-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V/wwRJDCqrfiqKgGLPd715BwCpJkMh/le2heg91MVSHhNBZEHs55IIICsmUK7/aZ 5OzaS947osOB4FLbgmPt3g== 0001110538-01-000010.txt : 20010223 0001110538-01-000010.hdr.sgml : 20010223 ACCESSION NUMBER: 0001110538-01-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLERA CORP CENTRAL INDEX KEY: 0000077551 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 061534213 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04389 FILM NUMBER: 1545437 BUSINESS ADDRESS: STREET 1: 761 MAIN AVE CITY: NORWALK STATE: CT ZIP: 06859-0199 BUSINESS PHONE: 2037621000 MAIL ADDRESS: STREET 1: 761 MAIN AVENUE CITY: NORWALK STATE: CT ZIP: 06859-0001 FORMER COMPANY: FORMER CONFORMED NAME: PE CORP DATE OF NAME CHANGE: 19990129 FORMER COMPANY: FORMER CONFORMED NAME: PERKIN ELMER CORP DATE OF NAME CHANGE: 19930601 10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 1-4389 APPLERA CORPORATION (Exact Name of Registrant as Specified in Its Charter) Delaware 06-1534213 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 761 Main Avenue, Norwalk, Connecticut 06859-0001 (Address of Principal Executive Offices, Including Zip Code) (203) 762-1000 (Registrant's Telephone Number, Including Area Code) PE Corporation (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ---- ---- As of the close of business on February 13, 2001, there were 210,879,760 shares of Applera Corporation - Applied Biosystems Group Common Stock and 61,191,533 shares of Applera Corporation - Celera Genomics Group Common Stock outstanding. APPLERA CORPORATION INDEX Part I. Financial Information Page A. Applera Corporation Consolidated Item 1. Financial Statements Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 1999 and 2000 1 Condensed Consolidated Statements of Financial Position at June 30, 2000 and December 31, 2000 2 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1999 and 2000 3 Notes to Unaudited Condensed Consolidated Financial Statements 4-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-26 B. Applied Biosystems Group Item 1. Financial Statements Condensed Combined Statements of Operations for the Three and Six Months Ended December 31, 1999 and 2000 27 Condensed Combined Statements of Financial Position at June 30, 2000 and December 31, 2000 28 Condensed Combined Statements of Cash Flows for the Six Months Ended December 31, 1999 and 2000 29 Notes to Unaudited Condensed Combined Financial Statements 30-35 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 36-45 APPLERA CORPORATION INDEX Part I. Financial Information (continued) Page C. Celera Genomics Group Item 1. Financial Statements Condensed Combined Statements of Operations for the Three and Six Months Ended December 31, 1999 and 2000 46 Condensed Combined Statements of Financial Position at June 30, 2000 and December 31, 2000 47 Condensed Combined Statements of Cash Flows for the Six Months Ended December 31, 1999 and 2000 48 Notes to Unaudited Condensed Combined Financial Statements 49-53 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 54-68 Part II. Other Information 69 APPLERA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (Dollar amounts in thousands except per share amounts)
Three months ended Six months ended December 31, December 31, 1999 2000 1999 2000 -------- -------- -------- -------- Net Revenues $327,364 $413,265 $616,207 $780,679 Cost of sales 147,261 191,109 279,812 354,610 -------- -------- -------- -------- Gross Margin 180,103 222,156 336,395 426,069 Selling, general and administrative 115,347 109,181 201,491 212,186 Research, development and engineering 60,725 84,277 117,385 167,984 Amortization of goodwill and intangibles 10,968 22,049 -------- -------- -------- -------- Operating Income 4,031 17,730 17,519 23,850 Gain on investments 25,811 2,981 25,811 14,985 Interest expense 856 337 1,250 1,390 Interest income 5,143 21,332 9,551 43,899 Other expense, net (4,305) (254) (8,885) (3,156) -------- -------- -------- -------- Income Before Income Taxes 29,824 41,452 42,746 78,188 Provision for income taxes 10,649 13,978 13,492 26,258 -------- -------- -------- -------- Net Income $ 19,175 $ 27,474 $ 29,254 $ 51,930 ======== ======== ======== ======== Applied Biosystems Group (see Note 4) Net Income $ 43,834 $ 57,954 $ 73,541 $107,098 Basic per share $ .21 $ .28 $ .36 $ .51 Diluted per share $ .20 $ .26 $ .34 $ .48 Dividends per share $ .0425 $ .0425 $ .085 $ .085 Celera Genomics Group (see Note 4) Net Loss $(24,278) $(29,704) $(43,676) $(55,393) Basic and diluted per share $ (.47) $ (.49) $ (.84) $ (.92)
See accompanying notes to unaudited condensed consolidated financial statements. 1 APPLERA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Dollar amounts in thousands)
At June 30, At December 31, 2000 2000 ---------- --------------- (unaudited) Assets Current assets Cash and cash equivalents $ 964,502 $ 616,352 Short-term investments 541,140 692,634 Accounts receivable, net 378,593 438,572 Inventories 157,827 168,161 Prepaid expenses and other current assets 83,465 114,034 ---------- ---------- Total current assets 2,125,527 2,029,753 Property, plant and equipment, net 334,855 406,936 Other long-term assets 622,933 558,003 ---------- ---------- Total Assets $3,083,315 $2,994,692 ========== ========== Liabilities and Stockholders' Equity Current liabilities Loans payable $ 15,693 $ 20,131 Accounts payable 191,484 178,577 Accrued salaries and wages 89,660 53,100 Accrued taxes on income 149,584 114,484 Other accrued expenses 200,079 207,337 ---------- ---------- Total current liabilities 646,500 573,629 Long-term debt 82,115 33,182 Other long-term liabilities 134,208 140,893 ---------- ---------- Total Liabilities 862,823 747,704 Stockholders' Equity Capital stock Applera Corporation - Applied Biosystems group 2,087 2,105 Applera Corporation - Celera Genomics group 593 609 Capital in excess of par value 1,714,362 1,798,297 Retained earnings 377,996 412,086 Accumulated other comprehensive income 125,454 33,891 ---------- ---------- Total Stockholders' Equity 2,220,492 2,246,988 ---------- ---------- Total Liabilities and Stockholders' Equity $3,083,315 $2,994,692 ========== ==========
See accompanying notes to unaudited condensed consolidated financial statements. 2 APPLERA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Dollar amounts in thousands)
Six months ended December 31, 1999 2000 -------- -------- Operating Activities from Continuing Operations Net income $ 29,254 $ 51,930 Adjustments to reconcile net income to net cash used by operating activities Depreciation and amortization 35,211 61,028 Long-term compensation programs 27,974 3,600 Gain on sale of assets (25,811) (14,985) Deferred income taxes (4,937) (1,355) Changes in operating assets and liabilities Increase in accounts receivable (15,063) (67,962) Increase in inventories (17,572) (13,259) Increase in prepaid expenses and other assets (18,323) (38,736) Decrease in accounts payable and other liabilities (26,737) (59,031) -------- -------- Net Cash Used by Operating Activities (16,004) (78,770) -------- -------- Investing Activities from Continuing Operations Additions to property, plant and equipment (net of disposals of $594 and $412, respectively) (50,513) (108,276) Purchases of short-term investments, net (151,205) Investments (12,000) (4,131) Proceeds from the sale of assets, net 31,056 15,498 -------- -------- Net Cash Used by Investing Activities (31,457) (248,114) -------- -------- Net Cash Used by Continuing Operations Before Financing Activities (47,461) (326,884) -------- -------- Net Cash Used by Operating Activities From Discontinued Operations (7,435) (1,561) -------- -------- Financing Activities Net change in loans payable 74,999 (39,960) Dividends (8,748) (17,758) Proceeds from stock issued for stock plans 27,692 37,821 -------- -------- Net Cash Provided (Used) by Financing Activities 93,943 (19,897) -------- -------- Effect of Exchange Rate Changes on Cash 2,413 192 -------- -------- Net Change in Cash and Cash Equivalents 41,460 (348,150) Cash and Cash Equivalents Beginning of Period 308,021 964,502 -------- -------- Cash and Cash Equivalents End of Period $349,481 $616,352 ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 3 APPLERA CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The name of PE Corporation was changed to Applera Corporation (the "Company") and the name of the PE Biosystems group was changed to the Applied Biosystems group effective November 30, 2000. The interim condensed consolidated financial statements should be read in conjunction with the financial statements presented in the Company's 2000 Annual Report to Stockholders. Significant accounting policies disclosed therein have not changed, except for the accounting for derivative instruments and hedging activities, which is discussed in Note 7 of the Company's condensed consolidated financial statements. The unaudited condensed consolidated financial statements reflect, in the opinion of the Company's management, all adjustments that are necessary for a fair statement of the results for the interim periods. All such adjustments are of a normal recurring nature. These results are, however, not necessarily indicative of the results to be expected for a full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain amounts in the condensed consolidated financial statements have been reclassified for comparative purposes. The Applied Biosystems group's and the Celera Genomics group's condensed combined financial statements should be read in conjunction with the Company's condensed consolidated financial statements. 4 APPLERA CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued NOTE 2 - ACQUISITIONS Paracel, Inc. During the fourth quarter of fiscal 2000, the Company acquired Paracel, Inc. in a stock-for-stock transaction. The net assets and results of operations of Paracel were included in the Company's condensed consolidated financial statements from the date of acquisition. The following selected unaudited pro forma information for the Company assumes the acquisition had occurred at the beginning of fiscal 2000 and gives effect to purchase accounting adjustments:
(Dollar amounts in millions except per share amounts) Three months ended Six months ended December 31, 1999 December 31, 1999 ------------------ ------------------- Net revenues $329.9 $621.7 Net income $ 7.0 $ 3.0 Applied Biosystems Group Net income $ 43.8 $ 73.5 Basic per share $ .21 $ .36 Diluted per share $ .20 $ .34 Celera Genomics group Net loss $(36.4) $(69.9) Basic and diluted per share $ (.68) $(1.31)
See Note 2 to the consolidated financial statements in the Company's 2000 Annual Report to Stockholders for a further discussion of this acquisition. 5 APPLERA CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued NOTE 3 - COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income included in Stockholders' Equity on the Condensed Consolidated Statements of Financial Position consists of foreign currency translation adjustments, unrealized gains and losses on foreign currency and interest rate hedge contracts, unrealized gains and losses on available-for-sale investments, and minimum pension liability adjustments. Total comprehensive income (loss) for the three and six months ended December 31, 1999 and 2000 is presented in the following table:
(Dollar amounts in millions) Three months ended Six months ended December 31, December 31, 1999 2000 1999 2000 ------ ------ ------ ------ Net income $ 19.2 $ 27.4 $ 29.3 $ 51.9 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (18.6) 7.8 (5.7) (4.8) Unrealized gain on hedge contracts, net 1.2 5.6 Unrealized gain (loss) on investments, net 29.3 (60.7) 61.9 (82.6) Reclassification adjustments for realized gains included in net income (16.7) (1.9) (16.7) (9.7) ------ ------ ------ ------ Other comprehensive income (loss) (6.0) (53.6) 39.5 (91.5) ------ ------ ------ ------ Comprehensive income (loss) $ 13.2 $(26.2) $ 68.8 $(39.6) ====== ====== ====== ======
6 APPLERA CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued NOTE 4 - EARNINGS PER SHARE Basic earnings per share for each series of common stock is computed by dividing the earnings allocated to each series of common stock by the weighted average number of outstanding shares of that series of common stock. Diluted earnings per share is computed by dividing the earnings allocated to each series of common stock by the weighted average number of outstanding shares of that series of common stock including the dilutive effect of common stock equivalents. The earnings allocated to each series of common stock is determined by the Company's Board of Directors. This determination is generally based on the net income or loss amounts of the corresponding group determined in accordance with generally accepted accounting principles consistently applied. The Company believes this method of allocation is systematic and reasonable. The Board can, at its discretion, change the method of allocating earnings to each series of common stock at any time. The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three months ended December 31:
(Amounts in thousands Applied Biosystems Celera Genomics except per share amounts) Group Group ----------------------- ---------------------- 1999 2000 1999 2000 -------- -------- -------- -------- Weighted average number of common shares used in the calculation of basic earnings (loss) per share 206,416 210,034 51,918 60,645 Common stock equivalents 8,658 12,656 -------- -------- -------- -------- Shares used in the calculation of diluted earnings (loss) per share 215,074 222,690 51,918 60,645 ======== ======== ======== ======== Earnings (loss) used in the calculation of basic and diluted earnings (loss) per share $ 43,834 $ 57,954 $(24,278) $(29,704) ======== ======== ======== ======== Earnings (loss) per share Basic $ .21 $ .28 $ (.47) $ (.49) Diluted $ .20 $ .26 $ (.47) $ (.49)
7 APPLERA CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued The following table presents a reconciliation of basic and diluted earnings (loss) per share for the six months ended December 31:
(Amounts in thousands Applied Biosystems Celera Genomics except per share amounts) Group Group ---------------------- ----------------------- 1999 2000 1999 2000 -------- -------- -------- -------- Weighted average number of common shares used in the calculation of basic earnings (loss) per share 206,064 209,584 51,695 60,182 Common stock equivalents 7,954 12,341 -------- -------- -------- -------- Shares used in the calculation of diluted earnings (loss) per share 214,018 221,925 51,695 60,182 ======== ======== ======== ======== Earnings (loss) used in the calculation of basic and diluted earnings (loss) per share $ 73,541 $107,098 $(43,676) $(55,393) ======== ======== ======== ======== Earnings (loss) per share Basic $ .36 $ .51 $ (.84) $ (.92) Diluted $ .34 $ .48 $ (.84) $ (.92)
Options to purchase 6.1 million shares of Applera Corporation-Applied Biosystems Group Common Stock were outstanding at December 31, 2000, but were not included in the computation of diluted earnings per share because the effect was antidilutive. There were no antidilutive options outstanding at December 31, 1999. Options and warrants to purchase 14.0 million and 13.7 million shares of Applera Corporation-Celera Genomics Group Common Stock were outstanding at December 31, 1999 and 2000, but were not included in the computation of diluted loss per share because the effect was antidilutive. 8 APPLERA CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued NOTE 5 - INVENTORIES Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Inventories included the following components:
(Dollar amounts in millions) June 30, December 31, 2000 2000 ---------- ------------- Raw materials and supplies $ 53.1 $ 64.4 Work-in-process 6.3 5.9 Finished products 98.4 97.9 ---------- ------------- Total inventories $157.8 $168.2 ========== =============
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION Significant non-cash financing activities were as follows:
(Dollar amounts in millions) Six months ended December 31, 1999 2000 ---------- ---------- Tax benefit related to employee stock options $ - $42.5 Dividends declared not paid $ 8.8 $ 8.9
NOTE 7 - FINANCIAL INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," amended in June 2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." The statements require the recognition of all derivative financial instruments as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative is driven by the intended use of the derivative and the resulting designation. The Company adopted the statements effective July 1, 2000. The cumulative effect of adoption resulted in an immaterial adjustment for a change in accounting principle in both the Condensed Consolidated Statements of Operations and in accumulated other comprehensive income in the Condensed Consolidated Statements of Financial Position. The Company's foreign currency risk management strategy utilizes derivative instruments to hedge certain foreign currency forecasted revenues and to offset the impact of changes in foreign currency exchange rates on certain foreign currency-denominated net asset positions. The principal objective of 9 APPLERA CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued this strategy is to minimize the risks and/or costs associated with the Company's global financial and operating activities. The Company utilizes foreign exchange forward, option, and range forward contracts to manage its foreign currency exposures, and an interest rate swap agreement to manage its interest rate exposure. The Company does not use derivative financial instruments for trading purposes, nor is it a party to leveraged derivatives. The fair value of all foreign currency derivative contracts is recorded in prepaid expenses and other current assets and other accrued expenses. The fair value of the interest rate swap agreement is recorded in other long-term liabilities. Cash Flow Hedges The Company's international sales are typically denominated in the customers' local (non-U.S. dollar) currency. The Company uses foreign exchange forward, option, and range forward contracts to hedge a portion of forecasted international sales not denominated in U.S. dollars. These contracts are designated as cash flow hedges and the effective portion of the change in the fair value of these contracts is recorded in other comprehensive income in the Condensed Consolidated Statements of Financial Position until the underlying external forecasted transaction affects earnings. At that time, the gain or loss on the derivative instrument, which had been deferred in other comprehensive income, is reclassified to net revenues in the Condensed Consolidated Statements of Operations. During the three and six months ended December 31, 2000, the Company recognized net gains of $3.7 million and $4.8 million, respectively, in net revenues from derivative instruments designated as cash flow hedges of anticipated sales. At December 31, 2000, $9.1 million of derivative gains ($6.0 million net of deferred taxes) recorded in other comprehensive income are expected to be reclassified to earnings during the next twelve months. For the three and six months ended December 31, 2000, the Company recognized expense of $1.0 million and $2.7 million, respectively, included in other expense in the Condensed Consolidated Statements of Operations, which represented the change in the time value component of the fair value of option contracts designated as cash flow hedges. The time value component is not included in the assessment of hedge effectiveness, and as a result, any changes are recognized in earnings in the period in which they occur. The Company maintains an interest rate swap in conjunction with a five-year Japanese yen debt obligation. The interest rate swap agreement involves the payment of a fixed rate of interest and the receipt of a floating rate of interest without the exchange of the underlying notional loan principal amount. Under the terms of this contract, the Company will make fixed interest payments of 2.1% while receiving interest at a LIBOR floating rate. No other cash payments will be made unless the contract is terminated prior to maturity, in which case the amount to be paid or received in settlement will be established by agreement at the time of termination. The agreed upon amount would usually represent the net present value at current interest rates of the remaining obligation to exchange payments under the terms of the contract. 10 APPLERA CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued Other Hedges The Company also uses derivative financial instruments to hedge against the adverse effects that foreign currency exchange rate fluctuations may have on its foreign currency-denominated net asset positions. The gains and losses on these derivatives are expected to largely offset transaction losses and gains, respectively, on the underlying foreign currency-denominated assets and liabilities, both of which are recorded in other expense. NOTE 8 - SEGMENT INFORMATION The following table presents summarized segment financial information for the three months ended December 31:
(Dollar amounts Applied Celera in millions) Biosystems Genomics Group Group Other Consolidated ---------- -------- ------- ------------ 1999 Net revenues from external customers $ 319.1 $ 8.3 $ - $ 327.4 Intersegment revenues 16.8 (16.8) ------- ------- ------- ------- Total revenues $ 335.9 $ 8.3 $ (16.8) $ 327.4 ======= ======= ======= ======= Operating income (loss) $ 43.5 $ (39.3) $ (.2) $ 4.0 2000 Net revenues from external customers $ 393.7 $ 19.6 $ - $ 413.3 Intersegment revenues 17.3 .7 (18.0) ------- ------- ------- ------- Total revenues $ 411.0 $ 20.3 $ (18.0) $ 413.3 ======= ======= ======= ======= Operating income (loss) $ 76.3 $ (57.8) $ (.7) $ 17.8
11 APPLERA CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued The following table presents summarized segment financial information for the six months ended December 31:
(Dollar amounts Applied Celera in millions) Biosystems Genomics Group Group Other Consolidated ---------- -------- ------- ------------ 1999 Net revenues from external customers $ 599.6 $ 16.6 $ - $ 616.2 Intersegment revenues 28.5 (28.5) ------- ------- ------- ------- Total revenues $ 628.1 $ 16.6 $ (28.5) $ 616.2 ======= ======= ======= ======= Operating income (loss) $ 88.5 $ (71.6) $ .6 $ 17.5 2000 Net revenues from external customers $ 742.8 $ 37.9 $ - $ 780.7 Intersegment revenues 31.8 .7 (32.5) ------- ------- ------- ------- Total revenues $ 774.6 $ 38.6 $ (32.5) $ 780.7 ======= ======= ======= ======= Operating income (loss) $ 134.2 $(110.4) $ .1 $ 23.9
See Note 6 to the consolidated financial statements included in the Company's 2000 Annual Report to Stockholders. NOTE 9 - DEBT Long-term debt at June 30, 2000 consisted of $46.0 million of commercial paper borrowing. The Company had the necessary credit facilities, through its revolving credit agreement, to refinance the commercial paper borrowings on a long-term basis. At June 30, 2000, these borrowings were classified as a noncurrent liability because it was the Company's intent to refinance these obligations on a long-term basis. However, in October 2000, the Company repaid this debt. NOTE 10 - RELATED PARTY TRANSACTIONS The Institute of Genomic Research ("TIGR"). During the second quarter of fiscal 2001, the Celera Genomics group entered into an agreement to perform sequencing services for TIGR. The President of the Celera Genomics group is also the current Chairman of the Board of Trustees of TIGR. An immediate family member of the President of the Celera Genomics group currently serves as TIGR's President and is on TIGR's Board of Trustees. Additionally, as of December 31, 2000, TIGR owns approximately 1.4 million options to purchase Applera Corporation - Celera Genomics Group Common Stock. 12 APPLERA CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued During the second quarter of fiscal 2001, the Celera Genomics group recognized revenues of $1.6 million from TIGR, which was also a receivable as of December 31, 2000. NOTE 11 - CONTINGENCIES Amersham On November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a patent infringement action against the Company in the United States District Court for the Northern District of California. The complaint alleges that the Company is directly, contributorily, or by inducement infringing U.S. Patent No. 5,688,648 ("the '648 patent"). Amersham asserts that the Company's use and sale of DNA analysis reagents and systems that incorporate "BigDye" fluorescence detection technology infringe the '648 patent, and seeks injunctive and monetary relief. The Company answered the complaint, alleging that the '648 patent is invalid and unenforceable, and that the Company has not infringed the '648 patent. In December 2000, the court granted Amersham's motion for summary judgment in part, finding that certain of the Company's activities infringe the claims of the '648 patent, but denied Amersham's motion for summary judgment that the Company induced its customers to infringe the claims of the '648 patent. The trial date has been postponed and is currently expected to be scheduled for spring or summer 2001. On March 13, 1998, the Company filed a patent infringement action against Amersham and Molecular Dynamics, Inc. in the United States District Court for the Northern District of California. The Company asserts that one of its patents (U.S. Patent No. 4,811,218) is infringed by reason of Molecular Dynamics' and Amersham's sale of certain DNA analysis systems (e.g., the MegaBACE 1000 System). In response, Amersham has asserted various affirmative defenses and several counterclaims, including that the Company is infringing two patents, U.S. Patent No. 5,091,652 ("the '652 patent") and U.S. Patent No. 5,459,325, each owned by or licensed to Molecular Dynamics, by selling certain ABI PRISM(TM)DNA sequencing systems. In December 2000, the court granted the Company's motion for summary judgment of non-infringement of the '652 patent. This case has not yet been scheduled for trial. On May 21, 1998, Amersham filed a patent infringement action against the Company in the United States District Court for the Southern District of New York. The complaint alleges that the Company is infringing, contributing to the infringement, and inducing the infringement of U.S. Patent No. 4,707,235 ("the '235 patent") by reason of the Company's sale of certain ABI PRISM(TM) DNA sequencing systems. The complaint seeks injunctive and monetary relief. The Company answered the complaint, alleging that the '235 patent is invalid and that the Company does not infringe the '235 patent. The matters described in this paragraph and the immediately preceding paragraph have been consolidated into a single case to be heard in the United States District Court for the Northern District of California. In December 2000, the court granted the Company's motion for summary judgment of non-infringement of the '235 patent. However, on December 18, 2000, Amersham filed a new complaint alleging that the Company is infringing the '235 patent by reason of the Company's sale of certain DNA sequencing systems, which allegations were not in the previous suit under the '235 patent. This action is in the early stages of discovery. 13 APPLERA CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS continued On May 30, 2000, the Company filed a patent infringement action against Amersham in the United States District Court for the Northern District of California. The Company asserts that one of its patents (U.S. Patent No. 5,945,526) is infringed by reason of Amersham's sale of DNA analysis reagents and systems that incorporate ET Terminator fluorescence detection technology. This case is in the early stages of discovery. The Company believes that the claims asserted by Amersham in the foregoing cases are without merit and intends to defend the cases vigorously. However, the outcome of this or any other litigation is inherently uncertain, and the Company cannot be sure that it will prevail in any of these matters. An adverse determination in any of the actions brought by Amersham could have a material adverse effect on the financial statements of the Company. Other The Company has been named as a defendant in several other legal actions, including patent, commercial, and environmental, arising from the conduct of normal business activities. Although the amount of any liability that might arise with respect to any of these matters cannot be accurately predicted, the resulting liability, if any, will not in the opinion of management have a material adverse effect on the financial statements of the Company. 14 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion of Operations The name of PE Corporation was changed to Applera Corporation (the "Company") and the name of the PE Biosystems group was changed to the Applied Biosystems group effective November 30, 2000. The following discussion should be read in conjunction with the Company's condensed consolidated financial statements and related notes included in this report and "Management's Discussion and Analysis" appearing on pages 73 - 87 of the Company's 2000 Annual Report to Stockholders. Historical results and percentage relationships are not necessarily indicative of operating results for any future periods. Events Impacting Comparability Gains on investments. The three and six months ended December 31, 2000 included before-tax gains of $3.0 million and $15.0 million, respectively, related to the sales of minority equity investments. The second quarter of fiscal 2000 included a before-tax gain of $25.8 million related to the sale of the Company's interest in a minority equity investment. Other special charges. During the second quarter of fiscal 2000, the Company recorded a before-tax charge of $21.6 million in selling, general and administrative expenses for costs related to the acceleration of certain long-term compensation programs as a result of the attainment of performance targets. Acquisition. During the fourth quarter of fiscal 2000, Paracel, Inc. was acquired in a stock-for-stock transaction. Paracel produces advanced genomic and text analysis technologies. Its products include a hardware accelerator for sequence comparison, a hardware accelerator for text search, and sequence analysis software tools. See Note 2 to the condensed consolidated financial statements for a discussion of this acquisition. Results of Operations for the Three Months Ended December 31, 2000 Compared With the Three Months Ended December 31, 1999 Applera Corporation reported net income of $27.5 million for the second quarter of fiscal 2001 compared with $19.2 million for the second quarter of fiscal 2000. On a segment basis, the Applied Biosystems group reported net income of $58.0 million for the second quarter of fiscal 2001 compared with $43.8 million for the second quarter of fiscal 2000. On a comparable basis, excluding the gains on the sales of minority equity investments from both fiscal years and the long-term compensation charge from fiscal 2000, net income increased $12.2 million, or 27.8%, to $56.0 million for the second quarter of fiscal 2001 compared with the second quarter of fiscal 2000. This increase was attributable to the growth in net revenues, lower operating expenses as a percentage of net revenues and lower interest expense. The negative effects of foreign currency reduced net income by approximately $7 million, or 16%, as compared with the second quarter of fiscal 2000. The Celera 15 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Genomics group reported a net loss of $29.7 million for the second quarter of fiscal 2001 compared with a net loss of $24.3 million for the second quarter of fiscal 2000. The increase in the net loss reflected the increased investment in research and development activities relating to expanded efforts in bioinformatics and software development capabilities; increased operating expenses required to support expanded product and business development activities; expansion of sales and marketing capabilities; and amortization of goodwill and intangibles primarily due to the Paracel acquisition. These increased expenses were partially offset by increased net revenues and interest income. Net revenues for the Company were $413.3 million for the second quarter of fiscal 2001 compared with $327.4 million for the second quarter of fiscal 2000, an increase of 26.2%. On a segment basis, net revenues for the Applied Biosystems group increased $75.1 million to $411.0 million for the second quarter of fiscal 2001 compared with $335.9 million for the prior year. Net revenues for the Celera Genomics group were $20.3 million for the second quarter of fiscal 2001 compared with $8.3 million for the second quarter of fiscal 2000. Net revenues for the Applied Biosystems group increased 22.3% compared with the prior year. The effects of foreign currency reduced net revenues by approximately $19 million for the second quarter of fiscal 2001, or 6%, compared with the prior year due primarily to weakness in the euro, the British pound, and the Japanese yen. Revenues from leased instruments and shipments to the Celera Genomics group were $17.3 million and $16.9 million for the second quarter of fiscal 2001 and fiscal 2000, respectively. Geographically, the Applied Biosystems group reported revenue growth in all regions for the second quarter of fiscal 2001 compared with the second quarter of fiscal 2000. Revenues increased 14.5% in the United States, 15.2% in Europe, 59.4% in the Far East, and 29.5% in Latin America and other markets, compared with the second quarter of the prior fiscal year. Excluding the effects of foreign currency, revenues grew approximately 31% in Europe and 63% in the Far East. Contributors to the