July 2001, the FASB issued SFAS No. performance of the Applied Biosystems business (‘‘Applied 142, ‘‘Goodwill and Other Intangible Assets.’’ Under SFAS Biosystems group’’), and Applera – Celera stock is intended No. 142, goodwill from acquisitions occurring after June 30, to reflect separately the performance of the Celera Genomics 2001 will not be amortized, and for goodwill existing prior business (‘‘Celera Genomics group’’). As part of the to June 30, 2001, the Company expects to adopt the recapitalization, each share of common stock of The Perkin- nonamortization provisions of the statement on July 1, 2001. Elmer Corporation (‘‘predecessor common stock’’) was Goodwill for which the nonamortization provisions are converted into one share of Applera – Applied Biosystems applied will be required to be reviewed for impairment at stock and 0.5 of a share of Applera – Celera stock, prior to least on an annual basis. If an impairment is found to exist, a giving effect to the stock splits since May 6, 1999. charge will be taken against operations. SFAS No. 142 requires that, upon adoption, goodwill and certain intangible The name of the Company was changed from PE assets be reviewed for classification and useful life. The Corporation to Applera Corporation and the name of the PE Company expects that, aside from the nonamortization of Biosystems group was changed to the Applied Biosystems goodwill on a prospective basis, the effect upon adoption of group effective November 30, 2000. SFAS No. 142 will be immaterial. Holders of Applera – Applied Biosystems stock and Earnings per Share Applera – Celera stock are stockholders of the Company. The Applied Biosystems group and the Celera Genomics Basic earnings per share for each class of common stock is group (individually referred to as a ‘‘group’’) are not separate computed by dividing the earnings allocated to each class of legal entities. As a result, stockholders are subject to all of the common stock by the weighted average number of risks associated with an investment in the Company and all outstanding shares of that class of common stock. Diluted of its businesses, assets, and liabilities. earnings per share is computed by dividing the earnings allocated to each class of common stock by the weighted Financial effects arising from one group that affect the average number of outstanding shares of that class of Company’s consolidated results of operations or consolidated common stock including the dilutive effect of common stock financial condition could, if significant, affect the combined equivalents. results of operations or combined financial condition of the other group and the per share market price of the class of The earnings allocated to each class of common stock is common stock relating to the other group. Any net losses of determined by the Company’s Board of Directors. This the Applied Biosystems group or the Celera Genomics group determination is generally based on the net income or loss and dividends or distributions on, or repurchases of, amounts of the corresponding group determined in Applera – Applied Biosystems stock or Applera – Celera accordance with generally accepted accounting principles stock or repurchases of preferred stock of the Company will consistently applied. The Company believes this method of allocation is systematic and reasonable. The Board of
APPLERA CORPORATION Annual Report 2001 37 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 38 of 67 Time: 18:18:10, Date: 09/17/01, BL: 0
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Directors can, at its discretion, change the method of Options to purchase 40,000, 5.9 million, and 9.1 million allocating earnings to each class of common stock at any shares of Applera – Applied Biosystems stock were ORATION time. outstanding at June 30, 1999, 2000, and 2001, respectively, but were not included in the computation of diluted
ORP The following table presents a reconciliation of basic and earnings per share because the effect was antidilutive. C diluted earnings (loss) per share from continuing operations: Options and warrants to purchase 11.2 million, 12.3 million, A Applied Biosystems Group and 14.7 million shares of Applera – Celera stock were R (Amounts in thousands except per share amounts) outstanding at June 30, 1999, 2000, and 2001, respectively, For the years ended June 30, 1999 2000 2001 but were not included in the computation of diluted PLE earnings per share because the effect was antidilutive. Weighted average AP number of common All Applera – Applied Biosystems stock and Applera – Celera shares used in the stock share and per share data reflects all stock splits. calculation of basic Foreign Currency earnings per share from continuing Assets and liabilities of foreign operations, where the operations 200,811 207,010 210,188 functional currency is the local currency, are translated into U.S. dollars at the fiscal year-end exchange rates. The related Common stock translation adjustments are recorded as a separate component equivalents 5,398 10,006 10,288 of stockholders’ equity. Foreign currency revenues and Shares used in the expenses are translated using monthly average exchange rates calculation of diluted prevailing during the year. Foreign currency transaction gains earnings per share and losses are included in net income. Transaction gains and from continuing losses occur from fluctuations in exchange rates when assets operations 206,209 217,016 220,476 and liabilities are denominated in currencies other than the functional currency of an entity. Net transaction losses for Income from the fiscal years ended June 30, 1999, 2000, and 2001 were continuing operations $5.6 million, $.1 million, and $1.3 million, respectively. The used in the net transaction loss for fiscal year 2001 included the gains calculation of basic and losses on the revaluation of non-functional currency- and diluted earnings denominated net assets offset by the losses and gains on non- per share from qualified hedges on these positions. See Note 11 for further continuing operations $ 148,365 $ 186,247 $ 212,391 information on the Company’s hedging program. Income per share from Derivative Financial Instruments continuing operations The Company uses derivative financial instruments to offset Basic $ .74 $ .90 $ 1.01 exposure to market risks arising from changes in foreign Diluted $ .72 $ .86 $ .96 currency exchange rates and interest rates. Derivative Celera Genomics Group financial instruments currently utilized by the Company (Amounts in thousands include foreign currency forward and range forward except per share amounts) contracts, foreign currency options, and an interest rate swap For the years ended June 30, 1999 2000 2001 (see Note 11). Weighted average number of common Cash and Cash Equivalents and Short-Term Investments shares used in the calculation of basic Cash equivalents consist of highly liquid debt instruments, loss per share 50,200 53,725 60,718 time deposits, and certificates of deposit with original Common stock maturities of three months or less. equivalents Short-term investments, that are classified as available-for- Shares used in the sale, have maturities of less than one year and are carried at calculation of diluted fair value with unrealized gains and losses included as a loss per share 50,200 53,725 60,718 separate component of equity, net of any related tax effect. The specific identification method is used to determine the Net loss used in the cost of securities disposed of, with realized gains and losses calculation of basic recorded to other income, net. and diluted loss per share $ (44,894) $ (92,737) $ (186,229) Net loss per share Basic and diluted $ (.89) $ (1.73) $ (3.07)
38 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 39 of 67 Time: 18:18:11, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
The fair value of short-term investments at June 30, 2000 Major renewals and improvements that significantly add to A and 2001 was as follows: productive capacity or extend the life of an asset are C
(Dollar amounts in millions) 2000 2001 capitalized. Repairs, maintenance, and minor renewals and O
improvements are expensed when incurred. The cost of R Certificates of deposit $ 107.3 $ 151.5 assets and related depreciation is removed from the related PO Commercial paper 364.5 141.4 accounts on the balance sheet when such assets are disposed RATIO U.S. government notes and bonds 49.2 194.8 of, and any related gains or losses are reflected in current Corporate bonds 20.1 109.2 earnings. Asset backed securities 113.0 Provisions for depreciation of owned property, plant and Foreign debt 69.6 equipment are based upon the expected useful lives of the N Total short-term investments $ 541.1 $ 779.5 assets and computed primarily by the straight-line method. Leasehold improvements are amortized over their estimated Gross unrealized gains and losses on short-term investments useful lives or the term of the applicable lease, whichever is were immaterial at June 30, 2000 and 2001. Realized gains less, using the straight-line method. Useful lives are generally and losses were less than $.1 million for both fiscal 2000 and 30 to 40 years for buildings and three to seven years for 2001. machinery and equipment. Capitalized internal-use software The Company also holds trading securities at June 30, 2001, costs are amortized primarily over the expected useful lives, which are recorded at fair value with realized and unrealized not to exceed three years. Depreciation expense for gains and losses included in income. During fiscal 2001, $1.4 property, plant and equipment was $42.5 million, $61.4 million of unrealized net losses were included in income. million, and $72.2 million for the fiscal years ended June 30, 1999, 2000, and 2001, respectively. Investments Machinery and equipment, at cost, included capitalized The equity method of accounting is used for investments in internal-use software primarily related to the Company’s joint ventures that are 20% to 50% owned and the cost worldwide information technology infrastructure of $61.8 method of accounting is used for investments that are less million and $65.8 million at June 30, 2000 and 2001, than 20% owned. Minority equity investments are generally respectively. Net of accumulated amortization, capitalized classified as available-for-sale and carried at market value in internal-use software was $43.5 million and $38.2 million at accordance with SFAS No. 115, ‘‘Accounting for Certain June 30, 2000 and 2001, respectively. Investments in Debt and Equity Securities.’’ The specific identification method is used to determine the cost of Capitalized Software securities disposed of. Internal software development costs, for software in the Company’s products, which are incurred from the time Inventories technological feasibility of the software is established until the Inventories are stated at the lower of cost (on a first-in, first- software is ready for its intended use, are capitalized and out basis) or market. Inventories at June 30, 2000 and 2001 included in other long-term assets. These costs are amortized included the following components: using the straight-line method over a maximum of three years or the expected life of the product, whichever is less. (Dollar amounts in millions) 2000 2001 At June 30, 2000 and 2001, capitalized software costs, net of Raw materials and supplies $ 53.1 $ 58.8 accumulated amortization, were $21.3 million and $27.9 Work-in-process 6.3 12.9 million, respectively. Research and development costs and Finished products 98.4 78.0 other computer software maintenance costs related to software development are expensed as incurred. Total inventories $ 157.8 $ 149.7 Intangible Assets Property, Plant and Equipment, and Depreciation The excess of purchase price over the net asset value of Property, plant and equipment are recorded at cost and companies acquired is amortized using a straight-line method consisted of the following at June 30, 2000 and 2001: over periods not exceeding 20 years. Patents and trademarks are amortized using the straight-line method over their (Dollar amounts in millions) 2000 2001 expected useful lives. At June 30, 2000 and 2001, other Land $ 23.5 $ 77.1 long-term assets included goodwill, net of accumulated Buildings and leasehold amortization, of $128.7 million and $24.4 million, improvements 185.1 220.5 respectively. Accumulated amortization of goodwill was $11.7 million and $52.2 million at June 30, 2000 and 2001, Machinery and equipment 311.6 375.0 respectively. Property, plant and equipment, at cost 520.2 672.6 Asset Impairment Accumulated depreciation and The Company reviews long-lived assets and goodwill for amortization 185.3 237.0 impairment, in accordance with SFAS No. 121, ‘‘Accounting Property, plant and equipment, net $ 334.9 $ 435.6 for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,’’ whenever events or
APPLERA CORPORATION Annual Report 2001 39 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 40 of 67 Time: 18:18:12, Date: 09/17/01, BL: 0
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
circumstances indicate that the carrying amount of an asset Note 2—Acquisitions, Investments, and may not be recoverable. The assessment of possible Dispositions ORATION impairment is based on the Company’s ability to recover the Tecan AG carrying value of the asset from the estimated future ORP undiscounted cash flows, before interest and taxes, of the During the fourth quarter of fiscal 1999, the Company C related operations. If these cash flows are less than the divested its interest in Tecan, a developer and manufacturer A carrying value of such asset, an impairment loss is recognized of automated sample processors, liquid handling systems, and R for the difference between estimated fair value and carrying microplate photometry, through a public offering in value. During fiscal 1999, the Company recorded a $14.5 Switzerland and private sales outside of Switzerland. Net cash PLE million charge to other special charges for the impairment of proceeds from the divestiture were $30.0 million. The Company recognized a before-tax gain of $1.6 million on
AP assets associated with the Molecular Informatics business and during fiscal 2001, the Company recorded a $69.1 million the divestiture. charge to other special charges for the impairment of assets Paracel, Inc. associated with the Paracel business (see Note 2). During the fourth quarter of fiscal 2000, the Company Revenues acquired Paracel, Inc. in a stock-for-stock transaction. Paracel Revenues are generally recorded at the time of shipment of produces advanced genomic and text analysis technologies. products or performance of services. When contractual Its products include a hardware accelerator for sequence acceptance clauses exist, revenue is recognized upon comparison, a hardware accelerator for text search, and satisfaction of such clauses. Revenues from service contracts sequence analysis software tools. are recorded as deferred service contract revenues and The Company issued approximately 1.6 million shares of reflected in net revenues over the term of the contract, Applera – Celera stock in exchange for all the outstanding generally one year. Subscription fees for access to the shares of Paracel common stock not previously owned by Company’s on-line information databases are recognized the Company. At the time of the acquisition, the Company ratably over the contracted period in accordance with the owned 14% of Paracel. The acquisition of the shares of provisions of the contract. Contract research service revenues Paracel not previously owned by the Company was valued at are earned and recognized in accordance with contract $125.6 million and was accounted for under the purchase provisions. Revenues may be recognized on a percentage of method of accounting. In connection with the acquisition, completion basis, as contract research costs are incurred, or $115.2 million was allocated to goodwill, including $5.3 may be contingent upon the achievement of certain million of deferred taxes, and $13.6 million was allocated to milestones. Amounts received in advance of performance or other intangible assets. The goodwill and the other intangible acceptance are recorded as deferred revenue. assets were being amortized on a straight-line method over 3 Research, Development and Engineering years. Research, development and engineering costs are expensed The net assets and results of operations of Paracel were when incurred. included in the Company’s consolidated financial statements from the date of acquisition. The following selected Supplemental Cash Flow Information unaudited pro forma information for the Company assumes Cash paid for interest and income taxes and significant non- the acquisition had occurred at the beginning of fiscal 1999 cash investing and financing activities for the following and fiscal 2000, and gives effect to purchase accounting periods were as follows: adjustments:
(Dollar amounts in millions (Dollar amounts in millions) 1999 2000 2001 except per share amounts) 1999 2000 Interest $ 3.4 $ 3.0 $ 1.8 Net revenues $ 1,226.8 $ 1,379.4 Income taxes $ 30.3 $ 49.3 $ 95.2 Net income $ 130.3 $ 47.7 Significant non-cash investing Applied Biosystems Group and financing activities: Capital expenditures liability $ 8.9 Net income per share Basic $ 1.13 $ .90 Tax benefit related to Diluted $ 1.10 $ .86 employee stock options $ 15.7 $ 65.7 $ 51.5 Dividends declared not paid $ 8.9 $ 9.0 Celera Genomics Group Equity instruments issued in Net loss per share Paracel acquisition $ 125.1 Basic and diluted $ (1.75) $ (2.54) The unaudited pro forma data is for informational purposes only and may not be indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of fiscal 1999 or at the beginning of fiscal 2000 or of the future operations of the combined companies.
40 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 41 of 67 Time: 18:18:13, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
In fiscal 2001, the Company recorded a $69.1 million Axys common stock. Depending on the average closing A charge, before taxes, to other special charges for the price of Applera – Celera stock at the time of the closing of C
impairment of goodwill and other intangibles associated with the merger, the Company will issue between 3.3 million O
Paracel. Due to Paracel’s substantially lower than originally shares and 5.4 million shares of Applera – Celera stock. R anticipated performance and the future outlook of this PO business, management performed an assessment of future cash
Note 3—Debt And Lines Of Credit RATIO flows and determined that it was necessary to record an Short-term debt and long-term debt at June 30, 2000 and impairment charge to reduce the carrying value of Paracel’s 2001 are summarized as follows: net assets to their estimated fair value. This charge included
$63.7 million for the write-down of goodwill and $5.4 (Dollar amounts in millions) 2000 2001 N million for the write-down of other intangibles. Short-Term Debt Millennium Pharmaceuticals, Inc. Short-term loans $ 15.7 $ 14.7 In fiscal 2000, the Company recognized a before-tax gain of Current portion of long-term debt $41.0 million from the sale of a portion of its equity interest (yen loan) 30.5 in Millennium Pharmaceuticals, Inc. Net cash proceeds from Total short-term debt $ 15.7 $ 45.2 the sale were $48.0 million. During fiscal 1999, the Long-Term Debt Company recorded a before-tax gain of $1.9 million in Commercial paper $ 46.0 $- connection with the release of previously existing contingencies on shares of Millennium common stock. Yen loan 36.1 Total long-term debt $ 82.1 $- Other Acquisitions The weighted average interest rates at June 30, 2000 and During fiscal years 1999, 2000, and 2001, the Company 2001 for short-term loans payable were .6% and .5%, acquired various equity interests in companies that were respectively. individually insignificant. The total amounts paid in fiscal years 1999, 2000, and 2001 were $5.3 million, $23.8 million, Long-term debt consisted of a 3.8 billion yen variable rate and $8.9 million, respectively, for these investments. loan that is scheduled to mature in March 2002. Through an interest rate swap (see Note 11), the effective interest rate for Other Dispositions the loan is fixed at 2.1%. There are no maturities of long- In fiscal years 1999, 2000, and 2001, the Company term debt subsequent to fiscal 2002. recognized before-tax gains of $2.6 million, $7.6 million, and Long-term debt at June 30, 2000 included $46.0 million of $15.0 million, respectively, from the sale of its equity interest commercial paper with an average interest rate of 6.84%. in various companies. Net cash proceeds from these sales These borrowings were classified as noncurrent at June 30, were $7.8 million in fiscal 1999, $10.7 million in 2000, and 2000 because it was the Company’s intent to refinance these $15.5 million in fiscal 2001. obligations on a long-term basis. However, the Company Pending Acquisition repaid this debt during the second quarter of fiscal 2001. Axys Pharmaceuticals, Inc. The Company maintains a $100 million revolving credit In June 2001, the Company signed a definitive merger agreement with four banks that expires on April 20, 2005. agreement to acquire Axys Pharmaceuticals, Inc. (‘‘Axys’’) in Commitment and facility fees are based on public debt a stock-for-stock transaction. Axys is an integrated small ratings, or net worth and leverage ratios. Interest rates on molecule drug discovery and development company that is amounts borrowed vary depending on whether borrowings developing products for chronic therapeutic applications are undertaken in the domestic or eurodollar markets. There through collaborations with pharmaceutical companies and were no outstanding borrowings under the facility at June has a proprietary product portfolio in oncology. 30, 2000 or 2001. The transaction, which is subject to customary closing At June 30, 2001, in addition to the $100 million revolving conditions, including approval by Axys stockholders and credit facility, the Company had $122 million of unused regulatory approvals, has been structured as a tax-free credit facilities for short-term borrowings from domestic and reorganization and will be accounted for under the purchase foreign banks in various currencies. These credit facilities method. Under the terms of the merger agreement, Axys consist of uncommitted overdraft credit lines that are shareholders will receive shares of Applera – Celera stock per provided at the discretion of various local banks. An Applera Axys share based on an exchange ratio which is calculated Corporation guarantee is usually required if a local unit based on the average closing price of Applera – Celera stock borrows funds. over the 10 trading days immediately preceding (but Under various debt and credit agreements, the Company is excluding) the second trading day prior to the closing of the required to maintain certain minimum net worth and merger. If the closing had occurred at the time the merger leverage ratios. The Company was in compliance with all agreement was signed, each share of Axys common stock such covenants as of June 30, 2001. would have been exchanged for a fractional share of Applera – Celera stock having an average closing price during the calculation period equivalent to $4.65 per share of
APPLERA CORPORATION Annual Report 2001 41 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 42 of 67 Time: 18:18:15, Date: 09/17/01, BL: 0
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Note 4—Income Taxes A reconciliation of the federal statutory tax to the Company’s continuing tax provision for fiscal 1999, 2000, ORATION Income (loss) before income taxes from continuing operations for fiscal 1999, 2000, and 2001 is summarized in and 2001 is set forth in the following table: the following table: ORP (Dollar amounts in millions) 1999 2000 2001 C (Dollar amounts in millions) 1999 2000 2001 A Federal statutory rate 35% 35% 35%
R United States $ (41.6) $ (46.5) $ (86.8) Tax at federal statutory rate $ 40.0 $ 47.6 $ 25.7 Foreign 155.9 182.6 160.2 State income taxes (net of PLE Total $ 114.3 $ 136.1 $ 73.4 federal benefit) .4 .4 .3
AP Effect on income taxes from The Company’s provision for income taxes from continuing foreign operations (25.0) (6.3) (12.9) operations for fiscal 1999, 2000, and 2001 consisted of the Effect on income taxes from following: foreign sales corporation (4.9) (7.1) (10.3) (Dollar amounts in millions) 1999 2000 2001 Reorganization, restructuring and other costs 7.9 Currently Payable Nondeductible goodwill 1.2 .5 35.3 Domestic $ 6.1 $ 18.4 $ 7.4 R&D tax credit (11.4) (3.4) Foreign 23.5 48.6 22.8 Valuation allowance (13.8) .1 9.5 Total currently payable 29.6 67.0 30.2 Long-term compensation 8.7 Deferred Recapitalization costs 3.3 Domestic (29.1) (14.0) 12.1 Other 2.9 .2 2.0 Foreign 3.6 (12.4) 3.9 Total provision for income Total deferred (25.5) (26.4) 16.0 taxes from continuing Total provision for income operations $ 4.1 $ 40.6 $ 46.2 taxes from continuing operations $ 4.1 $ 40.6 $ 46.2 The valuation allowance was increased in fiscal 2001 principally as a result of foreign tax credits generated by the Significant components of deferred tax assets and liabilities Company that management believes may not be realized from continuing operations at June 30, 2000 and 2001 are before the end of the statutory carryforward period, due to summarized below: significant domestic tax loss carryforwards. The fiscal 2001 increase in the valuation allowance was also due to foreign (Dollar amounts in millions) 2000 2001 loss carryforwards that management believes may not be Deferred Tax Assets realized because the Company will not generate sufficient Inventories $ 4.0 $ 4.3 taxable income in each of the respective foreign countries to Postretirement and utilize the tax loss carryforwards. The reduction in the postemployment benefits 31.4 50.7 valuation allowance in fiscal 1999, which was partially offset Other accruals 11.9 12.8 by an increase due to foreign loss carryforwards, was caused Tax credit and loss carryforwards 162.6 134.0 by management’s belief that once the sale of the Analytical Instruments business was completed, it was more likely than Capitalized R&D expense 67.2 not that the deferred tax assets to which the valuation Subtotal 209.9 269.0 allowance related would be realized. Valuation allowance (37.2) (45.5) Total deferred tax assets 172.7 223.5 At June 30, 2001, the Company’s worldwide valuation Deferred Tax Liabilities allowance of $45.5 million principally related to foreign tax Depreciation 15.8 16.0 loss carryforwards and domestic tax credit carryforwards. Other accruals 4.9 1.4 The Company has a consolidated domestic loss carryforward Intangibles 4.6 1.1 of approximately $201.4 million and consolidated domestic Unrealized gains on investments 89.2 29.6 credit carryforwards of $50 million that will expire between Total deferred tax liabilities 114.5 48.1 the fiscal years 2003 and 2021, and loss carryforwards of Total deferred tax assets, net $ 58.2 $ 175.4 approximately $37 million in various foreign countries with varying expiration dates. U.S. income taxes were not provided on approximately $406 million of net unremitted earnings from foreign subsidiaries since the Company either intends to permanently reinvest substantially all of such earnings outside the U.S., or expects the effect of any remittance after considering available tax credits and amounts previously accrued, not to be significant to the results of operations. These earnings include income
42 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 43 of 67 Time: 18:18:18, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
from manufacturing operations in Singapore, which is tax- The following tables set forth the changes in the benefit A exempt through fiscal 2004. obligations and the plan assets, the funded status of the plans, C
and the amounts recognized in the Company’s Consolidated O
Note 5—Retirement and Other Benefits Statements of Financial Position at June 30, 2000 and 2001: R PO Pension Plans, Retiree Healthcare, and Life Insurance Pension Postretirement
Benefits RATIO (Dollar amounts in millions) 2000 2001 2000 2001 The Company maintains or sponsors pension plans that cover a portion of all worldwide employees. Pension benefits Change In Benefit earned are generally based on years of service and Obligation N compensation during active employment. However, the level Benefit obligation, of benefits and terms of vesting may vary among plans. beginning of year $ 594.1 $ 607.9 $ 62.5 $ 61.9 Pension plan assets are administered by trustees and are Service cost 7.7 8.0 .3 .2 principally invested in equity and fixed income securities. Interest cost 44.1 48.7 4.6 4.8 The funding of pension plans is determined in accordance Benefits paid (36.7) (37.1) (5.4) (5.6) with statutory funding requirements. Actuarial (gain) loss 7.9 35.1 (.1) 5.0 The Company’s domestic pension plan covers a substantial Variable annuity unit portion of U.S. employees. During fiscal 1999, the plan was value change (12.9) (70.5) amended to terminate the accrual of benefits as of June 30, Addition of plan 3.9 2004 and to improve the benefit for participants who retire Foreign currency between the ages of 55 and 60. The pension plan is not translation (.2) (1.1) available to employees hired on or after July 1, 1999. Other (.8) Benefit obligation $ 607.9 $ 590.2 $ 61.9 $ 66.3 The postretirement benefit plan provides certain healthcare and life insurance benefits to domestic employees hired prior Change In Plan Assets to January 1, 1993, who retire and satisfy certain service and Fair value of plan assets, age requirements. Generally, medical coverage pays a stated beginning of year $ 600.6 $ 615.0 $–$– percentage of most medical expenses, reduced for any Actual return on plan deductible and for payments made by Medicare or other assets 47.9 (23.5) group coverage. The cost of providing these benefits is Company contributions .8 5.4 5.6 shared with retirees. The plan is unfunded. Benefits paid (34.3) (34.7) (5.4) (5.6) The components of net pension and postretirement benefit Addition of plan 1.0 expenses for fiscal 1999, 2000, and 2001 are set forth in the Foreign currency following table: translation (.2) (.5) Other (.1) (Dollar amounts in millions) 1999 2000 2001 Fair value of plan assets $ 615.0 $ 557.0 $–$– Pension Funded Status Service cost $ 5.2 $ 7.7 $ 8.0 Reconciliation Interest cost 38.7 44.1 48.7 Funded status $ 7.1 $ (33.2) $ (61.9) $ (66.3) Expected return on plan assets (38.6) (45.7) (50.5) Unrecognized prior Amortization of transition asset (1.9) (2.4) (.2) service gain (2.0) (1.9) Amortization of prior service cost (.4) (.4) (.5) Unrecognized transition Amortization of losses .5 .2 .1 asset .9 .9 Curtailments and settlements .1 Unrecognized (gains) Net periodic expense $ 3.6 $ 3.5 $ 5.6 losses 29.6 66.6 (21.5) (14.7) $ 32.4 $ (81.0) Postretirement Benefit Net amount recognized $ 35.6 $ (83.4) Service cost $ .2 $ .3 $.2 Amounts Recognized Interest cost 4.8 4.6 4.8 In The Statement Of Amortization of gains (1.5) (1.8) (1.7) Financial Position Net periodic expense $ 3.5 $ 3.1 $ 3.3 Prepaid benefit cost $ 47.4 $–$–$– Accrued benefit liability (15.8) (25.6) (83.4) (81.0) Intangible asset .6 .6 Minimum pension liability adjustment 3.4 57.4 Net amount recognized $ 35.6 $ 32.4 $ (83.4) $ (81.0)
A minimum pension liability adjustment is required when the actuarial present value of accumulated benefits exceeds plan assets and accrued pension liabilities. The projected benefit obligation and accumulated benefit obligation for the
APPLERA CORPORATION Annual Report 2001 43 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 44 of 67 Time: 18:18:22, Date: 09/17/01, BL: 0
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
pension plans with accumulated benefit obligations in excess $1.1 million, $1.3 million, and $1.8 million in fiscal 1999, of plan assets were $14.0 million and $12.8 million, 2000, and 2001, respectively. ORATION respectively, at June 30, 2000, with no corresponding plan assets. The projected benefit obligation and the accumulated Postemployment Benefits ORP benefit obligation for the pension plans with accumulated The Company provides certain postemployment benefits to C benefit obligations in excess of plan assets were $582.5 eligible employees. These benefits generally include A million and $575.5 million, respectively, at June 30, 2001,
