-----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, NigfcKwWZuHVBKgbRM/q/Ie64Rx10TfR1pEHXB1DlOWsHrboVxM5FJluL59u8jdK 8xWRbgMHSpsCakECIvu0OQ== 0001125282-02-002791.txt : 20020927 0001125282-02-002791.hdr.sgml : 20020927 20020927155958 ACCESSION NUMBER: 0001125282-02-002791 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020927 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04389 FILM NUMBER: 02774836 BUSINESS ADDRESS: STREET 1: 301 MERRITT 7 CITY: NORWALK STATE: CT ZIP: 06851 BUSINESS PHONE: 2038402000 MAIL ADDRESS: STREET 1: 301 MERRITT 7 CITY: NORWALK STATE: CT ZIP: 06851 FORMER COMPANY: FORMER CONFORMED NAME: PERKIN ELMER CORP DATE OF NAME CHANGE: 19930601 FORMER COMPANY: FORMER CONFORMED NAME: PE CORP DATE OF NAME CHANGE: 19990129 10-K 1 b320198_10k.txt ANNUAL REPORT =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-K [ X ] Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For the Fiscal Year Ended June 30, 2002 OR [ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For the transition period from _________to __________ Commission File Number 1-4389 -------------------- Applera Corporation (Exact name of registrant as specified in its charter) DELAWARE 06-1534213 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 301 Merritt 7, Norwalk, Connecticut 06851-1070 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 203-840-2000 -------------------- Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange Title of Class on Which Registered - ------------------------------------------------- -------------------------------------------- Applera Corporation - Applied Biosystems New York Stock Exchange Group Common Stock (par value $0.01 per share) Pacific Exchange Rights to Purchase Series A Participating New York Stock Exchange Junior Preferred Stock (par value $0.01 per share) Pacific Exchange Applera Corporation - Celera Genomics Group New York Stock Exchange Common Stock (par value $0.01 per share) Pacific Exchange Rights to Purchase Series B Participating New York Stock Exchange Junior Preferred Stock (par value $0.01 per share) Pacific Exchange
Securities registered pursuant to Section 12 (g) of the Act: Title of Class -------------------- Class G Warrants Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of September 4, 2002, 208,797,987 shares of Applera Corporation - Applied Biosystems Group Common Stock were outstanding, and the aggregate market value of such shares (based upon the average of the high and low price) held by non-affiliates was $3,778,158,063. As of September 4, 2002, 71,290,854 shares of Applera Corporation - Celera Genomics Group Common Stock were outstanding, and the aggregate market value of such shares (based upon the average of the high and low price) held by non-affiliates was $638,363,165. - ------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE Annual Report to Stockholders for Fiscal Year ended June 30, 2002 - Parts I, II, and IV. Proxy Statement for Annual Meeting of Stockholders dated September 4, 2002 - Part III. =============================================================================== PART I Item 1. BUSINESS General Development of Business Applera Corporation (hereinafter referred to as the "Company") was incorporated in 1998 under the laws of the State of Delaware. The Company conducts its business through two groups: the Applied Biosystems Group ("Applied Biosystems") and the Celera Genomics Group ("Celera Genomics"). In April 2001, Applied Biosystems and Celera Genomics formed a joint venture in the field of diagnostics ("Celera Diagnostics"). The Company maintains a corporate staff to provide accounting, tax, treasury, legal, information technology, human resources, and other internal services for Applied Biosystems, Celera Genomics, and Celera Diagnostics. The Company is the successor to PE Corporation (NY), formerly "The Perkin-Elmer Corporation," which became a wholly owned subsidiary of the Company as a result of a recapitalization of PE Corporation (NY) completed in May 1999. As part of the recapitalization, the Company established two classes of common stock that were intended to reflect separately the performance of the businesses of each of Applied Biosystems and Celera Genomics (i.e., Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock). Effective November 30, 2000, the Company, which was named "PE Corporation" at the time of the recapitalization, was renamed "Applera Corporation," and Applied Biosystems, which was named the "PE Biosystems Group" at the time of the recapitalization, was renamed the "Applied Biosystems Group." Applied Biosystems is engaged principally in the development, manufacture, sale, and service of instrument-based systems, reagents, and software, and the provision of contract services, for life science and related applications. Its products are used in various applications including synthesis, amplification, purification, isolation, analysis, and sequencing of nucleic acids, proteins, and other biological molecules. The markets for Applied Biosystems' products span the spectrum of the life sciences industry and research community, including: basic human disease research; genetic analysis; pharmaceutical drug discovery, development, and manufacturing; human identification; agriculture; and food and environmental testing. Universities, government agencies, and other non-profit organizations engaged in research activities also use Applied Biosystems' products. During the 2001 fiscal year, Applied Biosystems implemented an organizational realignment away from a business unit structure organized according to specific technologies to a more integrated marketing and product development structure. During the 2002 fiscal year, Applied Biosystems implemented further organizational changes intended to improve upon its new marketing and product development structure. As part of these additional organizational changes, in April 2002 Applied Biosystems announced the formation of its new Knowledge Business for the purpose of developing and marketing products and services designed to meet the needs of life science researchers in performing specific biological analysis applications. Products and services under development or expected to be developed by the Knowledge Business include genomic assays and related information, as well as other information-rich products, services, and analytical tools. Also in April 2002, Applied Biosystems and Celera Genomics entered into a marketing and distribution agreement pursuant to which Applied Biosystems has become the exclusive marketer of Celera Genomics' Celera Discovery System(TM) and related information assets as part of the Knowledge Business. Celera Genomics is engaged principally in integrating advanced technologies to discover and develop new therapeutics. Celera Genomics intends to leverage its capabilities in proteomics, bioinformatics, and genomics to identify and validate drug targets and diagnostic marker candidates, and to discover and develop novel therapeutic candidates. Celera Genomics was originally formed for the purpose of generating and commercializing information to accelerate the understanding of biological processes and to assist the research endeavors of pharmaceutical, biotechnology, and life science research entities. Celera Genomics' original business strategy was the development and sale of its Celera Discovery System, an online information and discovery system through which users can access Celera Genomics' genomic and related biological and medical information. During the 2001 fiscal year, Celera Genomics announced that it was expanding its operations to include a therapeutics discovery and development business. During the 2002 fiscal year, Celera Genomics completed a number of steps, including the following, to further develop its therapeutics business and establish that business as its primary focus: o In November 2001, Celera Genomics completed its acquisition of Axys Pharmaceuticals, Inc. ("Axys"), a small molecule drug discovery and development company. Celera Genomics believes that Axys' medicinal and structural chemistry and biology capabilities and preclinical programs will accelerate the development of its therapeutics business. o Celera Genomics announced a number of important management changes. In January 2002, Celera Genomics announced the resignation of J. Craig Venter as its President, and in April 2002, Celera Genomics announced the appointment of Kathy Ordonez, who is also President of Celera Diagnostics, as his replacement. Also in January 2002, Celera Genomics announced the appointment of David Block as the Chief Operating Officer of its therapeutics business. In July 2002, Celera Genomics announced the appointment of Robert Booth as its Senior Vice President of Research and Development to lead its therapeutics research and development efforts. o In April 2002, Celera Genomics and Applied Biosystems entered into a marketing and distribution agreement pursuant to which Applied Biosystems has become the exclusive marketer of Celera Genomics' Celera Discovery System and related information assets as part of Applied Biosystems' new Knowledge Business. The agreement is expected to enable Celera Genomics' executive team to focus on therapeutics discovery and development. o Celera Genomics substantially increased the number of research and development employees assigned to its therapeutics programs. In addition, in June 2002, Celera Genomics announced the implementation of a restructuring of its organization intended to focus the group's resources on therapeutic discovery and development. The restructuring also involved the reduction of infrastructure, including personnel and positions, previously built to support the group's sequencing activities and online/information business. Celera Diagnostics is focused on the discovery, development, and commercialization of novel diagnostic products. In June 2002, Celera Diagnostics announced the formation of a long- -2- term strategic alliance with Abbott Laboratories to develop, manufacture, and market a broad range of in vitro molecular diagnostic products for disease detection, disease progression monitoring, and therapy selection. In July 2001, the Company announced the Applera Genomics Initiative, a collaboration among Celera Genomics, Applied Biosystems, and Celera Diagnostics for commercializing products derived from information obtained through analysis of variations in the human genome. The Company expects that these products will be based on the identification of variations in the sequence and expression of genes, and their association with disease and therapy. As part of this program, Celera Genomics has prioritized and is resequencing approximately 25,000 genes from 39 individuals and a chimpanzee, which the Company believes will reveal a larger number of single nucleotide polymorphisms ("SNPs") with health related implications than is currently available. SNPs are naturally occurring genetic variations within a genome that scientists believe can be correlated with susceptibility to disease, disease prognosis, therapeutic efficiency, and therapeutic toxicity. Celera Genomics has identified over 100,000 SNPs to date, a majority of which the Company believes have not been previously identified by other researchers. In addition, Applied Biosystems has begun the process of validating the SNPs identified by Celera Genomics to enable their use in internal research and development and incorporation into commercial products and services. Celera Genomics intends to use this SNP data in its internal discovery efforts to improve the prediction of the efficacy and toxicity of drug candidates. Applied Biosystems intends to use this information to develop new assays for the study of SNPs and other polymorphisms, and gene expression and other genomic products. Applied Biosystems' Knowledge Business may also incorporate this data into its database offerings. Celera Diagnostics expects to use this information in genotyping and gene expression studies ultimately aimed at identifying new diagnostic markers. In July 2002, Applied Biosystems' Knowledge Business announced the launch of its Assays-on-Demand(TM) products, a collection of ready-to-use assays for gene expression and genotyping. Assays-on-Demand products represent the first commercial products resulting from the Applera Genomics Initiative, and the Company believes that Assays-on-Demand is also the first commercial product line to incorporate genomic data from both the public and private sector human genome sequencing projects. Financial Information About Industry Segments A summary of net revenues from external customers and operating income (loss) attributable to each of the Company's industry segments for the fiscal years ended June 30, 2000, 2001, and 2002, and total assets attributable to each of the Company's industry segments for the fiscal years ended June 30, 2001 and 2002, is incorporated herein by reference to Note 14 on pages 71-83 of the Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002. Total assets for the fiscal year ended June 30, 2000, were $1,698.2 million for Applied Biosystems, $1,413.3 million for Celera Genomics, and $3,083.3 million for the Company after the effects of ($28.2) million related to intercompany eliminations. Celera Diagnostics has been presented as a segment during fiscal 2002, and fiscal 2001 amounts have been restated accordingly. -3- Narrative Description of Business Applied Biosystems Group Overview. Applied Biosystems is engaged principally in the development, manufacture, sale, and service of instrument-based systems, reagents, and software, and the provision of contract services, for life science and related applications. Its products are used in various applications including the synthesis, amplification, purification, isolation, analysis, and sequencing of nucleic acids, proteins, and other biological molecules. The markets for Applied Biosystems' products span the spectrum of the life sciences industry and research community, including: basic human disease research; genetic analysis; pharmaceutical drug discovery, development, and manufacturing; human identification; agriculture; and food and environmental testing. Universities, government agencies, and other non-profit organizations engaged in research activities also use Applied Biosystems' products. For information on revenues from instruments and consumables for fiscal years 2000 through 2002, refer to pages 22-24 of Management's Discussion and Analysis in the Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002, which pages are incorporated herein by reference. During the 2001 fiscal year, Applied Biosystems implemented an organizational realignment away from a business unit structure organized according to specific technologies to a more integrated marketing and product development structure. During the 2002 fiscal year, Applied Biosystems implemented further organizational changes intended to improve upon its new marketing and product development structure. Under this structure, Applied Biosystems' business operations are divided among several principal operating units organized primarily according to their business function. These units are responsible for various aspects of product and service discovery, development, marketing, manufacturing, sales, and service. The operating activities of these units are supported by a shared service organization responsible for the human resources, finance, communications, legal, intellectual property, and advanced research functions. Scientific Background. All living organisms contain four basic biological molecules: nucleic acids, which include DNA and RNA; proteins; carbohydrates; and lipids. Biological molecules are typically much larger and more complex than common molecules. These structural differences make the analysis of biological molecules significantly more complex than the analysis of smaller compounds. Although all of these biological molecules are critical for a cell to function normally, key advances in therapeutics have historically come from an understanding of either proteins or DNA. DNA molecules provide instructions that ultimately control the synthesis of proteins within a cell, a process referred to as gene expression. DNA molecules consist of long chains of chemical subunits, called nucleotides. There are four nucleotides - adenine, cytosine, guanine, and thymine - often abbreviated with their first letters A, C, G, and T. DNA molecules consist of two long chains of nucleotides bound together to form a double helix. Genes are individual segments of these DNA molecules that carry the specific information necessary to construct particular proteins. Genes may contain from several dozen to tens of thousands of nucleotides. The entire collection of DNA in an organism, called the genome, may contain a wide range of nucleotides, including as few as 4 million nucleotides in the case of simple bacteria and 3.1 billion base pairs of nucleotides in the case of human beings. -4- RNA molecules are similar to DNA in structure and facilitate intracellular function. There are different types of RNA molecules, each of which has a different function. For example, messenger RNA, the most common form of RNA, acts as an intermediary between DNA and protein, transcribing the genetic code from DNA into protein. Principally driven by the "biotechnology revolution," and the increasing focus on DNA, researchers are developing a better understanding of DNA's role in human disease. An increased appreciation of how DNA ultimately determines the functions of living organisms has generated a worldwide effort to identify and sequence genes of many organisms, including the genes that make up the human genome. The Company believes the best scientific evidence to date indicates that the number of genes in the human genome that code for proteins is between 25,000 and 35,000, which is significantly less than had been previously thought. Individual research efforts in genetics generally fall into three broad categories: sequencing, genotyping, and gene expression. In sequencing procedures, the goal is to determine the exact order of the individual nucleotides in a DNA strand so that this information can be related to the genetic activity influenced by that piece of DNA. In genotyping, the goal is to determine a particular sequence variant of a gene and its particular association with an individual's DNA. Genotyping is not performed to determine the complete structure of the gene, but rather is performed to determine if the particular variant can be associated with a particular disease susceptibility or drug response. In gene expression studies, the goal is to determine whether a particular gene is expressed in a relevant biological tissue. As researchers learn more about DNA and genes, they are also developing a better understanding of the role of proteins in human disease through efforts in the field of proteomics, the study of proteins expressed, or encoded, by genes. Proteins are the products of genes and, after gene expression and modification, are believed to be the key drivers and mediators of cellular function and biological system activity. The understanding and treatment of disease today involves the study of genes and the proteins they code for, and frequently involves the measurement of a drug's ability to bind to specific proteins in the body. The Company believes that gene and protein research will increase as companies in the pharmaceutical and biotechnology industries seek to accelerate their drug discovery and development efforts. The Company also believes that ongoing drug discovery and development efforts will increase research of cells as researchers seek to further understand how drugs work in the body. These efforts are expected to create a demand for increased automation and efficiency in pharmaceutical and biotechnology laboratories. Applied Biosystems' products are designed to address this demand by combining the detection capabilities of analytical instruments with advances in automation and laboratory work-flow design. Knowledge Business; Online Marketing and Distribution Agreement with Celera Genomics. In April 2002, Applied Biosystems announced the formation of its new Knowledge Business for the purpose of developing and marketing products and services designed to meet the needs of life science researchers in performing specific biological analysis applications. Products and services under development or expected to be developed by the Knowledge Business include: genomic assays and related information, such as DNA sequence information and annotations linking researchers to relevant databases; products for human identification; products for agriculture, food, and environmental testing; products for functional proteomics, the study of protein function; cellular assays; as well as other information-rich products, services, and analytical tools. The Knowledge Business is focused on generating value to life science -5- customers through products and services with high information content that support improved experimental work-flows. Concurrently with Applied Biosystems' formation of the new Knowledge Business in April 2002, Celera Genomics and Applied Biosystems entered into a marketing and distribution agreement pursuant to which Applied Biosystems has become the exclusive marketer of Celera Genomics' Celera Discovery System and related information assets. Applied Biosystems is expected to integrate the Celera Discovery System and other genomic and biological information into the Knowledge Business. In exchange for marketing and distribution rights to the Celera Discovery System and other genomic and biological information and access to the Celera Discovery System and related information, Applied Biosystems will provide Celera Genomics with royalty payments on revenues generated by sales of certain products of the Knowledge Business from July 1, 2002, through the end of fiscal 2012. The royalty rate is progressive, up to a maximum of 5%, with the level of sales through fiscal 2008. The royalty rate becomes a fixed percentage of sales starting in fiscal 2009, and the rate declines each succeeding fiscal year through fiscal 2012. Assays-on-Demand, Assays-by-Design(SM), certain reagents for arrays, and new database subscriptions sold by the Knowledge Business are the products subject to royalties. Arrays are consumable devices used to perform analysis that are designed for, and ready for introduction into, an analytical instrument. Under the terms of the marketing and distribution agreement, Celera Genomics will receive all revenues under, and be responsible for all costs and expenses associated with, Celera Discovery System and related information contracts that were in effect on April 1, 2002, the effective date of the agreement, or which were entered into during a three-month transition period ended June 30, 2002 (as well as renewals of these contracts, if any). In addition, Applied Biosystems has agreed to reimburse Celera Genomics for any shortfall in earnings before interest, taxes, depreciation, and amortization from these contracts below $62.5 million (as well as renewals, if any) during the four fiscal years ending with the 2006 fiscal year if the shortfall is due to changes made to Celera Discovery System products by or at the request of Applied Biosystems, provided Celera Genomics otherwise continues to perform under these contracts. During the term of the marketing and distribution agreement (other than the transition period), Celera Genomics will not be marketing Celera Discovery System products and services to, and will not be contracting with, new customers. Products for the Genomics Market. Customers in the genomics market use systems for the analysis of nucleic acids for: basic research; pharmaceutical and diagnostic discovery and development; food and environmental testing; analysis of infectious diseases; and human identification and forensic analysis. Applied Biosystems has developed technologies and products to support key applications in sequencing, genotyping, and gene expression studies. The following is a description of Applied Biosystems' products for the genomics market: o PCR Products. Polymerase chain reaction ("PCR") is a process in which a short strand of DNA is copied multiple times, or "amplified," so that it can be more readily detected and analyzed. Applied Biosystems' PCR product line includes amplification instruments, known as thermal cyclers, several combination thermal cyclers and PCR detection systems, and reagents and software necessary for the PCR amplification and detection process. -6- Applied Biosystems' model 9700 dual 384-well sample thermal cycler is the highest capacity thermal cycler it offers. This instrument supports all key applications in genetic analysis and fills a significant market need for laboratories conducting high volume genomic research. This instrument is referred to as a "dual 384-well" instrument because it can simultaneously amplify samples on two plastic cards, referred to by researchers as microtiter plates, each having wells to hold 384 samples. Applied Biosystems also offers 60 and 96 sample thermal cyclers. Applied Biosystems is currently adapting its model 9700 dual 384-well thermal cycler to support a new proprietary microfluidic card system, rather than microtiter plates, for PCR-based assays, or analyses, such as TaqMan(R) assays described below. The microfluidic card system is being jointly developed with 3M Company. Applied Biosystems expects to complete development and commence sales of the modified model 9700 and the microfluidic cards in the 2003 fiscal year. Microfluidic cards are consumable laminated plastic sheets containing microscopic fluid channels and wells. This consumable, microscopic fluid channel design offers several advantages: o it requires less reagent for PCR amplification and analysis; o it enables researchers to introduce the initial sample to a single main fluid channel, which automatically routs the sample to the assay wells. Scientists using microtiter plates must either deposit samples into wells by hand, which is labor intensive and time consuming, or using robotics, which is expensive and complex; and o assay reagents can be deposited on the microfluidic cards before shipment to researchers, which eliminates a time consuming step in experiment setup. During the 2002 fiscal year, Applied Biosystems introduced new PCR reagent products for high-fidelity, or high accuracy, amplification of long DNA segments. These are useful in the determination of haplotypes, which are correlated patterns of inherited DNA mutations. Haplotypes are just beginning to be understood by scientists and be used in complex disease-gene association studies. Applied Biosystems' Sequence Detection Systems(TM) product line includes products both for sample preparation and for analysis. Applied Biosystems' sample preparation products take whole cells provided by a customer and extract DNA and/or RNA from them. This DNA or RNA, largely separated from the other molecules found in cells, can then be analyzed in instruments largely without interference from those other molecules, such as proteins. The Applied Biosystems model 6700 Automated Nucleic Acid Workstation automates this phase of preparation as well as the two other key phases, depositing the DNA and/or RNA samples on assay plates and sealing those plates to avoid contamination prior to analysis. The model 6700 is designed to substantially decrease the labor and cost involved in preparing DNA and RNA for analysis. During the 2002 fiscal year, Applied Biosystems introduced the ABI PRISM(R) 6100 Nucleic Acid PrepStation. This instrument shares some features of the model 6700, but is less automated and is designed for researchers seeking an economical alternative to higher performance, higher priced instruments. -7- Applied Biosystems offers two Sequence Detection System instruments for analysis of nucleic acids. The ABI PRISM 7900HT Sequence Detection System provides high throughput analysis of DNA for gene expression and genotyping studies. This is an automated analyzer that can process more than 250,000 samples in 24 hours for genotyping. Applied Biosystems is currently developing an optional module for the model 7900, allowing it to run assays implemented in the new proprietary microfluidic card format. Applied Biosystems expects to complete development and commence sales of the optional module for the model 7900 and the microfluidic cards in the 2003 fiscal year. Also, during the 2002 fiscal year, Applied Biosystems introduced the ABI PRISM 7000 Sequence Detection System. This instrument offers many of the same specifications as the model 7900, but in a less automated and lower throughput system designed for researchers seeking an economical alternative to higher performance and higher priced instruments. The Sequence Detection Systems product line uses TaqMan chemistry, a unique PCR technology designed by the Roche Group and developed by Applied Biosystems. TaqMan chemistry can be used both for measurement of RNA gene expression and for DNA genotyping. TaqMan chemistry detects the product of PCR amplification and quantifies the initial sample during the amplification process. This technique is referred to as quantitative real-time PCR. The Sequence Detection Systems instruments analyze a sample by measuring fluorescence resulting from the reaction of the TaqMan chemistry and the sample. This product line has been widely accepted in the pharmaceutical discovery research market. o Genetic Analysis Products. Genetic analysis uses electrophoresis to separate DNA molecules based on their differing lengths and the resulting differences in the speeds at which they will pass through a separation medium. Applied Biosystems' genetic analysis products, referred to as DNA sequencers or genetic analyzers, can be used to perform both DNA sequencing and fragment analysis. DNA sequencing is used to determine the exact order of nucleotides in a strand of DNA. Typically, fluorescent tags are used to generate labeled products, with each of the four different nucleotides labeled with a different color. The labeled fragments are run through an electrophoresis separation medium and detected. DNA fragment analysis is used to determine the size, quantity, or pattern of DNA fragments. DNA sequencing instruments have been used extensively to obtain the DNA sequence of the human genome and of other species. DNA sequencing instruments are also being used to help interpret genomes that have been sequenced. For example, as part of the Applera Genomics Initiative, Celera Genomics is in the process of resequencing approximately 25,000 genes from 39 individuals and a chimpanzee to find the differences between them. The Company believes this will reveal a larger number of SNPs with health related implications than are currently available. All of Applied Biosystems' genetic analysis instruments now use capillaries, which are tubes through which a DNA sample moves during electrophoresis. Capillary systems have higher throughput and greater automation than those based on slab-gels, an older and less efficient technology. During the 2002 fiscal year, Applied Biosystems introduced three new DNA sequencing instruments: the model 3730xl DNA Analyzer, a sequencer with 96 capillaries; the model 3730 DNA Analyzer, a sequencer with 48 capillaries; and the model 3100-Avant Genetic Analyzer, a -8- sequencer with 4 capillaries. In addition, Applied Biosystems offers the model 3100 Genetic Analyzer, a 16 capillary sequencer, and the model 310 Genetic Analyzer, a one capillary sequencer, as well as sequencing reagents and analysis software. Applied Biosystems has discontinued its model 377 DNA Sequencer, the last of its instruments to use slab-gel technology. The model 3730xl DNA Analyzer has superseded the 96 capillary model 3700 DNA Analyzer. Applied Biosystems expects to continue to offer the model 3700 only for a limited time during the remainder of 2002. At the time of its introduction in 1999, the model 3700 DNA Analyzer represented a significant advance in DNA sequencing technology because it could perform high throughput analysis of samples in unattended operation. The model 3700 DNA Analyzer was the principal instrument used by Celera Genomics for sequencing, and the Company believes the model 3700 DNA Analyzer is also the principal instrument used by the Human Genome Project for its sequencing projects. The model 3730xl DNA Analyzer offers significant increases in data quality, throughput, and cost effectiveness over the model 3700 DNA Analyzer. Because of these advances, the model 3730xl DNA Analyzer is able to read longer DNA fragments than its predecessor. For a given sequencing project, this means that customers will need to process fewer samples, lowering their preparation costs. Also, by incorporating a more sensitive optical design, the model 3730xl is able to complete the same analysis with lower reagent consumption per sample. The 48-capillary model 3730 DNA Analyzer, which incorporates the same technological advances as the model 3730xl, can be upgraded to become a 96-capillary model 3730xl. The 16-capillary model 3100 Genetic Analyzer was introduced in the 2000 fiscal year. It was designed for use by academic programs and commercial laboratories. It was the technological precursor of the model 3730 DNA Analyzer and incorporates many of the same features, though it has lower throughput and is less expensive. The 4-capillary model 3100-Avant Genetic Analyzer is a reduced capacity instrument derived from the model 3100 Genetic Analyzer, which has a lower cost than the model 3100. A model 3100-Avant Genetic Analyzer can be upgraded to a model 3100. Applied Biosystems offers several sequencing chemistries optimized for various customer requirements. Samples prepared using these chemistries are then analyzed on Applied Biosystems sequencer instruments. o DNA Synthesis. DNA synthesizers produce synthetic polymers of DNA, called oligonucleotides, for genetic analysis. The synthetic DNA is an essential reagent for PCR and DNA sequencing and is also used in drug discovery applications. DNA synthesis is used both by companies performing high throughput synthesis as a service as well as individual laboratories that synthesize DNA for their own use. Applied Biosystems offers several models of synthesizers and supporting reagents for the needs of its different customers. Applied Biosystems also provides custom synthesis, in which oligonucleotides are made to order and shipped to customers. o PNA. Applied Biosystems has a license, which is exclusive for certain applications, to manufacture and sell peptide nucleic acid ("PNA") for molecular biology research, diagnostic, and certain other applications. PNA resembles DNA in its chemical -9- structure except that it has a neutral peptide-like "backbone," whereas DNA has a negatively charged sugar phosphate backbone. The unique chemical structure of PNA enhances its affinity and specificity as a DNA or RNA probe, which is used to search for DNA and RNA sequences, which are complementary to the probe. PNA may be used in many areas, including basic research, pharmaceutical discovery, diagnostic development, and food and environmental testing. During the 2002 fiscal year, Applied Biosystems acquired additional rights to PNA technology, particularly exclusive rights in the field of diagnostics, through its acquisition of Boston Probes, Inc. and a party related to Boston Probes. o Genomic Assays. Through its Knowledge Business, Applied Biosystems offers its Assays-on-Demand product lines and its Assays-by-Design service. Assays are chemical tests used to measure a particular biochemical quantity. A genomic assay combines a set of pre-selected oligonucleotides, or synthetic polymers of DNA, with other analytical reagents that allow a researcher to measure differences between samples of genetic material. For example, a gene expression assay is a chemical test to measure how much RNA is being produced from a specific gene in the cells of a tissue sample. A genotyping assay is a chemical test to measure the presence or absence of a specific genetic sequence variation or mutation among DNA samples from different populations that can be used to correlate genetic traits with physical traits such as disease susceptibility or drug response. In July 2002, the Knowledge Business announced the launch of its Assays-on-Demand product line, a collection of assays for gene expression and genotyping that incorporates genome data into a tool that is ready to use for experimentation. Assays-on-Demand is the first commercial product resulting from the Applera Genomics Initiative, and Applied Biosystems believes that Assays-on-Demand is also the first commercial product line to incorporate genomic data from both the public and private sector human genome sequencing projects. The Knowledge Business also offers the Assays-by-Design service for the manufacture of custom-made assays. Researchers using the Assays-by-Design service supply the desired target and Applied Biosystems designs and manufactures an assay for that target using Applied Biosystems' proprietary software algorithms. Researchers traditionally have used "home brew" assays, which are assays that researchers both design and prepare themselves in their laboratories, a process that is relatively time consuming and expensive. Applied Biosystems believes that its Assays-on-Demand product line offers significant advantages to researchers compared with home brew assay design. These advantages include: o facilitation of experiments with many genes in parallel; o substantial reduction in experiment setup time; o decreased assay cost; and o creation of a set of standard and validated assays that enable comparisons of data between laboratories. -10- Applied Biosystems' current Assays-on-Demand and Assays-by-Design offerings are designed to be used with Applied Biosystems' Sequence Detection Systems PCR instruments. Products for the Proteomics Market. Genes code for proteins in biological organisms, and proteins are the key biological molecules that function in all aspects of living things such as growth, development, and reproduction. Differences in the types or amounts of specific proteins in biological systems are thought to be the primary differences between healthy and diseased systems or organs. A majority of drugs to treat human disease bind to and affect proteins. Proteins are large biological molecules made up of peptides, and peptides are made up of amino acids chemically linked together in long chains. Customers in the proteomics research market need systems for the analysis of proteins and peptides for the purpose of discovery of drug targets, protein therapeutics, and diagnostics. Applied Biosystems has developed products for the identification, characterization, and measurement of expression of proteins and peptides. The following is a description of Applied Biosystems' products for the proteomics market: o Mass Spectrometry. Mass spectrometry has become very useful for the analysis of large molecules of biological importance such as proteins. Analysis of proteins and other molecules by mass spectrometry involves the very accurate measurement of the mass, or size, of components in a sample, such as the measurement of the multiple different peptides that make up a defective protein. The technique involves the measurement of these molecules in instruments utilizing very high vacuum and sensitive electronics capable of measuring extremely fine differences in very small quantities of complex samples with multiple components. The technique of mass spectrometry requires three key elements be incorporated into the instrument: o a unique sample preparation process call ionization to charge the molecules for analysis; o mass analysis, which involves the separation of molecules based on their mass; and o detection, which is the electronic measurement of the mass and the relative amounts of molecule present. The market for mass spectrometry is served by a wide range of instrument types based on a variety of technologies for both ionization and mass analysis and combined together in different combinations in different instruments. The different instrument types, technologies, and combinations result in differing performance characteristics and price levels, and the suitability of any particular system for any researcher or research laboratory will depend on the nature of the work being performed and the capital budget of the researcher or research laboratory. Applied Biosystems sells instruments with ionization by either a laser based system called MALDI, which refers to matrix assisted laser desorption ionization, or a high voltage electric system called ESI, which refers to electrospray ionization. Applied Biosystems also has a variety of mass analysis technologies which separate and measure the mass of molecules in a sample. These include TOF, which refers to time of flight, which measures mass based on flight time in an electric field under vacuum; and quad, which refers to quadrupole, and ion trap, both of which measure -11- mass using radio frequencies and electric charges though using distinctly different technologies. Applied Biosystems and Applied Biosystems/MDS SCIEX Instruments, a joint venture between Applied Biosystems and MDS Inc. of Canada, supply a broad family of mass spectrometry products for the proteomics market that involve different combinations of these technologies. Customers select from this range of product types based on their workflows, sample types, preferences, and experience. Mass spectrometry products are often referred to or named based on their sample preparation and mass analysis technologies. For example, a "MALDI TOF" instrument is an instrument that uses MALDI to charge molecules for analysis and TOF for mass analysis. Also, mass spectrometry instruments are often referred to or named based on whether they are connected to liquid chromatography separation devices, which devices are used for sample preparation prior to analysis using mass spectrometry. An "LC/MS" system is a liquid chromatography device connected directly to a mass spectrometry instrument, and an "LC/MS/MS" system is a liquid chromatography device coupled with tandem mass spectrometry instruments. Tandem mass spectrometry enables a more detailed and accurate analysis of the components of the molecules being studied. The Applied Biosystems MALDI TOF product line includes the Voyager(TM) DE STR and DE PRO instruments and the Voyager based Proteomics Solution 1(TM) systems for automated protein identification. During the 2002 fiscal year, Applied Biosystems introduced the 4700 Proteomics Analyzer with TOF/TOF(TM) optics, which was designed to address the needs of proteomic researchers for increased speed and throughput as well as enhanced data quality and molecular information. This instrument incorporates a new high speed MALDI system with a tandem TOF mass analyzer, and Applied Biosystems believes it is the only instrument currently available that offers this combination of these advanced features. The ESI based product line from Applied Biosystems/MDS SCIEX Instruments includes the API QSTAR(R) Pulsar LC/MS/MS system which is a hybrid quadrupole - time of flight instrument (often referred to as a Qq-TOF instrument). The API QSTAR Pulsar LC/MS/MS system offers a choice of sample introduction technologies and therefore is a highly flexible life science mass spectrometer and proteomics instrument. During the 2002 fiscal year, Applied Biosystems/MDS SCIEX Instruments introduced the Q TRAP(TM) LC/MS/MS system, which uses ESI ionization. Applied Biosystems believes that this new mass spectrometer, which can be used for both protein and small molecule analysis, has performance advantages over competitively priced mass spectrometry instruments. Under the terms of the joint venture agreement with MDS Inc., Applied Biosystems has the exclusive worldwide distribution rights to the LC/MS systems manufactured for the joint venture by the MDS SCIEX Division of MDS Inc. for the analytical instruments market. In addition to the range of mass spectrometry instruments and software, Applied Biosystems has developed and commercialized the ICAT(TM) reagent technology of Dr. Ruedi Aebersold and others at the University of Washington. This chemistry technology, when utilized with various mass spectrometry systems, enables the quantitation and identification of proteins in experiments that compare normal and -12- diseased cells or samples. The ICAT reagent approach now offers laboratories a new way of running protein experiments using mass spectrometry and is the foundation of an expanding family of Applied Biosystems consumables, software, and systems for proteomics. o Biochromatography. Researchers studying complex protein samples through mass spectrometry must first prepare these samples and separate them into the components to be analyzed. A common and important technique for the separation, and in some cases purification, of biological molecules is generally referred to as biochromatography, a process by which molecules are separated according to one or more of their physical properties such as their size, shape, charge, or affinity to other molecules. Applied Biosystems' biochromatography products use liquid chromatography. Liquid chromatography is a process that separates molecules by passing them, in a liquid, across a stationary or solid medium such as chemically modified plastic beads specially designed for this process. Separation occurs because different molecules, which have different affinities to the beads, will migrate, or