increase in net revenues included genetic analysis products; polymerase chain reaction product lines; genetic synthesizer products; mass spectrometry instruments for proteomics; and royalties. Net revenues for the Celera Genomics group were $20.3 million for the second quarter of fiscal 2001 compared with $8.3 million for the second quarter of fiscal 2000. The increased revenues resulted primarily from database subscription agreements with commercial and academic customers, as well as revenues from Paracel and genomics services. Gross margin as a percentage of net revenues for the Company was 53.8% for the second quarter of fiscal 2001 compared with 55.0% for the second quarter of fiscal 2000. Gross margin as a percentage of net revenues for the Applied Biosystems group was 51.9% for the second quarter of fiscal 2001 compared with 53.8% for the second quarter of fiscal 2000. The decrease in the gross margin as a percentage of net revenues was primarily attributable to the negative effects of foreign currency and a change in product mix. 16 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued SG&A expenses for the Company were $109.2 million for the second quarter of fiscal 2001 compared with $115.3 million for the second quarter of fiscal 2000. On a segment basis, SG&A expenses for the Applied Biosystems group were $94.8 million and $105.8 million for the second quarter of fiscal 2001 and 2000, respectively. SG&A expenses for the Celera Genomics group were $14.4 million and $9.5 million for the second quarter of fiscal 2001 and 2000, respectively. SG&A expenses for the Applied Biosystems group, on a comparable basis excluding the long-term compensation charge in the second quarter of fiscal 2000, increased 12.5% over the prior year. This increase was due to higher planned worldwide selling and marketing expenses commensurate with the growth in revenues and orders. As a percentage of net revenues, SG&A expenses were 23.1% for the second quarter of fiscal 2001 compared with 25.1% for the second quarter of fiscal 2000, excluding the long-term compensation charge. The Celera Genomics group's SG&A expenses increased $4.9 million over the prior year. The increase was caused primarily by the Celera Genomics group's expansion of its sales and marketing capabilities and business development efforts. The acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed to the increase in SG&A expenses. R&D expenses for the Company increased to $84.3 million for the second quarter of fiscal 2001 compared with $60.7 million for the prior year. R&D expenses for the Applied Biosystems group were $42.0 million for the second quarter of fiscal 2001 compared with $31.4 million for the prior year, an increase of 33.9%, as a result of investment in new products and technologies. As a percentage of net revenues, R&D expenses were 10.2% for the second quarter of fiscal 2001 compared with 9.3% for the second quarter of fiscal 2000. The Celera Genomics group's R&D expenses increased $14.5 million to $52.7 million for the second quarter of fiscal 2001 from $38.2 million for the second quarter of fiscal 2000 primarily as a result of the development of expanded bioinformatics and software development capabilities. The group also expanded its scientific and annotation research teams and bioinformatics and software engineering staff. In addition, the Celera Genomics group accelerated the development of its discovery platform and is currently accelerating its gene discovery work and expanding its capabilities in proteomics and functional genomics. The acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed to the increase in R&D expenses. The Celera Genomics group recorded $11.0 million of expenses in the second quarter of fiscal 2001 relating to the amortization of goodwill and other intangibles primarily due to Paracel. Operating income was $17.7 million for the second quarter of fiscal 2001 compared with $4.0 million for the second quarter of the prior year. On a segment basis, operating income for the Applied Biosystems group increased to $76.3 million for the second quarter of fiscal 2001 compared with $43.5 million for the prior year. On a comparable basis, excluding the long-term compensation charge from the prior year, operating income increased $11.2 million, or 17.3%. The Applied 17 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Biosystems group benefited from increased revenues as a result of strong worldwide demand and lower SG&A expenses as a percentage of net revenues, partially offset by the negative effect of foreign currency. Excluding the negative effect of foreign currency and the special charge from the prior year, operating income increased approximately 33%. Operating income as a percentage of net revenues decreased to 18.6% for the second quarter of fiscal 2001 compared with 19.4% for the prior year, excluding the long-term compensation charge in fiscal 2000, primarily due to the negative effects of foreign currency and a change in product mix. Excluding the effects of foreign currency, operating income as a percentage of net revenues increased to 20.1% in the second quarter of fiscal 2001. Operating loss for the Celera Genomics group was $57.8 million for the second quarter of fiscal 2001 compared with $39.3 million for the second quarter of fiscal 2000. The increase in the operating loss reflected the increased investment in research and development activities relating to expanded efforts in bioinformatics and software development capabilities; increased operating expenses required to support expanded product and business development activities; expansion of sales and marketing capabilities; and amortization of goodwill and intangibles primarily due to the Paracel acquisition. These increased expenses were partially offset by increased net revenues. Interest expense was $.3 million for the second quarter of fiscal 2001 compared with $.9 million for the prior year primarily due to lower debt levels in the second quarter of fiscal 2001 compared with the same period of the prior year. Interest expense in both periods reflected the Company's financing of the purchase of the Celera Genomics group's Rockville, Maryland facilities. The financing, entered into during the first quarter of fiscal 2000, was repaid in October 2000. Interest income was $21.3 million for the second quarter of fiscal 2001 compared with $5.1 million for the prior year. The increase was attributable to the interest income on larger cash and cash equivalents and short-term investments, which increased as a result of the follow-on public offering of Applera Corporation-Celera Genomics Group Common Stock completed in March 2000. The second quarter of fiscal 2000 included interest income on the $150 million note receivable relating to the sale of the Analytical Instruments business. The note was collected in the fourth quarter of fiscal 2000. Other expense, net was $.3 million for the second quarter of fiscal 2001 compared with $4.3 million for the prior year. These amounts were primarily related to the Company's foreign currency management program. The Company's effective income tax rate was 34% for the second quarter of fiscal 2001 compared with 36% for the prior year. Excluding the gain on the sale of the minority equity investment in fiscal 2001, the effective income tax rate was 34%. Excluding the sale of a minority equity investment and the long-term compensation charge in fiscal 2000, the effective income tax rate was 25% for the second quarter of 2000. The increase in the effective income tax rate, excluding the special items, was primarily due to the amortization of nondeductible goodwill relating to the acquisition of Paracel. 18 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Results of Operations for the Six Months Ended December 31, 2000 Compared With the Six Months Ended December 31, 1999 Applera Corporation reported net income of $51.9 million for the first six months of fiscal 2001 compared with $29.3 million for the first six months of fiscal 2000. On a segment basis, the Applied Biosystems group reported net income of $107.1 million for the first six months of fiscal 2001 compared with $73.5 million for the first six months of fiscal 2000. On a comparable basis, excluding the gains on the sales of minority equity investments from the first six months of fiscal 2001 and 2000 and the long-term compensation charge from fiscal 2000, net income increased $23.8 million, or 32.4%, compared with the first six months of fiscal 2000. This increase was attributable to the growth in net revenues, lower operating expenses as a percentage of net revenues, lower interest expense, and lower non-operating costs related to the Applied Biosystems group's foreign currency management program. The Celera Genomics group reported a net loss of $55.4 million for the first six months of fiscal 2001 compared with a net loss of $43.7 million for the first six months of fiscal 2000. The increase in the net loss reflected the increased investment in research and development activities; increased operating expenses required to support expanded product and business development activities; expansion of sales and marketing capabilities; and amortization of goodwill and intangibles primarily due to the Paracel acquisition. These increased expenses were partially offset by increased net revenues and interest income. Net revenues for the Company were $780.7 million for the first six months of fiscal 2001 compared with $616.2 million for the first six months of fiscal 2000, an increase of 26.7%. On a segment basis, net revenues for the Applied Biosystems group increased $146.4 million to $774.6 million for the first six months of fiscal 2001 compared with $628.2 million for the prior year. Net revenues for the Celera Genomics group were $38.6 million for the first six months of fiscal 2001 compared with $16.6 million for the first six months of fiscal 2000. Net revenues for the Applied Biosystems group increased 23.3% compared with the prior year. The effects of foreign currency reduced net revenues by approximately $26 million, or 4%, compared with the prior year due primarily to weakness in the euro and the British pound. Revenues from leased instruments and shipments to the Celera Genomics group were $31.8 million and $28.6 million for the first six months of fiscal 2001 and fiscal 2000, respectively. Geographically, the Applied Biosystems group reported revenue growth in all regions for the first six months of fiscal 2001 compared with the first six months of fiscal 2000. Revenues increased 21.9% in the United States, 16.7% in Europe, 38.3% in the Far East, and 23.5% in Latin America and other markets, compared with the first six months of the prior fiscal year. Excluding the effects of foreign currency, revenues grew approximately 31% in Europe. Contributors to the increase in net revenues included genetic analysis products; sequence detection systems, including reagents and instrument systems for gene expression analysis and single nucleotide polymorphism ("SNP") detection; mass spectrometry products; polymerase chain reaction product lines; and royalties. 19 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Net revenues for the Celera Genomics group were $38.6 million for the first six months of fiscal 2001 compared with $16.6 million for the first six months of fiscal 2000. The increased revenues resulted primarily from database subscription agreements with commercial and academic customers, as well as revenues from Paracel and genomics services. Gross margin as a percentage of net revenues for the Company was 54.6% for the first six months of both fiscal 2001 and 2000. Gross margin as a percentage of net revenues for the Applied Biosystems group was 52.6% for the first six months of fiscal 2001 compared with 53.4% for the first six months of fiscal 2000. The decrease in the gross margin as a percentage of net revenues was primarily attributable to the negative effects of foreign currency and a change in product mix. SG&A expenses for the Company were $212.2 million for the first six months of fiscal 2001 compared with $201.5 million for the first six months of fiscal 2000. On a segment basis, SG&A expenses for the Applied Biosystems group were $184.8 million and $183.6 million for the first six months of fiscal 2001 and 2000, respectively. SG&A expenses for the Celera Genomics group were $27.4 million and $17.9 million for the first six months of fiscal 2001 and 2000, respectively. SG&A expenses for the Applied Biosystems group, on a comparable basis excluding the long-term compensation charge in the first six months of fiscal 2000, increased 14.1% over the prior year. This increase was due to higher planned worldwide selling and marketing expenses commensurate with the growth in revenues and orders. As a percentage of net revenues, SG&A expenses were 23.9% for the first six months of fiscal 2001 compared with 25.8% for the first six months of fiscal 2000, excluding the long-term compensation charge. The Celera Genomics group's SG&A expenses increased $9.5 million over the prior year. The increase was caused primarily by the Celera Genomics group's expansion of its sales and marketing capabilities and its business development efforts. The acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed to the increase in SG&A expenses. R&D expenses for the Company increased to $168.0 million for the first six months of fiscal 2001 compared with $117.4 million for the prior year. R&D expenses for the Applied Biosystems group were $88.1 million for the first six months of fiscal 2001 compared with $63.4 million for the prior year, an increase of 39.0%, as a result of investment in new products and technologies. As a percentage of net revenues, R&D expenses for the Applied Biosystems group were 11.4% for the first six months of fiscal 2001 compared with 10.1% for the first six months of fiscal 2000. The Celera Genomics group's R&D expenses increased $29.2 million to $99.5 million for the first six months of fiscal 2001 from $70.3 million for the first six months of fiscal 2000 primarily as a result of the expansion of its scientific and annotation research teams and bioinformatics and software engineering staff. In addition, the Celera Genomics group accelerated the development of its discovery platform and is currently accelerating its gene discovery work and expanding its 20 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued capabilities in proteomics and functional genomics. The acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed to the increase in R&D expenses. The Celera Genomics group recorded $22.0 million of expenses in the first half of fiscal 2001 relating to the amortization of goodwill and other intangibles primarily due to Paracel. Operating income was $23.9 million for the first six months of fiscal 2001 compared with $17.5 million for the first six months of the prior year. On a segment basis, operating income for the Applied Biosystems group increased to $134.2 million for the first six months of fiscal 2001 compared with $88.5 million for the prior year. On a comparable basis, excluding the long-term compensation charge in fiscal 2000, operating income increased $24.1 million, or 21.9%, over the prior year. The Applied Biosystems group benefited from increased revenues as a result of strong worldwide demand and lower SG&A expenses as percentage of net revenues, partially offset by the negative effect of foreign currency. Excluding the negative effect of foreign currency and the special charge from the prior year, operating income increased approximately 34%. Operating income as a percentage of net revenues, excluding the long-term compensation charge in fiscal 2000, remained essentially unchanged. Excluding the effects of foreign currency in fiscal 2001 and the long-term compensation charge in fiscal 2000, operating income as a percentage of net revenues was 18.4% for the first six months of fiscal 2001 compared with 17.5% in the prior year. Operating loss for the Celera Genomics group was $110.4 million for the first six months of fiscal 2001 compared with $71.6 million for the first six months of fiscal 2000. The increase in the operating loss reflected the increased investment in research and development activities; increased operating expenses required to support expanded product and business development activities; expansion of sales and marketing capabilities; and amortization of goodwill and intangibles primarily due to the Paracel acquisition. These increased expenses were partially offset by increased net revenues. Interest expense was $1.4 million for the first six months of fiscal 2001 compared with $1.3 million for the prior year. Interest expense in both periods reflected the Company's financing of the purchase of the Celera Genomics group's Rockville, Maryland facilities. The financing, entered into during the first quarter of fiscal 2000, was repaid in October 2000. Interest income was $43.9 million for the first six months of fiscal 2001 compared with $9.6 million for the prior year. This increase was attributable to the interest income on larger cash and cash equivalents and short-term investments, which increased as a result of the follow-on public offering of Applera Corporation-Celera Genomics Group Common Stock completed in March 2000. The first six months of fiscal 2000 included interest income on the $150 million note receivable relating to the sale of the Analytical Instruments business. The note was collected in the fourth quarter of fiscal 2000. Other expense, net was $3.2 million for the first six months of fiscal 2001 compared with $8.9 million for the prior year. These amounts were primarily related to the Company's foreign currency management program. 21 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued The Company's effective income tax rate was 34% for the first six months of fiscal 2001 compared with 32% for the prior year. Excluding the sales of minority equity investments during the first six months of fiscal 2001, the effective tax rate was 33%. Excluding the sale of a minority equity investment in fiscal 2000 and the long-term compensation charge, the effective income tax rate was 24%. The increase in the effective income tax rate, excluding the special items, was primarily due to the amortization of nondeductible goodwill relating to the acquisition of Paracel. Market Risk The Company operates internationally, with manufacturing and distribution facilities in various countries throughout the world. For fiscal 2000 and the first half of fiscal 2001, the Company derived approximately 50% of its revenues from countries outside of the United States. Results continue to be affected by market risk, including fluctuations in foreign currency exchange rates and changes in economic conditions in foreign markets. The Company performed a sensitivity analysis as of December 31, 2000 on its foreign currency derivative financial instruments. Assuming a hypothetical adverse change of 10% in foreign exchange rates in relation to the U.S. dollar at December 31, 2000, the Company calculated a hypothetical loss of $10.0 million when comparing the change in fair value of both the foreign currency contracts outstanding and the underlying exposures being hedged. This hypothetical analysis excludes the impact of foreign currency translation on the Company's operations. Actual gains and losses in the future could, however, differ materially from this analysis, based on changes in the timing and amount of foreign currency exchange rate movements and actual exposures and hedges. See Note 7 to the condensed consolidated financial statements for a further discussion of derivative financial instruments. Management's Discussion of Financial Resources and Liquidity The following discussion of financial resources and liquidity focuses on the Condensed Consolidated Statements of Financial Position and the Condensed Consolidated Statements of Cash Flows. Significant Changes in the Condensed Consolidated Statements of Financial Position. Cash and cash equivalents and short-term investments were $1.3 billion at December 31, 2000 compared with $1.5 billion at June 30, 2000, with total debt of $53.3 million at December 31, 2000 compared with $97.8 million at June 30, 2000. Working capital was $1.5 billion at December 31, 2000 and June 30, 2000. Debt to total capitalization decreased to 2% at December 31, 2000 from 4% at June 30, 2000. During the second quarter of fiscal 2001, the Company repaid the $46.0 million of commercial paper borrowing that was outstanding at June 30, 2000. Accounts receivable increased $60.0 million to $438.6 million at December 31, 2000 from $378.6 million at June 30, 2000. The increase was primarily due to growth in the Applied Biosystem group's net revenues and timing of collections. 22 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Prepaid expenses and other current assets increased $30.5 million to $114.0 million at December 31, 2000 from $83.5 million at June 30, 2000, primarily due to certain nontrade receivables and the fair value of derivative financial instruments. Property, plant and equipment, net increased $72.0 million to $406.9 million at December 31, 2000 from $334.9 million at June 30, 2000, primarily due to the Applied Biosystems group's purchase of property in Pleasanton, California for approximately $54 million. Other long-term assets decreased $64.9 million to $558.0 million at December 31, 2000 from $622.9 million at June 30, 2000. The Company's minority equity investments decreased $140.2 million due to a decrease in the fair value of the securities, as well as the sales of certain investments mentioned previously. This decrease was partially offset by an increase of $84.8 million in noncurrent deferred tax assets and by an increase in purchased license agreements. Accrued salaries and wages decreased $36.6 million to $53.1 million at December 31, 2000 from $89.7 million at June 30, 2000 reflecting the payments of certain compensation-related accruals. Accrued taxes on income decreased $35.1 million to $114.5 million at December 31, 2000 from $149.6 million at June 30, 2000 primarily due to income tax payments. Condensed Consolidated Statements of Cash Flows. Net cash used by operating activities was $78.8 million for the first six months of fiscal 2001 compared with $16.0 million for the same period in fiscal 2000. For the first six months of fiscal 2001, compared with the same period in the prior year, increases in accounts receivable, prepaid expenses and other assets, and higher payments to suppliers and payments of certain compensation-related accruals were only partially offset by higher income-related cash flows. Net cash used by investing activities was $248.1 million for the first six months of fiscal 2001 compared with $31.5 million for the first six months of fiscal 2000. During the first six months of fiscal 2001, the Company had net purchases of $151.2 million of short-term investments. For the first six months of fiscal 2001, the Company had capital expenditures of $108.7 million. Capital expenditures were $97.3 million for the Applied Biosystems group, which included approximately $54 million related to the purchase of property in Pleasanton, California for the future construction of new office, laboratory and light manufacturing facilities, and $15.1 million for laboratory facilities. Capital expenditures for the Celera Genomics group were $12.6 million for the first six months of fiscal 2001. For the same period in the prior year, capital expenditures for the Company were $51.1 million. In the first six months of fiscal 2001, the Company realized net proceeds of $11.4 million from the sales of minority equity investments compared with $19.1 million for the prior year. Net cash used by discontinued operations was $1.6 million for the first six months of fiscal 2001 compared with $7.4 million for the first six months of fiscal 2000. The fiscal 2000 and fiscal 2001 23 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued uses were for transaction-related payments and other cash outlays associated with the divestiture of the Analytical Instruments business. Net cash used by financing activities was $19.9 million for the first six months of fiscal 2001 compared with net cash provided by financing activities of $93.9 million for the prior year. During the first six months of fiscal 2001, the Company repaid $46.0 million of its commercial paper borrowing which it secured in the first half of fiscal 2000 specifically for the purchase of the Celera Genomics group's Rockville, Maryland facilities. Dividends paid were $17.8 million during the first six months of fiscal 2001 compared with $8.7 million in the prior year. The increase in the amount of dividends paid was due to timing. Proceeds from employee stock option exercises were $37.8 million in the first half of fiscal 2001 compared with $27.7 million for the first half of fiscal 2000. At December 31, 2000, the Company had unused credit facilities, including the existing revolving credit facility, totaling $319.2 million. Outlook The Applied Biosystems group expects to continue to grow and maintain profitability for the remainder of fiscal 2001. The Applied Biosystems group should continue to benefit from its customers in basic medical research, pharmaceutical development, and applied markets for sophisticated, automated, and cost-effective life science tools. Demand is expected to continue for a variety of tools to gather, interpret, and integrate biological information to achieve a better understanding of human health and disease. The Applied Biosystems group should also benefit from the introduction of new products designed to meet these demands during fiscal 2001. For example, during the first half of fiscal 2001, the Applied Biosystems group announced a new product and initiative in proteomics. Shipments of the first Maldi TOF/TOF mass spectrometer were made to early access customers and the Celera Genomics group in the first half of fiscal 2001. In addition, the Applied Biosystems group recently introduced a new Productivity Pack, intended to offer customers using the ABI PRISM(R) genetic analyzers a substantial improvement in productivity, and the ABI PRISM(R) 7900 HT sequence detection system. The Applied Biosystems group remains concerned about adverse currency effects because approximately 50% of its revenues were derived from regions outside the United States in fiscal 2000 and the first half of fiscal 2001. The Applied Biosystems group also remains subject to various other uncertainties, many of which are referenced in the "Forward-Looking Statements" section below. The Celera Genomics group expects to see a continued expansion in the customer base for online genomics information products and related genomics services, with corresponding increases in revenues during fiscal 2001. Revenue growth is expected to be generated primarily from increasing the customer base among the major pharmaceutical and biotech companies, academic institutions, and non-profit research organizations, and expanding the Celera Genomics group's research collaborations and services business. 24 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued The expected increase in revenues should be more than offset as the Celera Genomics group invests in the discovery aspects of its business and continues staffing the organization. The Celera Genomics group has recently hired key people to lead its efforts to develop potential new therapeutic targets and molecular diagnostic markers. The Celera Genomics group intends to continue to expand its efforts in the development of its proteomics and functional genomics capabilities. The Celera Genomics group also intends to continue to strengthen its bioinformatics platform, both in information content and in delivery systems. SG&A expenses are also expected to increase as the group continues to expand its sales and marketing functions. The Company believes the Celera Genomics group's existing cash and cash equivalents and short-term investments are sufficient to fund its operating expenses and capital requirements related to its original business plan, which relates to the sequencing and assembly of the human genome and the development of information products and related genomics services from this data. While the Company intends to use the net proceeds from the Celera Genomics group's follow-on public offering, which was completed in March 2000, primarily to fund its new product and technology development activities in functional genomics, with an emphasis on proteomics and personalized health/medicine, such funds may not be sufficient to support these new business activities as they develop. The Celera Genomics group's actual future capital uses and requirements with respect to its new activities will depend on many factors, including those discussed under "Forward-Looking Statements." During the first half of fiscal 2001, the Company announced plans to expand its existing molecular diagnostics business. This initiative is anticipated to leverage several technological resources of the Applied Biosystems group and the Celera Genomics group. Further details regarding the initiative and its status within the Company's capital structure are anticipated to be announced in the coming quarters, as the initiative is refined. Forward-Looking Statements Certain statements contained in this report, including the Outlook section, are forward-looking and are subject to a variety of risks and uncertainties. These statements may be identified by the use of forward-looking words or phrases such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential," among others. These forward-looking statements are based on our current expectations. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. For information concerning the risks and uncertainties that may affect the operations, performance, development and results of the Applied Biosystems group see "Applied Biosystems group - Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements" on pages 43 to 45 of this report. For information concerning the risks and uncertainties that may affect the operations, performance, development and results of the Celera 25 APPLERA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Genomics Group see "Celera Genomics group - Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements" on pages 59 to 68 of this report. 26 APPLIED BIOSYSTEMS GROUP CONDENSED COMBINED STATEMENTS OF OPERATIONS (unaudited) (Dollar amounts in thousands)
Three months ended Six months ended December 31, December 31, 1999 2000 1999 2000 --------- --------- --------- --------- Net Revenues $ 335,941 $ 411,021 $ 628,196 $ 774,593 Cost of sales 155,202 197,843 292,701 367,468 --------- --------- --------- --------- Gross Margin 180,739 213,178 335,495 407,125 Selling, general and administrative 105,822 94,819 183,559 184,794 Research, development and engineering 31,372 42,010 63,404 88,125 --------- --------- --------- --------- Operating Income 43,545 76,349 88,532 134,206 Gain on investments 25,811 2,981 25,811 14,985 Interest expense 2,116 294 4,329 561 Interest income 3,939 4,208 8,184 8,589 Other expense, net (4,305) (239) (8,885) (3,152) --------- --------- --------- --------- Income Before Income Taxes 66,874 83,005 109,313 154,067 Provision for income taxes 23,040 25,051 35,772 46,969 --------- --------- --------- --------- Net Income $ 43,834 $ 57,954 $ 73,541 $ 107,098 ========= ========= ========= =========
See accompanying notes to the Applied Biosystems group unaudited condensed combined financial statements. 27 APPLIED BIOSYSTEMS GROUP CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION (Dollar amounts in thousands)
At June 30, At December 31, 2000 2000 ---------- --------------- (unaudited) Assets Current assets Cash and cash equivalents $ 394,608 $ 270,054 Accounts receivable, net 367,370 427,594 Inventories 154,491 165,775 Prepaid expenses and other current assets 81,338 111,409 ---------- ---------- Total current assets 997,807 974,832 Property, plant and equipment, net 230,940 300,071 Other long-term assets 469,409 416,989 ---------- ---------- Total Assets $1,698,156 $1,691,892 ========== ========== Liabilities and Group Equity Current liabilities Loans payable $ 15,693 $ 20,131 Tax benefit payable to the Celera Genomics group 16,702 Accounts payable 173,631 165,292 Accrued salaries and wages 79,409 42,344 Accrued taxes on income 149,505 113,596 Other accrued expenses 167,718 177,990 ---------- ---------- Total current liabilities 602,658 519,353 Long-term debt 36,115 33,182 Other long-term liabilities 125,019 133,062 ---------- ---------- Total Liabilities 763,792 685,597 Group Equity 934,364 1,006,295 ---------- ---------- Total Liabilities and Group Equity $1,698,156 $1,691,892 ========== ==========
See accompanying notes to the Applied Biosystems group unaudited condensed combined financial statements. 28 APPLIED BIOSYSTEMS GROUP CONDENSED COMBINED STATEMENTS OF CASH FLOWS (unaudited) (Dollar amounts in thousands)