R severance, disability, and medical-related costs paid after with corresponding net plan assets having a fair value of employment but before retirement. $553.2 million. PLE The following actuarial assumptions were used for the Note 6—Segment, Geographic, and Customer AP pension and postretirement plans: Information Business Segments 2000 2001 The Company operates in the life science industry through Domestic Plans two reportable segments, the Applied Biosystems group and 1 Discount rate 8% 7/2% the Celera Genomics group. The Applied Biosystems group Compensation increase 6% 6% is engaged principally in the development, manufacture, sale, 1 1 1 Expected rate of return 8 - 9/4% 7/2 -9/4% and service of instrument systems and associated consumable Foreign Plans products for life science research and related applications. Its 3 products are used in various applications including the Discount rate 3 - 5/4% 3% synthesis, amplification, purification, isolation, analysis, and Compensation increase 2 - 4% 2% sequencing of nucleic acids, proteins, and other biological Expected rate of return 4 - 9% 4% molecules. The Celera Genomics group is engaged principally in integrating high throughput technologies to As part of the divestiture of the Analytical Instruments create therapeutic discovery and development capabilities for business in fiscal 1999, the Company guaranteed the pension internal use and for its customers and collaborators. The benefits for employees of a former German subsidiary. These Celera Genomics group’s businesses are its online benefits were not transferable to the buyer under German information business and its therapeutics discovery business. law. The guarantee, which approximated $41.2 million and The online information business is a leading provider of $35.4 million at June 30, 2000 and 2001, respectively, is not genomic and related biological and medical information. expected to have a material adverse effect on the Company’s Pharmaceutical, biotechnology, and academic customers use financial position or results of operations. this information, along with customized information For measurement purposes, an 11% annual rate of increase in technology solutions provided by the Celera Genomics the per capita cost of covered healthcare benefits was group, to enhance their capabilities in the fields of life assumed for plan year 2002, gradually reducing to 5.5% in science research and pharmaceutical and diagnostic discovery 2011 and thereafter. A one-percentage-point change in and development. The Celera Genomics group recently assumed healthcare cost trend rates would have the following expanded its focus to include therapeutic discovery and effects on postretirement benefits: development. The Celera Genomics group intends to leverage its capabilities in genomics, proteomics, and One-Percentage- One-Percentage- bioinformatics, both in internal programs and through (Dollar amounts in millions) Point Increase Point Decrease collaborations, to identify drug targets and diagnostic Effect on the total of service markers, and to discover and develop novel therapeutic and interest cost components $ .4 $ (.4) candidates. Initially, the Celera Genomics group intends to Effect on postretirement focus its therapeutic discovery efforts in the field of benefit obligation $ 5.0 $ (4.8) oncology. Segment operating income (loss) excludes other income Savings Plans (expense), gain on investments, net interest income, The Company provides a 401(k) savings plan, for domestic provision (benefit) for income taxes, and minority interest. employees, with automatic Company contributions of 2% of The accounting policies of the operating segments are the eligible compensation and a dollar-for-dollar matching same as those described in Note 1. Sales of products and contribution of up to 4% of eligible compensation. services between segments are based on terms that would be Employees not eligible for the employee pension plan available from third parties in commercial transactions. receive an extra 2% Company contribution in addition to ‘‘Other’’ consists of the elimination of intersegment activity the automatic 2% Company contribution through June 30, and the results of the Celera Diagnostics business. Other total 2004, while pension plan participants continue to receive the assets of $173.0 million for fiscal 1999 included the $150 automatic 2% contribution. The Company’s contributions to million Celera Genomics group note receivable from the this plan were $8.5 million, $12.1 million, and $16.3 million Applied Biosystems group. for fiscal 1999, 2000, and 2001, respectively. The Company recorded expenses for foreign defined contribution plans of
44 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 45 of 67 Time: 18:18:24, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Segment information follows: included a charge of $45.0 million related to the acceleration A of certain long-term compensation programs as a result of Applied Celera C
the attainment of performance targets and $2.1 million of O Biosystems Genomics Consol- (Dollar amounts in millions) Group Group Other idated acquisition-related costs. R PO 1999 Celera Genomics Group RATIO Net revenues from Fiscal 1999 operating loss included costs of $5.6 million external customers $ 1,204.4 $ 12.5 $ - $ 1,216.9 related to the recapitalization and transformation of the Intersegment Company. Fiscal 2001 operating loss included a $69.1
revenues 17.3 (17.3) million charge for the impairment of goodwill and other N Total revenues $ 1,221.7 $ 12.5 $ (17.3) $ 1,216.9 intangible assets. Operating income Geographic Areas (loss) $ 187.9 $ (68.8) $ (10.5) $ 108.6 Depreciation and Information concerning principal geographical areas for fiscal 1999, 2000, and 2001 follows: amortization expense $ 44.3 $ 3.8 $ 48.1 (Dollar amounts in millions) 1999 2000 2001 Capital expenditures $ 92.0 $ 94.5 $ (10.5) $ 176.0 Net Revenues From Total assets $ 1,347.6 $ 344.7 $ (173.0) $ 1,519.3 External Customers 2000 United States $ 609.0 $ 681.0 $ 819.3 Net revenues from Europe 370.1 376.0 436.6 external customers $ 1,328.3 $ 42.7 $ - $ 1,371.0 Japan 154.8 213.6 251.2 Intersegment Other Asian Pacific revenues 59.8 (59.8) countries 56.1 60.8 80.8 Total revenues $ 1,388.1 $ 42.7 $ (59.8) $ 1,371.0 Latin America and other 26.9 39.6 56.2 Operating income Consolidated $ 1,216.9 $ 1,371.0 $ 1,644.1 (loss) $ 213.2 $ (168.1) $ 3.0 $ 48.1 Net revenues are attributable to geographic areas based on Depreciation and the region of destination. amortization expense $ 54.5 $ 29.6 $ (3.4) $ 80.7 Information concerning long-lived assets at June 30, 2000 Capital expenditures $ 95.5 $ 30.7 $ (.4) $ 125.8 and 2001 follows: Total assets $ 1,698.2 $ 1,413.3 $ (28.2) $ 3,083.3 (Dollar amounts in millions) 2000 2001 2001 Long-Lived Assets Net revenues from United States $ 302.2 $ 403.4 external customers $ 1,555.4 $ 88.7 $ - $ 1,644.1 Europe 15.3 17.5 Intersegment Japan 18.1 14.6 revenues 64.1 .7 (64.8) Other Asian Pacific countries 2.1 3.1 Total revenues $ 1,619.5 $ 89.4 $ (64.8) $ 1,644.1 Latin America and other .8 .6 Operating income Consolidated $ 338.5 $ 439.2 (loss) $ 279.9 $ (289.6) $ (3.4) $ (13.1) Long-lived assets exclude goodwill and other intangible Depreciation and assets. amortization expense $ 66.8 $ 65.5 $ (3.1) $ 129.2 Customer Information Capital expenditures $ 152.2 $ 33.8 $ (.1) $ 185.9 The Company has a large and diverse customer base. No Total assets $ 1,677.9 $ 1,220.1 $ (10.1) $ 2,887.9 single customer accounted for more than 10% of total net revenues during fiscal 1999, 2000, and 2001. Events Impacting Comparability Applied Biosystems Group Fiscal 1999 operating income included $9.1 million for costs related to the acceleration of certain long-term compensation programs as a result of the attainment of performance targets; $4.6 million of charges related to the recapitalization of the Company; $6.1 million of other merger costs; a $14.5 million charge for the impairment of assets; a $3.5 million donation to the Company’s charitable foundation; and a $9.2 million reduction of charges required to implement the fiscal 1998 restructuring plan. Fiscal 2000 operating income
APPLERA CORPORATION Annual Report 2001 45 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 46 of 67 Time: 18:18:25, Date: 09/17/01, BL: 0
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Note 7—Stockholders’ Equity Stockholder Protection Rights Agreement
ORATION The Applera – Applied Biosystems stock was split two-for- In connection with the recapitalization of the Company, a one in July 1999 and February 2000. The Applera – Celera Stockholder Protection Rights Agreement (the ‘‘Rights stock was split two-for-one in February 2000. All such splits Agreement’’) was adopted to protect stockholders against ORP
C were in the form of stock dividends. Except for treasury abusive takeover tactics. Under the Rights Agreement, the
A stock data, all Applied Biosystems group and Celera Company will issue one right for every four shares of
R Genomics group share data reflect these splits. Applera – Applied Biosystems stock (an ‘‘Applera – Applied Biosystems Right’’), which will allow holders to purchase Capital Stock
PLE one-thousandth of a share of Series A participating junior The Company’s authorized capital stock consists of one preferred stock of the Company at a purchase price of $425, AP billion shares of a class of common stock designated as subject to adjustment (the ‘‘Series A Purchase Price’’), and Applera Corporation – Applied Biosystems Group Common one right for every two shares of Applera – Celera stock (an Stock, 225 million shares of a class of common stock ‘‘Applera – Celera Right’’), which will allow holders to designated as Applera Corporation – Celera Genomics purchase one-thousandth of a share of Series B participating Group Common Stock, and 10 million shares of preferred junior preferred stock of the Company at a purchase price of stock. Of the 10 million authorized shares of preferred stock, $125, subject to adjustment (the ‘‘Series B Purchase Price’’). the Company had designated 80,000 shares of two series of An Applera – Applied Biosystems Right or an Applera – participating junior preferred stock in connection with the Celera Right will be exercisable only if a person or group Company’s Stockholder Protection Rights Agreement as (‘‘Acquiring Person’’): (a) acquires 15% or more of the shares described below. of Applera – Applied Biosystems stock then outstanding or In March 2000, the Company completed a follow-on public 15% or more of the shares of Applera – Celera stock then offering of Applera – Celera stock. In this offering, 4.4 outstanding or (b) commences a tender offer that would million shares of Applera – Celera stock were sold, resulting result in such person or group owning such number of in net proceeds of $943.3 million. shares. Treasury Stock If any person or group becomes an Acquiring Person, each Applera – Applied Biosystems Right and each Applera – Common stock repurchases have been made in support of Celera Right will entitle its holder to purchase, for the Series the Company’s various stock plans and as part of a general A Purchase Price or the Series B Purchase Price, as share repurchase authorization. During fiscal 1999, 20,000 applicable, a number of shares of the related class of common shares of Applera – Applied Biosystems stock, before giving stock of the Company having a market value equal to twice effect to the stock splits, were repurchased to support various such purchase price. stock plans. There were no repurchases of common stock during fiscal 2000 or fiscal 2001. If following the time a person or group becomes an Acquiring Person, the Company is acquired in a merger or Stock Purchase Warrants other business combination transaction and the Company is As a result of the Company’s acquisition of PerSeptive not the surviving corporation; any person consolidates or Biosystems, Inc. in January 1998, each outstanding warrant merges with the Company and all or part of the common for shares of PerSeptive common stock was converted into stock is converted or exchanged for securities, cash, or warrants issued by the Company for the number of shares of property of any other person; or 50% or more of the the Company’s (predecessor) common stock that would have Company’s assets or earnings power is sold or transferred, been received by the holder if such warrants had been each Applera – Applied Biosystems Right and each exercised immediately prior to the effective time of the Applera – Celera Right will entitle its holder to purchase, merger. for the Series A Purchase Price or Series B Purchase Price, as applicable, a number of shares of common stock of the As a result of the recapitalization of the Company and stock surviving entity in any such merger, consolidation, or splits, each outstanding warrant for shares of PerSeptive business combination or the purchaser in any such sale or common stock was further converted into warrants to transfer having a market value equal to twice the Series A acquire .7704 share of Applera – Applied Biosystems stock Purchase Price or Series B Purchase Price. and .1926 share of Applera – Celera stock. The warrants are not separately exercisable into solely shares of The rights are redeemable at the Company’s option at one Applera – Applied Biosystems stock or Applera – Celera cent per right prior to a person or group becoming an stock. The exercise price and expiration date of each warrant Acquiring Person. were not affected by the recapitalization or the stock splits. Note 8—Stock Plans At June 30, 2001, there were 279,300 warrants outstanding at an exercise price of $12.66. Upon exercise of all of the Stock Option Plans warrants, the holders would receive approximately 215,000 Under the Company’s stock option plans, officers, directors, shares of Applera – Applied Biosystems stock and and other employees may be granted options, each of which approximately 54,000 shares of Applera – Celera stock. The allows for the purchase of shares of existing classes of warrants expire in September 2003. common stock at a price of not less than 100% of fair market value at the date of grant. Prior to the recapitalization
46 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 47 of 67 Time: 18:18:26, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
of the Company, most option grants had a two-year vesting A schedule, whereby 50% of the option grant vested at the end Applera – Celera Stock Weighted C
of each year from the date of grant. The Company’s Board O Number of Average of Directors has extended that schedule for most options Options Exercise Price R granted subsequent to the recapitalization whereby 25% will PO vest annually, resulting in 100% vesting after four years. Fiscal 1999 RATIO Options generally expire ten years from the date of grant. At Outstanding at May 6, 1999 3,595,686 $ 5.52 June 30, 2001, 27.6 million shares of Applera – Applied Granted 7,952,036 $ 8.72 Biosystems stock and 14.2 million shares of Applera – Celera Exercised 281,788 $ 5.25 Cancelled 132,606 $ 6.67 stock were authorized for grant of options. N Outstanding at June 30, 1999 11,133,328 $ 7.81 Transactions relating to the stock option plans of the Exercisable at June 30, 1999 3,636,232 $ 6.39 Company follow: Fiscal 2000 Granted 2,838,848 $ 77.55 Applera Corporation (predecessor) Exercised 1,392,069 $ 6.44 Weighted Number of Average Cancelled 311,266 $ 11.04 Options Exercise Price Outstanding at June 30, 2000 12,268,841 $ 20.49 Fiscal 1999 Exercisable at June 30, 2000 3,945,450 $ 7.47 Outstanding at June 30, 1998 5,216,964 $ 55.51 Fiscal 2001 Granted 37,000 $ 86.61 Granted 2,445,678 $ 45.23 Exercised 1,549,364 $ 45.74 Exercised 1,298,815 $ 7.70 Cancelled 108,914 $ 67.92 Cancelled 303,468 $ 60.43 Outstanding at May 5, 1999 3,595,686 $ 60.23 Outstanding at June 30, 2001 13,112,236 $ 25.69 Exercisable at May 5, 1999 2,639,696 $ 55.43 Exercisable at June 30, 2001 5,169,766 $ 14.81 As a result of the recapitalization of the Company, each Applera – Applied Biosystems Stock outstanding stock option under the Company’s stock option Weighted plans was converted into separately exercisable options to Number of Average Options Exercise Price acquire one share of Applera – Applied Biosystems stock and 0.5 of a share of Applera – Celera stock prior to giving effect Fiscal 1999 to the Applera – Applied Biosystems stock splits and the Outstanding at May 6, 1999 14,382,744 $ 13.67 Applera – Celera stock split. The exercise price for the Granted 5,896,092 $ 27.35 resulting Applera – Applied Biosystems stock options and Exercised 1,374,632 $ 13.25 Applera – Celera stock options was calculated by multiplying Cancelled 480,958 $ 16.38 the exercise price under the original option from which they Outstanding at June 30, 1999 18,423,246 $ 17.99 were converted by a fraction, the numerator of which was Exercisable at June 30, 1999 8,698,906 $ 12.34 the opening price of Applera – Applied Biosystems stock or Fiscal 2000 Applera – Celera stock, as the case may be, on May 6, 1999 (the first date such stocks were traded on the New York Granted 9,000,611 $ 86.06 Stock Exchange) and the denominator of which was the Exercised 3,146,903 $ 12.37 sum of such Applera – Applied Biosystems stock and Cancelled 661,236 $ 26.68 Applera – Celera stock prices. However, the aggregate Outstanding at June 30, 2000 23,615,718 $ 44.04 intrinsic value of the options was not increased, and the ratio Exercisable at June 30, 2000 9,879,917 $ 15.53 of the exercise price per option to the market value per Fiscal 2001 share was not reduced. In addition, the vesting provisions Granted 7,815,288 $ 32.69 and option periods of the original grants remained the same Exercised 2,410,166 $ 14.10 on conversion. Cancelled 1,099,092 $ 62.41 In connection with the acquisition of Paracel, the Company Outstanding at June 30, 2001 27,921,748 $ 42.61 assumed Paracel’s stock option plans. Options granted to Exercisable at June 30, 2001 10,689,250 $ 30.12 Paracel employees and directors in exchange for their Paracel options at the acquisition date have been included in the Applera – Celera stock options granted amount for fiscal 2000.
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The following tables summarize information regarding equal to the lower of 85% of the average market price of the options outstanding and exercisable at June 30, 2001: applicable class of common stock on the offering date or ORATION 85% of the average market price of such class of common Weighted Average stock on the last day of the purchase period. Provisions of ORP the plan for employees in countries outside the U.S. vary
C Contractual Life according to local practice and regulations. A Number of Exercise Remaining R (Option prices per share) Options Price in Years Applera – Applied Biosystems stock issued under the employee stock purchase plans during fiscal 1999, 2000, and
PLE Applera – Applied Biosystems Stock 2001 totaled 98,000 shares, 161,000 shares, and 250,000 Options Outstanding shares, respectively. Applera – Celera stock issued under the AP At $ 1.82 – $ 20.00 7,231,559 $ 13.75 5.5 employee stock purchase plans during fiscal 1999, 2000, and At $20.01 – $ 26.00 6,323,738 $ 25.54 9.6 2001 totaled 24,000 shares, 303,000 shares, and 269,000 At $26.01 – $ 60.00 6,986,065 $ 32.26 7.8 shares, respectively. Common stock issued under the At $60.01 – $110.00 7,380,386 $ 95.33 8.6 employee stock purchase plans during fiscal 1999 totaled 168,000 shares of Applera Corporation (predecessor) Options Exercisable common stock. At $ 1.82 – $ 20.00 6,555,559 $ 14.02 At $20.01 – $ 26.00 42,988 $ 21.09 Director Stock Purchase and Deferred Compensation At $26.01 – $ 60.00 2,210,415 $ 28.12 Plan At $60.01 – $110.00 1,880,288 $ 88.84 The Company has a Director Stock Purchase and Deferred Compensation Plan that requires non-employee directors Applera – Celera Stock of the Company to apply at least 50% of their annual Options Outstanding retainer to the purchase of common stock. Purchases of At $ 0.74 – $ 8.50 1,776,552 $ 5.74 5.6 Applera – Applied Biosystems stock and Applera – Celera At $ 8.51 – $ 10.00 6,069,878 $ 8.56 7.5 stock are made in a ratio approximately equal to the number At $10.01 – $ 75.00 3,697,792 $ 27.55 8.5 of shares of Applera – Applied Biosystems stock and At $75.01 – $135.00 1,568,014 $ 110.25 8.2 Applera – Celera stock outstanding. The purchase price is the fair market value on the date of purchase. At June 30, Options Exercisable 2001, the Company had approximately 335,000 shares of At $ 0.74 – $ 8.50 1,580,112 $ 5.83 Applera – Applied Biosystems stock and approximately At $ 8.51 – $ 10.00 2,635,775 $ 8.56 84,000 shares of Applera – Celera stock available for issuance At $10.01 – $ 75.00 638,025 $ 14.98 under this plan. At $75.01 – $135.00 315,854 $ 111.59 Restricted Stock 1999 Stock Incentive Plans As part of the Company’s stock incentive plans, employees The Applera Corporation/Applied Biosystems Group 1999 may be, and non-employee directors are, granted shares of Stock Incentive Plan (the ‘‘Applera – Applied Biosystems restricted stock that will vest when certain continuous Group Plan’’) and the Applera Corporation/Celera Genomics employment/service restrictions and/or specified Group 1999 Stock Incentive Plan (the ‘‘Applera – Celera performance goals are achieved. The fair value of shares Group Plan’’) were first approved in April 1999. The granted is generally expensed over the restricted periods, Applera – Applied Biosystems Group Plan authorizes grants which may vary depending on the estimated achievement of of stock options, stock awards, and performance shares with performance goals. respect to Applera – Applied Biosystems stock. The Applera – Celera Group Plan authorizes grants of stock As a result of the recapitalization of the Company, each options, stock awards, and performance shares with respect share of restricted stock held was redesignated as one to Applera – Celera stock. Directors, certain officers, and key share of Applera – Applied Biosystems stock and 0.5 of a employees with responsibilities involving both the Applied share of Applera – Celera stock prior to giving effect to Biosystems group and the Celera Genomics group may be the Applera – Applied Biosystems stock splits and the granted awards under both incentive plans in a manner Applera – Celera stock split. Restricted stock granted to which reflects their responsibilities. The Company’s Board of employees and non-employee directors totaled 3,600 shares Directors believes that granting awards tied to the of Applera – Applied Biosystems stock and 900 shares of performance of the group in which the participants work Applera – Celera stock during fiscal 2000 and 255,225 shares and, in certain cases the other group, is in the best interests of Applera – Applied Biosystems stock and 63,900 shares of of the Company and its stockholders. Applera – Celera stock during fiscal 2001. Restricted stock granted prior to the recapitalization to employees and non- Employee Stock Purchase Plans employee directors during fiscal 1999 totaled 42,900 shares The Company’s employee stock purchase plans offer U.S. of the Applera Corporation (predecessor) common stock. and certain non-U.S. employees the right to purchase Compensation expense of continuing operations recognized shares of Applera – Applied Biosystems stock and/or by the Company for these awards was $2.3 million, $6.5 Applera – Celera stock. The purchase price in the U.S. is million, and $6.1 million for fiscal 1999, 2000, and 2001, respectively. Unearned compensation included in capital
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APPLERA CORPORATION Notes to Consolidated Financial Statements continued
surplus within stockholders’ equity was $16.6 million at A June 30, 2001. There was no unearned compensation For the years ended June 30, 1999 2000 2001 C
included in stockholders’ equity at June 30, 2000. O
Applied Biosystems Group R
Performance Unit Bonus Plan PO Dividend yield .63% .17% .62%
The Company adopted a Performance Unit Bonus Plan in Volatility 34.40% 52.68% 71.91% RATIO fiscal 1997. The plan utilized stock options and a Risk-free interest rate 5.25% 5.88% 6.53% performance unit bonus pool. Performance units granted Expected option life in years 5.23 4.12 4 under the plan represented the right to receive a cash or
stock payment from the Company at a specified date in the Celera Genomics Group N future. The amount of the payment was determined on the Dividend yield –% –% –% date of the grant. The performance units vested upon shares Volatility 34.40% 99.30% 101.66% of the Company’s common stock attaining and maintaining Risk-free interest rate 5.00% 6.21% 6.53% specified price levels for a specified period. As of June 30, Expected option life in years 5.23 3.5 3.5 2000, three series of performance units were granted under Applera Corporation the plan. Compensation expense recognized under the plan (predecessor) for fiscal 1999 and 2000 was $14.8 million and $53.1 Dividend yield .62% million, respectively. Fiscal 1999 and 2000 compensation Volatility 34.40% expense included $10.1 million and $45.0 million, Risk-free interest rate 4.71% respectively, related to the acceleration of payments under Expected option life in years 5.23 the plan’s three series as a result of the attainment of the performance targets. The vesting of the related stock options For purposes of pro forma disclosure, the estimated fair value was not accelerated. No compensation expense pertaining to of the options is amortized to expense over the options’ the plan was recognized in fiscal 2001. vesting period. The plan was modified in fiscal 2000 to replace the The Company’s pro forma information for the years ended performance units with performance stock options. June 30, 1999, 2000, and 2001 is presented below: Performance stock options vest in equal portions upon the earlier of the shares of Applera – Applied Biosystems stock Applied Biosystems Group attaining and maintaining specified price levels for a specified (Dollar amounts in millions period of time or after a specified future date. except per share amounts) 1999 2000 2001 Accounting for Stock-Based Compensation Income from APB No. 25, ‘‘Accounting for Stock Issued to Employees,’’ continuing operations and FASB Interpretation No. 44 (‘‘FIN No. 44’’), As reported $ 148.4 $ 186.2 $ 212.4 ‘‘Accounting for Certain Transactions Involving Stock Pro forma $ 127.9 $ 140.2 $ 115.6 Compensation – An Interpretation of Accounting Principles Basic earnings Board Opinion No. 25’’ are applied in accounting for stock- from continuing based compensation plans. Accordingly, no compensation operations per share expense has been recognized for stock option and employee As reported $ .74 $ .90 $ 1.01 stock purchase plans, as all options have been issued at fair Pro forma $ .64 $ .68 $ .55 market value. Diluted earnings Pro forma net income and earnings per share information, as from continuing required by SFAS No. 123, ‘‘Accounting for Stock-Based operations per share Compensation,’’ have been determined for employee stock As reported $ .72 $ .86 $ .96 plans under the statement’s fair value method. The fair value Pro forma $ .62 $ .65 $ .52 of the options was estimated at grant date using a Black- Scholes option pricing model with the following weighted average assumptions:
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APPLERA CORPORATION Notes to Consolidated Financial Statements continued Note 9—Additional Information Celera Genomics Group
ORATION (Dollar amounts in millions Selected Accounts except per share amounts) 1999 2000 2001 The following table provides the major components of
ORP Loss from continuing selected accounts of the Consolidated Statements of Financial C operations Position at June 30, 2000 and 2001: A As reported $ (44.9) $ (92.7) $ (186.2) R Pro forma $ (47.5) $ (106.6) $ (223.3) (Dollar amounts in millions) 2000 2001 Basic loss from Other Long-Term Assets PLE continuing Minority equity investments $ 297.7 $ 111.1 AP operations per share Goodwill 129.2 24.4 As reported $ (.89) $ (1.73) $ (3.07) Noncurrent deferred tax asset 52.8 166.6 Pro forma $ (.95) $ (1.98) $ (3.68) Other 143.2 108.7 Diluted loss from Total other long-term assets $ 622.9 $ 410.8 continuing operations per share Other Accrued Expenses As reported $ (.89) $ (1.73) $ (3.07) Deferred revenues $ 70.9 $ 92.5 Pro forma $ (.95) $ (1.98) $ (3.68) Other 129.2 123.3 Applera Corporation Total other accrued expenses $ 200.1 $ 215.8 (Dollar amounts in millions except per share amounts) 1999 2000 2001 Other Long-Term Liabilities Income (loss) from Accrued postretirement benefits $ 77.9 $ 75.5 continuing operations Other 56.3 76.9 As reported $ 96.8 $ 95.5 $ 27.2 Total other long-term liabilities $ 134.2 $ 152.4 Pro forma $ 73.7 $ 35.6 $ (106.6) Minority equity investments consist of common stock in The weighted average fair value of Applera Corporation publicly-traded companies and common stock and preferred (predecessor) stock options granted was $33.54 per share stock in privately-held companies. Unrealized gains and for fiscal 1999. The weighted average fair value of losses on publicly-traded companies were $256.1 million and Applera – Applied Biosystems stock options granted was $.1 million, respectively, at June 30, 2000 and $69.9 million $10.12, $38.00, and $19.94 for fiscal 1999, 2000, and and $3.8 million, respectively, at June 30, 2001. 2001, respectively. The weighted average fair value of Applera – Celera stock options granted was $4.13, $46.41, Related Party Transactions and $32.79 for fiscal 1999, 2000, and 2001, respectively. In June 1999, the Company granted fully vested options to purchase 2.6 million shares of Applera – Celera stock at a price of $6.42 per share to the Institute of Genomic Research (‘‘TIGR’’) and entered into a one-year non- compete agreement with such party. The fair value of such options approximated $7.2 million and was amortized over the life of the non-compete agreement. The fair value of these options were determined under the Black-Scholes model using a volatility assumption of 40%, an expected option life assumption of two years, and a risk-free interest rate of 5.75%. As of June 30, 2001, TIGR held approximately 1.4 million of these options. The President of the Celera Genomics group is also the current Chairman of the Board of Trustees of TIGR. Also, an immediate family member of the President of the Celera Genomics group currently serves as TIGR’s President and is on TIGR’s Board of Trustees. During fiscal 2001, the Celera Genomics group entered into an agreement to perform sequencing services for TIGR and recognized revenues and collected cash of $7.0 million related to such services. Additionally, during fiscal 2001, the Applied Biosystems group recognized revenues of $7.0 million from TIGR, of which $1.8 million was receivable as of June 30, 2001.
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APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Note 10—Commitments and Contingencies On May 21, 1998, Amersham filed a patent infringement A action against the Company in the United States District Future minimum payments at June 30, 2001 under non- C cancelable operating leases for real estate and equipment Court for the Southern District of New York. The O were as follows: complaint alleges that the Company is infringing, R contributing to the infringement of, and inducing the PO infringement of U.S. Patent No. 4,707,235 (‘‘the ‘235
(Dollar amounts in millions) RATIO patent’’) by reason of the Company’s sale of certain ABI 2002 $ 54.5 PRISMTM DNA sequencing systems. The complaint seeks 2003 39.4 injunctive and monetary relief. The Company answered the
2004 28.3 complaint, alleging that the ‘235 patent is invalid and that N 2005 21.1 the Company does not infringe the ‘235 patent. The matters 2006 16.0 described in this paragraph and the immediately preceding 2007 and thereafter 58.7 paragraph have been consolidated into a single case to be heard in the United States District Court for the Northern Total $ 218.0 District of California. In December 2000, the court granted the Company’s motion for summary judgment of non- Rental expense was $43.1 million for fiscal 1999, $45.2 infringement of the ‘235 patent. However, on December 18, million for fiscal 2000, and $65.2 million for fiscal 2001. 2000, Amersham filed a new complaint alleging that the Amersham Company is infringing the ‘235 patent by reason of the Company’s sale of certain DNA sequencing systems, which On November 18, 1997, Amersham Pharmacia Biotech, Inc. allegations were not in the previous suit under the ‘235 (‘‘Amersham’’) filed a patent infringement action against the patent. This action is in the early stages of discovery. Company in the United States District Court for the Northern District of California. The complaint alleges that On May 30, 2000, the Company filed a patent infringement the Company is directly, contributorily, or by inducement action against Amersham in the United States District Court infringing U.S. Patent No. 5,688,648 (‘‘the ‘648 patent’’). for the Northern District of California. The Company asserts Amersham asserts that the Company’s use and sale of DNA that one of its patents (U.S. Patent No. 5,945,526) is analysis reagents and systems that incorporate ‘‘BigDye’’ infringed by reason of Amersham’s sale of DNA analysis fluorescence detection technology infringe the ‘648 patent, reagents and systems that incorporate ET Terminator and seeks injunctive and monetary relief. The Company fluorescence detection technology. The claims construction answered the complaint, alleging that the ‘648 patent is hearing previously scheduled for June 7, 2001 has been invalid and unenforceable, and that the Company has not postponed. infringed the ’648 patent. In December 2000, the court On July 10, 2001, United States Judge Charles R. Breyer granted Amersham’s motion for summary judgment in part, stayed all cases in the litigation described above for the finding that certain of the Company’s activities infringe the purpose of facilitating court ordered settlement mediation. claims of the ‘648 patent, but denied Amersham’s motion for The stay is scheduled to expire on March 11, 2002. summary judgment that the Company induced its customers to infringe the claims of the ‘648 patent. On April 6, 2001, The Company believes that the claims asserted by Amersham the court granted the Company’s motion for summary and Molecular Dynamics in the foregoing cases are without judgment finding that the Company’s recently introduced merit and intends to defend the cases vigorously. However, BigDye Version 3.0 dye technology does not infringe the the outcome of this or any other litigation is inherently ‘648 patent. uncertain, and the Company cannot be sure that it will prevail in any of these matters. An adverse determination in On March 13, 1998, the Company filed a patent any of the actions brought by Amersham could have a infringement action against Amersham and Molecular material adverse effect on the financial statements of the Dynamics, Inc. in the United States District Court for the Company. Northern District of California. The Company asserts that one of its patents (U.S. Patent No. 4,811,218) is infringed by Other reason of Molecular Dynamics’ and Amersham’s sale of The Company has been named as a defendant in several certain DNA analysis systems (e.g., the MegaBACE 1000 other legal actions, including patent, commercial, and System). In response, Amersham has asserted various environmental, arising from the conduct of normal business affirmative defenses and several counterclaims, including that activities. Although the amount of any liability that might the Company is infringing two patents, U.S. Patent No. arise with respect to any of these matters cannot be 5,091,652 (‘‘the ‘652 patent’’) and U.S. Patent No. accurately predicted, the resulting liability, if any, will not in 5,459,325, each owned by or licensed to Molecular TM the opinion of management have a material adverse effect on Dynamics, by selling certain ABI PRISM DNA sequencing systems. In December 2000, the court granted the the financial statements of the Company. Company’s motion for summary judgment of non- infringement of the ‘652 patent. The trial date previously scheduled for August 6, 2001 was vacated in July 2001.