pass, across the beads at different rates. Instruments that perform liquid chromatography under high pressure are referred to as high pressure liquid chromatography, or HPLC, instruments. Applied Biosystems believes that its biochromatography products can be incorporated readily into the proteomics discovery process and the development and manufacturing process of protein based pharmaceutical products. Applied Biosystems also believes its biochromatography products offer productivity advantages, enabled by high speed separation combined with high capacity and resolution, over competitive product offerings. Applied Biosystems' patented Perfusion Chromatography(R) technology uses proprietary flow-through POROS(R) beads and BioCad(R) Chromatography workstations to reduce the time necessary for the purification and analysis of biological molecules. Applied Biosystems' Vision(TM) Workstation is a robotic-equipped chromatography instrument marketed to life science researchers that allows for the separation of proteins followed by analysis of the fractions collected in an unattended operation. Together, the automated platform and flow-through beads are designed to increase throughput and efficiency for the separation and purification of biological molecules. o Protein Sequencing and Synthesis. Proteins are large biological molecules and are made of peptides, and peptides are made of amino acids chemically linked together in long chains. Protein sequencers provide information about the sequence of amino acids that make up a given protein by chemically disassembling the protein and analyzing the amino acids. The Procise(R) Protein Sequencing system uses a protein sequencing chemistry known as Edman chemistry to sequence a peptide, one amino acid at a time, and in turn to identify or characterize the protein that contains the peptide. Synthetically produced peptides are used in understanding antibody reactions and as potential drugs or drug analogs. Applied Biosystems' 433A Peptide Synthesis system is designed for the quality synthesis of peptides, peptide analogs, and small -13- proteins. Applied Biosystems also manufactures and sells proprietary synthesis reagents and fine chemicals for use with this and other products. Products for the Drug Metabolism and Pharmacokinetics Market. Applied Biosystems has a number of mass spectrometry products that life science researchers use to analyze small molecules. Small molecules studied in life science research are typically smaller than peptides and include, for example: o drugs; o metabolites, the compounds resulting from the body's acting upon a drug, and present in bodily fluids such as blood or urine; and o other small biological molecules found naturally in the human body such as hormones, which affect physiological activity by sending signals to cells and organs, and cholesterol, which the body uses, for example, to build cells and produce hormones. Mass spectrometry instruments are especially important for pharmaceutical researchers studying pharmacokinetics, the measurement of the bodily absorption, distribution, metabolism, and excretion of drugs. Pharmacokinetic information is required by the United States Food and Drug Administration and other regulatory agencies for the approval of drugs. This application requires instruments which have a high resolution, or the ability to distinguish among different molecules with similar masses, and high sensitivity, or the ability to identify very small quantities of molecules, because the amounts of the drugs and their metabolites are very low and the mixtures are very complex. Researchers can perform the required pharmacokinetic analysis with LC/MS/MS systems that have been developed and refined by Applied Biosystems/MDS SCIEX Instruments. Applied Biosystems/MDS SCIEX Instruments offers a broad product line for small molecule and pharmacokinetics researchers. This product line includes the API 2000(TM), API 3000(TM), and API 4000(TM) systems, all of which are triple quadrupole LC/MS/MS instruments. These instruments offer a range of sensitivity at varying costs, the API 4000 system being the most sensitive. The API product line has been widely accepted by pharmaceutical researchers, and the Company believes the API 4000 system is the most sensitive mass spectrometry instrument available to this research market. Applied Biosystems/MDS SCIEX Instruments also offers API QSTAR Pulsar LC/MS/MS system, which is a quadrupole - - time of flight instrument (often referred to as a Qq-TOF instrument). This instrument offers higher resolution and mass accuracy, or the ability to accurately determine the mass of a molecule, than the API 2000, 3000, and 4000 systems, which is particularly useful to researchers seeking to identify unknown molecules such as metabolites. In the 2002 fiscal year, Applied Biosystems/MDS SCIEX Instruments introduced the Q TRAP(TM) LC/MS/MS system, which uses ESI ionization. Applied Biosystems believes that this new mass spectrometer, which can be used for both protein and small molecule analysis, has advantages over competitively priced mass spectrometry instruments. Cell Biology and Functional Proteomics Products. Within the Knowledge Business, a new product group has been formed to develop products for early phase drug discovery and development. This group is focused on products that reveal gene and protein function. This -14- group also intends to develop products that reveal the biological reactions that take place in cells, which researchers refer to as biological pathways. Some scientists believe that a better understanding of this information may enable structure based drug design, which refers to the design of drugs based on the molecular structure of the intended drug target. This method can be contrasted with the traditional approach to drug development, whereby researchers seek to determine whether chemicals may work as drugs through trial-and-error experimentation. The following is a description of the existing products of this group as well as certain products in development: o Cell Based Detection Systems. Through its strategic alliance with Becton, Dickinson and Company, Applied Biosystems has co-developed a fluorometric microvolume assay technology system, referred to as an FMAT system. This instrument system uses proprietary scanning technology to rapidly detect and measure fluorescence associated with objects as small as a single cell. This system was designed for pharmaceutical researchers needing a high throughput screening system for the analysis of cells. o Chemiluminescence Products. Applied Biosystems' high throughput screening products include reagents and chemiluminescent plate readers that measure light emitted by a sample. Chemiluminescence is the conversion of chemical energy stored within a molecule into light. Chemiluminescent substrates are substances that emit light in the presence of another target substance that is tagged, or chemically linked, with an enzyme. Chemiluminescent technology is used in life science research and commercial applications including drug discovery and development, clinical diagnostics, gene function study, molecular biology, and immunology research. Applied Biosystems also licenses its technology to companies selling bioanalytical and clinical diagnostic tests. o Functional Proteomics Products. During the 2002 fiscal year, Applied Biosystems entered into licensing, supply, and collaboration agreements with HTS Biosystems, Inc. to jointly develop and commercialize a functional proteomics system based on HTS Biosystems' high throughput affinity screening technology. This technology enables functional proteomics research, or the study of protein function, by analyzing proteins based on the way they bind to each other. Under these agreements, Applied Biosystems and HTS Biosystems also plan to jointly further develop and commercialize HTS Biosystems' existing surface plasmon resonance technology, referred to as SPR technology. SPR technology, used in functional genomics research, or the study of gene function, enables the high throughput study of protein interactions in a more cost-effective and efficient manner than other existing technologies. The study of protein interactions is an important part of functional genomics research because genes contain the code for proteins. Applied Genetic Analysis Products. Applied Biosystems has developed, and expects to continue to develop, products and services specially designed for specific markets, with a focus in the areas of human identification, and environmental and food testing. For example, Applied Biosystems develops systems that are used by crime laboratories and other agencies to identify individuals based on their DNA. Applied Biosystems believes these systems are most often used in cases of violent crime where DNA found at the crime scene is matched with DNA from suspects. The use of DNA in some criminal investigations may help -15- solve the crimes and may reduce the cost of the investigation, and the Company believes there is a growing recognition of the validity of the use of DNA testing and DNA databases for this purpose. The systems are also used in the identification of human remains at disaster sites. Also, Applied Biosystems is developing technologies for bacterial and fungal detection, characterization, and identification. It has developed the MicroSeq 16S rDNA Bacterial Sequencing Kit to accurately identify microorganisms. TaqMan Pathogen Detection Kits relying on Sequence Detection Systems instrument platforms are under development. These kits are being developed to rapidly detect bacterial contamination and to detect and analyze genetically modified organisms in foods. Information Products. The Knowledge Business currently offers, and intends to further develop, products that offer information content designed to assist research and development efforts. The information products currently offered by the Knowledge Business include the Celera Discovery System database, as well as software, for use in combination with the Knowledge Business assay products, designed to facilitate and make more efficient experiment design and biological data analysis. Informatics Products and Services. The Knowledge Business develops, markets, and distributes informatics software and services used to integrate and automate life sciences research, development, and manufacturing laboratories. The science of informatics seeks to blend biology and computing to transform massive amounts of data into useful information. Informatics technology that is specifically designed for biological information is commonly referred to as bioinformatics technology. Users of Knowledge Business informatics products and services are typically involved in gene mapping, drug discovery, drug development, and drug manufacturing. The Knowledge Business offers various software products for laboratory information management. These products are designed to facilitate sample tracking, data collection, data analysis, and data mining. The Knowledge Business also offers informatics consulting services through its Rapid Integration Solutions Program. These system integration services are designed for laboratories seeking greater automation and integration of lab processes. Knowledge Business consultants assist customers in selecting and integrating technologies to streamline and accelerate their genomics, proteomics, and high throughput screening activities. Marketing and Distribution. The markets for Applied Biosystems' products and services span the spectrum of the life sciences industry, including: basic human disease research; genetic analysis; pharmaceutical drug discovery, development, and manufacturing; human identification; agriculture; and food and environmental testing. Universities, government agencies, and other non-profit organizations engaged in research activities also use Applied Biosystems' products. Each of these markets has unique requirements and expectations that Applied Biosystems seeks to address in its product offerings. Applied Biosystems' customers are continually searching for processes and systems that can perform tests faster, more efficiently, and at lower costs. Applied Biosystems believes that its focus on automated and high throughput systems enables it to respond to these needs. The size and growth of Applied Biosystems' markets are influenced by a number of factors, including: o technological innovation in methods for analyzing biological data; -16- o government funding for basic and disease-related research, such as in heart disease, AIDS, and cancer; o application of biotechnology to basic agricultural processes; o increased awareness of biological contamination in food and the environment; and o research and development spending by biotechnology and pharmaceutical companies. In the United States, Applied Biosystems markets the largest portion of its products directly through its own sales and distribution organizations, although certain products are marketed through independent distributors and sales representatives. Sales to major markets outside of the United States are generally made by Applied Biosystems' foreign-based sales and service staff, but are also made directly from the United States to foreign customers in some cases. In some foreign countries, sales are made through various representative and distributorship arrangements. Applied Biosystems owns or leases sales and service offices in the United States and in foreign countries through its foreign sales subsidiaries and distribution operations. None of Applied Biosystems' products are distributed through retail outlets. Raw Materials. There are no specialized raw materials that are particularly essential to the operation of Applied Biosystems' business. Applied Biosystems' manufacturing operations require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials, and other supplies, some of which are occasionally found to be in short supply. Applied Biosystems has multiple commercial sources for most components and supplies, but it is dependent on single sources for a limited number of such items, in which case Applied Biosystems normally secures long-term supply contracts. In some cases, if a supplier discontinues a product, it could temporarily interrupt the business of Applied Biosystems. Patents, Licenses, and Franchises. Applied Biosystems' products are based on complex, rapidly developing technologies. Some of these technologies are covered by patents owned by Applied Biosystems, and others are owned by third parties and used by Applied Biosystems under license. Applied Biosystems has pursued a policy of seeking patent protection in the United States and other countries for developments, improvements, and inventions originating within its organization that are incorporated into Applied Biosystems' products or that fall within its fields of interest. Applied Biosystems' business depends on its ability to continue developing new technologies which can be patented, or licensing new technologies from third parties that own patents in such technologies. The rights that Applied Biosystems considers important to its current business include the following: o Applied Biosystems has rights to PCR technology under a series of agreements with the Roche Group, which owns the patents covering the PCR process. The first of these patents expires in 2005 in the United States, and in 2006 in Europe and certain other jurisdictions. In July 2000, Applied Biosystems and the Roche Group agreed to expand the markets each company serves with products incorporating PCR. This arrangement will allow both companies to develop and market products for all potential uses of PCR. Additionally, Applied Biosystems continues to distribute products the Roche Group manufactures for research and non-diagnostic applications. -17- o Applied Biosystems also licenses rights under certain patents assigned to the California Institute of Technology relating to DNA sequencing. These patents expire between 2009 and 2018 in the United States, and in 2005 in Europe and certain other jurisdictions. o Applied Biosystems also licenses rights under certain patents assigned to the University of Colorado relating to oligonucleotide synthesis. The last of these patents in the United States will expire in 2007. The corresponding foreign patents have expired except for certain patents in Canada and Mexico, which expire in 2003. From time to time, Applied Biosystems has asserted that various competitors and others are infringing its patents; and similarly, from time to time, others have asserted that Applied Biosystems was or is infringing patents owned by them. These claims are sometimes settled by mutual agreement on a satisfactory basis and result in the granting of licenses by or to Applied Biosystems. However, the Company cannot make any assurances as to the outcome of any pending or future claims. Applied Biosystems has established a licensing program that provides industry access to certain of its intellectual property. Backlog. Applied Biosystems' total recorded backlog at June 30, 2001, was $202.3 million, which included $5.0 million of orders from Celera Genomics. Applied Biosystems' total recorded backlog at June 30, 2002 was $235.8 million, which included $4.6 million of orders from Celera Genomics and $3.0 million of orders from Celera Diagnostics. It is Applied Biosystems' general policy to include in backlog only purchase orders or production releases that have firm delivery dates within one year. Recorded backlog may not result in sales because of cancellation or other factors. It is anticipated that all orders included in the current backlog will be delivered before the close of fiscal year 2003. Competition. The markets in which Applied Biosystems operates are highly competitive and are characterized by the application of advanced technology. A number of Applied Biosystems' competitors are well known manufacturers with a high degree of technical proficiency. In addition, competition is intensified by the ever-changing nature of the technologies in the industries in which Applied Biosystems is engaged. Applied Biosystems' principal competition comes from specialized manufacturers that have strengths in narrow segments of the life science markets. Applied Biosystems competes principally in terms of the breadth and quality of its product offerings, and its service and distribution capabilities. While the absence of reliable statistics makes it difficult to determine Applied Biosystems' relative market position in its industry segment, Applied Biosystems believes it is one of the principal suppliers in its fields, marketing a broad line of instruments and life science systems. Research, Development, and Engineering. Applied Biosystems is actively engaged in basic and applied research, development, and engineering programs designed to develop new products and to improve existing products. Research, development, and engineering expenses for Applied Biosystems totaled $141.2 million in fiscal 2000, $184.5 million in fiscal 2001, and $219.6 million in fiscal 2002. The Company expensed $255.6 million in fiscal 2000, $323.4 -18- million in fiscal 2001, and $381.9 million in fiscal 2002 for Company-sponsored research, development, and engineering activities. Applied Biosystems' new products generally originate from four sources: internal research and development programs; external collaborative efforts with technology companies and individuals in academic institutions; devices or techniques that are generated in customers' laboratories; and business and technology acquisitions. Research and development projects at Applied Biosystems include: the development of improved electrophoresis techniques for DNA analysis; real-time PCR for nucleic acid quantification; innovative approaches to cellular analysis; sample preparation; information technologies; and mass spectrometry. Environmental Matters. Applied Biosystems is subject to federal, state, and local laws and regulations regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, in those jurisdictions where Applied Biosystems operates or maintains facilities. Applied Biosystems does not believe that any liability arising under, or compliance with, environmental laws or regulations will have a material effect on its business, and no material capital expenditures are expected for environmental control. Celera Genomics Group Overview. Celera Genomics is engaged principally in integrating advanced technologies to discover and develop new therapeutics. Celera Genomics intends to leverage its capabilities in proteomics, bioinformatics, and genomics to identify and validate drug targets and diagnostic marker candidates, and to discover and develop novel therapeutic candidates. Celera Genomics expects to use these capabilities with its molecular and cell biology, medicinal and computational chemistry, pharmacology, and other drug development technologies to optimize the potency, selectivity, and physical properties of new drug candidates. Currently, Celera Genomics has collaborations with large pharmaceutical companies and internal programs for discovering therapeutics for inflammatory diseases, including asthma, osteoporosis, and rheumatoid arthritis. Celera Genomics also has internal programs for discovering therapeutics for the treatment of thrombosis and various types of cancer, including pancreatic and lung cancer. Celera Genomics was originally formed for the purpose of generating and commercializing information to accelerate the understanding of biological processes and to assist the research endeavors of pharmaceutical, biotechnology, and life science research entities. A key component of Celera Genomics' original business strategy was the development and sale of its Celera Discovery System, an online information and discovery system through which users can access Celera Genomics' genomic and related biological and medical information. Development of Therapeutics Business. During its 2001 fiscal year, Celera Genomics announced that it was expanding its operations to include therapeutics discovery and development in addition to its online database business. During the 2002 fiscal year, Celera Genomics completed a number of steps, including the following, to further develop its therapeutics business and establish that business as its primary focus: o In November 2001, Celera Genomics completed the acquisition of Axys, a small molecule drug discovery and development company. Celera Genomics believes that -19- Axys' medicinal and structural chemistry and biology capabilities and preclinical programs will accelerate the development of its therapeutics business. o Celera Genomics announced a number of important management changes. In January 2002, Celera Genomics announced the resignation of J. Craig Venter, Ph.D. as its President, and in April 2002, Celera Genomics announced the appointment of Kathy Ordonez, who is also President of Celera Diagnostics, as his replacement. Before her affiliation with the Company, Ms. Ordonez served as the President and Chief Executive Officer of Roche Molecular Systems for nine years. Also in January 2002, Celera Genomics announced the appointment of David Block, M.D., as the Chief Operating Officer of its therapeutics business. Prior to his employment by the Company, Dr. Block was employed by DuPont Pharmaceuticals in various capacities for approximately 12 years, including Vice President for International Operations. In July 2002, Celera Genomics announced the appointment of Robert Booth, Ph.D., as its Senior Vice President of Research and Development to lead its therapeutics research and development efforts. Prior to his appointment by the Company, Dr. Booth was employed by Hoffmann-La Roche in various capacities for approximately 13 years, including as Senior Vice President responsible for all research and early development of inflammatory, viral, respiratory, and bone disease products. o In April 2002, Celera Genomics and Applied Biosystems entered into a marketing and distribution agreement pursuant to which Applied Biosystems has become the exclusive marketer of Celera Genomics' Celera Discovery System and related information assets as part of Applied Biosystems' new Knowledge Business. The agreement is expected to enable Celera Genomics' executive team to focus on therapeutic discovery and development. o Celera Genomics substantially increased the number of research and development employees assigned to therapeutic programs. Also, in June 2002, Celera Genomics announced the implementation of a restructuring of its organization intended to focus the group's resources on therapeutic discovery and development. The restructuring also involved the reduction of infrastructure, including personnel and positions, previously built to support the group's sequencing activities and online/information business. Celera Genomics may pursue both small molecule and antibody therapeutics. Small molecule therapeutics are low molecular weight synthetic pharmaceuticals, whereas antibody therapeutics are generally large molecular weight protein-based biological compounds. Celera Genomics plans to commercialize discoveries, either at the target or therapeutic level, through internal product development, collaborations, or licensing of intellectual property. Scientific Approach to Discovery. Celera Genomics expects its scientific approach in therapeutic discovery to be as follows: o Proteomics. Celera Genomics expects that its discovery program will use high throughput proteomics to identify proteins which are associated with the onset or progression of disease, and which may therefore be potential targets for therapeutic intervention or markers for disease detection or progression. In the 2002 fiscal year, -20- Celera Genomics completed the construction of its proteomics facility. Celera Genomics is currently scaling up the operations of the proteomics facility, which is expected to become fully operational during the Company's 2003 fiscal year. Using its proteomics technology, Celera Genomics plans to generate and identify proteins as therapeutic targets in the areas of pancreatic and lung cancer. Celera Genomics also intends to initiate a proteomics program for an additional disease during the 2003 fiscal year. Celera Genomics plans to evaluate differential protein patterns in biological samples from both healthy and diseased individuals. Celera Genomics expects to evaluate sera samples, which are readily available, as well as tissue samples, which are less readily available. Celera Genomics has designed advanced methods to separate cellular and subcellular components of biological samples and to capture from these components proteins belonging to druggable target classes. Druggable target classes are related proteins which in the past have been successfully used in the pharmaceutical industry as points of therapeutic intervention. Celera Genomics intends to use advanced chromatography and mass spectrometer systems that are amenable to high throughput quantitation and identification of proteins. Celera Genomics expects to use its assembled human and mouse genomes and proprietary software and algorithms to identify proteins associated with diseases. Celera Genomics expects to use a variety of methodologies to validate targets and markers. Validation refers to the process whereby the biological relevance of a particular target or marker, and, therefore, its potential therapeutic or diagnostic relevance, is confirmed. Celera Genomics intends to use immunohistochemistry, or the identification of proteins in tissues and cells using antibody reagents, to refine its understanding of therapeutic targets and diagnostic markers of interest and, for example, to identify expression profiles that would support or preclude meaningful progression of the drug targets. For targets and markers of interest, Celera Genomics intends to perform tests to determine their relevance across a broad range of tissues and diseases. Celera Genomics has obtained and expects to continue accessing further validation capabilities through collaborations. For example, in 2001, Celera Genomics entered into a collaboration with SomaLogic, Inc. to access its aptamer technology, which is used to identify protein expression and function. o Bioinformatics. Celera Genomics believes that its bioinformatics infrastructure will accelerate the discovery process of identifying targets and markers. For example, Celera Genomics expects to develop the capability to perform simulated, computer-based experimentation, which Celera Genomics believes would minimize or eliminate the need to perform more labor intensive experiments in the laboratory. Also, Celera Genomics believes that it can develop proprietary algorithms for use in its large scale computing infrastructure for the extraction of data from proteomics experiments and the integration of this data with genome, gene expression, and protein characterization information, scientific literature, and the patent status of possible targets or markers. Celera Genomics believes the application of these algorithms to this data could be used to facilitate the identification of targets and markers. However, Celera Genomics' ability to develop these capabilities is unproven, and, if developed, their utility in the therapeutics discovery and development process is uncertain. -21- o Genomics. As a complementary approach to the proteomics methods described above, Celera Genomics expects to use genomics to identify therapeutic targets. Celera Genomics intends to further characterize novel genes, including those for which the Company has been granted patents or for which it has filed patent applications, by conducting in vitro cell studies and in vivo animal studies. In vitro refers to testing or other activities performed outside the living body, and in vivo refers to testing or other activities performed in the living body. Celera Genomics expects to incorporate its bioinformatics capabilities into this process. After the functions of genes are determined, Celera Genomics intends to establish the priorities of these genes or their gene products as targets based on the families of proteins they encode, the association of the expression of these genes with specific diseases, and the functional importance of the genes products to cells. In 2001, Celera Genomics entered into a collaboration with Isis Pharmaceuticals, Inc. to add to its capabilities in this area. The collaboration provides Celera Genomics with access to Isis Pharmaceuticals' antisense technology, which is used to characterize the function of selected genes. Although Celera Genomics intends to use scientific methods that may result in diagnostic discoveries, Celera Genomics has not yet determined how it would seek to commercialize those discoveries, if any. They could be commercialized through Celera Diagnostics or through other arrangements. Axys Acquisition. In November 2001, Celera Genomics completed the acquisition of Axys, a small molecule drug discovery and development company. Celera Genomics believes that Axys' medicinal and structural chemistry and biology capabilities and preclinical programs will accelerate the development of its therapeutic discovery business for the following reasons: o Axys' medicinal chemistry and biology capabilities are expected to provide additional capabilities for in vivo and in vitro target validation, as well as chemistry based validation through hit-based functionation, which is the identification of function through interaction with molecules of known biological activity. o Celera Genomics expects to benefit from Axys' expertise in the fields of small molecule structure based drug design, medicinal and combinatorial chemistry, and pharmacokinetic and safety evaluation. Axys has developed a general expertise in proteases, a known druggable class of proteins. Proteases are enzymes that break down certain chemical bonds in proteins and are essential to the body's physiological processes such as inflammation. Proteases are generally classified by how they break down a protein's chemical bonds. Cysteine and serine proteases are two classes of these enzymes. o Axys has existing drug discovery partnerships in the area of inflammatory diseases, including (1) a collaboration with Merck & Co. to develop small molecule inhibitors of cathepsin K, a cysteine protease, for the treatment of osteoporosis, (2) a collaboration with Aventis Pharmaceuticals to develop inhibitors of cathepsin S, another type of cysteine protease, for the treatment of rheumatoid arthritis, chronic obstructive pulmonary disease, atherosclerosis, allergic rhinitis, and asthma, and (3) a collaboration with Bayer AG to develop inhibitors of tryptase, a serine protease, for the treatment of asthma. -22- o Axys also has non-partnered preclinical programs, including a program to develop inhibitors of Factor VIIa, a serine protease, for the treatment of deep vein thrombosis and cathepsin F, a cysteine protease, for the treatment of asthma and other inflammatory diseases. Scientific Progress Relating to Sequencing Efforts. In June 2000, Celera Genomics and the Human Genome Project each announced the "first assembly" of the human genome, and in April 2001, Celera Genomics announced the assembly of the mouse genome. Assembly is the process by which individual fragments of DNA, the molecule that forms the basis of the genetic material in virtually all living organisms, are pieced together into their appropriate order and placed or positioned on each chromosome within the genome. Celera Genomics' first assembly of the human genome covered approximately 95% of that genome, and its assembly of the mouse genome covered approximately 99% of that genome. Celera Genomics released a detailed ordered consensus human genome assembly in the journal Science in February 2001. Celera Genomics intends to continue updating the assembly of the human and mouse genomes as it continues to annotate these genomes, and to incorporate this information into its Celera Discovery System database. Annotation is the process of assigning features or characteristics to each chromosome. Each gene on each chromosome is given a name, its structural features are described, and proteins encoded by genes are classified into possible or known function. In sequencing and assembling the human and mouse genomes, Celera Genomics used an advanced strategy known as "shotgun sequencing." This technique uses a combination of Applied Biosystems' high throughput sequencing equipment to sequence DNA fragments and powerful computers and proprietary software algorithms to assemble them. Celera Genomics believes that its shotgun sequencing strategy has accelerated the generation of genomic information and the discovery of new genes. This information includes rarely expressed genes, predicted proteins, and other factors, such as regulatory regions, that control gene expression. This data forms the basis of Celera Genomics' human genome database. Information from this database is available through the Celera Discovery System, which is currently being marketed by the Applied Biosystems Knowledge Business. As part of the Applera Genomics Initiative, Celera Genomics has prioritized and is resequencing approximately 25,000 genes from 39 individuals and a chimpanzee, which the Company believes will reveal a larger number of SNPs with health related implications than are currently available. SNPs are naturally occurring genetic variations within a genome that scientists believe can be correlated with susceptibility to disease, disease prognosis, therapeutic efficiency, and therapeutic toxicity. Celera Genomics has identified over 100,000 SNPs to date, a majority of which Celera Genomics believes have not been previously identified by other researchers. Celera Genomics intends to use this SNP data in its internal discovery efforts to improve the prediction of the efficacy and toxicity of drug candidates. Online Marketing and Distribution Agreement with Applied Biosystems; Celera Discovery System. In April 2002, Celera Genomics and Applied Biosystems entered into a marketing and distribution agreement pursuant to which Applied Biosystems has become the exclusive marketer of Celera Genomics' Celera Discovery System and related information assets. Applied Biosystems is expected to integrate the Celera Discovery System and other genomic and biological information into its new Knowledge Business. The agreement is expected to enable Celera Genomics' executive team to focus on therapeutics discovery and development. -23- In exchange for marketing and distribution rights to the Celera Discovery System and other genomic and biological information and access to the Celera Discovery System and related information, Applied Biosystems will provide Celera Genomics with royalty payments on revenues generated by sales of certain products of the Knowledge Business from July 1, 2002, through the end of fiscal 2012. The royalty rate is progressive, up to a maximum of 5%, with the level of sales through fiscal 2008. The royalty rate becomes a fixed percentage of sales starting in fiscal 2009, and the rate declines each succeeding fiscal year through fiscal 2012. Assays-on-Demand, Assays-by-Design, certain reagents for arrays, and new database subscriptions sold by the Knowledge Business are the products subject to royalties. Whether Celera Genomics actually receives any royalties from Applied Biosystems under this agreement, and the amount of these royalties, depends on Applied Biosystems' ability to successfully commercialize Knowledge Business products subject to the royalty. The Knowledge Business is an emerging business, and Applied Biosystems has not proven its ability to successfully commercialize these products. Celera Genomics believes that in order for the Knowledge Business to be successful, Applied Biosystems may have to devote significant resources to researching, developing, marketing, and distributing Knowledge Business products and services. However, Celera Genomics has no control over the amount and timing of Applied Biosystems' use of its resources, including for products subject to Celera Genomics' royalty. In addition, the market for these products is intensely competitive, and there can be no assurance that there will be market acceptance of the utility and value of the product offerings of the Knowledge Business. Under the terms of the marketing and distribution agreement, Celera Genomics will receive all revenues under, and be responsible for all costs and expenses associated with, Celera Discovery System and related information contracts that were in effect on April 1, 2002, the effective date of the agreement, or which were entered into during a three-month transition period ended June 30, 2002 (as well as renewals of these contracts, if any). The revenue anticipated by Celera Genomics under these contracts could be adversely impacted as a result of changes made to Celera Discovery System products by or at the request of Applied Biosystems pursuant to the marketing and distribution agreement. However, Applied Biosystems has agreed to reimburse Celera Genomics for any shortfall in earnings before interest, taxes, depreciation, and amortization from these contracts below $62.5 million (as well as renewals, if any) during the four fiscal years ending with the 2006 fiscal year if the shortfall is due to changes made to Celera Discovery System products by or at the request of Applied Biosystems, provided Celera Genomics otherwise continues to perform under these contracts. During the term of the marketing and distribution agreement (other than the transition period), Celera Genomics will not be marketing Celera Discovery System products and services to, and will not be contracting with, new customers. Accordingly, except for the anticipated revenue under Celera Discovery System contracts in effect on June 30, 2002 and renewals of these contracts, if any, and Applied Biosystems' corresponding reimbursement obligation, Celera Genomics does not expect any revenues from Celera Discovery System and related products and services other than the potential royalty payments from Applied Biosystems under the marketing and distribution agreement. Although under certain contracts with existing Celera Discovery System customers, Celera Genomics is entitled to milestone payments or future royalties based on products developed by its customers, Celera Genomics believes these arrangements are unlikely to produce any significant revenue for the group. -24- Celera Genomics will continue to have access to all data, which may include formats not available to third parties, and other intellectual property associated with the Celera Discovery System for its therapeutic programs. Celera Genomics expects that such data and intellectual property will have a significant role in its product research and development. Raw Materials. Celera Genomics' operations require a variety of raw materials, such as chemical and biochemical materials and other supplies, some of which are occasionally found to be in short supply. Any interruption in the availability of these materials could adversely affect Celera Genomics' operations. In particular, Celera Genomics needs access to human and other tissue samples from diseased and healthy individuals, other biological materials, and related clinical and other information, which may be in limited supply. Celera Genomics may not be able to obtain or maintain access to these materials and information on acceptable terms. In addition, government regulation in the United States and foreign countries could result in restricted access to, or use of, human and other tissue samples. If Celera Genomics loses access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on its use of the information generated from tissue samples, its business may be harmed. Patents, Licenses, Franchises and other Intellectual Property. Through its internal research programs and collaborative programs, Celera Genomics anticipates that it will develop an increasing portfolio of intellectual property. Celera Genomics may use this intellectual property in its internal development programs or may license such intellectual property to third party collaborators or customers for some combination of license fees, milestone payments, and royalty payments. Celera Genomics' business and competitive position are dependent, in part, on its ability to protect its database information, its software technology, its novel DNA sequence discoveries, its SNP discoveries, its protein discoveries, its therapeutic discoveries, and its diagnostic discoveries using a variety of intellectual property mechanisms. In addition to seeking patent protection, Celera Genomics may rely on copyright and trade secret laws to protect its discoveries. Celera Genomics recognizes that many of the intellectual property laws are directly suitable for application to such discoveries while other protections may not be available or extend to cover genomic and/or proteomic-based discoveries. Celera Genomics has sought and expects to continue seeking patent protection for inventions relating to its DNA sequence, SNP, protein, therapeutic, and diagnostic discoveries. Celera Genomics' current plan is to apply for patent protection for novel DNA sequences, SNPs, proteins, and novel uses for these DNA sequences, SNPs and proteins, as well as therapeutic and diagnostic agents it discovers or develops. Although obtaining patent protection based on DNA sequences, SNPs, and proteins might enhance Celera Genomics' business, Celera Genomics does not believe that its commercial success will be materially dependent on its ability to do so. However, Celera Genomics' failure to receive patents for its therapeutic and diagnostic discoveries could adversely affect the commercial value of such discoveries. Currently, Celera Genomics has patent applications claiming its DNA sequence, SNP, protein, therapeutic, and diagnostic discoveries that are pending in the United States and in foreign jurisdictions and currently owns 55 United States patents. The issuance of patents is uncertain worldwide. Furthermore, laws relating to the patenting of novel DNA sequences and proteins are currently under review and revision in many -25- countries. Moreover, publication of information concerning partial DNA sequences prior to the time that Celera Genomics applies for patent protection may affect Celera Genomics' ability to obtain patent protection. In addition, patent claims to a partial sequence may not cover a full-length sequence inclusive of that partial sequence. Currently, the United States Patent and Trademark Office requires disclosure in the patent application of a specific and substantial and credible utility in order to support the patentability of a DNA sequence or protein. In January 1997, TIGR, in collaboration with the National Center for Biological Information, disclosed full-length DNA sequences assembled from expressed sequence tags available in publicly accessible databases or sequenced at TIGR. The National Human Genome Research Institute also plans to release sequence information to the public. These disclosures might limit the scope of Celera Genomics' claims or make subsequent discoveries related to certain DNA sequences and proteins unpatentable. While Celera Genomics believes that the publication of sequence data will not preclude it or others in all instances from obtaining patent protection on certain DNA sequences and proteins, there can be no assurances that these publications will not affect the ability to obtain patent protection. In February 2001, Celera Genomics disclosed an assembly of the human genome and gene/protein annotations