Six months ended December 31, 1999 2000 --------- --------- Operating Activities from Continuing Operations Net income $ 73,541 $ 107,098 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation and amortization 25,922 30,745 Long-term compensation programs 27,660 2,972 Gain on sale of assets (25,811) (14,985) Deferred income taxes 1,678 (741) Changes in operating assets and liabilities Increase in accounts receivable (13,683) (68,207) Increase in inventories (17,572) (14,209) Increase in prepaid expenses and other assets (17,008) (39,494) Decrease in accounts payable and other liabilities (23,844) (53,496) --------- --------- Net Cash Provided (Used) by Operating Activities 30,883 (50,317) --------- --------- Investing Activities from Continuing Operations Additions to property, plant and equipment (net of disposals of $594 and $412, respectively) (30,646) (96,904) Investments (9,000) (4,131) Proceeds from the sale of assets 31,056 15,498 --------- --------- Net Cash Used by Investing Activities (8,590) (85,537) --------- --------- Net Cash Provided (Used) by Continuing Operations Before Financing Activities 22,293 (135,854) --------- --------- Net Cash Used by Operating Activities From Discontinued Operations (7,435) (1,561) --------- --------- Financing Activities Net change in loans payable 28,999 6,040 Dividends (8,748) (17,758) Proceeds from stock issued for stock plans 21,474 24,387 --------- --------- Net Cash Provided by Financing Activities 41,725 12,669 --------- --------- Effect of Exchange Rate Changes on Cash 2,413 192 --------- --------- Net Change in Cash and Cash Equivalents 58,996 (124,554) Cash and Cash Equivalents Beginning of Period 236,530 394,608 --------- --------- Cash and Cash Equivalents End of Period $ 295,526 $ 270,054 ========= =========
See accompanying notes to the Applied Biosystems group unaudited condensed combined financial statements. 29 APPLIED BIOSYSTEMS GROUP NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS NOTE 1 - INTERIM CONDENSED COMBINED FINANCIAL STATEMENTS The name of PE Corporation was changed to Applera Corporation (the "Company") and the name of the PE Biosystems group was changed to the Applied Biosystems group effective November 30, 2000. The interim condensed combined financial statements should be read in conjunction with the financial statements presented in the Company's 2000 Annual Report to Stockholders. Significant accounting policies disclosed therein have not changed, except for the accounting for derivative instruments and hedging activities, which is discussed in Note 6 of the Applied Biosystems group's condensed combined financial statements. The unaudited condensed combined financial statements reflect, in the opinion of the Company's management, all adjustments that are necessary for a fair statement of the results for the interim periods. All such adjustments are of a normal recurring nature. These results are, however, not necessarily indicative of the results to be expected for a full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain amounts in the condensed combined financial statements have been reclassified for comparative purposes. The Applied Biosystems group's condensed combined financial statements should be read in conjunction with the Company's condensed consolidated financial statements. NOTE 2 - ALLOCATION OF FEDERAL AND STATE INCOME TAXES The federal income taxes of the Company and its subsidiaries, which own assets allocated between the groups, are determined on a consolidated basis. Consolidated federal income tax provisions and related tax payments or refunds are allocated between the groups based principally on the taxable income and tax credits directly attributable to each group. Such allocations reflect each group's contribution (positive or negative) to the Company's consolidated federal taxable income and the consolidated federal tax liability and tax credit position. Intergroup transactions are taxed as if each group were a stand-alone company. Tax benefits that cannot be used by the group generating those benefits but can be used on a consolidated basis are transferred to the group that can utilize such benefits. Tax benefits generated by the Celera Genomics group commencing July 1, 1998, which could be utilized on a consolidated basis, were reimbursed by the Applied Biosystems group to the Celera Genomics group up to a limit of $75 million. As of December 31, 2000, the Celera Genomics group generated cumulative tax benefits of $89.4 million that were utilized by the Applied Biosystems group. The amounts utilized by the Applied Biosystems group in excess of the $75 million limit are not reimbursed to the Celera Genomics group and are recorded to group equity in the Applied Biosystems group's Condensed Combined Statements of Financial Position. See Note 1 of 30 APPLIED BIOSYSTEMS GROUP NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS continued Applied Biosystems combined financial statements included in the Company's 2000 Annual Report to Stockholders for a further discussion of the tax allocation policy. NOTE 3 - COMPREHENSIVE INCOME Accumulated other comprehensive income included in Group Equity on the Condensed Combined Statements of Financial Position consists of foreign currency translation adjustments, unrealized gains and losses on foreign currency and interest rate hedge contracts, unrealized gains and losses on available-for-sale investments, and minimum pension liability adjustments. Total comprehensive income for the three and six months ended December 31, 1999 and 2000 is presented in the following table:
(Dollar amounts in millions) Three months ended Six months ended December 31, December 31, 1999 2000 1999 2000 ------ ------ ------ ------ Net income $ 43.8 $ 58.0 $ 73.5 $107.1 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (18.6) 7.8 (5.7) (4.8) Unrealized gain on hedge contracts, net 1.2 5.6 Unrealized gain (loss) on investments, net 29.3 (60.9) 61.9 (83.1) Reclassification adjustments for realized gains included in net income (16.7) (1.9) (16.7) (9.7) ------ ------ ------ ------ Other comprehensive income (loss) (6.0) (53.8) 39.5 (92.0) ------ ------ ------ ------ Comprehensive income $ 37.8 $ 4.2 $113.0 $ 15.1 ====== ====== ====== ======
NOTE 4 - INVENTORIES Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Inventories included the following components:
(Dollar amounts in millions) June 30, December 31, 2000 2000 ------ ------------ Raw materials and supplies $ 51.2 $ 61.5 Work-in-process 6.3 5.9 Finished products 97.0 98.4 ------ ------ Total inventories $154.5 $165.8 ====== ======
31 APPLIED BIOSYSTEMS GROUP NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS continued NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION Significant non-cash financing activities were as follows:
(Dollar amounts in millions) Six months ended December 31, 1999 2000 -------- --------- Nonreimbursable utilization of tax benefits generated by the Celera Genomics group $ - $14.4 Tax benefit related to employee stock options $ - $32.9 Dividends declared not paid $ 8.8 $ 8.9
NOTE 6 - FINANCIAL INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," amended in June 2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." The statements require the recognition of all derivative financial instruments as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative is driven by the intended use of the derivative and the resulting designation. The Applied Biosystems group adopted the statements effective July 1, 2000. The cumulative effect of adoption resulted in an immaterial adjustment for a change in accounting principle in both the Condensed Combined Statements of Operations and in accumulated other comprehensive income in the Condensed Combined Statements of Financial Position. The Applied Biosystems group's foreign currency risk management strategy utilizes derivative instruments to hedge certain foreign currency forecasted revenues and to offset the impact of changes in foreign currency exchange rates on certain foreign currency-denominated net asset positions. The principal objective of this strategy is to minimize the risks and/or costs associated with the Applied Biosystems group's global financial and operating activities. The Applied Biosystems group utilizes foreign exchange forward, option, and range forward contracts to manage its foreign currency exposures, and an interest rate swap agreement to manage its interest rate exposure. The Applied Biosystems group does not use derivative financial instruments for trading purposes, nor is it a party to leveraged derivatives. The fair value of all foreign currency derivative contracts is recorded in prepaid expenses and other current assets and other accrued expenses. The fair value of the interest rate swap agreement is recorded in other long-term liabilities. 32 APPLIED BIOSYSTEMS GROUP NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS continued Cash Flow Hedges The Applied Biosystems group's international sales are typically denominated in the customers' local (non-U.S. dollar) currency. The Applied Biosystems group uses foreign exchange forward, option, and range forward contracts to hedge a portion of forecasted international sales not denominated in U.S. dollars. These contracts are designated as cash flow hedges and the effective portion of the change in the fair value of these contracts is recorded in other comprehensive income in the Condensed Combined Statements of Financial Position until the underlying external forecasted transaction affects earnings. At that time, the gain or loss on the derivative instrument, which had been deferred in other comprehensive income, is reclassified to net revenues in the Condensed Combined Statements of Operations. During the three and six months ended December 31, 2000, the Applied Biosystems group recognized net gains of $3.7 million and $4.8 million, respectively, in net revenues from derivative instruments designated as cash flow hedges of anticipated sales. At December 31, 2000, $9.1 million of derivative gains ($6.0 million net of deferred taxes) recorded in other comprehensive income are expected to be reclassified to earnings during the next twelve months. For the three and six months ended December 31, 2000, the Applied Biosystems group recognized expense of $1.0 million and $2.7 million, respectively, included in other expense in the Condensed Combined Statements of Operations, which represented the change in the time value component of the fair value of option contracts designated as cash flow hedges. The time value component is not included in the assessment of hedge effectiveness, and as a result, any changes are recognized in earnings in the period in which they occur. The Applied Biosystems group maintains an interest rate swap in conjunction with a five-year Japanese yen debt obligation. The interest rate swap agreement involves the payment of a fixed rate of interest and the receipt of a floating rate of interest without the exchange of the underlying notional loan principal amount. Under the terms of this contract, the Applied Biosystems group will make fixed interest payments of 2.1% while receiving interest at a LIBOR floating rate. No other cash payments will be made unless the contract is terminated prior to maturity, in which case the amount to be paid or received in settlement will be established by agreement at the time of termination. The agreed upon amount would usually represent the net present value at current interest rates of the remaining obligation to exchange payments under the terms of the contract. Other Hedges The Applied Biosystems group also uses derivative financial instruments to hedge against the adverse effects that foreign currency exchange rate fluctuations may have on its foreign currency-denominated net asset positions. The gains and losses on these derivatives are expected to largely offset transaction losses and gains, respectively, on the underlying foreign currency-denominated assets and liabilities, both of which are recorded in other expense. 33 APPLIED BIOSYSTEMS GROUP NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS continued NOTE 7 - RELATED PARTY TRANSACTIONS Sales of Products and Services Between Groups. For the three and six months ended December 31, 1999, net revenues from leased instruments, shipments of consumables and project materials, and contracted R&D services to the Celera Genomics group totaled $16.9 million and $28.6 million, respectively. For the three and six months ended December 31, 2000, net revenues from leased instruments, shipments of consumables and project materials, and contracted R&D services to the Celera Genomics group totaled $17.3 million and $31.8 million, respectively. NOTE 8 - CONTINGENCIES Amersham On November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a patent infringement action against the Company in the United States District Court for the Northern District of California. The complaint alleges that the Company is directly, contributorily, or by inducement infringing U.S. Patent No. 5,688,648 ("the '648 patent"). Amersham asserts that the Company's use and sale of DNA analysis reagents and systems that incorporate "BigDye" fluorescence detection technology infringe the '648 patent, and seeks injunctive and monetary relief. The Company answered the complaint, alleging that the '648 patent is invalid and unenforceable, and that the Company has not infringed the '648 patent. In December 2000, the court granted Amersham's motion for summary judgment in part, finding that certain of the Company's activities infringe the claims of the '648 patent, but denied Amersham's motion for summary judgment that the Company induced its customers to infringe the claims of the '648 patent. The trial date has been postponed and is currently expected to be scheduled for spring or summer 2001. On March 13, 1998, the Company filed a patent infringement action against Amersham and Molecular Dynamics, Inc. in the United States District Court for the Northern District of California. The Company asserts that one of its patents (U.S. Patent No. 4,811,218) is infringed by reason of Molecular Dynamics' and Amersham's sale of certain DNA analysis systems (e.g., the MegaBACE 1000 System). In response, Amersham has asserted various affirmative defenses and several counterclaims, including that the Company is infringing two patents, U.S. Patent No. 5,091,652 ("the '652 patent") and U.S. Patent No. 5,459,325, each owned by or licensed to Molecular Dynamics, by selling certain ABI PRISM(TM)DNA sequencing systems. In December 2000, the court granted the Company's motion for summary judgment of non-infringement of the '652 patent. This case has not yet been scheduled for trial. On May 21, 1998, Amersham filed a patent infringement action against the Company in the United States District Court for the Southern District of New York. The complaint alleges that the Company is infringing, contributing to the infringement, and inducing the infringement of U.S. Patent No. 4,707,235 ("the '235 patent") by reason of the Company's sale of certain ABI PRISM(TM) DNA sequencing systems. The complaint seeks injunctive and monetary relief. The Company answered the 34 APPLIED BIOSYSTEMS GROUP NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS continued complaint, alleging that the '235 patent is invalid and that the Company does not infringe the '235 patent. The matters described in this paragraph and the immediately preceding paragraph have been consolidated into a single case to be heard in the United States District Court for the Northern District of California. In December 2000, the court granted the Company's motion for summary judgment of non-infringement of the '235 patent. However, on December 18, 2000, Amersham filed a new complaint alleging that the Company is infringing the '235 patent by reason of the Company's sale of certain DNA sequencing systems, which allegations were not in the previous suit under the '235 patent. This action is in the early stages of discovery. On May 30, 2000, the Company filed a patent infringement action against Amersham in the United States District Court for the Northern District of California. The Company asserts that one of its patents (U.S. Patent No. 5,945,526) is infringed by reason of Amersham's sale of DNA analysis reagents and systems that incorporate ET Terminator fluorescence detection technology. This case is in the early stages of discovery. The Company believes that the claims asserted by Amersham in the foregoing cases are without merit and intends to defend the cases vigorously. However, the outcome of this or any other litigation is inherently uncertain, and the Company cannot be sure that it will prevail in any of these matters. An adverse determination in any of the actions brought by Amersham could have a material adverse effect on the financial statements of the Applied Biosystems group and the Company. Other The Company has been named as a defendant in several other legal actions, including patent, commercial, and environmental, arising from the conduct of normal business activities. Although the amount of any liability that might arise with respect to any of these matters cannot be accurately predicted, the resulting liability, if any, will not in the opinion of management have a material adverse effect on the financial statements of the Applied Biosystems group or the Company. The holders of Applera Corporation - Applied Biosystems Group Common Stock are stockholders of the Company and will continue to be subject to all risks associated with an investment in the Company, including any legal proceedings and claims affecting the Celera Genomics group. 35 APPLIED BIOSYSTEMS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion of Operations The name of PE Corporation was changed to Applera Corporation (the "Company") and the name of the PE Biosystems group was changed to the Applied Biosystems group effective November 30, 2000. The following discussion should be read in conjunction with the Applied Biosystems group's condensed combined financial statements and related notes and the Company's condensed consolidated financial statements and related notes included in this report; Applied Biosystems' "Management's Discussion and Analysis" appearing on pages 10 - 19 of the Company's 2000 Annual Report to Stockholders; and the Company's "Management's Discussion and Analysis" appearing on pages 73 - 87 of the Company's 2000 Annual Report to Stockholders. Historical results and percentage relationships are not necessarily indicative of operating results for any future periods. Events Impacting Comparability Gains on investments. The three and six months ended December 31, 2000 included before-tax gains of $3.0 million and $15.0 million, respectively, related to the sales of minority equity investments. The second quarter of fiscal 2000 included a before-tax gain of $25.8 million related to the sale of the Company's interest in a minority equity investment. Other special charges. During the second quarter of fiscal 2000, the Applied Biosystems group recorded a before-tax charge of $21.6 million in selling, general and administrative expenses for costs related to the acceleration of certain long-term compensation programs as a result of the attainment of performance targets. Results of Operations for the Three Months Ended December 31, 2000 Compared With the Three Months Ended December 31, 1999 The Applied Biosystems group reported net income of $58.0 million for the second quarter of fiscal 2001 compared with $43.8 million for the second quarter of fiscal 2000. On a comparable basis, excluding the gains on the sales of minority equity investments from both fiscal years and the long-term compensation charge from fiscal 2000, net income increased $12.2 million, or 27.8%, to $56.0 million for the second quarter of fiscal 2001 compared with the second quarter of fiscal 2000. This increase was attributable to the growth in net revenues, lower operating expenses as a percentage of net revenues and lower interest expense. The negative effects of foreign currency reduced net income by approximately $7 million, or 16%, as compared with the second quarter of fiscal 2000. Net revenues were $411.0 million for the second quarter of fiscal 2001 compared with $335.9 million for the second quarter of fiscal 2000, an increase of 22.3%. The effects of foreign currency reduced net revenues by approximately $19 million for the second quarter of fiscal 2001, or 6%, compared with the prior year due primarily to weakness in the euro, the British pound, and the Japanese yen. 36 APPLIED BIOSYSTEMS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Revenues from leased instruments and shipments to the Celera Genomics group were $17.3 million and $16.9 million for the second quarter of fiscal 2001 and fiscal 2000, respectively. Geographically, the Applied Biosystems group reported revenue growth in all regions for the second quarter of fiscal 2001 compared with the second quarter of fiscal 2000. Revenues increased 14.5% in the United States, 15.2% in Europe, 59.4% in the Far East, and 29.5% in Latin America and other markets, compared with the second quarter of the prior fiscal year. Excluding the effects of foreign currency, revenues grew approximately 31% in Europe and 63% in the Far East. Contributors to the increase in net revenues included genetic analysis products; polymerase chain reaction product lines; genetic synthesizer products; mass spectrometry instruments for proteomics; and royalties. Gross margin as a percentage of net revenues was 51.9% for the second quarter of fiscal 2001 compared with 53.8% for the second quarter of fiscal 2000. The decrease in the gross margin as a percentage of net revenues was primarily attributable to the negative effects of foreign currency and a change in product mix. SG&A expenses were $94.8 million for the second quarter of fiscal 2001 compared with $105.8 million for the second quarter of fiscal 2000, a decrease of 10.4%. On a comparable basis, excluding the long-term compensation charge in the prior year, SG&A expenses increased 12.5%. This increase was due to higher planned worldwide selling and marketing expenses commensurate with the growth in revenues and orders. As a percentage of net revenues, SG&A expenses were 23.1% for the second quarter of fiscal 2001 compared with 25.1% for the second quarter of fiscal 2000, excluding the long-term compensation charge. R&D expenses were $42.0 million for the second quarter of fiscal 2001 compared with $31.4 million for the prior year, an increase of 33.9%, as a result of investment in new products and technologies. As a percentage of net revenues, R&D expenses were 10.2% for the second quarter of fiscal 2001 compared with 9.3% for the second quarter of fiscal 2000. Operating income increased to $76.3 million for the second quarter of fiscal 2001 compared with $43.5 million for the prior year. On a comparable basis, excluding the long-term compensation charge from the prior year, operating income increased $11.2 million, or 17.3%. The Applied Biosystems group benefited from increased revenues as a result of strong worldwide demand and lower SG&A expenses as a percentage of net revenues, partially offset by the negative effect of foreign currency. Excluding the negative effect of foreign currency and the special charge from the prior year, operating income increased approximately 33%. Operating income as a percentage of net revenues decreased to 18.6% for the second quarter of fiscal 2001 compared with 19.4% for the prior year, excluding the long-term compensation charge in fiscal 2000, primarily due to the negative effects of foreign currency and a change in product mix. Excluding the effects of foreign currency, operating income as a percentage of net revenues increased to 20.1% in the second quarter of fiscal 2001. Interest expense was $.3 million for the second quarter of fiscal 2001 compared with $2.1 million for the prior year. The second quarter of fiscal 2000 included interest on the $150 million note payable to 37 APPLIED BIOSYSTEMS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued the Celera Genomics group. The note was paid in the fourth quarter of fiscal 2000. Interest income was $4.2 million for the second quarter of fiscal 2001 compared with $3.9 million for the prior year. The increase was due to larger cash balances and higher interest rates for fiscal 2001 compared with fiscal 2000. The second quarter of fiscal 2000 included interest income on the $150 million note receivable relating to the sale of the Analytical Instruments business. The note was collected in the fourth quarter of fiscal 2000. Other expense, net was $.2 million for the second quarter of fiscal 2001 compared with $4.3 million for the prior year. These amounts were primarily related to the Company's foreign currency management program. The effective income tax rate was 30% for the second quarter of fiscal 2001 compared with 34% for the prior year. Excluding the special items previously discussed, the effective income tax rate was 30% for the second quarter of both fiscal years. See Note 1 to Applied Biosystems combined financial statements in the Company's 2000 Annual Report to Stockholders for a discussion of allocations of federal and state income taxes. Results of Operations for the Six Months Ended December 31, 2000 Compared With the Six Months Ended December 31, 1999 The Applied Biosystems group reported net income of $107.1 million for the first six months of fiscal 2001 compared with $73.5 million for the first six months of fiscal 2000. On a comparable basis, excluding the gains on the sales of minority equity investments from the first six months of fiscal 2001 and 2000 and the long-term compensation charge from fiscal 2000, net income increased $23.8 million, or 32.4%, compared with the first six months of fiscal 2000. This increase was attributable to the growth in net revenues, lower operating expenses as a percentage of net revenues, lower interest expense, and lower non-operating costs related to the Applied Biosystems group's foreign currency management program. Net revenues were $774.6 million for the first six months of fiscal 2001 compared with $628.2 million for the first six months of fiscal 2000, an increase of 23.3%. The effects of foreign currency reduced net revenues by approximately $26 million, or 4%, compared with the prior year due primarily to weakness in the euro and the British pound. Revenues from leased instruments and shipments to the Celera Genomics group were $31.8 million and $28.6 million for the first six months of fiscal 2001 and fiscal 2000, respectively. Geographically, the Applied Biosystems group reported revenue growth in all regions for the first six months of fiscal 2001 compared with the first six months of fiscal 2000. Revenues increased 21.9% in the United States, 16.7% in Europe, 38.3% in the Far East, and 23.5% in Latin America and other markets, compared with the first six months of the prior fiscal year. Excluding the effects of foreign currency, revenues grew approximately 31% in Europe. Contributors to the increase in net revenues included genetic analysis products; sequence detection systems, including reagents and instrument 38 APPLIED BIOSYSTEMS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued systems for gene expression analysis and single nucleotide polymorphism ("SNP") detection; mass spectrometry products; polymerase chain reaction product lines; and royalties. Gross margin as a percentage of net revenues was 52.6% for the first six months of fiscal 2001 compared with 53.4% for the first six months of fiscal 2000. The decrease in the gross margin as a percentage of net revenues was primarily attributable to the negative effects of foreign currency and a change in product mix. SG&A expenses were $184.8 million for the first six months of fiscal 2001 compared with $183.6 million for the first six months of fiscal 2000. On a comparable basis, excluding the long-term compensation charge in the prior year, SG&A expenses increased 14.1% over the prior year. This increase was due to higher planned worldwide selling and marketing expenses commensurate with the growth in revenues and orders. As a percentage of net revenues, SG&A expenses were 23.9% for the first six months of fiscal 2001 compared with 25.8% for the first six months of fiscal 2000, excluding the long-term compensation charge. R&D expenses were $88.1 million for the first six months of fiscal 2001 compared with $63.4 million for the prior year, an increase of 39.0%, as a result of investment in new products and technologies. As a percentage of net revenues, R&D expenses were 11.4% for the first six months of fiscal 2001 compared with 10.1% for the first six months of fiscal 2000. Operating income increased to $134.2 million for the first six months of fiscal 2001 compared with $88.5 million for the prior year. On a comparable basis, excluding the long-term compensation charge in fiscal 2000, operating income increased $24.1 million, or 21.9%, over the prior year. The Applied Biosystems group benefited from increased revenues as a result of strong worldwide demand and lower SG&A expenses as percentage of net revenues, partially offset by the negative effect of foreign currency. Excluding the negative effect of foreign currency and the special charge from the prior year, operating income increased approximately 34%. Operating income as a percentage of net revenues, excluding the long-term compensation charge in fiscal 2000, remained essentially unchanged. Excluding the effects of foreign currency in fiscal 2001 and the long-term compensation charge in fiscal 2000, operating income as a percentage of net revenues was 18.4% for the first six months of fiscal 2001 compared with 17.5% in the prior year. Interest expense was $.6 million for the first six months of fiscal 2001 compared with $4.3 million for the prior year. The first six months of fiscal 2000 included interest on the $150 million note payable to the Celera Genomics group. The note was paid in the fourth quarter of fiscal 2000. Interest income was $8.6 million for the first six months of fiscal 2001 compared with $8.2 million for the prior year. The increase was due to larger cash balances and higher interest rates for fiscal 2001 compared with fiscal 2000. The first half of fiscal 2000 included interest income on the $150 million note receivable relating to the sale of the Analytical Instruments business. The note was collected in the fourth quarter of fiscal 2000. 39 APPLIED BIOSYSTEMS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Other expense, net was $3.2 million for the first six months of fiscal 2001 compared with $8.9 million for the prior year. These amounts were primarily related to the Company's foreign currency management program. The effective income tax rate was 30% for the first six months of fiscal 2001 compared with 33% for the prior year. Excluding the special items discussed above, the effective income tax rate was 30% for both six month periods ended December 31, 2000 and 1999. See Note 1 to Applied Biosystems combined financial statements in the Company's 2000 Annual Report to Stockholders for a discussion of allocations of federal and state income taxes. Market Risk The Applied Biosystems group operates internationally, with manufacturing and distribution facilities in various countries throughout the world. For fiscal 2000 and the first half of fiscal 2001, the Applied Biosystems group derived approximately 50% of its revenues from countries outside of the United States. Results continue to be affected by market risk, including fluctuations in foreign currency exchange rates and changes in economic conditions in foreign markets. The Applied Biosystems group performed a sensitivity analysis as of December 31, 2000 on its foreign currency derivative financial instruments. Assuming a hypothetical adverse change of 10% in foreign exchange rates in relation to the U.S. dollar at December 31, 2000, the Applied Biosystems group calculated a hypothetical loss of $10.0 million when comparing the change in fair value of both the foreign currency contracts outstanding and the underlying exposures being hedged. This hypothetical analysis excludes the impact of foreign currency translation on the Applied Biosystems group's operations. Actual gains and losses in the future could, however, differ materially from this analysis, based on changes in the timing and amount of foreign currency exchange rate movements and actual exposures and hedges. See Note 6 to the condensed combined financial statements for a further discussion of derivative financial instruments. Management's Discussion of Financial Resources and Liquidity The following discussion of financial resources and liquidity focuses on the Condensed Combined Statements of Financial Position and the Condensed Combined Statements of Cash Flows. Significant Changes in the Condensed Combined Statements of Financial Position. Cash and cash equivalents were $270.1 million at December 31, 2000 compared with $394.6 million at June 30, 2000, with total debt of $53.3 million at December 31, 2000 compared with $51.8 million at June 30, 2000. Working capital was $455.5 million at December 31, 2000 compared with $395.1 million at June 30, 2000. Debt to total capitalization remained unchanged at 5% at December 31, 2000 compared with June 30, 2000. 