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APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Note 11—Financial Instruments During the fourth quarter of fiscal 2001, the Financial Accounting Standards Board’s Derivative Implementation ORATION In June 1998, the FASB issued Statement of Financial Accounting Standards (‘‘SFAS’’) No. 133, ‘‘Accounting for Group (‘‘DIG’’) issued guidance that would allow a company Derivative Instruments and Hedging Activities,’’ amended in to defer in other comprehensive income, all or part of the ORP changes in the option’s time value for option-based hedging
C June 2000 by SFAS No. 138, ‘‘Accounting for Certain strategies that are perfectly or highly effective. The Company
A Derivative Instruments and Certain Hedging Activities.’’ changed its methodology of accounting for currency options R These statements require the recognition of all derivative financial instruments as either assets or liabilities in the during the fourth quarter of fiscal 2001 based on this new guidance from the DIG. Prior to this new guidance, any
PLE statement of financial position and the measurement of those instruments at fair value. The accounting for changes in the changes in the time value component of a currency option
AP fair value of a derivative is driven by the intended use of the were recognized in earnings in the period in which they derivative and the resulting designation. The Company occurred. For fiscal 2001, the Company recognized expense adopted these statements effective July 1, 2000. The of $3.4 million included in other income (expense), net in cumulative effect of adoption resulted in an immaterial the Consolidated Statements of Operations, which adjustment to the consolidated financial statements. represented the change in the time value component of the fair value of option contracts designated as cash flow hedges. The Company’s foreign currency risk management strategy utilizes derivative instruments to hedge certain foreign Other Foreign Currency Derivatives currency forecasted revenues and to offset the impact of The Company also uses derivative financial instruments to changes in foreign currency exchange rates on certain foreign hedge against the adverse effects that foreign currency currency-denominated receivables and payables. The exchange rate fluctuations may have on its foreign currency- principal objective of this strategy is to minimize the risks denominated net asset positions. The gains and losses on and/or costs associated with the Company’s global financing these derivatives are expected to largely offset transaction and operating activities. The Company utilizes foreign losses and gains, respectively, on the underlying foreign exchange forward, option, and range forward contracts to currency-denominated assets and liabilities, both of which are manage its foreign currency exposures, and an interest rate recorded in other income (expense), net in the Consolidated swap to manage its interest rate exposure. The Company Statement of Operations. does not use derivative financial instruments for trading purposes or for activities other than risk management, nor is Interest Rate Risk Management it a party to leveraged derivatives. The Company maintains an interest rate swap in conjunction The fair value of foreign currency derivative contracts is with a five-year Japanese yen debt obligation (see Note 3). recorded in either prepaid expenses and other current assets The interest rate swap involves the payment of a fixed rate or other accrued expenses. The fair value of the interest rate of interest and the receipt of a floating rate of interest swap is recorded in other long-term liabilities. without the exchange of the underlying notional loan principal amount. Under the terms of this contract, the Cash Flow Hedges Company will make fixed interest payments of 2.1% while The Company’s international sales are typically denominated receiving interest at a LIBOR floating rate. No other cash in the customers’ local (non-U.S. dollar) currency. The payments will be made unless the contract is terminated Company uses foreign exchange forward, option, and range prior to maturity, in which case the amount to be paid or forward contracts to hedge a portion of forecasted received in settlement will be established by agreement at the international sales not denominated in U.S. dollars. The time of termination. The agreed upon amount would usually Company utilizes hedge accounting on derivative contracts represent the net present value at current interest rates of the which are considered highly effective in offsetting the remaining obligation to exchange payments under the terms changes in fair value of the forecasted sales transactions of the contract. caused by movements in foreign currency exchange rates. At June 30, 2001, the Company had a liability of $.5 million These contracts are designated as cash flow hedges and the which represented the fair value of the interest rate swap. effective portion of the change in the fair value of these Changes in the fair value of the interest rate swap are contracts is recorded in other comprehensive income (loss) in recognized in other comprehensive income. A change in the Consolidated Statements of Financial Position until the interest rates would have no impact on the Company’s underlying external forecasted transaction affects earnings. At reported interest expense and related cash payments because that time, the gain or loss on the derivative instrument, the floating rate debt and fixed rate interest swap have the which had been deferred in other comprehensive income same maturity and are based on the same interest rate index. (loss), is reclassified to net revenues in the Consolidated Statements of Operations. During fiscal 2001, the Company Concentration of Credit Risk recognized net gains of $17.8 million in net revenues from The forward contracts, options, and swap used by the derivative instruments designated as cash flow hedges of Company in managing its foreign currency and interest rate anticipated sales. At June 30, 2001, $17.8 million of exposures contain an element of risk in that the derivative gains ($11.2 million net of deferred taxes) counterparties may be unable to meet the terms of the recorded in other comprehensive income (loss) are expected agreements. However, the Company minimizes this risk by to be reclassified to earnings during the next twelve months. limiting the counterparties to a diverse group of highly-rated
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APPLERA CORPORATION Notes to Consolidated Financial Statements continued
major domestic and international financial institutions with market prices, if available, or quoted market prices of A which the Company has other financial relationships. The financial instruments with similar characteristics. The fair C
Company is exposed to potential losses in the event of non- value of debt is based on the current rates offered to the O
performance by these counterparties; however, the Company Company for debt of similar remaining maturities. The R does not expect to record any losses as a result of following table presents the carrying amounts and fair values PO counterparty default. The Company does not require and is of the Company’s significant financial instruments at June RATIO not required to place collateral for these financial 30, 2000 and 2001: instruments. Other financial instruments that potentially subject the Company to concentrations of credit risk are cash 2000 2001 Carrying Fair Carrying Fair and cash equivalents, short-term investments, and accounts N (Dollar amounts in millions) Amount Value Amount Value receivable. The Company minimizes the risk related to cash and cash equivalents and short-term investments by utilizing Cash and cash highly-rated financial institutions that invest in a broad and equivalents $ 964.5 $ 964.5 $ 608.5 $ 608.5 diverse range of financial instruments. The Company has Short-term investments $ 541.1 $ 541.1 $ 779.3 $ 779.5 established guidelines relative to credit ratings and maturities Currency forwards and that seek to maintain safety and liquidity. options $ 3.7 $ 3.0 $ 2.6 $ 20.3 Concentration of credit risk with respect to accounts Interest rate swap $ - $ (1.0)$ - $ (.5) receivable is limited due to the Company’s large and diverse Other investments $ - $ - $ 9.0 $ 9.0 customer base, which is dispersed over differing geographic Minority equity areas. Allowances are maintained for potential credit losses investments $ 42.5 $ 297.7 $ 45.0 $ 111.1 and such losses have been within management’s expectations. Short-term debt $ 15.7 $ 15.7 $ 45.2 $ 45.2 Fair Value Long-term debt $ 82.1 $ 82.1 $-$- The fair value of significant financial instruments held or Net unrealized gains and losses on short-term investments owned by the Company is estimated using various methods. and minority equity investments are reported as a separate Cash and cash equivalents approximate their carrying component of accumulated other comprehensive income amount. The fair values of short-term investments and (loss) in the Consolidated Statements of Financial Position. minority equity investments are estimated based on quoted
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APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Note 12—Quarterly Financial Information (Unaudited) ORATION The following is a summary of quarterly financial results: ORP
C First Quarter Second Quarter Third Quarter Fourth Quarter
A (Dollar amounts in millions except per share amounts) 2000 2001 2000 2001 2000 2001 2000 2001 R Net revenues $ 288.8 $ 367.4 $ 327.4 $ 413.3 $ 363.1 $ 447.1 $ 391.7 $ 416.3 Gross margin 153.5 198.2 175.9 213.5 201.2 236.3 216.3 215.4 PLE Net income (loss) 10.1 24.4 19.2 27.5 32.8 28.3 33.4 (53.0) AP Applied Biosystems Group Dividends per share $ .0425 $ .0425 $ .0425 $ .0425 $ .085 $ .085 Net income per share Basic $ .14 $ .23 $ .21 $ .28 $ .27 $ .27 $ .27 $ .23 Diluted .14 .22 .20 .26 .26 .26 .26 .22 Celera Genomics Group Net loss per share Basic and diluted $ (.38) $ (.43) $ (.47) $ (.49) $ (.45) $ (.48) $ (.43) $ (1.66) Price range of common stock Applied Biosystems Group 5 3 15 5 1 7 15 High $ 38/16 $ 126/4 $62/16 $ 133/16 $ 160 $94/4 $ 111/16 $36/100 9 3 5 49 13 1 Low $ 26/16 $64/4 $30/8 $75$50$18/100 $42/16 $24/2 Celera Genomics Group 29 9 13 1 9 9 High $ 26 /32 $ 118/16 $96/32 $ 100/2 $ 276 $54/10 $ 151 $49/10 7 3 3 1 3 2 Low $ 7/8 $80/16 $15/16 $29/4 $73$24$50/16 $26/10 There were no dividends on Applera – Celera stock for the $2.1 million of acquisition-related before-tax costs and a periods presented. before-tax gain of $8.2 million from the sale of real estate. There was no aggregate after-tax effect of the above items Events Impacting Comparability for the second and fourth quarters. Fiscal 2000 Second and fourth quarter results included Fiscal 2001 First and second quarter results included before- before-tax gains of $25.8 million and $22.8 million, tax non-recurring gains of $12.0 million and $3.0 million, respectively, in non-recurring gains primarily related to the respectively, primarily related to the sale of the Company’s sale of a portion of the Company’s minority equity minority equity investments. The fourth quarter results investments. Second and fourth quarter results included included a before-tax charge of $69.1 million for the before-tax charges of $21.6 million and $23.4 million, impairment of goodwill and other intangibles related to respectively, related to the acceleration of certain long-term Paracel. compensation programs. Fourth quarter results included
54 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 55 of 67 Time: 18:19:13, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Note 13—Accumulated Other Comprehensive Income (Loss) A C
Accumulated other comprehensive income (loss), net of tax, O for fiscal 1999, 2000, and 2001 was as follows: R PO
Unrealized Unrealized Foreign Minimum Accumulated RATIO Gain Gain on Currency Pension Other (Loss) on Hedge Translation Liability Comprehensive (Dollar amounts in millions) Investments Contracts Adjustments Adjustment Income (Loss) Balance at June 30, 1998 $ (1.4) $ - $ (7.8) $ (.4) $ (9.6) N Activity 11.9 (5.4) (1.7) 4.8 Balance at June 30, 1999 10.5 (13.2) (2.1) (4.8) Activity 155.6 (25.2) (.1) 130.3 Balance at June 30, 2000 166.1 (38.4) (2.2) 125.5 Activity (123.2) 11.2 (34.2) (35.2) (181.4) Balance at June 30, 2001 $ 42.9 $ 11.2 $ (72.6) $ (37.4) $ (55.9) Information regarding the income tax effects for items of The currency translation adjustments are not currently other comprehensive income (loss) are as follows: adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Before- Tax After- Tax Benefit Tax (Dollar amounts in millions) Amount (Expense) Amount Note 14—Discontinued Operations For the Year Ended Effective May 28, 1999, the Company completed the sale of June 30, 2000 its Analytical Instruments business to EG&G, Inc. Analytical Unrealized gains on investments $ 293.5 $ (106.3) $ 187.2 Instruments, formerly a unit of the Applied Biosystems Less: Reclassification group, developed, manufactured, marketed, sold, and adjustments for gains realized serviced analytical instruments used in a variety of markets. in net income 48.6 (17.0) 31.6 Net unrealized gains on The aggregate consideration received by the Company was investments 244.9 (89.3) 155.6 $425 million, consisting of $275 million in cash and one- year secured promissory notes in the aggregate principal Foreign currency translation amount of $150 million bearing an interest rate of 5% per adjustment (25.2) (25.2) annum. The promissory notes were collected in fiscal 2000. Minimum pension liability In fiscal 1999, the Company recognized a net gain on adjustment (1.3) 1.2 (.1) disposal of discontinued operations of $100.2 million, net of Other comprehensive income $ 218.4 $ (88.1) $ 130.3 $87.8 million of income taxes. For the Year Ended Amounts previously reported for Analytical Instruments were June 30, 2001 reclassified and stated as discontinued operations. There were Unrealized losses on investments $ (174.6) $ 61.1 $ (113.5) no remaining assets, liabilities, or operations within Less: Reclassification discontinued operations at or for the fiscal years ended June adjustments for gains realized 30, 2000 and 2001. Summary results for the eleven months in net income 14.9 (5.2) 9.7 ended May 28, 1999 prior to discontinuance were as follows: Net unrealized losses on investments (189.5) 66.3 (123.2) (Dollar amounts in millions) 1999 Unrealized gains on hedge Net revenues $ 479.4 contracts 35.1 (12.4) 22.7 Total costs and expenses 509.7 Less: Reclassification Provision (benefit) for income taxes (9.2) adjustments for gains realized Income (loss) from discontinued operations $ (21.1) in net income 17.8 (6.3) 11.5 Net unrealized gains on hedge Income Taxes contracts 17.3 (6.1) 11.2 Income (loss) before income taxes of discontinued operations Foreign currency translation for the eleven months ended May 28, 1999 consisted of the adjustment (34.2) (34.2) following: Minimum pension liability adjustment (54.1) 18.9 (35.2) (Dollar amounts in millions) 1999 Other comprehensive loss $ (260.5) $ 79.1 $ (181.4) United States $ (36.2) Foreign 5.9 Total $ (30.3)
APPLERA CORPORATION Annual Report 2001 55 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 56 of 67 Time: 18:19:14, Date: 09/17/01, BL: 0
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
The components of the provision (benefit) for income taxes resources, legal, accounting, auditing, tax, treasury, strategic of discontinued operations for the eleven months ended May planning and environmental services) have been allocated to ORATION 28, 1999 consisted of the following: the Applied Biosystems group or the Celera Genomics group based upon identification of such services specifically ORP (Dollar amounts in millions) 1999 benefiting each group. A portion of the Company’s costs of C Currently Payable administrative shared services (such as information A technology services) has been allocated in a similar manner. R Domestic $ (13.7) Foreign 4.5 Where determination based on specific usage alone is not practical, other methods and criteria were used that
PLE Provision (benefit) for income taxes from discontinued operations $ (9.2) management believes are equitable and provide a reasonable
AP estimate of the cost attributable to each group. Management For the eleven months ended May 28, 1999, the effective believes that the allocation methods developed are reasonable tax rate for discontinued operations was 30%. The difference and have been consistently applied. between the effective tax rate and the statutory tax rate of The federal income taxes of the Company and its subsidiaries 35% was mainly attributed to benefits from the use of U.S. which own assets allocated between the groups are alternative minimum tax credit carryforwards, benefits from determined on a consolidated basis using the asset and the use of a foreign sales corporation and federal research tax liability approach prescribed by SFAS No. 109, ‘‘Accounting credits, and restructuring charges. for Income Taxes.’’ The federal income tax provisions and related tax payments or refunds are allocated between the Note 15—Consolidating Information groups based on a consolidated return approach taking into Presented below is the consolidating financial information account each group’s relative contribution (positive or reflecting the businesses of the individual groups, including negative) to the Company’s consolidated federal taxable the allocation of expenses between groups in accordance income, tax liability and tax credit position. Intergroup with the Company’s allocation policies, as well as other transactions are taxed as if each group were a stand-alone related party transactions, such as sales of products between company. Tax benefits that cannot be used by the group groups and interest income and expense on intercompany generating those benefits, but can be used on a consolidated borrowings. Earnings attributable to each group has been basis, are transferred to the group that can utilize such determined in accordance with accounting principles benefits. Existing tax benefits acquired by either group in a generally accepted in the U.S. business combination which are utilized by the other group will be reimbursed to the group that acquired such benefits. The management and allocation policies applicable to the Tax benefits generated by the Celera Genomics group attribution of assets, liabilities, revenues and expenses to the commencing July 1, 1998, which could be utilized on a Applied Biosystems group and the Celera Genomics group consolidated basis, were reimbursed by the Applied may be modified or rescinded, or additional policies may be Biosystems group to the Celera Genomics group up to a adopted, at the sole discretion of the Company’s Board of limit of $75 million. Directors at any time without stockholder approval. The Board of Directors would make any decision in accordance If the Company allocates debt for a particular financing in its with its good faith business judgment that its decision is in entirety to one group, that debt will bear interest at the rate the best interests of the Company and all of the stockholders determined by the Company’s Board of Directors. If the as a whole. Company allocates preferred stock in its entirety to one group, the Company will charge the dividend cost to that The attribution of the assets, liabilities, revenues and group in a similar manner. If the interest or dividend cost is expenses to each group is primarily based on specific higher than the Company’s actual cost, the other group will identification of the businesses included in each group. receive a credit for an amount equal to the difference as Where specific identification was not practical, other compensation for the use of the Company’s credit capacity. methods and criteria were used that management believes are Any expense related to debt or preferred stock of the equitable and provide a reasonable estimate of the assets, Company that is allocated in its entirety to a group will be liabilities, revenues and expenses attributable to each group. allocated in whole to that group. It is not practical to specifically identify a portion of corporate overhead expenses attributable to each of the Cash or other property that the Company allocates to one groups. The Company allocates such corporate overhead group that is transferred to the other group, could, if so expenses primarily based upon headcount, total expenses, and determined by the Company’s Board of Directors, be revenues attributable to each group. accounted for either as a short-term loan or as a long-term loan. Short-term loans bear interest at a rate equal to the Sales of products and services from one group to another weighted average interest rate of the Company’s pooled group within Applera Corporation are recorded as debt. If the Company does not have any pooled debt, the intergroup revenues. These sales are made on terms that Company’s Board of Directors will determine the rate of would be available from third parties in commercial interest for such loan. The Company’s Board of Directors transactions. establishes the terms on which long-term loans between the The Company’s shared corporate services and related balance groups will be made, including interest rate, amortization sheet amounts (such as executive management, human schedule, maturity, and redemption terms.
56 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 57 of 67 Time: 18:19:15, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
During fiscal 2001, the Company formed Celera Diagnostics, value, as determined by the Company’s Board of Directors. A a joint venture of the Applied Biosystems group and the The consideration for such transfers may be paid by one C
Celera Genomics group. Refer to Note 2 of the Applied group to the other in cash or other consideration, as O
Biosystems group combined financial statements and Note 2 determined by the Company’s Board of Directors. R of the Celera Genomics group combined financial statements PO See Note 1 to the Applied Biosystems group’s and the for a description of the Celera Diagnostics joint venture. As Celera Genomics group’s combined financial statements for a RATIO part of the formation of the joint venture, the Applied detailed description of allocation policies. Biosystems group will reimburse the Celera Genomics group for tax benefits generated by Celera Diagnostics to the extent In the following tables, the ‘‘other’’ column represents the
such tax benefits are utilized by the Applied Biosystems elimination of intergroup activity and the results of the N group. These tax benefits are not subject to the $75 million Celera Diagnostics joint venture in fiscal year 2001. Other limit described above. total assets of $173.0 million for fiscal 1999 included the $150 million Celera Genomics group note receivable from Transfers of assets can be made between groups without the Applied Biosystems group. stockholder approval. Such transfers will be made at fair
APPLERA CORPORATION Annual Report 2001 57 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 58 of 67 Time: 18:19:16, Date: 09/17/01, BL: 0
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Consolidating Statement of Operations For the Year Ended June 30, 2001 ORATION Applied Celera Biosystems Genomics Eliminations/ ORP
C (Dollar amounts in millions) Group Group Other Consolidated
A Net revenues from external customers $ 1,555.4 $ 88.7 $ - $ 1,644.1 R Intergroup revenues 64.1 .7 (64.8) Net Revenues 1,619.5 89.4 (64.8) 1,644.1 PLE Cost of sales 774.5 43.0 (36.8) 780.7
AP Gross Margin 845.0 46.4 (28.0) 863.4 Selling, general and administrative 337.8 49.0 53.3 440.1 Corporate allocated expenses 42.8 9.3 (52.1) Research, development and engineering 184.5 164.7 (25.8) 323.4 Amortization of goodwill and other intangibles 43.9 43.9 Restructuring and other special charges 69.1 69.1 Operating Income (Loss) 279.9 (289.6) (3.4) (13.1) Gain on investments 15.0 15.0 Interest expense (1.3) (.8) (2.1) Interest income 16.8 63.5 80.3 Other income (expense), net (5.9) (5.8) 5.0 (6.7) Income (Loss) Before Income Taxes 304.5 (232.7) 1.6 73.4 Provision (benefit) for income taxes 92.1 (46.5) .6 46.2 Net Income (Loss) $ 212.4 $ (186.2) $ 1.0 $ 27.2
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APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Consolidating Statement of Financial Position At June 30, 2001 A C
Applied Celera O Biosystems Genomics Eliminations/ R PO (Dollar amounts in millions) Group Group Other Consolidated Assets RATIO Current assets Cash and cash equivalents $ 392.4 $ 216.1 $ - $ 608.5
Short-term investments 779.5 779.5 N Accounts receivable, net 382.5 24.0 (5.7) 400.8 Inventories 140.8 6.2 2.7 149.7 Prepaid expenses and other current assets 98.2 4.8 103.0 Total current assets 1,013.9 1,030.6 (3.0) 2,041.5 Property, plant and equipment, net 315.4 123.5 (3.3) 435.6 Other long-term assets 348.6 66.0 (3.8) 410.8 Total Assets $ 1,677.9 $ 1,220.1 $ (10.1) $ 2,887.9 Liabilities And Stockholders’ Equity Current liabilities Loans payable $ 14.7 $ - $ - $ 14.7 Current portion of long-term debt 30.5 30.5 Accounts payable 162.1 21.0 (4.8) 178.3 Accrued salaries and wages 49.5 15.1 .3 64.9 Accrued taxes on income 82.7 2.6 (2.3) 83.0 Other accrued expenses 168.6 46.9 .3 215.8 Total current liabilities 508.1 85.6 (6.5) 587.2 Other long-term liabilities 128.6 23.8 152.4 Total Liabilities 636.7 109.4 (6.5) 739.6 Stockholders’ Equity Applera Corporation—Applied Biosystems stock 2.1 2.1 Applera Corporation—Celera Genomics stock .6 .6 Other stockholders’ equity 1,041.2 1,110.7 (6.3) 2,145.6 Total Stockholders’ Equity 1,041.2 1,110.7 (3.6) 2,148.3 Total Liabilities And Stockholders’ Equity $ 1,677.9 $ 1,220.1 $ (10.1) $ 2,887.9
APPLERA CORPORATION Annual Report 2001 59 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 60 of 67 Time: 18:19:21, Date: 09/17/01, BL: 0
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Consolidating Statement of Cash Flows For the Year Ended June 30, 2001 ORATION Applied Celera Biosystems Genomics Eliminations/ ORP
C (Dollar amounts in millions) Group Group Other Consolidated
A Operating Activities From Continuing Operations R Net income (loss) $ 212.4 $ (186.2) $ 1.0 $ 27.2 Adjustments to reconcile net income (loss) to net cash provided PLE by operating activities
AP Depreciation and amortization 66.8 65.5 (3.1) 129.2 Impairment of goodwill and other intangibles 69.1 69.1 Long-term compensation programs 4.5 1.6 6.1 Deferred income taxes 20.5 (8.5) 4.0 16.0 Gains from sales of assets (15.0) (15.0) Loss from joint venture 5.0 (5.0) Nonreimbursable utilization of tax benefits generated by the Celera Genomics group 32.2 (32.2) Changes in operating assets and liabilities Decrease in tax benefit receivable from the Applied Biosystems group 16.7 (16.7) Increase in accounts receivable (42.3) (9.1) 2.1 (49.3) (Increase) decrease in inventories 4.2 (2.9) (.4) .9 Increase in prepaid expenses and other assets (34.3) (.2) .1 (34.4) Increase (decrease) in accounts payable and other liabilities (107.3) 32.6 11.3 (63.4) Net Cash Provided (Used) By Operating Activities 141.7 (48.6) (6.7) 86.4 Investing Activities From Continuing Operations Additions to property, plant and equipment, net (143.6) (33.8) .1 (177.3) Purchases of short-term investments, net (238.1) (238.1) Acquisitions and investments, net (5.9) (9.6) 6.6 (8.9) Proceeds from the sale of assets, net 15.4 15.4 Net Cash Used By Investing Activities (134.1) (281.5) 6.7 (408.9) Net Cash From Continuing Operations Before Financing Activities 7.6 (330.1) (322.5) Discontinued Operations Net cash used by operating activities (2.9) (2.9) Net Cash From Discontinued Operations Before Financing Activities (2.9) (2.9) Financing Activities Net change in loans payable 1.6 1.6 Principal payments on long-term debt (46.0) (46.0) Dividends (35.7) (35.7) Proceeds from stock issued for stock plans 37.8 22.3 60.1 Net Cash Provided (Used) For Financing Activities 3.7 (23.7) (20.0) Effect Of Exchange Rate Changes On Cash (10.6) (10.6) Net Change In Cash And Cash Equivalents (2.2) (353.8) (356.0) Cash And Cash Equivalents Beginning Of Year 394.6 569.9 964.5 Cash And Cash Equivalents End Of Year $ 392.4 $ 216.1 $ - $ 608.5
60 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 61 of 67 Time: 18:19:23, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Consolidating Statement of Operations For the Year Ended June 30, 2000 A C
Applied Celera O Biosystems Genomics Eliminations/ R PO (Dollar amounts in millions) Group Group Other Consolidated Net revenues from external customers $ 1,328.3 $ 42.7 $ - $ 1,371.0 RATIO Intergroup revenues 59.8 (59.8) Net Revenues 1,388.1 42.7 (59.8) 1,371.0
Cost of sales 637.7 15.0 (28.6) 624.1 N Gross Margin 750.4 27.7 (31.2) 746.9 Selling, general and administrative 348.0 35.5 53.4 436.9 Corporate allocated expenses 45.9 7.5 (53.4) Research, development and engineering 141.2 148.6 (34.2) 255.6 Amortization of goodwill and intangibles 4.2 4.2 Restructuring and other special charges 2.1 2.1 Operating Income (Loss) 213.2 (168.1) 3.0 48.1 Gain on investments 48.6 48.6 Interest expense (1.4) (2.1) (3.5) Intergroup interest expense (6.7) 6.7 Interest income 18.6 20.8 39.4 Intergroup interest income 6.7 (6.7) Other income (expense), net 3.4 .1 3.5 Income (Loss) Before Income Taxes 275.7 (142.7) 3.1 136.1 Provision (benefit) for income taxes 89.5 (50.0) 1.1 40.6 Net Income (Loss) $ 186.2 $ (92.7) $ 2.0 $ 95.5
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APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Consolidating Statement of Financial Position At June 30, 2000 ORATION Applied Celera Biosystems Genomics Eliminations/ ORP
C (Dollar amounts in millions) Group Group Other Consolidated
A Assets R Current assets Cash and cash equivalents $ 394.6 $ 569.9 $ - $ 964.5 PLE Short-term investments 541.1 541.1
AP Tax benefit receivable from the Applied Biosystems group 16.7 (16.7) Accounts receivable, net 367.4 14.9 (3.7) 378.6 Inventories 154.5 3.3 157.8 Prepaid expenses and other current assets 81.4 2.4 (.3) 83.5 Total current assets 997.9 1,148.3 (20.7) 2,125.5 Property, plant and equipment, net 230.9 111.4 (7.4) 334.9 Other long-term assets 469.4 153.6 (.1) 622.9 Total Assets $ 1,698.2 $ 1,413.3 $ (28.2) $ 3,083.3 Liabilities And Stockholders’ Equity Current liabilities Loans payable $ 15.7 $ - $ - $ 15.7 Tax benefit payable to Celera Genomics group 16.7 (16.7) Accounts payable 173.7 21.5 (3.8) 191.4 Accrued salaries and wages 79.4 10.3 89.7 Accrued taxes on income 149.5 2.9 (2.8) 149.6 Other accrued expenses 167.7 32.5 (.1) 200.1 Total current liabilities 602.7 67.2 (23.4) 646.5 Long-term debt 36.1 46.0 82.1 Other long-term liabilities 125.0 9.2 134.2 Total Liabilities 763.8 122.4 (23.4) 862.8 Stockholders’ Equity Applera Corporation—Applied Biosystems stock 2.1 2.1 Applera Corporation—Celera Genomics stock .6 .6 Other stockholders’ equity 934.4 1,290.9 (7.5) 2,217.8 Total Stockholders’ Equity 934.4 1,290.9 (4.8) 2,220.5 Total Liabilities And Stockholders’ Equity $ 1,698.2 $ 1,413.3 $ (28.2) $ 3,083.3
62 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 63 of 67 Time: 18:19:28, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Consolidating Statement of Cash Flows For the Year Ended June 30, 2000 A C
Applied Celera O Biosystems Genomics Eliminations/ R PO (Dollar amounts in millions) Group Group Other Consolidated Operating Activities From Continuing Operations RATIO Net income (loss) $ 186.2 $ (92.7) $ 2.0 $ 95.5 Adjustments to reconcile net income (loss) to net cash provided
by operating activities N Depreciation and amortization 54.5 29.6 (3.4) 80.7 Long-term compensation programs 9.7 .8 10.5 Deferred income taxes (19.4) (7.0) (26.4) Gains from sales of assets (56.8) (56.8) Changes in operating assets and liabilities Increase in tax benefit receivable from the Applied Biosystems group (6.8) 6.8 Increase in accounts receivable (62.2) (11.6) 1.3 (72.5) (Increase) decrease in inventories (2.8) .6 (2.2) Increase in prepaid expenses and other assets (22.4) (.4) (22.8) Increase in accounts payable and other liabilities 80.0 29.2 (7.0) 102.2 Net Cash Provided (Used) By Operating Activities 166.8 (58.3) (.3) 108.2 Investing Activities From Continuing Operations Additions to property, plant and equipment, net (94.5) (29.5) .3 (123.7) Purchases of short-term investments, net (541.1) (541.1) Acquisitions and investments, net (20.7) (2.3) (23.0) Proceeds from the sale of assets, net 82.8 82.8 Proceeds from the collection of notes receivable 150.0 150.0 Net Cash Provided (Used) By Investing Activities 117.6 (572.9) .3 (455.0) Net Cash From Continuing Operations Before Financing Activities 284.4 (631.2) (346.8) Discontinued Operations Net cash used by operating activities (15.1) (15.1) Net Cash From Discontinued Operations Before Financing Activities (15.1) (15.1) Financing Activities Net change in loans payable 6.7 46.0 52.7 Dividends (26.3) (26.3) Net proceeds from follow-on stock Offering 943.3 943.3 Proceeds from stock issued for stock plans 43.4 17.6 61.0 (Collection) payment of note (receivable) payable (150.0) 150.0 Net cash allocated (to) from groups 27.3 (27.3) Net Cash Provided (Used) For Financing Activities (98.9) 1,129.6 1,030.7 Effect Of Exchange Rate Changes On Cash (12.3) (12.3) Net Change In Cash And Cash Equivalents 158.1 498.4 656.5 Cash And Cash Equivalents Beginning Of Year 236.5 71.5 308.0 Cash And Cash Equivalents End Of Year $ 394.6 $ 569.9 $ - $ 964.5
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APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Consolidating Statement of Operations For the Year Ended June 30, 1999 ORATION Applied Celera Biosystems Genomics Eliminations/ ORP
C (Dollar amounts in millions) Group Group Other Consolidated
A Net revenues from external customers $ 1,204.4 $ 12.5 $ - $ 1,216.9 R Intergroup revenues 17.3 (17.3) Net Revenues 1,221.7 12.5 (17.3) 1,216.9 PLE Cost of sales 548.4 4.7 (4.0) 549.1
AP Gross Margin 673.3 7.8 (13.3) 667.8 Selling, general and administrative 302.2 23.1 38.8 364.1 Corporate allocated expenses 33.7 5.1 (38.8) Research, development and engineering 133.5 43.7 (2.7) 174.5 Restructuring and other special charges 16.0 4.6 20.6 Operating Income (Loss) 187.9 (68.7) (10.6) 108.6 Gain on investments 6.1 6.1 Interest expense (3.8) (3.8) Intergroup interest expense (.7) .7 Interest income 2.4 .5 2.9 Intergroup interest income .7 (.7) Other income (expense), net .5 .5 Income (Loss) Before Income Taxes 192.4 (67.5) (10.6) 114.3 Provision (benefit) for income taxes 30.7 (22.6) (4.0) 4.1 Minority interest 13.3 13.3 Income (Loss) From Continuing Operations 148.4 (44.9) (6.6) 96.9 Discontinued Operations, Net Of Income Taxes Loss from discontinued operations (21.1) (21.1) Gain on disposal of discontinued operations 100.1 100.1 Net Income (Loss) $ 227.4 $ (44.9) $ (6.6) $ 175.9
64 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 65 of 67 Time: 18:19:32, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Consolidating Statement of Financial Position At June 30, 1999 A C
Applied Celera O Biosystems Genomics Eliminations/ R PO (Dollar amounts in millions) Group Group Other Consolidated RATIO Assets Current assets Cash and cash equivalents $ 236.5 $ 71.5 $ - $ 308.0
Note receivable 150.0 150.0 N Note receivable from the Applied Biosystems group 150.0 (150.0) Tax benefit receivable from the Applied Biosystems group 9.9 (9.9) Accounts receivable, net 306.2 3.3 (2.4) 307.1 Inventories 149.7 149.7 Prepaid expenses and other current assets 75.9 3.5 (.2) 79.2 Total current assets 918.3 238.2 (162.5) 994.0 Property, plant and equipment, net 182.2 104.2 (10.6) 275.8 Other long-term assets 247.1 2.3 .1 249.5 Total Assets $ 1,347.6 $ 344.7 $ (173.0) $ 1,519.3 Liabilities And Stockholders’ Equity Current liabilities Loans payable $ 3.9 $ - $ - $ 3.9 Note payable to the Celera Genomics group 150.0 (150.0) Tax benefit payable to the Celera Genomics group 9.9 (9.9) Accounts payable 147.7 19.8 (2.5) 165.0 Accrued salaries and wages 43.3 4.2 47.5 Accrued taxes on income 132.2 (3.9) 128.3 Other accrued expenses 156.6 21.3 177.9 Total current liabilities 643.6 45.3 (166.3) 522.6 Long-term debt 31.5 31.5 Other long-term liabilities 138.2 5.5 143.7 Total Liabilities 813.3 50.8 (166.3) 697.8 Stockholders’ Equity Applera Corporation—Applied Biosystems stock 1.0 1.0 Applera Corporation—Celera Genomics stock .3 .3 Other stockholders’ equity 534.3 293.9 (8.0) 820.2 Total Stockholders’ Equity 534.3 293.9 (6.7) 821.5 Total Liabilities And Stockholders’ Equity $ 1,347.6 $ 344.7 $ (173.0) $ 1,519.3
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APPLERA CORPORATION Notes to Consolidated Financial Statements continued
Consolidating Statement of Cash Flows For the Year Ended June 30, 1999 ORATION Applied Celera Biosystems Genomics Eliminations/ ORP
C (Dollar amounts in millions) Group Group Other Consolidated
A Operating Activities From Continuing Operations R Income (loss) from continuing operations $ 148.4 $ (44.9) $ (6.6) $ 96.9 Adjustments to reconcile income (loss) from continuing PLE operations to net cash provided by operating activities
AP Depreciation and amortization 44.3 3.8 48.1 Long-term compensation programs 14.7 2.8 17.5 Deferred income taxes (25.5) (25.5) Gains from sales of assets (6.1) (6.1) Provision for restructured operations and other merger costs (9.2) (9.2) Asset impairment 14.5 14.5 Changes in operating assets and liabilities Increase in tax benefit receivable from the Applied Biosystems group (9.9) 9.9 Increase in accounts receivable (105.0) (2.5) 2.4 (105.1) Increase in inventories (22.4) (22.4) Increase in prepaid expenses and other assets (43.3) (3.5) (46.8) Increase in accounts payable and other liabilities 92.0 31.4 (16.3) 107.1 Net Cash Provided (Used) By Operating Activities 102.4 (22.8) (10.6) 69.0 Investing Activities From Continuing Operations Additions to property, plant and equipment, net (82.5) (94.5) 10.6 (166.4) Acquisitions and investments, net (4.0) (1.3) (5.3) Proceeds from the sale of assets, net 325.8 325.8 Net Cash Provided (Used) By Investing Activities 239.3 (95.8) 10.6 154.1 Net Cash From Continuing Operations Before Financing Activities 341.7 (118.6) 223.1 Discontinued Operations Net cash used by operating activities (16.3) (16.3) Net cash used by investing activities (27.0) (27.0) Net Cash From Discontinued Operations Before Financing Activities (43.3) (43.3) Financing Activities Net change in loans payable (9.6) (9.6) Principal payments on long-term debt (6.8) (6.8) Dividends (34.2) (34.2) Purchases of common stock for treasury (2.2) (2.2) Proceeds from stock issued for stock plans 94.9 1.5 96.4 Net cash allocated (to) from groups (188.6) 188.6 Net Cash Provided (Used) For Financing Activities (146.5) 190.1 43.6 Effect Of Exchange Rate Changes On Cash 1.7 1.7 Net Change In Cash And Cash Equivalents 153.6 71.5 225.1 Cash And Cash Equivalents Beginning Of Year 82.9 82.9 Cash And Cash Equivalents End Of Year $ 236.5 $ 71.5 $ - $ 308.0
66 APPLERA CORPORATION Annual Report 2001 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: d_312849_doc4.3d, Page: 67 of 67 Time: 18:19:36, Date: 09/17/01, BL: 0 APPLER
APPLERA CORPORATION Report of Management and Report of Independent Accountants A
Report of Management Report of Independent Accountants C O
To the Stockholders of To the Stockholders and Board of Directors of R
Applera Corporation Applera Corporation PO
Management is responsible for the accompanying In our opinion, the accompanying consolidated statements of RATIO consolidated financial statements, which have been prepared financial position and the related consolidated statements of in conformity with generally accepted accounting principles. operations, of stockholders’ equity, and of cash flows present In preparing the financial statements, it is necessary for fairly, in all material respects, the financial position of N management to make informed judgments and estimates Applera Corporation and its subsidiaries at June 30, 2001 and which it believes are in accordance with accounting 2000, and the results of their operations and their cash flows principles generally accepted in the United States appropriate for each of the three fiscal years in the period ended June under the circumstances. Financial information presented 30, 2001 in conformity with accounting principles generally elsewhere in this annual report is consistent with that in the accepted in the United States of America. These financial financial statements. statements are the responsibility of the Company’s management; our responsibility is to express an opinion on In meeting its responsibility for preparing reliable financial these financial statements based on our audits. We conducted statements, the Company maintains a system of internal our audits of these statements in accordance with auditing accounting controls designed to provide reasonable assurance standards generally accepted in the United States of America, that assets are safeguarded and transactions are properly which require that we plan and perform the audit to obtain recorded and executed in accordance with corporate policy reasonable assurance about whether the financial statements and management authorization. The Company believes its are free of material misstatement. An audit includes accounting controls provide reasonable assurance that errors examining, on a test basis, evidence supporting the amounts or irregularities which could be material to the financial and disclosures in the financial statements, assessing the statements are prevented or would be detected within a accounting principles used and significant estimates made by timely period. In designing such control procedures, management, and evaluating the overall financial statement management recognizes judgments are required to assess and presentation. We believe that our audits provide a reasonable balance the costs and expected benefits of a system of basis for our opinion. internal accounting controls. Adherence to these policies and procedures is reviewed through a coordinated audit effort of the Company’s internal audit staff and independent accountants. The Audit/Finance Committee of the Board of Directors is PricewaterhouseCoopers LLP comprised solely of outside directors and is responsible for Stamford, Connecticut overseeing and monitoring the quality of the Company’s July 26, 2001 accounting and auditing practices. The independent accountants and internal auditors have full and free access to the Audit/Finance Committee and meet periodically with the committee to discuss accounting, auditing, and financial reporting matters.