in a publicly accessible database at Celera Genomics. The federally funded Human Genome Project also released a human genome sequence assembly to the public on this date, and has announced that a finished version of its human genome sequence will be completed in 2003. These disclosures might limit the scope of Celera Genomics' claims or make subsequent discoveries related to certain DNA sequences and proteins unpatentable. While Celera Genomics believes that the publication of sequence data will not preclude it or others in all instances from obtaining patent protection on certain DNA sequences and proteins, there can be no assurances that these publications will not affect the ability to obtain patent protection. Celera Genomics also cannot ensure that any changes to, or interpretations of, the patent laws will not adversely affect its patent position. Celera Genomics anticipates that there may be significant litigation regarding genomic patent and other intellectual property rights. If Celera Genomics becomes involved in such litigation, it could consume a substantial portion of Celera Genomics' resources, and Celera Genomics may not ultimately prevail. If Celera Genomics does not prevail in a patent litigation dispute, it may be required to pay damages or royalties or to take measures to avoid any future infringement, or Celera Genomics may not be able to stop a competitor from making, using, or selling similar products or technology. Celera Genomics also intends to rely on trade secret protection for its confidential and proprietary information. Celera Genomics believes it has developed proprietary procedures for sequencing and analyzing genes and for assembling the genes in their naturally occurring order. In addition, Celera Genomics believes it has developed novel methods for searching and identifying particularly important regions of genetic information or whole genes of interest. Celera Genomics currently protects these methods and procedures as trade secrets and has sought patent protection for some of the proprietary methods although no such patents have yet been issued. Celera Genomics has sought and plans to continue seeking intellectual property protection, including copyright protection, for the Celera Discovery System, including its content, and the software and methods it creates to manage, store, analyze, and search novel information. Celera Genomics has taken security measures to protect its databases, including entering into confidentiality agreements with employees and academic collaborators who are -26- provided or have access to confidential or proprietary information. Celera Genomics continues to explore ways to further enhance the security for its data, including copyright protection for its databases. Backlog. Celera Genomics' total recorded backlog at June 30, 2001 was $66.1 million. Celera Genomics' total recorded backlog at June 30, 2002 was $81.5 million. It is Celera Genomics' general policy to include in backlog only purchase orders that have firm delivery dates within one year. Recorded backlog may not result in sales because of cancellation or other factors. It is anticipated that all orders included in the current backlog will be delivered before the close of fiscal year 2003. Competition. The pharmaceutical industry is competitive and evolving. There is intense competition among pharmaceutical and biotechnology companies attempting to discover candidates for potential new therapeutic products. These companies may: o develop new therapeutic products in advance of Celera Genomics; o develop therapeutic products which are more effective or more cost-effective than those developed by Celera Genomics; o obtain regulatory approvals of their therapeutic products more rapidly than Celera Genomics; or o obtain patent protection or other intellectual property rights that would limit Celera Genomics' ability to develop and commercialize therapeutic products. Research and Development. Celera Genomics is actively engaged in basic and applied research and development programs designed to develop new therapeutic products and support the commitments of existing online/information contracts. Research and development expenses for Celera Genomics totaled $148.6 million in fiscal 2000, $164.7 million in fiscal 2001, and $132.7 million in fiscal 2002. The Company expensed $255.6 million in fiscal 2000, $323.4 million in fiscal 2001, and $381.9 million in fiscal 2002 for Company-sponsored research, development, and engineering activities. Celera Genomics' new products are expected to originate from three sources: internal research and development programs, external collaborative efforts or alliances, and business and technology acquisitions. Environmental Matters. Celera Genomics is subject to federal, state, and local laws and regulations regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, in those jurisdictions where Celera Genomics operates or maintains facilities. Celera Genomics does not believe that any liability arising under, or compliance with, environmental laws or regulations will have a material effect on its business, and no material capital expenditures are expected for environmental control. Celera Diagnostics, a Joint Venture between Applied Biosystems and Celera Genomics Overview. Celera Diagnostics is engaged principally in the discovery, development, and commercialization of novel human diagnostic products. These products are expected to provide genetic information which may lead to earlier and more effective treatment of disease. Celera -27- Diagnostics expects that the primary users of its products will be reference laboratories, hospitals, and medical clinics worldwide that perform diagnostic testing for human health care. During the 2001 fiscal year, Celera Diagnostics was formed and moved into its principal facilities in Alameda, California. During the 2002 fiscal year, its first full fiscal year of operations, it took a number of steps, including the following, to develop its business: o it assembled an experienced management team; o it integrated the pre-existing molecular diagnostics business contributed by Applied Biosystems in connection with the formation of Celera Diagnostics; o it substantially increased its staff in the area of discovery research, product development, manufacturing, quality, regulatory affairs, and marketing; o it completed construction of its high-volume discovery laboratories for conducting genotyping and gene expression research; o it initiated its first gene-disease association study, which is being conducted to identify genetic markers that correlate with Alzheimer's disease; o it entered into a strategic alliance with Abbott Laboratories to develop, manufacture, and market a broad range of in vitro molecular diagnostic products, or molecular diagnostic products that are used for testing outside of the living body, for disease detection, disease progression monitoring, and therapy selection; and o it submitted its first regulatory filing to the United States Food and Drug Administration for an HIV diagnostic product. Summary of Joint Venture Agreement. Celera Diagnostics was formed during the 2001 fiscal year as a joint venture between Applied Biosystems and Celera Genomics. In connection with the formation of Celera Diagnostics, Applied Biosystems contributed, among other things, its then-existing molecular diagnostics business to Celera Diagnostics, and Celera Genomics contributed, among other things, access to its genome databases. Also, Celera Genomics agreed to fund all of the cash operating losses of Celera Diagnostics up to a maximum of $300 million ("initial losses"), after which, operating losses, if any, will be shared equally by Applied Biosystems and Celera Genomics. Celera Diagnostics' profits, if any, will be shared in the ratio of 65 percent to Celera Genomics and 35 percent to Applied Biosystems until the cumulative profits of Celera Diagnostics equal the initial losses. Subsequently, profits and losses and cash flows would be shared equally between the groups. Capital expenditures and working capital requirements of Celera Diagnostics will be funded equally by the groups. Applied Biosystems will reimburse Celera Genomics for all tax benefits generated by Celera Diagnostics to the extent such tax benefits are utilized by Applied Biosystems. In the event of liquidation of the assets attributable to Celera Diagnostics, including sale of these assets, the proceeds upon liquidation would be distributed to Applied Biosystems and Celera Genomics based on a proportion similar to their relative investment accounts. If the proceeds upon liquidation are in excess of the groups' combined investment accounts, the excess liquidation proceeds would be shared in the ratio of 65 percent to Celera Genomics and 35 percent to Applied Biosystems until the cumulative amount of the distributed excess proceeds equals the initial losses funded by Celera -28- Genomics. Any additional liquidation proceeds would be allocated equally to Celera Genomics and Applied Biosystems. Research and Development; Abbott Laboratories Strategic Alliance. During the 2002 fiscal year, Celera Diagnostics first focused its activities on staffing and completing its high-volume discovery laboratories, and then began research and development of products that detect infectious diseases and human genetic disorders. Celera Diagnostics expects to expand these research and development efforts, and in particular, it intends to leverage its genotyping and gene expression capabilities, and the SNP data from the Applera Genomics Initiative, to perform large-scale gene-disease association studies to identify new diagnostic markers. Celera Diagnostics' first gene-disease association study, involving Alzheimer's disease, is currently underway, and several additional studies in cancer, cardiovascular disease, and inflammatory diseases are planned for the current fiscal year. If these studies are successful, Celera Diagnostics expects to develop and market reagents that detect the newly discovered genetic markers. In June 2002, Celera Diagnostics announced a strategic alliance with Abbott Laboratories, one of the world's largest diagnostics companies, to discover, develop and commercialize a broad range of in vitro diagnostic products for disease detection, disease progression monitoring, and therapy selection. The agreement with Abbott Laboratories is limited to diagnostic products that detect nucleic acids, for example DNA or RNA. Diagnostics based on the detection of proteins, rather than nucleic acids, is another potential business area for Celera Diagnostics but is not a part of the agreement with Abbott Laboratories and is not a current focus of Celera Diagnostics. Under the Abbott Laboratories agreement, Celera Diagnostics and Abbott Laboratories will jointly fund research and development. Celera Diagnostics believes that Abbott Laboratories' expertise in the diagnostics industry will enhance Celera Diagnostics' research and development efforts, and expedite its ability to bring products to market. Celera Diagnostics expects to rely substantially on its alliance with Abbott Laboratories for the success of its business strategy for the foreseeable future. The Abbott Laboratories agreement may be terminated by a non-breaching party in the event of a material breach and, under certain circumstances, by either party in the event of a change in control of the other party. Also, Celera Diagnostics cannot ensure that Abbott Laboratories will perform its obligations as expected. If Abbott Laboratories terminates the alliance or otherwise fails to conduct its collaborative activities in a timely manner, the development or commercialization of diagnostics products may be delayed or otherwise adversely affected. Research and development expenses for Celera Diagnostics totaled $4.5 million in fiscal 2001 and $39.0 million in fiscal 2002. The Company expensed $255.6 million in fiscal 2000, $323.4 million in fiscal 2001, and $381.9 million in fiscal 2002 for Company-sponsored research, development, and engineering activities. Celera Diagnostics Products. Celera Diagnostics plans to develop products that provide useful genetic information to facilitate disease detection, prediction of disease predisposition, disease progression, disease severity, and responsiveness to treatment regimens. Such products are expected to include primarily in vitro diagnostic test kits, which may be labeled for use in diagnosing specific diseases or other conditions, as well as products referred to as "analyte specific reagents," which may be used for clinical testing but which may not be labeled for use in diagnosing any specific disease or condition. -29- While the sale of in vitro diagnostic test kits requires clearance or approval by the United States Food and Drug Administration, analyte specific reagents are a class of products defined by the agency's regulations which may be sold without any regulatory submission, so long as they are manufactured and marketed in compliance with the requirements of the agency's Quality System regulations, such as Good Manufacturing Practices. Because analyte specific reagents are not subject to United States Food and Drug Administration clearance or approval, Celera Diagnostics believes they can generally be commercialized sooner than diagnostic test kits, though the labeling restrictions would likely affect market acceptance of the products. Celera Diagnostics is currently marketing three products, all of which were contributed by Applied Biosystems in connection with the formation of Celera Diagnostics in different stages of development. Following is a description of these products: o ViroSeq(TM) HIV-1 Genotyping System. The genome of human immunodeficiency virus, commonly known as HIV, undergoes mutations in an infected patient, especially in response to anti-viral drug treatment. Some of the mutations have been shown to render the virus resistant to the action of these drugs, thereby diminishing the effectiveness of the treatment. Therefore, the detection of mutations in HIV that correlate with drug resistance provides useful information to physicians in monitoring the course of treatment and selecting the most effective regimen for each individual HIV-infected patient. During the 2002 fiscal year, Celera Diagnostics submitted a 510(k) filing to the United States Food and Drug Administration for the ViroSeq(TM) HIV-1 Genotyping System. A 510(k) filing is a pre-market notification to the United States Food and Drug Administration that Celera Diagnostics intends to market this product as an in vitro diagnostic test kit. This product is for use in testing human blood samples for identifying drug-resistant mutations in the HIV-1 genome. HIV-1 is one of the most prevalent strains of HIV. Celera Diagnostics' filing is currently under review by the agency, which must provide clearance before Celera Diagnostics can market the product in the United States. Regulatory approval was granted in France for this product during the 2002 fiscal year, and the product is currently being marketed in that country. o Cystic Fibrosis Assay. Cystic fibrosis is an inherited genetic disorder that affects children and young adults. It is caused by a number of mutations in the cystic fibrosis gene. Detection of these mutations should allow for testing of women during pregnancy, as currently recommended by the American College of Obstetricians and Gynecologists, as well as for early monitoring of the disease and prescription of appropriate treatment. Celera Diagnostics sells analyte specific reagents that identify mutations in the cystic fibrosis gene. o HLA Sequencing-Based Typing Kits. Transplantation of tissues and organs between genetically-unrelated individuals usually results in rejection of the donor graft, or tissue, by the recipient. Such rejection is due to differences in certain genes between a donor and a recipient. These genes have been mapped to a region of the human genome known as HLA. Analysis of HLA genes to match donor-recipient pairs with minimal differences in these genes has greatly improved the success of transplantation. Celera Diagnostics' HLA-typing products detect specific DNA -30- sequences in several HLA genes that are known to be involved in transplantation rejection, and thus provide useful information regarding the likelihood of transplant rejection by a recipient. Celera Diagnostics has not sought or received clearance or approval of the United States Food and Drug Administration for these products, and does not manufacture these products in accordance with United States Food and Drug Administration requirements. Accordingly, these products can be sold only for research use and cannot be sold for diagnostic purposes either as diagnostic kits or as analyte specific reagents. Celera Diagnostics is evaluating its strategy for these products, which may result in discontinuance or which may result in further development to enable sale as diagnostic products. Regulation of Diagnostic Products. In the United States and in other countries, diagnostic products are heavily regulated by governmental agencies. Although some of the products that Celera Diagnostics expects to market may not require regulatory clearance or approval, its current business strategy is to develop and market a number of products that will require this clearance or approval, including for example its ViroSeq HIV-1 Genotyping System. In the United States, either Celera Diagnostics or its collaborators will have to show through pre-clinical studies and clinical trials that each of these diagnostic product candidates is safe and effective for each indication before obtaining regulatory clearance or approval from the United States Food and Drug Administration for the commercial sale of that product. Outside of the United States, the regulatory requirements vary from country to country. If Celera Diagnostics or its collaborator fails to adequately show the safety and effectiveness of a diagnostic product, regulatory clearance or approval could be delayed or denied. The results from pre-clinical studies may be different from the results that are obtained in large-scale clinical trials. Celera Diagnostics cannot be certain that it will show sufficient safety and effectiveness in its clinical trials to allow it to obtain the needed regulatory clearance or approval. The regulatory review and approval process can take many years and require substantial expense and may not be successful. A number of companies in the diagnostics industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier studies. Even if Celera Diagnostics obtains regulatory clearance or approval, it will be subject to certain risks and uncertainties relating to regulatory compliance, including: post-approval clinical studies and inability to meet the compliance requirements of the United States Food and Drug Administration's Good Manufacturing Practices (Quality System) regulations. In addition, the occurrence of manufacturing problems could cause subsequent suspension of product manufacture or withdrawal of approval, or could require reformulation of a diagnostic product, additional testing, or changes in labeling of the product. This could delay or prevent Celera Diagnostics from generating revenues from the sale of that diagnostic product. Marketing and Distribution. Celera Diagnostics expects that reference laboratories, hospitals, and medical clinics that perform diagnostic testing will be the primary users of its products. Celera Diagnostics does not expect to develop its own marketing and distribution organization for the foreseeable future. Under the terms of its strategic alliance with Abbott Laboratories, Abbott Laboratories will serve as Celera Diagnostics' exclusive worldwide distributor of nucleic acid-based diagnostic products developed under the agreement. Celera Diagnostics expects that substantially all of its nucleic acid testing products for the foreseeable future will be covered by the Abbott Laboratories agreement. However, in the future Celera Diagnostics may develop products not covered by the agreement, in which case -31- Celera Diagnostics would have to develop its own marketing and distribution capability or find other distributors for these products. Raw Materials. Celera Diagnostics' operations require a variety of raw materials, such as chemical and biochemical materials, and other supplies, some of which are occasionally found to be in short supply. Any interruption in the availability of these materials could adversely affect Celera Diagnostics' operations. In particular, Celera Diagnostics needs access to human tissue samples from diseased and healthy individuals, other biological materials, and related clinical and other information, which may be in limited supply. Celera Diagnostics may not be able to obtain or maintain access to these materials and information on acceptable terms. In addition, government regulation in the United States and foreign countries could result in restricted access to, or use of, human tissue samples. If Celera Diagnostics loses access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on its use of the information generated from tissue samples, its business may be harmed. Patents, Licenses, and Franchises. Through its internal research programs and collaborative programs, including the Applera Genomics Initiative, Celera Diagnostics anticipates that it will develop an increasing portfolio of intellectual property. Celera Diagnostics may use such intellectual property in its internal development programs or may license it to third parties or customers for some combination of license fees, milestone payments, and royalty payments. Celera Diagnostics' products are based on complex, rapidly developing technologies. Some of these technologies are covered by patents owned by Applied Biosystems and Celera Genomics, and other patents are owned by third parties and used by Celera Diagnostics under license. Competition. The diagnostic industry in which Celera Diagnostics operates is competitive and evolving. There is intense competition among healthcare, biotechnology, and diagnostic companies attempting to discover candidates for potential new diagnostic products. These companies may: o develop new diagnostic products in advance of Celera Diagnostics; o develop diagnostic products which are more effective or more cost-effective than those developed by Celera Diagnostics; o obtain regulatory clearance or approval of their diagnostic products more rapidly than Celera Diagnostics; or o obtain patent protection or other intellectual property rights that would limit Celera Diagnostics' ability to develop and commercialize, or its customers' ability to use, Celera Diagnostics' diagnostic products. Celera Diagnostics competes with entities in the United States and abroad that are engaged in the development and commercialization of products that provide genetic information. They include: -32- o purveyors of genetic testing services, which are not subject to the same clinical validation requirements as Celera Diagnostics' products, and which do not require United States Food and Drug Administration or other regulatory approval, including Laboratory Corporation of America Holdings, Quest Diagnostics Inc., and Specialty Laboratories, Inc.; o manufacturers of analyte specific reagents and genotyping test kits; o purveyors of phenotyping assay services, which are used to determine the physical traits of diseased samples; and o manufacturers and distributors of DNA probe-based diagnostic systems. Environmental Matters. Celera Diagnostics is subject to federal, state, and local laws and regulations regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, in those jurisdictions where Celera Diagnostics operates or maintains facilities. Celera Diagnostics does not believe that any liability arising under, or compliance with, environmental laws or regulations will have a material effect on its business, and no material capital expenditures are expected for environmental control. Employees As of June 30, 2002, the Company had approximately 5,950 employees allocated as follows: Business/Function Number ----------------- ------ Applied Biosystems 4,790 Celera Genomics 820 Celera Diagnostics 160 Corporate Staff 180 The Company's corporate staff provides accounting, tax, treasury, legal, information technology, human resources, and other internal services for Applied Biosystems, Celera Genomics, and Celera Diagnostics. None of Applied Biosystems' United States employees, and none of Celera Genomics' or Celera Diagnostics' employees or the Company's corporate staff employees, are subject to collective bargaining agreements. The Company generally considers its relations with its employees to be good. Financial Information About Geographic Areas A summary of net revenues from external customers and long-lived assets attributed to each of the Company's geographic areas for the fiscal years 2000, 2001, and 2002 is incorporated herein by reference to Note 14 on pages 71-83 of the Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002. -33- The Company's consolidated net revenues from external customers in countries other than the United States for fiscal years 2000, 2001, and 2002 were $690.0 million, $833.9 million, and $845.4 million, or 50.3%, 50.7%, and 49.7%, respectively, of the Company's consolidated net revenues. The Company's manufacturing facilities outside the continental United States are located in the United Kingdom, Japan, and Singapore. Executive Officers of the Registrant Information concerning the executive officers of the Company is incorporated by reference to the description under the heading "Identification and Business Experience of Executive Officers" on pages 71 and 72 in Part III of this Annual Report on Form 10-K. Item 2. PROPERTIES Applied Biosystems Group Facilities Applied Biosystems' headquarters are located in leased facilities in Foster City, California. Applied Biosystems owns or leases various other facilities worldwide for manufacturing, distribution, warehousing, research and development, sales and demonstration, service, and administration. The following is a list of Applied Biosystems' principal and other material facilities. Except as otherwise noted below, substantially all of the space in these facilities is used by Applied Biosystems and these facilities are maintained in good working order. Owned or Leased Location (Approximate Floor Area in Sq. Ft.) (Expiration Date of Leases) - -------------------------------------------- --------------------------- Foster City, CA (762,000) Leased (2003-2015) Hayward, CA (66,000) Leased (2004) San Jose, CA (81,000) Owned Bedford, MA (73,000) Leased (2004 - 2011) Framingham, MA (140,000) Leased (2009) Cambridge, MA (10,700) Leased (2003) Santa Fe, NM (14,000) Leased (2010) Houston, TX (50,000) Leased (2004) Warrington, United Kingdom (88,000) Owned Rotterdam, Netherlands (64,000) Leased (2010) Singapore (36,000) Leased (2002) Narita, Japan (24,000) Owned The Foster City, California facilities are comprised of 27 buildings located at a single complex. These buildings are leased from various parties under leases that expire between 2003 and 2015. The Bedford, Massachusetts facilities include 3 buildings at separate locations within that city having approximately 30,000, 28,000, and 15,000 square feet, the leases for which expire in 2011, 2004, and 2007. The Warrington, United Kingdom facilities include 2 buildings at separate locations within that city having approximately 49,000 and 39,000 square feet. -34- Applied Biosystems purchased an 80-acre property in Pleasanton, California, in September 2000, on which the Company intends to construct new facilities with approximately 600,000 square feet for research and development, manufacturing, and administrative purposes. Since acquiring this property, Applied Biosystems has demolished a majority of the existing facilities and commenced the first phase of construction. During this first phase, Applied Biosystems is constructing two buildings comprising approximately 140,000 and 95,000 square feet. Applied Biosystems expects to complete and occupy the smaller of these two buildings during the first half of 2003. Completion and occupancy of the other building is expected to occur later in 2003. Also, Applied Biosystems is currently constructing a new building with approximately 30,000 square feet in Bedford, Massachusetts. Applied Biosystems expects to move its Cambridge, Massachusetts operations to this building upon the expiration of the Cambridge, Massachusetts lease in March 2003. Applied Biosystems also owns approximately 15 acres of undeveloped land in Vacaville, California, and is evaluating whether to develop or sell this property. Celera Genomics Group Facilities Celera Genomics' headquarters are located in two owned adjacent buildings in Rockville, Maryland. Celera Genomics' administrative facilities, sequencing facility, research and development laboratories, bioinformatics data center, and proteomics laboratory are located at its headquarters. Celera Genomics also leases various other facilities for research and development, sales, and service, as well as a facility in Pasadena, California which is the headquarters for Paracel, Inc., which was acquired by Celera Genomics in June 2000. The following is a list of Celera Genomics' principal and other material facilities. Except as otherwise noted below, substantially all of the space in these facilities is used by Celera Genomics and these facilities are maintained in good working order: Owned or Leased Location (Approximate Floor Area in Sq. Ft.) (Expiration Date of Leases) - -------------------------------------------- --------------------------- Rockville, MD (220,000) Owned Pasadena, CA (85,000) Leased (2011) South San Francisco, CA (69,300) Leased (2006) South San Francisco, CA (44,000) Owned South San Francisco, CA (13,600) Leased (2006) Celera Genomics expects to use approximately 80% of the capacity of the owned facility in Rockville, Maryland for the foreseeable future. The Company expects that the remaining approximately 20% of capacity will be used by Applied Biosystems and for general corporate purposes. Also, this facility is located on a parcel of land owned by the Company that includes approximately 13 acres of undeveloped land. The Company believes this land could be used for the construction of additional facilities, if necessary. Celera Genomics expects to use approximately 35% of the capacity of the leased facility in Pasadena, California for the remainder of the lease term. The Company has subleased a -35- portion of the remaining capacity and is seeking to sublease the balance of the remaining capacity for the remainder of the lease term. The owned facility in South San Francisco, California is located on land leased by the Company under a long-term ground lease. Celera Diagnostics Facilities The Company has leased the following two facilities to serve as the principal facilities for Celera Diagnostics, which Celera Diagnostics is using as its headquarters as well as for research and development and administrative purposes, and which it expects to use for manufacturing purposes in the future. Except as otherwise noted below, these facilities are maintained in good working order. Owned or Leased Location (Approximate Floor Area in Sq. Ft.) (Expiration Date of Leases) - -------------------------------------------- --------------------------- Alameda, CA (48,000) Leased (2006) Alameda, CA (19,000) Leased (2006) Celera Diagnostics is using substantially all of the space in these two facilities except for approximately 10,000 square feet in the larger facility, which Celera Diagnostics is renovating for use in manufacturing, and approximately 8,000 square feet in the same facility, which Celera Diagnostics is renovating for use as additional research and development space. Celera Diagnostics expects to complete the renovations of, and occupy, the manufacturing space by the end of 2002, and expects to complete the renovations of, and occupy, the research and development space in early 2003. Pending completion of these manufacturing facilities, Celera Diagnostics has been using up to approximately 19,000 square feet of Applied Biosystems' space in Foster City, California, for manufacturing. Corporate Facilities The Company's corporate headquarters is located in a leased facility in Norwalk, Connecticut. The Company leases approximately 51,000 square feet at this facility, substantially all of which the Company uses for corporate staff and related support functions. This facility is maintained in good working order. The Company also owns another facility in Norwalk and Wilton, Connecticut, with an area of approximately 402,000 square feet. This facility was previously used for the Company's corporate headquarters, but is no longer used by the Company. This facility is being held for sale or long term lease. This facility is currently vacant and is expected to remain vacant pending completion of such a sale or lease. Item 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings from time to time, including actions with respect to commercial, intellectual property, antitrust, environmental, securities, and employment matters. The following is a description of certain claims currently being defended by the Company. The Company believes that it has meritorious defenses against the claims -36- currently asserted against it, including those described below, and intends to defend them vigorously. However, the outcome of litigation is inherently uncertain, and the Company cannot be sure that it will prevail in any of the cases described below or in the Company's other current litigation. An adverse determination in certain of the Company's current litigation, particularly the cases described below under the headings "Securities Litigation," "MJ Research Litigation," "Promega Litigation," and "Beckman Coulter Litigation," could have a material adverse effect on the Company. Securities Litigation The Company and some of its officers were served in five lawsuits between April and May 2000, purportedly on behalf of purchasers of Applera Corporation - Celera Genomics Group Common Stock in the Company's follow-on public offering of Applera Corporation - Celera Genomics Group Common Stock completed on March 6, 2000. In the offering, the Company sold an aggregate of approximately 4.4 million shares of Applera Corporation - Celera Genomics Group Common Stock at a public offering price of $225 per share. All of these lawsuits have been consolidated into a single case and are pending in the United States District Court for the District of Connecticut, and an amended consolidated complaint was filed on August 21, 2001. The consolidated complaint generally alleges that the prospectus used in connection with the offering was inaccurate or misleading because it failed to adequately disclose the alleged opposition of the Human Genome Project and two of its supporters, the governments of the United States and the United Kingdom, to providing patent protection to the Company's genomic-based products. Although Celera Genomics has never sought, or intended to seek, a patent on the basic human genome sequence data, the complaint also alleges that the Company did not adequately disclose the risk that it would not be able to patent this data. The consolidated complaint seeks unspecified money damages, rescission, costs and expenses, and other relief as the court deems proper. A motion to dismiss the case filed by the Company and the other defendants is pending. MJ Research Litigation The Company is involved in several litigation matters with MJ Research, Inc., commencing with the Company's filing claims against MJ Research based on its alleged infringement of certain polymerase chain reaction, or PCR, patents. On December 21, 2000, MJ Research filed an action against the Company in the United States District Court for the District of Columbia. The complaint is based on the allegation that the patents underlying the Company's DNA sequencing instruments were invalidly obtained because one of the alleged inventors, whose work was funded in part by the United States government, was knowingly omitted from the patent applications. The Company patents at issue are U.S. Patent Nos. 5,171,534, 5,821,058, 6,200,748, and 4,811,218. The complaint asserts violations of the Federal False Claims Act and the Federal Bayh Dole Act, invalidity and unenforceability of the patents at issue, patent infringement, and various other civil claims against the Company. MJ Research is seeking monetary damages, costs and expenses, injunctive relief, transfer of ownership of the patents in dispute, and other relief as the court deems proper. MJ Research claims to be suing in the name of the United States government although the government has to date declined to participate in the suit. -37- Promega Litigation On April 24, 2001, Promega Corporation filed a patent infringement action against the Company, Lifecodes Corporation, Cellmark Diagnostics, and Genomics International Corporation in the United States District Court for the Western District of Wisconsin. The complaint alleges that the defendants are infringing Promega's U.S. Patent Nos. 6,221,598 and 5,843,660, both entitled "Multiplex Amplification of Short Tandem Repeat Loci," due to the defendants' sale of forensic identification and paternity testing kits. Promega is seeking monetary damages, costs and expenses, injunctive relief, and other relief as the court deems proper. The defendants answered the complaint on July 9, 2001, and the Company asserted counterclaims alleging that Promega is infringing the Company's U.S. Patent No. 6,200,748, entitled "Tagged Extendable Primers and Extension Products," due to Promega's sale of forensic identification and paternity testing kits. The trial in this case is currently scheduled for November 18, 2002. Beckman Coulter Litigation On July 3, 2002, Beckman Coulter, Inc., filed a patent infringement action against the Company in the United States District Court for the Central District of California. The complaint alleges that the Company is infringing Beckman Coulter's U.S. Patent Nos. RE 37,606 and 5,421,980, both entitled "Capillary Electrophoresis Using Replaceable Gels," and U.S. Patent No. 5,552,580, entitled "Heated Cover Device," although it does not identify the specific facts on which this allegation is based. Beckman Coulter is seeking monetary damages, costs and expenses, injunctive relief, and other relief as the court deems proper. United States v. Davis The Company is a party to the action United States v. Davis, pending in the United States District Court for the District of Rhode Island. The Company was brought into the case along with numerous other companies as a result of a third party complaint filed by United Technologies Corporation ("UTC") seeking contribution for environmental cleanup costs imposed by the United States government. In December 1998, the District Court found the Company liable to UTC along with certain, but not all, of the defendants in the case. The Company believes the amount of such liability to be less than $200,000, which will be determined when all appeals have been concluded. Both UTC and the Company appealed the District Court's decision. In August 2001, the United States Court of Appeals for the First Circuit affirmed the District Court's decision and remanded the case to the District Court for further proceedings. The Company and the other defendants are considering the decision of the Court of Appeals and their legal alternatives. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -38- PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The principal United States market where the Company's Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock are traded is the New York Stock Exchange, although such stock is also traded on the Pacific Exchange. Applera Corporation - Applied Biosystems Group Common Stock is listed on the New York Stock Exchange under the trading symbol "ABI" and is intended to reflect the relative performance of Applied Biosystems. Applera Corporation - Celera Genomics Group Common Stock is listed on the New York Stock Exchange under the trading symbol "CRA" and is intended to reflect the relative performance of Celera Genomics. There is no single security that represents the performance of the Company as a whole, nor is there a separate security traded for Celera Diagnostics. Holders of Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock are stockholders of the Company. Applied Biosystems and Celera Genomics are not separate legal entities, and holders of these stocks are stockholders of a single company, the Company. As a result, holders of these stocks are subject to all of the risks associated with an investment in the Company and all of its businesses, assets, and liabilities. The high and low sales prices of Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock for each quarterly period during fiscal years 2001 and 2002 is incorporated herein by reference to Note 11, page 69, of the Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002. Holders On September 4, 2002, the approximate number of holders of Applera Corporation - Applied Biosystems Group Common Stock was 6,244, and the approximate number of holders of Applera Corporation - Celera Genomics Group Common Stock was 6,535. The approximate number of holders is based upon the actual number of holders registered in the Company's records at such date and does not include holders of shares in "street name" or persons, partnerships, associations, corporations, or other entities identified in security position listings maintained by depository trust companies. The calculation of the market value of shares held by non-affiliates shown on the cover of this Annual Report on Form 10-K was made on the assumption that there were no affiliates other than executive officers and directors as of the date of calculation. -39- Dividends Information regarding the amount of quarterly dividends during fiscal years 2001 and 2002 is incorporated herein by reference to Note 11, page 69, of the Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002. Sale of Unregistered Securities The Company has not sold any securities during the fiscal year ended June 30, 2002, that were not registered under the Securities Act of 1933. Forward Looking Statements and Risk Factors Certain statements contained in, or incorporated by reference in, this Annual Report on Form 10-K are forward-looking and are subject to a variety of risks and uncertainties. These statements may be identified by the use of forward-looking words or phrases such as "believe," "expect," "intend," "anticipate," "should," "plan," "estimate," and "potential," among others. These forward-looking statements are based on the Company's current expectations. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. Also, the Company notes that owners of Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock are subject to risks arising from their ownership of common stock of a corporation with two separate classes of common stock. The risks and uncertainties that may affect the operations, performance, development, and results of the Company's business, and the risks arising from a capital structure with two separate classes of common stock, include, but are not limited to: Risks Relating to Applied Biosystems Rapidly changing technology in life sciences could make Applied Biosystems' product line obsolete unless it continues to improve existing products, develop new products, and pursue new market opportunities. A significant portion of the net revenues for Applied Biosystems each year is derived from products that did not exist in the prior year. Applied Biosystems' future success depends on its ability to continually improve its current products, develop and introduce, on a timely and cost-effective basis, new products that address the evolving needs of its customers, and pursue new market opportunities that develop as a result of technological and scientific advances in life sciences. Applied Biosystems' products are based on complex technology which is subject to rapid change as new technologies are developed and introduced in the marketplace. Unanticipated difficulties or delays in replacing existing products with new products could adversely affect Applied Biosystems' future operating results. The pursuit of new market opportunities will add further complexity and require additional management attention and resources as these markets are addressed. -40- Applied Biosystems' new Knowledge Business may not be successful. In April 2002, Applied Biosystems became the exclusive distributor of Celera Genomics' Celera Discovery System and related human genomic and other biological and medical information under the terms of a 10-year marketing and distribution agreement. Applied Biosystems expects to integrate the Celera Discovery System and Celera Genomics' related information into a new Knowledge Business that combines current Applied Biosystems assay, human identification and forensics, and cell biology products with new biological information content and analytical tools. The Knowledge Business is an emerging business, and Applied Biosystems believes that in order for it to be successful Applied Biosystems may have to devote a significant amount of resources to researching, developing, marketing, and distributing Knowledge Business products and services. The market for these products and services is intensely competitive, and there can be no assurance that there will be market acceptance of the utility and value of the product and service offerings of the Knowledge Business. A significant portion of sales depends on customers' capital spending policies that may be subject to significant and unexpected decreases. A significant portion of Applied Biosystems' instrument product sales are capital purchases by its customers. Applied Biosystems' customers include pharmaceutical, environmental, research, biotechnology, and chemical companies, and the capital spending policies of these companies can have a significant effect on the demand for Applied Biosystems' products. These policies are based on a wide variety of factors, including the resources available to make purchases, the spending priorities among various types of research equipment, and policies regarding capital expenditures during recessionary periods. Any decrease in capital spending or change in spending policies of these companies could significantly reduce the demand for Applied Biosystems' products. A substantial portion of Applied Biosystems' sales is to customers at universities or research laboratories whose funding is dependent on both the level and timing of funding from government sources. As a result, the timing and amount of revenues from these sources may vary significantly due to factors that can be difficult to forecast. Although research funding has increased during the past several years, grants have, in the past, been frozen for extended periods or otherwise become unavailable to various institutions, sometimes without advance notice. Budgetary pressures may result in reduced allocations to government agencies that fund research and development activities. If government funding necessary to purchase Applied Biosystems' products were to become unavailable to researchers for any extended period of time, or if overall research funding were to decrease, the business of Applied Biosystems could be adversely affected. Applied Biosystems is currently and could in the future be subject to claims for infringement of patents and other intellectual property rights. Applied Biosystems' products are based on complex, rapidly developing technologies. These products could be developed without knowledge of previously filed patent applications that mature into patents that cover some aspect of these technologies. In addition, there are relatively few decided court cases interpreting the scope of patent claims in these technologies, and Applied Biosystems' belief that its products do not infringe the technology covered by valid -41- and enforceable patents could be successfully challenged by third parties. Also, in the course of its business, Applied Biosystems may from time to time have access to confidential or proprietary information of third parties, and these parties could bring a theft of trade secret claim against Applied Biosystems asserting that Applied Biosystems' products improperly use technologies which are not patented but which are protected as trade secrets. Applied Biosystems has been made a party to litigation regarding intellectual property matters, including the litigation described in the following paragraph, some of which, if determined adversely, could have a material adverse effect on Applied Biosystems. Due to the fact that Applied Biosystems' business depends in large part on rapidly developing and dynamic technologies, there remains a constant risk of intellectual property litigation affecting the group. Applied Biosystems has from time to time been notified that it may be infringing patents and other intellectual property rights of others. It may be necessary or desirable in the future to obtain licenses relating to one or more products or relating to current or future technologies, and Applied Biosystems cannot be assured that it will be able to obtain these licenses or other rights on commercially reasonable terms. MJ Research, Inc. has filed a lawsuit against the Company based on the allegation that four patents underlying Applied Biosystems' DNA sequencing instruments were invalidly obtained because one of the alleged inventors, whose work was funded in part by the United States government, was knowingly omitted from the patent applications. MJ Research claims to be suing in the name of the United States government although the government has to date declined to participate in the lawsuit. Promega Corporation has filed a lawsuit against the Company alleging that Applied Biosystems, along with certain other named defendants, is infringing two Promega patents due to the sale of forensic identification and paternity testing kits. Beckman Coulter, Inc. has filed a lawsuit against the Company alleging that Applied Biosystems is infringing three Beckman Coulter patents, although it has not identified the specific facts on which the allegation is based. At present, only the Promega litigation is scheduled for trial. If any of these matters does proceed to trial, the cost of the litigation, and the amount of management time that will be devoted to the litigation, will be significant. There can be no assurance that these matters will be resolved favorably, that the Company, Applied Biosystems, or Celera Genomics will not be enjoined from selling the products in question or other products as a result, or that any monetary or other damages assessed against the Company will not have a material adverse effect on the financial condition of the Company, Applied Biosystems, or Celera Genomics. Since Applied Biosystems' business is dependent on foreign sales, fluctuating currencies will make revenues and operating results more volatile. Approximately 50% of Applied Biosystems' net revenues during fiscal 2002 were derived from sales to customers outside of the United States. The majority of these sales were based on the relevant customer's local currency. A significant portion of the related costs for Applied Biosystems are based on the U.S. dollar. As a result, Applied Biosystems' reported and anticipated operating results and cash flows are subject to fluctuations due to material changes in foreign currency exchange rates that are beyond Applied Biosystems' control. Integrating acquired technologies may be costly and may not result in technological advances. The future growth of Applied Biosystems depends in part on its ability to acquire complementary technologies through acquisitions and investments. The consolidation of -42- employees, operations, and marketing and distribution methods could present significant managerial challenges. For example, Applied Biosystems may encounter operational difficulties in the integration of manufacturing or other facilities. In addition, technological advances resulting from the integration of technologies may not be achieved as successfully or rapidly as anticipated, if at all. Applied Biosystems' Knowledge Business depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, and Internet applications and related tools and functions. Because Applied Biosystems' Knowledge Business requires manipulating and analyzing large amounts of data, and communicating the results of the analysis to its internal research personnel and to its customers via the Internet, Applied Biosystems depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that Applied Biosystems' hardware or software malfunctions or access to Applied Biosystems' data by internal Knowledge Business research personnel or Knowledge Business customers through the Internet is interrupted, the Knowledge Business could suffer. Applied Biosystems' computer and communications hardware is protected through physical and software safeguards. However, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, and similar events. In addition, the Knowledge Business online products are complex and sophisticated, and as such, could contain data, design, or software errors that could be difficult to detect and correct. Software defects could be found in current or future products. If Applied Biosystems fails to maintain and further develop the necessary computer capacity and data to support its computational needs and its customers' access to the Knowledge Business product offerings, it could experience a loss of or delay in revenues or market acceptance. In addition, any sustained disruption in Internet access provided by third parties could adversely affect the Knowledge Business. Electricity shortages and earthquakes could disrupt operations in California. The headquarters and principal operations of Applied Biosystems are located in Foster City, California. In 2001, the State of California experienced a statewide electricity shortage due to a variety of factors. Although some of the factors causing this shortage have been eliminated or mitigated, there are ongoing concerns about the availability of electricity in California, particularly during peak usage periods. Blackouts in Foster City, even of modest duration, could impair or cause a temporary suspension of the group's operations, including the manufacturing and shipment of new products. Power disruptions of an extended duration or high frequency could have a material adverse effect on operating results. In addition, Foster City is located near major California earthquake faults. The ultimate impact of earthquakes on Applied Biosystems, its significant suppliers, and the general infrastructure is unknown, but operating results could be materially affected in the event of a major earthquake. -43- Risks Relating to Celera Genomics Celera Genomics has incurred net losses to date and may not achieve profitability. Celera Genomics has accumulated net losses of $576.8 million as of June 30, 2002, and expects that it will continue to incur additional net losses for the foreseeable future. These cumulative losses are expected to increase as Celera Genomics continues to make investments in new technology and product development, including its investments in its therapeutics business and the Applera Genomics Initiative, as well as investments in diagnostics through Celera Diagnostics, its joint venture with Applied Biosystems. Celera Genomics will record all initial operating losses of Celera Diagnostics up to a maximum of $300 million, after which any additional operating losses would be shared equally by Celera Genomics and Applied Biosystems. As an early stage business, Celera Genomics faces significant challenges in expanding its operations into the therapeutics research and development business. As a result, there is a high degree of uncertainty that Celera Genomics will be able to achieve profitable operations. Celera Genomics has entered into an exclusive arrangement with Applied Biosystems to distribute the Celera Discovery System and related information as part of Applied Biosystems' new Knowledge Business, and the revenue that Celera Genomics receives from Applied Biosystems will depend heavily on Applied Biosystems' ability to market and distribute its Knowledge Business products. Effective April 2002, Applied Biosystems became the exclusive distributor of Celera Discovery System and Celera Genomics' related human genomic and other biological and medical information under the terms of a ten-year marketing and distribution agreement. Celera Genomics expects that Applied Biosystems will integrate the Celera Discovery System and the related information into a new Knowledge Business that combines current Applied Biosystems assay, human identification and forensics, and cell biology products with new biological information content and analytical tools. Under the terms of the agreement, Applied Biosystems is obligated to pay a royalty to Celera Genomics based on sales, if any, of certain Knowledge Business products after July 1, 2002. Whether Celera Genomics actually receives any royalties from Applied Biosystems under this agreement, and the amount of these royalties, depends on Applied Biosystems' ability to successfully commercialize Knowledge Business products subject to the royalty. The Knowledge Business is an emerging business, and Applied Biosystems has not proven its ability to successfully commercialize these products. Celera Genomics believes that in order for the Knowledge Business to be successful, Applied Biosystems may have to devote a significant amount of its resources to researching, developing, marketing, and distributing Knowledge Business products and services. However, Celera Genomics has no control over the amount and timing of Applied Biosystems' use of its resources, including for products subject to Celera Genomics' royalty. In addition, the market for these products is intensely competitive, and there can be no assurance that there will be market acceptance of the utility and value of the product offerings of the Knowledge Business. -44- Celera Genomics does not intend to seek any new customers for its Celera Discovery System and related information products and services after June 30, 2002, and therefore its future revenues from these products and services will be limited. Under the terms of the marketing and distribution agreement between Celera Genomics and Applied Biosystems, Celera Genomics will receive all revenues under, and be responsible for all costs and expenses associated with, Celera Discovery System and related information contracts that were in effect on April 1, 2002, the effective date of the agreement, or which were entered into during a three-month transition period ended June 30, 2002 (as well as renewals of these contracts, if any). However, the revenue anticipated by Celera Genomics under these contracts could be adversely impacted as a result of changes made to Celera Discovery System products by or at the request of Applied Biosystems pursuant to the agreement, although Applied Biosystems has agreed to reimburse Celera Genomics for any shortfall in earnings before interest, taxes, depreciation, and amortization from these contracts below $62.5 million (as well as renewals, if any) during the four fiscal years ending with the 2006 fiscal year if the shortfall is due to these changes, provided Celera Genomics otherwise continues to perform under these contracts. However, during the term of the marketing and distribution agreement (other than the transition period), Celera Genomics will not be marketing Celera Discovery System products and services to, and will not be contracting with, new customers. Accordingly, except for the anticipated revenue under Celera Discovery System contracts existing on June 30, 2002 and renewals of these contracts, if any, and the Applied Biosystems' corresponding reimbursement obligation, Celera Genomics does not expect any revenues from Celera Discovery System and related products and services other than the potential royalty payments from Applied Biosystems under the marketing and distribution agreement. Although under certain contracts with existing Celera Discovery System customers Celera Genomics is entitled to milestone payments or future royalties based on products developed by its customers, Celera Genomics believes these arrangements are unlikely to produce any significant revenue for the group. Celera Genomics' ability to maintain its relationships with existing Celera Discovery System customers depends heavily on continued assembly and annotation of the human and mouse genomes. In June 2000, Celera Genomics and the Human Genome Project each announced the "first assembly" of the human genome, and in April 2001, Celera Genomics announced the assembly of the mouse genome. Assembly is the process by which individual fragments of DNA, the molecule that forms the basis of the genetic material in virtually all living organisms, are pieced together into their appropriate order and place on each chromosome within the genome. Celera Genomics' first assembly of the human genome covered approximately 95% of that genome, and its assembly of the mouse genome covered approximately 99% of that genome. Celera Genomics intends to continue updating the assembly of the human and mouse genomes as it continues to annotate these genomes. Annotation is the process of assigning features or characteristics to each chromosome. Each gene on each chromosome is given a name, its structural features are described, and proteins encoded by genes are classified into possible or known function. Celera Genomics' ability to maintain its relationship with the existing Celera Discovery System customers depends heavily upon the continued assembly and annotation of these genomes. Failure to continue to update the assembly and annotation efforts in a timely manner may have a material adverse effect on Celera Genomics' revenues. -45- Celera Genomics' ability to develop and commercialize proprietary therapeutics is unproven. As Celera Genomics expands its therapeutics discovery and development business, it faces the difficulties inherent in developing and commercializing therapeutic products. It is possible that Celera Genomics' discovery and development efforts will not result in any commercial products or services. In particular, Celera Genomics and its collaborators are seeking to develop new therapeutic products based on information derived from the study of the genetic material of organisms, or genomics, and the study of proteins, or proteomics. These methods are unproven, as few therapeutic products based on genomic or proteomic discoveries have been developed and commercialized and, to date, no one has developed or commercialized any therapeutic products based on Celera Genomics' technologies. Therapeutic product candidates may never result in a commercialized product. All of Celera Genomics' therapeutic product candidates are in various stages of research and development and will require significant additional research and development efforts by Celera Genomics or its collaborators before they can be marketed. These efforts include extensive preclinical and clinical testing and lengthy regulatory review and clearance or approval by the United States Food and Drug Administration and comparable agencies in other countries. The development of Celera Genomics' new therapeutics products is highly uncertain and subject to a number of significant risks. To date, Celera Genomics has not commercialized a therapeutic product and Celera Genomics does not expect any of its therapeutic product candidates to be commercially available for a number of years, if ever. Therapeutic product candidates that appear to be promising at early stages of development may not be developed into commercial products, or may not be successfully marketed, for a number of reasons, including: o Celera Genomics or its collaborators may not successfully complete any research and development efforts; o Celera Genomics or its collaborators may not successfully build the necessary preclinical and clinical development organizations; o any therapeutic product candidates Celera Genomics or its collaborators develop may be found during preclinical testing or clinical trials to be ineffective or to cause harmful side effects; o Celera Genomics or its collaborators may fail to obtain required regulatory approvals for products they develop; o Celera Genomics or its collaborators may be unable to manufacture enough of any potential products at an acceptable cost and with appropriate quality; o Celera Genomics or its collaborators may fail to build necessary distribution channels; o Celera Genomics' or its collaborator's products may not be competitive with other existing or future products; -46- o adequate reimbursement for Celera Genomics' or its collaborators products may not be available to physicians and patients from the government or insurance companies; and o Celera Genomics or its collaborators may be unable to obtain necessary intellectual property protection, or third parties may own proprietary rights that prevent Celera Genomics or its collaborators from commercializing their products. If Celera Genomics fails to maintain its existing collaborative relationships and enter into new collaborative relationships, or if collaborators do not perform under collaboration agreements, development of its therapeutic product candidates could be delayed. Celera Genomics' strategy for the discovery, development, clinical testing, manufacturing and commercialization of most of its therapeutic product candidates includes entering into collaborations with partners. Although Celera Genomics has expended, and continues to expend, time and money on internal research and development programs, it may be unsuccessful in creating therapeutic product candidates that would enable it to form additional collaborations and receive milestone and/or royalty payments from collaborators. Each of Celera Genomics' existing collaboration agreements may be canceled under certain circumstances. In addition, the amount and timing of resources to be devoted to research, development, eventual clinical trials and commercialization activities by Celera Genomics' collaborators are not within Celera Genomics' control. Celera Genomics cannot ensure that its collaborators will perform their obligations as expected. If any of Celera Genomics' collaborators terminate or elect to cancel their agreements or otherwise fail to conduct their collaborative activities in a timely manner, the development or commercialization of therapeutic products may be delayed or otherwise adversely affected. If in some cases Celera Genomics assumes responsibilities for continuing programs on its own after termination of a collaboration, Celera Genomics may be required to devote additional resources to product development and commercialization or Celera Genomics may need to cancel certain development programs. If Celera Genomics fails to satisfy regulatory requirements for any therapeutic product candidate, Celera Genomics will be unable to complete the development and commercialization of that product. Celera Genomics does not currently have the internal capability to move potential products through clinical testing, manufacturing and the approval processes of the United States Food and Drug Administration and comparable agencies in other countries. In the United States, either Celera Genomics or its collaborators must show through pre-clinical studies and clinical trials that each of Celera Genomics' therapeutic product candidates is safe and effective in humans for each indication before obtaining regulatory clearance from the United States Food and Drug Administration for the commercial sale of that product. Outside of the United States, the regulatory requirements vary from country to country. If Celera Genomics or its collaborator fails to adequately show the safety and effectiveness of a therapeutic product, regulatory clearance or approval could be delayed or denied. The results from pre-clinical studies may be different from the results that are obtained in large-scale clinical trials. Celera Genomics cannot be certain that it will show sufficient safety and effectiveness in its clinical trials to allow it to obtain the needed regulatory clearance or approval. The regulatory review and approval process can take many years and require substantial expense and may not be successful. Many -47- companies in the therapeutic industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier studies. Even if Celera Genomics obtains regulatory clearance or approval, it will be subject to certain risks and uncertainties relating to regulatory compliance, including: post-approval clinical studies and inability to meet the compliance requirements of the United States Food and Drug Administration's Good Manufacturing Practices regulations. In addition, identification of certain adverse side effects after a therapeutic product is on the market or the occurrence of manufacturing problems could cause subsequent suspension of product manufacture or withdrawal of approval, or could require reformulation of a therapeutic product, additional testing, or changes in labeling of the product. This could delay or prevent Celera Genomics from generating revenues from the sale of that therapeutic product. Celera Genomics' research and product development, including its proteomics efforts, depends on access to tissue samples and other biological materials. Celera Genomics will need access to human and other tissue samples from diseased and healthy individuals, other biological materials, and related clinical and other information, which may be in limited supply. Celera Genomics may not be able to obtain or maintain access to these materials and information on acceptable terms. In addition, government regulation in the United States and foreign countries could result in restricted access to, or use of, human and other tissue samples. If Celera Genomics loses access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on its use of the information generated from tissue samples, its business may be harmed. The pharmaceutical industry is intensely competitive and evolving. There is intense competition among pharmaceutical and biotechnology companies attempting to discover candidates for potential new therapeutic products. These companies may: o develop new therapeutic products in advance of Celera Genomics; o develop therapeutic products which are more effective or more cost-effective than those developed by Celera Genomics; o obtain regulatory approvals of their therapeutic products more rapidly than Celera Genomics; or o obtain patent protection or other intellectual property rights that would limit Celera Genomics' ability to develop and commercialize therapeutic products. Introduction of new products may expose Celera Genomics to product liability claims. New products developed by Celera Genomics or its collaborators could expose Celera Genomics to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of human therapeutic products. Product liability claims or product recalls, regardless of the ultimate outcome, could require Celera Genomics to spend significant time and money in litigation and to pay significant damages. Although Celera Genomics expects to seek and maintain product liability insurance to cover claims relating to the testing and use of -48- therapeutic products, there can be no assurance that such insurance will be available on commercially reasonable terms, if at all, or that the amount of coverage obtained will be adequate to cover losses from any particular claim. The therapeutics discovery and development business is highly technical, and there is a competitive market for personnel with the necessary expertise to develop and expand Celera Genomics' therapeutics business. Celera Genomics believes that in order to develop and commercialize therapeutic products, it will need to recruit and retain scientific and management personnel having specialized training or advanced degrees, or otherwise having the technical background, necessary for an understanding of therapeutic products. There is a shortage of qualified scientific and management who possess this technical background. Celera Genomics competes for these personnel with other pharmaceutical and biotechnology companies, academic institutions and government entities. If Celera Genomics is unable to retain and attract qualified scientific and management personnel, the growth of the group's therapeutics discovery and development business could be delayed or curtailed. Celera Genomics could incur liabilities relating to hazardous materials that it uses in its research and development activities. Celera Genomics' research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive materials. In the event of an accidental contamination or injury from these materials, Celera Genomics could be held liable for damages in excess of its resources. Celera Genomics' business depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, and Internet applications and related tools and functions. Because Celera Genomics' business requires manipulating and analyzing large amounts of data, and communicating the results of the analysis to its internal research personnel and to its customers via the Internet, Celera Genomics depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that Celera Genomics' hardware or software malfunctions or access to Celera Genomics' data by Celera Genomics' internal research personnel or customers through the Internet is interrupted, its business could suffer. Celera Genomics' computer and communications hardware is protected through physical and software safeguards. However, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, and similar events. In addition, Celera Genomics' online products are complex and sophisticated, and as such, could contain data, design, or software errors that could be difficult to detect and correct. Software defects could be found in current or future products. If Celera Genomics fails to maintain and further develop the necessary computer capacity and data to support its computational needs and its customers' therapeutics discovery and research efforts, it could experience a loss of or delay in revenues. In addition, any sustained disruption in Internet access provided by third parties could adversely affect Celera Genomics' business. -49- Celera Genomics' competitive position depends on maintaining its intellectual property protection and obtaining licenses to intellectual property it may need from others. Celera Genomics' ability to compete and to achieve and maintain profitability depends on its ability to protect its proprietary discoveries or technology, in large part, through obtaining and enforcing patent rights, obtaining copyright protection, maintaining its trade secrets, and operating without infringing the intellectual property rights of others. Celera Genomics' ability to obtain patent protection for the inventions it makes is uncertain. The patentability of biotechnology and pharmaceutical inventions involves complex factual and legal questions. As a result, it is difficult to predict whether patents will issue or the breadth of claims that will be allowed in biotechnology and pharmaceutical patents. This may be particularly true with regard to the patenting of gene sequences, gene functions, and genetic variations. In this regard, the United States Patent and Trademark Office has adopted guidelines for use in the review of the utility of inventions, particularly biotechnology inventions. These guidelines increased the amount of evidence required to demonstrate utility in order to obtain a patent in the biotechnology field, making patent protection more difficult to obtain. Although others have been successful in obtaining patents to biotechnology inventions, since the adoption of these guidelines, these patents have been issued with increasingly less frequency. As a result, patents may not issue from patent applications that Celera Genomics may own or license if the applicant is unable to satisfy the new guidelines. The United States Patent and Trademark Office has issued several patents to third parties covering inventions involving single nucleotide polymorphisms ("SNPs"), naturally occurring genetic variations that scientists believe can be correlated with susceptibility to disease, disease prognosis, therapeutic efficiency, and therapeutic toxicity. These inventions are subject to the same new guidelines as other biotechnology inventions. In addition, Celera Genomics may need to obtain rights to patented SNPs in order to develop, use and sell analyses of the overall human genome or particular full-length genes. These licenses may not be available to Celera Genomics on commercially acceptable terms, or at all. In some instances, patent applications in the United States are maintained in secrecy until a patent issues. In most instances, the content of United States and international patent applications is made available to the public approximately 18 months after the application's filing date. As a result, Celera Genomics cannot be certain that others have not filed patent applications for inventions covered by Celera Genomics' patent applications or that Celera Genomics inventors were the first to make the invention. Accordingly, Celera Genomics' patent applications may be preempted or Celera Genomics may have to participate in interference proceedings before the United States Patent and Trademark Office. These proceedings determine the priority of invention and the right to a patent for the claimed invention in the United States. Furthermore, lawsuits may be necessary to enforce any patents issued to Celera Genomics or to determine the scope and validity of the rights of third parties. Lawsuits and interference proceedings, even if they are successful, are expensive to pursue, and Celera Genomics could use a substantial amount of its financial resources in either case. An adverse outcome could subject Celera Genomics to significant liabilities to third parties and require Celera Genomics to license disputed rights from third parties or to cease using the technology. -50- Celera Genomics may be dependent on protecting its proprietary databases through copyright law to prevent other organizations from taking information from those databases and copying and reselling it. Copyright law currently provides uncertain protection regarding the copying and resale of factual data. Changes in copyright law could either expand or reduce the extent to which Celera Genomics and its customers are able to protect their intellectual property. Accordingly, Celera Genomics is uncertain as to whether it can prevent such copying or resale through copyright law. Celera Genomics also relies on trade secret protection for its confidential and proprietary information and procedures, including procedures related to sequencing genes and to searching and identifying important regions of genetic information. Celera Genomics protects its trade secrets through recognized practices, including access control, confidentiality and nonuse agreements with employees, consultants, collaborators and customers, and other security measures. These confidentiality and nonuse agreements may be breached, however, and Celera Genomics may not have adequate remedies for a breach. In addition, Celera Genomics' trade secrets may otherwise become known or be independently developed by competitors. Accordingly, it is unclear whether Celera Genomics' trade secrets will provide adequate protection. Disputes may arise in the future with regard to the ownership of rights to any invention developed with collaborators. These and other possible disagreements with collaborators could lead to delays in the achievement of milestones or receipt of royalty payments or in research, development and commercialization of Celera Genomics' products. In addition, these disputes could require or result in lawsuits or arbitration. Lawsuits and arbitration are time-consuming and expensive. Even if Celera Genomics wins, the cost of these proceedings could adversely affect its business, financial condition and operating results. Celera Genomics may infringe the intellectual property rights of third parties and may become involved in expensive intellectual property litigation. The intellectual property rights of biotechnology companies, including Celera Genomics, are generally uncertain and involve complex legal, scientific and factual questions. Celera Genomics' success in therapeutics discovery and development may depend, in part, on its ability to operate without infringing the intellectual property rights of others and to prevent others from infringing its intellectual property rights. There has been substantial litigation regarding patents and other intellectual property rights in the biotechnology and pharmaceutical industries. Celera Genomics may become a party to patent litigation or proceedings at the United States Patent and Trademark Office to determine its patent rights with respect to third parties. Interference proceedings may be necessary to establish which party was the first to make the invention sought to be patented. Celera Genomics may become involved in patent litigation against third parties to enforce its patent rights, to invalidate patents held by the third parties, or to defend against these claims. The cost to Celera Genomics of any patent litigation or similar proceeding could be substantial, and it may absorb significant management time. If infringement litigation against Celera Genomics is resolved unfavorably to Celera Genomics, Celera Genomics may be enjoined from manufacturing or selling its products or services without a license from a third party. Celera Genomics may not be able to obtain a license on commercially acceptable terms, or at all. -51- Ethical, legal and social issues related to the use of genetic information and genetic testing may cause less demand for Celera Genomics' products. Genetic testing has raised issues regarding confidentiality and the appropriate uses of the resulting information. For example, concerns have been expressed regarding the use of genetic test results by insurance carriers or employers to discriminate on the basis of this information, resulting in barriers to the acceptance of genetic tests by consumers. This could lead to governmental authorities calling for limits on or regulation of the use of genetic testing or prohibiting testing for genetic predisposition to certain diseases, particularly those that have no known cure. Any of these scenarios could reduce the potential markets for products of Celera Genomics. Future acquisitions and other transactions may absorb significant resources, may be unsuccessful and could dilute the holders of Applera Corporation - Celera Genomics Group Common Stock. As part of Celera Genomics' strategy, it expects to pursue acquisitions, investments and other strategic relationships and alliances. Acquisitions, investments and other strategic relationships and alliances may involve significant cash expenditures, debt incurrence, additional operating losses, and expenses that could have a material effect on Celera Genomics' financial condition and operating results. Acquisitions involve numerous other risks, including: o difficulties integrating acquired technologies and personnel into the business of Celera Genomics; o diversion of management from daily operations; o inability to obtain required financing on favorable terms; o entry into new markets in which Celera Genomics has little previous experience; o potential loss of key employees, key contractual relationships, or key customers of acquired companies or of Celera Genomics; and o assumption of the liabilities and exposure to unforeseen liabilities of acquired companies. It may be difficult for Celera Genomics to complete these transactions quickly and to integrate these businesses efficiently into its current business. Any acquisitions, investments or other strategic relationships and alliances by Celera Genomics may ultimately have a negative impact on its business and financial condition. For example, future acquisitions may not be as successful as originally anticipated and may result in special charges, such as the charges for impairment of Paracel goodwill, intangibles and other assets and other charges in the amounts of $69.1 million during fiscal 2001 and $25.9 million during fiscal 2002 and for the Molecular Informatics business in the amount of $14.5 million during fiscal 1999. In addition, acquisitions and other transactions may involve the issuance of a substantial amount of Applera Corporation - Celera Genomics Group Common Stock without the approval of the holders of Applera Corporation - Celera Genomics Group Common Stock. Any issuances -52- of this nature will be dilutive to holders of Applera Corporation - Celera Genomics Group Common Stock. Applera Corporation - Celera Genomics Group Common Stock price is highly volatile. The market price of Applera Corporation - Celera Genomics Group Common Stock has been and may continue to be highly volatile due to the risks and uncertainties described in this section of this Annual Report on Form 10-K, as well as other factors that may have affected or may in the future affect the market price, such as: o conditions and publicity regarding the genomics, biotechnology, pharmaceutical, or life sciences industries generally; o price and volume fluctuations in the stock market at large which do not relate to Celera Genomics' operating performance; and o comments by securities analysts or government officials, including with regard to the viability or profitability of the biotechnology sector generally or with regard to intellectual property rights of biotechnology companies, or Celera Genomics' failure to meet market expectations. The stock market has from time to time experienced extreme price and volume fluctuations that are unrelated to the operating performance of particular companies. In the past, companies that have experienced volatility have sometimes been the subjects of securities class action litigation. If litigation was instituted on this basis, it could result in substantial costs and a diversion of management's attention and resources. The Company is subject to a purported class action lawsuit relating to its 2000 offering of shares of Applera Corporation - Celera Genomics Group Common Stock that may be expensive and time consuming. The Company and some of its officers were served in five lawsuits purportedly on behalf of purchasers of Applera Corporation - Celera Genomics Group Common Stock in the Company's follow-on public offering of Applera Corporation - Celera Genomics Group Common Stock completed on March 6, 2000. In the offering, the Company sold an aggregate of approximately 4.4 million shares of Applera Corporation - Celera Genomics Group Common Stock at a public offering price of $225 per share. All of these lawsuits have been consolidated into a single case and an amended consolidated complaint was filed on August 21, 2001. The consolidated complaint generally alleges that the prospectus used in connection with the offering was inaccurate or misleading because it failed to adequately disclose the alleged opposition of the Human Genome Project and two of its supporters, the governments of the United States and the United Kingdom, to providing patent protection to the Company's genomic-based products. Although Celera Genomics has never sought, or intended to seek, a patent on the basic human genome sequence data, the complaint also alleges that the Company did not adequately disclose the risk that it would not be able to patent this data. The consolidated complaint seeks unspecified monetary damages, rescission, costs and expenses, and other relief as the court deems proper. The Company and the other defendants have filed a motion to dismiss the case, which motion is pending before the court. Although the Company believes the asserted claims are without merit and intends to defend the case vigorously, the outcome of this or any other -53- litigation is inherently uncertain. The defense of this case will require management attention and resources. Risks Relating to Celera Diagnostics, a Joint Venture Between Applied Biosystems and Celera Genomics Celera Diagnostics' ability to develop and commercialize proprietary diagnostic products is unproven. Celera Diagnostics faces the difficulties inherent in developing and commercializing diagnostic products. It is possible that Celera Diagnostics' discovery and development efforts will not result in any commercial products or services. In particular, Celera Diagnostics and its collaborators are seeking to develop new diagnostic products based on information derived from the study of the genetic material of organisms, or genomics, and the study of proteins, or proteomics. This method carries inherent risks, as only a limited number of diagnostic products based on genomic or proteomic discoveries have been developed and commercialized to date. Diagnostic product candidates may never result in a commercialized product. Most of Celera Diagnostics' potential diagnostic products are in various stages of research and development and will require significant additional research and development efforts by Celera Diagnostics or its collaborators before they can be marketed. These efforts include extensive clinical testing and may require lengthy regulatory review and clearance or approval by the United States Food and Drug Administration and comparable agencies in other countries. The development of Celera Diagnostics' new diagnostics products is highly uncertain and subject to a number of significant risks. Diagnostic product candidates that appear to be promising at early stages of development may not be developed into commercial products, or may not be successfully marketed, for a number of reasons, including: o Celera Diagnostics or its collaborators may not successfully complete any research and development efforts; o any diagnostic products Celera Diagnostics or its collaborators develop may be found during clinical trials to have limited medical value; o Celera Diagnostics or its collaborators may fail to obtain required regulatory approvals for products they develop; o Celera Diagnostics or its collaborators may be unable to manufacture enough of any potential products at an acceptable cost and with appropriate quality; o any diagnostic products Celera Diagnostics or its collaborators develop may not be competitive with other existing or future products; o adequate reimbursement for Celera Diagnostics' and its collaborators' products may not be available to physicians or patients from the government or insurance companies; and -54- o Celera Diagnostics may be unable to obtain necessary intellectual property protection, or third parties may own proprietary rights that prevent Celera Diagnostics or its collaborators from commercializing their products. If Celera Diagnostics fails to satisfy