40 APPLIED BIOSYSTEMS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Accounts receivable increased $60.2 million to $427.6 million at December 31, 2000 from $367.4 million at June 30, 2000, primarily due to growth in net revenues and timing of collections. Prepaid expenses and other current assets increased $30.1 million to $111.4 million at December 31, 2000 from $81.3 million at June 30, 2000, primarily due to certain nontrade receivables and the fair value of derivative financial instruments. Property, plant and equipment, net increased $69.2 million to $300.1 million at December 31, 2000 from $230.9 million at June 30, 2000, primarily due to the Applied Biosystems group's purchase of property in Pleasanton, California for approximately $54 million. Other long-term assets decreased $52.4 million to $417.0 million at December 31, 2000 from $469.4 million at June 30, 2000. The Applied Biosystems groups' minority equity investments decreased $140.2 million due to a decrease in the fair value of the securities, as well as the sales of certain investments mentioned previously. This decrease was partially offset by an increase of $74.5 million in noncurrent deferred tax assets and by an increase in purchased license agreements. The tax benefit payable to the Celera Genomics group of $16.7 million at June 30, 2000 was settled during the first six months of fiscal 2001. The reimbursable limit of $75 million was reached during the first quarter of fiscal 2001. See Note 2 to the condensed combined financial statements for a further discussion of the tax allocation policy. Accrued salaries and wages decreased $37.1 million to $42.3 million at December 31, 2000 from $79.4 million at June 30, 2000 reflecting the payments of certain compensation-related accruals. Accrued taxes on income decreased $35.9 million to $113.6 million at December 31, 2000 from $149.5 million at June 30, 2000 primarily due to income tax payments and the utilization of tax benefits generated by the Celera Genomics group. Condensed Combined Statements of Cash Flows. Net cash used by operating activities was $50.3 million for the first six months of fiscal 2001 compared with $30.9 million of net cash provided by operating activities for the same period in fiscal 2000. For the first six months of fiscal 2001, compared with the same period in the prior year, increases in accounts receivable, prepaid expenses and other assets, and higher payments to suppliers and payments of certain compensation-related accruals were only partially offset by higher income-related cash flows. Net cash used by investing activities was $85.5 million for the first six months of fiscal 2001 compared with $8.6 million for the prior year. In the first six months of fiscal 2001, the Applied Biosystems group's capital expenditures were $97.3 million, which included approximately $54 million related to the purchase of property in Pleasanton, California for the future construction of new office, laboratory and light manufacturing facilities and $15.1 million for laboratory facilities. For the same period in the prior year, capital expenditures were $31.2 million. In the first six months of 41 APPLIED BIOSYSTEMS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued fiscal 2001, the Applied Biosystems group realized net proceeds of $11.4 million from the sales of minority equity investments compared with $22.1 million for the prior year. Net cash used by discontinued operations was $1.6 million for the first six months of fiscal 2001 compared with $7.4 million for the first six months of fiscal 2000. The fiscal 2000 and fiscal 2001 uses were for transaction-related payments and other cash outlays associated with the divestiture of the Analytical Instruments business. Net cash provided by financing activities was $12.7 million for the first six months of fiscal 2001 compared with $41.7 million for the prior year. Proceeds from employee stock option exercises were $24.4 million in the first half of fiscal 2001 compared with $21.5 million for the first six months of fiscal 2000. Loans payable increased $6.0 million for the first six months of fiscal 2001 compared with an increase of $29.0 million for the prior year. Dividends paid were $17.8 million during the first six months of fiscal 2001 compared with $8.7 million in the prior year. The increase in the amount of dividends paid was due to timing. At December 31, 2000, the Company had unused credit facilities, including the Company's revolving credit facility, totaling $319.2 million, which is available to both the Applied Biosystems group and the Celera Genomics group. Outlook The Applied Biosystems group expects to continue to grow and maintain profitability for the remainder of fiscal 2001. The Applied Biosystems group should continue to benefit from its customers in basic medical research, pharmaceutical development, and applied markets for sophisticated, automated, and cost-effective life science tools. Demand is expected to continue for a variety of tools to gather, interpret, and integrate biological information to achieve a better understanding of human health and disease. The Applied Biosystems group should also benefit from the introduction of new products designed to meet these demands during fiscal 2001. For example, during the first half of fiscal 2001, the Applied Biosystems group announced a new product and initiative in proteomics. Shipments of the first Maldi TOF/TOF mass spectrometer were made to early access customers and the Celera Genomics group in the first half of fiscal 2001. In addition, the Applied Biosystems group recently introduced a new Productivity Pack, intended to offer customers using the ABI PRISM(R) genetic analyzers a substantial improvement in productivity, and the ABI PRISM(R) 7900 HT sequence detection system. During the first half of fiscal 2001, the Company announced plans to expand its existing molecular diagnostics business. This initiative is anticipated to leverage several technological resources of the Applied Biosystems group and the Celera Genomics group. Further details regarding the initiative and its status within the Company's capital structure are anticipated to be announced in the coming quarters, as the initiative is refined. 42 APPLIED BIOSYSTEMS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued The Applied Biosystems group remains concerned about adverse currency effects because approximately 50% of its revenues were derived from regions outside the United States in fiscal 2000 and the first half of fiscal 2001. The Applied Biosystems group also remains subject to various other uncertainties, many of which are referenced in the "Forward-Looking Statements" section below. Forward-Looking Statements Certain statements contained in this report, including the Outlook section, are forward-looking and are subject to a variety of risks and uncertainties. These statements may be identified by the use of forward-looking words or phrases such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential," among others. These forward-looking statements are based on our current expectations. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, and results of our businesses include, but are not limited to: Rapidly changing technology in life sciences could make the Applied Biosystems group's product line obsolete unless it continues to improve existing products, develop new products, and pursue new market opportunities. A significant portion of the net revenues for the Applied Biosystems group each year is derived from products that did not exist in the prior year. The Applied Biosystems group's future success depends on its ability to continually improve its current products, develop and introduce, on a timely and cost-effective basis, new products that address the evolving needs of its customers, and pursue new market opportunities that develop as a result of technological and scientific advances in life sciences. The Applied Biosystems group's products are based on complex technology which is subject to rapid change as new technologies are developed and introduced in the marketplace. Unanticipated difficulties or delays in replacing existing products with new products could adversely affect the Applied Biosystems group's future operating results. The pursuit of new market opportunities will add further complexity and require additional management attention and resources as these markets are addressed. A significant portion of sales depends on customers' capital spending policies which may be subject to significant and unexpected decreases. A significant portion of the Applied Biosystems group's instrument product sales are capital purchases by its customers. The Applied Biosystems group's customers include pharmaceutical, environmental, research, and chemical companies, and the capital spending policies of these companies can have a significant effect on the demand for the Applied Biosystems group's products. These policies are based on a wide variety of factors, including the resources available to make purchases, the spending priorities among various types of research equipment, and policies regarding capital expenditures during recessionary periods. Any decrease in capital spending or change in spending policies of these companies could significantly reduce the demand for the Applied Biosystems group's products. 43 APPLIED BIOSYSTEMS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued A substantial portion of the Applied Biosystems group's sales is to customers at universities or research laboratories whose funding is dependent on both the level and timing of funding from government sources. As a result, the timing and amount of revenues from these sources may vary significantly due to factors that can be difficult to forecast. Although research funding has increased during the past several years, grants have, in the past, been frozen for extended periods or otherwise become unavailable to various institutions, sometimes without advance notice. Budgetary pressures, particularly in the United States and Japan, may result in reduced allocations to government agencies that fund research and development activities. If government funding necessary to purchase the Applied Biosystems group's products were to become unavailable to researchers for any extended period of time, or if overall research funding were to decrease, the business of the Applied Biosystems group could be adversely affected. The Applied Biosystems group has been and could in the future be subject to claims for infringement of patents and other intellectual property rights. The Applied Biosystems group's products are based on complex, rapidly developing technologies. These products could be developed without knowledge of previously filed but unpublished patent applications that cover some aspect of these technologies. In addition, there are relatively few decided court cases interpreting the scope of patent claims in these technologies, and the Applied Biosystems group's belief that its products do not infringe the technology covered by patents and patent applications could be successfully challenged by third parties. Also, in the course of its business, the Applied Biosystems group may from time to time have access to confidential or proprietary information of third parties, and such parties could bring a theft of trade secret claim against the Applied Biosystems group asserting that the Applied Biosystems group's products improperly utilize technologies which are not patented but which are protected as trade secrets. The Applied Biosystems group has been made a party to litigation regarding intellectual property matters, including patent litigation, some of which, if determined adversely, could have a material adverse effect on the Applied Biosystems group. Due to the fact that the Applied Biosystems group's business depends in large part on rapidly developing and dynamic technologies, there remains a constant risk of intellectual property litigation affecting the group. The Applied Biosystems group has from time to time been notified that it may be infringing certain patents and other intellectual property rights of others. It may be necessary or desirable in the future to obtain licenses relating to one or more products or relating to current or future technologies, and the Applied Biosystems group cannot be assured that it will be able to obtain these licenses or other rights on commercially reasonable terms. Since the Applied Biosystems group's business is dependent on foreign sales, fluctuating currencies will make our revenues and operating results more volatile. Approximately 50% of the Applied Biosystems group's net revenues during fiscal 2000 and the first half of fiscal 2001 were derived from sales to customers outside of the United States. The majority of these sales were based on the relevant customer's local currency. As a result, the Applied Biosystems group's reported and anticipated operating results and cash flows are subject to fluctuations due to material changes in foreign currency exchange rates that are beyond the Applied Biosystems group's control. Integrating acquired technologies may be costly and may not result in technological advances. The future growth of the Applied Biosystems group depends in part on its ability to acquire complementary technologies through acquisitions and investments. The consolidation of employees, 44 APPLIED BIOSYSTEMS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued operations, and marketing and distribution methods could present significant managerial challenges. For example, the Applied Biosystems group may encounter operational difficulties in the integration of manufacturing or other facilities. In addition, technological advances resulting from the integration of technologies may not be achieved as successfully or rapidly as anticipated, if at all. Electricity shortages and earthquakes could disrupt operations in California. The headquarters and principal operations of the Applied Biosystems group are located in Foster City, California. The State of California and its principal electrical utility companies have recently indicated that there is a statewide electricity shortage and that these utility companies are in poor financial condition. As a result, California has experienced temporary localized electricity outages, or rolling blackouts, which may continue or worsen into blackouts of longer duration in the future. Blackouts in Foster City, even of relatively short duration, could impair or cause a temporary suspension of the group's operations, including the manufacturing and shipment of new products, and could have a material adverse effect on operating results. In addition, Foster City is located near major California earthquake faults. The ultimate impact of earthquakes on the Applied Biosystems group, its significant suppliers, and the general infrastructure is unknown, but operating results could be materially affected in the event of a major earthquake. 45 CELERA GENOMICS GROUP CONDENSED COMBINED STATEMENTS OF OPERATIONS (unaudited) (Dollar amounts in thousands)
Three months ended Six months ended December 31, December 31, 1999 2000 1999 2000 -------- -------- -------- -------- Net Revenues $ 8,346 $ 20,319 $ 16,625 $ 38,572 Costs and Expenses Research and development 38,169 52,745 70,333 99,489 Selling, general and administrative 9,525 14,362 17,932 27,392 Amortization of goodwill and intangibles 10,968 22,049 -------- -------- -------- -------- Operating Loss (39,348) (57,756) (71,640) (110,358) Interest expense 610 43 661 829 Interest income 3,074 17,124 5,107 35,310 Other expense, net 15 4 -------- -------- -------- -------- Loss Before Income Taxes (36,884) (40,690) (67,194) (75,881) Benefit for income taxes 12,606 10,986 23,518 20,488 -------- -------- -------- -------- Net Loss $(24,278) $(29,704) $(43,676) $(55,393) ======== ======== ======== ========
See accompanying notes to the Celera Genomics group unaudited condensed combined financial statements. 46 CELERA GENOMICS GROUP CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION (Dollar amounts in thousands)
At June 30, At December 31, 2000 2000 ---------- --------------- (unaudited) Assets Current assets Cash and cash equivalents $ 569,894 $ 346,298 Short-term investments 541,140 692,634 Tax benefit receivable from the Applied Biosystems group 16,702 Accounts receivable, net 14,936 19,239 Inventories, net 3,336 2,957 Prepaid expenses and other current assets 2,283 2,625 ---------- ---------- Total current assets 1,148,291 1,063,753 Property, plant and equipment, net 111,442 113,819 Other long-term assets 153,524 141,014 ---------- ---------- Total Assets $1,413,257 $1,318,586 ========== ========== Liabilities and Group Equity Current liabilities Accounts payable $ 21,566 $ 21,546 Accrued salaries and wages 10,251 10,756 Deferred revenues 24,169 19,141 Other accrued expenses 11,266 14,156 ---------- ---------- Total current liabilities 67,252 65,599 Long-term debt 46,000 Other long-term liabilities 9,189 7,831 ---------- ---------- Total Liabilities 122,441 73,430 Group Equity 1,290,816 1,245,156 ---------- ---------- Total Liabilities and Group Equity $1,413,257 $1,318,586 ========== ==========
See accompanying notes to the Celera Genomics group unaudited condensed combined financial statements. 47 CELERA GENOMICS GROUP CONDENSED COMBINED STATEMENTS OF CASH FLOWS (unaudited) (Dollar amounts in thousands)
Six months ended December 31, 1999 2000 --------- --------- Operating Activities Net loss $ (43,676) $ (55,393) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 10,652 32,107 Long-term compensation program 314 628 Deferred income taxes (6,615) (15,043) Changes in operating assets and liabilities Decrease in tax benefit receivable from the Applied Biosystems group 522 16,702 Increase in accounts receivable (6,512) (4,303) Decrease in inventory 379 (Increase) decrease in prepaid expenses and other assets (2,051) 758 Increase (decrease) in accounts payable and other liabilities 479 (3,037) --------- --------- Net Cash Used by Operating Activities (46,887) (27,202) --------- --------- Investing Activities Additions to property, plant and equipment (19,867) (12,623) Purchases of short-term investments, net (151,205) Investments (3,000) --------- --------- Net Cash Used by Investing Activities (22,867) (163,828) --------- --------- Financing Activities Net change in loans payable 46,000 (46,000) Proceeds from stock issued for stock plans 6,218 13,434 --------- --------- Net Cash Provided (Used) by Financing Activities 52,218 (32,566) --------- --------- Net Change in Cash and Cash Equivalents (17,536) (223,596) Cash and Cash Equivalents Beginning of Period 71,491 569,894 --------- --------- Cash and Cash Equivalents End of Period $ 53,955 $ 346,298 ========= =========
See accompanying notes to the Celera Genomics group unaudited condensed combined financial statements. 48 CELERA GENOMICS GROUP NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS NOTE 1 - INTERIM CONDENSED COMBINED FINANCIAL STATEMENTS The name of PE Corporation was changed to Applera Corporation (the "Company") and the name of the PE Biosystems group was changed to the Applied Biosystems group effective November 30, 2000. The interim condensed combined financial statements should be read in conjunction with the financial statements presented in the Company's 2000 Annual Report to Stockholders. Significant accounting policies disclosed therein have not changed. The unaudited condensed combined financial statements reflect, in the opinion of the Company's management, all adjustments that are necessary for a fair statement of the results for the interim periods. All such adjustments are of a normal recurring nature. These results are, however, not necessarily indicative of the results to be expected for a full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain amounts in the condensed combined financial statements have been reclassified for comparative purposes. The Celera Genomics group's condensed combined financial statements should be read in conjunction with the Company's condensed consolidated financial statements. NOTE 2 - ALLOCATION OF FEDERAL AND STATE INCOME TAXES The federal income taxes of the Company and its subsidiaries, which own assets allocated between the groups, are determined on a consolidated basis. Consolidated federal income tax provisions and related tax payments or refunds are allocated between the groups based principally on the taxable income and tax credits directly attributable to each group. Such allocations reflect each group's contribution (positive or negative) to the Company's consolidated federal taxable income and the consolidated federal tax liability and tax credit position. Intergroup transactions are taxed as if each group were a stand-alone company. Tax benefits that cannot be used by the group generating those benefits but can be used on a consolidated basis are transferred to the group that can utilize such benefits. Tax benefits generated by the Celera Genomics group commencing July 1, 1998, which could be utilized on a consolidated basis, were reimbursed by the Applied Biosystems group to the Celera Genomics group up to a limit of $75 million. As of December 31, 2000, the Celera Genomics group generated cumulative tax benefits of $89.4 million that were utilized by the Applied Biosystems group since July 1, 1998. The amounts utilized by the Applied Biosystems group in excess of the $75 million limit are not reimbursed to the Celera Genomics group and are recorded to group equity in the Celera Genomics group's Condensed Combined Statements of Financial Position. See Note 1 of the 49 CELERA GENOMICS GROUP NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS continued Celera Genomics group's combined financial statements included in the Company's 2000 Annual Report to Stockholders for a further discussion of the tax allocation policy. NOTE 3 - ACQUISITIONS Paracel, Inc. During the fourth quarter of fiscal 2000, the Company acquired Paracel, Inc. in a stock-for-stock transaction. The net assets and results of operations of Paracel were included in the Celera Genomics group's condensed combined financial statements from the date of acquisition. The following selected unaudited pro forma information for the Celera Genomics group assumes the acquisition had occurred at the beginning of fiscal 2000 and gives effect to purchase accounting adjustments:
(Dollar amounts in millions) Three months ended Six months ended December 31, 1999 December 31, 1999 ----------------- ----------------- Net revenues $ 10.8 $ 22.1 Net loss $ (36.4) $ (69.9)
See Note 2 to the Celera Genomics group's combined financial statements in the Company's 2000 Annual Report to Stockholders for a further discussion of this acquisition. NOTE 4 - COMPREHENSIVE LOSS Accumulated other comprehensive income included in Group Equity in the Condensed Combined Statements of Financial Position consists of unrealized gains and losses on available-for-sale investments. Total comprehensive loss for the three and six months ended December 31, 1999 and 2000 is presented in the following table:
(Dollar amounts in millions) Three months ended Six months ended December 31, December 31, 1999 2000 1999 2000 -------------- ------------ ------------- ------------ Net loss $(24.3) $(29.7) $(43.7) $(55.4) Other comprehensive income: Unrealized gain on investments, net of tax 0.2 0.5 -------------- ------------ ------------- ------------ Comprehensive loss $(24.3) $(29.5) $(43.7) $(54.9) ============== ============ ============= ============
50 CELERA GENOMICS GROUP NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS continued NOTE 5 - INVENTORIES Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Inventories included the following components:
(Dollar amounts in millions) June 30, December 31, 2000 2000 -------- ------------ Raw materials and supplies $1.9 $2.9 Finished products 1.4 0.1 ---- ---- Total inventories $3.3 $3.0 ==== ====
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION Significant non-cash financing activities were as follows:
(Dollar amounts in millions) Six months ended December 31, 1999 2000 ------- ------- Nonreimbursable utilization of tax benefits by the Applied Biosystems group $ - $14.4 Tax benefit related to employee stock options $ - $ 9.6
NOTE 7 - DEBT Long-term debt at June 30, 2000 consisted of $46.0 million of commercial paper borrowing. The Company had the necessary credit facilities, through its revolving credit agreement, to refinance the commercial paper borrowings on a long-term basis. At June 30, 2000, these borrowings were classified as a noncurrent liability because it was the Company's intent to refinance these obligations on a long-term basis. However, in October 2000, the Company repaid this debt. NOTE 8 - RELATED PARTY TRANSACTIONS Sales of Products and Services Between Groups. For the three and six months ended December 31, 1999, research and development expenses included $14.3 million and $26.0 million, respectively, for lease payments on instruments, the purchase of consumables and project materials, and services contracted from the Applied Biosystems group. For the three and six month periods ended December 31, 2000, research and development expenses included $17.3 million and $30.5 million, respectively, for lease payments on instruments, the purchase of consumables and project materials, and services contracted from the Applied Biosystems group. 51 CELERA GENOMICS GROUP NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS continued The Institute of Genomic Research ("TIGR"). During the second quarter of fiscal 2001, the Celera Genomics group entered into an agreement to perform sequencing services for TIGR. The President of the Celera Genomics group is also the current Chairman of the Board of Trustees of TIGR. An immediate family member of the President of the Celera Genomics group currently serves as TIGR's President and is on TIGR's Board of Trustees. Additionally, as of December 31, 2000, TIGR owns approximately 1.4 million options to purchase Applera Corporation - Celera Genomics Group Common Stock. During the second quarter of fiscal 2001, the Celera Genomics group recognized revenues of $1.6 million from TIGR, which was also a receivable as of December 31, 2000. NOTE 9 - CONTINGENCIES Amersham On November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a patent infringement action against the Company in the United States District Court for the Northern District of California. The complaint alleges that the Company is directly, contributorily, or by inducement infringing U.S. Patent No. 5,688,648 ("the '648 patent"). Amersham asserts that the Company's use and sale of DNA analysis reagents and systems that incorporate "BigDye" fluorescence detection technology infringe the '648 patent, and seeks injunctive and monetary relief. The Company answered the complaint, alleging that the '648 patent is invalid and unenforceable, and that the Company has not infringed the '648 patent. In December 2000, the court granted Amersham's motion for summary judgment in part, finding that certain of the Company's activities infringe the claims of the '648 patent, but denied Amersham's motion for summary judgment that the Company induced its customers to infringe the claims of the '648 patent. The trial date has been postponed and is currently expected to be scheduled for spring or summer 2001. On March 13, 1998, the Company filed a patent infringement action against Amersham and Molecular Dynamics, Inc. in the United States District Court for the Northern District of California. The Company asserts that one of its patents (U.S. Patent No. 4,811,218) is infringed by reason of Molecular Dynamics' and Amersham's sale of certain DNA analysis systems (e.g., the MegaBACE 1000 System). In response, Amersham has asserted various affirmative defenses and several counterclaims, including that the Company is infringing two patents, U.S. Patent No. 5,091,652 ("the '652 patent") and U.S. Patent No. 5,459,325, each owned by or licensed to Molecular Dynamics, by selling certain ABI PRISM(TM)DNA sequencing systems. In December 2000, the court granted the Company's motion for summary judgment of non-infringement of the '652 patent. This case has not yet been scheduled for trial. On May 21, 1998, Amersham filed a patent infringement action against the Company in the United States District Court for the Southern District of New York. The complaint alleges that the Company is infringing, contributing to the infringement, and inducing the infringement of U.S. Patent No. 4,707,235 ("the 52 CELERA GENOMICS GROUP NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS continued '235 patent") by reason of the Company's sale of certain ABI PRISM(TM) DNA sequencing systems. The complaint seeks injunctive and monetary relief. The Company answered the complaint, alleging that the '235 patent is invalid and that the Company does not infringe the '235 patent. The matters described in this paragraph and the immediately preceding paragraph have been consolidated into a single case to be heard in the United States District Court for the Northern District of California. In December 2000, the court granted the Company's motion for summary judgment of non-infringement of the '235 patent. However, on December 18, 2000, Amersham filed a new complaint alleging that the Company is infringing the '235 patent by reason of the Company's sale of certain DNA sequencing systems, which allegations were not in the previous suit under the '235 patent. This action is in the early stages of discovery. On May 30, 2000, the Company filed a patent infringement action against Amersham in the United States District Court for the Northern District of California. The Company asserts that one of its patents (U.S. Patent No. 5,945,526) is infringed by reason of Amersham's sale of DNA analysis reagents and systems that incorporate ET Terminator fluorescence detection technology. This case is in the early stages of discovery. The Company believes that the claims asserted by Amersham in the foregoing cases are without merit and intends to continue to defend the cases vigorously. However, the outcome of this or any other litigation is inherently uncertain, and the Company cannot be sure that it will prevail in any of these matters. An adverse determination in any of the actions brought by Amersham could have a material adverse effect on the financial statements of the Celera Genomics group and the Company. Other The Company has been named as a defendant in several other legal actions, including patent, commercial, and environmental, arising from the conduct of normal business activities. Although the amount of any liability that might arise with respect to any of these matters cannot be accurately predicted, the resulting liability, if any, will not in the opinion of management have a material adverse effect on the financial statements of the Celera Genomics group or the Company. The holders of Applera Corporation - Celera Genomics Group Common Stock are stockholders of the Company and will continue to be subject to all risks associated with an investment in the Company, including any legal proceedings and claims affecting the Applied Biosystems group. 