Dennis L. Winger Senior Vice President and Chief Financial Officer
Tony L. White Chairman, President, and Chief Executive Officer
APPLERA CORPORATION Annual Report 2001 67 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: e_312849_doc5.3d, Page: 68 of 90 Time: 18:19:42, Date: 09/17/01, BL: 0
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APPLIED BIOSYSTEMS GROUP Combined Statements of Operations
(Dollar amounts in thousands) For the years ended June 30, 1999 2000 2001 Net Revenues $ 1,221,691 $ 1,388,100 $ 1,619,495 Cost of sales 548,403 637,693 774,475 Gross Margin 673,288 750,407 845,020 Selling, general and administrative 335,873 393,889 380,668 Research, development and engineering 133,525 141,194 184,491 Restructuring and other special charges 15,964 2,142 Operating Income 187,926 213,182 279,861 Gain on investments 6,126 48,603 14,985 Interest expense (4,503) (8,126) (1,296) Interest income 2,344 18,620 16,767
Other income (expense), net 522 3,446 (5,832) APPLIED Income Before Income Taxes 192,415 275,725 304,485 Provision for income taxes 30,688 89,478 92,094 Minority interest 13,362 Income From Continuing Operations 148,365 186,247 212,391
Discontinued Operations, Net Of Income Taxes B
Loss from discontinued operations (21,109) IOSYSTE Gain on disposal of discontinued operations 100,167 Net Income $ 227,423 $ 186,247 $ 212,391
See accompanying notes to the Applied Biosystems group’s combined financial statements. M S G ROU P
APPLERA CORPORATION Annual Report 2001 69 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: e_312849_doc5.3d, Page: 70 of 90 Time: 18:19:46, Date: 09/17/01, BL: 0
APPLIED BIOSYSTEMS GROUP Combined Statements of Financial Position
(Dollar amounts in thousands) At June 30, 2000 2001 Assets Current assets Cash and cash equivalents $ 394,608 $ 392,459 Accounts receivable (net of allowances for doubtful accounts of $3,965 and $4,740, respectively) 367,370 382,560 Inventories, net 154,491 140,813 Prepaid expenses and other current assets 81,338 98,124 Total current assets 997,807 1,013,956 Property, plant and equipment, net 230,940 315,356 Other long-term assets 469,409 348,575 Total Assets $ 1,698,156 $ 1,677,887 UP
O Liabilities And Allocated Net Worth R Current liabilities G Loans payable $ 15,693 $ 14,678 Current portion of long-term debt 30,480 Tax benefit payable to the Celera Genomics group (see Note 1) 16,702 Accounts payable 173,631 162,104 STEMS
Y Accrued salaries and wages 79,409 49,553 Accrued taxes on income 149,505 82,717
IOS Other accrued expenses 167,718 168,552
B Total current liabilities 602,658 508,084 Long-term debt 36,115 Other long-term liabilities 125,019 128,592 Total Liabilities 763,792 636,676 PLIED Commitments and contingencies (see Note 10)
AP Allocated Net Worth 934,364 1,041,211 Total Liabilities And Allocated Net Worth $ 1,698,156 $ 1,677,887
See accompanying notes to the Applied Biosystems group’s combined financial statements.
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APPLIED BIOSYSTEMS GROUP Combined Statements of Cash Flows
(Dollar amounts in thousands) For the years ended June 30, 1999 2000 2001 Operating Activities From Continuing Operations Income from continuing operations $ 148,365 $ 186,247 $ 212,391 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation and amortization 44,309 54,513 66,794 Impairment of goodwill and other intangibles 14,464 Long-term compensation programs 14,680 9,652 4,477 Deferred income taxes (25,533) (19,428) 20,488 Gains from sales of assets (6,126) (56,801) (14,985) Nonreimbursable utilization of tax benefits generated by the
Celera Genomics group 32,197 APPLIED Provision for restructured operations and other merger costs (9,200) Changes in operating assets and liabilities Increase in accounts receivable (105,018) (62,186) (42,279)
(Increase) decrease in inventories (22,387) (2,795) 4,231 B
Increase in prepaid expenses and other assets (43,207) (22,396) (34,327) IOSYSTE Increase (decrease) in accounts payable and other liabilities 92,052 80,061 (107,315) Net Cash Provided By Operating Activities 102,399 166,867 141,672 Investing Activities From Continuing Operations
Additions to property, plant and equipment M (net of disposals of $9,614, $1,026, and $8,524, respectively) (82,463) (94,449) (143,663) S Acquisitions and investments, net (4,025) (20,748) (5,912) G Proceeds from the sale of assets, net 325,766 82,763 15,498 ROU Proceeds from the collection of notes receivable 150,000
Net Cash Provided (Used) By Investing Activities 239,278 117,566 (134,077) P Net Cash From Continuing Operations Before Financing Activities 341,677 284,433 7,595 Discontinued Operations Net cash used by operating activities (16,297) (15,081) (2,860) Net cash used by investing activities (26,970) Net Cash From Discontinued Operations Before Financing Activities (43,267) (15,081) (2,860) Financing Activities Net change in loans payable (9,572) 6,701 1,553 Principal payments on long-term debt (6,843) Dividends (34,156) (26,358) (35,669) Purchases of common stock for treasury (2,187) Proceeds from stock issued for stock plans 94,894 43,434 37,836 Payment of note payable to the Celera Genomics group (150,000) Net cash allocated (to) from the Celera Genomics group (188,535) 27,283 Net Cash Provided (Used) By Financing Activities (146,399) (98,940) 3,720 Effect Of Exchange Rate Changes On Cash 1,654 (12,334) (10,604) Net Change In Cash And Cash Equivalents 153,665 158,078 (2,149) Cash And Cash Equivalents Beginning Of Year 82,865 236,530 394,608 Cash And Cash Equivalents End Of Year $ 236,530 $ 394,608 $ 392,459
See accompanying notes to the Applied Biosystems group’s combined financial statements.
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APPLIED BIOSYSTEMS GROUP Combined Statements of Allocated Net Worth
Accumulated Other Retained Comprehensive Allocated (Dollar amounts in thousands) Other Earnings Income (Loss) Net Worth Balance At June 30, 1998 $ 342,903 $ 232,117 $ (9,513) $ 565,507 Comprehensive income Net income 227,423 227,423 Other comprehensive income: Foreign currency translation adjustments (5,415) Minimum pension liability adjustment (1,779) Unrealized gain on investments, net of tax 11,887 Other comprehensive income 4,693 4,693 Comprehensive income 232,116 Cash dividends declared on Applera Corporation stock (25,479) (25,479) UP Cash dividends declared on Applera – Applied Biosystems stock (8,677) (8,677) O
R Issuances under Applera Corporation stock plans 89,550 (14,862) 74,688
G Issuances under Applera – Applied Biosystems stock plans 20,157 (1,290) 18,867 Repurchases of Applera – Applied Biosystems stock (2,187) (2,187) Tax benefit related to employee stock options 15,735 15,735 Stock compensation 1,090 1,207 2,297
STEMS Allocated capital to the Celera Genomics group (338,535) (338,535) Y Balance At June 30, 1999 128,713 410,439 (4,820) 534,332 Comprehensive income IOS Net income 186,247 186,247 B Other comprehensive income: Foreign currency translation adjustments (25,196) Minimum pension liability adjustment (60)
PLIED Unrealized gain on investments, net of tax 155,522 Other comprehensive income 130,266 130,266 AP Comprehensive income 316,513 Cash dividends declared on Applera – Applied Biosystems stock (35,220) (35,220) Issuances under common stock plans 43,434 43,434 Tax benefit related to employee stock options 44,618 44,618 Stock compensation 5,190 5,190 Net cash allocated from the Celera Genomics group 27,283 27,283 Allocation of investment to the Celera Genomics group (1,786) (1,786) Balance At June 30, 2000 247,452 561,466 125,446 934,364 Comprehensive income Net income 212,391 212,391 Other comprehensive loss: Foreign currency translation adjustments (33,973) Unrealized gain on hedge contracts, net of tax 11,158 Minimum pension liability adjustment (35,151) Unrealized loss on investments, net of tax (113,527) Reclassification adjustment for realized gains included in net income (9,741) Other comprehensive loss (181,234) (181,234) Comprehensive income 31,157 Cash dividends declared on Applera – Applied Biosystems stock (35,786) (35,786) Issuances under common stock plans 37,835 37,835 Tax benefit related to employee stock options 36,967 36,967 Stock compensation 4,477 4,477 Nonreimbursible utilization of tax benefits generated by the Celera Genomics group 32,197 32,197 Balance At June 30, 2001 $ 358,928 $ 738,071 $ (55,788) $ 1,041,211
See accompanying notes to the Applied Biosystems group’s combined financial statements.
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements
Note 1—Accounting Policies And Practices and (2) all other corporate assets and liabilities and related Basis of Presentation transactions of the Company, including allocated portions of the Company’s cash, debt, and selling, general and Applera Corporation (‘‘Applera’’ or ‘‘the Company’’)is administrative costs. comprised of two separate business segments: the Applied Biosystems group and the Celera Genomics group. The Holders of Applera – Applied Biosystems stock and Applied Biosystems group is engaged principally in the Applera – Celera stock are stockholders of the Company. development, manufacture, sale, and service of instrument The Applied Biosystems group and the Celera Genomics systems and associated consumable products for life science group are not separate legal entities. As a result, stockholders research and related applications. Its products are used in are subject to all of the risks associated with an investment in various applications including the synthesis, amplification, the Company and all of its businesses, assets, and liabilities. purification, isolation, analysis, and sequencing of nucleic The issuance of Applera – Applied Biosystems stock and acids, proteins, and other biological molecules. The name of Applera – Celera stock and the allocations of assets and the Company was changed from PE Corporation to Applera liabilities between the Applied Biosystems group and the APPLIED Corporation and the name of the PE Biosystems group was Celera Genomics group did not result in a distribution or changed to the Applied Biosystems group effective spin-off of any assets or liabilities of the Company or November 30, 2000. The Celera Genomics group is otherwise affect ownership of any assets or responsibility for engaged principally in integrating high throughput the liabilities of the Company or any of its subsidiaries. The assets the Company attributes to one group could be subject
technologies to create therapeutic discovery and B to the liabilities of the other group, whether such liabilities development capabilities for internal use and for its customers IOSYSTE and collaborators. The Celera Genomics group recently arise from lawsuits, contracts, or indebtedness attributable to expanded its focus to include therapeutic discovery and the other group. If the Company is unable to satisfy one development. group’s liabilities out of assets attributed to it, the Company may be required to satisfy these liabilities with assets Celera Diagnostics has been established as a joint venture attributed to the other group. between the Applied Biosystems group and the Celera M Genomics group during the fourth quarter of fiscal 2001. Financial effects arising from one group that affect the S This new venture is focused on discovery, development and Company’s consolidated results of operations or consolidated G commercialization of novel diagnostic tests. financial condition could, if significant, affect the combined ROU results of operations or combined financial condition of the Recapitalization other group and the per share market price of the class of common stock relating to the other group. Any net losses of P The recapitalization of the Company on May 6, 1999 the Applied Biosystems group or the Celera Genomics group resulted in the issuance of two new classes of common stock and dividends or distributions on, or repurchases of, called Applera Corporation – Applied Biosystems Group Applera – Applied Biosystems stock or Applera – Celera Common Stock (‘‘Applera – Applied Biosystems stock’’) and stock or repurchases of preferred stock of the Company will Applera Corporation – Celera Genomics Group Common reduce the assets of the Company legally available for Stock (‘‘Applera – Celera stock’’). Applera – Applied payment of dividends. Biosystems stock is intended to reflect separately the performance of the Applied Biosystems business (‘‘Applied The management and allocation policies applicable to the Biosystems group’’), and Applera – Celera stock is intended preparation of the combined financial statements of the to reflect separately the performance of the Celera Genomics Applied Biosystems group and the Celera Genomics group business (‘‘Celera Genomics group’’). As part of the may be modified or rescinded, or additional policies may be recapitalization, each share of common stock of The Perkin- adopted, at the sole discretion of the Company’s Board of Elmer Corporation (‘‘predecessor common stock’’) was Directors at any time without prior approval of the converted into one share of Applera – Applied Biosystems stockholders. The Board of Directors would make any stock and 0.5 of a share of Applera – Celera stock, prior to decision in accordance with its good faith business judgment giving effect to the stock splits since May 6, 1999. that its decision is in the best interests of the Company and all of the stockholders as a whole. The combined financial statements of the Applied Biosystems group and the Celera Genomics group (individually referred The Applied Biosystems group’s combined financial to as a ‘‘group’’) comprise all of the accounts included in the statements reflect the application of management and corresponding consolidated financial statements of the allocation policies adopted by the Company’s Board of Company. Intergroup transactions between the Applied Directors to various corporate activities, as described below. Biosystems group and the Celera Genomics group have not The Applied Biosystems group’s combined financial been eliminated in the Applied Biosystems group’s combined statements should be read in conjunction with the financial statements but have been eliminated in the Company’s consolidated financial statements and Company’s consolidated financial statements. The Applied notes thereto. Biosystems group’s combined financial statements have been Financing Activities prepared on a basis that management believes to be reasonable and appropriate, and reflect (1) the financial As a matter of policy, the Company manages most financing position, results of operations, and cash flows of businesses activities of the Applied Biosystems group and the Celera that comprise the Applied Biosystems group, with all Genomics group on a centralized basis. These activities significant intragroup transactions and balances eliminated include the investment of surplus cash, the issuance and
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
repayment of short-term and long-term debt, and the establishes the terms on which long-term loans between the issuance and repayment of any preferred stock. As the groups will be made, including interest rate, amortization financing activities of the Celera Genomics group were not schedule, maturity, and redemption terms. significant for any of the periods prior to the recapitalization Although the Company may allocate its debt and preferred of the Company, all historical cash and debt balances for stock between the groups, the debt and preferred stock those periods presented were allocated to the Applied remain obligations of the Company and all stockholders of Biosystems group. the Company are subject to the risks associated with those The Company’s Board of Directors has adopted the obligations. following financing policy that affects the combined financial In addition, cash allocated to the Applied Biosystems group statements of the Applied Biosystems group and the Celera may be reallocated to the Celera Genomics group in Genomics group. exchange for Celera Genomics Designated Shares as The Company allocates the Company’s debt between the provided under the Company’s Certificate of Incorporation. Applied Biosystems group and the Celera Genomics group The number of Celera Genomics Designated Shares issued
UP (‘‘pooled debt’’) or, if the Company so determines, in its would be determined by dividing the amount of cash
O entirety to a particular group. The Company will allocate reallocated by the average market value of Applera - Celera
R preferred stock, if issued, in a similar manner. stock over the 20-trading day period immediately prior to G Cash allocated to one group that is used to repay pooled the date of the reallocation. As a result of such a debt or redeem pooled preferred stock decreases such group’s reallocation, a relative percentage of future earnings or losses allocated portion of the pooled debt or preferred stock. Cash of the Celera Genomics group would be attributed to the or other property allocated to one group that is transferred to Applied Biosystems group. STEMS the other group, if so determined by the Company’s Board Y Allocation of Corporate Overhead and Administrative of Directors, decreases the transferring group’s allocated Shared Services portion of the pooled debt or preferred stock and, IOS A portion of the Company’s corporate overhead (such as
B correspondingly, increases the recipient group’s allocated portion of the pooled debt or preferred stock. executive management, human resources, legal, accounting, Pooled debt bears interest for group financial statement auditing, tax, treasury, strategic planning, and environmental purposes at a rate equal to the weighted average interest rate services) has been allocated to the Applied Biosystems group
PLIED of the debt calculated on a quarterly basis and applied to the based upon identification of such services specifically average pooled debt balance during the period. Preferred benefiting each group. A portion of the Company’s costs of AP stock, if issued and if pooled in a manner similar to the administrative shared services (such as information pooled debt, will bear dividends for group financial technology services) has been allocated in a similar manner. statement purposes at a rate based on the weighted average Where determination based on specific usage alone is not dividend rate of the preferred stock similarly calculated and practical, other methods and criteria were used that applied. Any expense related to increases in pooled debt or management believes are equitable and provide a reasonable preferred stock will be reflected in the weighted average estimate of the cost attributable to the Applied Biosystems interest or dividend rate of such pooled debt or preferred group. The totals for these allocations were $33.7 million, stock as a whole. $45.9 million, and $42.8 million for fiscal 1999, 2000, and 2001, respectively. It is not practicable to provide a detailed If the Company allocates debt for a particular financing in its estimate of the expenses which would be recognized if the entirety to one group, that debt will bear interest for group Applied Biosystems group were a separate legal entity. financial statement purposes at the rate determined by the Management believes that the allocation methods developed Company’s Board of Directors. If the Company allocates are reasonable and have been consistently applied. preferred stock in its entirety to one group, the Company will charge the dividend cost to that group in a similar Joint Transactions Between Groups manner. If the interest or dividend cost is higher than the The groups may from time to time engage in transactions Company’s actual cost, the other group will receive a credit jointly, including with third parties. Research and for an amount equal to the difference as compensation for development and other services performed by one group for the use of the Company’s credit capacity. Any expense a joint venture or other collaborative arrangement will be related to debt or preferred stock of the Company that is charged at fair value, as determined by the Company’s Board allocated in its entirety to a group will be allocated in whole of Directors. to that group. Cash or other property that the Company allocates to one Allocation of Federal and State Income Taxes group that is transferred to the other group, could, if so The federal income taxes of the Company and its subsidiaries determined by the Company’s Board of Directors, be which own assets allocated between the groups are accounted for either as a short-term loan or as a long-term determined on a consolidated basis using the asset and loan. Short-term loans bear interest at a rate equal to the liability approach prescribed by SFAS No. 109, ‘‘Accounting weighted average interest rate of the Company’s pooled for Income Taxes.’’ The federal income tax provisions and debt. If the Company does not have any pooled debt, the related tax payments or refunds are allocated between the Company’s Board of Directors will determine the rate of groups based on a consolidated return approach taking into interest for such loan. The Company’s Board of Directors account each group’s relative contribution (positive or
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
negative) to the Company’s consolidated federal taxable Principles of Combination income, tax liability and tax credit position. The Applied Biosystems group’s combined financial Tax benefits that cannot be used by the group generating statements have been prepared in accordance with those benefits, but can be used on a consolidated basis, are accounting principles generally accepted in the U.S. and, transferred to the group that can utilize such benefits. taken together with the Celera Genomics group’s combined Existing tax benefits acquired by either group in a business financial statements, comprise all the accounts included in combination which are utilized by the other group will be the corresponding consolidated financial statements of the reimbursed to the group that acquired such benefits. Tax Company. Intergroup transactions between the Applied benefits generated by the Celera Genomics group Biosystems group and the Celera Genomics group have not commencing July 1, 1998, which could be utilized on a been eliminated in the Applied Biosystems group’s combined consolidated basis, were reimbursed by the Applied financial statements but have been eliminated in the Biosystems group to the Celera Genomics group up to a Company’s consolidated financial statements. The combined
limit of $75 million. financial statements of each group reflect the financial APPLIED During fiscal 2001, the Company formed Celera Diagnostics, condition, results of operations, and cash flows of the a joint venture of the Applied Biosystems group and the businesses included therein. The combined financial Celera Genomics group (see Note 2). As part of the statements of the Applied Biosystems group include the assets formation of the joint venture, the Applied Biosystems group and liabilities of the Company specifically identified with or allocated to the Applied Biosystems group. Certain amounts
will reimburse the Celera Genomics group for tax benefits B
generated by Celera Diagnostics to the extent such tax in the combined financial statements and notes have been IOSYSTE benefits are utilized by the Applied Biosystems group. These reclassified to conform to the current year’s presentation. tax benefits are not subject to the $75 million limit described Use of Estimates above. As a result of the above tax allocation policy, as of June 30, The preparation of the combined financial statements in
2001, the Celera Genomics group generated cumulative tax conformity with accounting principles generally accepted in M
benefits of $32.2 million that were utilized by the Applied the U.S. requires management to make estimates and S
Biosystems group with no reimbursement to the Celera assumptions that affect the reported amounts of assets and G Genomics group. The amounts utilized by the Applied liabilities, disclosure of contingent assets and liabilities at the ROU Biosystems group that were not reimbursed to the Celera date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual
Genomics group were recorded to allocated net worth in the P Applied Biosystems group’s Combined Statements of results could differ from those estimates. Financial Position. Discontinued Operations Depending on the tax laws of the respective jurisdictions, The Applied Biosystems group’s combined financial state and local income taxes are calculated on either a statements were restated to reflect the net assets and separate, consolidated, or combined basis. State and local operating results of the Analytical Instruments business as income tax provisions and related tax payments or refunds discontinued operations (see Note 14). The operating results will be allocated between the groups in a manner designed are reflected in the Combined Statements of Operations as to reflect the respective contributions of the groups to the loss from discontinued operations for fiscal 1999. The Company’s state or local taxable income. accompanying notes, except Note 14, relate only to The discussion of the Applied Biosystems group’s income continuing operations. taxes (see Note 4) should be read in conjunction with the Company’s consolidated financial statements and notes Recently Issued Accounting Standards thereto. In July 2001, the Financial Accounting Standards Board Transfers of Assets Between Groups (‘‘FASB’’) issued Statement of Financial Accounting Standards (‘‘SFAS’’) No. 141, ‘‘Business Combinations,’’ which applies Transfers of assets can be made between groups without to all business combinations initiated after June 30, 2001. prior stockholder approval. Such transfers will be made at The provisions of this statement require business fair value, as determined by the Company’s Board of combinations to be accounted for using the purchase method Directors. The consideration for such transfers may be paid of accounting. Also in July 2001, the FASB issued SFAS No. by one group to the other in cash or other consideration, as 142, ‘‘Goodwill and Other Intangible Assets.’’ Under SFAS determined by the Company’s Board of Directors. No. 142, goodwill from acquisitions occurring after June 30, 2001 will not be amortized, and for goodwill existing prior Dividends to June 30, 2001, the Company expects to adopt the For purposes of the historical (periods prior to the nonamortization provisions of the statement on July 1, 2001. recapitalization) combined financial statements of the Applied Goodwill for which the nonamortization provisions are Biosystems group and the Celera Genomics group, all applied will be required to be reviewed for impairment at dividends declared and paid by the Company were allocated least on an annual basis. If an impairment is found to exist, a to the Applied Biosystems group. charge will be taken against operations. SFAS No. 142 requires that, upon adoption, goodwill and certain intangible assets be reviewed for classification and useful life. The
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
Applied Biosystems group expects that, aside from the Inventories nonamortization of goodwill on a prospective basis, the Inventories are stated at the lower of cost (on a first-in, first- effect upon adoption of SFAS No. 142 will be immaterial. out basis) or market. Inventories at June 30, 2000 and 2001 Foreign Currency included the following components: Assets and liabilities of foreign operations, where the (Dollar amounts in millions) 2000 2001 functional currency is the local currency, are translated into Raw materials and supplies $ 51.2 $ 51.8 U.S. dollars at the fiscal year-end exchange rates. The related Work-in-process 6.3 12.2 translation adjustments are recorded as a separate component Finished products 97.0 76.8 of allocated net worth. Foreign currency revenues and Total inventories $ 154.5 $ 140.8 expenses are translated using monthly average exchange rates prevailing during the year. Foreign currency transaction gains Property, Plant and Equipment, and Depreciation and losses are included in net income. Transaction gains and losses occur from fluctuations in exchange rates when assets Property, plant and equipment are recorded at cost and UP and liabilities are denominated in currencies other than the consisted of the following at June 30, 2000 and 2001: O
R functional currency of an entity. Net transaction losses for (Dollar amounts in millions) 2000 2001
G the fiscal years ended June 30, 1999, 2000, and 2001 were $5.6 million, $.1 million, and $1.3 million, respectively. The Land $ 13.5 $ 67.1 net transaction loss for fiscal year 2001 included the gains Buildings and leasehold improvements 115.3 143.6 and losses on the revaluation of non-functional currency– Machinery and equipment 267.8 303.8 denominated net assets offset by the losses and gains on non- STEMS Property, plant and equipment, at cost 396.6 514.5 Y qualified hedges on these positions. See Note 11 for further Accumulated depreciation and information on the Company’s hedging program. amortization 165.7 199.1 IOS Property, plant and equipment, net $ 230.9 $ 315.4
B Derivative Financial Instruments The Company uses derivative financial instruments to offset exposure to market risks arising from changes in foreign Major renewals and improvements that significantly add to currency exchange rates and interest rates. Derivative financial productive capacity or extend the life of an asset are PLIED instruments currently utilized by the Company include capitalized. Repairs, maintenance, and minor renewals and foreign currency forward and range forward contracts, foreign improvements are expensed when incurred. The cost of AP currency options, and an interest rate swap (see Note 11). All assets and related depreciation is removed from the related of the Company’s derivative financial instruments have been accounts on the balance sheet when such assets are disposed allocated to the Applied Biosystems group. of, and any related gains or losses are reflected in current earnings. Cash and Cash Equivalents Provisions for depreciation of owned property, plant and Cash equivalents consist of highly liquid debt instruments, equipment are based upon the expected useful lives of the time deposits, and certificates of deposit with original assets and computed primarily by the straight-line method. maturities of three months or less. Leasehold improvements are amortized over their estimated useful lives or the term of the applicable lease, whichever is Investments less, using the straight-line method. Useful lives are generally The equity method of accounting is used for investments in 30 to 40 years for buildings and three to seven years for joint ventures that are 20% to 50% owned and the cost machinery and equipment. Capitalized internal-use software method of accounting is used for investments that are less costs are amortized primarily over the expected useful lives, than 20% owned. Minority equity investments are generally not to exceed three years. Depreciation expense for classified as available-for-sale and carried at market value in property, plant and equipment was $38.7 million, $49.1 accordance with SFAS No. 115, ‘‘Accounting for Certain million, and $53.9 million for the fiscal years ended June 30, Investments in Debt and Equity Securities.’’ The specific 1999, 2000, and 2001, respectively. identification method is used to determine the cost of Machinery and equipment, at cost, included capitalized securities disposed of. Trading securities are recorded at fair internal-use software primarily related to the Company’s value with realized and unrealized gains and losses included worldwide information technology infrastructure of $61.8 in income. During fiscal 2001, $1.4 million of unrealized net million and $65.8 million at June 30, 2000 and 2001, losses were included in income. respectively. Net of accumulated amortization, capitalized internal-use software was $43.5 million and $38.2 million at June 30, 2000 and 2001, respectively.