regulatory requirements for any diagnostic product candidate, it may be unable to complete the development and commercialization of that product. Celera Diagnostics is currently developing its capability to move potential products through clinical testing, manufacturing, and the approval processes of the United States Food and Drug Administration and comparable agencies in other countries. In the United States, either Celera Diagnostics or its collaborators must show through pre-clinical studies and clinical trials that each of Celera Diagnostics' diagnostic product candidates is safe and effective for each indication before obtaining regulatory clearance from the United States Food and Drug Administration for the commercial sale of that product. Outside of the United States, the regulatory requirements vary from country to country. If Celera Diagnostics or its collaborator fails to adequately show the safety and effectiveness of a diagnostic product, regulatory clearance or approval could be delayed or denied. The results from pre-clinical studies may be different from the results that are obtained in large-scale clinical trials. Celera Diagnostics cannot be certain that it will show sufficient safety and effectiveness in its clinical trials to allow it to obtain the needed regulatory clearance or approval. The regulatory review and approval process can take many years and require substantial expense and may not be successful. A number of companies in the diagnostics industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier studies. Even if Celera Diagnostics obtains regulatory clearance or approval, it will be subject to certain risks and uncertainties relating to regulatory compliance, including: post-approval clinical studies and inability to meet the compliance requirements of the United States Food and Drug Administration's Good Manufacturing Practices (Quality System) regulations. In addition, the occurrence of manufacturing problems could cause subsequent suspension of product manufacture or withdrawal of approval, or could require reformulation of a diagnostic product, additional testing, or changes in labeling of the product. This could delay or prevent Celera Diagnostics from generating revenues from the sale of that diagnostic product. Celera Diagnostics' products may not be fully accepted by physicians and laboratories. Celera Diagnostics' growth and success will depend on market acceptance by physicians and laboratories of its products as clinically useful and cost-effective. Celera Diagnostics expects that most of its products will use genotyping and gene expression information to predict predisposition to diseases, disease progression or severity, or responsiveness to treatment. Market acceptance will depend on the widespread acceptance and use by doctors and clinicians of genetic testing for these purposes. The use of genotyping and gene expression information by doctors and clinicians for these purposes is relatively new. Celera Diagnostics cannot be certain that doctors and clinicians will want to use its products designed for these purposes. Even if genetic testing is accepted as a method to manage health care, Celera Diagnostics cannot be certain that its products will be accepted in the clinical diagnostic market. If genetic testing becomes widely accepted in the clinical diagnostic market, Celera Diagnostics -55- cannot predict the extent to which doctors and clinicians may be willing to utilize Celera Diagnostics' products in providing patient care. Doctors and clinicians may prefer competing technologies and products that can be used for the same purposes as Celera Diagnostics' products. Ethical, legal and social issues related to the use of genetic information and genetic testing may cause less demand for Celera Diagnostics' products. Genetic testing has raised issues regarding confidentiality and the appropriate uses of the resulting information. For example, concerns have been expressed regarding the use of genetic test results by insurance carriers or employers to discriminate on the basis of this information, resulting in barriers to the acceptance of genetic tests by consumers. This could lead to governmental authorities calling for limits on or regulation of the use of genetic testing or prohibiting testing for genetic predisposition to certain diseases, particularly those that have no known cure. Any of these scenarios could reduce the potential markets for products of Celera Diagnostics. If insurance companies and other third-party payors do not reimburse doctors and patients for Celera Diagnostics' tests, its ability to sell its products to the clinical diagnostics market will be impaired. Sales of Celera Diagnostics' products will depend, in large part, on the availability of adequate reimbursement to users of those products from government insurance plans, including Medicare and Medicaid in the United States, managed care organizations, and private insurance plans. Physicians' recommendations to use diagnostic tests, as well as decisions by patients to pursue those tests, are likely to be influenced by the availability of reimbursement by insurance companies and other third party payors. Third-party payors are increasingly attempting to contain health care costs by limiting both the extent of coverage and the reimbursement rate for testing and treatment products and services. In particular, products and services that are determined to be investigational in nature or that are not considered "reasonably and necessary" for diagnosis or treatment may be denied reimbursement coverage. In addition, third-party payors are increasingly limiting reimbursement coverage for medical diagnostic products and, in many instances, are exerting pressure on medical suppliers to reduce their prices. Thus, third-party reimbursement may not be consistently available or financially adequate to cover the cost of Celera Diagnostics' products. This could limit the ability of Celera Diagnostics to sell its products, cause Celera Diagnostics to reduce the prices of its products, or otherwise adversely affect Celera Diagnostics' operating results. Because each third-party payor individually approves reimbursement, obtaining these approvals is a time-consuming and costly process that requires Celera Diagnostics to provide scientific and clinical support for the use of each of its products to each payor separately with no assurance that such approval will be obtained. This process can delay the broad market introduction of new products and could have a negative effect on Celera Diagnostics' revenues and operating results. -56- If Celera Diagnostics fails to maintain its existing collaborative relationships and enter into new collaborative relationships, or if collaborators do not perform under collaboration agreements, development of its diagnostic products could be delayed. Celera Diagnostics' strategy for the discovery, development, clinical testing, manufacturing and commercialization of most of its diagnostic product candidates includes entering into collaborations with partners. Although Celera Diagnostics has expended, and continues to expend, time and money on internal research and development programs, it may be unsuccessful in creating diagnostic product candidates that would enable it to form additional collaborations. Celera Diagnostics has entered into a strategic alliance agreement with Abbott Laboratories for the joint discovery, development, manufacturing, and commercialization of nucleic acid-based diagnostic products. The Abbott Laboratories agreement may be terminated by the non-breaching party in the event of a material breach and, under certain circumstances, by either party in the event of a change in control of the other party. In addition, the amount and timing of resources to be devoted to research, development, eventual clinical trials and commercialization activities by Abbott are not within Celera Diagnostics' control. Future collaborations with other third parties are likely to be subject to similar terms and conditions. Celera Diagnostics cannot ensure that its collaborators will perform their obligations as expected. If any of Celera Diagnostics' collaborators terminate or elect to cancel their agreements or otherwise fail to conduct their collaborative activities in a timely manner, the development or commercialization of diagnostics products may be delayed or otherwise adversely affected. If in some cases Celera Diagnostics assumes responsibilities for continuing programs on its own after termination of a collaboration, Celera Diagnostics may be required to devote additional resources to product development and commercialization or Celera Diagnostics may need to cancel certain development programs. Celera Diagnostics does not have marketing capability in the clinical diagnostic market. Celera Diagnostics currently does not have a marketing organization. Accordingly, its ability to successfully sell its products will depend on its ability to either develop a marketing organization or work with Abbott Laboratories under their current agreement, or a combination of both. In jurisdictions where Celera Diagnostics uses third party distributors, its success will depend to a great extent on the efforts of the distributors. Celera Diagnostics has limited manufacturing capability and may encounter difficulties expanding Celera Diagnostics' operations. Celera Diagnostics has limited commercial manufacturing experience and capabilities. If product sales increase, Celera Diagnostics will have to increase the capacity of its manufacturing processes and facilities or rely on its collaborators, if any. Celera Diagnostics may encounter difficulties in scaling-up manufacturing processes and may be unsuccessful in overcoming such difficulties. In such circumstances, Celera Diagnostics' ability to meet product demand may be impaired or delayed. Celera Diagnostics' facilities are subject, on an ongoing basis, to the United States Food and Drug Administration's Good Manufacturing Practices (Quality System) regulations, international quality standards and other regulatory requirements, including requirements for -57- good manufacturing practices. Celera Diagnostics may encounter difficulties expanding Celera Diagnostics' manufacturing operations in accordance with these regulations and standards, which could result in a delay or termination of manufacturing or an inability to meet product demand. Celera Diagnostics is currently operating its manufacturing at an Applied Biosystems group facility, and intends to relocate these operations to a new facility currently under construction. Celera Diagnostics expects to operate its manufacturing out of a single facility for the foreseeable future, and it does not have alternative production plans in place or alternative facilities available should its existing manufacturing facility or its new manufacturing facility, after completion of and relocation to this facility, cease to function. Accordingly, Celera Diagnostics' business could be adversely affected by unexpected interruptions in manufacturing caused by events such as labor problems, equipment failures, or other factors, and the resulting inability to meet customer orders on a timely basis. Celera Diagnostics' research and product development depends on access to tissue samples and other biological materials. Celera Diagnostics needs access to human tissue samples from diseased and healthy individuals, other biological materials, and related clinical and other information, which may be in limited supply. Celera Diagnostics may not be able to obtain or maintain access to these materials and information on acceptable terms. In addition, government regulation in the United States and foreign countries could result in restricted access to, or use of, human tissue samples. If Celera Diagnostics loses access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on its use of the information generated from tissue samples, its business may be harmed. Single suppliers or a limited number of suppliers provide key components of Celera Diagnostics' products. If these suppliers fail to supply these components, Celera Diagnostics may be unable to satisfy product demand. Several key components of Celera Diagnostics' products come from, or are manufactured for Celera Diagnostics by, a single supplier or a limited number of suppliers. This applies in particular to components such as enzymes and fluorescent dyes. Celera Diagnostics acquires some of these and other key components on a purchase-order basis, meaning that the supplier is not required to supply Celera Diagnostics with specified quantities over longer periods of time or set-aside part of its inventory for Celera Diagnostics' forecasted requirements. Celera Diagnostics has not arranged for alternative supply sources for some of these components and it may be difficult to find alternative suppliers, especially to replace enzymes and fluorescent dyes. If Celera Diagnostics' product sales increase beyond the forecast levels, or if its suppliers are unable or unwilling to supply it on commercially acceptable terms, it may not have access to sufficient quantities of key components on a timely basis and may be unable to satisfy product demand. In addition, if any of the components of Celera Diagnostics' products are no longer available in the marketplace, it may be forced to further develop its products or technology to incorporate alternate components. The incorporation of new components into its products may require Celera Diagnostics to seek approvals from the United States Food and Drug Administration or foreign regulatory agencies prior to commercialization. -58- Celera Diagnostics' competitive position depends on maintaining its intellectual property protection and obtaining licenses to intellectual property it may need from others. Celera Diagnostics' ability to compete and to achieve and maintain profitability depends on its ability to protect its proprietary discoveries or technologies, in large part, through obtaining and enforcing patent rights, maintaining its trade secrets, and operating without infringing the intellectual property rights of others. Celera Diagnostics' ability to obtain patent protection for the inventions it makes is uncertain. The patentability of biotechnology inventions involves complex factual and legal questions. As a result, it is difficult to predict whether patents will issue or the breadth of claims that will be allowed in biotechnology and pharmaceutical patents. This may be particularly true with regard to the patenting of gene sequences, gene functions, and genetic variations. In this regard, the United States Patent and Trademark Office has adopted guidelines for use in the review of the utility of inventions, particularly biotechnology inventions. These guidelines increased the amount of evidence required to demonstrate utility in order to obtain a patent in the biotechnology field, making patent protection more difficult to obtain. Although others have been successful in obtaining patents to biotechnology inventions, since the adoption of these guidelines, these patents have been issued with increasingly less frequency. As a result, patents may not issue from patent applications that Celera Diagnostics may own or license if the applicant is unable to satisfy the new guidelines. In some instances, patent applications in the United States are maintained in secrecy until a patent issues. In most instances, the content of United States and international patent applications is made available to the public approximately 18 months after the application's filing date. As a result, Celera Diagnostics cannot be certain that others have not filed patent applications for inventions covered by Celera Diagnostics' patent applications or that Celera Diagnostics inventors were the first to make the invention. Accordingly, Celera Diagnostics' patent applications may be preempted or Celera Diagnostics may have to participate in interference proceedings before the United States Patent and Trademark Office. These proceedings determine the priority of invention and the right to a patent for the claimed invention in the United States. Furthermore, lawsuits may be necessary to enforce any patents issued to Celera Diagnostics or to determine the scope and validity of the patent rights of third parties. Lawsuits and interference proceedings, even if they are successful, are expensive to pursue, and Celera Diagnostics could use a substantial amount of its financial resources in either case. An adverse outcome could subject Celera Diagnostics to significant liabilities to third parties and require Celera Diagnostics to license disputed rights from third parties or to cease development or sales of a product. Celera Diagnostics also relies on trade secret protection for its confidential and proprietary information and procedures. Celera Diagnostics protects its trade secrets through recognized practices, including access control, confidentiality and nonuse agreements with employees, consultants, collaborators and customers, and other security measures. These confidentiality and nonuse agreements may be breached, however, and Celera Diagnostics may not have adequate remedies for a breach. In addition, Celera Diagnostics' trade secrets may otherwise become known or be independently developed by competitors. Accordingly, it is unclear whether Celera Diagnostics' trade secrets will provide adequate protection. -59- Disputes may arise in the future with regard to the ownership of rights to any invention developed with collaborators. These and other possible disagreements with collaborators could lead to delays in the achievement of milestones or receipt of royalty payments or in research, development, and commercialization of Celera Diagnostics' products. In addition, these disputes could require or result in lawsuits or arbitration. Lawsuits and arbitration are time-consuming and expensive. Even if Celera Diagnostics wins, the cost of these proceedings could adversely affect its business, financial condition and operating results. Celera Diagnostics may infringe the intellectual property rights of third parties and may become involved in expensive intellectual property litigation. The intellectual property rights of biotechnology companies, including Celera Diagnostics, are generally uncertain and involve complex legal, scientific and factual questions. Celera Diagnostics' success in diagnostic discovery and development may depend, in part, on its ability to operate without infringing the intellectual property rights of others and to prevent others from infringing its intellectual property rights. There has been substantial litigation regarding patents and other intellectual property rights in the biotechnology and pharmaceutical industries. Celera Diagnostics may become a party to patent litigation or proceedings at the United States Patent and Trademark Office to determine its patent rights with respect to third parties. Interference proceedings may be necessary to establish which party was the first to make the invention sought to be patented. Celera Diagnostics may become involved in patent litigation against third parties to enforce its patent rights, to invalidate patents held by the third parties, or to defend against these claims. The cost to Celera Diagnostics of any patent litigation or similar proceeding could be substantial, and it may absorb significant management time. If infringement litigation against Celera Diagnostics is resolved unfavorably to Celera Diagnostics, Celera Diagnostics may be enjoined from manufacturing or selling its products or services without a license from a third party. Celera Diagnostics may not be able to obtain a license on commercially acceptable terms, or at all. Introduction of new products may expose Celera Diagnostics to product liability claims. New products developed by Celera Diagnostics or its collaborators could expose Celera Diagnostics to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of human diagnostic products. In addition, clinicians, patients, third-party payors, and others may at times seek damages based on testing or analysis errors based on a technician's misreading of results, mishandling of the patient samples, or similar claims. Product liability claims or product recalls, regardless of the ultimate outcome, could require Celera Diagnostics to spend significant time and money in litigation and to pay significant damages. Although Celera Diagnostics expects to seek and maintain product liability insurance to cover claims relating to the testing and use of diagnostic products, there can be no assurance that such insurance will be available on commercially reasonable terms, if at all, or that the amount of coverage obtained will be adequate to cover losses from any particular claim. -60- The diagnostics industry is intensely competitive and evolving. There is intense competition among health care, biotechnology, and diagnostic companies attempting to discover candidates for potential new diagnostic products. These companies may: o develop new diagnostic products in advance of Celera Diagnostics; o develop diagnostic products which are more effective or more cost-effective than those developed by Celera Diagnostics; o obtain regulatory approvals of their diagnostic products more rapidly than Celera Diagnostics; or o obtain patent protection or other intellectual property rights that would limit Celera Diagnostics' ability to develop and commercialize, or its customers' ability to use, Celera Diagnostics' diagnostic products. Celera Diagnostics competes with entities in the United States and abroad that are engaged in the development and commercialization of products that provide genetic information. They include: o purveyors of genetic testing services, which are not subject to the same clinical validation requirements as Celera Diagnostics' products, and which do not require United States Food and Drug Administration or other regulatory approval, including Laboratory Corporation of America Holdings, Quest Diagnostics Inc., and Specialty Laboratories, Inc.; o manufacturers of analyte specific reagents and genotyping test kits; o purveyors of phenotyping assay services; and o manufacturers and distributors of DNA probe-based diagnostic systems. Electricity shortages and earthquakes could disrupt operations in California. The headquarters and principal operations of Celera Diagnostics are located in Alameda, California. In 2001, the State of California experienced a statewide electricity shortage due to a variety of factors. Although some of the factors causing this shortage have been eliminated or mitigated, there are ongoing concerns about the availability of electricity in California, particularly during peak usage periods. Blackouts in Alameda, even of modest duration, could impair or cause a temporary suspension of Celera Diagnostics' operations, including the manufacturing and shipment of new products. Power disruptions of an extended duration or high frequency could have a material adverse effect on operating results. In addition, Alameda is located near major California earthquake faults. The ultimate impact of earthquakes on the Celera Diagnostics, its significant suppliers, and the general infrastructure is unknown, but operating results could be materially affected in the event of a major earthquake. -61- Risks Relating to a Capital Structure with Two Separate Classes of Common Stock Stockholders of the Company are stockholders of one company and, therefore, financial effects on one group could adversely affect the other. Applied Biosystems and Celera Genomics are not separate legal entities. As a result, stockholders will continue to be subject to all of the risks of an investment in the Company, including Applied Biosystems and Celera Genomics. The risks and uncertainties that may affect the operations, performance, development, and results of the businesses of Applied Biosystems and Celera Genomics are described above. The assets attributed to one group could be subject to the liabilities of the other group, even if these liabilities arise from lawsuits, contracts, or indebtedness that the Company attributes to the other group. If the Company is unable to satisfy one group's liabilities out of the assets attributed to it, the Company may be required to satisfy those liabilities with assets attributed to the other group. Financial effects from one group that affect the Company's consolidated results of operations or financial condition could, if significant, affect the results of operations or financial condition of the other group and the market price of the common stock relating to the other group. In addition, net losses of either group and dividends or distributions on, or repurchases of, either class of common stock or repurchases of preferred stock will reduce the funds the Company can pay as dividends on each class of common stock under Delaware law. For these reasons, stockholders should read the consolidated financial information with the financial information the Company provides for each group. The market price of either class of the Company's common stock may not reflect the separate performance of the group related to that common stock. The market price of Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock may not reflect the separate performance of the business of the group relating to that class of common stock. The market price of either class of common stock could simply reflect the performance of the Company as a whole, or the market price of either class of common stock could move independently of the performance of the business of either group. Investors may discount the value of either class of common stock because it is part of a common enterprise rather than a stand-alone company. The market price of either class of the Company's common stock may be affected by factors that do not affect traditional common stock. o The complex nature of the terms of Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock may adversely affect the market price of either class of common stock. The complex nature of the terms of the two classes of common stock, such as the convertibility of Applera Corporation - Applied Biosystems Group Common Stock into Applera Corporation - Celera Genomics Group Common Stock, or vice versa, and the potential difficulties investors may have understanding these terms, may adversely affect the market price of either class of common stock. o The market price of Applera Corporation - Applied Biosystems Group Common Stock or Applera Corporation - Celera Genomics Group Common Stock may be adversely affected by the fact that holders have limited legal interests in the group relating to the class of common stock held as a separate legal entity. For example, -62- as described in greater detail in the subsequent risk factors, holders of either class of common stock generally do not have separate class voting rights with respect to significant matters affecting either group. In addition, upon a liquidation or dissolution of the Company, holders of either class of common stock will not have specific rights to the assets of the group relating to the class of common stock held and will not be entitled to receive proceeds that are proportional to the relative performance of that group. o The market price of Applera Corporation - Applied Biosystems Group Common Stock or Applera Corporation - Celera Genomics Group Common Stock may be adversely affected by events involving the group relating to the other class of common stock or the performance of the class of common stock relating to that group. Events, such as earnings announcements or other developments concerning one group that the market does not view favorably and which thus adversely affect the market price of the class of common stock relating to that group, may adversely affect the market price of the class of common stock relating to the other group. Because both classes of common stock are common stock of the Company, an adverse market reaction to one class of common stock may, by association, cause an adverse reaction to the other class of common stock. This reaction may occur even if the triggering event was not material to the Company as a whole. Limits exist on the voting power of group common stock. o Applera Corporation - Celera Genomics Group Common Stock May Not Have Any Influence on the Outcome of Stockholder Voting. Applera Corporation - Applied Biosystems Group Common Stock currently has a substantial majority of the voting power of the Company's common stock and had approximately 83.3% of the voting power as of August 28, 2002, the record date for the Company's 2002 annual meeting of stockholders. Except in limited circumstances where there is separate class voting, the relative voting power of the two classes of common stock fluctuates based on their relative market values. Therefore, except in cases of separate class voting, either class of common stock that is entitled to more than the number of votes required to approve any stockholder action could control the outcome of the vote even if the matter involves a divergence or conflict of the interests of the holders of Applera Corporation - Applied Group Biosystems Common Stock and Applera Corporation - Celera Genomics Group Common Stock. These matters may include mergers and other extraordinary transactions. o A class of group common stock with less than majority voting power can block action if a class vote is required. If Delaware law, stock exchange rules, or the Company's Board of Directors requires a separate vote on a matter by the holders of either Applera Corporation - Applied Biosystems Group Common Stock or Applera Corporation - Celera Genomics Group Common Stock, those holders could prevent approval of the matter even if the holders of a majority of the total number of votes cast or entitled to be cast, voting together as a class, were to vote in favor of it. As a result, in cases where holders of Applera Corporation - Applied Biosystems Group Common Stock or Applera Corporation - Celera Genomics Group Common Stock vote as separate classes on a proposal, the affirmative vote of shares representing a majority of one class of common stock will not prevent the holders of the other class of common stock from defeating the proposal. -63- o Holders of only one class of common stock cannot ensure that their voting power will be sufficient to protect their interests. Since the relative voting power per share of Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock will fluctuate based on the market values of the two classes of common stock, the relative voting power of a class of common stock could decrease. As a result, holders of shares of only one of the two classes of common stock cannot ensure that their voting power will be sufficient to protect their interests. o Stockholders of either class of common stock will not have some of the stockholder rights traditionally associated with common stock. Neither Applied Biosystems nor Celera Genomics will have a separate board of directors to represent solely the interests of either class of common stock as holders of that class. Consequently, there will be no board of directors that owes any separate duties to holders of one class of common stock as holders of that class. The Company's Board of Directors will act in accordance with its good faith business judgment of the best interests of the Company, taking into consideration the interests of all common stockholders regardless of class or series, which may be detrimental to holders of one class of common stock has holders of that class. Stockholders may not have any remedies for breach of fiduciary duties if any action by directors or officers has a disadvantageous effect on either class of common stock. Stockholders may not have any remedies if any action or decision of the Company's Board of Directors or officers has a disadvantageous effect on Applera Corporation - Applied Biosystems Group Common Stock or Applera Corporation - Celera Genomics Group Common Stock compared to the other class of common stock. Cases in Delaware involving tracking stocks have established that decisions by directors or officers involving differing treatment of tracking stocks are judged under the principle known as the "business judgment rule" unless self-interest is shown. In addition, principles of Delaware law established in cases involving differing treatment of two classes of common stock or two groups of holders of the same class of common stock provide that a board of directors owes an equal duty to all stockholders regardless of class or series. Absent abuse of discretion, a good faith business decision made by a disinterested and adequately informed Board of Directors, Board of Directors' committee, or officer of the Company with respect to any matter having different effects on holders of Applera Corporation - Applied Biosystems Group Common Stock and holders of Applera Corporation - Celera Genomics Group Common Stock would be a defense to any challenge to the determination made by or on behalf of the holders of either class of common stock. Stock ownership could cause directors and officers to favor one group over the other. As a policy, the Company's Board of Directors periodically monitors the ownership of shares of Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock by the Company's directors and senior officers as well as their option holdings and other benefits so that their interests are not -64- misaligned with the two classes of common stock and with their duty to act in the best interests of the Company and its stockholders as a whole. However, because the actual stock market value of their interests in Applera Corporation - - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock could vary significantly, it is possible that they could favor one group over the other as a result of their common stock holdings, options and other benefits. As of August 26, 2002, the Company's directors and senior officers held shares of Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock representing approximately equal percentages of the total shares outstanding of Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock. The stock market value of these shares will vary with fluctuations in the market price of Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock. However, the market capitalization of Applied Biosystems is substantially greater than that of Celera Genomics and, therefore, the market value of Applera Corporation - Applied Biosystems Group Common Stock held by the Company's directors and senior officers was significantly higher than the market value of Applera Corporation - Celera Genomics Group Common Stock held by them on that date. Numerous potential conflicts of interest exist between the classes of common stock that may be difficult to resolve by the Company's Board of Directors or that may be resolved adversely to one of the classes. o Allocation of corporate opportunities could favor one group over the other. The Company's Board of Directors may be required to allocate corporate opportunities between Applied Biosystems and Celera Genomics. In some cases, the Company's directors could determine that a corporate opportunity, such as a business that the Company is acquiring or a new business, should be shared by the groups or be allocated to one group over the other. Any decisions could favor one group to the detriment of the other. o Applied Biosystems and Celera Genomics may compete with each other to the detriment of their businesses. The existence of two separate classes of common stock will not prevent Applied Biosystems and Celera Genomics from competing with each other. Any competition between Applied Biosystems and Celera Genomics could be detrimental to the businesses of either or both of the groups. Under a Board of Directors' policy, the groups will generally not engage in the principal businesses of the other, except for joint transactions with each other. However, the Company's Chief Executive Officer or Board of Directors will permit indirect competition between the groups, such as one group doing business with a competitor of the other group, based on his or its good faith business judgment that the competition is in the best interests of the Company and all of the Company's stockholders as a whole. In addition, the groups may compete in a business that is not a principal business of the other group. o The Company's Board of Directors may pay more or less dividends on group common stock than if that group were a separate company. Subject to the limitations referred to below, the Company's Board of Directors has the authority to declare and pay dividends on Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock in any amount and could, in its sole discretion, declare and pay dividends exclusively -65- on Applera Corporation - Applied Biosystems Group Common Stock, exclusively on Applera Corporation - Celera Genomics Group Common Stock, or on both, in equal or unequal amounts. The Company's Board of Directors is not required to consider the amount of dividends previously declared on each class, the respective voting or liquidation rights of each class, or any other factor. The performance of one group may cause the Company's Board of Directors to pay more or less dividends on the common stock relating to the other group than if that other group were a stand-alone company. In addition, Delaware law and the Company's certificate of incorporation impose limitations on the amount of dividends that may be paid on each class of common stock. o Proceeds of mergers or consolidations may be allocated unfavorably. The Company's Board of Directors will determine how consideration to be received by holders of common stock in connection with a merger or consolidation involving the Company is to be allocated among holders of each class of common stock. This percentage may be materially more or less than that which might have been allocated to the holders had the Company's Board of Directors chosen a different method of allocation. o Holders of either class of common stock may be adversely affected by a conversion of group common stock. The Company's Board of Directors could, in its sole discretion and without stockholder approval, determine to convert shares of Applera Corporation - Applied Biosystems Group Common Stock into shares of Applera Corporation - Celera Genomics Group Common Stock, or vice versa, at any time, including when either or both classes of common stock may be considered to be overvalued or undervalued. If the Company's Board of Directors chose to issue Applera Corporation - Celera Genomics Group Common Stock in exchange for Applera Corporation - Applied Biosystems Group Common Stock, or vice versa, the conversion would dilute the interests in the Company of the holders of the class of common stock being issued in the conversion. If the Company's Board of Directors were to choose to issue Applera Corporation - Celera Genomics Group Common Stock in exchange for Applera Corporation - Applied Biosystems Group Common Stock, or vice versa, the conversion could give holders of shares of the class of common stock being converted a greater or lesser premium than any premium that was paid or might be paid by a third-party buyer of all or substantially all of the assets of the group whose stock is converted. o Cash proceeds of newly issued Applera Corporation - Celera Genomics Group Common Stock in the future could be allocated to Applied Biosystems. If and to the extent Applied Biosystems holds "Celera Genomics Designated Shares" at the time of any future sale of Applera Corporation - Celera Genomics Group Common Stock, the Company's Board of Directors could allocate some or all of the proceeds of that sale to Applied Biosystems in consideration of a reduction in the number of these shares. Celera Genomics Designated Shares are a type of authorized shares of Applera Corporation - Celera Genomics Group Common Stock. Any decision could favor one group over the other group. For example, the decision to allocate the proceeds of that sale to Applied Biosystems could adversely affect Celera Genomics' ability to obtain funds to finance its growth strategies. Applied Biosystems does not hold any Celera Genomics Designated Shares as of the date of this Annual Report on Form 10-K. Celera Genomics Designated Shares could be issued in the future if the -66- Company's Board of Directors determines that Celera Genomics requires additional capital to finance its business and that Applied Biosystems should supply that capital. The Company's Board of Directors may change its management and allocation policies without stockholder approval to the detriment of either group. The Company's Board of Directors may modify or rescind the Company's policies with respect to the allocation of corporate overhead, taxes, debt, interest, and other matters, or may adopt additional policies, in its sole discretion without stockholder approval. A decision to modify or rescind these policies, or adopt additional policies, could have different effects on holders of Applera Corporation - Applied Biosystems Group Common Stock and holders of Applera Corporation - Celera Genomics Group Common Stock or could result in a benefit or detriment to one class of stockholders compared to the other class. The Company's Board of Directors will make any decision in accordance with its good faith business judgment that the decision is in the best interests of the Company and all of its stockholders as a whole. Either Applied Biosystems or Celera Genomics may finance the other group on terms unfavorable to either group. From time to time, the Company anticipates that it will transfer cash and other property between groups to finance their business activities. When this occurs, the group providing the financing will be subject to the risks relating to the group receiving the financing. The Company will account for those transfers in one of the following ways: o as a reallocation of pooled debt or preferred stock; o as a short-term or long-term loan between groups or as a repayment of a previous borrowing; o as an increase or decrease in Celera Genomics Designated Shares; or o as a sale of assets between groups. The Company's Board of Directors has not adopted specific criteria for determining when it will account for transfer of cash or other property as a reallocation of pooled debt or preferred stock, a loan or repayment, an increase or decrease in Celera Genomics Designated Shares, or a sale of assets. These determinations, including the terms of any transactions accounted for as debt, may be unfavorable to either the group transferring or receiving the cash or other property. The Company's Board of Directors expects to make these determinations, either in specific instances or by setting generally applicable policies, after considering the financing requirements and objectives of the receiving group, the investment objectives of the transferring group, and the availability, cost, and time associated with alternative financing sources, prevailing interest rates, and general economic conditions. The Company cannot assure stockholders that any terms that it fixes for debt will approximate those that could have been obtained by the borrowing group if it were a stand-alone company. -67- Celera Genomics could incur a higher tax liability than if it were a stand-alone taxpayer. The Company's tax allocation policy provides that some tax benefits that cannot be used by the group generating those benefits but can be used on a consolidated basis are to be transferred, without reimbursement, to the group that can use the benefits. Any tax benefits that are transferred from Celera Genomics to Applied Biosystems will not be carried forward to reduce Celera Genomics' future tax liability. As a result of this policy, Celera Genomics generated tax benefits of $32.2 million for the Company's 2001 fiscal year and $19.0 million for the Company's 2002 fiscal year that were utilized by Applied Biosystems with no reimbursement to Celera Genomics. This and future use by Applied Biosystems, without reimbursement, of tax benefits generated by Celera Genomics will result in Celera Genomics paying a greater portion of the total corporate tax liability than would have been the case if Celera Genomics were a stand-alone taxpayer. Holders of group common stock may receive less consideration upon a sale of assets than if the group were a separate company. The Company's certificate of incorporation provides that if a disposition of all or substantially all of the assets of either group occurs, the Company must, subject to certain exceptions: o distribute to holders of the class of common stock relating to that group an amount equal to the net proceeds of such disposition; or o convert at a 10% premium the common stock relating to that group into shares of the class of common stock relating to the other group. If the group subject to the disposition were a separate, independent company and its shares were acquired by another person, some of the costs of that disposition, including corporate level taxes, might not be payable in connection with that acquisition. As a result, if the group subject to the disposition were a stand-alone company, stockholders of that group might receive a greater amount than the net proceeds that would be received by those stockholders if the assets of that group were sold and the proceeds distributed to those stockholders. In addition, the Company cannot assure stockholders that the net proceeds per share of the common stock relating to that group will be equal to or more than the market value per share of that common stock prior to or after announcement of a disposition. The Company's capital structure and variable vote per share may discourage acquisitions of a group or a class of common stock. A potential acquirer could acquire control of the Company by acquiring shares of common stock having a majority of the voting power of all shares of common stock outstanding. This majority could be obtained by acquiring a sufficient number of shares of both classes of common stock or, if one class of common stock has a majority of the voting power, only shares of that class since the relative aggregate voting power of the two classes of common stock fluctuates based on their relative aggregate market values. Currently, Applera Corporation - Applied Biosystems Group Common Stock has a substantial majority of the voting power. As a -68- result, it might be possible for an acquirer to obtain control by purchasing only shares of Applera Corporation - Applied Biosystems Group Common Stock. Decisions by the Company's Board of Directors and officers that affect market values could adversely affect voting and conversion rights. The relative voting power per share of each class of common stock and the number of shares of one class of common stock issuable upon the conversion of the other class of common stock will vary depending upon the relative market values of Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock. The market value of either or both classes of common stock could be adversely affected by market reaction to decisions by the Company's Board of Directors or management that investors perceive as affecting differently one class of common stock compared to the other. These decisions could involve changes to the Company's management and allocation policies, transfers of assets between groups, allocations of corporate opportunities and financing resources between groups, and changes in dividend policies. Provisions governing common stock could discourage a change of control and the payment of a premium for stockholders' shares. The Company's stockholder rights plan could prevent stockholders from profiting from an increase in the market value of their shares as a result of a change in control of the Company by delaying or preventing a change in control. The existence of two classes of common stock could also present complexities and may pose obstacles, financial and otherwise, to an acquiring person. In addition, provisions of Delaware law and the Company's certificate of incorporation and bylaws may also deter hostile takeover attempts. Legislative proposals could have adverse tax consequences for the Company and holders of Applera Corporation - Celera Genomics Group Common Stock and Applera Corporation - Applied Biosystems Group Common Stock. The Clinton Administration Budget Proposals in 1999 and 2000 proposed legislation that would have adversely affected holders of tracking stock such as Applera Corporation - Celera Genomics Group Common Stock and Applera Corporation - - Applied Biosystems Group Common Stock. The 1999 proposal would have required corporate-level gain recognition on the issuance of tracking stock, while the 2000 proposal would have required that the stockholders of the issuing corporation be taxed upon the receipt of tracking stock in specified circumstances. Although Congress did not act on either proposal and the 2001 and 2002 Bush Administration Budget Proposals do not contain a similar provision, it is impossible to predict whether any proposals relating to tracking stock will be made in the future, and to what extent Congress would act upon any proposals. The Company may convert Applera Corporation - Celera Genomics Group Common Stock or Applera Corporation - Applied Biosystems Group Common Stock into shares of the other class without any premium if, based on the legal opinion of its tax counsel, it is more likely than not as a result of the enactment of legislative changes or administrative proposals or changes that the Company or its stockholders will be subject to tax upon issuance of Applera Corporation - Celera Genomics Group Common Stock or Applera Corporation - Applied Biosystems Group Common Stock or that the stock will not be treated as stock of the Company. -69- Item 6. SELECTED FINANCIAL DATA The Company incorporates herein by reference pages 9 and 10 of the Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company incorporates herein by reference pages 11-45 of the Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company incorporates herein by reference page 30 of the Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and the supplementary financial information included in the Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002, are incorporated herein by reference: the Consolidated Financial Statements and the report thereon of PricewaterhouseCoopers LLP dated July 25, 2002, on pages 46-84 of said Annual Report, including Note 11, page 69, which contains unaudited quarterly financial information. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -70- PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Identification and Business Experience of Directors With respect to the identification and business experience of the Company's directors and persons nominated to become directors, the Company incorporates herein by reference pages 3 and 4 of the Company's Proxy Statement dated September 4, 2002, in connection with its Annual Meeting of Stockholders to be held on October 17, 2002. Identification and Business Experience of Executive Officers The following is a list of the Company's executive officers, their ages, and their corporate offices with the Company and other positions held as of September 27, 2002.