53 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion of Operations The name of PE Corporation was changed to Applera Corporation (the "Company") and the name of the PE Biosystems group was changed to the Applied Biosystems group effective November 30, 2000. The following discussion should be read in conjunction with the Celera Genomics group's condensed combined financial statements and related notes and the Company's condensed consolidated financial statements and related notes included in this report; the Celera Genomics group's "Management's Discussion and Analysis" appearing on pages 46 - 54 of the Company's 2000 Annual Report to Stockholders; and the Company's "Management's Discussion and Analysis" appearing on pages 73 - 87 of the Company's 2000 Annual Report to Stockholders. Historical results and percentage relationships are not necessarily indicative of operating results for any future periods. Events Impacting Comparability Acquisition. During the fourth quarter of fiscal 2000, Paracel, Inc. was acquired in a stock-for-stock transaction. Paracel produces advanced genomic and text analysis technologies. Its products include a hardware accelerator for sequence comparison, a hardware accelerator for text search, and sequence analysis software tools. See Note 3 to the condensed combined financial statements for a discussion of this acquisition. Results of Operations for the Three Months Ended December 31, 2000 Compared With the Three Months Ended December 31, 1999 The Celera Genomics group reported a net loss of $29.7 million for the second quarter of fiscal 2001 compared with a net loss of $24.3 million for the second quarter of fiscal 2000. The increase in the net loss reflected the increased investment in research and development activities relating to expanded efforts in bioinformatics and software development capabilities; increased operating expenses required to support expanded product and business development activities; expansion of sales and marketing capabilities; and amortization of goodwill and intangibles primarily due to the Paracel acquisition. These increased expenses were partially offset by increased net revenues and interest income. Net revenues for the Celera Genomics group were $20.3 million for the second quarter of fiscal 2001 compared with $8.3 million for the second quarter of fiscal 2000. The increased revenues resulted primarily from database subscription agreements with commercial and academic customers, as well as revenues from Paracel and genomics services. R&D expenses increased $14.5 million to $52.7 million for the second quarter of fiscal 2001 from $38.2 million for the second quarter of fiscal 2000 primarily as a result of the development of expanded bioinformatics and software development capabilities. The group also expanded its 54 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued scientific and annotation research teams and bioinformatics and software engineering staff. In addition, the Celera Genomics group accelerated the development of its discovery platform and is currently accelerating its gene discovery work and expanding its capabilities in proteomics and functional genomics. The acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed to the increase in R&D expenses. SG&A expenses were $14.4 million for the second quarter of fiscal 2001 compared with $9.5 million for the second quarter of fiscal 2000. The increase was caused primarily by the Celera Genomics group's expansion of its sales and marketing capabilities and business development efforts. The acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed to the increase in SG&A expenses. The Celera Genomics group recorded $11.0 million of expenses in the second quarter of fiscal 2001 relating to the amortization of goodwill and other intangibles primarily due to Paracel. Interest expense was less than $.1 million for the second quarter of fiscal 2001 compared with $.6 million for the second quarter of fiscal 2000. Interest expense in both periods reflected the Company's financing of the purchase of the Celera Genomics group's Rockville, Maryland facilities. The financing, entered into during the first quarter of fiscal 2000, was repaid in October 2000. Interest income was $17.1 million for the second quarter of fiscal 2001 compared with $3.1 million for the second quarter of fiscal 2000. The increase was attributable to interest income on cash and cash equivalents and short-term investments, which increased as a result of the follow-on public offering of Applera Corporation-Celera Genomics Group Common Stock completed in March 2000. The second quarter of fiscal 2000 included interest income from the $150 million note receivable from the Applied Biosystems group. The note was collected in the fourth quarter of fiscal 2000. The effective income tax rate was 27% for the second quarter of fiscal 2001 and 34% for the second quarter of fiscal 2000. The decrease in the effective income tax benefit rate was primarily due to the amortization of nondeductible goodwill relating to the acquisition of Paracel. See Note 1 to the Celera Genomics group's combined financial statements in the Company's 2000 Annual Report to Stockholders for a discussion of allocations of federal and state income taxes. Results of Operations for the Six Months Ended December 31, 2000 Compared With the Six Months Ended December 31, 1999 The Celera Genomics group reported a net loss of $55.4 million for the first six months of fiscal 2001 compared with a net loss of $43.7 million for the first six months of fiscal 2000. The increase in the net loss reflected the increased investment in research and development activities; increased operating expenses required to support expanded product and business development activities; expansion of sales and marketing capabilities; and amortization of goodwill and intangibles primarily due to the 55 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Paracel acquisition. These increased expenses were partially offset by increased net revenues and interest income. Net revenues for the Celera Genomics group were $38.6 million for the first six months of fiscal 2001 compared with $16.6 million for the first six months of fiscal 2000. The increased revenues resulted primarily from database subscription agreements with commercial and academic customers, as well as revenues from Paracel and genomics services. R&D expenses increased $29.2 million to $99.5 million for the first six months of fiscal 2001 from $70.3 million for the first six months of fiscal 2000 primarily as a result of the expansion of its scientific and annotation research teams and bioinformatics and software engineering staff. In addition, the Celera Genomics group accelerated the development of its discovery platform and is currently accelerating its gene discovery work and expanding its capabilities in proteomics and functional genomics. The acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed to the increase in R&D expenses. SG&A expenses were $27.4 million for the first six months of fiscal 2001 compared with $17.9 million for the prior year. The increase was caused primarily by the Celera Genomics group's expansion of its sales and marketing capabilities and its business development efforts. The acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed to the increase in SG&A expenses. The Celera Genomics group recorded $22.0 million of expenses in the first half of fiscal 2001 relating to the amortization of goodwill and other intangibles primarily due to Paracel. Interest expense was $.8 million for the first six months of fiscal 2001 compared with $.7 million for the first six months of fiscal 2000. Interest expense in both periods reflected the Company's financing of the purchase of the Celera Genomics group's Rockville, Maryland facilities. The financing, entered into during the first quarter of fiscal 2000, was repaid in October 2000. Interest income was $35.3 million for the first six months of fiscal 2001 compared with $5.1 million for the first six months of fiscal 2000. The increase was attributable to interest income on cash and cash equivalents and short-term investments, which increased as a result of the follow-on public offering of Applera Corporation-Celera Genomics Group Common Stock completed in March 2000. The first six months of fiscal 2000 included interest income from the $150 million note receivable from the Applied Biosystems group. This note was collected in the fourth quarter of fiscal 2000. The effective income tax rate was 27% for the first six months of fiscal 2001 and 35% for the first six months of fiscal 2000. The decrease in the effective income tax benefit rate was primarily due to the amortization of nondeductible goodwill relating to the acquisition of Paracel. See Note 1 to the Celera Genomics group's combined financial statements in the Company's 2000 Annual Report to Stockholders for a discussion of allocations of federal and state income taxes. 56 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Management's Discussion of Financial Resources and Liquidity The following discussion of financial resources and liquidity focuses on the Condensed Combined Statements of Financial Position and the Condensed Combined Statements of Cash Flows. Significant Changes in the Condensed Combined Statements of Financial Position. Cash and cash equivalents and short-term investments were $1.0 billion at December 31, 2000 compared with $1.1 billion at June 30, 2000. During the second quarter of fiscal 2001, the Company repaid the $46.0 million of commercial paper borrowing that was outstanding at June 30, 2000. Working capital was $1.0 billion at December 31, 2000 and $1.1 billion at June 30, 2000. The Celera Genomics group had a tax benefit receivable from the Applied Biosystems group of $16.7 million at June 30, 2000. This amount represented the tax benefits reimbursable from the Applied Biosystems group for the fourth quarter of fiscal 2000. The tax benefit receivable was settled during the first half of fiscal 2001. At December 31, 2000, the Applied Biosystems group had utilized tax benefits generated by the Celera Genomics group in excess of the maximum reimbursable amount. See Note 2 to the Celera Genomics group's condensed combined financial statements for a discussion of allocations of federal and state income taxes. Accounts receivable increased $4.3 million to $19.2 million at December 31, 2000 from $14.9 million at June 30, 2000, primarily as a result of increased revenues and the timing of payments received on subscription and service agreements. Other long-term assets decreased $12.5 million to $141.0 at December 31, 2000 from $153.5 million at June 30, 2000, primarily due to amortization of goodwill and other intangibles, partially offset by an increase in deferred tax assets. Deferred revenues decreased $5.1 million to $19.1 million at December 31, 2000 from $24.2 million at June 30, 2000 due to revenue recognized under database subscriptions and genomic service agreements, partially offset by the timing of subscriptions received for these services. Condensed Combined Statements of Cash Flows. Cash used by operating activities was $27.2 million for the first six months of fiscal 2001 compared with $46.9 million for the same period in the prior year. The decrease in cash used by operating activities resulted primarily from lower net cash operating losses, the settlement of the tax benefit receivable from the Applied Biosystems group, and lower increases in accounts receivable during the first six months of fiscal 2001. Prepaid expenses and other assets decreased during the first six months of fiscal 2001 compared to an increase in the same period in the prior year. These items were partially offset by a decrease in deferred revenues. Net cash used by investing activities was $163.8 million for the first six months of fiscal 2001 compared with $22.9 million for the first six months of fiscal 2000. The Celera Genomics group had 57 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued net purchases of $151.2 million of short-term investments during fiscal 2001. Capital expenditures were $12.6 million for the first six months of fiscal 2001 compared to $19.9 million for the first six months of fiscal 2000. Fiscal 2001 capital expenditures included $1.9 million of purchases from the Applied Biosystems group. Fiscal 2000 capital expenditures included payments of $8.1 million for software licenses. The Celera Genomics group had investments of $3.0 million during the first six months of fiscal 2000. Net cash used by financing activities was $32.6 million for the first six months of fiscal 2001 compared with $52.2 million provided by financing activities for the same period in the prior year. During the first six months of fiscal 2001, the Company repaid $46.0 million of its commercial paper borrowing which it secured in the first half of fiscal 2000 specifically for the purchase of the Rockland, Maryland facilities. This repayment was offset in fiscal 2001 by $13.4 million in proceeds received from stock issued for employee stock plans compared with $6.2 million in the same period of the prior year. At December 31, 2000, the Company had unused credit facilities, including the Company's revolving credit facility, totaling $319.2 million, which is available to both the Celera Genomics group and the Applied Biosystems group. Outlook The Celera Genomics group expects to see a continued expansion in the customer base for online genomics information products and related genomics services, with corresponding increases in revenues during fiscal 2001. Revenue growth is expected to be generated primarily from increasing the customer base among the major pharmaceutical and biotech companies, academic institutions, and non-profit research organizations, and expanding the Celera Genomics group's research collaborations and services business. The expected increase in revenues should be more than offset as the Celera Genomics group invests in the discovery aspects of its business and continues staffing the organization. The Celera Genomics group has recently hired key people to lead its efforts to develop potential new therapeutic targets and molecular diagnostic markers. The Celera Genomics group intends to continue to expand its efforts in the development of its proteomics and functional genomics capabilities. The Celera Genomics group also intends to continue to strengthen its bioinformatics platform, both in information content and in delivery systems. SG&A expenses are also expected to increase as the group continues to expand its sales and marketing functions. During the first half of fiscal 2001, the Company announced plans to expand its existing molecular diagnostics business. This initiative is anticipated to leverage several technological resources of the Applied Biosystems group and the Celera Genomics group. Further details regarding the initiative 58 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued and its status within the Company's capital structure are anticipated to be announced in the coming quarters, as the initiative is refined. The Company believes the Celera Genomics group's existing cash and cash equivalents and short-term investments are sufficient to fund its operating expenses and capital requirements related to its original business plan, which relates to the sequencing and assembly of the human genome and the development of information products and related genomics services from this data. While the Company intends to use the net proceeds from the Celera Genomics group's follow-on public offering, which was completed in March 2000, primarily to fund its new product and technology development activities in functional genomics, with an emphasis on proteomics and personalized health/medicine, such funds may not be sufficient to support these new business activities as they develop. The Celera Genomics group's actual future capital uses and requirements with respect to its new activities will depend on many factors, including those discussed under "Forward-Looking Statements." Forward-Looking Statements Certain statements contained in this report, including the Outlook section, are forward-looking and are subject to a variety of risks and uncertainties. These statements may be identified by the use of forward-looking words or phrases such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential," among others. These forward-looking statements are based on our current expectations. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, and results of our businesses include, but are not limited to: The Celera Genomics group has incurred net losses to date and may not achieve profitability. The Celera Genomics group has accumulated net losses of $234.2 million as of December 31, 2000 and expects that it will continue to incur additional net losses for the foreseeable future. These losses may increase as Celera expands its investments in new technology and product development, including the development of its functional genomics and personalized health/medicine efforts. As an early-stage business, the Celera Genomics group faces significant challenges in simultaneously expanding its operations, pursuing key scientific goals, and attracting customers for its information products and services. As a result, there is a high degree of uncertainty that the Celera Genomics group will be able to achieve profitable operations. Celera Genomics' business plan is unique and expanding. No organization has ever attempted to combine in one business organization all of the Celera Genomics group's businesses. In addition, as Celera Genomics moves beyond completion of the sequencing of the human genome, it is expanding its business plan to provide new scientific services to customers in areas such as functional genomics, 59 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued personalized health/medicine, and proteomics. The offering of genomics databases, functional genomics, proteomics, and personalized health/medicine capabilities targeted at a wide variety of customers, from pharmaceutical companies to university researchers, has a number of risks, including pricing and volume issues, technology and access concerns, computer security, pursuit of key scientific goals, and protection of intellectual property. The addition of the functional genomics, personalized health/medicine, and proteomics efforts will add further complexity and require additional management attention and resources as these new markets are addressed. Celera Genomics' business plan depends heavily on accurate and complete assembly and annotation of the human and mouse genomes. The Celera Genomics group has assembled human genome sequence data obtained using "whole genome shotgun sequencing." Although the Celera Genomics group believes that its assembly efforts have produced a human genome assembly of high quality, the Celera Genomics group will continue to update its assembly as it continues to annotate the human genome. The Celera Genomics group has also completed the first assembly of the mouse genome using the same method. The Celera Genomics group's ability to retain its existing customers and attract new customers is heavily dependent upon the continued assembly and annotation of the human and mouse genomes. This information is essential to the functional genomics and personalized health/medicine components of Celera Genomics' business strategy in which Celera Genomics intends to make substantial investments in the near future. As a result, failure to update the assembly and annotation efforts in a timely manner may have a material adverse effect on the Celera Genomics group's business. Celera Genomics' revenue growth depends on retaining existing and adding new customers. The Celera Genomics group has a small number of customers, the revenues from which will offset only a small portion of its expenses. In order to generate significant additional revenues, the Celera Genomics group must obtain additional customers and retain its existing customers. Celera Genomics' ability to retain existing and add new customers depends upon customers' continued belief that Celera Genomics' products can help accelerate their drug discovery and development efforts and fundamental discoveries in biology. Although customer agreements typically have multi-year terms, there can be no assurance that any will be renewed upon expiration. The Celera Genomics group's future revenues are also affected by the extent to which existing customers expand their agreements to include new services and database products. In some cases, the Celera Genomics group may accept milestone payments or future royalties on products developed by its customers as consideration for access to Celera Genomics' databases and products in lieu of a portion of subscription fees. Such arrangements are unlikely to produce revenue for the Celera Genomics group for a number of years, if ever, and depend heavily on the research and product development, sales and marketing, and intellectual property protection abilities of the customer. Use of genomics information to develop or commercialize products is unproven. The development of new drugs and the diagnosis of disease based on genomic information is unproven. Few therapeutic or diagnostic products based on genomic discoveries have been developed and commercialized, and to date no one has developed or commercialized any therapeutic, diagnostic, or agricultural products 60 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued based on the Celera Genomics group's technologies. If the Celera Genomics group's customers are unsuccessful in developing and commercializing products based on the group's databases or other products or services, customers and the group may be unable to generate sufficient revenues, and its business may suffer as a result. Development of such products will be subject to risks of failure, including that such products will be found to be toxic, found to be ineffective, fail to receive regulatory approvals, fail to be developed prior to the successful marketing of similar products by competitors, or infringe on proprietary rights of third parties. The genomics industry is intensely competitive and evolving. There is intense competition among entities attempting to sequence segments of the human genome and identify genes associated with specific diseases and develop products, services, and intellectual property based on these discoveries. Celera Genomics faces competition in these areas from genomic, pharmaceutical, biotechnology and diagnostic companies, academic and research institutions, and government or other publicly funded agencies, both in the United States and abroad. A number of companies, other institutions, and government-financed entities are engaged in gene sequencing, gene discovery, gene expression analysis, positional cloning, the study of genetic variation, functional genomics, and other genomic service businesses. Some of these competitors are developing databases containing gene sequence, gene expression, genetic variation, or other biological information and are marketing or plan to market their data to pharmaceutical and biotechnology companies and academic and research institutions. Additional competitors may attempt to establish databases containing this information in the future. The Celera Genomics group has licensed some of its key technology on a non-exclusive basis from third parties, and therefore such technology may be available for license by the Company's competitors. Competitors may also discover, characterize, or develop important genes, drug targets or leads, drug discovery technologies, or drugs in advance of Celera Genomics or its customers, or which are more effective than those developed by Celera Genomics or its customers, or may obtain regulatory approvals of their drugs more rapidly than Celera Genomics' customers do, any of which could have a material adverse effect on any of Celera Genomics' similar programs. Moreover, these competitors may obtain patent protection or other intellectual property rights that would limit Celera Genomics' rights or its customers' ability to use Celera Genomics' products to commercialize therapeutic, diagnostic, or agricultural products. In addition, a customer may use the Celera Genomics group's services to develop products that compete with products separately developed by the Celera Genomics group or its other customers. Future competition will come from existing competitors as well as other companies seeking to develop new technologies for drug discovery, drug development, and diagnostics based on gene sequencing, target gene identification, bioinformatics, and related technologies. In addition, certain pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet such needs. Celera Genomics also faces competition from providers of software. A number of companies have announced their intent to 61 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued develop and market software to assist pharmaceutical companies and academic researchers in managing and analyzing their own genomic data and publicly available data. Celera Genomics' current and potential customers are primarily from, and are subject to risks faced by, the pharmaceutical and biotechnology industries. The Celera Genomics group derives a substantial portion of its revenues from fees paid by pharmaceutical companies and larger biotechnology companies for its information products and services, including Amgen Inc., Novartis Pharma AG, Pharmacia & Upjohn, Pfizer Inc., Takeda Chemical Industries, Ltd., American Home Products Corporation, and Immunex Corporation. The Celera Genomics group expects that pharmaceutical companies and larger biotechnology companies will continue to be the Celera Genomics group's primary source of revenues for the foreseeable future. As a result, the Celera Genomics group is subject to risks and uncertainties that affect the pharmaceutical and biotechnology industries and to reduction and delays in research and development expenditures by companies in these industries. In addition, the Celera Genomics group's future revenues may be adversely affected by mergers and consolidation in the pharmaceutical and biotechnology industries, which will reduce the number of the group's potential customers. Large pharmaceutical and biotechnology customers could also decide to conduct their own genomics programs or seek other providers instead of using Celera Genomics' products and services. Celera Genomics relies on its strategic relationship with the Applied Biosystems group. The Celera Genomics group believes that its strategic relationship with the Applied Biosystems group has provided it with a significant competitive advantage in its efforts to date to sequence the human and other genomes. Celera Genomics' timely completion of that work and successful extension of its business into the functional genomics, personalized health/medicine, and proteomics arenas will depend on the Applied Biosystems group's ability to continue to provide leading-edge, proprietary technology and products, including technologies relating to genetic analysis, protein analysis, and high-throughput screening. If the Applied Biosystems group is unable to supply these technologies, Celera will need to obtain access to alternative technologies, which may not be available, or may only be available on unfavorable terms. Any change in the relationship with the Applied Biosystems group that adversely affects the Celera Genomics group's access to the Applied Biosystems group's technology or failure by the Applied Biosystems group to continue to develop new technologies or protect its proprietary technology could adversely affect Celera Genomics' business. Introduction of new products may expose Celera Genomics to product liability claims. New products developed by Celera Genomics could expose Celera Genomics to potential product liability risks which are inherent in the testing, manufacturing, and marketing of human therapeutic and diagnostic products. Product liability claims or product recalls, regardless of the ultimate outcome, could require Celera Genomics to spend significant time and money in litigation and to pay significant damages. 62 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Celera Genomics could incur liabilities relating to hazardous materials that it uses in its research and development activities. Celera Genomics' research and development activities involve the controlled use of hazardous materials and chemicals, and may in the future involve various radioactive materials. In the event of an accidental contamination or injury from these materials, the Celera Genomics group could be held liable for damages in excess of its resources. Celera Genomics' sales cycle is lengthy and it may spend considerable resources on unsuccessful sales efforts or may not be able to complete deals on the schedule anticipated. The Celera Genomics group's ability to obtain new customers for genomic information products, value-added services and licenses to intellectual property depends on its customers' belief that the group can help accelerate their drug discovery efforts. The Celera Genomics group's sales cycle is typically lengthy because the group needs to educate potential customers and sell the benefits of its products and services to a variety of constituencies within such companies. In addition, each agreement involves the negotiation of unique terms. The Celera Genomics group may expend substantial funds and management effort with no assurance that an agreement will be reached with a potential customer. Actual and proposed consolidations of pharmaceutical companies have affected, and may in the future affect, the timing and progress of the Celera Genomics group's sales efforts. Scientific and management staff have unique expertise which is key to Celera Genomics' commercial viability and which would be difficult to replace. Celera Genomics is highly dependent on the principal members of its scientific and management staff, particularly J. Craig Venter, its President. For the sequencing and assembly of the human genome, the Celera Genomics group believes the following members of its staff are essential: Dr. Venter; Mark Adams, Vice President for Genome Programs; and Eugene Myers, Vice President of Informatics Research, who is responsible for the group assembling the genome. None of these individuals are party to employment agreements, non-competition agreements, or non-solicitation agreements with the Celera Genomics group. Additional members of the Celera Genomics group's medical, scientific, and bioinformatics staff are important to the development of information, tools, and services required for implementation of its business plan. Also, in an effort to meet the demands of its growing business, including the development of its discovery business, the group recently hired other key management personnel in the areas of immunotherapeutics, proteomics, operations, sales, marketing, and business development, and the group believes that these persons will be important to the successful growth of the group's business. The loss of any of these persons' expertise would be difficult to replace and could have a material adverse effect on the Celera Genomics group's ability to achieve its goals. Celera Genomics' competitive position may depend on patent and copyright protection, which may not be sufficiently available. The Celera Genomics group's ability to compete and to achieve profitability may be affected by its ability to protect its proprietary technology and other intellectual property. While Celera Genomics' business is currently primarily dependent on revenues from access fees to its discovery and information system, obtaining patent protection may also be important to its 63 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued business, in that Celera Genomics would be able to prevent competitors from making, using, or selling any of its technology for which it obtains a patent. Patent law affecting Celera Genomics' business, particularly gene sequences, gene function, and polymorphisms, is uncertain, and as a result, the Celera Genomics group is uncertain as to its ability to obtain intellectual property protection covering its information discoveries sufficient to prevent competitors from developing similar subject matter. Patents may not issue from patent applications that the Celera Genomics group may own or license. In addition, because patent applications in the United States are maintained in secrecy until patents issue, third parties may have filed patent applications for technology used by Celera Genomics or covered by Celera Genomics' pending patent applications without Celera Genomics being aware of such applications. Moreover, the Celera Genomics group may be dependent on protecting, through copyright law or otherwise, its databases to prevent other organizations from taking information from such databases and copying and reselling it. Copyright law currently provides uncertain protection regarding the copying and resale of factual data. As such, Celera Genomics is uncertain whether it could prevent such copying or resale. Changes in copyright and patent law could either expand or reduce the extent to which the Celera Genomics group and its customers are able to protect their intellectual property. Celera Genomics' position may depend on its ability to protect trade secrets. The Celera Genomics group relies on trade secret protection for its confidential and proprietary information and procedures, including procedures related to sequencing genes and to searching and identifying important regions of genetic information. The Celera Genomics group currently protects such information and procedures as trade secrets. The Celera Genomics group protects its trade secrets through recognized practices, including access control, confidentiality and non-use agreements with employees, consultants, collaborators and customers, and other security measures. These confidentiality and non-use agreements may be breached, however, and the group may not have adequate remedies for any such breach. In addition, the group's trade secrets may otherwise become known or be independently developed by competitors. Public disclosure of genomics sequence data could jeopardize Celera Genomics' intellectual property protection and have an adverse effect on the value of the Celera Genomics group's products and services. The Celera Genomics group, the federally funded Human Genome Project, and others engaged in similar research have made and are expected to continue making available to the public basic human sequence data. Such disclosures might limit the scope of the Celera Genomics group's claims or make subsequent discoveries related to full-length genes unpatentable. While the Celera Genomics group believes that the publication of sequence data will not preclude it or others from being granted patent protection on genes, there can be no assurance that such publication has not affected, and will not affect, the ability to obtain patent protection. Customers may conclude that uncertainties of such protection decrease the value of the Celera Genomics group's information products and services and, as a result, it may be required to reduce the fees it charges for such products and services. 