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
Capitalized Software Supplemental Cash Flow Information Internal software development costs, for software used in the Cash paid for interest and income taxes and significant Applied Biosystems group’s products, which are incurred non-cash investing and financing activities for the following from the time technological feasibility of the software is periods were as follows: established until the software is ready for its intended use, are capitalized and included in other long-term assets. These (Dollar amounts in millions) 1999 2000 2001 costs are amortized using the straight-line method over a Interest $ 3.4 $ .9 $ 1.0 maximum of three years or the expected life of the product, Interest paid to the Celera whichever is less. At June 30, 2000 and 2001, capitalized Genomics group $ .2 $ 6.8 software costs, net of accumulated amortization, were $21.3 Income taxes $ 30.3 $ 48.2 $ 92.4 million and $27.9 million, respectively. Research and development costs and other computer software maintenance Tax benefits paid to the Celera Genomics group $ 12.7 $ 39.1 $ 24.9 costs related to software development are expensed as APPLIED incurred. Significant non-cash investing and financing activities: Intangible Assets Note payable to the The excess of purchase price over the net asset value of Celera Genomics companies acquired is amortized using a straight-line method group $ 150.0 B
over periods not exceeding 20 years. Patents and trademarks Tax benefit related to IOSYSTE are amortized using the straight-line method over their employee stock options $ 15.7 $ 44.6 $ 37.0 expected useful lives. At June 30, 2000 and 2001, other Dividends declared not long-term assets included goodwill, net of accumulated paid $ 8.9 $ 9.0 amortization, of $15.8 million and $14.0 million, Nonreimbursable
respectively. Accumulated amortization of goodwill was $8.4 M utilization of tax
million and $10.1 million at June 30, 2000 and 2001, S benefits generated by
respectively. G the Celera Genomics ROU Asset Impairment group $ 32.2 The Applied Biosystems group reviews long-lived assets and goodwill for impairment, in accordance with SFAS No. 121, Note 2—Acquisitions, Investments, and P ‘‘Accounting for the Impairment of Long-Lived Assets and Dispositions for Long-Lived Assets to Be Disposed Of,’’ whenever events or circumstances indicate that the carrying amount of an Tecan AG asset may not be recoverable. The assessment of possible During the fourth quarter of fiscal 1999, the Company impairment is based on the Company’s ability to recover the divested its interest in Tecan, a developer and manufacturer carrying value of the asset from the estimated future of automated sample processors, liquid handling systems, and undiscounted cash flows, before interest and taxes, of the microplate photometry, through a public offering in related operations. If these cash flows are less than the Switzerland and private sales outside of Switzerland. Net cash carrying value of such asset, an impairment loss is recognized proceeds from the divestiture were $30.0 million. The for the difference between estimated fair value and carrying Company recognized a before-tax gain of $1.6 million on value. During fiscal 1999, the Applied Biosystems group the divestiture. recorded a $14.5 million charge to other special charges for the impairment of assets associated with the Molecular Paracel, Inc. Informatics business (see Note 2). In the fourth quarter of fiscal 2000, the Company issued approximately 1.6 million shares of Applera – Celera stock in Revenues exchange for all the outstanding shares of Paracel common Revenues are generally recorded at the time of shipment of stock not previously owned by the Company. At the time of products or performance of services. When contractual the acquisition, the Company owned 14% of Paracel, which acceptance clauses exist, revenue is recognized upon was allocated to the Applied Biosystems group. The transfer satisfaction of such clauses. Revenues from service contracts of the Paracel shares to the Celera Genomics group resulted are recorded as deferred service contract revenues and in a $27.3 million cash payment to the Applied Biosystems reflected in net revenues over the term of the contract, group, which represented the fair market value of those generally one year. shares at the transfer date. The Celera Genomics group recorded the previously owned investment at the Company’s Research, Development and Engineering original cost value. The transfer of the original cost value Research, development and engineering costs are expensed and the $27.3 million cash payment was recorded as an when incurred. adjustment to allocated net worth in the Applied Biosystems group’s Combined Statements of Financial Position and the Celera Genomics group’s Combined Statements of Financial Position.
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
Celera Diagnostics release of previously existing contingencies on shares of During the fourth quarter of fiscal 2001, Celera Diagnostics Millennium common stock. was established as a joint venture between the Applied Other Acquisitions Biosystems group and the Celera Genomics group. This new venture is focused on discovery, development and During fiscal years 1999, 2000, and 2001, the Company commercialization of novel diagnostic tests. The Company acquired various equity interests in companies that were anticipates that Celera Diagnostics will leverage the individually insignificant. The total amounts paid in fiscal instrument and technology expertise of the Applied years 1999, 2000, and 2001 were $4.0 million, $20.7 million, Biosystems group with the discovery and informatics and $4.8 million, respectively, for these investments. expertise of the Celera Genomics group in order to Other Dispositions contribute to the future of diagnostic medicine. In fiscal years 1999, 2000, and 2001, the Applied Biosystems The Applied Biosystems group has contributed to Celera group recognized before-tax gains of $2.6 million, $7.6 Diagnostics its existing molecular diagnostics business. The million, and $15.0 million, respectively, from the sale of its UP Celera Genomics group will provide access to its genome equity interest in various companies. Net cash proceeds from O databases and will fund all of the cash operating losses of
R these sales were $7.8 million in fiscal 1999, $10.7 million in
G Celera Diagnostics up to a maximum of $300 million 2000, and $15.5 million in fiscal 2001. (‘‘initial losses’’), after which, operating losses, if any, would be shared equally by the Celera Genomics group and the Note 3—Debt And Lines Of Credit Applied Biosystems group. Celera Diagnostics’ profits would be shared in the ratio of 65 percent to the Celera Genomics Allocated Debt Activity STEMS
Y group and 35 percent to the Applied Biosystems group until Short-term debt and long-term debt at June 30, 2000 and the cumulative profits of Celera Diagnostics equal the initial 2001 are summarized as follows: losses. Subsequently, profits and losses and cash flows would IOS (Dollar amounts in millions) B be shared equally. Capital expenditures and working capital 2000 2001 requirements of the joint venture will be funded equally by Short-Term Debt the Celera Genomics group and the Applied Biosystems Short-term loans $ 15.7 $ 14.7 group. The Applied Biosystems group will reimburse the Current portion of long-term debt
PLIED Celera Genomics group for all tax benefits generated by Celera Diagnostics to the extent such tax benefits are utilized (yen loan) 30.5 AP by the Applied Biosystems group. Total short-term debt $ 15.7 $ 45.2 Long-Term Debt The Celera Genomics group and the Applied Biosystems group will account for their investments in Celera Yen loan $ 36.1 $- Diagnostics under the equity method of accounting, with the The weighted average interest rates at June 30, 2000 and Celera Genomics group recording 100 percent of the initial 2001 for short-term loans payable were .6% and .5%, losses in its income statement as loss from joint venture. respectively. In the event of liquidation of the assets attributable to Celera Long-term debt consisted of a 3.8 billion yen variable rate Diagnostics, including sale of such assets, the proceeds upon loan that is scheduled to mature in March 2002. Through an liquidation would be distributed to the Applied Biosystems interest rate swap (see Note 11), the effective interest rate for group and the Celera Genomics group based on a the loan is fixed at 2.1%. There are no maturities of long- proportion similar to their relative investment accounts. If term debt subsequent to 2002. the proceeds upon liquidation are in excess of the groups’ combined investment accounts, the Celera Genomics group The Company maintains a $100 million revolving credit would be allocated a preference on the liquidation proceeds agreement with four banks that expires on April 20, 2005. in an amount equal to 65 percent of the Celera Genomics Commitment and facility fees are based on public debt group’s funding of initial losses. If liquidation proceeds and ratings, or net worth and leverage ratios. Interest rates on the Celera Genomics group’s share of profits generated by amounts borrowed vary depending on whether borrowings Celera Diagnostics exceed 65 percent of the Celera are undertaken in the domestic or eurodollar markets. There Genomics group’s funding of initial losses, the excess were no outstanding borrowings under the facility at June liquidation proceeds would be allocated equally to the Celera 30, 2000 or 2001. Genomics group and the Applied Biosystems group. At June 30, 2001, in addition to the $100 million revolving Millennium Pharmaceuticals, Inc. credit facility, the Company had $122 million of unused credit facilities for short-term borrowings from domestic and In fiscal 2000, the Applied Biosystems group recognized a foreign banks in various currencies. These credit facilities before-tax gain of $41.0 million from the sale of a portion of consist of uncommitted overdraft credit lines that are the Company’s equity interest in Millennium provided at the discretion of various local banks. An Applera Pharmaceuticals, Inc. Net cash proceeds from the sale were Corporation guarantee is usually required if a local unit $48.0 million. During fiscal 1999, the Company recorded a borrows funds. before-tax gain of $1.9 million in connection with the
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
Under various debt and credit agreements, the Company is Significant components of deferred tax assets and liabilities required to maintain certain minimum net worth and from continuing operations at June 30, 2000 and 2001 are leverage ratios. The Company was in compliance with all summarized below: such covenants as of June 30, 2001. (Dollar amounts in millions) 2000 2001 Note Payable to the Celera Genomics Group Deferred Tax Assets At September 30, 1998, the Company allocated to the Inventories $ 4.0 $ 4.3 Celera Genomics group a $330 million note payable of the Postretirement and Applied Biosystems group. The $330 million note postemployment benefits 31.4 50.7 represented an allocation of the Company’s capital to the Other accruals 9.7 9.6 Celera Genomics group and did not result in the Applied Tax credit and loss carryforwards 136.1 101.8 Biosystems group holding a residual interest in the allocated Capitalized R&D expense 50.4
net worth attributed to the Celera Genomics group. APPLIED Accordingly, no interest was ascribed to the note. This Subtotal 181.2 216.8 allocation of capital represented management’s decision to Valuation allowance (37.2) (42.7) allocate a portion of the Company’s capital to the Celera Total deferred tax assets 144.0 174.1 Genomics group and the remaining capital to the Applied Deferred Tax Liabilities Biosystems group prior to the effective date of the Depreciation 14.5 13.6 recapitalization. The group combined financial statements do Other accruals 4.9 1.4 B IOSYSTE not include any residual interests in the allocated net worth Unrealized gains on investments 89.2 29.5 of one group by the other group. The note payable was Total deferred tax liabilities 108.6 44.5 liquidated on May 28, 1999 in exchange for a portion of the Total deferred tax assets, net $ 35.4 $ 129.6 proceeds received from the sale of the Analytical Instruments business and a new note payable to the Celera Genomics A reconciliation of the federal statutory tax to the Applied M group for $150 million. The new note payable, which was Biosystems group’s continuing tax provision for fiscal 1999, S for a term of one year, bearing an interest rate of 5% per 2000, and 2001 is set forth in the following table: annum and payable on demand without penalty, was paid G ROU during fiscal 2000. (Dollar amounts in millions) 1999 2000 2001 Federal statutory rate 35% 35% 35% Note 4—Income Taxes P Tax at federal statutory rate $ 67.3 $ 96.5 $ 106.6 Income before income taxes from continuing operations for State income taxes (net of fiscal 1999, 2000, and 2001 is summarized below: federal benefit) .4 .2 .1 (Dollar amounts in millions) 1999 2000 2001 Effect on income taxes from United States $ 36.5 $ 93.1 $ 143.7 foreign operations (25.0) (6.3) (12.9) Foreign 155.9 182.6 160.8 Effect on income taxes from Total $ 192.4 $ 275.7 $ 304.5 foreign sales corporation (4.8) (7.1) (10.3) Reorganization, restructuring The provision for income taxes from continuing operations and other costs 6.5 includes the Applied Biosystems group’s allocated portion of Nondeductible goodwill 2.1 .3 .4 income taxes currently payable and those deferred because of R&D tax credit (6.0) (.5) differences between the financial statement and tax bases of Valuation allowance (13.8) .1 6.7 assets and liabilities. The Applied Biosystems group’s Long-term compensation 8.7 provision for income taxes from continuing operations for Recapitalization costs 1.6 fiscal 1999, 2000, and 2001 consisted of the following: Other 2.9 (3.4) 2.0 (Dollar amounts in millions) 1999 2000 2001 Total provision for income taxes from continuing Currently Payable operations $ 30.7 $ 89.5 $ 92.1 Domestic $ 6.2 $ 60.3 $ 48.8 Foreign 23.5 48.6 22.8 As described in Note 1, the Company presents the income Total currently payable 29.7 108.9 71.6 taxes allocated to the groups under the consolidated return Deferred approach in accordance with SFAS No. 109. If management Domestic (2.5) (7.0) 16.6 had utilized the separate return basis of accounting, the tax Foreign 3.5 (12.4) 3.9 provision of the Applied Biosystems group would not have Total deferred 1.0 (19.4) 20.5 changed. Total provision for income taxes from continuing operations $ 30.7 $ 89.5 $ 92.1
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
The valuation allowance was increased in fiscal 2001 principally invested in equity and fixed income securities. principally as a result of foreign tax credits generated by the The funding of pension plans is determined in accordance Company that management believes may not be realized with statutory funding requirements. before the end of the statutory carryforward period, due to The Company’s domestic pension plan covers a substantial significant domestic tax loss carryforwards. The fiscal 2001 portion of U.S. employees. During fiscal 1999, the plan was increase in the valuation allowance was also due to foreign amended to terminate the accrual of benefits as of June 30, loss carryforwards that management believes may not be 2004 and to improve the benefit for participants who retire realized because the Company will not generate sufficient between the ages of 55 and 60. The pension plan is not taxable income in each of the respective foreign countries to utilize the tax loss carryforwards. The reduction in the available to employees hired on or after July 1, 1999. valuation allowance in fiscal 1999, which was partially offset The postretirement benefit plan provides certain healthcare by an increase due to foreign loss carryforwards, was caused and life insurance benefits to domestic employees hired prior by management’s belief that once the sale of the Analytical to January 1, 1993, who retire and satisfy certain service and Instruments business was completed, it was more likely than age requirements. Generally, medical coverage pays a stated UP not that the deferred tax assets to which the valuation percentage of most medical expenses, reduced for any O allowance related would be realized.
R deductible and for payments made by Medicare or other
G group coverage. The cost of providing these benefits is At June 30, 2001, the Applied Biosystems group’s allocated shared with retirees. The plan is unfunded. portion of the Company’s worldwide valuation allowance of $42.7 million related to foreign tax loss carryforwards and As the pension and postretirement activity attributable to the domestic tax credit carryforwards. Celera Genomics group was not material for the fiscal year STEMS ended June 30, 1999, all pension and postretirement amounts Y The Applied Biosystems group has been allocated a recognized in the Company’s Consolidated Statements of consolidated domestic loss carryforward of $144.4 million Financial Position were allocated to the Applied Biosystems
IOS and domestic tax credit carryforwards of $38 million that will group. B expire between the fiscal years 2003 and 2021, and loss carryforwards of approximately $37 million in various foreign The components of net pension and postretirement benefit countries with varying expiration dates. expenses for fiscal 1999, 2000, and 2001 are set forth in the following table: U.S. income taxes were not provided on approximately $406 PLIED million of net unremitted earnings from foreign subsidiaries (Dollar amounts in millions) 1999 2000 2001 AP since the Company either intends to permanently reinvest substantially all of such earnings outside the U.S., or expects Pension the effect of any remittance after considering available tax Service cost $ 5.2 $ 7.4 $ 7.7 credits and amounts previously accrued, not to be significant Interest cost 38.7 44.0 48.5 to the results of operations. These earnings include income Expected return on plan assets (38.6) (45.6) (50.3) from manufacturing operations in Singapore, which is tax- Amortization of transition asset (1.9) (2.4) (.2) exempt through fiscal 2004. Amortization of prior service cost (.4) (.4) (.5) Amortization of losses .5 .2 .1 Note 5—Retirement and Other Benefits Curtailments and settlements .1 Pension Plans, Retiree Healthcare, and Life Insurance Net periodic expense $ 3.6 $ 3.2 $ 5.3 Benefits Postretirement Benefit The Company maintains or sponsors pension plans that Service cost $ .2 $ .3 $.2 cover a portion of all worldwide employees. Pension benefits Interest cost 4.8 4.6 4.8 earned are generally based on years of service and Amortization of gains (1.5) (1.8) (1.7) compensation during active employment. However, the level Net periodic expense $ 3.5 $ 3.1 $ 3.3 of benefits and terms of vesting may vary among plans. Pension plan assets are administered by trustees and are
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
The following tables set forth the changes in the benefit benefit obligation and accumulated benefit obligation for the obligations and the plan assets, the funded status of the plans, pension plans with accumulated benefit obligations in excess and the amounts recognized in the Applied Biosystems of plan assets were $14.0 million and $12.8 million, group’s Combined Statements of Financial Position at respectively, at June 30, 2000, with no corresponding plan June 30, 2000 and 2001: assets. The projected benefit obligation and the accumulated Pension Postretirement benefit obligation for the pension plans with accumulated (Dollar amounts in millions) 2000 2001 2000 2001 benefit obligations in excess of plan assets were $582.5 million and $575.5 million, respectively, at June 30, 2001, Change In Benefit with corresponding net plan assets having a fair value of Obligation $553.2 million. Benefit obligation, beginning of year $ 594.1 $ 607.5 $ 62.5 $ 61.9 The following actuarial assumptions were used for the Service cost 7.4 7.7 .3 .2 pension and postretirement plans: Interest cost 44.0 48.5 4.6 4.8 2000 2001 APPLIED Benefits paid (36.7) (37.1) (5.4) (5.6) Domestic Plans 1 Actuarial (gain) loss 7.9 35.1 (.1) 5.0 Discount rate 8% 7/2% Variable annuity unit Compensation increase 6% 6% 1 1 1 value change (12.9) (70.5) Expected rate of return 8 – 9/4% 7/2 – 9/4% Addition of plan 3.9 B Foreign Plans IOSYSTE Foreign currency 3 Discount rate 3 – 5/4% 3% translation (.2) (1.1) Compensation increase 2 – 4% 2% Other (.8) Expected rate of return 4 – 9% 4% Benefit obligation $ 607.5 $ 589.3 $ 61.9 $ 66.3
Change In Plan Assets As part of the divestiture of the Analytical Instruments M
Fair value of plan assets, business in fiscal 1999, the Company guaranteed the pension S
beginning of year $ 600.6 $ 615.0 $-$- benefits for employees of a former German subsidiary. These G
Actual return on plan benefits were not transferable to the buyer under German ROU assets 47.9 (23.5) law. The guarantee, which approximated $41.2 million and $35.4 million at June 30, 2000 and 2001, respectively, is not
Company contributions .8 5.4 5.6 P Benefits paid (34.3) (34.7) (5.4) (5.6) expected to have a material adverse effect on the Company’s Addition of plan 1.0 financial position or results of operations. Foreign currency For measurement purposes, an 11% annual rate of increase in translation (.2) (.5) the per capita cost of covered healthcare benefits was Other (.1) assumed for plan year 2002, gradually reducing to 5.5% in Fair value of plan 2011 and thereafter. A one-percentage-point change in assets $ 615.0 $ 557.0 $-$- assumed healthcare cost trend rates would have the following Funded Status effects on postretirement benefits: Reconciliation One-Percentage- One-Percentage- Funded status $ 7.5 $ (32.3) $ (61.9) $ (66.3) (Dollar amounts in millions) Point Increase Point Decrease Unrecognized prior Effect on the total of service service gain (2.0) (1.9) and interest cost components $ .4 $ ( .4) Unrecognized Effect on postretirement transition asset .9 .9 benefit obligation $ 5.0 $ (4.8) Unrecognized (gains) losses 29.6 66.6 (21.5) (14.7) Savings Plans Net amount recognized $ 36.0 $ 33.3 $ (83.4) $ (81.0) The Company provides a 401(k) savings plan, for domestic Amounts Recognized employees, with automatic Company contributions of 2% of In The Statement Of eligible compensation and a dollar-for-dollar matching Financial Position contribution of up to 4% of eligible compensation. Prepaid benefit cost $ 47.4 $-$-$- Employees not eligible for the employee pension plan Accrued benefit liability (15.4) (24.7) (83.4) (81.0) receive an extra 2% Company contribution in addition to Intangible asset .6 .6 the automatic 2% Company contribution through June 30, Minimum pension 2004, while pension plan participants continue to receive the liability adjustment 3.4 57.4 automatic 2% contribution. The Company’s contributions Net amount recognized $ 36.0 $ 33.3 $ (83.4) $ (81.0) allocated to the Applied Biosystems group were $8.0 million, $10.2 million, and $12.5 million for fiscal 1999, 2000, and A minimum pension liability adjustment is required when 2001, respectively. The Company recorded expenses for the actuarial present value of accumulated benefits exceeds foreign defined contribution plans of $1.1 million, $1.3 plan assets and accrued pension liabilities. The projected
APPLERA CORPORATION Annual Report 2001 81 Burrups Project: Celera_Genomics Final No: 312849 Job Number/Filename: e_312849_doc5.3d, Page: 82 of 90 Time: 18:20:07, Date: 09/17/01, BL: 0
APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
million, and $1.8 million in fiscal 1999, 2000, and 2001, Customer Information respectively. The Applied Biosystems group has a large and diverse Postemployment Benefits customer base. No single customer accounted for more than 10% of total net revenues during fiscal 1999, 2000, and The Company provides certain postemployment benefits to 2001. eligible employees. These benefits generally include severance, disability, and medical-related costs paid after Note 7—Allocated Net Worth employment but before retirement. Applera – Applied Biosystems stock represents a separate class Note 6—Segment, Geographic, and Customer of the Company’s common stock. Additional shares of Information Applera – Applied Biosystems stock may be issued from time to time upon exercise of stock options or at the discretion of Business Segments the Company’s Board of Directors. Transactions in The Applied Biosystems group, which operates in one Applera – Applied Biosystems stock are attributed to the
UP business segment, is engaged principally in the development, Applied Biosystems group’s allocated net worth and O manufacture, sale, and service of instrument systems and transactions in Applera – Celera stock are attributed to the R Celera Genomics group’s allocated net worth.
G associated consumable products for life science research and related applications. Its products are used in various The Company’s authorized capital stock consists of one applications including the synthesis, amplification, billion shares of a class of common stock designated as purification, isolation, analysis, and sequencing of nucleic Applera Corporation – Applied Biosystems Group Common acids, proteins, and other biological molecules. STEMS Stock, 225 million shares of a class of common stock Y Geographic Areas designated as Applera Corporation – Celera Genomics Group Common Stock, and 10 million shares of preferred
IOS Information concerning principal geographical areas for fiscal stock. Of the 10 million authorized shares of preferred stock, B 1999, 2000, and 2001 follows: the Company has designated 80,000 shares of two series of participating junior preferred stock in connection with the (Dollar amounts in millions) 1999 2000 2001 Company’s Stockholder Protection Rights Agreement. See Net Revenues From Note 7 to the Applera Corporation Consolidated Financial PLIED External Customers Statements for information regarding the stockholders’ equity
AP United States $ 596.5 $ 638.3 $ 757.4 of the Company. Europe 370.1 376.0 419.9 Common stock repurchases have been made in support of Japan 154.8 213.6 251.2 the Company’s various stock plans. During fiscal 1999, Other Asian Pacific 20,000 shares of Applera – Applied Biosystems stock, before countries 56.1 60.8 80.8 giving effect to the stock splits, were repurchased to support Latin America and other 26.9 39.6 46.1 various stock plans. There were no repurchases of Combined $ 1,204.4 $ 1,328.3 $ 1,555.4 Applera – Applied Biosystems stock during fiscal 2000 or fiscal 2001. Net revenues are attributable to geographic areas based on the region of destination. Note 8—Stock Plans Information concerning long-lived assets at June 30, 2000 Stock Option Plans and 2001 follows: Under the Company’s stock option plans, officers, directors, and other employees may be granted options, each of which (Dollar amounts in millions) 2000 2001 allows for the purchase of shares of existing classes of Long-Lived Assets common stock at a price of not less than 100% of fair United States $ 198.3 $ 283.1 market value at the date of grant. Prior to the recapitalization Europe 15.3 17.5 of the Company, most option grants had a two-year vesting Japan 18.1 14.6 schedule, whereby 50% of the option grant vested at the end Other Asian Pacific countries 2.1 3.1 of each year from the date of grant. The Company’s Board Other countries .8 .6 of Directors has extended that schedule for most options Combined $ 234.6 $ 318.9 granted subsequent to the recapitalization whereby 25% will vest annually, resulting in 100% vesting after four years. Long-lived assets exclude goodwill and other intangible Options generally expire ten years from the date of grant. At assets. June 30, 2001, 27.6 million shares of Applera – Applied Biosystems stock were authorized for grant of options. See Note 8 to the Applera Corporation Consolidated Financial Statements for information regarding transactions related to the Company’s stock option plans and a summary of options outstanding and exercisable at June 30, 2001.
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
1999 Stock Incentive Plans Restricted Stock The Applera Corporation/Applied Biosystems Group 1999 As part of the Company’s stock incentive plans, employees Stock Incentive Plan (the ‘‘Applera – Applied Biosystems may be, and non-employee directors are, granted shares of Group Plan’’) and the Applera Corporation/Celera Genomics restricted stock that will vest when certain continuous Group 1999 Stock Incentive Plan (the ‘‘Applera – Celera employment/service restrictions and/or specified Group Plan’’) were first approved in April 1999. The performance goals are achieved. The fair value of shares Applera – Applied Biosystems Group Plan authorizes grants granted is generally expensed over the restricted periods, of stock options, stock awards, and performance shares with which may vary depending on the estimated achievement of respect to Applera – Applied Biosystems stock. The performance goals. Applera – Celera Group Plan authorizes grants of stock options, stock awards, and performance shares with respect As a result of the recapitalization of the Company, each to Applera – Celera stock. Directors, certain officers, and key share of restricted stock held was redesignated as one share of Applera – Applied Biosystems stock and 0.5 of a share employees with responsibilities involving both the Applied APPLIED Biosystems group and the Celera Genomics group may be of Applera – Celera stock prior to giving effect to the granted awards under both incentive plans in a manner Applera – Applied Biosystems stock splits and the which reflects their responsibilities. The Company’s Board of Applera – Celera stock split. Restricted stock granted to Directors believes that granting awards tied to the employees and non-employee directors totaled 3,600 shares performance of the group in which the participants work of Applera – Applied Biosystems stock and 900 shares of Applera – Celera stock during fiscal 2000 and 255,225 shares B
and, in certain cases the other group, is in the best interests IOSYSTE of the Company and its stockholders. of Applera – Applied Biosystems stock and 63,900 shares of Applera – Celera stock during fiscal 2001. Restricted stock Employee Stock Purchase Plan granted prior to the recapitalization to employees and non- employee directors during fiscal 1999 totaled 42,900 shares The Company’s employee stock purchase plans offer of the Applera Corporation (predecessor) common stock.
U.S. and certain non-U.S. employees the right to purchase Compensation expense of continuing operations recognized M
shares of Applera – Applied Biosystems stock and/or S by the Applied Biosystems group for these awards was $2.3
Applera – Celera stock. The purchase price in the U.S. is G million, $5.5 million, and $4.8 million for fiscal 1999, 2000, equal to the lower of 85% of the average market price of the and 2001, respectively. Unearned compensation included in ROU applicable class of common stock on the offering date or allocated net worth was $14.0 million at June 30, 2001. 85% of the average market price of such class of common
There was no unearned compensation included in allocated P stock on the last day of the purchase period. Provisions of net worth at June 30, 2000. the plan for employees in countries outside the U.S. vary according to local practice and regulations. Performance Unit Bonus Plan Applera – Applied Biosystems stock issued under the The Company adopted a Performance Unit Bonus Plan in employee stock purchase plans during fiscal 1999, 2000, and fiscal 1997. The plan utilized stock options and a 2001 totaled 98,000 shares, 161,000 shares, and 250,000 performance unit bonus pool. Performance units granted shares, respectively. Applera – Celera stock issued under the under the plan represented the right to receive a cash or employee stock purchase plans during fiscal 1999, 2000, and stock payment from the Company at a specified date in the 2001 totaled 24,000 shares, 303,000 shares, and 269,000 future. The amount of the payment was determined on the shares, respectively. Common stock issued under the date of the grant. The performance units vested upon shares employee stock purchase plans during fiscal 1999 totaled of the Company’s common stock attaining and maintaining 168,000 shares of Applera Corporation (predecessor) specified price levels for a specified period. As of June 30, common stock. 2000, three series of performance units were granted under the plan. Compensation expense recognized under the plan Director Stock Purchase and Deferred Compensation for fiscal 1999 and 2000 was $13.5 million and $53.1 Plan million, respectively. Fiscal 1999 and 2000 compensation The Company has a Director Stock Purchase and Deferred expense included $9.1 million and $45.0 million, Compensation Plan that requires non-employee directors respectively, related to the acceleration of payments under of the Company to apply at least 50% of their annual the plan’s three series as a result of the attainment of the retainer to the purchase of common stock. Purchases of performance targets. The vesting of the related stock options Applera – Applied Biosystems stock and Applera – Celera was not accelerated. No compensation expense pertaining to stock are made in a ratio approximately equal to the number the plan was recognized in fiscal 2001. of shares of Applera – Applied Biosystems stock and Applera – Celera stock outstanding. The purchase price The plan was modified in fiscal 2000 to replace the is the fair market value on the date of purchase. At performance units with performance stock options. June 30, 2001, the Company had approximately 335,000 Performance stock options vest in equal portions upon the shares of Applera – Applied Biosystems stock and earlier of the shares of Applera – Applied Biosystems stock approximately 84,000 shares of Applera – Celera stock attaining and maintaining specified price levels for a specified available for issuance under this plan. period of time or after a specified future date.