Name Age Present Corporate Office (Year First Elected), and Other Positions Held - ---- --- ----------------------------------------------------------------------- Ugo D. DeBlasi................40 Assistant Controller (1999), and Vice President, Finance, Celera Genomics Group David S. Block................42 Vice President (2002), and Senior Vice President and Chief Operating Officer, Therapeutics, of the Celera Genomics Group Robert F.G. Booth.............48 Vice President (2002), and Senior Vice President, Research and Development, Celera Genomics Group Patrick T. Carroll............50 Vice President (2002), and Senior Vice President, Worldwide Sales, Service and Support, Applied Biosystems Group Michael W. Hunkapiller........53 Senior Vice President, and President, Applied Biosystems Group (1997) Vikram Jog....................46 Corporate Controller (1999), and Vice President, Finance, Celera Diagnostics Robert C. Jones...............47 Vice President (2001), and Senior Vice President, R&D, Applied Biosystems Group Barbara J. Kerr...............56 Vice President, Human Resources (2000) Sandeep Nayyar................43 Assistant Controller (2002), and Vice President, Finance, Applied Biosystems Group Kathy P. Ordonez..............52 Senior Vice President, and President, Celera Genomics Group and Celera Diagnostics (2002) Robert P. Ragusa..............42 Vice President (2001), and Senior Vice President, Global Operations, Applied Biosystems Group William B. Sawch..............48 Senior Vice President (1997) and General Counsel (1993) Deborah A. Smeltzer...........48 Vice President (2002), and Vice President, Knowledge Business, Applied Biosystems Group Tony L. White.................56 Chairman, President, and Chief Executive Officer (1995) Dennis L. Winger..............54 Senior Vice President and Chief Financial Officer (1997)
Each of the foregoing named officers was either elected at the last organizational meeting of the Company's Board of Directors, or elected by the Board since that date. The term of each officer will expire on October 17, 2002, the date of the next scheduled organizational meeting of the Board of Directors, unless renewed for another year. Each executive officer of the Company has been employed by the Company or a subsidiary in one or more executive or managerial capacities for at least the past five years, with the exception of Dr. Block, Dr. Booth, Mr. Jog, Ms. Kerr, Mr. Nayyar, Ms. Ordonez, Ms. Smeltzer, and Mr. Winger. Mr. DeBlasi previously served as Controller of the Company, from November 1996 to August 1999. Dr. Hunkapiller previously served as Vice President of the Company from September 1994 to October 1997. Mr. Sawch previously served as Vice President, General Counsel, and Secretary of the Company from July 1993 to October 1997, and as Senior Vice President, General Counsel, and Secretary of the Company from October 1997 to March 2000. -71- Dr. Block was elected Vice President of the Company on April 5, 2002. Prior to his employment by the Company in January 2002, Dr. Block was employed by DuPont Pharmaceuticals Company, an international pharmaceutical company, where he held a series of executive positions over 12 years, including most recently Executive Vice President of International Operations throughout 2001. Prior to that he was the Senior Vice President, Business Development and Strategic Planning from 1999 to 2001 and Vice President, Product Planning and Acquisition from 1997 to 1999. Dr. Booth was elected Vice President of the Company on August 15, 2002. Prior to his employment by the Company in August 2002, Dr. Booth was employed by Hoffmann-La Roche, a leading international healthcare company, where he held a series of executive positions over 13 years, including most recently as Senior Vice President responsible for all research and early development of inflammatory, viral, respiratory, and bone disease products from January 1996 to August 2002. Mr. Jog was elected Controller of the Company on August 19, 1999. Prior to his employment by the Company in August 1999, Mr. Jog served as Vice President and Controller of Hercules Incorporated, a manufacturer of chemicals, for seven years. Ms. Kerr was elected Vice President, Human Resources of the Company on September 5, 2000. Prior to her employment by the Company in September 2000, Ms. Kerr served as a principal of Quantic, Inc., a human resources and compensation consulting firm. Prior to that, Ms. Kerr was employed by Chiron Corporation, which conducts research and development in the fields of biological proteins, gene therapy, and combinatorial chemistry, where she was Vice President, Human Resources from 1990 to 1997. Mr. Nayyar was elected Assistant Controller of the Company on April 5, 2002. Prior to his employment by the Company in October 2001, Mr. Nayyar was employed by Quantum Corporation, a data storage company, where he was Vice President of Finance for the Hard Disk Drive Group from 2000 to 2001, Vice President, Finance for the High-end Storage Division from 1998 to 2000, Director of Finance for the Corporate Finance Group from 1997 to 1998, and Controller for the High Capacity Storage Group from 1994 to 1997. Ms. Ordonez was elected Vice President of the Company on December 1, 2000, and was elected Senior Vice President, and President Celera Genomics Group and Celera Diagnostics on August 15, 2002. Prior to her employment by the Company in December 2000, Ms. Ordonez was employed by Hoffmann-La Roche, a leading international healthcare company, where she was President and Chief Executive Officer of Roche Molecular Systems from 1991 to 2000. Ms. Smeltzer was elected Assistant Controller of the Company on November 18, 1999, and was elected Vice President of the Company on April 5, 2002. Prior to her employment by the Company in November 1999, Ms. Smeltzer served as Chief Financial Officer and Vice President of Genset, SA, a global genomics company from May 1996 to November 1999, and she was a general partner of Grotech Capital Group, Inc. from 1988 to 1996. Mr. Winger was elected Senior Vice President and Chief Financial Officer of the Company on October 16, 1997. Prior to his employment by the Company in September 1997, Mr. Winger was employed by Chiron Corporation, which conducts research and development in the fields of biological proteins, gene therapy, and combinatorial chemistry, where he was Senior Vice President, Finance and Administration, and Chief Financial Officer from 1989 to 1997. -72- Identification of Certain Significant Employees Not applicable. Family Relationships To the best of the Company's knowledge and belief, there is no family relationship between any of the Company's directors, executive officers, or persons nominated or chosen by the Company to become a director or an executive officer. Involvement in Certain Legal Proceedings To the best of the Company's knowledge and belief, none of the Company's directors, persons nominated to become directors, or executive officers has been involved in any proceedings during the past five years that are material to an evaluation of the ability or integrity of such persons to be directors or executive officers of the Company. Section 16(a) Beneficial Ownership Reporting Compliance Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to page 10 of the Company's Proxy Statement dated September 4, 2002, in connection with its Annual Meeting of Stockholders to be held on October 17, 2002. Item 11. EXECUTIVE COMPENSATION The Company incorporates herein by reference pages 11-21 of the Company's Proxy Statement dated September 4, 2002, in connection with its Annual Meeting of Stockholders to be held on October 17, 2002. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Securities Authorized for Issuance Under Equity Compensation Plans Information regarding securities authorized for issuance under equity compensation plans as of the end of the 2002 fiscal year is incorporated herein by reference to pages 35-37 of the Company's Proxy Statement dated September 4, 2002, in connection with its Annual Meeting of Stockholders to be held on October 17, 2002. Security Ownership of Certain Beneficial Owners Information concerning the security ownership of certain beneficial owners is incorporated herein by reference to pages 8-10 of the Company's Proxy Statement dated September 4, 2002, in connection with its Annual Meeting of Stockholders to be held on October 17, 2002. -73- Security Ownership of Management Information concerning the security ownership of management is incorporated herein by reference to pages 8-10 of the Company's Proxy Statement dated September 4, 2002, in connection with its Annual Meeting of Stockholders to be held on October 17, 2002. Changes in Control The Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is incorporated herein by reference to pages 21 and 22 of the Company's Proxy Statement dated September 4, 2002, in connection with its Annual Meeting of Stockholders to be held on October 17, 2002. Item 14. CONTROLS AND PROCEDURES There have not been any significant changes in the Company's internal controls or in other factors that could significantly affect these controls during the 90 days prior to the filing of this Annual Report on Form 10-K. -74- PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following financial statements, together with the report thereon of PricewaterhouseCoopers LLP dated July 25, 2002, appearing in the Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002, are incorporated by reference in this Annual Report on Form 10-K. With the exception of the aforementioned information and that which is specifically incorporated in Parts I and II, the Annual Report to Stockholders for the fiscal year ended June 30, 2002, is not to be deemed filed as part of this Annual Report on Form 10-K. Annual Report Page No. ----------------- Consolidated Statements of Operations Fiscal years 2000, 2001, and 2002 46 Consolidated Statements of Financial Position At June 30, 2001 and 2002 47 Consolidated Statements of Cash Flows Fiscal years 2000, 2001, and 2002 48 Consolidated Statements of Stockholders' Equity Fiscal years 2000, 2001, and 2002 49 Notes to Consolidated Financial Statements 50-83 Report of Management 84 Report of Independent Accountants 84 -75- (a) 2. Financial Statement Schedule The following additional financial data should be read in conjunction with the consolidated financial statements in said Annual Report to Stockholders for the fiscal year ended June 30, 2002. Schedules not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 10-K Page No. ------------- Report of Independent Accountants on Financial Statement Schedule................................................. 83 Schedule II - Valuation and Qualifying Accounts and Reserves................................................. 84 (a) 3. Exhibits Exhibit No. - --------- 2.1 Agreement and Plan of Merger dated March 10, 1999, among The Perkin-Elmer Corporation, a New York corporation, The Perkin-Elmer Corporation, a Delaware corporation, and PE Merger Corp., a New York corporation (incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-4 (No. 333-67797)). 2.2 Agreement and Plan of Merger dated as of June 12, 2001, among Applera Corporation, a Delaware corporation, Angel Acquisition Sub, Inc., a Delaware corporation, and Axys Pharmaceuticals, Inc., a Delaware corporation (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 12, 2001 (Commission file number 1-4389)). 3.1.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3(i) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2000 (Commission file number 1-4389)). 3.1.2 Certificate of Designations of Series A Participating Junior Preferred Stock and Series B Participating Junior Preferred Stock (incorporated by reference to Exhibit A to Exhibit 4.1 to the Company's Registration Statement on Form S-4 (No. 333-67797)). 3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 (No. 333-67797)). 4.1 Stockholder Protection Rights Agreement between the Company and BankBoston, N.A. (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4 (No. 333-67797)). 4.2 Amendment to Rights Agreement among BankBoston, N.A., EquiServe Trust Company, N.A., and the Company. 4.3 Credit Agreement dated as of April 20, 2000, among The Perkin-Elmer Corporation, the Company, the lenders party thereto, Salomon Smith Barney Inc., Wachovia Bank, N.A., The Chase Manhattan Bank, and Citibank, N.A. (incorporated by reference to Exhibit 4(2) to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 2000 (Commission file number 1-4389)). 4.4 Indenture dated as of September 22, 2000, between U.S. Bank Trust National Association and Axys Pharmaceuticals, Inc. (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K of Axys Pharmaceuticals, Inc. filed September 28, 2000 (Commission file number 0-22788)). 4.5 First Supplemental Indenture dated as of September 22, 2000, between U.S. Bank Trust National Association and Axys Pharmaceuticals, Inc. (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K of Axys Pharmaceuticals, Inc. filed September 28, 2000 (Commission file number 0-22788)). -76- 10.1 The Perkin-Elmer Corporation 1988 Stock Incentive Plan for Key Employees (incorporated by reference to Exhibit 10(4) to Annual Report on Form 10-K of the Company for the fiscal year ended July 31, 1988 (Commission file number 1-4389)).* 10.2 The Perkin-Elmer Corporation 1993 Stock Incentive Plan for Key Employees (incorporated by reference to Exhibit 99 to the Company's Registration Statement on Form S-8 (No. 33-50847)).* 10.3 The Perkin-Elmer Corporation 1996 Stock Incentive Plan (incorporated by reference to Exhibit 99 to the Company's Registration Statement on Form S-8 (No. 333-15189)).* 10.4 The Perkin-Elmer Corporation 1996 Employee Stock Purchase Plan, as amended October 15, 1998 (incorporated by reference to Exhibit A to the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders (Commission file number 1-4389)).* 10.5 The Perkin-Elmer Corporation 1997 Stock Incentive Plan (incorporated by reference to Exhibit 99 to the Company's Registration Statement on Form S-8 (No. 333-38713)).* 10.6 The Perkin-Elmer Corporation 1998 Stock Incentive Plan (incorporated by reference to Exhibit B to the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders (Commission file number 1-4389)).* 10.7 Applera Corporation 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders (Commission file number 1-4389)).* 10.8 Applera Corporation/Applied Biosystems Group 1999 Stock Incentive Plan, as amended October 18, 2001 (incorporated by reference to Appendix A to Schedule 14A, filed September 24, 2001, containing the Company's Proxy Statement for its 2001 Annual Meeting of Stockholders (Commission file number 1-4389)).* 10.9 Applera Corporation/Celera Genomics Group 1999 Stock Incentive Plan, as amended October 18, 2001 (incorporated by reference to Appendix B to Schedule 14A, filed September 24, 2001, containing the Company's Proxy Statement for its 2001 Annual Meeting of Stockholders (Commission file number 1-4389)).* 10.10 The Perkin-Elmer Corporation Supplemental Retirement Plan effective as of August 1, 1979, as amended through October 1, 1996 (incorporated by reference to Exhibit 10(22) to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 2000 (Commission file number 1-4389)).* 10.11 The Excess Benefit Plan of The Perkin-Elmer Corporation dated August 1, 1984, as amended through August 17, 2000 (incorporated by reference to Exhibit 10(23) to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 2000 (Commission file number 1-4389)).* 10.12 Third Amendment to The Excess Benefit Plan of The Perkin-Elmer Corporation effective January 1, 2001 (incorporated by reference to Exhibit 10.25 to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 2001 (Commission file number 1-4389)). * 10.13 Fourth Amendment to The Excess Benefit Plan of The Perkin-Elmer Corporation effective October 1, 2001.* 10.14 1993 Director Stock Purchase and Deferred Compensation Plan, as amended through March 17, 2000 (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2000 (Commission file number 1-4389)).* 10.15 Applera Corporation Performance Unit Bonus Plan, as amended through August 16, 2001 (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q of the Company for the quarter ended December 31, 2001 (Commission file number 1-4389)).* 10.16 The Estate Enhancement Plan of The Perkin-Elmer Corporation (incorporated by reference to Exhibit 10(22) to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 1997 (Commission file number 1-4389)).* 10.17 Applera Corporation Deferred Compensation Plan, as amended and restated effective as of January 1, 2002 (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q of the Company for the quarter ended December 31, 2001 (Commission file number 1-4389)).* 10.18 Applied Biosystems, Inc. 1992 Stock Option Plan (incorporated by reference to Exhibit 28(a) to the Company's Registration Statement on Form S-8 (No. 33-58778)).* 10.19 PerSeptive Biosystems, Inc. 1992 Stock Plan, as amended January 20, 1997 (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of PerSeptive Biosystems, Inc. for the fiscal quarter ended March 29, 1997 (Commission file No. 0-20032)).* 10.20 PerSeptive Biosystems, Inc. 1997 Non-Qualified Stock Option Plan, as amended August 21, 1997 (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 of PerSeptive Biosystems, Inc. (No. 333-38989)).* -77- 10.21 Molecular Informatics, Inc. 1997 Equity Ownership Plan (incorporated by reference to Exhibit 99 to the Company's Registration Statement on Form S-8 (No. 333-42683)).* 10.22 Paracel, Inc. Stock Option Plan.* 10.23 Axys Pharmaceuticals, Inc. 1989 Stock Plan (incorporated by reference to Exhibit 10.2 to Annual Report on Form 10-K of Axys Pharmaceuticals, Inc. for the fiscal year ended December 31, 1996 (Commission file number 0-22788)).* 10.24 Axys Pharmaceuticals, Inc. 1997 Equity Incentive Plan (incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-8 (No. 333-73980)).* 10.25 Axys Pharmaceuticals, Inc. 1997 Non-Officer Equity Incentive Plan (incorporated by reference to Exhibit 10.31 to the Company's Registration Statement on Form S-8 (No. 33-73980)).* 10.26 Employment Agreement dated as of September 12, 1995, between the Company and Tony L. White (incorporated by reference to Exhibit 10(21) to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 1995 (Commission file number 1-4389)).* 10.27 Amendment dated August 17, 2001, to Employment Agreement dated as of September 12, 1995, between the Company and Tony L. White (incorporated by reference to Exhibit 10.l4 to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 2001 (Commission file number 1-4389)).* 10.28 Change of Control Agreement dated as of September 12, 1995, between the Company and Tony L. White (incorporated by reference to Exhibit 10(16) to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 1995 (Commission file number 1-4389)).* 10.29 Employment Agreement dated as of November 16, 1995, between the Company and Michael W. Hunkapiller (incorporated by reference to Exhibit 10(11) to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 1996 (Commission file number 1-4389)).* 10.30 Deferred Compensation Contract dated as of September 15, 1994, between the Company and Michael W. Hunkapiller (incorporated by reference to Exhibit 10(7) to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 1995 (Commission file number 1-4389)).* 10.31 Employment Agreement dated as of November 16, 1995, between the Company and William B. Sawch (incorporated by reference to Exhibit 10(16) to Annual Report on Form 10-K of the Company for fiscal year ended June 30, 1998 (Commission file number 1-4389)).* 10.32 Deferred Compensation Contract dated as of July 15, 1993, between the Company and William B. Sawch (incorporated by reference to Exhibit 10(19) to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 1998 (Commission file number 1-4389)).* 10.33 Letter Agreement dated June 24, 1997, between the Company and Dennis L. Winger (incorporated by reference to Exhibit 10(18) to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 1998 (Commission file number 1-4389)).* 10.34 Employment Agreement dated as of September 25, 1997, between the Company and Dennis L. Winger (incorporated by reference to Exhibit 10(17) to Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 1998 (Commission file number 1-4389)).* 10.35 Employment Agreement dated as of December 1, 2000, between the Company and Kathy P. Ordonez.* 10.36 Celera Diagnostics Joint Venture Agreement dated as of April 1, 2001, among the Company, its Applied Biosystems Group, its Celera Genomics Group, Foster City Holdings, LLC, and Rockville Holdings, LLC 10.37 Description of Celera Genomics/Applied Biosystems Marketing and Distribution Agreement. 11 Computation of Net Income (Loss) per Share for the three years ended June 30, 2002 (incorporated by reference to Note 1 to Consolidated Financial Statements of Annual Report to Stockholders for the fiscal year ended June 30, 2002). 13 Annual Report to Stockholders for the fiscal year ended June 30, 2002 (to the extent incorporated herein by reference). 21 List of Subsidiaries. 23 Consent of PricewaterhouseCoopers LLP. 99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -78- 99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Management plan or compensatory plan or arrangement (b) Reports on Form 8-K During the quarter ended June 30, 2002, the Company did not file any Current Reports on Form 8-K. -79- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLERA CORPORATION By /s/ William B. Sawch ------------------------------------ William B. Sawch Senior Vice President and General Counsel Date: September 27, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Tony L. White September 27, 2002 - -------------------------------------------- Tony L. White Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) /s/ Dennis L. Winger September 27, 2002 - ----------------------------------------------------- Dennis L. Winger Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Vikram Jog September 27, 2002 - ----------------------------------------------------- Vikram Jog Corporate Controller (Principal Accounting Officer) -80- /s/ Richard H. Ayers September 27, 2002 - ----------------------------------------------------- Richard H. Ayers Director /s/ Jean-Luc Belingard September 27, 2002 - ----------------------------------------------------- Jean-Luc Belingard Director /s/ Robert H. Hayes September 27, 2002 - ----------------------------------------------------- Robert H. Hayes Director /s/ Arnold J. Levine September 27, 2002 - ----------------------------------------------------- Arnold J. Levine Director /s/ Theodore E. Martin September 27, 2002 - ----------------------------------------------------- Theodore E. Martin Director /s/ Georges C. St. Laurent, Jr. September 27, 2002 - ----------------------------------------------------- Georges C. St. Laurent, Jr. Director /s/ Carolyn W. Slayman September 27, 2002 - ----------------------------------------------------- Carolyn W. Slayman Director /s/ Orin R. Smith September 27, 2002 - -------------------------------------------- Orin R. Smith Director /s/ James R. Tobin September 27, 2002 - ----------------------------------------------------- James R. Tobin Director -81- CERTIFICATIONS Principal Executive Officer Certification I, Tony L. White, certify that: 1. I have reviewed this annual report on form 10-K of Applera Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 27, 2002 /s/ Tony L. White ----------------------------------- Chief Executive Officer Principal Financial Officer Certification I, Dennis L. Winger, certify that: 1. I have reviewed this annual report on Form 10-K of Applera Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 27, 2002 /s/ Dennis L. Winger ----------------------------------- Chief Financial Officer -82- REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Stockholders and Board of Directors of Applera Corporation Our audits of the consolidated financial statements referred to in our report dated July 25, 2002, appearing in the 2002 Annual Report to Stockholders of Applera Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Stamford, Connecticut July 25, 2002 -83- APPLERA CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS ENDED JUNE 30, 2000, 2001, and 2002 (Amounts in thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS ----------------- Balance at June 30, 1999............................................. $ 3,834 Charged to income in fiscal year 2000................................ 3,146 Deductions from reserve in fiscal year 2000.......................... (3,015) ------- Balance at June 30, 2000............................................. 3,965 Charged to income in fiscal year 2001................................ 3,326 Deductions from reserve in fiscal year 2001.......................... (2,221) ------- Balance at June 30, 2001 (1)......................................... 5,070 Charged to income in fiscal year 2002................................ 8,858 Deductions from reserve in fiscal year 2002.......................... (2,978) ------- Balance at June 30, 2002 (1)......................................... $ 10,950 ========
(1) Deducted in the Consolidated Statements of Financial Position from accounts receivable. SCHEDULE II -84- EXHIBIT INDEX Exhibit Number 4.2 Amendment to Rights Agreement dated as of April 17, 2002, among BankBoston, N.A., EquiServe Trust Company, N.A., and the Company 10.13 Fourth Amendment to the Excess Benefit Plan of The Perkin-Elmer Corporation effective October 1, 2001 10.22 Paracel, Inc. Stock Option Plan 10.35 Employment Agreement dated as of December 1, 2000, between the Company and Kathy P. Ordonez 10.36 Celera Diagnostics Joint Venture Agreement dated as of April 1, 2001, among the Company, its Applied Biosystems Group, its Celera Genomics Group, Foster City Holdings, LLC, and Rockville Holdings, LLC 10.37 Description of Celera Genomics/Applied Biosystems Marketing and Distribution Agreement 13 Annual Report to Stockholders for the fiscal year ended June 30, 2002 (to the extent incorporated herein by reference) 21 List of Subsidiaries 23 Consent of PricewaterhouseCoopers LLP 99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-4.2 3 b320198ex4_2.txt AMENDMENT TO RIGHTS AGREEMENT Exhibit 4.2 AMENDMENT TO RIGHTS AGREEMENT 1. General Background. In accordance with Section 27 of the Rights Agreement between Fleet National Bank, N.A. (f/k/a BankBoston, N.A.)" (the "Rights Agent") and Applera Corporation ("Applera") dated April 28, 1999 (the "Agreement"), the Rights Agent and Applera Corporation, desire to amend the Agreement to appoint EquiServe Trust Company, N.A. 2. Effectiveness. This Amendment shall be effective as of April 17, 2002 (the "Amendment") and all defined terms and definitions in the Agreement shall be the same in the Amendment except as specifically revised by the Amendment. 3. Revision. The section in the Agreement entitled "Change of Rights Agent" is hereby deleted in its entirety and replaced with the following: Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Common Stock or Preferred Stock by registered or certified mail and, following the Distribution Date, to the holders of the Right Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock or Preferred Stock by registered or certified mail, and, following the Distribution Date, to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit such holder's Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation or trust company organized and doing business under the laws of the United States or any state thereof, in good standing, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has individually or combined with an affiliate at the time of its appointment as Rights Agent a combined capital and surplus of at least $100 million dollars. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock or Preferred Stock, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. 4. Except as amended hereby, the Agreement and all schedules or exhibits thereto shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in their names and on their behalf by and through their duly authorized officers, as of this 17th day of April, 2002. Applera Corporation Bank Boston, N.A. /s/ Thomas P. Livingston /s/ Tyler Haynes - ------------------------------------ ------------------------------------ By: Thomas P. Livingston By: Tyler Haynes Title: Secretary Title: Managing Director EquiServe Trust Company, N.A. /s/ Tyler Haynes ----------------------------------- By: Tyler Haynes Title: Managing Director EX-10.13 4 b320198_ex10-13.txt FOURTH AMENDMENT EXHIBIT 10.13 FOURTH AMENDMENT THE EXCESS BENEFIT PLAN OF THE PERKIN-ELMER CORPORATION WHEREAS, the PE Corporation ("Company") last restated The Excess Benefit Plan of The Perkin-Elmer Corporation ("Plan") effective October 1, 1995; and WHEREAS, the Board of Directors of the Company pursuant to Section 6.1 of the Plan reserves the right to amend the Plan from time to time; and WHEREAS, it has been determined that an amendment is required at this time. NOW, THEREFORE, the Plan be amended as stipulated below: 1. Effective October 1, 2001, Section 4.1(b) of the Plan is amended to replace the "Vanguard Life Strategy Moderate Growth Fund" with the "Fidelity Asset Manager Fund as held by The Employee 401(k) Savings Plan of the Applera Corporation." 2. Effective October 1, 2001, Article 6 of the Plan is amended by the addition of a new section which shall be titled Section 6.2 and shall now read as follows: "The Committee shall be granted the authority to make administrative changes to the Plan document by amendment of the Plan authorized by resolution of the Committee. Administrative changes include, but are not limited to, conforming provisions for administrative procedures to actual practice or changes in practice; deleting or correcting language that fails to accurately reflect the intended provisions of the Plan; updates for different funds used to measure performance; changes to the name of the Plan and Company; and implementing policy decisions that assist or clarify the administration of the Plan." EX-10.22 5 b320198_ex10-22.txt STOCK OPTION PLAN EXHIBIT 10.22 PARACEL, INC. STOCK OPTION PLAN 1. Purpose The purposes of the Paracel, Inc. Stock Option Plan are to assist Paracel, Inc. in attracting, motivating and retaining key employees, consultants and directors, and to provide incentives that will further its development and success and will unify the interests of key employees, consultants, directors and shareholders through increased stock ownership. 2. Definitions For purposes of this Plan: "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the Stock Option Committee appointed pursuant to Section 13 of this Plan. "Company" means Paracel, Inc., a California corporation. "Consultant" means any person who is a consultant to the Company or to any Subsidiary Corporation, as defined in Rule 701 promulgated under the Securities Act. "Director" means any person who is a member of the Board. "Employee" means any person who is an employee of the Company or of any Subsidiary Corporation. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Incentive Stock Option" means and Option that is designated by the Committee as an "incentive stock option" within the meaning of Code Section 422. "Nonstatutory Option" means an Option that is designated by the Committee as such or that is not designated by the Committee as an Incentive Stock Option. "Option" means an option granted under this Plan to purchase shares of Stock. An "Option" may be either an Incentive Stock Option or a Nonstatutory Option. "Parent Corporation" shall have the meaning set forth in Code Section 424(e). -1- "Participant" means a person to whom an Option is granted under this Plan. "Permanent Disability" means permanent and total disability within the meaning of Code Section 22(e)(3), which reads, in pertinent part, as follows: An individual is permanently and totally disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. "Plan" means this Paracel, Inc. Stock Option Plan. "Retirement" means normal retirement of an Employee under policies established by his or her employer. "Securities Act" means the Securities Act of 1933, as amended. "Stock" means the Common Stock of the Company. Unless the context expressly indicates otherwise, "shares" means shares of Stock. "Subsidiary Corporation" shall have the meaning set forth in Code Section 424(f). "Ten Percent Shareholder" means an Employee who on the date of grant of the Option owns (within the meaning of Code Section 424(d)) more than 10% of the total combined voting power of all classes of stock of the Company, any Subsidiary Corporation or any Parent Corporation. 3. Shares Subject to Plan Options may be granted under this Plan to acquire an aggregate of up to 750, 000 shares of Stock, subject to adjustment as provided in Section 7 of this Plan. If Options terminate, expire or are cancelled without having been fully exercised, the number of shares subject to such Options (but only to the extent not exercised prior to termination, expiration or cancellation) may again be subject to Options granted under this Plan. 4. Eligibility Any Key Employee, any Consultant and any Director shall be eligible to become a Participant and to be granted an Option to purchase Stock. Additional Options may be granted to a Participant while such Participant continues as an Employee, Consultant or Director. The Committee may exclude otherwise eligible persons. -2- 5. Grant of Options The Committee shall, from time to time and in its absolute discretion, determine which Employees are key Employees and which eligible persons shall become Participants. Either Incentive Stock Options or Nonstatutory Options, as determined by the Committee in its absolute discretion, may be granted to Employees, and only Nonstatutory Options may be granted to Consultants and to Directors who are not Employees. The Committee also shall determine the number of shares of Stock to be subject to each Option and the price, terms and conditions, consistent with this Plan, of each Option. Without limiting the generality of the preceding paragraph, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition to the grant of an Option to an Employee, Consultant or Director, that the Employee, Consultant or Director surrender for cancellation some or all of any unexercised Options which have been previously granted to the Employee, Consultant or Director. An Option, the grant of which is conditioned upon such surrender, may have an option price lower or higher than the option price of the surrendered Option, may cover the same, or a lesser or greater, number of shares as the surrendered Option, may contain such other terms as the Committee deems appropriate and shall be exercisable in accordance with its terms, without regard to the number of shares, price, option period or any other term or condition of the surrendered Option. Notwithstanding any other provision of this Plan, the aggregate fair market value (determined as of the dates of their respective grants) of shares as to which Incentive Stock Options (within the meaning of Code Section 422(b)) granted or assumed by the Company, any Parent Corporation and any Subsidiary Corporation first become exercisable by a Participant in any calendar year shall not exceed $100,000. Should it be determined that an entire Option granted under this Plan or any portion thereof exceeds such maximum for any reason other than the failure of a good faith attempt to value the stock subject to the Option, such Option or portion thereof shall be considered a Nonstatutory Option to the extent, but only to the extent, of such excess. 6. Option Terms Each Option shall be evidenced by a written Stock Option Agreement in a form approved by the Committee. Each Stock Option Agreement shall be executed by the Company and by the Participant receiving the Option. Each Option shall be subject to the following terms and conditions and to such other terms and conditions as the Committee may deem appropriate: 6.1 Type of Option; Number of Shares Each Stock Option Agreement shall indicate whether the Option is an Incentive Stock Option or a Nonstatutory Option and shall specify the number of shares of Stock subject to the Option. -3- 6.2 Option Price The price of the shares subject to each Option shall be determined by the Committee and shall be set forth in the Stock Option Agreement, provided that the price per share shall not be less than the fair market value of such share on the day the Option is granted; and provided further that, in the case of an Incentive Stock Option granted to a Ten Percent Shareholder, the price per share shall not be less than 110% of the fair market value of such share at the time such Option is granted. 6.3 Period of Exercise No Option shall be exercisable in whole or in part before one year from the date of grant or after ten years from the date of grant. Notwithstanding the foregoing, no Incentive Stock Option granted to a Ten Percent Shareholder may be exercisable after five years from the date such Option is granted. Subject to the forgoing limitations and Sections 6.5, 6.7 and 8 of this Plan, Options shall become exercisable at such times and in such installments (which may be cumulative) as the Committee shall provide in each Stock Option Agreement. The Committee may in its absolute discretion, and on such terms and conditions as it considers appropriate, accelerate the times at which an Option may be exercised in whole or in part. 6.4 Manner and Conditions of Exercise To exercise an Option or any portion thereof, the Participant or other person then entitled to exercise such Option or portion thereof shall deliver to the Secretary of the Company a notice in writing signed by the Participant or such other person stating that such Option or portion is exercised, specifying the number of shares to be acquired upon exercise and complying with all applicable rules established by the Committee, together with the following: (a) Full payment (in cash or bank cashiers' check) for the shares with respect to which such Option or portion is being exercised; or (b) With the consent of the Committee, shares of Stock owned by the Participant, duly endorsed for transfer to the Company, with a fair market value on the date of exercise equal to the aggregate purchase price of the shares with respect to which such Option or portion is being exercised; or (c) With the consent of the Committee, a full recourse promissory note in a form, bearing interest (at a rate at least equal to the minimum rate necessary to avoid imputed interest under the Code) and payable upon such terms as may be prescribed by the Committee; or (d) Any combination of the consideration provided in the foregoing subsections (a), (b) and (c). -4- No such exercise shall be effective unless and until a proper notice and payment have been delivered as provided above. No fractional shares shall be issued on exercise of Options under this Plan. In the event that an Option or portion thereof shall be exercised pursuant to Section 6.5 of this Plan by any person or persons other than the Participant, appropriate proof of the right of such person or persons to exercise the Option or portion thereof shall be delivered to the Company. The Committee may require, as a condition to the exercise of an Option, such representations and covenants as it, in its absolute discretion, deems necessary to effect compliance with the Securities Act, any state securities laws or rules and regulations thereunder, including a representation that the shares to be acquired upon exercise of an Option will be purchased for the Participant's own account and not with a view to or for sale in connection with any distribution of the Stock. The Participant, as a condition to exercising an Option, shall also make any arrangements determined by the Committee to be necessary or appropriate to satisfy any federal and state withholding tax obligation resulting from the exercise of an Option, from a disposition described in Section 9 of this Plan or from the termination or partial termination of any restriction applicable to any shares acquired on exercise of an Option, including the retention of shares by the Company or the delivery of shares to the Company equal in amount to all or a portion of the withholding tax obligation pursuant to such arrangements as may be established by the Committee. Any shares retained by or delivered to the Company under this Section shall be valued at the date of exercise at their fair market value as determined by the Committee. To insure that such exercise and any resales are made in compliance with the Securities Act and the Articles of Incorporation and Bylaws of the Company, the Company may imprint an appropriate legend on certificates representing shares acquired on the exercise of an Option and issue appropriate stop-transfer orders to its transfer agents. Any stock certificate evidencing shares of Stock issued pursuant to the exercise of an Option shall bear such other legends as the Committee, in the exercise of its absolute discretion, shall require. 