64 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Celera Genomics may infringe the intellectual property rights of third parties and may become involved in expensive intellectual property litigation. The intellectual property rights of biotechnology companies, including Celera Genomics, are generally uncertain and involve complex legal, scientific, and factual questions. Celera Genomics' success in the functional genomics field may depend, in part, on its ability to operate without infringing on the intellectual property rights of others and to prevent others from infringing on its intellectual property rights. There has been substantial litigation regarding patents and other intellectual property rights in the genomics industry. The Celera Genomics group may become a party to patent litigation or proceedings in the federal courts or at the U.S. Patent and Trademark Office to determine its patent rights with respect to third parties which may include subscribers to Celera Genomics' database information services. Interference proceedings may be necessary to establish which party was the first to discover such intellectual property. Celera Genomics may become involved in patent litigation against third parties to enforce the Celera Genomics group's patent rights, to invalidate patents held by such third parties, or to defend against such claims. The cost to Celera Genomics of any patent litigation or similar proceeding could be substantial, and it may absorb significant management time. If an infringement litigation against Celera Genomics is resolved unfavorably to Celera Genomics, Celera Genomics may be enjoined from manufacturing or selling certain of its products or services without a license from a third party. Celera Genomics may not be able to obtain such a license on commercially acceptable terms, or at all. The U.S. Patent and Trademark Office has issued several patents to third parties relating to single nucleotide polymorphisms ("SNPs"). If other important SNPs receive patents, Celera Genomics will need to obtain rights to those important SNPs in order to develop, use, and sell related assays. Such licenses may not be available to Celera Genomics on commercially acceptable terms, or at all. Celera Genomics' business is dependent on the continuous, effective, reliable, and secure operation of its computer hardware, software, and internet applications and related tools and functions. Because the Celera Genomics group's business requires manipulating and analyzing large amounts of data, and communicating the results of such analysis to customers via the Internet, the Celera Genomics group depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, networks, internet servers, and related infrastructure. To the extent that the Celera Genomics group's hardware or software malfunctions or the Celera Genomics group's customers' access to products through the Internet is interrupted, its business could suffer. The Celera Genomics group's computer and communications hardware is protected through physical and software safeguards. However, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, and similar events. In addition, Celera Genomics' database products are complex and sophisticated, and as such, could contain data, design, or software errors that could be difficult to detect and correct. Software defects could be found in current or future products. If the Celera Genomics group fails to maintain and further develop the necessary computer capacity and data to support computational needs and its customers' drug efforts, 65 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued it could result in loss of or delay in revenues and market acceptance. In addition, any sustained disruption in Internet access provided by third parties could adversely impact the Celera Genomics group's business. Celera Genomics' research and product development depends on access to tissue samples and other biological materials. To continue to build its product base, Celera Genomics will need access to normal and diseased human and other tissue samples, other biological materials, and related clinical and other information, which may be in limited supply. Celera Genomics may not be able to obtain or maintain access to these materials and information on acceptable terms. In addition, government regulation in the United States and foreign countries could result in restricted access to, or use of, human and other tissue samples. If Celera Genomics loses access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on its use of the information generated from tissue samples, its business may be harmed. Ethical, legal, and social issues related to the use of genetic information and genetic testing may cause less demand for the Celera Genomics group's products. Genetic testing has raised issues regarding confidentiality and the appropriate uses of the resulting information. For example, concerns have been expressed toward insurance carriers and employers using such tests to discriminate on the basis of such information, resulting in barriers to the acceptance of such tests by consumers. This could lead to governmental authorities calling for limits on, or regulation of, the use of genetic testing, or prohibit testing for genetic predisposition to certain diseases, particularly those that have no known cure. Any of these scenarios could reduce the potential markets for the Company's products. Expected rapid growth in the number of its employees could absorb valuable management resources and be disruptive to the development of Celera Genomics' business. The Celera Genomics group expects to grow significantly. This growth will require substantial effort to hire new employees and train and integrate them into the Celera Genomics group's business and to develop and implement management information systems, financial controls, and facility plans. In addition, the Celera Genomics group will be required to create a sales and marketing organization and expand customer support resources as sales of its information products increase. The Celera Genomics group's inability to manage growth effectively would have a material adverse effect on its future operating results. The use of Celera Genomics' products and services by its customers may be subject to government regulation. Within the field of genomics, the use of the Celera Genomics group's products by pharmaceutical and biotechnology customers may be subject to certain U.S. Food and Drug Administration or other regulatory approvals. For example, any new drug developed by the efforts of the Celera Genomics group's customers as a result of their use of the Celera Genomics group's databases must undergo an extensive regulatory review process. This process can take many years and require substantial expense. 66 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Within the field of personalized health/medicine, current and future patient privacy and healthcare laws and regulations issued by the FDA may limit the use of polymorphism data. To the extent that use of the Celera Genomics group's databases is limited, or additional costs are imposed on the Celera Genomics group's customers due to regulation, the Celera Genomics group's business may be adversely affected. Furthermore, the Celera Genomics group may be directly subject to the regulations as a provider of diagnostic information. To the extent that such regulations restrict the sale of the Celera Genomics group's products or impose other costs, the Celera Genomics group's business may be materially adversely affected. Future acquisitions may absorb significant resources and may be unsuccessful. As part of the Celera Genomics group's strategy, it expects to pursue acquisitions, investments, and other relationships and alliances. Acquisitions may involve significant cash expenditures, debt incurrence, additional operating losses, dilutive issuances of equity securities, and expenses that could have a material effect on the Celera Genomics group's financial condition and results of operations. For example, to the extent that it elects to pay the purchase price for such acquisitions in shares of Applera Corporation - Celera Genomics Group Common Stock, such issuance of additional shares of Applera Corporation - Celera Genomics Group Common Stock will be dilutive to holders of Applera Corporation - Celera Genomics Group Common Stock. Acquisitions involve numerous other risks, including: o difficulties integrating acquired technologies and personnel into the business of the Celera Genomics group; o diversion of management from daily operations; o inability to obtain required financing on favorable terms; o entry into new markets in which the Celera Genomics group has little or no previous experience; o potential loss of key employees or customers of acquired companies; o assumption of the liabilities and exposure to unforseen liabilities of acquired companies; and o amortization of the intangible assets of acquired companies. It may be difficult for the Celera Genomics group to complete such transactions quickly and to integrate such business efficiently into its current business. Any such acquisitions or investments by the Celera Genomics group may ultimately have a negative impact on its business and financial condition. Applera Corporation is subject to a purported class action lawsuit relating to its 2000 offering of shares of Applera Corporation - Celera Genomics Group Common Stock which may be expensive and time consuming. Applera Corporation and certain of its officers have been served in five lawsuits purportedly on behalf of purchasers of Applera Corporation - Celera Genomics Group Common Stock in Applera Corporation's offering of Applera Corporation - Celera Genomics Group Common 67 CELERA GENOMICS GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued Stock completed on March 6, 2000. In the offering, Applera Corporation sold an aggregate of approximately 4.4 million shares of Applera Corporation - Celera Genomics Group Common Stock at a public offering price of $225 per share. The complaints in these lawsuits generally allege that the prospectus used in connection with the offering contained inaccurate and misleading statements in violation of federal securities laws. The complaints seek unspecified damages, rescission, costs and expenses, and such other relief as the court deems proper. All of these lawsuits have been consolidated into a single case. Although Applera Corporation believes the asserted claims are without merit and intends to defend the case vigorously, the outcome of this or any other litigation is inherently uncertain. The defense of this case will require management attention and resources. 68 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 3(i) Restated Certificate of Incorporation. (b) Reports on Form 8-K. During the quarter ended December 31, 2000, the Company filed a Current Report on Form 8-K dated November 27, 2000 to report under Item 5 thereof the change of the Company's corporate name to Applera Corporation and the name of the Company's PE Biosystems Group to the Applied Biosystems Group and certain related matters. 69 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. APPLERA CORPORATION By: /s/ Dennis L. Winger ----------------------------- Dennis L. Winger Senior Vice President and Chief Financial Officer By: /s/ Vikram Jog ----------------------------- Vikram Jog Corporate Controller (Chief Accounting Officer) Dated: February 14, 2001 70 EX-3.I 2 0002.txt RESTATED CERTIFICATE OF INCORPORATION RESTATED CERTIFICATE OF INCORPORATION OF PE CORPORATION (Originally incorporated November 16, 1998 under the name of The Perkin-Elmer Corporation, which name was subsequently changed to PE Corporation upon the filing of an amendment to the first Restated Certificate of Incorporation on January 29, 1999) ARTICLE I. NAME The name of the corporation is Applera Corporation (the "Corporation"). ARTICLE II. ADDRESS OF REGISTERED OFFICE; NAME OF REGISTERED AGENT The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, 19801. The name of its registered agent at that address is The Corporation Trust Company. ARTICLE III. PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law (the "DGCL"). ARTICLE IV. CAPITAL STOCK Section 1. Authorization. The aggregate number of shares of stock which the Corporation shall have authority to issue is one billion two hundred thirty-five million (1,235,000,000) shares, of which one billion (1,000,000,000) shares shall be shares of a class of common stock designated as "Applera Corporation--Applied Biosystems Group Common Stock," having a par value of $0.01 per share (the "Applied Biosystems Stock"), two hundred twenty-five million (225,000,000) shares shall be shares of a class of common stock designated as "Applera Corporation--Celera Genomics Group Common Stock," having a par value of $0.01 per share (the "Celera Genomics Stock"), and ten million (10,000,000) shares shall be shares of a class of preferred stock having a par value of $.01 per share (the "Preferred Stock") and issuable in one or more series as hereinafter provided. The Applied Biosystems Stock and the Celera Genomics Stock shall hereinafter collectively be called "Common Stock" and either shall sometimes be called a class of Common Stock. For purposes of this Article IV, references to the "Board of Directors" shall refer to the Board of Directors of the Corporation, as established in accordance with Article V of the certificate of incorporation of the Corporation, and references to "the Certificate of Incorporation" shall refer to this Restated Certificate of Incorporation as the same may be amended from time to time. Certain capitalized terms used in this Article IV, shall have the meanings set forth in Section 2.6 of this Article. For purposes of this Article IV, the Applied Biosystems Stock, when issued, shall be considered issued in respect of the Applied Biosystems Group and the Celera Genomics Stock, when issued, shall be considered issued in respect of the Celera Genomics Group. The number of authorized shares of any class or classes of capital stock of the Corporation may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of the stock of the Corporation entitled to vote generally in the election of directors. Section 2. Common Stock. The voting powers, preferences and relative, participating, optional or other special rights of the Common Stock, and the qualifications and restrictions thereon, shall be as follows in this Section 2. Section 2.1 Dividends. Subject to any preferences and relative, participating, optional or other special rights of any outstanding class or series of preferred stock of the Corporation and any qualifications or restrictions on either class of Common Stock created thereby, dividends may be declared and paid upon either class of Common Stock, upon the terms with respect to each such class, and subject to the limitations provided for below in this Section 2.1, as the Board of Directors may determine. (a) Dividends on Applied Biosystems Stock. Dividends on Applied Biosystems Stock may be declared and paid only out of the lesser of (i) the funds of the Corporation legally available therefor and (ii) the Applied Biosystems Group Available Dividend Amount. (b) Dividends on Celera Genomics Stock. Dividends on Celera Genomics Stock may be declared and paid only out of the lesser of (i) the funds of the Corporation legally available therefor and (ii) the Celera Genomics Group Available Dividend Amount. (c) Discrimination in Dividends Between Classes of Common Stock. The Board of Directors, subject to the provisions of Sections 2.1(a) and 2.1(b), may at any time declare and pay dividends exclusively on Applied Biosystems Stock, exclusively on Celera Genomics Stock, or on both such classes, in equal or unequal amounts, notwithstanding the relative amounts of the Available Dividend Amount with respect to either Group, the amount of dividends previously declared on either class, the respective voting or liquidation rights of either class or any other factor. (d) Shares Distributions. Except as permitted by Sections 2.4(a) and 2.4(b), the Board of Directors may declare and pay dividends or distributions of shares of Applied Biosystems Stock or Celera Genomics Stock (or Convertible Securities convertible into or exchangeable or exercisable for shares of Applied Biosystems Stock or Celera Genomics Stock) on shares of a class of Common Stock or shares of a class or series of preferred stock of the Corporation only as follows: (i) dividends or distributions of shares of Applied Biosystems Stock (or Convertible Securities convertible into or exchangeable or exercisable for shares of Applied Biosystems Stock) on shares of Applied Biosystems Stock or shares of preferred stock attributed to the Applied Biosystems Group; 2 (ii) dividends or distributions of shares of Celera Genomics Stock (or Convertible Securities convertible into or exchangeable or exercisable for shares of Celera Genomics Stock) on shares of Celera Genomics Stock or shares of preferred stock attributed to the Celera Genomics Group; and (iii) dividends or distributions of shares of Celera Genomics Stock (or Convertible Securities convertible into or exchangeable or exercisable for shares of Celera Genomics Stock) on shares of Applied Biosystems Stock or shares of preferred stock attributed to the Applied Biosystems Group, but only if the sum of (1) the number of shares of Celera Genomics Stock to be so issued (or the number of such shares which would be issuable upon conversion, exchange or exercise of any Convertible Securities to be so issued) and (2) the number of shares of Celera Genomics Stock which are issuable upon conversion, exchange or exercise of any Convertible Securities then outstanding that are attributed to the Applied Biosystems Group is less than or equal to the Number of Celera Genomics Designated Shares. Section 2.2 Voting Rights. (a) General. Except as otherwise provided by law, by the terms of any outstanding class or series of preferred stock of the Corporation or by any provision of the Certificate of Incorporation restricting the power to vote on a specified matter to other stockholders, the entire voting power of the stockholders of the Corporation shall be vested in the holders of the Common Stock, who shall be entitled to vote on any matter on which the holders of stock of the Corporation shall, by law or by the provisions of the Certificate of Incorporation or By-laws of the Corporation, be entitled to vote, and both classes of Common Stock shall vote thereon together as a single class. (b) Number of Votes for each Class of Common Stock. On each matter to be voted on by the holders of both classes of Common Stock voting together as a single class, the number of votes per share of each class shall be as follows: (i) each outstanding share of Applied Biosystems Stock shall have one vote; and (ii) each outstanding share of Celera Genomics Stock shall have a number of votes (including a fraction of one vote) equal to the quotient (rounded to the nearest three decimal places) of the average Market Value of one share of Celera Genomics Stock during the 20-Trading Day Period ending on the tenth Trading Day prior to the record date for determining the stockholders entitled to vote, divided by the average Market Value of a share of Applied Biosystems Stock during such 20-Trading Day period. Notwithstanding the foregoing, if shares of only one class of Common Stock are outstanding on the record date for determining the holders of Common Stock entitled to vote on any matter, then each share of that class shall be entitled to one vote and, if either class of Common Stock is entitled to vote as a separate class with respect to any matter, each share of that class shall, for purpose of such vote, be entitled to one vote on such matter. In addition to any provision of law or any provision of the Certificate of Incorporation entitling the holders of outstanding shares of Applied Biosystems Stock or Celera Genomics Stock to vote as a separate class, the Board of Directors may condition the approval of any matter submitted to stockholders on receipt of a separate vote of the holders of outstanding shares of Applied Biosystems Stock or Celera Genomics Stock. 3 Section 2.3 Liquidation Rights. In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, after payment or provision for payment of the debts and other liabilities of the Corporation and the full preferential amounts (including any accumulated and unpaid dividends) to which the holders of any outstanding shares of preferred stock of the Corporation are entitled (regardless of the Group to which such shares of preferred stock were attributed), the holders of the Applied Biosystems Stock and Celera Genomics Stock shall be entitled to receive the assets, if any, of the Corporation remaining for distribution to holders of Common Stock on a per share basis in proportion to the respective liquidation units per share of such class. Each share of Applied Biosystems Stock shall have one liquidation unit and each share of Celera Genomics Stock shall have a number of liquidation units (including a fraction of one liquidation unit) equal to the quotient (rounded to the nearest five decimal places) of the average Market Value of one share of Celera Genomics Stock during the 20-Trading Day period ending on the 40th Trading Day after the effective date of this certificate of incorporation, divided by the average Market Value of one share of Applied Biosystems Stock during such 20-Trading Day period. Neither the merger nor consolidation of the Corporation into or with any other corporation, nor a sale, transfer or lease of all or any part of the assets of the Corporation, shall, alone, be deemed a liquidation or winding up of the Corporation or cause the dissolution of the Corporation, for purposes of this Section 2.3. If the Corporation shall in any manner subdivide (by stock split, reclassification or otherwise) or combine (by reverse stock split, reclassification or otherwise) the outstanding shares of Applied Biosystems Stock or Celera Genomics Stock, or declare a dividend in shares of either class to holders of such class, the per share liquidation units of either class of Common Stock specified in the preceding paragraph of this Section 2.3, as adjusted from time to time, shall be appropriately adjusted as determined by the Board of Directors, so as to avoid dilution in the aggregate, relative liquidation rights of the shares of any class of Common Stock. Section 2.4 Conversion or Redemption of the Common Stock. Applied Biosystems Stock is subject to conversion or redemption and Celera Genomics Stock is subject to conversion or redemption, in each case, upon the terms provided below in this Section 2.4; provided, however, that neither class of Common Stock may be converted or redeemed if the other class of Common Stock has been converted or redeemed in its entirety or notice thereof shall have been given as required by this Section 2.4. (a) Mandatory and Optional Conversion and Redemption of Applied Biosystems Stock Other Than for Applied Biosystems Subsidiary Stock. (i) In the event of the Disposition, in one transaction or a series of related transactions, by the Corporation and/or its subsidiaries of all or substantially all of the properties and assets attributed to the Applied Biosystems Group to one or more persons or entities (other than the Disposition (w) by the Corporation of all or substantially all of its properties and assets in one transaction or a series of related transactions in connection with the dissolution, liquidation or winding up of the Corporation and the distribution of assets to stockholders as referred to in Section 2.3, (x) of the properties and assets attributed to the Applied Biosystems Group as contemplated by Section 2.4(c) or otherwise to all holders of shares of Applied Biosystems Stock divided among such holders on a pro rata basis in accordance with the number of shares of Applied Biosystems Stock outstanding, (y) to any person or entity controlled (as determined by the Board of Directors) by the Corporation or (z) in connection with a Related Business Transaction in respect of the Applied Biosystems Group), the Corporation shall, on or prior to the 95th Trading Day after the date of consummation of such Disposition (the "Disposition Date"), pay a dividend on Applied Biosystems Stock or redeem some or all of Applied Biosystems Stock or convert Applied Biosystems Stock into Celera Genomics Stock (or another class or series of common stock of the Corporation), all as provided by the following 4 Sections 2.4(a)(i)(1) and 2.4(a)(i)(2) and, to the extent applicable, by Section 2.4(f), as the Board of Directors shall have selected among such alternatives: (1) provided that there are funds of the Corporation legally available therefor: (A) pay to the holders of the shares of Applied Biosystems Stock a dividend pro rata in accordance with the number of shares of Applied Biosystems Stock held by each such holder, as the Board of Directors shall have declared subject to compliance with Section 2, in cash and/or in securities (other than a dividend of shares of a class of Common Stock) or other property having a Fair Value as of the Disposition Date in the aggregate equal to the Fair Value as of the Disposition Date of the Net Proceeds of such Disposition; or (B) (I) subject to the last sentence of this Section 2.4(a)(i), if such Disposition involves all (not merely substantially all) of the properties and assets attributed to the Applied Biosystems Group, redeem or exchange as of the Redemption Date determined as provided by Section 2.4(f)(iii), all outstanding shares of Applied Biosystems Stock in exchange for, on a pro rata basis, cash and/or for securities (other than shares of a class of Common Stock) or other property having a Fair Value as of the Disposition Date in the aggregate equal to the Fair Value as of the Disposition Date of the Net Proceeds of such Disposition; or (II) subject to the last sentence of this Section 2.4(a)(i), if such Disposition involves substantially all (but not all) of the properties and assets attributed to the Applied Biosystems Group, redeem or exchange as of the Redemption Date determined as provided by Section 2.4(f)(iv) such number of whole shares of Applied Biosystems Stock (which may be all, but not more than all, of such shares outstanding) as have in the aggregate an average Market Value during the period of ten consecutive Trading Days beginning on the 26th Trading Day immediately succeeding the Disposition Date closest to the Fair Value as of the Disposition Date of the Net Proceeds of such Disposition in consideration for, on a pro rata basis, cash and/or securities (other than shares of a class of Common Stock) or other property having a Fair Value as of the Disposition Date in the aggregate equal to such Fair Value of the Net Proceeds; or (2) declare that each outstanding share of Applied Biosystems Stock shall be converted as of the Conversion Date determined as provided by Section 2.4(f)(v) into a number of fully paid and nonassessable shares of Celera Genomics Stock (or, if Celera Genomics Stock is not Publicly Traded at such time and shares of another class or series of common stock of the Corporation (other than Applied Biosystems Stock) are then Publicly Traded, of such other class or series of the common stock of the Corporation as has the largest Market Capitalization as of the close of business on the Trading Day immediately preceding the date of the notice of such conversion required by Section 2.4(f)(v)) equal to 110% of the ratio, expressed as a decimal fraction rounded to the nearest five decimal places, of the average Market Value of one share of Applied Biosystems Stock over the period of ten consecutive Trading Days beginning on the 26th Trading Day immediately succeeding the Disposition Date to the average Market Value of one share of Celera Genomics Stock (or such other class or series of common stock) over the same ten Trading Day period. Notwithstanding the foregoing provisions of this Section 2.4(a)(i), the Corporation shall redeem shares of a class of Common Stock as provided by Section 2.4(a)(i)(1)(B)(I) or (II) only if the 5 amount to be paid in redemption of such stock is less than or equal to the Applied Biosystems Group Available Dividend Amount as of the Redemption Date. (ii) For purposes of this Section 2.4(a): (1) as of any date, "substantially all of the properties and assets" attributed to the Applied Biosystems Group shall mean a portion of such properties and assets (A) that represents at least 80% of the Fair Value of the properties and assets attributed to the Applied Biosystems Group as of such date or (B) from which were derived at least 80% of the aggregate revenues for the immediately preceding twelve fiscal quarterly periods of the Corporation (calculated on a pro forma basis to include revenues derived from any of such properties and assets acquired during such period) derived from the properties and assets attributed to the Applied Biosystems Group as of such date; (2) in the case of a Disposition of the properties and assets attributed to the Applied Biosystems Group in a series of related transactions, such Disposition shall not be deemed to have been consummated until the consummation of the last of such transactions; and (3) the Board of Directors may pay any dividend or redemption price referred to in Section 2.4(a)(i) in cash, securities (other than shares of a class of Common Stock) or other property, regardless of the form or nature of the proceeds of the Disposition. (iii) The Board of Directors may at any time declare that each outstanding share of Applied Biosystems Stock shall be converted, as of the Conversion Date provided by Section 2.4(f)(v), into a number of fully paid and nonassessable shares of Celera Genomics Stock (or, if Celera Genomics Stock is not Publicly Traded at such time and shares of any other class or series of common stock of the Corporation (other than Applied Biosystems Stock) are then Publicly Traded, of such other class or series of common stock of the Corporation as has the largest Market Capitalization as of the close of business on the fifth Trading Day immediately preceding the date of the notice of conversion required by Section 2.4(f)(v)) equal to 110% of the Market Value Ratio of Applied Biosystems Stock to Celera Genomics Stock as of the fifth Trading Day prior to the date of the notice of such conversion required by Section 2.4(f)(v); provided that, if a Tax Event has occurred, such number of fully paid and nonassessable shares shall equal 100% of such ratio. (b) Mandatory and Optional Conversion and Redemption of Celera Genomics Stock Other Than for Celera Genomics Subsidiary Stock. (i) In the event of the Disposition, in one transaction or a series of related transactions, by the Corporation and/or its subsidiaries of all or substantially all of the properties and assets attributed to the Celera Genomics Group to one or more persons or entities (other than the Disposition (w) by the Corporation of all or substantially all of its properties and assets in one transaction or a series of related transactions in connection with the dissolution, liquidation or winding up of the Corporation and the distribution of assets to stockholders as referred to in Section 2.3, (x) of the properties and assets attributed to the Celera Genomics Group as contemplated by Section 2.4(d) or otherwise to all holders of shares of Celera Genomics Stock divided among such holders on a pro rata basis in accordance with the number of shares of Celera Genomics Stock outstanding, (y) to any person or entity controlled (as determined by the Board of Directors) by the Corporation or (z) in connection with a Related Business Transaction in respect of the Celera Genomics Group), the Corporation shall, on or prior to the 95th Trading Day after the date of consummation of such Disposition (the "Disposition Date"), pay a dividend on Celera Genomics Stock or redeem some or all of Celera Genomics Stock or convert Celera Genomics Stock into Applied Biosystems Stock (or another class or series of common stock of the Corporation), all as provided by the following Sections 2.4(b)(i)(1) and 2.4(b)(i)(2) and, to the extent applicable, by Section 2.4(f), as the Board of Directors shall have selected among such alternatives: 6 (1) provided that there are funds of the Corporation legally available therefor: (A) pay to the holders of the shares of Celera Genomics Stock a dividend pro rata in accordance with the number of shares of Celera Genomics Stock held by each such holder, as the Board of Directors shall have declared subject to compliance with Section 2.1, in cash and/or in securities (other than a dividend of shares of a class of Common Stock) or other property having a Fair Value as of the Disposition Date in the aggregate equal to the Fair Value as of the Disposition Date of the Net Proceeds of such Disposition; or (B) (I) subject to the last sentence of this Section 2.4(b)(i), if such Disposition involves all (not merely substantially all) of the properties and assets attributed to the Celera Genomics Group, redeem or exchange as of the Redemption Date determined as provided by Section 2.4(f)(iii), all outstanding shares of Celera Genomics Stock in exchange for, on a pro rata basis, cash and/or for securities (other than shares of a class of Common Stock) or other property having a Fair Value as of the Disposition Date in the aggregate equal to the Fair Value as of the Disposition Date of the Net Proceeds of such Disposition; or (II) subject to the last sentence of this Section 2.4(b)(i), if such Disposition involves substantially all (but not all) of the properties and assets attributed to the Celera Genomics Group, redeem or exchange as of the Redemption Date determined as provided by Section 2.4(f)(iv) such number of whole shares of Celera Genomics Stock (which may be all, but not more than all, of such shares outstanding) as have in the aggregate an average Market Value during the period of ten consecutive Trading Days beginning on the 26th Trading Day immediately succeeding the Disposition Date closest to the Fair Value as of the Disposition Date of the Net Proceeds of such Disposition in consideration for, on a pro rata basis, cash and/or securities (other than shares of a class of Common Stock) or other property having a Fair Value as of the Disposition Date in the aggregate equal to such product; or (2) declare that each outstanding share of Celera Genomics Stock shall be converted as of the Conversion Date determined as provided by Section 2.4(f)(v) into a number of fully paid and nonassessable shares of Applied Biosystems Stock (or, if Applied Biosystems Stock is not Publicly Traded at such time and shares of another class or series of common stock of the Corporation (other than Celera Genomics Stock) are then Publicly Traded, of such other class or series of the common stock of the Corporation as has the largest Market Capitalization as of the close of business on the Trading Day immediately preceding the date of the notice of such conversion required by Section 2.4(f)(v)) equal to 110% of the ratio, expressed as a decimal fraction rounded to the nearest five decimal places, of the average Market Value of one share of Celera Genomics Stock over the period of ten consecutive Trading Days beginning on the 26th Trading Day immediately succeeding the Disposition Date to the average Market Value of one share of Applied Biosystems Stock (or such other class or series of common stock) over the same ten Trading Day period. Notwithstanding the foregoing provisions of this Section 2.4(b)(i), the Corporation shall redeem shares of a class of Common Stock as provided by Section 2.4(b)(i)(1)(B)(I) or (II) only if the amount to be paid in redemption of such stock is less than or equal to the Celera Genomics Group Available Dividend Amount as of the Redemption Date. 7 (ii) For purposes of this Section 2.4(b): (1) as of any date, "substantially all of the properties and