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
Accounting for Stock-Based Compensation Related-Party Information APB No. 25, ‘‘Accounting for Stock Issued to Employees,’’ Sales of Products and Services Between Groups and FASB Interpretation No. 44 (‘‘FIN No. 44’’), A group will sell products or services to the other group on ‘‘Accounting for Certain Transactions Involving Stock terms that would be available from third parties in Compensation – An Interpretation of Accounting Principles commercial transactions. If terms for such transactions are Board Opinion No. 25’’ are applied in accounting for stock- not available, the purchasing group will pay fair value as based compensation plans. Accordingly, no compensation determined by the Company’s Board of Directors for such expense has been recognized for stock option and employee products and services or at the cost (including overhead) of stock purchase plans, as all options have been issued at fair the selling group. For fiscal 1999, 2000, and 2001, net market value. revenues from leased instruments, shipments of consumables Pro forma net income as required by SFAS No. 123, and project materials, and contracted R&D services to the ‘‘Accounting for Stock-Based Compensation,’’ has been Celera Genomics group were $17.3 million, $59.8 million, determined for employee stock plans under the statement’s and $64.1 million, respectively.
UP fair value method. For purposes of pro forma disclosure, the
O Access to Technology and Know-How estimated fair value of the options is amortized to expense R Each group has free access to all Company technology and
G over the options’ vesting period. know-how (excluding products and services of the other Pro forma information for the years ended June 30, 1999, group) that may be useful in that group’s business, subject to 2000, and 2001 is presented below: obligations and limitations applicable to the Company and to such exceptions that the Company’s Board of Directors may
STEMS (Dollar amounts in millions) 1999 2000 2001 determine. The groups consult with each other on a regular Y Income from basis concerning technology issues that affect both groups. continuing operations The costs of developing technology remain in the group IOS
B As reported $ 148.4 $ 186.2 $ 212.4 responsible for its development. Pro forma $ 127.9 $ 140.2 $ 115.6 Institute of Genomic Research (‘‘TIGR’’) Note 8 to the Applera Corporation Consolidated Financial During fiscal 2001, the Applied Biosystems group recognized
PLIED Statements contains the information regarding the revenues of $7.0 million from TIGR, of which $1.8 million assumptions made in calculating pro forma compensation was receivable as of June 30, 2001. The President of the AP expense in accordance with SFAS No. 123. Celera Genomics group is the current Chairman of the Board of Trustees of TIGR. Also, an immediate family Note 9—Additional Information member of the President of the Celera Genomics group Selected Accounts currently serves as TIGR’s President and is on TIGR’s Board of Trustees. Additionally, as of June 30, 2001, TIGR The following table provides the major components of owned fully vested options to purchase approximately 1.4 selected accounts of the Combined Statements of Financial million shares of Applera – Celera stock. Position at June 30, 2000 and 2001: Celera Diagnostics Joint Venture (Dollar amounts in millions) 2000 2001 During fiscal 2001, the Applied Biosystems group funded Other Long-Term Assets $.9 million and $.2 million for capital expenditures and Minority equity investments $ 297.7 $ 111.1 working capital needs, respectively, for the Celera Noncurrent deferred tax asset 29.8 121.9 Diagnostics joint venture (see Note 2). Other 141.9 115.6 Total other long-term assets $ 469.4 $ 348.6 Note 10—Commitments and Contingencies Other Accrued Expenses Future minimum payments at June 30, 2001 under non- Deferred service contract revenues $ 46.7 $ 55.0 cancelable operating leases for real estate and equipment Other 121.0 113.6 were as follows: Total other accrued expenses $ 167.7 $ 168.6 (Dollar amounts in millions) Other Long-Term Liabilities 2002 $ 39.9 Accrued postretirement benefits $ 77.9 $ 75.5 2003 31.8 Other 47.1 53.1 2004 24.3 Total other long-term liabilities $ 125.0 $ 128.6 2005 17.1 Minority equity investments consist of common stock in 2006 12.4 publicly-traded companies and common stock and preferred 2007 and thereafter 45.6 stock in privately-held companies. Unrealized gains and Total $ 171.1 losses on publicly-traded companies were $256.1 million and $.1 million, respectively, at June 30, 2000 and $69.9 million Rental expense was $34.6 million for fiscal 1999, $35.6 and $3.8 million, respectively, at June 30, 2001. million for fiscal 2000, and $52.7 million for fiscal 2001.
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
Amersham allegations were not in the previous suit under the ‘235 On November 18, 1997, Amersham Pharmacia Biotech, Inc. patent. This action is in the early stages of discovery. (‘‘Amersham’’) filed a patent infringement action against the On May 30, 2000, the Company filed a patent infringement Company in the United States District Court for the action against Amersham in the United States District Court Northern District of California. The complaint alleges that for the Northern District of California. The Company asserts the Company is directly, contributorily, or by inducement that one of its patents (U.S. Patent No. 5,945,526) is infringing U.S. Patent No. 5,688,648 (‘‘the ‘648 patent’’). infringed by reason of Amersham’s sale of DNA analysis Amersham asserts that the Company’s use and sale of DNA reagents and systems that incorporate ET Terminator analysis reagents and systems that incorporate ‘‘BigDye’’ fluorescence detection technology. The claims construction fluorescence detection technology infringe the ‘648 patent, hearing previously scheduled for June 7, 2001 has been and seeks injunctive and monetary relief. The Company postponed. answered the complaint, alleging that the ‘648 patent is
invalid and unenforceable, and that the Company has not On July 10, 2001, United States Judge Charles R. Breyer APPLIED infringed the ‘648 patent. In December 2000, the court stayed all cases in the litigation described above for the granted Amersham’s motion for summary judgment in part, purpose of facilitating court ordered settlement mediation. finding that certain of the Company’s activities infringe the The stay is scheduled to expire on March 11, 2002. claims of the ‘648 patent, but denied Amersham’s motion for The Company believes that the claims asserted by Amersham summary judgment that the Company induced its customers
and Molecular Dynamics in the foregoing cases are without B
to infringe the claims of the ‘648 patent. On April 6, 2001, merit and intends to defend the cases vigorously. However, IOSYSTE the court granted the Company’s motion for summary the outcome of this or any other litigation is inherently judgment finding that the Company’s recently introduced uncertain, and the Company cannot be sure that it will BigDye Version 3.0 dye technology does not infringe the prevail in any of these matters. An adverse determination in ‘648 patent. any of the actions brought by Amersham could have a
On March 13, 1998, the Company filed a patent material adverse effect on the financial statements of the M infringement action against Amersham and Molecular Applied Biosystems group and the Company. S
Dynamics, Inc. in the United States District Court for the G
Other ROU Northern District of California. The Company asserts that one of its patents (U.S. Patent No. 4,811,218) is infringed by The Company has been named as a defendant in several other legal actions, including patent, commercial, and reason of Molecular Dynamics’ and Amersham’s sale of P certain DNA analysis systems (e.g., the MegaBACE 1000 environmental, arising from the conduct of normal business System). In response, Amersham has asserted various activities. Although the amount of any liability that might affirmative defenses and several counterclaims, including that arise with respect to any of these matters cannot be the Company is infringing two patents, U.S. Patent No. accurately predicted, the resulting liability, if any, will not in 5,091,652 (‘‘the ‘652 patent’’) and U.S. Patent No. the opinion of management have a material adverse effect on 5,459,325, each owned by or licensed to Molecular the financial statements of the Applied Biosystems group or Dynamics, by selling certain ABI PRISMTM DNA sequencing the Company. systems. In December 2000, the court granted the The holders of Applera – Applied Biosystems stock are Company’s motion for summary judgment of non- stockholders of the Company and will continue to be subject infringement of the ‘652 patent. The trial date previously to all risks associated with an investment in the Company, scheduled for August 6, 2001 was vacated in July 2001. including any legal proceedings and claims affecting the On May 21, 1998, Amersham filed a patent infringement Celera Genomics group. action against the Company in the United States District Court for the Southern District of New York. The Note 11—Financial Instruments complaint alleges that the Company is infringing, In June 1998, the FASB issued Statement of Financial contributing to the infringement of, and inducing the Accounting Standards (‘‘SFAS’’) No. 133, ‘‘Accounting for infringement of U.S. Patent No. 4,707,235 (‘‘the ‘235 Derivative Instruments and Hedging Activities,’’ amended in patent’’) by reason of the Company’s sale of certain ABI June 2000 by SFAS No. 138, ‘‘Accounting for Certain TM PRISM DNA sequencing systems. The complaint seeks Derivative Instruments and Certain Hedging Activities.’’ injunctive and monetary relief. The Company answered the These statements require the recognition of all derivative complaint, alleging that the ‘235 patent is invalid and that financial instruments as either assets or liabilities in the the Company does not infringe the ‘235 patent. The matters statement of financial position and the measurement of those described in this paragraph and the immediately preceding instruments at fair value. The accounting for changes in the paragraph have been consolidated into a single case to be fair value of a derivative is driven by the intended use of the heard in the United States District Court for the Northern derivative and the resulting designation. The Applied District of California. In December 2000, the court granted Biosystems group adopted these statements effective July 1, the Company’s motion for summary judgment of non- 2000. The cumulative effect of adoption resulted in an infringement of the ‘235 patent. However, on December 18, immaterial adjustment to the combined financial statements. 2000, Amersham filed a new complaint alleging that the Company is infringing the ‘235 patent by reason of the The Company’s foreign currency risk management strategy Company’s sale of certain DNA sequencing systems, which utilizes derivative instruments to hedge certain foreign
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
currency forecasted revenues and to offset the impact of Other Foreign Currency Derivatives changes in foreign currency exchange rates on certain foreign The Applied Biosystems group also uses derivative financial currency-denominated receivables and payables. The instruments to hedge against the adverse effects that foreign principal objective of this strategy is to minimize the risks currency exchange rate fluctuations may have on its foreign and/or costs associated with the Company’s global financing currency-denominated net asset positions. The gains and and operating activities. The Company utilizes foreign losses on these derivatives are expected to largely offset exchange forward, option, and range forward contracts to transaction losses and gains, respectively, on the underlying manage its foreign currency exposures, and an interest rate foreign currency-denominated assets and liabilities, both of swap to manage its interest rate exposure. The Company which are recorded in other income (expense), net in the does not use derivative financial instruments for trading Combined Statements of Operations. purposes or for activities other than risk management, nor is it a party to leveraged derivatives. Interest Rate Risk Management The fair value of foreign currency derivative contracts is The Company maintains an interest rate swap in conjunction
UP recorded in either prepaid expenses and other current assets with a five-year Japanese yen debt obligation (see Note 3).
O or other accrued expenses. The fair value of the interest rate The interest rate swap involves the payment of a fixed rate
R swap is recorded in other long-term liabilities. of interest and the receipt of a floating rate of interest G without the exchange of the underlying notional loan Cash Flow Hedges principal amount. Under the terms of this contract, the The Applied Biosystems group’s international sales are Company will make fixed interest payments of 2.1% while typically denominated in the customers’ local (non-U.S. receiving interest at a LIBOR floating rate. No other cash STEMS dollar) currency. The Applied Biosystems group uses foreign payments will be made unless the contract is terminated Y exchange forward, option, and range forward contracts to prior to maturity, in which case the amount to be paid or hedge a portion of forecasted international sales not received in settlement will be established by agreement at the IOS denominated in U.S. dollars. The Company utilizes hedge time of termination. The agreed upon amount would usually B accounting on derivative contracts which are considered represent the net present value at current interest rates of the highly effective in offsetting the changes in fair value of the remaining obligation to exchange payments under the terms forecasted sales transactions caused by movements in foreign of the contract. currency exchange rates. These contracts are designated as PLIED At June 30, 2001, the Company had a liability of $.5 million cash flow hedges and the effective portion of the change in which represented the fair value of the interest rate swap. AP the fair value of these contracts is recorded in other Changes in the fair value of the interest rate swap are comprehensive income (loss) in the Combined Statements of recognized in other comprehensive income. A change in Financial Position until the underlying external forecasted interest rates would have no impact on the Company’s transaction affects earnings. At that time, the gain or loss on reported interest expense and related cash payments because the derivative instrument, which had been deferred in other the floating rate debt and fixed rate interest swap have the comprehensive income (loss), is reclassified to net revenues same maturity and are based on the same interest rate index. in the Combined Statements of Operations. During fiscal 2001, the Applied Biosystems group recognized net gains of Concentration of Credit Risk $17.8 million in net revenues from derivative instruments The forward contracts, options, and swap used by the designated as cash flow hedges of anticipated sales. At June Company in managing its foreign currency and interest rate 30, 2001, $17.8 million of derivative gains ($11.2 million net exposures contain an element of risk in that the of deferred taxes) recorded in other comprehensive income counterparties may be unable to meet the terms of the (loss) are expected to be reclassified to earnings during the agreements. However, the Company minimizes this risk by next twelve months. During the fourth quarter of fiscal limiting the counterparties to a diverse group of highly-rated 2001, the Financial Accounting Standards Board’s Derivative major domestic and international financial institutions with Implementation Group (‘‘DIG’’) issued guidance that would which the Company has other financial relationships. The allow a company to defer in other comprehensive income, Company is exposed to potential losses in the event of non- all or part of the changes in the option’s time value for performance by these counterparties; however, the Company option-based hedging strategies that are perfectly or highly does not expect to record any losses as a result of effective. The Applied Biosystems group changed its counterparty default. The Company does not require and is methodology of accounting for currency options during the not required to place collateral for these financial fourth quarter of fiscal 2001 based on this new guidance instruments. Other financial instruments that potentially from the DIG. Prior to this new guidance, any changes in subject the Company to concentrations of credit risk are cash the time value component of a currency option were and cash equivalents and accounts receivable. The Company recognized in earnings in the period in which they occurred. minimizes the risk related to cash and cash equivalents by For fiscal 2001, the Applied Biosystems group recognized utilizing highly-rated financial institutions that invest in a expense of $3.4 million included in other income (expense), broad and diverse range of financial instruments. The net in the Combined Statements of Operations, which Company has established guidelines relative to credit ratings represented the change in the time value component of the and maturities that seek to maintain safety and liquidity. fair value of option contracts designated as cash flow hedges.
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
Concentration of credit risk with respect to accounts Note 12—Quarterly Financial Information receivable is limited due to the Applied Biosystems group’s (Unaudited) large and diverse customer base, which is dispersed over The following is a summary of quarterly financial results: differing geographic areas. Allowances are maintained for potential credit losses and such losses have been within First Quarter Second Quarter management’s expectations. (Dollar amounts in millions) 2000 2001 2000 2001 Fair Value Net revenues $ 292.3 $ 363.6 $ 335.9 $ 411.0 The fair value of significant financial instruments held or Gross margin 154.8 193.9 180.7 213.2 owned by the Company is estimated using various methods. Net income 29.7 49.1 43.8 58.0 Cash and cash equivalents approximate their carrying amount. The fair value of minority equity investments is Third Quarter Fourth Quarter (Dollar amounts in millions) 2000 2001 2000 2001
estimated based on quoted market prices, if available, or APPLIED quoted market prices of financial instruments with similar Net revenues $ 368.1 $ 439.8 $ 391.8 $ 405.1 characteristics. The fair value of debt is based on the current Gross margin 202.3 231.2 212.6 206.7 rates offered to the Company for debt of similar remaining Net income 56.1 57.7 56.6 47.6 maturities. The following table presents the carrying amounts and fair values of the Applied Biosystems group’s significant Events Impacting Comparability financial instruments at June 30, 2000 and 2001: B Fiscal 2000 Second and fourth quarter results included IOSYSTE 2000 2001 before-tax gains of $25.8 million and $22.8 million, Carrying Fair Carrying Fair respectively, in non-recurring gains primarily related to the (Dollar amounts in millions) Amount Value Amount Value sale of a portion of the Company’s minority equity Cash and cash investments. Second and fourth quarter results included equivalents $ 394.6 $ 394.6 $ 392.5 $ 392.5 before-tax charges of $21.6 million and $23.4 million, M Currency forwards and respectively, related to the acceleration of certain long-term S compensation programs. Fourth quarter results included $2.1 G
options $ 3.7 $ 3.0 $ 2.6 $ 20.3 ROU million of acquisition-related before-tax costs and a before- Interest rate swap $ - $ (1.0) $ - $ (.5) tax gain of $8.2 million from the sale of real estate. There Other investments $ - $ - $ 9.0 $ 9.0
was no aggregate after-tax effect of the above items for the P Minority equity second and fourth quarters. investments $ 42.5 $ 297.7 $ 45.0 $ 111.1 Short-term debt $ 15.7 $ 15.7 $ 45.2 $ 45.2 Fiscal 2001 First and second quarter results included before- Long-term debt $ 36.1 $ 36.1 $-$- tax non-recurring gains of $12.0 million and $3.0 million, respectively, primarily related to the sale of the Company’s Net unrealized gains and losses on minority equity minority equity investments. investments are reported as a separate component of accumulated other comprehensive income (loss) as part of allocated net worth in the Combined Statements of Financial Position.
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
Note 13—Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss), net of tax, for fiscal 1999, 2000, and 2001 was as follows: Unrealized Unrealized Foreign Minimum Accumulated Gain Gain on Currency Pension Other (Loss) on Hedge Translation Liability Comprehensive (Dollar amounts in millions) Investments Contracts Adjustments Adjustment Income (Loss) Balance at June 30, 1998 $ (1.4) $ - $ (7.8) $ (.4) $ (9.6) Activity 11.9 (5.4) (1.7) 4.8 Balance at June 30, 1999 10.5 (13.2) (2.1) (4.8) Activity 155.5 (25.2) (.1) 130.2
UP Balance at June 30, 2000 166.0 (38.4) (2.2) 125.4
O Activity (123.2) 11.2 (34.0) (35.2) (181.2) R Balance at June 30, 2001 $ 42.8 $ 11.2 $ (72.4) $ (37.4) $ (55.8) G Information regarding the income tax effects for items of The foreign currency translation adjustments are not other comprehensive income (loss) are as follows: currently adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Before- Tax After- STEMS Tax Benefit Tax Y (Dollar amounts in millions) Amount (Expense) Amount Note 14—Discontinued Operations For the Year Ended Effective May 28, 1999, the Company completed the sale of IOS June 30, 2000 B its Analytical Instruments business to EG&G, Inc. Analytical Unrealized gains on investments $ 293.3 $ (106.2) $ 187.1 Instruments, formerly a unit of the Applied Biosystems Less: Reclassification group, developed, manufactured, marketed, sold, and adjustments for gains realized serviced analytical instruments used in a variety of markets.
PLIED in net income 48.6 (17.0) 31.6 Net unrealized gains on The aggregate consideration received by the Company was
AP investments 244.7 (89.2) 155.5 $425 million, consisting of $275 million in cash and one- year secured promissory notes in the aggregate principal Foreign currency translation amount of $150 million bearing an interest rate of 5% per adjustment (25.2) (25.2) annum. The promissory notes were collected in fiscal 2000. Minimum pension liability In fiscal 1999, the Company recognized a net gain on adjustment (1.3) 1.2 (.1) disposal of discontinued operations of $100.2 million, net of Other comprehensive income $ 218.2 $ (88.0) $ 130.2 $87.8 million of income taxes. For the Year Ended Amounts previously reported for Analytical Instruments were June 30, 2001 reclassified and stated as discontinued operations. There were Unrealized losses on investments $ (174.7) $ 61.2 $ (113.5) no remaining assets, liabilities, or operations within Less: Reclassification discontinued operations at or for the fiscal years ended June adjustments for gains realized 30, 2000 and 2001. Summary results for the eleven months in net income 14.9 (5.2) 9.7 ended May 28, 1999 prior to discontinuance were as follows: Net unrealized losses on investments (189.6) 66.4 (123.2) (Dollar amounts in millions) 1999 Unrealized gains on hedge Net revenues $ 479.4 contracts 35.1 (12.4) 22.7 Total costs and expenses 509.7 Less: Reclassification Provision (benefit) for income taxes (9.2) adjustments for gains realized Income (loss) from discontinued operations $ (21.1) in net income 17.8 (6.3) 11.5 Net unrealized gains on hedge contracts 17.3 (6.1) 11.2 Foreign currency translation adjustment (34.0) (34.0) Minimum pension liability adjustment (54.1) 18.9 (35.2) Other comprehensive loss $ (260.4) $ 79.2 $ (181.2)
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APPLIED BIOSYSTEMS GROUP Notes to Combined Financial Statements continued
Income Taxes (Dollar amounts in millions) 1999 Income (loss) before income taxes of discontinued operations for the eleven months ended May 28, 1999 consisted of the Currently Payable following: Domestic $ (13.7) Foreign 4.5 (Dollar amounts in millions) 1999 Provision (benefit) for income taxes from United States $ (36.2) discontinued operations $ (9.2) Foreign 5.9 Total $ (30.3) For the eleven months ended May 28, 1999, the effective tax rate for discontinued operations was 30%. The difference The components of the provision (benefit) for income taxes between the effective tax rate and the statutory tax rate of of discontinued operations for the eleven months ended May 35% was mainly attributed to benefits from the use of U.S.
28, 1999 consisted of the following: alternative minimum tax credit carryforwards, benefits from APPLIED the use of a foreign sales corporation and federal research tax credits, and restructuring charges. B IOSYSTE M S G ROU P
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APPLIED BIOSYSTEMS GROUP Report of Management and Report of Independent Accountants
Report of Management Report of Independent Accountants To the Stockholders of To the Stockholders and Board of Directors of Applera Corporation Applera Corporation
Management is responsible for the accompanying combined In our opinion, the accompanying combined statements of financial statements, which have been prepared in financial position and the related combined statements of conformity with generally accepted accounting principles. In operations, of allocated net worth, and of cash flows present preparing the financial statements, it is necessary for fairly, in all material respects, the financial position of the management to make informed judgments and estimates Applied Biosystems group of Applera Corporation at June which it believes are in accordance with accounting 30, 2001 and 2000, and the results of its operations and its principles generally accepted in the United States appropriate cash flows for each of the three fiscal years in the period under the circumstances. Financial information presented ended June 30, 2001 in conformity with accounting
UP elsewhere in this annual report is consistent with that in the principles generally accepted in the United States of
O financial statements. America. These financial statements are the responsibility of R the management of Applera Corporation; our responsibility G In meeting its responsibility for preparing reliable financial is to express an opinion on these financial statements based statements, the Company maintains a system of internal on our audits. We conducted our audits of these statements accounting controls designed to provide reasonable assurance in accordance with auditing standards generally accepted in that assets are safeguarded and transactions are properly the United States of America, which require that we plan STEMS recorded and executed in accordance with corporate policy and perform the audit to obtain reasonable assurance about Y and management authorization. The Company believes its whether the financial statements are free of material accounting controls provide reasonable assurance that errors misstatement. An audit includes examining, on a test basis, IOS or irregularities which could be material to the financial evidence supporting the amounts and disclosures in the B statements are prevented or would be detected within a financial statements, assessing the accounting principles used timely period. In designing such control procedures, and significant estimates made by management, and management recognizes judgments are required to assess and evaluating the overall financial statement presentation. We balance the costs and expected benefits of a system of
PLIED believe that our audits provide a reasonable basis for our internal accounting controls. Adherence to these policies and opinion.
AP procedures is reviewed through a coordinated audit effort of the Company’s internal audit staff and independent As described above and more fully in Note 1 to the Applied accountants. Biosystems group’s combined financial statements, the Applied Biosystems group is a group of Applera The Audit/Finance Committee of the Board of Directors is Corporation; accordingly, the combined financial statements comprised solely of outside directors and is responsible for of the Applied Biosystems group should be read in overseeing and monitoring the quality of the Company’s conjunction with the audited financial statements of Applera accounting and auditing practices. The independent Corporation. accountants and internal auditors have full and free access to the Audit/Finance Committee and meet periodically with the committee to discuss accounting, auditing, and financial reporting matters. PricewaterhouseCoopers LLP Stamford, Connecticut July 26, 2001 Dennis L. Winger Senior Vice President and Chief Financial Officer
Tony L. White Chairman, President, and Chief Executive Officer
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CELERA GENOMICS GROUP Combined Statements of Operations
(Dollar amounts in thousands) For the years ended June 30, 1999 2000 2001 Net Revenues $ 12,541 $ 42,747 $ 89,385 Costs And Expenses Cost of sales 4,699 15,045 42,990 Research and development 43,749 148,620 164,693 Selling, general and administrative 28,255 43,022 58,314 Amortization of goodwill and intangibles 4,166 43,934 Other special charges 4,616 69,069 Operating Loss (68,778) (168,106) (289,615) Interest expense (2,115) (829) Interest income 1,245 27,548 63,581 Other expense, net (839) Loss from joint venture (4,960) Loss Before Income Taxes (67,533) (142,673) (232,662) Benefit for income taxes 22,639 49,936 46,433 Net Loss $ (44,894) $ (92,737) $ (186,229)
See accompanying notes to the Celera Genomics group’s combined financial statements. CELERA G EN OMICS GROU P
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CELERA GENOMICS GROUP Combined Statements of Financial Position
(Dollar amounts in thousands) At June 30, 2000 2001 Assets Current assets Cash and cash equivalents $ 569,894 $ 216,076 Short-term investments 541,140 779,482 Tax benefit receivable from the Applied Biosystems group (see Note 1) 16,702 Accounts receivable (net of allowances for doubtful accounts of $2 and $330, respectively) 14,936 24,019 Inventories, net 3,336 6,239 Prepaid expenses and other current assets 2,283 4,838 Total current assets 1,148,291 1,030,654 Property, plant and equipment, net 111,442 123,497 Other long-term assets 153,524 65,985 Total Assets $ 1,413,257 $ 1,220,136
Liabilities And Allocated Net Worth Current liabilities Accounts payable $ 21,566 $ 21,024 Accrued salaries and wages 10,251 15,088 Deferred revenues 24,169 37,486 Other accrued expenses 11,266 11,982 Total current liabilities 67,252 85,580 Long-term debt 46,000 Other long-term liabilities 9,189 23,840 Total Liabilities 122,441 109,420 Commitments and contingencies (see Note 10) Allocated Net Worth 1,290,816 1,110,716 Total Liabilities And Allocated Net Worth $ 1,413,257 $ 1,220,136
See accompanying notes to the Celera Genomics group’s combined financial statements. P U O R G S C MI O N GE RA E L E C
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CELERA GENOMICS GROUP Combined Statements of Cash Flows
(Dollar amounts in thousands) For the years ended June 30, 1999 2000 2001 Operating Activities Net loss $ (44,894) $ (92,737) $ (186,229) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 3,757 29,575 65,503 Impairment of goodwill and other intangibles 69,069 Long-term compensation programs 2,802 883 1,605 Loss from joint venture 4,960 Deferred income taxes (6,971) (8,449) Nonreimbursable utilization of tax benefits by the Applied Biosystems group (32,197) Changes in operating assets and liabilities (Increase) decrease in tax benefit receivable from the Applied Biosystems group (9,935) (6,767) 16,702 Increase in accounts receivable (2,520) (11,620) (9,083) (Increase) decrease in inventories 615 (2,903) Increase in prepaid expenses and other assets (3,458) (446) (158) Increase in accounts payable and other liabilities 31,496 29,138 32,629 Net Cash Used By Operating Activities (22,752) (58,330) (48,551) Investing Activities Additions to property, plant and equipment (net of disposals of $–, $1,175, and $5, respectively) (94,541) (29,498) (33,817) Purchases of short-term investments, net (541,127) (238,115) Acquisitions and investments, net (1,236) (2,275) (9,573) Net Cash Used By Investing Activities (95,777) (572,900) (281,505) Financing Activities Net change in debt 46,000 (46,000) Net proceeds from follow-on stock offering 943,303
Proceeds from stock issued for stock plans 1,485 17,613 22,238 CELERA Proceeds from the collection of note receivable from the Applied Biosystems group 150,000 Net cash allocated (to) from the Applied Biosystems group 188,535 (27,283) Net Cash Provided (Used) By Financing Activities 190,020 1,129,633 (23,762) Net Change In Cash And Cash Equivalents 71,491 498,403 (353,818) G Cash And Cash Equivalents Beginning Of Year 71,491 569,894 EN
Cash And Cash Equivalents End Of Year $ 71,491 $ 569,894 $ 216,076 OMICS
See accompanying notes to the Celera Genomics group’s combined financial statements. GROU P
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CELERA GENOMICS GROUP Combined Statements of Allocated Net Worth
Accumulated Other Allocated Accumulated Comprehensive Net Worth (Dollar amounts in thousands) Other Deficit Income (Loss) (Deficit) Balance At June 30, 1998 $ 39,892 $ (41,151) $ – $ (1,259) Net loss (44,894) (44,894) Issuances under stock plans 1,485 1,485 Net cash allocated from the Applied Biosystems group 8,535 8,535 Allocated capital from the Applied Biosystems group 330,000 330,000 Balance At June 30, 1999 379,912 (86,045) 293,867 Comprehensive loss Net loss (92,737) (92,737) Other comprehensive income: Unrealized gain on investments, net of tax 8 Other comprehensive income 8 8 Comprehensive loss (92,729) Issuances under stock plans 17,613 17,613 Tax benefit related to employee stock options 21,090 21,090 Stock compensation 8,076 8,076 Issuances under follow-on stock offering 943,303 943,303 Purchase business combination 125,093 125,093 Net cash allocated to the Applied Biosystems group (27,283) (27,283) Allocation of investment from the Applied Biosystems group 1,786 1,786 Balance At June 30, 2000 1,469,590 (178,782) 8 1,290,816 Comprehensive loss Net loss (186,229) (186,229) Other comprehensive loss: Foreign currency translation adjustment (230) Unrealized gain on investments, net of tax 145 Other comprehensive loss (85) (85)
P Comprehensive loss (186,314)
U Issuances under stock plans 22,238 22,238 O Tax benefit related to employee stock options 14,568 14,568 R
G Stock compensation 1,605 1,605
S Nonreimbursible utilization of tax benefits by the Applied
C Biosystems group (32,197) (32,197) Balance At June 30, 2001 $ 1,475,804 $ (365,011) $ (77) $ 1,110,716 MI O
N See accompanying notes to the Celera Genomics group’s combined financial statements. GE RA E L E C
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CELERA GENOMICS GROUP Notes to Combined Financial Statements
Note 1—Accounting Policies And Practices referred to as a ‘‘group’’) comprise all of the accounts Basis of Presentation included in the corresponding consolidated financial statements of the Company. Intergroup transactions between Applera Corporation (‘‘Applera’’ or ‘‘the Company’’)is the Celera Genomics group and the Applied Biosystems comprised of two separate business segments: the Celera group have not been eliminated in the Celera Genomics Genomics group and the Applied Biosystems group. The group’s combined financial statements but have been Celera Genomics group is engaged principally in integrating eliminated in the Company’s consolidated financial high throughput technologies to create therapeutic discovery statements. The Celera Genomics group’s combined financial and development capabilities for internal use and for its statements have been prepared on a basis that management customers and collaborators. The Celera Genomics group’s believes to be reasonable and appropriate, and reflect (1) the businesses are its online information business and its financial position, results of operations, and cash flows of therapeutics discovery business. The online information businesses that comprise the Celera Genomics group, with all business is a leading provider of genomic and related significant intragroup transactions and balances eliminated biological and medical information. Pharmaceutical, and (2) all other corporate assets and liabilities and related biotechnology, and academic customers use this information, transactions of the Company, including allocated portions of along with customized information technology solutions the Company’s cash, debt, and selling, general and provided by the Celera Genomics group, to enhance their administrative costs. capabilities in the fields of life science research and pharmaceutical and diagnostic discovery and development. Holders of Applera – Celera stock and Applera – Applied The Celera Genomics group recently expanded its focus to Biosystems stock are stockholders of the Company. The include therapeutic discovery and development. The Celera Celera Genomics group and the Applied Biosystems group Genomics group intends to leverage its capabilities in are not separate legal entities. As a result, stockholders are genomics, proteomics, and bioinformatics, both in internal subject to all the risks associated with an investment in the programs and through collaborations, to identify drug targets Company and all of its businesses, assets, and liabilities. The and diagnostic markers, and to discover and develop novel issuance of Applera – Celera stock and Applera – Applied therapeutic candidates. Initially, the Celera Genomics group Biosystems stock and the allocations of assets and liabilities intends to focus its therapeutic discovery efforts in the field between the Celera Genomics group and the Applied of oncology. The Applied Biosystems group is engaged Biosystems group did not result in a distribution or spin-off principally in the development, manufacture, sale and service of any assets or liabilities of the Company or otherwise affect of instrument systems and associated consumable products for ownership of any assets or responsibility for the liabilities of life science research and related applications. The name of the Company or any of its subsidiaries. The assets the the Company was changed from PE Corporation to Applera Company attributes to one group could be subject to the Corporation and the name of the PE Biosystems group was liabilities of the other group, whether such liabilities arise CELERA changed to the Applied Biosystems group effective from lawsuits, contracts, or indebtedness attributable to the November 30, 2000. other group. If the Company is unable to satisfy one group’s liabilities out of assets attributed to it, the Company may be Celera Diagnostics has been established as a joint venture required to satisfy these liabilities with assets attributed to the between the Celera Genomics group and the Applied other group. G Biosystems group during the fourth quarter of fiscal 2001. EN This new venture is focused on discovery, development and Financial effects arising from one group that affect the commercialization of novel diagnostic tests. Company’s consolidated results of operations or consolidated OMICS financial condition could, if significant, affect the combined Recapitalization results of operations or combined financial condition of the The recapitalization of the Company on May 6, 1999 other group and the per share market price of the class of resulted in the issuance of two new classes of common stock common stock relating to the other group. Any net losses of GROU called Applera Corporation – Celera Genomics Group the Celera Genomics group or the Applied Biosystems group Common Stock (‘‘Applera – Celera stock’’) and Applera and dividends or distributions on, or repurchases of, Corporation – Applied Biosystems Group Common Stock Applera – Celera stock or Applera – Applied Biosystems P (‘‘Applera – Applied Biosystems stock’’). Applera – Celera stock or repurchases of preferred stock of the Company will stock is intended to reflect separately the performance of the reduce the assets of the Company legally available for Celera Genomics business (‘‘Celera Genomics group’’), and payment of dividends. Applera – Applied Biosystems stock is intended to reflect The management and allocation policies applicable to the separately the performance of the Applied Biosystems preparation of the combined financial statements of the business (‘‘Applied Biosystems group’’). As part of the Celera Genomics group and the Applied Biosystems group recapitalization, each share of common stock of The may be modified or rescinded, or additional policies may be Perkin-Elmer Corporation (‘‘predecessor common stock’’) adopted, at the sole discretion of the Company’s Board of was converted into 0.5 of a share of Applera – Celera stock Directors at any time without prior approval of the and one share of Applera – Applied Biosystems stock, prior stockholders. The Board of Directors would make any to giving effect to the stock splits since May 6, 1999. decision in accordance with its good faith business judgment The combined financial statements of the Celera Genomics that its decision is in the best interests of the Company and group and the Applied Biosystems group (individually all of the stockholders as a whole.