6.5 Cessation of Employment or Service as Consultant or Director A Stock Option Agreement may provide, on such terms and conditions as the Committee shall deem appropriate in its absolute discretion, for acceleration of the times at which an Option may be exercised in the event of a Participant's Retirement, death or Permanent Disability, and may provide for expiration prior to the stated expiration date in the event of cessation of employment or service as a Consultant or Director. In the absence of provision in the Stock Option Agreement, Options shall be accelerated or expire as set forth below in this Section 6.5. -5- If a Participant who is an Employee but is not a Director ceases to be an Employee other than by reason of death or Permanent Disability, the Participant shall be permitted to exercise his or her Option, to the extent it was exerciseable at the date of cessation, until 30 days after such date, but in no event after its stated expiration date. If a Participant who is a Consultant or Director but not an Employee ceases to be a Consultant or Director, other than by reason of death, the Participant shall be permitted to exercise his or her Option, to the extent it was exercisable at the date of cessation, until 30 days after such date, but in no event after its stated expiration date. If a Participant who is an Employee but not a Director ceases to be an Employee because of Permanent Disability, the Participant shall be permitted to exercise his or her Option, to the extent it was exercisable at the date of cessation of employment, until 90 days after the date he or she ceases to be an Employee, but in no event after its stated expiration date. If a Participant dies while an Employee, a Director or a Consultant or within 90 days after ceasing to be an Employee because of Permanent Disability, his or her Option may be exercised by the Participant's estate or any person who acquired the right to exercise the Option by Will or the laws of decent and distribution, to the extent it was exercisable at the date of death, until one year after such date, but in no event after its stated expiration date. If a Participant who is both an Employee and a Director ceases to be an Employee but remains a Director, or ceases to be a Director but remains an Employee, then subject to this Section 6.5 all of the Participant's Nonstatutory Options shall remain in effect and, if the Participant ceases to be an Employee, all of the Participant's Incentive Stock Options shall become Nonstatutory Options 30 days after the date of cessation. Transfers of employment between the Company and any Subsidiary Corporation or between Subsidiary Corporations shall not be deemed cessation of employment for purposes of any Option granted hereunder. 6.6 Nontransferability During the lifetime of a Participant, his or her Options shall be exercisable only by the Participant and no Option shall be transferable other than by Will or the laws of descent and distribution. No interest of any Participant under this Plan or in any Option shall be subject to attachment, execution, garnishment, sequestration, the laws of bankruptcy or any other legal or equitable process. -6- 6.7 Stock Restriction Agreement In its absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may require by the terms of any Option that Stock received upon exercise of such Option is subject to the Participant's execution and delivery of an agreement providing for (i) a right of first refusal for the benefit of the Company, and (ii) repurchase by the Company on the occurrence of certain events, including the death, disability, retirement or termination of employment of the Participant. The execution and delivery of such an agreement prior to the delivery of any shares issued upon exercise of an Option containing such a requirement shall be a condition precedent to the right of a Participant to acquire any shares upon exercise of the Option. 7. Adjustment Upon Changes in Capitalization In the event of any change in the Stock by reason of any stock dividend, recapitalization, split-up, combination or exchange of shares, or by reason of any similar change affecting the Stock (but not the issuance of additional shares, securities convertible into shares or options or rights to acquire shares of Stock or the Company's repurchase of shares), the number and class of shares which thereafter may be acquired on exercise of Options under Section 3 of this Plan and the number and class of shares subject to outstanding Options and the exercise price of each such share shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, Participants. Any such adjustment shall be final and binding on each Participant. 8. Merger, Consolidation, Etc. In its absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may provide by the terms of any Option that such Option cannot be exercised after the merger or consolidation of the Company with or into another corporation, the acquisition by another corporation or person of all or substantially all of the Company's assets or the liquidation or dissolution of the Company; and if the Committee so provides, it may, in its absolute discretion, and on such terms and conditions as it deems appropriate, also provide, either by the terms of such Option or by a resolution adopted prior to the occurrence of such merger, consolidation, acquisition, liquidation or dissolution, that, for some period of time prior to such event, such Option shall become exercisable as to all shares covered thereby, notwithstanding anything to the contrary in Section 6.3 of this Plan or any installment provisions of such Option. 9. Disqualifying Dispositions If a Participant makes a "disposition" (within the meaning of Code Section 424(c)) of any shares issued upon exercise of an Incentive Stock Option within two years after the date the Incentive Stock Option is granted or within one year after shares are issued to the Participant pursuant to the exercise of the Incentive Stock Option, the Participant shall notify the Committee in writing of such disposition within 20 days thereafter. -7- 10. No Rights as a Shareholder No Participant shall have any rights or privileges as a shareholder with respect to any shares subject to Options prior to the date of issuance to him or her of a certificate for such shares. 11. No Right to Continued Employment Neither this Plan nor any Option granted under this Plan shall confer upon any Participant or any other person any right to continued employment by the Company or any Subsidiary Corporation, nor shall it interfere in any way with the right of his or her employer to terminate his or her employment at any time for any reason whatsoever, with or without cause. 12. Compliance With Laws and Regulations This Plan, the grant and exercise of Options under this Plan and the obligation of the Company to sell and deliver shares under Options shall be subject to all applicable federal and state laws, rules and regulations and to any approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificate for shares of Stock either (a) prior to (i) the listing of such shares on any stock exchange on which the Stock may then be listed or inclusion on any interdealer quotation system on which the Stock may be quoted, and (ii) the completion of any registration or qualification of such shares which is required under any federal or state law, or any ruling or regulation of any government body, and which the Company shall, in its sole discretion, determine to be necessary or advisable, or (b) until exemptions from such registration and qualification requirements are established to the reasonable satisfaction of the Company and its counsel. 13. Administration The Board may appoint a Stock Option Committee consisting of two or more Directors to administer this Plan. The Committee members shall serve at the pleasure of the Board. If the Board does not appoint a Committee, the Board shall administer this Plan and shall have the powers and duties granted to the Committee in this Plan. If Stock is registered under Section 12 of the Exchange Act, no Director shall be appointed to, or shall serve on, the Committee unless he or she shall be a "disinterested person" within the meaning of Rule 16b-3 under such Act as presently in effect or hereafter amended. -8- The Committee shall administer this Plan in accordance with its provisions and shall have full authority to interpret this Plan, prescribe, amend and rescind any rules and regulations necessary or appropriate for the administration of this Plan and make such other determinations and take such other action as it deems necessary or advisable, except as otherwise expressly reserved to the Board in this Plan. Without limiting the generality of the preceding sentence, the Committee may, in its discretion, determine that for Option purposes a Participant remains an Employee during all or any portion of a leave of absence approved by the Company. Any interpretation, determination or other action made or taken by the Committee shall be final and binding upon all Participants. No member of the Committee and no officer of the Company shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan or any Option, and all such persons shall be fully indemnified and protected by the Company, to the full extent that the Company is permitted to provide such indemnification and protection, in respect to an such action, determination or interpretation. 14. Severability The invalidity or unenforceability of any particular provision of this Plan shall not affect the other provisions, and this Plan shall be construed in all respects as if any invalid or unenforceable provisions were omitted, but only to the extent invalid or unenforceable under the circumstances. 15. Effective Date This Plan shall be effective as of the date of adoption by the Board. 16. Approval by Shareholders This Plan will be submitted for the approval by holders of a majority of the shares of Stock voting thereon within twelve months after the Board's adoption of this Plan. Options may be granted prior to such shareholder approval, provided that such Options shall not be exercisable prior to the time when the Plan is approved by shareholders and, if such approval is not obtained by the end of the twelve-month period, all Options previously granted shall thereupon be cancelled. 17. Amendment and Discontinuance The Board may from time to time amend, suspend or discontinue this Plan; provided that, without approval of the holders of a majority of the shares of Stock voting thereon, no action of the Board shall (a) increase the number of shares reserved for Options pursuant to Section 3 of this Plan, (b) permit the grant of any Option at a price less than that determined in accordance with Section 6.2 of this Plan, or (c) permit the grant of Options which expire beyond the periods provided for in Section 6.3 of this Plan. Without the written consent of a Participant, no such amendment, suspension or discontinuance of this Plan shall alter or impair any Option previously granted to such Participant pursuant to this Plan. -9- 18. Term Unless terminated earlier pursuant to Section 17 of this Plan, this Plan shall expire on, and no further Options shall be granted pursuant to this Plan on or after, ten years after the date of adoption of this Plan by the Board. -10- EX-10.35 6 b320198ex10_35.txt CHANGE OF CONTROL AGREEMENT Exhibit 10.35 EMPLOYMENT AGREEMENT AGREEMENT entered into as of December 1, 2000, between APPLERA CORPORATION, a Delaware corporation having its principal place of business at Norwalk, Connecticut (the "Company"), and Kathy P. Ordonez, residing at 5465 Hilltop Crescent, Oakland, CA 94618 (the "Employee"). WHEREAS, the Employee has rendered and/or will render valuable services to the Company and it is regarded essential by the Company that it have the benefit of Employee's services in future years; and WHEREAS, the Board of Directors of the Company believes that it is essential that, in the event of the possibility of a Change in Control of the Company (as defined herein), the Employee be able to continue her attention and dedication to her duties and to assess and advise the Board of Directors of the Company (the "Board") whether such proposals would be in the best interest of the Company and its stockholders without distraction regarding any uncertainty concerning her future with the Company; and WHEREAS, the Employee is willing to agree to continue to serve the Company in the future; NOW, THEREFORE, it is mutually agreed as follows: 1. Employment. The Company agrees to employ Employee, and the Employee agrees to serve as an employee of the Company or one or more of its subsidiaries after a Change of Control during the Period of Employment (as those terms are defined in Section 2 hereof) in such executive capacity as Employee served immediately prior to the Change in Control which caused the commencement of the Period of Employment. The Employee also agrees to serve during the Period of Employment, if elected or appointed thereto, as a Director of the Board of Directors of the Company and as a member of any committee of the Board of Directors. Notwith-standing anything to the contrary herein, the Period of Employment shall not commence and the Employee shall not be entitled to any rights, benefits, or payments hereunder unless and until a Change in Control has occurred. 2. Definitions. (a) Cause. During the Period of Employment, "Cause" means termination upon (i) the willful and continued failure by the Employee to perform substantially her duties with the Company (other than any such failure resulting from the Employee's incapacity due to physical or mental illness) after a demand for a substantial performance is delivered to the Employee by the Chief Executive Officer of the Company ("CEO") which specifically identifies the manner in which the CEO believes that the Employee has not substantially performed her duties, or (ii) the willful engaging by the Employee in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this Section 2(a), no act, or failure to act, on the part of the Employee shall be considered "willful" unless done, or omitted to be done, by the Employee in bad faith and without reasonable belief that the Employee's action or omission was in, or not opposed to, the best interests of the Company. -2- Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Employee in good faith and in the best interests of the Company. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Employee and an opportunity for her, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Employee was guilty of the conduct set forth above in (i) or (ii) of this Section 2(a) and specifying the particulars thereof in detail. (b) Cash Compensation. "Cash Compensation" shall mean the sum of (i) Employee's Base Salary (determined in accordance with the provisions of Section 4(a) hereof) and (ii) Employee's incentive compensation (provided for under Section 4(b) hereof), which shall be an amount equal to the greatest of (x) the average of the amount of Employee's incentive compensation for the last three completed fiscal years immediately prior to the Employee's termination of employment (whether or not such years occurred during the Period of Employment), (y) the target amount of such Employee's incentive compensation for the fiscal year in which her termination of employment occurs, or (z) the Employee's target amount for the fiscal year in which the Change in Control occurs. (c) Change in Control. "Change in Control" means the occurrence of any of the following: an event that would be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred at such time as (i) any "person" within the meaning of Section 14(d) of the Securities Exchange Act of 1934 becomes the "beneficial owner" as defined in Rule 13d-3 thereunder, directly or indirectly, of more than 25% of the Company's Common Stock; (ii) during any two-year period, individuals who constitute the Board of Directors of the Company (the "Incumbent Board") as of the beginning of the period cease for any reason to constitute at least a majority thereof, provided that any person becoming a director during such period whose election or nomination for election by the Company's stockholders was approved by a vote of at least three quarters of the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director without objection to such nomination) shall be, for purposes of this clause (ii), considered as though such person were a member of the Incumbent Board; or (iii) the approval by the Company's stockholders of the sale of all or substantially all of the stock or assets of the Company. -3- (d) Disability. "Disability" means the absence of the Employee from her duties with the Company on a full-time basis for one hundred eighty (180) consecutive days as a result of incapacity due to physical or mental illness. (e) Good Reason. During the Period of Employment, "Good Reason" means: (i) an adverse change in the status of the Employee (other than any such change primarily attributable to the fact that the Company may no longer be publicly owned) or position(s) as an officer of the Company as in effect immediately prior to the Change in Control or the assignment to the Employee of any duties or responsibilities which, in her reasonable judgment, are inconsistent with such status or position(s), or any removal of the Employee from or any failure to reappoint or reelect her to such position(s) (except in connection with the termination of the Employee's employment for Cause, Disability, or upon attaining age 65 or upon taking early retirement under any of the Company's retirement plans, or as a result of death or by the Employee other than for Good Reason); (ii) a reduction by the Company after a Change in Control in the Employee's Base Salary; (iii) a material reduction after a Change in Control in the Employee's total annual compensation; provided, however, that for these purposes a reduction for any year of over 10% of total compensation measured by the preceding year without a substantially similar reduction to all other executives participating in incentive compensation plans shall be considered "material"; and the failure of the Company to adopt or renew a stock option plan or to grant amounts of restricted stock or stock options, which are consistent with the Company's prior practices, to the Employee shall also be considered a material reduction, unless the Employee participates in substitute programs that provide substantially equivalent economic value to the Employee; (iv) the failure by the Company to continue in effect any Benefit Plan (as hereinafter defined) in which Employee was participating at the time of the Change in Control (or Benefit Plans providing Employee with at least substantially similar benefits) other than as a result of the normal expiration of any such Benefit Plan in accordance with its terms as in effect at the time of the Change in Control, or the taking of any action, or the failure to act, by the Company which would adversely affect Employee's continued participation in any such Benefit Plans on at least as favorable a basis to Employee as was the case immediately prior to the Change in Control or which would materially reduce Employee's benefits in the future under any of such Benefit Plans or deprive Employee of any material benefit enjoyed by Employee immediately prior to the Change in Control; -4- (v) the failure by the Company after a Change in Control to provide and credit Employee with the number of paid vacation days to which Employee was then entitled in accordance with the Company's normal vacation policy as in effect immediately prior to the Change in Control; or (vi) the Company's requiring the Employee after a Change in Control to be based more than fifty miles from the Employee's principal place of business immediately prior to the Change in Control except for required travel on the Company's business to an extent substantially consistent with the business travel obligations which she undertook on behalf of the Company prior to the Change in Control. (f) Period of Employment. (i) "Period of Employment" means, subject to the provisions of Section 2(f)(ii), the period of thirty-six (36) months commencing on the date of a Change in Control (as defined in Section 2(c) hereof) and the period of any extension or extensions thereof in accordance with the terms of this Section. The Period of Employment shall be extended automatically by one week for each week in which the Employee's employment continues after the date of a Change in Control. (ii) Notwithstanding the provisions of Section 2(f)(i) hereof, the Period of Employment shall terminate upon the occurrence of the earliest of (A) the Employee's attainment of age 65, or the election by the Employee to retire early from the Company under any of its retirement plans, (B) the death of the Employee, (C) the Disability of the Employee or (D) a termination of Employee's employment by the Company for Cause or by the Employee without Good Reason. (g) Termination Date. "Termination Date" means the date on which the Period of Employment terminates. 3. Duties During the Period of Employment. While employed by the Company during the Period of Employment, the Employee shall devote her full business time, attention, and best efforts to the affairs of the Company and its subsidiaries; provided, however, that the Employee may engage in other activities, such as activities involving charitable, educational, religious, and similar types of organizations, speaking engagements, membership on the board of directors of other organizations, and similar types of activities to the extent that such other activities do not prohibit the performance of her duties under this Agreement, or inhibit or conflict in any material way with the business of the Company and its subsidiaries. -5- 4. Current Cash Compensation. (a) Base Salary. The Company will pay to the Employee while employed by the Company during the Period of Employment an annual base salary ("Base Salary") in an amount determined by the Board of Directors or its Compensation Committee which shall never be less than the greater of (i) the Employee's Base Salary prior to the commencement of the Period of Employment or (ii) her Base Salary during the preceding year of the Period of Employment; provided, however, that it is agreed between the parties that the Company shall review annually the Employee's Base Salary, and in light of such review may, in the discretion of the Board of Directors or its Compensation Committee, increase such Base Salary taking into account the Employee's responsi-bilities, inflation in the cost of living, increase in salaries of executives of other corporations, performance by the Employee, and other pertinent factors. The Base Salary shall be paid in substantially equal biweekly installments while Employee is employed by the Company. (b) Incentive Compensation. While employed by the Company during the Period of Employment, the Employee shall continue to participate in such of the Company's incentive compensation programs for executives as the Employee participated in prior to the commencement of the Period of Employment. Any amount awarded to the Employee under such programs shall be paid to Employee in accordance with the terms thereof. 5. Employee Benefits. (a) Vacation and Sick Leave. The Employee shall be entitled during the Period of Employment to a paid annual vacation of not less than twenty (20) business days during each calendar year while employed by the Company and to reasonable sick leave. (b) Regular Reimbursed Business Expenses. The Company shall reimburse the Employee for all expenses and disbursements reasonably incurred by the Employee in the performance of her duties during the Period of Employment. (c) Employment Benefit Plans or Arrangements. While employed by the Company, Employee shall be entitled to participate in all employee benefit plans, programs, or arrangements ("Benefit Plans") of the Company, in accordance with the terms thereof, as in effect from time to time, which provide benefits to senior executives of the Company. For purposes of this Agreement, Benefit Plans shall include, without limitation, any compensation plan such as an incentive, deferred, stock option or restricted stock plan, or any employee benefit plan such as a thrift, pension, profit sharing, pre-tax savings, medical, dental, disability, salary continuation, accident, life insurance plan, or a relocation plan or policy, or any other plan, program, or policy of the Company intended to benefit employees. -6- 6. Termination of Employment. (a) Termination by the Company for Cause or Termination by the Employee Other Than for Good Reason. If during the Period of Employment the Company terminates the employment of the Employee for Cause or if the Employee terminates her employment other than for Good Reason the Company shall pay the Employee (i) the Employee's Base Salary through the end of the month in which the Termination Date occurs, (ii) any incentive compensation payable to her pursuant to Section 4(b) hereof, including a pro rata share for any partial year, (iii) any accrued vacation pay, and (iv) benefits payable to her pursuant to the Company's Benefit Plans as provided in Section 5(c) hereof through the end of the month in which the Termination Date occurs. The amounts and benefits set forth in clauses (i), (ii), (iii) and (iv) of the preceding sentence shall hereinafter be referred to as "Accrued Benefits." (b) Termination by the Company Without Cause or by the Employee for Good Reason. If during the Period of Employment the Company terminates the Employee's employment with the Company without Cause or the Employee terminates her employment with the Company for Good Reason, the Company will pay to Employee all Accrued Benefits and, in addition, pay or provide to the Employee the following: (i) within thirty (30) days after the date of termination, a lump sum equal to the greater of (A) the Employee's Cash Compensation for the remainder of the Period of Employment or (B) two times the Employee's Cash Compensation; (ii) for the greater of two years or the remainder of the Period of Employment immediately following the Employee's date of termination, the Employee and Employee's family shall continue to participate in any Benefit Plans of the Company (as defined in Section 5(c) hereof) in which Employee or Employee's family participated at any time during the one-year period ending on the day immediately preceding Employee's termination of employment, provided that (a) such continued participation is possible under -7- the terms of such Benefit Plans, and (b) the Employee continues to pay contributions for such participation at the rates paid for similar participation by active Company employees in similar positions to that held by the Employee immediately prior to the date of termination. If such continued participation is not possible, the Company shall provide, at its sole cost and expense, substantially identical benefits to the Employee plus pay an additional amount to the Employee equal to the Employee's liability for federal, state and local income taxes on any amounts includible in the Employee's income by virtue of the terms of this Section 6(b)(ii) so that Employee does not have to personally pay any federal, state and local income taxes by virtue of the terms of this Section 6(b)(ii); (iii) three additional years of service credit under the Company's Non-Qualified Plans and, for purposes of such plans, Employee's final average pay shall be deemed to be her Cash Compensation for the year in which the date of termination occurs; (iv) the Company shall take all reasonable actions to cause any Company restricted stock ("Restricted Stock") granted to Employee to become fully vested and any options to purchase Company stock ("Options") granted to Employee to become fully exercisable, and in the event the Company cannot effect such vesting or acceleration within sixty (60) days, the Company shall pay within thirty (30) days thereafter to Employee (i) with respect to each Option, an amount equal to the product of (x) the number of unvested shares subject to such Option, multiplied by (y) the excess of the fair market value of such a share of Company common stock on the date of Employee's termination of employment, over the per share exercise price of such Option and (ii) with respect to each unvested share of Restricted Stock an amount equal to the fair market value of such a share of Company common stock on the date of Employee's termination of employment. Except as provided in the following sentence, the amounts payable to the Employee under this Section 6(b) shall be absolutely owing and shall not be subject to reduction or mitigation as a result of employment of the Employee elsewhere after the date of termination. Notwithstanding any provision herein to the contrary, the benefits described in clauses (i), (ii) and (iii) of this Section 6(b) shall only be payable with respect to the period ending upon the earlier of (i) the end of the period specified in each such clause or (ii) Employee's attainment of age 65. -8- 7. Gross-Up. In the event any amounts due to the Employee under this Agreement after a Change in Control, under the terms of any Benefit Plan, or otherwise payable by the Company or an affiliate of the Company are subject to excise taxes under Section 4999 of the Internal Revenue Code of 1986, as amended ("Excise Taxes"), the Company shall pay to the Employee, in addition to any other payments due under other provisions of this Agreement, an amount equal to the amount of such Excise Taxes plus the amount of any federal, state and local income or other taxes and Excise Taxes attributable to all amounts, including income taxes, payable under this Section 7, so that after payment of all income, Excise and other taxes with respect to the amounts due to the Employee under this Agreement, the Employee will retain the same net after tax amount with respect to such payments as if no Excise Taxes had been imposed. 8. Governing Law. This Agreement is governed by, and is to be construed and enforced in accordance with, the laws of the State of Connecticut. If under such laws any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation, or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement, and the invalidity of any such portion shall not affect the force, effect, and validity of the remaining portion hereof. 9. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its Secretary) or seventy-two (72) hours after deposit thereof in the U.S. mail, postage prepaid, for delivery as registered or certified mail -- addressed, in the case of the Employee, to the Employee at Employee's residential address, and in the case of the Company, to its corporate headquarters, attention of the Secretary, or to such other address as the Employee or the Company may designate in writing at any time or from time to time to the other party. In lieu of personal notice or notice by deposit in the U.S. mail, a party may give notice by telegram, fax or telex. 10. Miscellaneous. This Agreement may be amended only by a subsequent written agreement of the Employee and the Company. This Agreement shall be binding upon and shall inure to the benefit of the Employee, the Employee's heirs, executors, administrators, beneficiaries, and assigns and to the benefit of the Company and its successors. Notwithstanding anything in this Agreement to the contrary, nothing herein shall prevent or interfere with the ability of the Company to terminate the employment of the Employee prior to a Change in Control nor be construed to entitle Employee to be continued in employment prior to a Change in Control and this Agreement shall terminate if Employee or the Company terminates Employee's employment prior to a Change in Control. Similarly, nothing herein shall prevent the Employee from retiring under any of the Company's retirement plans and receiving the corresponding benefits thereunder consistent with the treatment of other Company employees. -9- 11. Fees and Expenses. The Company shall pay all reasonable legal fees and related expenses incurred by the Employee in connection with this Agreement following a Change in Control of the Company, including without limitation, all such fees and expenses, if any, incurred in connection with (i) contesting or disputing any termination of the Employee's employment hereunder, or (ii) the Employee seeking to obtain or enforce any right or benefit provided by the Agreement. 12. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Connecticut by three arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that the Employee shall be entitled to be paid as if his or her employment continued during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Company shall bear all costs and expenses arising in connection with any arbitration pursuant to this Section 12. -10- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the year and day first above written. APPLERA CORPORATION By: /s/ Tony L. White ------------------------------ Tony L. White Chairman, President and Chief Executive Officer ATTEST: By: /s/ William B. Sawch ---------------------------- William B. Sawch Senior Vice President and General Counsel ACCEPTED AND AGREED: /s/ Kathy P. Ordonez ----------------------------------- Kathy P. Ordonez EX-10.36 7 b320198ex10_36.txt JOINT VENTURE AGREEMENT Exhibit 10.36 ================================================================================ CELERA DIAGNOSTICS JOINT VENTURE AGREEMENT AS OF APRIL 1, 2001 ================================================================================ JOINT VENTURE AGREEMENT JOINT VENTURE AGREEMENT (this "Agreement"), dated as of the 1st day of April, 2001, by and among Applera Corporation ("Applera"), the Applied Biosystems Group of Applera ("ABI"), the Celera Genomics Group of Applera ("CRA"), Foster City Holdings, LLC ("ABI LLC"), and Rockville Holdings, LLC ("CRA LLC"). RECITALS WHEREAS, effective as of December 1, 2000, Applera hired Kathy Ordonez to lead a major initiative in diagnostics, with the expectation that such initiative, although commenced within ABI, would be conducted with the active participation of CRA; and WHEREAS, the Board of Directors of Applera has determined that it is appropriate and in the best interest of Applera and its stockholders that such joint initiative be carried out in the form of a joint venture between ABI and CRA on the terms and subject to the conditions set forth in this Agreement (the "Joint Venture"). NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Formation. ABI and CRA hereby agree to the legal formation of the Joint Venture, which Joint Venture shall be structured in the manner described in Annex A attached hereto. 2. Name. The name of the Joint Venture shall be "Celera Diagnostics, LLC." The Joint Venture shall be referred to as a joint venture with Applied Biosystems. 3. Field. The business of the Joint Venture shall be limited to the field as described in Annex B attached hereto (as such description may be amended from time to time in accordance with this Agreement, the "JV Field"). 4. Contributions. ABI agrees to make the contributions to the Joint Venture as described in Annex C-1 attached hereto (the "Initial ABI Contribution"), and CRA agrees to make the contributions to the Joint Venture as described in Annex C-2 attached hereto (the "Initial CRA Contribution" and, together with the Initial ABI Contribution, the "Initial Contributions"). 5. Employees. The initial employees of the Joint Venture shall be those employees of ABI identified on Annex D attached hereto (the "Employees"). 6. Terms and Conditions. The Terms and Conditions described in Annex E attached hereto shall govern all other aspects of the Joint Venture. IN WITNESS WHEREOF, the parties agree to the foregoing as of the date first written above. APPLERA CORPORATION By: /s/ Tony L. White ------------------------------------------- Name: Tony L. White Title: Chairman, President and Chief Executive Officer APPLIED BIOSYSTEMS GROUP OF APPLERA CORPORATION By: /s/ Michael W. Hunkapiller ------------------------------------------- Name: Michael W. Hunkapiller Title: President CELERA GENOMICS GROUP OF APPLERA CORPORATION By: /s/ J. Craig Venter ------------------------------------------- Name: J. Craig Venter Title: President and Chief Scientific Officer FOSTER CITY HOLDINGS, LLC By: PE Corporation (NY), acting through the Applied Biosystems Group, as the sole member of Foster City Holdings, LLC By: /s/ Michael W. Hunkapiller ------------------------------------------- Name: Michael W. Hunkapiller Title: President ROCKVILLE HOLDINGS, LLC By: PE Corporation (NY), acting through the Celera Genomics Group, as the sole member of Rockville Holdings, LLC By: /s/ J. Craig Venter ------------------------------------------- Name: J. Craig Venter Title: President ANNEX A JOINT VENTURE FORMATION MECHANICS/STRUCTURE --------------------- ----------------------- PE Corporation (NY) PE Corporation (NY) acting through the 2 acting through the Applied Biosystems ---------------- Celera Genomics Group Group --------------------- ----------------------- | | | 100% | 100% 4 | Membership 4 | Membership | Interest | Interest | | ---------------------- ------------------------- 1 Foster City Holdings, 3 Rockville Holdings, LLC 1 LLC ("ABI LLC") ---------------- ("CRA LLC") ---------------------- ------------------------- \ / \ / \ 4 4 / Class A \ / Class B Membership \ / Membership Interest \ / Interest \ / ------------------------- Celera Diagnostics, LLC 1 ("JV Company") ------------------------- ------------------------- 1. CRA LLC and ABI LLC have been formed on behalf of PE Corporation (NY) acting through CRA and ABI, respectively. The JV Company has been formed on behalf of CRA LLC and ABI LLC. 2. PE Corporation (NY) acting through CRA and ABI, respectively, has signed separate operating agreements as the sole member of CRA LLC and ABI LLC, respectively, for the purposes of establishing CRA LLC and ABI LLC as single member limited liability companies to be treated as pass through entities for tax purposes and certain other ministerial matters. 3. ABI LLC and CRA LLC shall sign an operating agreement (the "JV Operating Agreement") for the JV Company. Pursuant to this operating agreement, ABI LLC and CRA LLC shall own separate classes of membership interests in the JV Company (to be designated as the Class A membership interest and the Class B membership interest in the JV Company) with the economic and voting rights specified therein, which shall embody and/or incorporate by reference, as applicable, the relevant provisions of this Agreement, including the Terms and Conditions of Joint Venture specified in Annex E. 4. The Initial ABI Contribution and the Initial CRA Contribution shall be contributed by ABI and CRA, respectively, to the JV Company through ABI LLC and CRA LLC, respectively, as the Class A and Class B members of the JV Company. Such contributions shall be deemed contributed to the JV Company as of the date of this Agreement (the "Commencement Date"), and accounted for as such in accordance with this Agreement as net assets of the JV Company as of such date. This Agreement shall serve as the legal transfer document, provided that if any further documentation is legally required from time to time after the date hereof the parties shall cooperate in implementing such documentation. ANNEX B DESCRIPTION OF JV FIELD The business of the Joint Venture shall be limited to the field of Human In Vitro Diagnostics (HIVD). The HIVD field comprises products, technologies, services, and/or processes for use in the measurement, observation, or determination of attributes, characteristics, diseases, traits, or other conditions: o for medical management of a human being; and/or o for quality control or testing of human blood or tissue for transfusion or blood banking, bone marrow transplantation or banking, or tissue typing for transplantation.. Examples of activities in the HIVD field: o Development, manufacture, or sale of anything labeled for in vitro diagnostic use or any testing products labeled for investigational use; o Development, manufacture, or sale of products designated as Analyte Specific Reagents (ASR's) by FDA or their research use counterparts in Europe and Japan and general purpose reagents (GPR's) that are specifically sold for use with ASR's; o Development and sale of software products for the interpretation of data to provide an HIVD clinical test result; o Development, manufacture, and sale of products that convey amplification, sequencing, or other patent rights in the HIVD field, or products that are designated specifically for use with products that convey amplification, sequencing, or other patent rights in the HIVD field; o Genetic testing for sample tracking in a clinical laboratory; o Sale of any in vitro testing products regulated by the FDA, including products claimed to be produced under cGMP to be sold to IVD companies or clinical testing laboratories; o In- and out-licensing or other transfer of patents, technology, or know-how for HIVD use; and o Development, manufacture, or sale of, or providing service and support for, systems (reagents, components and/or instruments) developed and manufactured for HIVD use or developed specifically for use with ASRs (or their counterparts outside the US). Specific examples of activities not in the HIVD field: o Development, manufacture, or sale of products or services for basic and applied research, including clinical research where the medical management of a patient is not involved, unless the product or service is regulated as an in vitro diagnostic test or ASR by the FDA; o Development, manufacture, or sale of products or services for quality assurance and quality control, including testing to determine conformance with specifications, purity and batch-to-batch consistency, but excluding human plasma or tissue-derived samples for the pharmaceuticals industry; o Testing of environmental samples, including the detection of organisms, where the medical management of a human is not involved; o Identity testing applications for forensic purposes or determination of paternity, excluding genotyping or other identification testing for medical management of a human being or sample tracking in a clinical laboratory; o In vitro diagnostic testing of non-human (plant or animal) samples, including animal breeding, pedigree determination, or gender determination; o Testing for the agricultural or food industries, including the identification of genetically modified organisms (GMOs) for these industries; o Sale or service of general purpose ("open") instrument systems or general purpose reagents, including enzymes, unless sold in conjunction with ASRs or other products regulated by the FDA; o Sale of non-exclusive information products and services not regulated by FDA (such as the Celera Discovery System) to any customers, including those customers operating in the HIVD field; o Sale of anything labeled for Therapeutic or Prophylactic use; o Sale of products or services that convey therapeutic or research patent rights; and o In- and out- licensing or other transfer of patents, technology or know-how for use in the therapeutic or research fields. ANNEX C-1 INITIAL ABI CONTRIBUTION TO JOINT VENTURE The Initial ABI Contribution shall consist of the following: 1. The ongoing commitment by ABI to pursue all opportunities within the JV Field exclusively through the Joint Venture, pursuant to the terms of this Agreement. 2. ABI's existing molecular diagnostics business unit headed by Kathy Ordonez; 3. ABI's existing diagnostic sequencing business headed by Eric Shulse; 4 Rights under license with Roche to use PCR and ABI's instrumentation platform in the human diagnostics field for the exclusive use by the JV Company in the JV Field; as well as exclusive rights to all other existing and future ABI patents, technology, and know-how in the JV Field as more fully described in, and subject to the terms and conditions of, Section 3.1(b) of Annex E to this Agreement; 5. On-going royalties payable to ABI under the terms of the License Agreement between Visible Genetics and ABI; 6. ABI's agreement to fund 50% of the working capital and fixed capital requirements of the Joint Venture as specified in Sections 2.3 and 7.3 of Annex E to this Agreement; and 7. ABI's agreement to reimburse CRA for tax benefits resulting from losses generated by the JV Company as specified in Section 7.4 of Annex E to this Agreement. ANNEX C-2 INITIAL CRA CONTRIBUTION TO JOINT VENTURE The Initial CRA Contribution shall consist of the following: 1. The ongoing commitment by CRA to pursue all opportunities within the JV Field exclusively through the Joint Venture, pursuant to the terms of this Agreement. 