assets" attributed to the Celera Genomics Group shall mean a portion of such properties and assets (A) that represents at least 80% of the Fair Value of the properties and assets attributed to the Celera Genomics Group as of such date or (B) from which were derived at least 80% of the aggregate revenues for the immediately preceding twelve fiscal quarterly periods of the Corporation (calculated on a pro forma basis to include revenues derived from any of such properties and assets acquired during such period) derived from the properties and assets attributed to the Celera Genomics Group as of such date; (2) in the case of a Disposition of the properties and assets attributed to the Celera Genomics Group in a series of related transactions, such Disposition shall not be deemed to have been consummated until the consummation of the last of such transactions; and (3) the Board of Directors may pay any dividend or redemption price referred to in Section 2.4(b)(i) in cash, securities (other than shares of a class of Common Stock) or other property, regardless of the form or nature of the proceeds of the Disposition. (iii) The Board of Directors may at any time declare that each outstanding share of Celera Genomics Stock shall be converted, as of the Conversion Date provided by Section 2.4(f)(v), into a number of fully paid and nonassessable shares of Applied Biosystems Stock (or, if Applied Biosystems Stock is not Publicly Traded at such time and shares of any other class or series of common stock of the Corporation (other than Celera Genomics Stock) are then Publicly Traded, of such other class or series of common stock of the Corporation as has the largest Market Capitalization as of the close of business on the fifth Trading Day immediately preceding the date of the notice of conversion required by Section 2.4(f)(v)) equal to 110% of the Market Value Ratio of Celera Genomics Stock to Applied Biosystems Stock as of the fifth Trading Day prior to the date of the notice of such conversion required by Section 2.4(f)(v); provided that, if a Tax Event has occurred, such number of fully paid and nonassessable shares shall equal 100% of such ratio. (c) Redemption of Applied Biosystems Stock for Applied Biosystems Subsidiary Stock. At any time at which all of the assets and liabilities attributed to the Applied Biosystems Group (and no other assets or liabilities of the Corporation or any subsidiary thereof) are held directly or indirectly by one or more wholly-owned subsidiaries of the Corporation (each, an "Applied Biosystems Subsidiary"), the Board of Directors may, provided that there are funds of the Corporation legally available therefor, redeem all of the outstanding shares of Applied Biosystems Stock, on a Redemption Date of which notice is delivered in accordance with Section 2.4(f)(vi), in exchange for all of the shares of common stock of each Applied Biosystems Subsidiary as will be outstanding immediately following such exchange of shares, such shares of common stock of each Applied Biosystems Subsidiary to be delivered to the holders of shares of Applied Biosystems Stock on the Redemption Date either directly or indirectly through the delivery of shares of another Applied Biosystems Subsidiary that owns directly or indirectly all such shares, and to be divided among the holders of Applied Biosystems Stock pro rata in accordance with the number of shares of Applied Biosystems Stock held by each such holder on such Redemption Date, each of which shares of common stock of such Applied Biosystems Subsidiary shall be, upon such delivery, fully paid and nonassessable. (d) Redemption of Celera Genomics Stock for Celera Genomics Subsidiary Stock. At any time at which all of the assets and liabilities attributed to the Celera Genomics Group (and no other assets or liabilities of the Corporation or any subsidiary thereof) are held directly or indirectly by one or more wholly-owned subsidiaries of the Corporation (each, a "Celera Genomics Subsidiary"), the Board of Directors may, provided that there are funds of the Corporation legally available therefor, redeem all of the outstanding shares of Celera Genomics Stock, on a Redemption Date of which notice is delivered in accordance with Section 2.4(f)(vi), 8 in exchange for all of the shares of common stock of each Celera Genomics Subsidiary as will be outstanding immediately following such exchange of shares, such shares of common stock of each Celera Genomics Subsidiary to be delivered to the holders of shares of Celera Genomics Stock on the Redemption Date either directly or indirectly through the delivery of shares of another Celera Genomics Subsidiary that owns directly or indirectly all such shares, and to be divided among the holders of Celera Genomics Stock pro rata in accordance with the number of shares of Celera Genomics Stock held by each such holder on such Redemption Date, each of which shares of common stock of such Celera Genomics Subsidiary shall be, upon such delivery, fully paid and nonassessable. (e) Treatment of Convertible Securities. After any Conversion Date or Redemption Date on which all outstanding shares of either Applied Biosystems Stock or Celera Genomics Stock are converted or redeemed, any share of such class of Common Stock that is to be issued on conversion, exchange or exercise of any Convertible Securities shall, immediately upon such conversion, exchange or exercise and without any notice from or to, or any other action on the part of, the Corporation or its Board of Directors or the holder of such Convertible Security: (i) in the event the shares of such class of Common Stock outstanding on such Conversion Date were converted into shares of the other class of Common Stock (or another class or series of common stock of the Corporation) pursuant to Section 2.4(a)(i)(2), 2.4(a)(iii), 2.4(b)(i)(2) or 2.4(a)(iii), be converted into the amount of cash and/or the number of shares of the kind of capital stock and/or other securities or property of the Corporation that number of shares of such class of Common Stock that were to be issued upon such conversion, exchange or exercise would have received had such shares been outstanding on such Conversion Date; or (ii) in the event the shares of such class of Common Stock outstanding on such Redemption Date were redeemed pursuant to Section 2.4(a)(i)(1)(B)(I), 2.4(b)(i)(1)(B)(I), 2.4(c) or 2.4(d), be redeemed, to the extent of funds of the Corporation legally available therefor, for $.01 per share in cash for each share of such class of Common Stock that otherwise would be issued upon such conversion, exchange or exercise. The provisions of the preceding sentence of this Section 2.4(e) shall not apply to the extent that other adjustments in respect of such conversion, exchange or redemption of a class of Common Stock are otherwise made pursuant to the provisions of such Convertible Securities. (f) Notice and Other Provisions. (i) Not later than the 20th Trading Day following the consummation of a Disposition referred to in Section 2.4(a)(i) (in the case of Applied Biosystems Stock) or Section 2.4(b)(i) (in the case of Celera Genomics Stock), the Corporation shall announce publicly by press release (1) the estimated Net Proceeds of such Disposition, (2) the number of shares outstanding of the class of Common Stock relating to the Group subject to such Disposition and (3) the number of shares of such class of Common Stock into or for which Convertible Securities are then convertible, exchangeable or exercisable and the conversion, exchange or exercise price thereof. Not earlier than the 36th Trading Day and not later than the 40th Trading Day following the consummation of such Disposition, the Corporation shall announce publicly by press release which of the actions specified in Section 2.4(a)(i) or 2.4(b)(i), as the case may be, it has irrevocably determined to take in respect of such Disposition. (ii) If the Corporation determines to pay a dividend pursuant to Section 2.4(a)(i)(1)(A) (in the case of Applied Biosystems Stock) or Section 2.4(b)(i)(1)(A) (in the case of Celera Genomics Stock), the Corporation shall, not later than the 40th Trading Day following the consummation of 9 the Disposition referred to in such Section, cause notice to be given to the holders of shares of the class of Common Stock relating to the Group subject to such Disposition and to each holder of Convertible Securities that are convertible into or exchangeable or exercisable for shares of such class of Common Stock (unless alternate provision for such notice to the holders of such Convertible Securities is made pursuant to the terms of such Convertible Securities), setting forth (1) the record date for determining holders entitled to receive such dividend, which shall be not earlier than the tenth Trading Day and not later than the 20th Trading Day following the date of such notice, (2) the anticipated payment date of such dividend (which shall not be more than 95 Trading Days following the consummation of such Disposition), (3) the type of property to be paid as such dividend in respect of the outstanding shares of such class of Common Stock, (4) the Net Proceeds of such Disposition, (5) the number of outstanding shares of such class of Common Stock and the number of shares of such class of Common Stock into or for which outstanding Convertible Securities are then convertible, exchangeable or exercisable and the conversion, exchange or exercise price thereof and (6) in the case of notice to be given to holders of Convertible Securities, a statement to the effect that a holder of such Convertible Securities shall be entitled to receive such dividend only if such holder properly converts, exchanges or exercises such Convertible Securities on or prior to the record date referred to in clause (1) of this sentence. Such notice shall be sent by first-class mail, postage prepaid, to each such holder at such holder's address as the same appears on the transfer books of the Corporation on the record date fixed for such notice. (iii) If the Corporation determines to undertake a redemption pursuant to Section 2.4(a)(i)(1)(B)(I) (in the case of Applied Biosystems Stock) or Section 2.4(b)(i)(1)(B)(I) (in the case of Celera Genomics Stock), the Corporation shall, not earlier than the 45th Trading Day and not later than the 35th Trading Day prior to the Redemption Date, cause notice to be given to the holders of shares of the class of Common Stock relating to the Group subject to the Disposition referred to in such Section and to each holder of Convertible Securities convertible into or exchangeable or exercisable for shares of such class of Common Stock (unless alternate provision for such notice to the holders of such Convertible Securities is made pursuant to the terms of such Convertible Securities), setting forth (1) a statement that all shares of such class of Common Stock outstanding on the Redemption Date shall be redeemed, (2) the Redemption Date (which shall not be more than 95 Trading Days following the consummation of such Disposition), (3) the type of property in which the redemption price for the shares of such class of Common Stock to be redeemed is to be paid, (4) the Net Proceeds of such Disposition, (5) the place or places where certificates for shares of such class of Common Stock, properly endorsed or assigned for transfer (unless the Corporation waives such requirement), are to be surrendered for delivery of cash and/or securities or other property, (6) the number of outstanding shares of such class of Common Stock and the number of shares of such class of Common Stock into or for which outstanding Convertible Securities are then convertible, exchangeable or exercisable and the conversion, exchange or exercise price thereof, (7) in the case of notice to be given to holders of Convertible Securities, a statement to the effect that a holder of such Convertible Securities shall be entitled to participate in such redemption only if such holder properly converts, exchanges or exercises such Convertible Securities on or prior to the Redemption Date referred to in clause (2) of this sentence and a statement as to what, if anything, such holder will be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, this Section 2.4 if such holder thereafter converts, exchanges or exercises such Convertible Securities and (8) a statement to the effect that, except as otherwise provided by Section 2.4(f)(ix), dividends on shares of such class of Common Stock shall cease to be paid as of such Redemption Date. Such notice shall be sent by first-class mail, postage prepaid, to each such holder at such holder's address as the same appears on the transfer books of the Corporation on the record date fixed for such notice. 10 (iv) If the Corporation determines to undertake a redemption pursuant to Section 2.4(a)(i)(1)(B)(II) (in the case of Applied Biosystems Stock) or Section 2.4(b)(i)(1)(B)(II) (in the case of Celera Genomics Stock), the Corporation shall, not later than the 40th Trading Day following the consummation of the Disposition referred to in such Section, cause notice to be given to the holders of shares of the class of Common Stock relating to the Group subject to such Disposition and to each holder of Convertible Securities that are convertible into or exchangeable or exercisable for shares of such class of Common Stock (unless alternate provision for such notice to the holders of such Convertible Securities is made pursuant to the terms of such Convertible Securities) setting forth (1) a date not earlier than the tenth Trading Day and not later than the 20th Trading Day following the date of such notice on which shares of such class of Common Stock shall be selected for redemption, (2) the anticipated Redemption Date (which shall not be more than 95 Trading Days following the consummation of such Disposition), (3) the type of property in which the redemption price for the shares to be redeemed is to be paid, (4) the Net Proceeds of such Disposition, (5) the number of shares of such class of Common Stock outstanding and the number of shares of such class of Common Stock into or for which outstanding Convertible Securities are then convertible, exchangeable or exercisable and the conversion, exchange or exercise price thereof, (6) in the case of notice to be given to holders of Convertible Securities, a statement to the effect that a holder of such Convertible Securities shall be eligible to participate in such selection for redemption only if such holder properly converts, exchanges or exercises such Convertible Securities on or prior to the record date referred to in clause (1) of this sentence, and a statement as to what, if anything, such holder will be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, this Section 2.4 if such holder thereafter converts, exchanges or exercises such Convertible Securities and (7) a statement that the Corporation will not be required to register a transfer of any shares of such class of Common Stock for a period of 15 Trading Days next preceding the date referred to in clause (1) of this sentence. Promptly following the date referred to in clause (1) of the preceding sentence, the Corporation shall cause a notice to be given to each holder of record of shares of such class of Common Stock to be redeemed setting forth (1) the number of shares of such class of Common Stock held by such holder to be redeemed, (2) a statement that such shares of such class of Common Stock shall be redeemed, (3) the Redemption Date, (4) the kind and per share amount of cash and/or securities or other property to be received by such holder with respect to each share of such class of Common Stock to be redeemed, including details as to the calculation thereof, (5) the place or places where certificates for shares of such class of Common Stock, properly endorsed or assigned for transfer (unless the Corporation shall waive such requirement), are to be surrendered for delivery of such cash and/or securities or other property, (6) if applicable, a statement to the effect that the shares being redeemed may no longer be transferred on the transfer books of the Corporation after the Redemption Date and (7) a statement to the effect that, subject to Section 2.4(f)(ix), dividends on such shares of such class of Common Stock shall cease to be paid as of the Redemption Date. Such notices shall be sent by first-class mail, postage prepaid, to each such holder at such holder's address as the same appears on the transfer books of the Corporation on the record date fixed for such notice. (v) If the Corporation determines to convert Applied Biosystems Stock into Celera Genomics Stock or Celera Genomics Stock into Applied Biosystems Stock (or, in either case, another class or series of common stock of the Corporation) pursuant to Section 2.4(a)(i)(2) or 2.4(a)(iii) (in the case of the conversion of Applied Biosystems Stock) or Section 2.4(b)(i)(2) or 2.4(b)(iii) (in the case of the conversion of Celera Genomics Stock), the Corporation shall, not earlier than the 45th Trading Day and not later than the 35th Trading Day prior to the Conversion Date cause notice to be given to the holders of shares of the class of Common Stock to be so converted and to each holder of Convertible Securities that are convertible into or exchangeable or exercisable for shares of such class of Common Stock (unless alternate provision for such 11 notice to the holders of such Convertible Securities is made pursuant to the terms of such Convertible Securities) setting forth (1) a statement that all outstanding shares of such class of Common Stock shall be converted, (2) the Conversion Date (which, in the case of a conversion after a Disposition, shall not be more than 95 Trading Days following the consummation of such Disposition), (3) the per share number of shares of Common Stock (or another class or series of common stock of the Corporation) to be received with respect to each share of such class of Common Stock, including details as to the calculation thereof, (4) the place or places where certificates for shares of such class of Common Stock, properly endorsed or assigned for transfer (unless the Corporation shall waive such requirement), are to be surrendered for delivery of certificates for shares of such class of Common Stock, (5) the number of outstanding shares of such class of Common Stock and the number of shares of such class of Common Stock into or for which outstanding Convertible Securities are then convertible, exchangeable or exercisable and the conversion, exchange or exercise price thereof, (6) a statement to the effect that, subject to Section 2.4(f)(ix), dividends on shares of such class of Common Stock shall cease to be paid as of such Conversion Date and (7) in the case of notice to holders of such Convertible Securities, a statement to the effect that a holder of such Convertible Securities shall be entitled to receive shares of such class of Common Stock upon such conversion if such holder properly converts, exchanges or exercises such Convertible Securities on or prior to such Conversion Date and a statement as to what, if anything, such holder will be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, this Section 2.4 if such holder thereafter converts, exchanges or exercises such Convertible Securities. Such notice shall be sent by first-class mail, postage prepaid, to each such holder at such holder's address as the same appears on the transfer books of the Corporation on the record date fixed for such notice. (vi) If the Corporation determines to redeem shares of Applied Biosystems Stock pursuant to Section 2.4(c) or Celera Genomics Stock pursuant to Section 2.4(d), the Corporation shall cause notice to be given to each holder of shares of such class of Common Stock to be redeemed and to the holders of Convertible Securities that are convertible into or exchangeable or exercisable for shares of such class of Common Stock (unless alternate provision for such notice to the holders of such Convertible Securities is made pursuant to the terms of such Convertible Securities), setting forth (1) a statement that all shares of such class of Common Stock outstanding on the Redemption Date shall be redeemed in exchange for shares of common stock of each Applied Biosystems Subsidiary or Celera Genomics Subsidiary, as applicable, (2) the Redemption Date, (3) the place or places where certificates for shares of the class of Common Stock to be redeemed, properly endorsed or assigned for transfer (unless the Corporation shall waive such requirement), are to be surrendered for delivery of certificates for shares of common stock of each Applied Biosystems Subsidiary or Celera Genomics Subsidiary, as applicable, (4) a statement to the effect that, subject to Section 2.4(f)(ix), dividends on shares of such class of Common Stock being redeemed shall cease to be paid as of such Redemption Date, (5) the number of shares of such class of Common Stock outstanding and the number of shares of such class of Common Stock into or for which outstanding Convertible Securities are then convertible, exchangeable or exercisable and the conversion, exchange or exercise price thereof and (6) in the case of notice to holders of Convertible Securities, a statement to the effect that a holder of Convertible Securities shall be entitled to receive shares of common stock of each Applied Biosystems Subsidiary or Celera Genomics Subsidiary, as applicable, upon redemption only if such holder properly converts, exchanges or exercises such Convertible Securities on or prior to the Redemption Date and a statement as to what, if anything, such holder will be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, this Section 2.4(f), if such holder thereafter converts, exchanges or exercises such Convertible Securities. Such notice shall be sent by first-class mail, postage prepaid, not less than 35 Trading Days nor more than 45 12 Trading Days prior to the Redemption Date to each such holder at such holder's address as the same appears on the transfer books of the Corporation on the record date fixed for such notice. (vii) If less than all of the outstanding shares of either class of Common Stock are to be redeemed pursuant to Section 2.4(a)(i)(1) (in the case of Applied Biosystems Stock) or Section 2.4(b)(i)(1) (in the case of Celera Genomics Stock), the shares to be redeemed by the Corporation shall be selected from among the holders of shares of such class of Common Stock outstanding at the close of business on the record date for such redemption on a pro rata basis among all such holders or by lot or by such other method as may be determined by the Board of Directors to be equitable. (viii) The Corporation shall not be required to issue or deliver fractional shares of any capital stock or of any other securities to any holder of either class of Common Stock upon any conversion, redemption, dividend or other distribution pursuant to this Section 2.4. If more than one share of either class of Common Stock shall be held at the same time by the same holder, the Corporation may aggregate the number of shares of any capital stock that shall be issuable or any other securities or property that shall be distributable to such holder upon any conversion, redemption, dividend or other distribution (including any fractional shares). If fractional shares of any capital stock or of any other securities would be required to be issued or distributed to the holders of either class of Common Stock, the Corporation shall, if such fractional shares are not issued or distributed to the holder, pay cash in respect of such fractional shares in an amount equal to the Fair Value thereof (without interest). (ix) No adjustments in respect of dividends shall be made upon the conversion or redemption of any shares of either class of Common Stock; provided, however, that if the Conversion Date or Redemption Date, as the case may be, with respect to any shares of either class of Common Stock shall be subsequent to the record date for the payment of a dividend or other distribution thereon or with respect thereto, the holders of such class of Common Stock at the close of business on such record date shall be entitled to receive the dividend or other distribution payable on or with respect to such shares on the date set for payment of such dividend or other distribution, in each case without interest, notwithstanding the subsequent conversion or redemption of such shares. (x) Before any holder of shares of either class of Common Stock shall be entitled to receive any cash payment and/or certificates or instruments representing shares of any capital stock and/or other securities or property to be distributed to such holder with respect to such class of Common Stock pursuant to this Section 2.4, such holder shall surrender at such place as the Corporation shall specify certificates for such shares of Common Stock, properly endorsed or assigned for transfer (unless the Corporation shall waive such requirement). The Corporation shall as soon as practicable after receipt of certificates representing such shares of Common Stock deliver to the person for whose account such shares of Common Stock were so surrendered, or to such person's nominee or nominees, the cash and/or the certificates or instruments representing the number of whole shares of the kind of capital stock and/or other securities or property to which such person shall be entitled as aforesaid, together with any payment in respect of fractional shares contemplated by Section 2.4(f)(viii), in each case without interest. If less than all of the shares of either class of Common Stock represented by any one certificate are to be redeemed, the Corporation shall issue and deliver a new certificate for the shares of such class of Common Stock not redeemed. (xi) From and after any applicable Conversion Date or Redemption Date, as the case may be, all rights of a holder of shares of either class of Common Stock that were converted or 13 redeemed shall cease except for the right, upon surrender of the certificates representing such shares of Common Stock as required by Section 2.4(f)(x), to receive the cash and/or the certificates or instruments representing shares of the kind and amount of capital stock and/or other securities or property for which such shares were converted or redeemed, together with any payment in respect of fractional shares contemplated by Section 2.4(f)(viii) (which shall be held by the Corporation for the holder of such shares of Common Stock that were redeemed until the receipt of certificates representing such shares of Common Stock as provided in Section 2.4(f)(x)) and rights to dividends as provided in Section 2.4(f)(ix), in each case without interest. No holder of a certificate that immediately prior to the applicable Conversion Date or Redemption Date represented shares of a class of Common Stock shall be entitled to receive any dividend or other distribution or interest payment with respect to shares of any kind of capital stock or other security or instrument for which such class of Common Stock was converted or redeemed until the surrender as required by this Section 2.4 of such certificate in exchange for a certificate or certificates or instrument or instruments representing such capital stock or other security. Subject to applicable escheat and similar laws, upon such surrender, there shall be paid to the holder the amount of any dividends or other distributions (without interest) which theretofore became payable on any class or series of capital stock of the Corporation as of a record date after the Conversion Date or Redemption Date, but that were not paid by reason of the foregoing, with respect to the number of whole shares of the kind of capital stock represented by the certificate or certificates issued upon such surrender. From and after a Conversion Date or Redemption Date, the Corporation shall, however, be entitled to treat the certificates for a class of Common Stock that have not yet been surrendered for conversion or redemption as evidencing the ownership of the number of whole shares of the kind or kinds of capital stock of the Corporation for which the shares of such class of Common Stock represented by such certificates shall have been converted or redeemed, notwithstanding the failure to surrender such certificates. (xii) The Corporation shall pay any and all documentary, stamp or similar issue or transfer taxes that may be payable in respect of the issuance or delivery of any shares of capital stock and/or other securities upon conversion or redemption of shares of either class of Common Stock pursuant to this Section 2.4. The Corporation shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issuance or delivery of any shares of capital stock and/or other securities in a name other than that in which the shares of such class of Common Stock so converted or redeemed were registered, and no such issuance or delivery shall be made unless and until the person requesting such issuance or delivery has paid to the Corporation the amount of any such tax or has established to the satisfaction of the Corporation that such tax has been paid. (xiii) Neither the failure to mail any notice required by this Section 2.4 to any particular holder of a class of Common Stock or of Convertible Securities nor any defect therein shall affect the sufficiency thereof with respect to any other holder of outstanding shares of a class of Common Stock or of Convertible Securities or the validity of any such conversion or redemption. (xiv) The Board of Directors may establish such rules and requirements to facilitate the effectuation of the transactions contemplated by this Section 2.4 as the Board of Directors shall determine to be appropriate. Section 2.5 Application of the Provisions of Article IV. (a) Certain Determinations by the Board of Directors. The Board of Directors shall make such determinations with respect to the businesses, assets, properties and liabilities to be attributed to the Groups, the application of the provisions of the Certificate of Incorporation to transactions to be engaged in by the Corporation and the voting powers, preferences and relative, participating, optional and other 14 special rights of the holders of either class of Common Stock, and the qualifications and restrictions thereon, provided by the Certificate of Incorporation as may be or become necessary or appropriate to the exercise of such powers, preferences and relative, participating, optional and other special rights, including, without limiting the foregoing, the determinations referred to in this Section 2.5. A record of any such determination shall be filed with the records of the actions of the Board of Directors. (i) Upon any acquisition by the Corporation or its subsidiaries of any assets or business, or any assumption of liabilities, outside of the ordinary course of business of the Applied Biosystems Group or the Celera Genomics Group, as the case may be, the Board of Directors shall determine whether such assets, business and liabilities (or an interest therein) shall be for the benefit of the Applied Biosystems Group or the Celera Genomics Group or that an interest therein shall be partly for the benefit of the Applied Biosystems Group and partly for the benefit of the Celera Genomics Group and, accordingly, shall be attributed to the Applied Biosystems Group or the Celera Genomics Group, or partly to each, in accordance with Section 2.6(b) or 2.6(f), as the case may be. (ii) Upon any issuance of any shares of Celera Genomics Stock at a time when the Number of Celera Genomics Designated Shares is greater than zero, the Board of Directors shall determine, based on the use of the proceeds of such issuance and any other relevant factors, whether all or any part of the shares of Celera Genomics Stock so issued shall reduce the Number of Celera Genomics Designated Shares and the Number of Celera Genomics Designated Shares shall be adjusted accordingly. (iii) Upon any issuance by the Corporation or any subsidiary thereof of any Convertible Securities that are convertible into or exchangeable or exercisable for shares of Celera Genomics Stock, if at the time such Convertible Securities are issued the Number of Celera Genomics Designated Shares is greater than zero, the Board of Directors shall determine, based on the use of the proceeds of such issuance and any other relevant factors, whether, upon conversion, exchange or exercise thereof, the issuance of shares of Celera Genomics Stock pursuant thereto shall, in whole or in part, reduce the Number of Celera Genomics Designated Shares and the Number of Celera Genomics Designated Shares shall be adjusted accordingly. (iv) Upon any issuance of any shares of any class or series of preferred stock of the Corporation, the Board of Directors shall attribute, based on the use of proceeds of such issuance of shares of preferred stock in the business of the Applied Biosystems Group or the Celera Genomics Group and any other relevant factors, the shares so issued entirely to the Applied Biosystems Group or entirely to the Celera Genomics Group or partly to the Applied Biosystems Group and partly to the Celera Genomics Group in such proportion as the Board of Directors shall determine. (v) Upon any redemption or repurchase by the Corporation or any subsidiary thereof of shares of preferred stock of any class or series or of other securities or debt obligations of the Corporation, the Board of Directors shall determine, based on the property used to redeem or purchase such shares, other securities or debt obligations, which, if any, of such shares, other securities or debt obligations redeemed or repurchased shall be attributed to the Applied Biosystems Group and which, if any, of such shares, other securities or debt obligations shall be attributed to the Celera Genomics