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued The Celera Genomics group’s combined financial statements for an amount equal to the difference as compensation for reflect the application of management and allocation policies the use of the Company’s credit capacity. Any expense adopted by the Company’s Board of Directors to various related to debt or preferred stock of the Company that is corporate activities, as described below. The Celera allocated in its entirety to a group will be allocated in whole Genomics group’s combined financial statements should be to that group. read in conjunction with the Company’s consolidated financial statements and notes thereto. Cash or other property that the Company allocates to one group that is transferred to the other group, could, if so Financing Activities determined by the Company’s Board of Directors, be accounted for either as a short-term loan or as a long-term As a matter of policy, the Company manages most financing loan. Short-term loans bear interest at a rate equal to the activities of the Celera Genomics group and the Applied weighted average interest rate of the Company’s pooled Biosystems group on a centralized basis. These activities debt. If the Company does not have any pooled debt, the include the investment of surplus cash, the issuance and Company’s Board of Directors will determine the rate of repayment of short-term and long-term debt, and the interest for such loan. The Company’s Board of Directors issuance and repayment of any preferred stock. As the establishes the terms on which long-term loans between the financing activities of the Celera Genomics group were not groups will be made, including interest rate, amortization significant for any of the periods prior to the recapitalization schedule, maturity, and redemption terms. of the Company, all historical cash and debt balances for those periods presented were allocated to the Applied Although the Company may allocate its debt and preferred Biosystems group. stock between the groups, the debt and preferred stock remain obligations of the Company and all stockholders of The Company’s Board of Directors has adopted the the Company are subject to the risks associated with those following financing policy that affects the combined financial obligations. statements of the Celera Genomics group and the Applied Biosystems group. In addition, cash allocated to the Applied Biosystems group may be reallocated to the Celera Genomics group in The Company allocates the Company’s debt between the exchange for Celera Genomics Designated Shares as Celera Genomics group and the Applied Biosystems group provided under the Company’s Certificate of Incorporation. (‘‘pooled debt’’) or, if the Company so determines, in its The number of Celera Genomics Designated Shares issued entirety to a particular group. The Company will allocate would be determined by dividing the amount of cash preferred stock, if issued, in a similar manner. reallocated by the average market value of Applera - Celera Cash allocated to one group that is used to repay pooled Genomics stock over the 20-trading day period immediately
P debt or redeem pooled preferred stock decreases such group’s prior to the date of the reallocation. As a result of such a
U allocated portion of the pooled debt or preferred stock. Cash reallocation, a relative percentage of future earnings or losses O or other property allocated to one group that is transferred to of the Celera Genomics group would be attributed to the R the other group, if so determined by the Company’s Board Applied Biosystems group. G of Directors, decreases the transferring group’s allocated S Allocation of Corporate Overhead and Administrative
C portion of the pooled debt or preferred stock and, Shared Services correspondingly, increases the recipient group’s allocated MI portion of the pooled debt or preferred stock. A portion of the Company’s corporate overhead (such as O executive management, human resources, legal, accounting, N Pooled debt bears interest for group financial statement auditing, tax, treasury, strategic planning, and environmental purposes at a rate equal to the weighted average interest rate GE services) has been allocated to the Celera Genomics group of the debt calculated on a quarterly basis and applied to the based upon identification of such services specifically
RA average pooled debt balance during the period. Preferred benefiting each group. A portion of the Company’s costs of E stock, if issued and if pooled in a manner similar to the administrative shared services (such as information L pooled debt, will bear dividends for group financial
E technology services) has been allocated in a similar manner. statement purposes at a rate based on the weighted average C Where determination based on specific usage alone is not dividend rate of the preferred stock similarly calculated and practical, other methods and criteria were used that applied. Any expense related to increases in pooled debt or management believes are equitable and provide a reasonable preferred stock will be reflected in the weighted average estimate of the cost attributable to the Celera Genomics interest or dividend rate of such pooled debt or preferred group. The totals for these allocations were $5.1 million, stock as a whole. $7.5 million, and $9.3 million for fiscal 1999, 2000, and If the Company allocates debt for a particular financing in its 2001, respectively. It is not practicable to provide a detailed entirety to one group, that debt will bear interest for group estimate of the expenses which would be recognized if the financial statement purposes at the rate determined by the Celera Genomics group were a separate legal entity. Company’s Board of Directors. If the Company allocates Management believes that the allocation methods developed preferred stock in its entirety to one group, the Company are reasonable and have been consistently applied. will charge the dividend cost to that group in a similar manner. If the interest or dividend cost is higher than the Company’s actual cost, the other group will receive a credit
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued Joint Transactions Between Groups Company’s consolidated financial statements and notes The groups may from time to time engage in transactions thereto. jointly, including with third parties. Research and Transfers of Assets Between Groups development and other services performed by one group for a joint venture or other collaborative arrangement will be Transfers of assets can be made between groups without charged at fair value, as determined by the Company’s Board prior stockholder approval. Such transfers will be made at of Directors. fair value, as determined by the Company’s Board of Directors. The consideration for such transfers may be paid Allocation of Federal and State Income Taxes by one group to the other in cash or other consideration, as The federal income taxes of the Company and its subsidiaries determined by the Company’s Board of Directors. which own assets allocated between the groups are Dividends determined on a consolidated basis using the asset and liability approach prescribed by SFAS No. 109, ‘‘Accounting For purposes of the historical (periods prior to the for Income Taxes.’’ The federal income tax provisions and recapitalization) combined financial statements of the Celera related tax payments or refunds are allocated between the Genomics group and the Applied Biosystems group, all groups based on a consolidated return approach taking into dividends declared and paid by the Company were allocated account each group’s relative contribution (positive or to the Applied Biosystems group. negative) to the Company’s consolidated federal taxable Principles of Combination income, tax liability and tax credit position. The Celera Genomics group’s combined financial statements Tax benefits that cannot be used by the group generating have been prepared in accordance with accounting principles those benefits, but can be used on a consolidated basis, are generally accepted in the U.S. and, taken together with the transferred to the group that can utilize such benefits. Applied Biosystems group’s combined financial statements, Existing tax benefits acquired by either group in a business comprise all the accounts included in the corresponding combination which are utilized by the other group will be consolidated financial statements of the Company. Intergroup reimbursed to the group that acquired such benefits. Tax transactions between the Celera Genomics group and the benefits generated by the Celera Genomics group Applied Biosystems group have not been eliminated in the commencing July 1, 1998, which could be utilized on a Celera Genomics group’s combined financial statements but consolidated basis, were reimbursed by the Applied have been eliminated in the Company’s consolidated Biosystems group to the Celera Genomics group up to a financial statements. The combined financial statements of limit of $75 million. each group reflect the financial condition, results of
During fiscal 2001, the Company formed Celera Diagnostics, operations, and cash flows of the businesses included therein. CELERA a joint venture of the Celera Genomics group and the The combined financial statements of the Celera Genomics Applied Biosystems group (see Note 2). As part of the group include the assets and liabilities of the Company formation of the joint venture, the Applied Biosystems group specifically identified with or allocated to the Celera will reimburse the Celera Genomics group for tax benefits Genomics group. Certain amounts in the combined financial generated by Celera Diagnostics to the extent such tax statements and notes have been reclassified to conform to the G benefits are utilized by the Applied Biosystems group. These current year’s presentation. EN
tax benefits are not subject to the $75 million limit described Use of Estimates OMICS above. The preparation of the combined financial statements in As a result of the above tax allocation policy, as of June 30, conformity with accounting principles generally accepted in 2001, the Celera Genomics group generated cumulative tax the U.S. requires management to make estimates and benefits of $32.2 million that were utilized by the Applied assumptions that affect the reported amounts of assets and GROU Biosystems group with no reimbursement to the Celera liabilities, disclosure of contingent assets and liabilities at the Genomics group. The amounts utilized by the Applied date of the financial statements, and the reported amounts of Biosystems group that were not reimbursed to the Celera revenues and expenses during the reporting periods. Actual P Genomics group were recorded to allocated net worth in the results could differ from those estimates. Celera Genomics group’s Combined Statements of Financial Position. Recently Issued Accounting Standards Depending on the tax laws of the respective jurisdictions, In July 2001, the Financial Accounting Standards Board state and local income taxes are calculated on either a (‘‘FASB’’) issued Statement of Financial Accounting Standards separate, consolidated, or combined basis. State and local (‘‘SFAS’’) No. 141, ‘‘Business Combinations,’’ which applies income tax provisions and related tax payments or refunds to all business combinations initiated after June 30, 2001. will be allocated between the groups in a manner designed The provisions of this statement require business to reflect the respective contributions of the groups to the combinations to be accounted for using the purchase method Company’s state or local taxable income. of accounting. Also in July 2001, the FASB issued SFAS No. 142, ‘‘Goodwill and Other Intangible Assets.’’ Under SFAS The discussion of the Celera Genomics group’s income taxes No. 142, goodwill from acquisitions occurring after June 30, (see Note 4) should be read in conjunction with the 2001 will not be amortized, and for goodwill existing prior to June 30, 2001, the Company expects to adopt the
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued nonamortization provisions of the statement on July 1, 2001. Property, Plant and Equipment, and Depreciation Goodwill for which the nonamortization provisions are Property, plant and equipment are recorded at cost and applied will be required to be reviewed for impairment at consisted of the following at June 30, 2000 and 2001: least on an annual basis. If an impairment is found to exist, a charge will be taken against operations. SFAS No. 142 (Dollar amounts in millions) 2000 2001 requires that, upon adoption, goodwill and certain intangible Land $ 10.0 $ 10.0 assets be reviewed for classification and useful life. The Celera Genomics group expects that, aside from the Buildings and leasehold improvements 69.8 76.9 nonamortization of goodwill on a prospective basis, the Machinery and equipment 54.6 79.6 effect upon adoption of SFAS No. 142 will be immaterial. Property, plant and equipment, at cost 134.4 166.5 Accumulated depreciation and Cash and Cash Equivalents and Short-Term amortization 23.0 43.0 Investments Property, plant and equipment, net $ 111.4 $ 123.5 Cash equivalents consist of highly liquid debt instruments, time deposits, and certificates of deposit with original Major renewals and improvements that significantly add to maturities of three months or less. productive capacity or extend the life of an asset are capitalized. Repairs, maintenance, and minor renewals and Short-term investments, that are classified as available-for- improvements are expensed when incurred. The cost of sale, have maturities of less than one year and are carried at assets and related depreciation is removed from the related fair value with unrealized gains and losses included as a accounts on the balance sheet when such assets are disposed separate component of allocated net worth, net of any of, and any related gains or losses are reflected in current related tax effect. The specific identification method is used earnings. to determine the cost of securities disposed of, with realized gains and losses recorded to other income, net. Provisions for depreciation of owned property, plant and equipment are based upon the expected useful lives of the The fair value of short-term investments at June 30, 2000 assets and computed primarily by the straight-line method. and 2001 was as follows: Leasehold improvements are amortized over their estimated useful lives or the term of the applicable lease, whichever is (Dollar amounts in millions) 2000 2001 less, using the straight-line method. Useful lives are generally Certificates of deposit $ 107.3 $ 151.5 30 to 40 years for buildings and three to seven years for Commercial paper 364.5 141.4 machinery and equipment. Capitalized internal-use software U.S. government notes and bonds 49.2 194.8 costs are amortized primarily over the expected useful lives, not to exceed three years. Depreciation expense for
P Corporate bonds 20.1 109.2
U Asset backed securities 113.0 property, plant and equipment was $3.8 million, $15.7
O Foreign debt 69.6 million, and $21.8 million for the fiscal years ended June 30, R Total short-term investments $ 541.1 $ 779.5 1999, 2000, and 2001, respectively. G
S Machinery and equipment, at cost, included $13.4 million
C Gross unrealized gains and losses on short-term investments and $17.1 million of software licenses at June 30, 2000 and were immaterial at June 30, 2000 and 2001. Realized gains 2001, respectively. At June 30, 2001, machinery and MI and losses were less than $.1 million for both fiscal 2000 and
O equipment also included capitalized internal-use software of 2001. N $7.1 million, net of accumulated amortization of $1.4 Investments million. GE The Celera Genomics group’s allocated investments in Intangible Assets
RA Shanghai GeneCore BioTechnologies Co., Ltd., Agrogene
E The excess of purchase price over the net asset value of
L S.A., HuBit Genomix, Inc., and the Celera Diagnostics joint companies acquired is amortized using a straight-line method E venture are accounted for under the equity method of over periods not exceeding 3 years. Other intangible assets, C accounting. which included patents and purchased technology rights, are Inventories amortized using the straight-line method over their expected useful lives, not to exceed 15 years. Inventories are stated at the lower of cost (on a first-in, first- out basis) or market. Inventories at June 30, 2000 and 2001 At June 30, 2000 and 2001, other long-term assets included included the following components: goodwill, net of accumulated amortization, of $112.9 million and $10.4 million, respectively. Accumulated amortization of (Dollar amounts in millions) 2000 2001 goodwill was $3.3 million and $42.1 million at June 30, Raw materials and supplies $ 1.9 $ 4.9 2000 and 2001, respectively. Work-in-process .6 Finished products 1.4 .7 Total inventories $ 3.3 $ 6.2
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued At June 30, 2000 and 2001, other long-term assets included other intangible assets, net of accumulated amortization, of (Dollar amounts in millions) 1999 2000 2001 $14.5 million and $4.4 million, respectively. Accumulated Interest $ 2.1 $.8 amortization was $.9 million and $5.7 million at June 30, Income taxes $ 1.1 $ 2.8 2000 and 2001, respectively. Significant non-cash investing Asset Impairment and financing activities: Capital expenditures The Celera Genomics group reviews long-lived assets and liability $ 8.9 goodwill for impairment, in accordance with SFAS No. 121, ‘‘Accounting for the Impairment of Long-Lived Assets and Note receivable from the for Long-Lived Assets to Be Disposed Of,’’ whenever events Applied Biosystems group $ 150.0 or circumstances indicate that the carrying amount of an Equity instruments issued asset may not be recoverable. The assessment of possible in Paracel acquisition $ 125.1 impairment is based on the Company’s ability to recover the Tax benefit related to carrying value of the asset from the estimated future employee stock options $ 21.1 $ 14.6 undiscounted cash flows, before interest and taxes, of the Nonreimbursable utilization related operations. If these cash flows are less than the of tax benefits by the carrying value of such asset, an impairment loss is recognized Applied Biosystems group $ 32.2 for the difference between estimated fair value and carrying value. During fiscal 2001, the Celera Genomics group recorded a $69.1 million charge to other special charges for Note 2—Acquisitions and Investments the impairment of assets associated with the Paracel business Paracel, Inc. (see Note 2). During the fourth quarter of fiscal 2000, the Company Revenues acquired Paracel, Inc. in a stock-for-stock transaction. Paracel produces advanced genomic and text analysis technologies. Subscription fees for access to the Company’s on-line Its products include a hardware accelerator for sequence information databases are recognized ratably over the comparison, a hardware accelerator for text search, and contracted period in accordance with the provisions of the sequence analysis software tools. contract. Contract research service revenues are earned and recognized in accordance with contract provisions. Revenue The Company issued approximately 1.6 million shares may be recognized on a percentage of completion basis, as of Applera – Celera stock in exchange for all the outstanding
contract research costs are incurred, or may be contingent shares of Paracel common stock not previously owned by CELERA upon the achievement of certain milestones. Amounts the Company. At the time of the acquisition, the Company received in advance of performance or acceptance are owned 14% of Paracel, which was allocated to the Applied recorded as deferred revenue. Revenues derived from Biosystems group. The transfer of the Paracel shares to the equipment sales are generally recorded at the time of Celera Genomics group resulted in a $27.3 million cash
shipment. payment to the Applied Biosystems group, which G
represented the fair market value of those shares at the EN Research and Development transfer date. The Celera Genomics group recorded the Costs incurred for internal, contract, and grant-sponsored previously owned investment at the Company’s original cost OMICS research and development are expensed when incurred. value. The transfer of the original cost value and the $27.3 million cash payment were recorded as an adjustment to Supplemental Cash Flow Information allocated net worth in the Celera Genomics group’s Cash paid for interest and income taxes and significant non- Combined Statements of Financial Position and the Applied GROU cash investing and financing activities for the following Biosystems group’s Combined Statements of Financial periods were as follows: Position. The acquisition of the shares of Paracel not previously P owned by the Company was valued at $125.6 million and was accounted for under the purchase method of accounting. In connection with the acquisition, $115.2 million was allocated to goodwill, including $5.3 million of deferred taxes, and $13.6 million was allocated to other intangible assets. The goodwill and the other intangible assets were being amortized on a straight-line method over 3 years.
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued The net assets and results of operations of Paracel were The Celera Genomics group and the Applied Biosystems included in the Celera Genomics group’s combined financial group will account for their investments in Celera statements from the date of acquisition. The following Diagnostics under the equity method of accounting, with the selected unaudited pro forma information for the Celera Celera Genomics group recording 100 percent of the initial Genomics group assumes the acquisition had occurred at the losses in its income statement as loss from joint venture. beginning of fiscal 1999 and fiscal 2000, and gives effect to purchase accounting adjustments: In the event of liquidation of the assets attributable to Celera Diagnostics, including sale of such assets, the proceeds upon (Dollar amounts in millions) 1999 2000 liquidation would be distributed to the Applied Biosystems group and the Celera Genomics group based on a Net revenues $ 22.7 $ 51.1 proportion similar to their relative investment accounts. If Net loss $ (90.4) $ (140.5) the proceeds upon liquidation are in excess of the groups’ combined investment accounts, the Celera Genomics group The unaudited pro forma data is for informational purposes would be allocated a preference on the liquidation proceeds only and may not be indicative of the actual results that in an amount equal to 65 percent of the Celera Genomics would have occurred had the acquisition been consummated group’s funding of initial losses. If liquidation proceeds and at the beginning of fiscal 1999 or at the beginning of fiscal the Celera Genomics group’s share of profits generated by 2000 or of the future operations of the combined companies. Celera Diagnostics exceed 65 percent of the Celera In fiscal 2001, the Company recorded a $69.1 million Genomics group’s funding of initial losses, the excess charge, before taxes, to other special charges for the liquidation proceeds would be allocated equally to the Celera impairment of goodwill and other intangibles associated with Genomics group and the Applied Biosystems group. Paracel. Due to Paracel’s substantially lower than originally anticipated performance and the future outlook of this Other Acquisitions business, management performed an assessment of future cash During fiscal years 1999, 2000, and 2001, the Company flows and determined that it was necessary to record an acquired various equity interests in companies that were impairment charge to reduce the carrying value of Paracel’s individually insignificant. The total amounts paid in fiscal net assets to their estimated fair value. This charge included years 1999, 2000, and 2001 were $1.3 million, $3.1 million, $63.7 million for the write-down of goodwill and $5.4 and $4.1 million, respectively, for these investments. million for the write-down of other intangibles. Pending Acquisition Celera Diagnostics Axys Pharmaceuticals, Inc. During the fourth quarter of fiscal 2001, Celera Diagnostics In June 2001, the Company signed a definitive merger
P was established as a joint venture between the Celera agreement to acquire Axys Pharmaceuticals, Inc. (‘‘Axys’’)in
U Genomics group and the Applied Biosystems group. This a stock-for-stock transaction. Axys is an integrated small O new venture is focused on discovery, development and molecule drug discovery and development company that is R commercialization of novel diagnostic tests. The Company developing products for chronic therapeutic applications G anticipates that Celera Diagnostics will leverage the discovery through collaborations with pharmaceutical companies and S
C and informatics expertise of the Celera Genomics group with has a proprietary product portfolio in oncology. the instrument and technology expertise of the Applied
MI The transaction, which is subject to customary closing Biosystems group in order to contribute to the future of O conditions, including approval by Axys stockholders and diagnostic medicine. N regulatory approvals, has been structured as a tax-free The Applied Biosystems group has contributed to Celera reorganization and will be accounted for under the purchase GE Diagnostics its existing molecular diagnostics business. The method. Under the terms of the merger agreement, Axys
RA Celera Genomics group will provide access to its genome shareholders will receive shares of Applera – Celera stock per
E databases and will fund all of the cash operating losses of Axys share based on an exchange ratio which is calculated L Celera Diagnostics up to a maximum of $300 million based on the average closing price of Applera – Celera stock E
C (‘‘initial losses’’), after which, operating losses, if any, would over the 10 trading days immediately preceding (but be shared equally by the Celera Genomics group and the excluding) the second trading day prior to the closing of the Applied Biosystems group. Celera Diagnostics’ profits would merger. If the closing had occurred at the time the merger be shared in the ratio of 65 percent to the Celera Genomics agreement was signed, each share of Axys common stock group and 35 percent to the Applied Biosystems group until would have been exchanged for a fractional share of the cumulative profits of Celera Diagnostics equal the initial Applera – Celera stock having an average closing price losses. Subsequently, profits and losses and cash flows would during the calculation period equivalent to $4.65 per share of be shared equally. Capital expenditures and working capital Axys common stock. Depending on the average closing requirements of the joint venture will be funded equally by price of Applera – Celera stock at the time of the closing of the Celera Genomics group and the Applied Biosystems the merger, the Company will issue between 3.3 million group. The Applied Biosystems group will reimburse the shares and 5.4 million shares of Applera – Celera stock. Celera Genomics group for all tax benefits generated by Celera Diagnostics to the extent such tax benefits are utilized by the Applied Biosystems group.
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued Note 3—Debt And Lines Of Credit Significant components of deferred tax assets and liabilities at Allocated Debt Activity June 30, 2000 and 2001 are summarized below:
Long-term debt at June 30, 2000 consisted of $46.0 million (Dollar amounts in millions) 2000 2001 of commercial paper with an average interest rate of 6.84%. Deferred Tax Assets These borrowings were classified as noncurrent at June 30, 2000 because it was the Company’s intent to refinance these Accruals $ 2.2 $ 3.0 obligations on a long-term basis. However, the Company Tax credit and loss carryforwards 26.5 32.2 repaid this debt during the second quarter of fiscal 2001. Research and development expense 16.8 Subtotal 28.7 52.0 The Company maintains a $100 million revolving credit Valuation allowance (2.8) agreement with four banks that expires on April 20, 2005. Total deferred tax assets 28.7 49.2 Commitment and facility fees are based on public debt ratings, or net worth and leverage ratios. Interest rates on Deferred Tax Liabilities amounts borrowed vary depending on whether borrowings Depreciation 1.3 2.4 are undertaken in the domestic or eurodollar markets. There Intangibles 4.6 1.1 were no outstanding borrowings under the facility at June Total deferred tax 30, 2000 or 2001. liabilities 5.9 3.5 Total deferred tax assets, At June 30, 2001, in addition to the $100 million revolving credit facility, the Company had $122 million of unused net $ 22.8 $ 45.7 credit facilities for short-term borrowings from domestic and A reconciliation of the federal statutory tax to the Celera foreign banks in various currencies. These credit facilities Genomics group’s benefit for income taxes for fiscal 1999, consist of uncommitted overdraft credit lines that are 2000, and 2001 is set forth in the following table: provided at the discretion of various local banks. An Applera Corporation guarantee is usually required if a local unit (Dollar amounts in millions) 1999 2000 2001 borrows funds. Federal statutory rate 35% 35% 35% Under various debt and credit agreements, the Company is Tax at federal statutory required to maintain certain minimum net worth and rate $ (23.6) $ (49.9) $ (81.4) leverage ratios. The Company was in compliance with all such covenants as of June 30, 2001. State income taxes (net of federal benefit) .2 .2
Note 4—Income Taxes Reorganization, restructuring CELERA and other costs 1.4 Loss before income taxes for fiscal 1999, 2000, and 2001 Nondeductible goodwill .2 34.9 primarily relates to operations in the United States. R&D tax credit (5.4) (2.9) The benefit for income taxes includes the Celera Genomics Valuation allowance 2.8 group’s allocated portion of income taxes currently payable Recapitalization costs 1.6 G and those deferred because of differences between the Other (.6) 3.6 EN financial statement and tax bases of assets and liabilities. The Total benefit from income OMICS Celera Genomics group’s benefit for income taxes for fiscal taxes $ (22.6) $ (49.9) $ (46.4) 1999, 2000, and 2001 consisted of the following: As described in Note 1, the Company presents the income (Dollar amounts in millions) 1999 2000 2001
taxes allocated to the groups under the consolidated return GROU Currently receivable $ 22.6 $ 42.9 $ 41.9 approach in accordance with SFAS No. 109. If management Deferred 7.0 4.5 had utilized the separate return basis of accounting, Total benefit for income taxes $ 22.6 $ 49.9 $ 46.4 management would have determined that it was more likely than not a significant valuation allowance would have been P required for the Celera Genomics group’s tax benefits associated with losses and credits. The following pro forma presentation indicates the results of the Celera Genomics group had the separate return basis of accounting been applied.
(Dollar amounts in millions) 1999 2000 2001 Loss before income taxes $ (67.5) $ (142.7) $ (232.7) Provision for income taxes .2 2.8 3.0 Net loss $ (67.7) $ (145.5) $ (235.7)
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued At June 30, 2001, the Celera Genomics group was allocated Postemployment Benefits a valuation allowance of $2.8 million related to domestic tax The Company provides certain postemployment benefits to credit carryforwards. eligible employees. These benefits generally include The Celera Genomics group was allocated a consolidated severance, disability, and medical-related costs paid after domestic loss carryforward of $57 million and domestic employment but before retirement. credit carryforward of $12 million, which will expire between the fiscal years 2005 and 2021. Note 6—Segment, Geographic, and Customer Information Note 5—Retirement and Other Benefits Business Segments Pension Plan The Celera Genomics group, which operates in one business The Company maintains or sponsors a pension plan that segment, is engaged principally in integrating high covers certain employees of the Celera Genomics group. throughput technologies to create therapeutic discovery and Pension benefits earned are generally based on years of development capabilities for internal use and for its customers service and compensation during active employment. and collaborators. The Celera Genomics group’s businesses Pension plan assets are administered by a trustee and are are its online information business and its therapeutics principally invested in equity and fixed-income securities. discovery business. The online information business is a The funding of the pension plan is determined in accordance leading provider of genomic and related biological and with statutory funding requirements. medical information. Pharmaceutical, biotechnology, and academic customers use this information, along with The Company’s domestic pension plan covers a substantial customized information technology solutions provided by the portion of U.S. employees. During fiscal 1999, the plan was Celera Genomics group, to enhance their capabilities in the amended to terminate the accrual of benefits as of June 30, fields of life science research and pharmaceutical and 2004 and to improve the benefit for participants who retire diagnostic discovery and development. The Celera Genomics between the ages of 55 and 60. The pension plan is not group recently expanded its focus to include therapeutic available to employees hired on or after July 1, 1999. discovery and development. The Celera Genomics group Pension expense, consisting primarily of service cost allocated intends to leverage its capabilities in genomics, proteomics, to the Celera Genomics group, was less than $.1 million for and bioinformatics, both in internal programs and through fiscal 1999 and $.3 million for both fiscal 2000 and 2001. collaborations, to identify drug targets and diagnostic markers, and to discover and develop novel therapeutic Retiree Healthcare and Life Insurance Benefits candidates. Initially, the Celera Genomics group intends to focus its therapeutic discovery efforts in the field of
P The postretirement benefit plan provides certain healthcare oncology.