Group and, accordingly, how many of the shares of such class or series of preferred stock or of such other securities, or how much of such debt obligations, that remain 15 outstanding, if any, are thereafter attributed to the Applied Biosystems Group or the Celera Genomics Group. (b) Certain Determinations Not Required. Notwithstanding the foregoing provisions of this Section 2.5, the provisions of Section 2.6(b) or 2.6(f) or any other provision of the Certificate of Incorporation, at any time when there are not outstanding both (i) one or more shares of Applied Biosystems Stock or Convertible Securities convertible into or exchangeable or exercisable for Applied Biosystems Stock and (ii) one or more shares of Celera Genomics Stock or Convertible Securities convertible into or exchangeable or exercisable for Celera Genomics Stock, the Corporation need not (A) attribute any of the assets or liabilities of the Corporation or any of its subsidiaries to the Applied Biosystems Group or the Celera Genomics Group or (B) make any determination required in connection therewith, nor shall the Board of Directors be required to make any of the determinations otherwise required by this Article, and in such circumstances the holders of the shares of Applied Biosystems Stock and Celera Genomics Stock outstanding, as the case may be, shall (unless otherwise specifically provided by the Certificate of Incorporation) be entitled to all the voting powers, preferences and relative, participating, optional and other special rights of both classes of Common Stock without differentiation between the Applied Biosystems Stock and the Celera Genomics Stock. (c) Board Determinations Binding. Subject to applicable law, any determinations made in good faith by the Board of Directors of the Corporation under any provision of this Section 2.5 or otherwise in furtherance of the application of this Section 2 shall be final and binding on all stockholders. Section 2.6 Certain Definitions. As used in the Certificate of Incorporation, the following terms shall have the following meanings (with terms defined in the singular having comparable meaning when used in the plural and vice versa), unless the context otherwise requires. As used in this Section 2.6, a "contribution" or "transfer" of assets or properties from one Group to another shall refer to the reattribution of such assets or properties from the contributing or transferring Group to the other Group and correlative phrases shall have correlative meanings. (a) Applera Corporation Earnings (Loss) Attributable to the Applied Biosystems Group shall mean, for any period through any date, (i) the net income or loss of the Applied Biosystems Group for such period determined in accordance with generally accepted accounting principles in effect at such time, reflecting income and expense of the Corporation attributed to the Applied Biosystems Group on a basis substantially consistent with attributions of income and expense made in the calculation of Applera Corporation Earnings (Loss) Attributable to the Celera Genomics Group, including, without limitation, corporate administrative costs, net interest and other financial costs and income taxes, increased by (ii) the amount reducing Applera Corporation Earnings (Loss) Attributable to the Celera Genomics Group for such period pursuant to clause (ii) of Section 2.6(b). (b) Applera Corporation Earnings (Loss) Attributable to the Celera Genomics Group shall mean, for any period through any date, (i) the net income or loss of the Celera Genomics Group for such period determined in accordance with generally accepted accounting principles in effect at such time, reflecting income and expense of the Corporation attributed to the Celera Genomics Group on a basis substantially consistent with attributions of income and expense made in the calculation of Applera Corporation Earnings (Loss) Attributable to the Applied Biosystems Group, including, without limitation, corporate administrative costs, net interest and other financial costs and income taxes, reduced by (ii) the aggregate amount of consolidated 16 allowable tax benefits for federal income tax purposes generated by the Celera Genomics Group for such period which can not be utilized by the Celera Genomics Group but can be utilized by the Corporation on a consolidated basis for such period to the extent such amount was included in the calculation of net income or loss under clause (i) for such period ("Excludable Celera Tax Benefits") (provided that the amount referred to in clause (i) shall be reduced only to the extent the cumulative amount of Excludable Celera Tax Benefits from July 1, 1998 exceeds $75 million). (c) Applied Biosystems Group shall mean, as of any date: (i) the interest of the Corporation or any of its subsidiaries on such date in all of the businesses, assets, properties and liabilities of the Corporation or any of its subsidiaries (and any successor companies), other than any businesses, assets, properties and liabilities attributed in accordance with this Article to the Celera Genomics Group; (ii) all businesses, assets, properties and liabilities transferred to the Applied Biosystems Group from the Celera Genomics Group (other than in a transaction pursuant to Section 2.6(c)(iii)) pursuant to transactions in the ordinary course of business of the Applied Biosystems Group and the Celera Genomics Group or otherwise as the Board of Directors may have directed as permitted by the Certificate of Incorporation; (iii) all properties and assets transferred to the Applied Biosystems Group from the Celera Genomics Group in connection with a reduction of the Number of Celera Genomics Designated Shares; and (iv) the interest of the Corporation or any of its subsidiaries in any business or asset acquired and any liabilities assumed by the Corporation or any of its subsidiaries outside of the ordinary course of business and attributed to the Applied Biosystems Group, as determined by the Board of Directors as contemplated by Section 2.5(a)(i); provided that from and after any transfer of any assets or properties from the Applied Biosystems Group to the Celera Genomics Group, the Applied Biosystems Group shall no longer include such assets or properties so transferred. (d) Applied Biosystems Group Available Dividend Amount shall mean, on any date, either: (x)(i) the amount equal to the fair market value of the total assets attributed to the Applied Biosystems Group less the total liabilities attributed to the Applied Biosystems Group (provided that preferred stock shall not be treated as a liability), in each case, as of such date and determined on a basis consistent with that applied in determining Applera Corporation Earnings (Loss) Attributable to the Applied Biosystems Group, minus (ii) the aggregate par value of, or any greater amount determined in accordance with applicable law to be capital in respect of, all outstanding shares of Applied Biosystems Stock and each class or series of preferred stock attributed in accordance with the Certificate of Incorporation to the Applied Biosystems Group, or (y) in case the total amount calculated pursuant to clause (i) above is not a positive number, an amount equal to Applera Corporation Earnings (Loss) Attributable to the Applied Biosystems Group (if positive) for the fiscal year in which the dividend is declared and/or the preceding fiscal year. 17 Notwithstanding the foregoing provisions of this Section 2.6(d), and consistent with Section 2.5(c), at any time when there are not outstanding both (i) one or more shares of Applied Biosystems Stock or Convertible Securities convertible into or exchangeable or exercisable for Applied Biosystems Stock and (ii) one or more shares of Celera Genomics Stock or Convertible Securities convertible into or exchangeable or exercisable for Celera Genomics Stock, the "Available Dividend Amount," on any calculation date during such time period, with respect to the Applied Biosystems Stock or the Celera Genomics Stock, as the case may be (depending on which of such classes of Common Stock or Convertible Securities convertible into or exchangeable or exercisable for such class of Common Stock is outstanding), shall mean the amount available for the payment of dividends on such Common Stock in accordance with law. (e) Available Dividend Amount shall mean, as the context requires, a reference to the Applied Biosystems Group Available Dividend Amount or the Celera Genomics Group Available Dividend Amount. (f) Celera Genomics Group shall mean, as of any date: (i) the interest of the Corporation on such date in Celera Genomics Corporation, PE AgGen, Inc. and GenScope, Inc. (the "Celera Genomics Group Companies"), any successor companies, and all of the businesses, assets and liabilities of the Celera Genomics Group Companies and any subsidiaries thereof; (ii) all assets and liabilities of the Corporation and its subsidiaries attributed by the Board of Directors to the Celera Genomics Group, whether or not such assets or liabilities are or were also assets and liabilities of the Celera Genomics Group Companies; (iii) all businesses, assets, properties and liabilities transferred to the Celera Genomics Group from the Applied Biosystems Group (other than in a transaction pursuant to Section 2.6(f)(iv)) pursuant to transactions in the ordinary course of business of the Celera Genomics Group and the Applied Biosystems Group or otherwise as the Board of Directors may have directed as permitted by the Certificate of Incorporation; (iv) all properties and assets transferred to the Celera Genomics Group from the Applied Biosystems Group in connection with an increase in the Number of Celera Genomics Designated Shares; and (v) the interest of the Corporation or any of its subsidiaries in any business or asset acquired and any liabilities assumed by the Corporation or any of its subsidiaries outside of the ordinary course of business and attributed to the Celera Genomics Group, as determined by the Board of Directors as contemplated by Section 2.5(a)(i); provided that from and after any transfer of any assets or properties from the Celera Genomics Group to the Applied Biosystems Group, the Celera Genomics Group shall no longer include such assets or properties so transferred. (g) Celera Genomics Group Available Dividend Amount shall mean, on any date, either: (x)(i) an amount equal to the fair market value of the total assets attributed to the Celera Genomics Group less the total liabilities attributed to the Celera Genomics Group 18 (provided that preferred stock shall not be treated as a liability), in each case, as of such date and determined on a basis consistent with that applied in determining Applera Corporation Earnings (Loss) Attributable to the Celera Genomics Group, minus (ii) the aggregate par value of, or any greater amount determined in accordance with applicable law to be capital in respect of, all outstanding shares of Celera Genomics Stock and each class or series of preferred stock attributed in accordance with the Certificate of Incorporation to the Celera Genomics Group, or (y) in case the total amount calculated pursuant to clause (i) above is not a positive number, an amount equal to Applera Corporation Earnings (Loss) Attributable to the Celera Genomics Group (if positive) for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Notwithstanding the foregoing provisions of this Section 2.6(g), and consistent with Section 2.5(c), at any time when there are not outstanding both (i) one or more shares of Applied Biosystems Stock or Convertible Securities convertible into or exchangeable or exercisable for Applied Biosystems Stock and (ii) one or more shares of Celera Genomics Stock or Convertible Securities convertible into or exchangeable or exercisable for Celera Genomics Stock, the "Available Dividend Amount," on any calculation date during such time period, with respect to the Applied Biosystems Stock or the Celera Genomics Stock, as the case may be (depending on which of such classes of Common Stock or Convertible Securities convertible into or exchangeable or exercisable for such class of Common Stock is outstanding), shall mean the amount available for the payment of dividends on such Common Stock in accordance with law. (h) Conversion Date shall mean the date fixed by the Board of Directors as the effective date for the conversion of shares of Applied Biosystems Stock into shares of Celera Genomics Stock (or another class or series of common stock of the Corporation) or of shares of Celera Genomics Stock into shares of Applied Biosystems Stock (or another class or series of common stock of the Corporation), as the case may be, as shall be set forth in the notice to holders of shares of the class of Common Stock subject to such conversion and to holders of any Convertible Securities that are convertible into or exchangeable or exercisable for shares of the class of Common Stock subject to such conversion required pursuant to Section 2.4(f)(v). (i) Convertible Securities shall mean, as of any date, any securities of the Corporation or of any subsidiary thereof (other than shares of a class of Common Stock), including warrants and options, outstanding at such time that by their terms are convertible into or exchangeable or exercisable for or evidence the right to acquire any shares of either class of Common Stock, whether convertible, exchangeable or exercisable at such time or a later time or only upon the occurrence of certain events; provided that securities shall only be Convertible Securities in respect of the number of shares of Common Stock into or for which such securities are then convertible, exchangeable or exercisable. (j) Disposition shall mean a sale, transfer, assignment or other disposition (whether by merger, consolidation, sale or contribution of assets or stock or otherwise) of properties or assets (including stock, other securities and goodwill). (k) Fair Value shall mean, (i) in the case of equity securities or debt securities of a class or series that has previously been Publicly Traded for a period of at least 15 months, the Market Value thereof (if such Market Value, as so defined, can be determined); (ii) in the case of an equity security or debt security that has not been Publicly Traded for at least 15 months or the Market Value of which cannot be determined, the fair value per share of stock or per other unit of 19 such security, on a fully distributed basis, as determined by an independent investment banking firm experienced in the valuation of securities selected in good faith by the Board of Directors, or, if no such investment banking firm is, as determined in the good faith judgment of the Board of Directors, available to make such determination, in good faith by the Board of Directors; (iii) in the case of cash denominated in U.S. dollars, the face amount thereof and in the case of cash denominated in other than U.S. dollars, the face amount thereof converted into U.S. dollars at the rate published in The Wall Street Journal on the date for the determination of Fair Value or, if not so published, at such rate as shall be determined in good faith by the Board of Directors based upon such information as the Board of Directors shall in good faith determine to be appropriate; and (iv) in the case of property other than securities or cash, the "Fair Value" thereof shall be determined in good faith by the Board of Directors based upon such appraisals or valuation reports of such independent experts as the Board of Directors shall in good faith determine to be appropriate. Any such determination of Fair Value shall be described in a statement filed with the records of the actions of the Board of Directors. (l) Group shall mean, as of any date, the Applied Biosystems Group or the Celera Genomics Group, as the case may be. (m) Market Capitalization of any class or series of capital stock on any date shall mean the product of (i) the Market Value of one share of such class or series of capital stock on such date and (ii) the number of shares of such class or series of capital stock outstanding on such date. (n) Market Value of a share of any class or series of capital stock of the Corporation on any day shall mean the average of the high and low reported sales prices regular way of a share of such class or series on such Trading Day or, in case no such reported sale takes place on such Trading Day, the average of the reported closing bid and asked prices regular way of a share of such class or series on such Trading Day, in either case as reported on the New York Stock Exchange Composite Tape or, if the shares of such class or series are not listed or admitted to trading on such Exchange on such Trading Day, on the principal national securities exchange in the United States on which the shares of such class or series are listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange on such Trading Day, on the Nasdaq National Market or, if the shares of such class or series are not listed or admitted to trading on any national securities exchange or quoted on the Nasdaq National Market on such Trading Day, the average of the closing bid and asked prices of a share of such class or series in the over-the-counter market on such Trading Day as furnished by any New York Stock Exchange member firm selected from time to time by the Corporation or, if such closing bid and asked prices are not made available by any such New York Stock Exchange member firm on such Trading Day, the Fair Value of a share of such class or series as set forth in clause (ii) of the definition of Fair Value; provided that, for purposes of determining the "Market Value" of a share of any class or series of capital stock for any period, (i) the "Market Value" of a share of capital stock on any day prior to any "ex-dividend" date or any similar date occurring during such period for any dividend or distribution (other than any dividend or distribution contemplated by clause (ii)(B) of this sentence) paid or to be paid with respect to such capital stock shall be reduced by the Fair Value of the per share amount of such dividend or distribution and (ii) the "Market Value" of any share of capital stock on any day prior to (A) the effective date of any subdivision (by stock split or otherwise) or combination (by reverse stock split or otherwise) of outstanding shares of such class or series of capital stock occurring during such period or (B) any "ex-dividend" date or any similar date occurring during such period for any dividend or distribution with respect to such capital stock to be made in shares of such class or series of capital stock or Convertible Securities that are convertible, exchangeable or exercisable for such class or series of 20 capital stock shall be appropriately adjusted, as determined by the Board of Directors, to reflect such subdivision, combination, dividend or distribution. (o) Market Value Ratio of Applied Biosystems Stock to Celera Genomics Stock as of any date shall mean the fraction (which may be greater or less than 1/1), expressed as a decimal (rounded to the nearest five decimal places), of a share of Celera Genomics Stock (or another class or series of common stock of the Corporation, if so provided by Section 2.4(a)(iii) because Celera Genomics Stock is not then Publicly Traded) to be issued in respect of a share of Applied Biosystems Stock upon a conversion of Applied Biosystems Stock into Celera Genomics Stock (or another class or series of common stock of the Corporation) in accordance with Section 2.4(a)(iii), the numerator of which shall be the average Market Value of one share of Applied Biosystems Stock during the 20-Trading Day period ending on such date and the denominator of which shall be the average Market Value of one share of Celera Genomics Stock (or such other common stock) during the 20-Trading Day period ending on such date. (p) Market Value Ratio of Celera Genomics Stock to Applied Biosystems Stock as of any date shall mean the fraction (which may be greater or less than 1/1), expressed as a decimal (rounded to the nearest five decimal places), of a share of Applied Biosystems Stock (or another class or series of common stock of the Corporation, if so provided by Section 2.4(b)(iii) because Applied Biosystems Stock is not then Publicly Traded) to be issued in respect of a share of Celera Genomics Stock upon a conversion of Celera Genomics Stock into Applied Biosystems Stock (or another class or series of common stock of the Corporation) in accordance with Section 2.4(b)(iii) the numerator of which shall be the average Market Value of one share of Celera Genomics Stock during the 20-Trading Day period ending on such date and the denominator of which shall be the average Market Value of one share of Applied Biosystems Stock (or such other common stock) during the 20-Trading Day period ending on such date. (q) Net Proceeds shall mean, as of any date with respect to any Disposition of any of the properties and assets attributed to the Applied Biosystems Group or the Celera Genomics Group, as the case may be, an amount, if any, equal to what remains of the gross proceeds of such Disposition after payment of, or reasonable provision is made as determined by the Board of Directors for, (i) any taxes payable by the Corporation (or which would have been payable but for the utilization of tax benefits attributable to the other Group) in respect of such Disposition or in respect of any resulting dividend or redemption pursuant to Section 2.4(a)(i)(1)(A), 2.4(a)(i)(1)(B), 2.4(b)(i)(1)(A) or 2.4(b)(i)(1)(B), (ii) any transaction costs, including, without limitation, any legal, investment banking and accounting fees and expenses and (iii) any liabilities (contingent or otherwise) of or attributed to such Group, including, without limitation, any liabilities for deferred taxes or any indemnity or guarantee obligations of the Corporation incurred in connection with the Disposition or otherwise, and any liabilities for future purchase price adjustments and any preferential amounts plus any accumulated and unpaid dividends in respect of the preferred stock attributed to such Group. For purposes of this definition, any properties and assets attributed to the Group, the properties and assets of which are subject to such Disposition, remaining after such Disposition shall constitute "reasonable provision" for such amount of taxes, costs and liabilities (contingent or otherwise) as the Board of Directors determines can be expected to be supported by such properties and assets. (r) Number of Celera Genomics Designated Shares shall be, as of the date of effectiveness of the Certificate of Incorporation, zero; provided, however, that the "Number of Celera Genomics Designated Shares" shall from time to time thereafter be: 21 (i) adjusted, if before such adjustment such number is greater than zero, as determined by the Board of Directors to be appropriate to reflect equitably any subdivision (by stock split or otherwise) or combination (by reverse stock split or otherwise) of the Celera Genomics Stock or any dividend or other distribution of shares of Celera Genomics Stock to holders of shares of Celera Genomics Stock or any reclassification of Celera Genomics Stock; (ii) decreased (but to not less than zero), if before such adjustment such number is greater than zero, by action of the Board of Directors by (1) the number of shares of Celera Genomics Stock issued or sold by the Corporation that, immediately prior to such issuance or sale, were included in the Number of Celera Genomics Designated Shares, (2) the number of shares of Celera Genomics Stock issued upon conversion, exchange or exercise of Convertible Securities that, immediately prior to the issuance or sale of such Convertible Securities, were included in the Number of Celera Genomics Designated Shares, (3) the number of shares of Celera Genomics Stock issued by the Corporation as a dividend or other distribution (including in connection with any reclassification or exchange of shares) to holders of Applied Biosystems Stock, (4) the number of shares of Celera Genomics Stock issued upon the conversion, exchange or exercise of any Convertible Securities issued by the Corporation as a dividend or other distribution (including in connection with any reclassification or exchange of shares) to holders of Applied Biosystems Stock, and (5) the number (rounded, if necessary, to the nearest whole number) equal to the quotient of (A) the aggregate Fair Value as of the date of contribution of properties or assets (including cash) transferred from the Celera Genomics Group to the Applied Biosystems Group in consideration for a reduction in the Number of Celera Genomics Designated Shares divided by (B) the average Market Value of one share of Celera Genomics Stock during the 20-Trading Day period ending on the date immediately prior to the date of such transfer; and (iii) increased by the number (rounded, if necessary, to the nearest whole number) equal to the quotient of (A) the Fair Value of properties or assets (including cash) theretofore attributed as provided by Section 2.6(c) to the Applied Biosystems Group that are contributed to the Celera Genomics Group in consideration of an increase in the Number of Celera Genomics Designated Shares divided by (B) the average Market Value of one share of Celera Genomics Stock during the 20-Trading Day period ending on the date immediately prior to the date of such contribution. (s) Publicly Traded with respect to any security shall mean that such security is (i) registered under Section 12 of the Securities Exchange Act of 1934, as amended (or any successor provision of law), and (ii) listed for trading on the New York Stock Exchange or the American Stock Exchange (or any national securities exchange registered under Section 7 of the Securities Exchange Act of 1934, as amended (or any successor provision of law), that is the successor to either such exchange) or listed on The Nasdaq Stock Market (or any successor market system). (t) Redemption Date shall mean the date fixed by the Board of Directors as the effective date for a redemption of shares of either class of Common Stock, as set forth in a notice to holders thereof required pursuant to Section 2.4(f)(iii), (iv), (v) or (vi). (u) Related Business Transaction means any Disposition of all or substantially all the properties and assets attributed to the Applied Biosystems Group or the Celera Genomics Group, as the case may be, in a transaction or series of related transactions that result in the Corporation 22 receiving in consideration of such properties and assets primarily equity securities (including, without limitation, capital stock, debt securities convertible into or exchangeable for equity securities or interests in a general or limited partnership or limited liability company, without regard to the voting power or other management or governance rights associated therewith) of any entity which (i) acquires such properties or assets or succeeds (by merger, formation of a joint venture or otherwise) to the business conducted with such properties or assets or controls such acquiror or successor and (ii) is engaged primarily or proposes to engage primarily in one or more businesses similar or complementary to the businesses conducted by such Group prior to such Disposition, as determined by the Board of Directors. (v) Tax Event shall mean the receipt by the Corporation of an opinion of tax counsel to the Corporation experienced in such matters, who shall not be an officer or employee of the Corporation or any of its affiliates, that, as a result of any amendment to, or change in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein (including any announced proposed change by an applicable legislative committee or the chair thereof in such laws or by an administrative agency in such regulations), or as a result of any official or administrative pronouncement or action or judicial decision interpreting or applying such laws or regulations, it is more likely than not that for United States federal income tax purposes (i) the Corporation or its stockholders is or, at any time in the future, will be subject to tax upon the issuance of shares of either Applied Biosystems Stock or Celera Genomics Stock or (ii) either Applied Biosystems Stock or Celera Genomics Stock is not or, at any time in the future, will not be treated solely as stock of the Corporation. For purposes of rendering such opinion, tax counsel shall assume that any legislative or administrative proposals will be adopted or enacted as proposed. (w) Trading Day shall mean each weekday other than any day on which the relevant class of common stock of the Corporation is not traded on any national securities exchange or listed on The Nasdaq Stock Market or in the over-the-counter market. Section 3. Preferred Stock. The Preferred Stock may be issued from time to time in one or more series, each with such distinctive designation as may be stated in the Certificate of Incorporation or in any amendment hereto, or in a resolution or resolutions providing for the issue of such stock from time to time adopted by the Board of Directors or a duly authorized committee thereof. The resolution or resolutions providing for the issue of shares of a particular series shall fix, subject to applicable laws and the provisions of the Certificate of Incorporation, for each such series the number of shares constituting such series and the designation and the voting powers, preferences and relative, participating, optional or other special rights and the qualifications, limitations or restrictions thereof, including, without limiting the generality of the foregoing, such provisions as may be desired concerning voting, redemption, dividends, dissolution or the distribution of assets, conversion or exchange, and such other subjects or matters as may be fixed by the Board of Directors or a duly authorized committee thereof under the DGCL. ARTICLE V. BOARD OF DIRECTORS Section 1. Number of Directors. The number of directors shall be fixed by resolution of the Board of Directors, but shall not be less than three nor more than thirteen. Election of directors need not be by written ballot, unless so provided in the By-laws of the Corporation. 23 Section 2. Powers of the Board of Directors. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors selected as provided by law and the Certificate of Incorporation and the By-laws of the Corporation. In furtherance, and not in limitation, of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to: (a) adopt, amend, alter, change or repeal By-laws of the Corporation; (b) subject to the By-laws as from time to time in effect, determine the rules and procedures for the conduct of the business of the Board of Directors and the management and direction by the Board of Directors of the business and affairs of the Corporation, including the power to designate and empower committees of the Board of Directors, to elect, or authorize the appointment of, and empower officers and other agents of the Corporation, and to determine the time and place of, the notice requirements for, and the manner of conducting, Board meetings, as well as other notice requirements for, and the manner of taking, Board action; and (c) exercise all such powers and do all such acts as may be exercised or done by the Corporation, subject to the provisions of the DGCL and the Certificate of Incorporation and By-laws of the Corporation. ARTICLE VI. STOCKHOLDER ACTIONS Section 1. Special Meetings. Special meetings of stockholders may be called at any time by the Board of Directors or by the Chairman of the Board of Directors, the President or the Secretary of the Corporation. Section 2. Written Consents. Any action required or permitted to be taken by the stockholders of the Corporation may be effected by written consent in lieu of a meeting of such holders, provided that such consent must be signed by all the holders of all outstanding shares of the Corporation's capital stock entitled to vote thereon. ARTICLE VII. LIMITATION ON LIABILITY OF DIRECTORS No person shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, including without limitation for serving on a committee of the Board of Directors; provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. Any amendment, repeal or modification of this Article VII shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such amendment, repeal or modification. 24 ARTICLE VIII. AMENDMENT OF CERTIFICATE OF INCORPORATION The Corporation hereby reserves the right from time to time to amend, alter, change or repeal any provision contained in the Certificate of Incorporation of the Corporation in any manner permitted by the DGCL and all rights and powers conferred upon stockholders, directors and officers herein are granted subject to this reservation. In addition to any vote otherwise required by law, and except as may otherwise be provided in the Certificate of Incorporation, any such amendment, alteration, change or repeal shall require approval of both (i) the Board of Directors by the affirmative vote of a majority of the members then in office and (ii) the holders of a majority of the voting power of all of the shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. IN WITNESS WHEREOF, this Restated Certificate of Incorporation which restates, integrates and amends the provisions of the certificate of incorporation of the Corporation, and which has been duly adopted in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law, has been executed by William B. Sawch, its Senior Vice President, this 29th day of November, 2000, and shall be effective as of 12:01 a.m. on the 30th day of November, 2000. PE CORPORATION By: /s/ William B. Sawch ------------------------------ Name: William B. Sawch Title: Senior Vice President -----END PRIVACY-ENHANCED MESSAGE-----