U and life insurance benefits to domestic employees hired prior O to January 1, 1993, who retire and satisfy certain service and Geographic Areas R age requirements. Generally, medical coverage pays a stated G percentage of most medical expenses, reduced for any Information concerning principal geographic areas for fiscal S deductible and for payments made by Medicare or other 2001 follows: C group coverage. The cost of providing these benefits is (Dollar amounts in millions) 2001 MI shared with retirees. The plan is unfunded. The O postretirement benefit expense allocated to the Celera Net Revenues From N Genomics group was not material for fiscal 1999, 2000, and External Customers
GE 2001. Amounts allocated to the Celera Genomics group United States $ 62.0 were less than $.1 million for all periods presented. Europe 16.6 RA Other 10.1 E Savings Plan
L Combined $ 88.7
E The Company provides a 401(k) savings plan, for domestic
C employees, with automatic Company contributions of 2% of Revenues prior to fiscal 2001 were attributable to the eligible compensation and a dollar-for-dollar matching United States. Net revenues are attributable to geographic contribution of up to 4% of eligible compensation. areas based on the region of destination. Long-lived assets are Employees not eligible for the employee pension plan located in the United States. receive an extra 2% Company contribution in addition to the automatic 2% Company contribution through June 30, Customer Information 2004, while pension plan participants continue to receive the The Celera Genomics group has a small number of automatic 2% contribution. The Company’s contributions customers and derives a substantial portion of its revenues allocated to the Celera Genomics group were $.5 million, from fees paid by multinational pharmaceutical companies $1.9 million, and $3.8 million for fiscal 1999, 2000, and and larger biotechnology companies. During fiscal 1999, one 2001, respectively. customer accounted for approximately 24% of the Celera Genomics group’s net revenues. During fiscal 2000, five customers that were individually greater than 10% of net revenues accounted for approximately 70% of the Celera
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued Genomics group’s net revenues in the aggregate. During Tax Benefit Receivable from the Applied Biosystems fiscal 2001, one customer accounted for approximately 10% group of the Celera Genomics group’s net revenues. The Applied Biosystems group reimbursed the Celera Genomics group for tax benefits generated, which were Note 7—Allocated Net Worth utilized on a consolidated basis. These reimbursements were Applera – Celera stock represents a separate class of the intended to provide additional cash resources to the Celera Company’s common stock. Additional shares of Genomics group up to a maximum of $75 million, Applera – Celera stock may be issued from time to time excluding tax benefits generated by Celera Diagnostics. As of upon exercise of stock options or at the discretion of the June 30, 2001, the Celera Genomics group had generated Company’s Board of Directors. Transactions in cumulative tax benefits of $32.2 million utilized by the Applera – Celera stock are attributed to the Celera Applied Biosystems group with no reimbursement to the Genomics group’s allocated net worth and transactions in Celera Genomics group. The amounts utilized by the Applera – Applied Biosystems stock are attributed to the Applied Biosystems group that were not reimbursed to the Applied Biosystems group’s allocated net worth. There were Celera Genomics group were recorded to allocated net no repurchases of Applera – Celera stock for fiscal 1999, worth in the Celera Genomics group’s Combined Statements fiscal 2000, and fiscal 2001. of Financial Position. The tax benefit receivable of $16.7 million at June 30, 2000 was reimbursed to the Celera The Company’s authorized capital stock consists of 225 Genomics group in fiscal 2001. million shares of a class of common stock designated as Applera Corporation – Celera Genomics Group Common Third-Party Equity Transaction Stock, one billion shares of a class of common stock In June 1999, the Company granted fully vested options to designated as Applera Corporation – Applied Biosystems purchase 2.6 million shares of Applera – Celera stock at a Group Common Stock, and 10 million shares of preferred price of $6.42 per share to the Institute for Genomic stock. Of the 10 million authorized shares of preferred stock, Research (‘‘TIGR’’) and entered into a one-year non- the Company has designated 80,000 shares of two series of compete agreement with such party. The fair value of such participating junior preferred stock in connection with the option approximated $7.2 million and was amortized over Company’s Stockholder Protection Rights Agreement. See the life of the non-compete agreement. The fair value of Note 7 to the Applera Corporation Consolidated Financial these options were determined under the Black-Scholes Statements for information regarding the stockholders’ equity model using a volatility assumption of 40%, an expected of the Company. option life assumption of two years, and a risk-free interest In March 2000, the Company completed a follow-on public rate of 5.75%. See Note 9 for further discussions of offering of Applera – Celera stock. In this offering, 4.4 transactions with TIGR. CELERA million shares of Applera – Celera stock were sold, resulting in net proceeds of $943.3 million. Note 8—Stock Plans Stock Option Plans Note Receivable from the Applied Biosystems group
Under the Company’s stock option plans, officers, directors, G The initial capitalization of the Celera Genomics group and other employees may be granted options, each of which EN included a $330 million short-term note receivable from the allows for the purchase of shares of existing classes of Applied Biosystems group established at September 30, 1998. OMICS common stock at a price of not less than 100% of fair The $330 million note represented an allocation of the market value at the date of grant. Prior to the recapitalization Company’s capital to the Celera Genomics group and did of the Company, most option grants had a two-year vesting not result in the Applied Biosystems group holding a residual schedule, whereby 50% of the option grant vested at the end
interest in the allocated net worth attributed to the Celera GROU of each year from the date of grant. The Company’s Board Genomics group. Accordingly, no interest was ascribed to of Directors has extended that schedule for most options the note. This allocation of capital represented management’s decision to allocate a portion of the Company’s capital to the granted subsequent to the recapitalization whereby 25% will vest annually, resulting in 100% vesting after four years. P Celera Genomics group and the remaining capital to the Options generally expire ten years from the date of grant. At Applied Biosystems group prior to the effective date of the recapitalization. The group combined financial statements do June 30, 2001, 14.2 million shares of Applera – Celera stock were authorized for grant of options. See Note 8 to the not include any residual interests in the allocated net worth Applera Corporation Consolidated Financial Statements for of one group by the other group. The note receivable was information regarding transactions related to the Company’s liquidated on May 28, 1999 in exchange for a portion of the stock option plans and a summary of options outstanding and proceeds received from the sale of the Analytical Instruments exercisable at June 30, 2001. business and a new note receivable from the Applied Biosystems group for $150 million. The new note receivable, 1999 Stock Incentive Plans which was for a term of one year, bearing an interest rate of 5% per annum and payable on demand without penalty, was The Applera Corporation/Celera Genomics Group 1999 paid during fiscal 2000. Stock Incentive Plan (the ‘‘Applera – Celera Group Plan’’) and the Applera Corporation/Applied Biosystems Group 1999 Stock Incentive Plan (the ‘‘Applera – Applied Biosystems Group Plan’’) were first approved in April 1999.
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued The Applera – Celera Group Plan authorizes grants of stock which may vary depending on the estimated achievement of options, stock awards, and performance shares with respect performance goals. to Applera – Celera stock. The Applera – Applied Biosystems Group Plan authorizes grants of stock options, As a result of the recapitalization of the Company, each stock awards, and performance shares with respect to share of restricted stock held was redesignated as 0.5 Applera – Applied Biosystems stock. Directors, certain of a share of Applera – Celera stock and one share of officers, and key employees with responsibilities involving Applera – Applied Biosystems stock prior to giving effect to both Applied Biosystems group and the Celera Genomics the Applera – Celera stock split and the Applera – Applied group may be granted awards under both incentive plans in Biosystems stock splits. Restricted stock granted to a manner which reflects their responsibilities. The employees and non-employee directors totaled 900 Company’s Board of Directors believes that granting awards shares of Applera – Celera stock and 3,600 shares of tied to the performance of the group in which the Applera – Applied Biosystems stock during fiscal 2000 and participants work and, in certain cases the other group, is in 63,900 shares of Applera – Celera stock and 255,225 shares the best interests of the Company and its stockholders. of Applera – Applied Biosystems stock during fiscal 2001. Restricted stock granted prior to recapitalization to Employee Stock Purchase Plan employees and non-employee directors during fiscal 1999 totaled 42,900 shares of the Applera Corporation The Company’s employee stock purchase plans offer U.S. (predecessor) common stock. Compensation expense and certain non-U.S. employees the right to purchase shares recognized by the Celera Genomics group for these awards of Applera – Celera stock and/or Applera – Applied was $1.0 million and $1.3 million for fiscal 2000 and 2001, Biosystems stock. The purchase price in the U.S. is equal to respectively. Unearned compensation included in allocated the lower of 85% of the average market price of the net worth was $2.6 million at June 30, 2001. There was no applicable class of common stock on the offering date or unearned compensation included in allocated net worth at 85% of the average market price of such class of common June 30, 2000. stock on the last day of the purchase period. Provisions of the plan for employees in countries outside the U.S. vary Performance Unit Bonus Plan according to local practice and regulations. The Company adopted a Performance Unit Bonus Plan in Applera – Celera stock issued under the employee stock fiscal 1997. The plan utilized stock options and a purchase plans during fiscal 1999, 2000, and 2001 totaled performance unit bonus pool. Performance units granted 24,000 shares, 303,000 shares, and 269,000 shares, under the plan represented the right to receive a cash or respectively. Applera – Applied Biosystems stock issued stock payment from the Company at a specified date in the under the employee stock purchase plans during fiscal 1999, future. The amount of the payment was determined on the
P 2000, and 2001 totaled 98,000 shares, 161,000 shares, and date of the grant. The performance units vested upon shares
U 250,000 shares, respectively. Common stock issued under the of the Company’s common stock attaining and maintaining
O employee stock purchase plans during fiscal 1999 totaled specified price levels for a specified period. As of June 30, R 168,000 shares of Applera Corporation (predecessor) 2000, three series of performance units were granted under G common stock. the plan. Certain members of the Celera Genomics group’s S
C senior management participated in the first series of the plan, Director Stock Purchase and Deferred Compensation which was prior to the recapitalization. Compensation MI Plan expense, pertaining to the first series, for the Celera O The Company has a Director Stock Purchase and Deferred Genomics group was $1.3 million for fiscal 1999. Fiscal 1999 N Compensation Plan that requires non-employee directors compensation expense included $1.0 million related to the
GE of the Company to apply at least 50% of their annual acceleration of payments under the plan as a result of the retainer to the purchase of common stock. Purchases of attainment of the performance targets. The vesting of the
RA Applera – Celera stock and Applera – Applied Biosystems related stock options was not accelerated. No compensation E stock are made in a ratio approximately equal to the number expense pertaining to the plan was recognized in fiscal 2000 L
E of shares of Applera – Celera stock and Applera – Applied or 2001.
C Biosystems stock outstanding. The purchase price is the fair market value on the date of purchase. At June 30, 2001, The plan was modified in fiscal 2000 to replace the the Company had approximately 84,000 shares of performance units with performance stock options. Applera – Celera stock and approximately 335,000 shares of Performance stock options vest in equal portions upon the the Applera – Applied Biosystems stock available for issuance earlier of the shares of Applera – Applied Biosystems stock under this plan. attaining and maintaining specified price levels for a specified period of time or after a specified future date. Members of Restricted Stock the Celera Genomics group are not participants in this modified plan. As part of the Company’s stock incentive plans, employees may be, and non-employee directors are, granted shares of Accounting for Stock-Based Compensation restricted stock that will vest when certain continuous employment/service restrictions and/or specified APB No. 25, ‘‘Accounting for Stock Issued to Employees,’’ performance goals are achieved. The fair value of shares and FASB Interpretation No. 44 (‘‘FIN No. 44’’), granted is generally expensed over the restricted periods, ‘‘Accounting for Certain Transactions Involving Stock Compensation – An Interpretation of Accounting Principles
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued Board Opinion No. 25’’ are applied in accounting for stock- basis concerning technology issues that affect both groups. based compensation plans. Accordingly, no compensation The costs of developing technology remain in the group expense has been recognized for stock option and employee responsible for its development. stock purchase plans, as all options have been issued at fair market value. TIGR During fiscal 2001, the Celera Genomics group entered into Pro forma net income as required by SFAS No. 123, an agreement to perform sequencing services for TIGR and ‘‘Accounting for Stock-Based Compensation,’’ has been recognized revenues and collected cash of $7.0 million determined for employee stock plans under the statement’s related to such services. The President of the Celera fair value method. For purposes of pro forma disclosure, the Genomics group is the current Chairman of the Board of estimated fair value of the options is amortized to expense Trustees of TIGR. Also, an immediate family member of the over the options’ vesting period. President of the Celera Genomics group currently serves as Pro forma information for the years ended June 30, 1999, TIGR’s President and is on TIGR’s Board of Trustees. 2000, and 2001 is presented below: Additionally, as of June 30, 2001, TIGR owned fully vested options to purchase approximately 1.4 million shares of (Dollar amounts in millions) 1999 2000 2001 Applera – Celera stock. Net loss Celera Diagnostics Joint Venture As reported $ (44.9) $ (92.7) $ (186.2) During fiscal 2001, the Celera Genomics group funded $4.4 Pro forma $ (47.5) $ (106.6) $ (223.3) million of operating losses, $.9 million for capital expenditures and $.2 million for working capital needs Note 8 to the Applera Corporation Consolidated Financial related to the Celera Diagnostics joint venture (see Note 2). Statements contains the information regarding the assumptions made in calculating pro forma compensation Note 10—Commitments and Contingencies expense in accordance with SFAS No. 123. Future minimum payments at June 30, 2001 under non- Note 9—Additional Information cancelable operating leases for real estate and equipment were as follows: Selected Accounts The following table provides the major components of (Dollar amounts in millions) selected accounts of the Combined Statements of Financial 2002 $ 22.2 Position at June 30, 2000 and 2001: 2003 10.7
2004 2.6 CELERA (Dollar amounts in millions) 2000 2001 2005 2.6 Other Long-Term Liabilities 2006 2.6 Deferred service contract revenues $ 3.7 $ 18.3 2007 and thereafter 13.1 Other 5.5 5.5 Total $ 53.8 Total other long-term liabilities $ 9.2 $ 23.8 G Rental expense was $8.5 million for fiscal 1999, $30.5 EN million for fiscal 2000, and $41.0 million for fiscal 2001. Related-Party Information OMICS Sales of Products and Services Between Groups Amersham A group will sell products or services to the other group on On November 18, 1997, Amersham Pharmacia Biotech, Inc. terms that would be available from third parties in (‘‘Amersham’’) filed a patent infringement action against the commercial transactions. If terms for such transactions are Company in the United States District Court for the GROU not available, the purchasing group will pay fair value as Northern District of California. The complaint alleges that determined by the Company’s Board of Directors for such the Company is directly, contributorily, or by inducement
products and services or at the cost (including overhead) of infringing U.S. Patent No. 5,688,648 (‘‘the ‘648 patent’’). P the selling group. For fiscal 1999, 2000, and 2001, R&D Amersham asserts that the Company’s use and sale of DNA expenses included $17.3 million, $54.4 million, and $60.1 analysis reagents and systems that incorporate ‘‘BigDye’’ million, respectively, for lease payments on instruments, the fluorescence detection technology infringe the ‘648 patent, purchase of consumables and project materials, and and seeks injunctive and monetary relief. The Company contracted R&D services from the Applied Biosystems answered the complaint, alleging that the ‘648 patent is group. invalid and unenforceable, and that the Company has not infringed the ‘648 patent. In December 2000, the court Access to Technology and Know-How granted Amersham’s motion for summary judgment in part, finding that certain of the Company’s activities infringe the Each group has free access to all Company technology and claims of the ‘648 patent, but denied Amersham’s motion for know-how (excluding products and services of the other summary judgment that the Company induced its customers group) that may be useful in that group’s business, subject to to infringe the claims of the ‘648 patent. On April 6, 2001, obligations and limitations applicable to the Company and to the court granted the Company’s motion for summary such exceptions that the Company’s Board of Directors may judgment finding that the Company’s recently introduced determine. The groups consult with each other on a regular
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued BigDye Version 3.0 dye technology does not infringe the On July 10, 2001, United States Judge Charles R. Breyer ‘648 patent. stayed all cases in the litigation described above for the On March 13, 1998, the Company filed a patent purpose of facilitating court ordered settlement mediation. infringement action against Amersham and Molecular The stay is scheduled to expire on March 11, 2002. Dynamics, Inc. in the United States District Court for the The Company believes that the claims asserted by Amersham Northern District of California. The Company asserts that and Molecular Dynamics in the foregoing cases are without one of its patents (U.S. Patent No. 4,811,218) is infringed by merit and intends to defend the cases vigorously. However, reason of Molecular Dynamics’ and Amersham’s sale of the outcome of this or any other litigation is inherently certain DNA analysis systems (e.g., the MegaBACE 1000 uncertain, and the Company cannot be sure that it will System). In response, Amersham has asserted various prevail in any of these matters. An adverse determination in affirmative defenses and several counterclaims, including that any of the actions brought by Amersham could have a the Company is infringing two patents, U.S. Patent No. material adverse effect on the financial statements of the 5,091,652 (‘‘the ‘652 patent’’) and U.S. Patent No. Celera Genomics group and the Company. 5,459,325, each owned by or licensed to Molecular TM Dynamics, by selling certain ABI PRISM DNA sequencing Other systems. In December 2000, the court granted the Company’s motion for summary judgment of non- The Company has been named as a defendant in several infringement of the ‘652 patent. The trial date previously other legal actions, including patent, commercial, and scheduled for August 6, 2001 was vacated in July 2001. environmental, arising from the conduct of normal business activities. Although the amount of any liability that might On May 21, 1998, Amersham filed a patent infringement arise with respect to any of these matters cannot be action against the Company in the United States District accurately predicted, the resulting liability, if any, will not in Court for the Southern District of New York. The the opinion of management have a material adverse effect on complaint alleges that the Company is infringing, the financial statements of the Celera Genomics group or the contributing to the infringement of, and inducing the Company. infringement of U.S. Patent No. 4,707,235 (‘‘the ‘235 patent’’) by reason of the Company’s sale of certain ABI The holders of Applera – Celera stock are stockholders of PRISMTM DNA sequencing systems. The complaint seeks the Company and will continue to be subject to all risks injunctive and monetary relief. The Company answered the associated with an investment in the Company, including complaint, alleging that the ‘235 patent is invalid and that any legal proceedings and claims affecting the Applied the Company does not infringe the ‘235 patent. The matters Biosystems group. described in this paragraph and the immediately preceding paragraph have been consolidated into a single case to be Note 11—Financial Instruments P
U heard in the United States District Court for the Northern Concentration of Credit Risk
O District of California. In December 2000, the court granted Financial instruments that potentially subject the Company R the Company’s motion for summary judgment of non- G infringement of the ‘235 patent. However, on December 18, to concentrations of credit risk are cash and cash equivalents, S 2000, Amersham filed a new complaint alleging that the short-term investments, and accounts receivable. The C Company is infringing the ‘235 patent by reason of the Company minimizes the risk related to cash and cash equivalents and short-term investments by utilizing highly- MI Company’s sale of certain DNA sequencing systems, which
O allegations were not in the previous suit under the ‘235 rated financial institutions that invest in a broad and diverse N patent. This action is in the early stages of discovery. range of financial instruments. The Company has established guidelines relative to credit ratings and maturities that seek to GE On May 30, 2000, the Company filed a patent infringement maintain safety and liquidity. action against Amersham in the United States District Court RA for the Northern District of California. The Company asserts Accounts receivable balances are with a small number of E customers, primarily multinational pharmaceutical companies L that one of its patents (U.S. Patent No. 5,945,526) is
E infringed by reason of Amersham’s sale of DNA analysis and larger biotechnology companies. Allowances are C reagents and systems that incorporate ET Terminator maintained for potential credit losses and such losses have fluorescence detection technology. The claims construction been within management’s expectations. hearing previously scheduled for June 7, 2001 has been postponed.
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CELERA GENOMICS GROUP Notes to Combined Financial Statements continued Fair Value Events Impacting Comparability The fair value of significant financial instruments held or Fiscal 2001 The fourth quarter results included a before-tax owned by the Company is estimated using various methods. charge of $69.1 million for the impairment of goodwill and Cash and cash equivalents approximate their carrying other intangibles related to Paracel. The fourth quarter results amount. The fair value of short-term investments is also included a loss of $5.0 million from the Celera estimated based on quoted market prices, if available, or Genomics group’s interest in Celera Diagnostics. quoted market prices of financial instruments with similar characteristics. The fair value of debt is based on the current Note 13—Accumulated Other Comprehensive rates offered to the Company for debt of similar remaining Loss maturities. The following table presents the carrying amounts Accumulated other comprehensive loss, net of tax, for fiscal and fair values of the Company’s significant financial 2001 was as follows: instruments at June 30, 2000 and 2001: Foreign Accumulated 2000 2001 Unrealized Currency Other Carrying Fair Carrying Fair Gain on Translation Comprehensive (Dollar amounts in millions) Amount Value Amount Value (Dollar amounts in millions) Investments Adjustments Loss Cash and cash Balance at June 30, 2000 $ - $- $- equivalents $ 569.9 $ 569.9 $ 216.1 $ 216.1 Activity .1 (.2) (.1) Balance at June 30, 2001 $ .1 $ (.2) $ (.1) Short-term investments $ 541.1 $ 541.1 $ 779.3 $ 779.5 Long-term debt $ 46.0 $ 46.0 Amounts recorded in accumulated other comprehensive income prior to fiscal 2001 were less than $0.1 million. Net unrealized gains and losses on short-term investments are reported as a separate component of accumulated other Information regarding the income tax effects for items of comprehensive income (loss) as part of allocated net worth in other comprehensive loss are as follows: the Combined Statements of Financial Position. Before-Tax Tax After-Tax (Dollar amounts in millions) Amount Expense Amount Note 12—Quarterly Financial Information For the Year (Unaudited) Ended The following is a summary of quarterly financial results: June 30, 2001 Unrealized gains on First Quarter Second Quarter investments $ .2 $ (.1) $ .1 (Dollar amounts in millions) 2000 2001 2000 2001 Foreign currency translation CELERA Net revenues $ 8.3 $ 18.3 $ 8.3 $ 20.3 adjustment (.2) (.2) Cost of sales 2.8 5.8 4.2 10.4 Other comprehensive loss $ - $ (.1) $ (.1) Research and development 29.4 41.0 34.0 42.3 The foreign currency translation adjustment is not currently adjusted for income taxes as it relates to indefinite G Operating loss (32.3) (52.6) (39.3) (57.7) EN Net loss (19.4) (25.7) (24.3) (29.7) investments in non-U.S. subsidiaries. OMICS Third Quarter Fourth Quarter (Dollar amounts in millions) 2000 2001 2000 2001 Net revenues $ 11.1 $ 23.4 $ 15.0 $ 27.4 Cost of sales 3.3 12.0 4.7 14.8 GROU Research and development 40.1 40.2 45.1 41.2
Operating loss (42.9) (54.9) (53.6) (124.4) P Net loss (24.1) (29.1) (24.9) (101.7)
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CELERA GENOMICS GROUP Report of Management and Report of Independent Accountants
Report of Management Report of Independent Accountants To the Stockholders of To the Stockholders and Board of Directors of Applera Corporation Applera Corporation
Management is responsible for the accompanying combined In our opinion, the accompanying combined statements of financial statements, which have been prepared in financial position and the related combined statements of conformity with generally accepted accounting principles. In operations, of allocated net worth, and of cash flows present preparing the financial statements, it is necessary for fairly, in all material respects, the financial position of the management to make informed judgments and estimates Celera Genomics group of Applera Corporation at June 30, which it believes are in accordance with accounting 2001 and 2000, and the results of its operations and its cash principles generally accepted in the United States appropriate flows for each of the three fiscal years in the period ended under the circumstances. Financial information presented June 30, 2001 in conformity with accounting principles elsewhere in this annual report is consistent with that in the generally accepted in the United States of America. These financial statements. financial statements are the responsibility of the management of Applera Corporation; our responsibility is to express an In meeting its responsibility for preparing reliable financial opinion on these financial statements based on our audits. statements, the Company maintains a system of internal We conducted our audits of these statements in accordance accounting controls designed to provide reasonable assurance with auditing standards generally accepted in the United that assets are safeguarded and transactions are properly States of America, which require that we plan and perform recorded and executed in accordance with corporate policy the audit to obtain reasonable assurance about whether the and management authorization. The Company believes its financial statements are free of material misstatement. An accounting controls provide reasonable assurance that errors audit includes examining, on a test basis, evidence supporting or irregularities which could be material to the financial the amounts and disclosures in the financial statements, statements are prevented or would be detected within a assessing the accounting principles used and significant timely period. In designing such control procedures, estimates made by management, and evaluating the overall management recognizes judgments are required to assess and financial statement presentation. We believe that our audits balance the costs and expected benefits of a system of provide a reasonable basis for our opinion. internal accounting controls. Adherence to these policies and procedures is reviewed through a coordinated audit effort of As described above and more fully in Note 1 to the Celera the Company’s internal audit staff and independent Genomics group’s combined financial statements, the Celera accountants. Genomics group is a group of Applera Corporation; P accordingly, the combined financial statements of the Celera U The Audit/Finance Committee of the Board of Directors is
O Genomics group should be read in conjunction with the comprised solely of outside directors and is responsible for R audited financial statements of Applera Corporation. overseeing and monitoring the quality of the Company’s G accounting and auditing practices. The independent S
C accountants and internal auditors have full and free access to the Audit/Finance Committee and meet periodically with MI the committee to discuss accounting, auditing, and financial O PricewaterhouseCoopers LLP
N reporting matters. Stamford, Connecticut July 26, 2001 GE RA E
L Dennis L. Winger
E Senior Vice President and C Chief Financial Officer
Tony L. White Chairman, President, and Chief Executive Officer
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APPLERA CORPORATION Directors and Officers
BOARD OF DIRECTORS CORPORATE OFFICERS
Tony L. White Theodore E. Martin Tony L. White* Robert A. Millman Chairman, President and Retired President and Chairman, President and Intellectual Property Chief Executive Officer Chief Executive Officer Chief Executive Officer Celera Genomics Applera Corporation Barnes Group Inc. Director since 1995 Director since 1999 Peter Barrett, Ph.D. Kenneth D. Noonan, (1,4) (2) Vice President Ph.D.* Celera Genomics Senior Vice President Richard H. Ayers Carolyn W. Slayman, Corporate Development Retired Chairman and Ph.D. Samuel E. Broder, M.D. Chief Executive Officer Sterling Professor and Vice President Kathy Ordoñez* The Stanley Works Deputy Dean Celera Genomics Vice President Director since 1988 Yale University School (1,2) and President of Medicine Peter Chambré* Celera Diagnostics Director since 1994 Chief Operating Officer Jean-Luc Bélingard (1,3,4,5) Celera Genomics John S. Ostaszewski Chief Executive Officer Treasurer bioMérieux-Pierre Orin R. Smith Fabre Group Retired Chairman and Ugo D. DeBlasi Robert P. Ragusa Director since 1993 Chief Executive Officer Finance (3,4,5) Vice President Engelhard Corporation Celera Genomics Applied Biosystems Director since 1995 Robert H. Hayes, Ph.D. (3,4) Michael W. * Philip Caldwell Professor, Hunkapiller, Ph.D.* William B. Sawch Emeritus Georges C. St. Laurent, Jr. Senior Vice President and Senior Vice President and Harvard Business School Principal President General Counsel Director since 1985 St. Laurent Properties Applied Biosystems (1,2,5) Former Chief Executive Deborah A. Smeltzer Officer Vikram Jog Finance Arnold J. Levine, Ph.D. Western Bank Corporate Controller Applied Biosystems President and Chief Director since 1996 Executive Officer (3,4,5) Robert C. Jones Joseph H. Smith Rockefeller University Vice President Intellectual Property Director since 1999 James R. Tobin Applied Biosystems (2,5) Applied Biosystems President and Chief Executive Officer * Barbara J. Kerr* J. Craig Venter, Ph.D. Boston Scientific Vice President Senior Vice President and Corporation Human Resources President Director since 1999 Celera Genomics (2) Thomas P. Livingston * Secretary Dennis L. Winger Committee Memberships: Senior Vice President and 1 Executive Committee Chief Financial Officer Stephen J. Lombardi 2 Audit/Finance Committee Vice President 3 Management Resources * Committee Applied Biosystems Member, Management 4 Nominating Committee Executive Committee 5 Technology Advisory Joseph E. Malandrakis Committee Vice President Applied Biosystems
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APPLERA CORPORATION Stockholder Information
PRINCIPAL OFFICES FORM 10-K Applera Corporation A copy of the annual report to the Securities and 301 Merritt 7 Exchange Commission on Form 10-K may be obtained Norwalk, CT 06851 without charge by writing to the Secretary at the T 203.840.2000 301 Merritt 7 corporate address. www.applera.com Mailing Address: INFORMATION VIA INTERNET Applera Corporation Internet users can access information on Applera P.O. Box 5435 Corporation, its public announcements, including press Norwalk, CT 06856-5435 releases, quarterly conference calls, products and services, Applied Biosystems and other items of interest, through the following address: 850 Lincoln Centre Drive http://www.applera.com Foster City, CA 94404 Alternatively, you may request this information by T 650.570.6667 writing to: www.appliedbiosystems.com Applera Corporation Celera Genomics Corporate Communications 45 West Gude Drive 850 Lincoln Centre Drive Rockville, MD 20850 Foster City, CA 94404 T 240.453.3000 www.celera.com ANNUAL MEETING Celera Diagnostics The Annual Meeting of Stockholders will be held 1401 Harbor Bay Parkway on Thursday, October 18, 2001, at 9:30 a.m. at Alameda, CA 94502 301 Merritt 7, Norwalk, CT 06851. T 510.749.4200 INVESTOR RELATIONS www.applera.com Vice President, Investor Relations STOCKHOLDER RESPONSE CENTER Peter Dworkin Fleet National Bank, the stockholder services and transfer Investment professionals should call 650.554.2449. agent, will gladly answer questions about your accounts, certificates, and dividends. Please phone toll free: CORPORATE COMMUNICATIONS 800.730.4001 or write to: Vice President, Corporate Communications Fleet National Bank Carolyn E. Christenson c/o EquiServe P.O. Box 8040 News media representatives and others seeking general Boston, MA 02266-8040 information should call 650.554.2636. http://www.equiserve.com TRADEMARKS DIVIDEND REINVESTMENT AB (Design), Applera, API 4000, BigDye, Celera, Celera The Applied Biosystems Dividend Reinvestment Plan Diagnostics, Celera Discovery System, Celera Genomics, provides owners of Applera–Applied Biosystems common the Celera Spirit, TOF/TOF, ViroSeq, and Voyager are stock with a convenient, automatic, and inexpensive trademarks and ABI PRISM and Applied Biosystems are way to purchase additional shares. For information and registered trademarks of Applera Corporation or its an enrollment form, contact Fleet National Bank at the subsidiaries in the US and certain other countries. TaqMan address above. is a registered trademark of Roche Molecular Systems, Inc. STOCKHOLDER PUBLICATIONS ICAT is a trademark of the University of Washington, Applera Corporation information, including quarterly exclusively licensed to the Applied Biosystems Group of earnings releases, is available by phoning 800.762.6923. Applera Corporation. This menu-driven system allows callers to receive specific news releases by fax within minutes of a request. You EQUAL EMPLOYMENT OPPORTUNITY AND may also leave a message to have corporate publications, AFFIRMATIVE ACTION including the annual report, proxy statement, and Applera Corporation has long been committed to Equal Securities and Exchange Commission filings (Forms 10-K, Employment Opportunity and Affirmative Action. 10-Q, etc.), mailed to you directly. A policy of positive action is the foundation of this STOCK EXCHANGE LISTINGS commitment and is typified at Applera Corporation by The Applera–Applied Biosystems and Applera–Celera programs directed toward responsible community Genomics common stocks are listed on the New York involvement. and Pacific exchanges under the symbols ABI and CRA, Copyright © 2001 Applera Corporation respectively.
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Applera Corporation 301 Merritt 7 Norwalk, CT 06851 tel 203.840.2000 www.applera.com
0604-AR-01