2. Access to the Celera Discovery System and all databases, including databases developed after the date hereof and during the term of the Joint Venture; as well as exclusive rights to all existing and future CRA patents, technology, and know-how in the JV Field as more fully described in, and subject to the terms and conditions of, Section 3.1(b) of Annex E to this Agreement; 3. CRA's payment of certain amounts relating to the molecular diagnostics initiative (primarily salaries) incurred from January 1, 2001, to March 31, 2001) under the terms of that certain Agreement dated as of March 30, 2001 between CRA and ABI (the "Prior Payment"); 4. CRA's agreement to fund 50% of the working capital and fixed capital requirements of the Joint Venture as specified in Sections 2.3 and 7.3 of Annex E to this Agreement; and 5. CRA's agreement to fund all of the cash operating losses of the Joint Venture up to a maximum of $300 million (excluding those amounts required for periodic working and fixed capital contributions which are to be shared equally by ABI and CRA) and to absorb the full operating losses of the Joint Venture in the manner specified in Sections 7.1(a) and 7.3(a) of Annex E to this Agreement, subject to a credit for the Prior Payment as specified in such Sections. ANNEX D ABI EMPLOYEES INITIALLY TRANSFERRING TO THE JOINT VENTURE [Intentionally omitted. The Company will furnish supplementally a copy of this annex to the Securities and Exchange Commission upon request.] ANNEX E TERMS AND CONDITIONS OF JOINT VENTURE 1. Joint Venture Business and Related Fundamental Principles 1.1 Scope of JV Company Business; Activities of ABI and CRA. The business of the Joint Venture as conducted through the JV Company shall be limited to the JV Field (which expressly includes the right to conduct such business jointly with collaboration partners). The JV Company shall not conduct any business outside of the JV Field unless the JV Field definition is amended to include such other business in accordance with the terms and conditions contained herein. Similarly, subject to Sections 1.4, 1.5, 3.3 and 3.4 below, ABI and CRA shall engage in activities in the JV Field (whether directly or indirectly through collaboration with third parties) exclusively through the JV Company and shall not conduct any business within the JV Field other than through the JV Company. Subject to Sections 1.4, 1.5, 3.3 and 3.4 of this Annex, the Joint Venture shall collect all revenues or other consideration from the sale of any products, services, licenses, or technology transfers in the JV Field, unless otherwise agreed by the JV Board. 1.2 Role within Applera Corporation. The following principles shall govern the operation of the Joint Venture as a business unit within Applera Corporation: (a) As specified in further detail in Section 4 below, the JV Company shall have its own board of managers (the "JV Board") and management who shall be responsible for the operation of the JV Company's business. (b) The parties recognize that certain matters relating to or affecting the JV Company may also relate to or affect ABI or CRA. Therefore, as a general principle these matters should be subject to the same procedures and processes currently used to resolve issues between ABI and CRA, with the understanding that the JV Company would be included in those procedures and processes as applied to such matters. These procedures and processes include the Applera Inter-Group Policy Committee (the "Inter-Group Policy Committee," which term includes any processes or procedures for resolution of issues between ABI and CRA, or among ABI, CRA, and the JV Company, as may be applicable from time to time, and any successor committees, processes, or procedures). This Annex E specifies certain matters that must be reviewed by the Inter-Group Policy Committee, but these matters should not be viewed as exclusive. Annex E-1 (c) The parties also recognize that, since ABI, CRA, and the JV Company operate under the authority of the Applera Corporation Board of Directors (the "Applera Board"), the terms, conditions, ownership, and operation of the Joint Venture shall at all times remain subject to the ultimate supervision of the Applera Board. Section 8 below outlines this principle in further detail, and in particular identifies certain "Fundamental Changes" which require the approval of the Applera Board. (d) Within this framework, the parties anticipate that disputes and disagreements can be minimized by encouraging ongoing consultation and discussions among the parties and by using formal processes and procedures where necessary or appropriate. The parties shall communicate regarding potential concerns before signing agreements or committing to transactions, and are encouraged to initiate dialogue, whenever there is potential for conflict or disagreement even where this potential is not deemed significant. 1.3 JV Field Definition and Interpretation. The JV Field definition affects all parties, and therefore interpretation and amendment of the definition shall be subject to the approval of the Inter-Group Policy Committee (subject to the oversight of the Applera Board as outlined in Section 8). However, the JV Board, acting in consultation with JV Company management, shall have the primary responsibility for reviewing the JV Field definition from time to time and recommending any proposed amendments to the Inter-Group Policy Committee. Such review shall occur at least on an annual basis, but shall also occur more frequently as circumstances require, such as due to actual or anticipated technological changes or evolution of the human in vitro diagnostics market, with the goal of anticipating issues to minimize the development of conflict. ABI and CRA may also make recommendations to the Inter-Group Policy Committee from time to time as they believe necessary or appropriate with respect to the JV Field definition. Amendments approved by the Inter-Group Policy Committee shall be binding on the parties and shall be formally adopted as provided in Section 9 below. Annex E-2 1.4 Business Opportunities, Including New Technology and IP. If either ABI or CRA identifies a business opportunity within the JV Field (including any proposed acquisition of technology or other intellectual property or improvements thereto with applications within the JV Field as contemplated by Section 3.3), they shall present this opportunity to the JV Company. Subject to the authority of the Applera Board as described in Section 8 of this Annex E, it shall be within the sole discretion of the JV Board as to whether or not the JV Company shall pursue the business opportunity. If the JV Board makes a determination that the JV Company will not pursue such a business opportunity, then the party that identified the opportunity shall be permitted to pursue such opportunity in the JV Field on the terms and conditions approved by the Inter-Group Policy Committee. 1.5 Certain Third Party Collaborations. Notwithstanding the restriction in Section 1.1 above, the JV Company, ABI and CRA may individually establish collaborations with third party companies to conduct pharmacogenomic research. Such research relates to the identification, analysis or validation of surrogate markers for drug activation or drug metabolism, and the determination or prediction of treatment response, efficacy or adverse effects specifically in connection with the development of a therapeutic regimen. The JV Company shall have royalty-free access to all markers derived from any third party collaboration for use in the JV Field, except for royalties owed to third parties. The JV Company shall maintain the exclusive right within Applera to commercialize any analyte specific reagents and in vitro diagnostic products resulting from any such third party collaboration. Furthermore, the JV Company shall have the right of first refusal within Applera to establish a third party collaboration that involves the discovery of markers for use in the JV Field. Notwithstanding anything herein to the contrary, CRA shall retain the right to utilize such markers in its clinical trial activities without compensation to the JV Company. However, the JV Company may not establish a third party collaboration that is specifically designed to identify therapeutic targets. In cases where the third party collaboration involves the discovery of both diagnostic and therapeutic markers, the JV Company and another Applera operating group would jointly establish the collaboration. The Applera operating group establishing a third party collaboration shall collect all revenues from that collaboration. If more than one Applera operating group participates in the collaboration, the revenues shall be shared proportionately as agreed between them with the approval of the Inter-Group Policy Committee. Annex E-3 2. Formation/Capitalization 2.1 Nature of Joint Venture; Ownership . The Joint Venture shall be conducted by CRA and ABI through the JV Company. ABI and CRA shall each own their respective interests in the JV Company through ABI LLC and CRA LLC, respectively, which shall own Class A and Class B membership interests, respectively, in the JV Company. The economic and voting rights associated with those two classes of membership interests are to be set forth in the JV Operating Agreement, which shall have terms and conditions which are not inconsistent with this Agreement. The Class A and Class B membership interests in the JV Company shall represent equal membership interests in the JV company with respect to all matters (including voting and economic rights) except as otherwise specifically provided in this Agreement. ABI and CRA, as the Class A and Class B members, respectively, of the JV Company, shall account for their respective membership interests in the JV Company consistent with the rights and obligations associated with those interests pursuant to the JV Operating Agreement, which shall embody and/or incorporate by reference the principles outlined in Section 7 below. 2.2 Initial Capital Contributions. The Initial Contributions of ABI through ABI LLC and CRA through CRA LLC to the JV Company and the contribution mechanics are as described in Annexes A, C-1, and C-2 attached hereto. 2.3 Future Capital Contributions. All future funding needs for the JV Company shall be satisfied in accordance with Section 7.3 of this Annex subject to the following: (a) The funding of the LLC pursuant to Section 7.3 shall not alter ABI LLC's or CRA LLC's respective Class A or Class B membership interest in the JV Company even though, among other things, such provisions may require unequal cash contributions to the JV Company, as the commitment to make such contributions are part of the Initial Contributions. The making of any contributions which would cause deviation in the Class A or Class B membership interests or the rights or obligations associated with such interests as set forth in this Annex is a Fundamental Change subject to Section 8 below. (b) Except as set forth in this Agreement with respect to the Initial Contributions, all contributions from the parties shall be in the form of cash unless otherwise approved by the JV Board. Non-cash contributions shall be valued at the fair value of the property contributed as determined by the Applera Board using outside resources to the extent it deems necessary. For the avoidance of doubt, it is understood that such valuation is for purposes of determining the Class A and Class B membership interests of each of ABI LLC and CRA LLC in the JV Company and not for accounting purposes. Annex E-4 The JV Board shall review and approve the JV Company business plan and corresponding budget (including fixed and working capital requirements) prior to the commencement of each of its fiscal years, and at such other times as the JV Board determines from time to time. 3. Intellectual Property Matters 3.1 IP Contributions by ABI and CRA. The initial intellectual property contributions of each of ABI and CRA to the JV Company through ABI LLC and CRA LLC, respectively, include (a) the intellectual property specifically set forth in Annexes C-1 and C-2, and (b) subject to Section 3.4 below and subject to the rights of third parties, exclusive rights to all existing and future ABI and CRA patents, technology, and know-how (including improvements and modifications thereto) for applications within the JV Field. Subject to Sections 1.4 and 1.5 above and Sections 3.3 and 3.4 below, the JV Company shall have the right to use such intellectual property within the JV Field (including the right to license or sublicense such intellectual property) without the payment of any license fees or royalties to ABI or CRA but subject to the terms and conditions, including royalty or license fee obligations, owing to any third party in respect of such intellectual property. ABI and CRA shall use their commercially reasonable efforts to ensure that future contracts with third parties do not contain restrictions that would restrict the JV Company's access to and use of their intellectual property as contemplated by this Section, and before entering into any contract that contains such a restriction they shall obtain the approval of the Inter-Group Policy Committee. Annex E-5 3.2 Rights to Technology Developed or Acquired by JV Company. Subject to Sections 1.4 and 1.5 above, the JV Company shall have the exclusive right to use intellectual property developed or acquired by the JV Company within the JV Field. Outside of the JV Field, subject to the rights of any third party, any intellectual property developed or acquired by the JV Company (a) may be used exclusively by ABI within the research field without the payment of any license fees or royalties to the JV Company, and (b) may be used exclusively by CRA within the therapeutics field without the payment of any license fees or royalties to the JV Company. The use of any intellectual property developed by the JV Company in a field of use not contemplated by this Section 3.2 shall be determined by the Inter-Group Policy Committee. The foregoing notwithstanding, the use of technology, know-how, information, or data developed by the JV Company may be subjected to such reasonable restrictions as the Inter-Group Policy Committee may determine for purposes of securing necessary patent protection, complying with JV Company obligations to third parties, or maximizing the commercial value to Applera of the technology, know-how, information, or data. The JV Company shall use its commercially reasonable efforts to ensure that future contracts with third parties do not contain restrictions that would restrict ABI's or CRA's access to and use of its intellectual property as contemplated by this Section, and before entering into any contract that contains such a restriction it shall obtain the approval of the Inter-Group Policy Committee. 3.3 Rights to Third-Party Technology. ABI's or CRA's subsequent acquisition of rights to technology or other intellectual property or improvements thereto from a third party with applications within the JV Field shall be subject to Section 1.4 above. 3.4 CRA's Existing Collaborations. The parties acknowledge that CRA currently is a party to certain collaboration and other agreements that, among other things, provide third parties with access to certain CRA technology for use in certain fields, including fields that would be considered within the JV Field. Notwithstanding anything to the contrary contained herein, these agreements and the transactions and relationships established by them shall be deemed excluded from the JV Field and the grant of rights to third parties under these agreements shall not be a violation of this Joint Venture Agreement if and to the extent that CRA is, under the terms and conditions of such collaboration and other agreements, prohibited from assigning them to the JV Company. CRA and the JV Company will separately agree in writing on the list of collaboration and other agreements that are covered by the exception in this Section 3.4. For the avoidance of doubt, it is understood that even if a collaboration or other agreement is excluded under this Section 3.4, intellectual property that CRA may derive from such agreement within the JV Field shall be covered by Section 3.1 above, and will be deemed contributed to the JV Company for its exclusive use within the JV Field, unless prohibited under the terms of such collaboration and other agreements. Annex E-6 3.5 Determinations. The applicability to the JV Field of intellectual property that is subsequently created or acquired by either ABI or CRA, as the case may be, shall be determined by the Inter-Group Policy Committee as contemplated by Section 1.2 above. 4. Governance. 4.1 JV Board The Joint Venture shall operate under the supervision of the JV Board, which shall have the authority of a "manager" of a limited liability company under the Limited Liability Company Act of the State of Delaware, subject to the specific limits set forth herein. The following provisions shall apply to the JV Board: (a) Composition. The JV Board shall have six (6) members, consisting of: (i) the Chief Executive Officer of Applera (the "CEO"), (ii) the JV President (as defined below), (iii) one member appointed by ABI LLC as the Class A member of the JV Company (the "ABI Nominee"), (iv) one member appointed by CRA LLC as the Class B member of the JV Company (the "CRA Nominee"), (v) the Chief Financial Officer of Applera, and (vi) the General Counsel of Applera, The CEO shall be the Chairman of the JV Board. ABI LLC and CRA LLC can remove and replace the ABI Nominee and CRA Nominee appointed by them, respectively, from time to time without restriction. Any member of the JV Board who is unable to attend a meeting of the JV Board may, for that meeting, designate an alternate or proxy to act on behalf of such member of the JV Board, subject to approval of the CEO. (b) Meetings. Meetings of the JV Board shall be held from time to time as the parties deem necessary or as required to take the actions specified herein, and as may otherwise be requested from time to time by the CEO. A quorum for meetings requires the presence of the ABI Nominee, the CRA Nominee, the JV President, and the CEO (or, if applicable, their designated alternates or proxies). Annex E-7 (c) Voting. Approval of matters voted on by the JV Board at meetings requires a vote of a majority of the entire JV Board (regardless of who is present at a meeting); provided, however, that (i) in the event of a tie vote the CEO (or his designated alternate or proxy) shall have a casting (i.e., tie-breaking) vote and (ii) in lieu of exercising such casting vote, the CEO (or, if applicable, his designated alternate or proxy) may instead have the matter referred to and determined by the Applera Board as contemplated by Section 8.3 below. (d) No Fiduciary Duties. No members of the JV Board shall have any fiduciary or similar duties to the members of the JV Company, and are therefore free to vote in accordance with instructions from the parties nominating such members. (e) Action By Written Consent. Notwithstanding the foregoing, any action required or permitted to be taken at any meeting of the JV Board may be taken without a meeting if all members of the JV Board consent thereto in writing. (f) Indemnification. The JV Company shall indemnify and hold harmless each member of the JV Board from and against any and all claims and demands to the fullest extent permitted by law and Applera's By-laws. 4.2 Joint Venture Management The day-to-day operations of the Joint Venture shall be run by a management team employed by, and dedicated to, the JV Company under the management and direction of the JV Board. Such management team shall be headed by a president (the "JV President") who shall initially be Kathy Ordonez. The balance of the management team, and the personnel filling management positions, shall be determined from time to time by the JV President under the supervision of the JV Board. The management of the JV Company shall have such authority as the JV Board shall from time to time delegate except that the JV Company's management authority shall not extend to matters requiring approval of the Applera Board or the Inter-Group Policy Committee under the terms hereof. 5. Operations 5.1 Access to ABI and CRA Products and Services. From time to time, the JV Company may require products and services of ABI or CRA in addition to those products and services that constitute the Initial Contributions. ABI and CRA, as applicable, shall supply the JV Company with such products and services on terms and conditions (including price) approved by the Applera Board consistent with then applicable policies on intra-company transactions. Such products and services will not be treated as contributions to the JV Company through ABI LLC or CRA LLC unless otherwise determined by the Applera Board consistent with the principles set forth in this Annex. Annex E-8 5.2 Access to Corporate Overhead. The JV Company shall have access to Applera's general corporate resources (including tax, accounting and legal) in accordance with, and subject to, Applera management allocation policies as in effect from time to time. The JV Company shall incur an administrative charge to its operations reflecting an allocation of corporate costs as determined by the overall allocation formula (commonly referred to as the "Four-Factor Allocation"). 6. Employees and Benefits 6.1 Employees. The JV Company shall be staffed with employees who are dedicated full time to the business of the JV Company. The JV Company shall be prohibited from hiring employees of either ABI or CRA without the consent of the affected group, except that the employees identified on Annex D shall initially staff the JV and no consent of ABI is required with respect to such employees. 6.2 Compensation and Benefits. Subject to Section 4.1(c) and subject also to any matters which by their own terms require Applera Board approval (such as stock options), matters relating to the compensation of JV Company personnel shall be determined by management of the JV Company consistent with Applera policies applicable to such matters as in effect from time to time. JV Company personnel shall also be provided with Applera benefits in accordance with applicable Applera policies as in effect from time to time. 7. Tax/Accounting Matters 7.1 Joint Venture Losses. JV Company losses shall be for the account of ABI LLC, as the Class A member of the JV Company, and CRA LLC, as the Class B member of the JV Company (and accordingly recorded by ABI or CRA, as applicable, on their books), as follows: (a) During the Initial Loss Period (as defined below), all operating losses of the JV Company up to an aggregate amount equal to $300 million (the "Initial Loss Commitment") shall be allocated to CRA LLC, provided that CRA LLC shall receive a credit under this clause against the Initial Loss Commitment for the Prior Payment (the aggregate operating losses allocated to CRA LLC from time to time under this clause, including the credit for the Prior Payment, is referred to herein as the "Allocated Initial Losses"); and Annex E-9 (b) All operating losses of the JV Company above the Initial Loss Commitment, or which occur after the Initial Loss Period, shall be allocated 50% for the account of ABI LLC and 50% for the account of CRA LLC (as the Class A and Class B members, respectively, of the JV Company). The "Initial Loss Period" shall mean the period beginning with the formation of the Joint Venture and ending on the earliest to occur of (i) the time at which Allocated Initial Losses equal the Initial Loss Commitment, (ii) the last day of any fiscal quarter during which the JV Company experiences gross operating profits, if such fiscal quarter represents the fourth of four consecutive fiscal quarters during which the JV Company experiences gross operating profits. For these purposes, the JV Company's operating results shall include all items, except those deemed to be non-recurring in nature as determined by the JV Board. 7.2 Joint Venture Profits. JV Company profits shall be for the account of ABI LLC, as the Class A member of the JV Company, and CRA LLC as the Class B member of the JV Company (and accordingly recorded by ABI or CRA, as applicable, on their books), as follows: (a) All profits of the JV Company shall be allocated 65% for the account of CRA LLC and 35% for the account of ABI LLC until the cumulative profits of the JV Company equal the Allocated Initial Losses; and (b) All profits of the JV Company above the amount referred to in clause (b) above shall be allocated to ABI LLC and CRA LLC equally. 7.3 Cash Contributions. (a) Cash operating losses of the JV Company shall be funded by CRA LLC (as the Class B member of the JV Company) up to the Initial Loss Commitment, subject to a [credit] under this provision in an amount equal to the Prior Payment. The amounts to be funded pursuant to the following clauses (b) and (c) are incremental to this amount. (b) Working capital requirements of the JV Company shall be funded by ABI LLC and CRA LLC (as the Class A and Class B members, respectively, of the JV Company) equally. Working capital shall be measured at the end of each fiscal quarter as the cash flow impact of the change in the current assets and liabilities of the JV Company. Annex E-10 (c) Plant, property, and equipment ("fixed capital") requirements of the JV Company shall be funded by ABI LLC and CRA LLC (as the Class A and the Class B members, respectively, of the JV Company) equally. 7.4 Reimbursement of Tax Benefits. If CRA LLC, as the Class B member of the JV Company, assumes and CRA records on its books JV Company losses as provided in Section 7.1 above, then ABI shall reimburse CRA for any tax benefits resulting from such losses or any other tax benefits generated by the JV Company during the loss year to the extent that such benefits are utilized by ABI. 7.5 Distributions On Liquidation. Upon a liquidation of the JV Company business (which for these purposes includes a sale of the business regardless of the legal structure of such transaction), the assets of the JV Company (or, if applicable, the proceeds of such sale) shall be allocated to ABI LLC and CRA LLC as the Class A and Class B members of the JV Company as follows (after payment of all of the JV Company's debts and liabilities): (a) First, to the extent of any such proceeds, to ABI LLC and CRA LLC in an amount equal to the balance in their respective shareholder equity accounts in the JV Company (payable to them pro rata based on the amounts owing to them under this clause (a) up to such amounts); (b) Second, to the extent of any such proceeds after payment of the amounts in clause (a) above, 65% to CRA LLC and 35% to ABI LLC until the cumulative amounts paid under this clause (b), together with any cumulative profit returned under Section 7.2(a), equals the Allocated Initial Losses; and (c) Third, to the extent of any remaining proceeds after payments of the amounts referred to in clauses (a) and (b) above, to ABI LLC and CRA LLC equally. 8. Matters Subject to Applera Board Approval or Review 8.1 Role of Applera Board. Notwithstanding anything to the contrary contained herein, all matters relating to the JV Company shall at all times remain within the purview of the Applera Board, which shall have the authority to review matters relating to the JV Company or the JV Board on its own initiative and, if it deems appropriate, instruct the JV Company or the JV Board regarding particular matters (in which case the JV Company and the JV Board shall be bound to comply with such instructions). Without limiting the foregoing, the conduct of the business of ABI, CRA, ABI LLC, CRA LLC, and the JV Company shall at all times remain subject to Applera policies in effect from time to time. Annex E-11 8.2 Fundamental Changes. Although the parties do not anticipate any material alteration in the fundamental structure and ownership of the JV Company for the foreseeable future, from time to time circumstances may arise which warrant consideration of such alterations ("Fundamental Changes"). Fundamental changes, defined to include the following matters, require approval of the Applera Board: (a) Terminating the Joint Venture by transferring its business to either or both of ABI and/or CRA; (b) Spinning off the JV Company into an independent business; (c) Altering the ownership of the JV Company between ABI and CRA due to, for example, alterations in the rights or obligations (including contribution commitments) associated with their direct or indirect interests in the JV Company as set forth in Section 7 above); (d) Allowing a third party to participate in the JV Company, including by way of a transfer by either or both of ABI and/or CRA of its direct or indirect interest or by contribution of new equity into the JV Company; (e) Liquidating the JV Company in whole or in part by disposing of some or all of its assets to a third party; and (f) Other matters identified by the CEO or the Applera Board from time to time as Fundamental Changes. 8.3 Interpretation of Agreement; Resolution of Disputes. It is the intent of the parties that, subject to the preceding provisions of this Section 8, all issues relating to the JV Company, including the interpretation of this Agreement, be decided or resolved by the JV Board or, in the case of issues which affect or relate to ABI or CRA (including, without limitation, issues relating to the definition of the JV Field), the Inter-Group Policy Committee. However, any dispute, disagreement, or deadlock relating to the JV Company which cannot be so resolved may be referred by the CEO to the Applera Board, and any resulting determination by the Applera Board shall be binding on the parties. Annex E-12 9. Amendment and Waiver Subject to any approval of the Applera Board required under Section 8 of this Annex, the terms and conditions contained in this Agreement may be amended, and the conduct of the parties may deviate from such terms and conditions, with the approval ofthe Inter-Group Policy Committee; provided, however, that any amendment to this Agreement, upon receiving the necessary approval, shall be in a written instrument signed by (a) ABI and ABI LLC, (b) CRA and CRA LLC, and (c) the CEO. In addition, if any provision of this Agreement specifies that the approval or determination of the Applera Board is required for or with respect to any matter, then such provision may not be amended, and the conduct of the parties shall not deviate from such provision, without the approval of the Applera Board. Annex E-13 EX-10.37 8 b320198_ex10-37.txt MARKETING AND DISTRIBUTION AGREEMENT EXHIBIT 10.37 Description of Celera Genomics/Applied Biosystems Marketing and Distribution Agreement In April 2002, the Celera Genomics group of Applera Corporation ("Celera Genomics") and the Applied Biosystems group of Applera Corporation ("Applied Biosystems") entered into a 10-year marketing and distribution agreement pursuant to which Applied Biosystems has become the exclusive marketer of Celera Genomics' Celera Discovery System(TM) and related information assets. The principal terms and conditions of the marketing and distribution agreement are described below. o Applied Biosystems is expected to integrate the Celera Discovery System and other genomic and biological information into its new Knowledge Business. In exchange for marketing and distribution rights to the Celera Discovery System and other genomic and biological information and access to the Celera Discovery System and related information, Applied Biosystems will provide Celera Genomics with royalty payments on revenues generated by sales of certain products of its Knowledge Business from July 1, 2002, through the end of fiscal 2012. The royalty rate is progressive, up to a maximum of 5%, with the level of sales through fiscal 2008. The royalty rate becomes a fixed percentage of sales starting in fiscal 2009, and the rate declines each succeeding fiscal year through fiscal 2012. Assays-on-Demand(TM), Assays-by-Design(SM), certain reagents for arrays, and new database subscriptions sold by the Knowledge Business are the products subject to royalties. o Celera Genomics will receive all revenues under, and be responsible for all costs and expenses associated with, Celera Discovery System and related information contracts that were in effect on April 1, 2002, the effective date of the agreement, or which were entered into during a three-month transition period ended June 30, 2002 (as well as renewals of these contracts, if any). Applied Biosystems has agreed to reimburse Celera Genomics for any shortfall in earnings before interest, taxes, depreciation, and amortization from these contracts below $62.5 million (as well as renewals, if any) during the four fiscal years ending with the 2006 fiscal year if the shortfall is due to changes made to Celera Discovery System products by or at the request of Applied Biosystems, provided Celera Genomics otherwise continues to perform under these contracts. During the term of the marketing and distribution agreement (other than the transition period), Celera Genomics will not be marketing Celera Discovery System products and services to, and will not be contracting with, new customers. o Celera Genomics will continue to have access to all data, which may include formats not available to third parties, and other intellectual property associated with the Celera Discovery System for its therapeutic programs. EX-13 9 b320198_ex13.txt ANNUAL REPORT TO STOCKHOLDERS Exhibit 13 2002 APPLERA CORPORATION Annual Report APPLIED BIOSYSTEMS CELERA GENOMICS Table of contents - -------------------------------------------------------------------------------- Letter to Stockholders Applera Corporation 3 Applied Biosystems Group 4 Celera Genomics Group 5 Celera Diagnostics 6 Financial Review 8 Directors and Officers 85 Stockholder Information 86 - -------------------------------------------------------------------------------- APPLERA CORPORATION Mission: To provide the world's leading technology and information solutions that enable life scientists to understand and use the power of biology. Business Groups: Applied Biosystems and Celera Genomics Headquarters: Norwalk, Connecticut ------------------ APPLIED BIOSYSTEMS GROUP Profile: A leading provider of technology solutions for life sciences research and related applications with customers in more than 100 countries. Headquarters: Foster City, California New York Stock Exchange Symbol: ABI CELERA GENOMICS GROUP Profile: A biopharmaceutical business engaged principally in integrating advanced technologies to discover and develop new therapeutics by leveraging its capabilities in proteomics, bioinformatics, genomics, and medicinal chemistry. Headquarters: Rockville, Maryland New York Stock Exchange Symbol: CRA ------------------ CELERA DIAGNOSTICS Profile: A joint venture between Applied Biosystems and Celera Genomics, with a mission to improve human health through discovery, development, and commercialization of novel molecular diagnostic products. Headquarters: Alameda, California - -------------------------------------------------------------------------------- To our stockholders: - -------------------------------------------------------------------------------- The past year was a challenging time at Applera Corporation, as it was for most technology companies. Global economic pressures and uncertainty translated into disappointing financial performance and unstable stock prices during the period. Yet this has not dampened our optimism. Our commitment to research and development produced a pipeline of new products that expanded our market opportunities, while our culture of continuous innovation drove significant redefinition of our businesses. As we begin fiscal 2003, these strategic actions have given us an even stronger foundation for serving our customers and contributing to advances in health care. While tough times are always difficult to weather, Applera's ability to embrace change and evolution in our businesses has set the stage for new growth. During fiscal 2002, we announced an innovative concept called the Applied Biosystems Knowledge Business, which should allow researchers seamless access to information and products based on the sequencing of the human genome. At Applied Biosystems, we launched new production-level sequencers and tools for drug development that have been well received by the market. We completed the transformation of Celera Genomics' focus from information to therapeutic development. And we made investments that quickly built Celera Diagnostics into an approximately 175-person organization with top diagnostic talent and technology capabilities. The leaders of our businesses provide further detail on these exciting developments in the following pages. Our strategy has been to manage those things we can control during downturns, while continuing to invest in the future. We have been able to increase our R&D investments consistently over the past several years. This includes the approximately $100 million we expect to invest in the Applera Genomics Initiative. This initiative, begun in July 2001, has already resulted in products that have reached the market. This level of commitment should allow us to withstand current global economic pressures and ensure that we aren't constrained when conditions improve. Ultimately, Applera's collective resources distinguish our businesses and maximize our opportunities for long-term success. Our technologies are unmatched, yet we continue efforts to surpass them. Our financial resources allow us to stay the course and invest at a level few in our industry can match. Our businesses are strong and optimally situated in growing life sciences segments. These businesses also complement each other and benefit from synergies that don't exist elsewhere. My confidence in our ability to grow by making breakthrough research more productive and cost-efficient continues to be bolstered by Applera's global organization of nearly 6000 employees. During a challenging year, our people have proved themselves with their creativity, flexibility, and insight. Thanks to their efforts, we will continue to help our customers operate at the forefront of discovery and strive to deliver maximum long-term value to our stockholders. The need to facilitate discovery for the betterment of the human condition will continue to increase, and at Applera, we remain committed to leading the way. /s/ Tony L. White - ------------------------ Tony L. White Chairman, President, and Chief Executive Officer Applera Corporation APPLERA CORPORATION Annual Report 2002 3 APPLIED BIOSYSTEMS GROUP Fiscal 2002 has been a year of investment and preparation for new opportunities as Applied Biosystems has introduced a new generation of tools and systems to help biologists accelerate the pace of their discovery. Revenues were $1.6 billion for the year, essentially unchanged from fiscal 2001, excluding foreign currency effects. These results reflect the overall downturn in technology spending and recent buying patterns of life sciences research customers. In response, we have managed our financial resources conservatively so we can remain productive in a tighter spending environment. As a result, we continue to be in a strong financial position at the end of a difficult year. We have also taken a longer-term view and made a conscious commitment to expand R&D programs across our product lines. Thanks to our strong finances and the investments we have made over the past several years, we continued to introduce breakthrough products during fiscal 2002 and lay the groundwork for new products going forward. Our core genetic analysis business has been strengthened by several product introductions that extend our offerings across the entire research spectrum. The Applied Biosystems 3730 DNA Analyzer and 3730xl DNA Analyzer set new standards in high-performance genetic analysis for medium- and production-level users. These 48- and 96-capillary platforms can reliably determine sequences at nearly twice the effective read length possible with previous systems. Participation in our early access program for these next-generation systems has been strong, and early response positive. The 3100-Avant Genetic Analyzer also fills an important price/performance gap in our genetic analysis business. With this four-capillary system, which delivers higher performance for low- to medium-throughput DNA analysis, Applied Biosystems now offers 1-, 4-, 16-, 48-, and 96-capillary systems that cover virtually any genetic analysis need. We were also pleased to announce our new Knowledge Business offering, through which Applied Biosystems expects to integrate the rich genomic information and sophisticated information portal from the Celera Discovery System(TM) (CDS) with our own information-rich products, services, and analytical tools. We expect the result will be a complete solution that will help our customers reduce the time necessary to design their experiments, select the right reagents, run those experiments, and interpret the results. The Knowledge Business is a logical evolution. Early in our history, we provided researchers with the technology tools and reagents they needed to focus on small-scale biological problems. More recently, as sequencing and reagent technologies developed, large-scale biology projects such as sequencing the human genome have come to the fore. Here, too, Applied Biosystems has led the way in supplying tools and consumables to industrial-scale research. With the Knowledge Business, we have come full circle: providing an information and product portal that enables researchers focused on smaller-scale biology projects to take advantage of the knowledge emerging from industrial-scale, high-throughput biology programs. The ability to conduct specific queries of definitive genomic and proteomic information using Celera Genomics' informatics tools in a context of definitive genomic and proteomic information, as well as the ability to order our off-the-shelf Assays-on-Demand(TM) or customized Assays-by-Design(SM) to run their experiments, should have a significant impact on the quality of the results researchers receive. As the Applera Genomics Initiative draws to a close and we continue to discover novel SNPs in and around genes, we also envision that the Knowledge Business will provide an opportunity to build on our already substantial genetic analysis business. 4 APPLERA CORPORATION Annual Report 2002 Fiscal 2002 was also an exciting year in mass spectrometry, as we expanded our suite of next-generation tools for the proteomics and drug metabolism/phar-macokinetics (DMPK) markets. In January we introduced the Applied Biosystems 4700 Proteomics Analyzer, which uses tandem time-of-flight technology to identify and characterize thousands of proteins per day -- up to 10 times faster than current technology. In May we launched the Q TRAP(TM) LC/MS/MS System, a first ever union of triple quadrupole and ion trap technologies, which researchers are using to identify proteins and peptides in proteomics research and small molecule drug metabolites important in therapeutic development. Added to our existing mass spectrometry products, including the API 4000(TM) LC/MS/MS System, which continues to be a strong performer for DMPK studies, our family of mass spectrometry instruments now spans a wide range of needs for protein and small molecule analysis problems. In addition, our recently introduced ICAT(TM) protein expression reagents and upcoming second-generation ICAT reagent technology should expand researchers' ability to look at proteomics at a functional level. Upcoming products, such as the functional proteomics system we are developing with partner HTS Biosystems, should further extend our next-generation offerings in this area. In closing, we would like to thank our stockholders and especially our employees for their support. Going forward, we continue to look for opportunities to serve the needs of the life sciences market. Applied Biosystems has faced downturns in the past and has responded with new products that appealed to our customers and carried us past our competitors. We believe that this cycle will be no different. /s/ Michael W. Hunkapiller - ------------------------------ Michael W. Hunkapiller, Ph.D. President Applied Biosystems Group CELERA GENOMICS GROUP Celera Genomics has undergone tremendous organizational and strategic change in its evolution from a genomics information company to a biopharmaceutical business with innovative enabling technology platforms. We have undertaken this change because we believe the potential return from a successful therapeutics business is significantly greater and is more sustainable than what might be realized from an information-based business. I'm pleased to report that we bring fiscal 2002 to a close with a clear strategy and focused programs to build our therapeutics business. Our confidence in the future is based on the quality of our technology and our people, the progress we have made toward aligning Celera's organization with its strategy, and the promise of our preclinical pipeline. Thanks to industry-leading expertise and platforms in proteomics, genomics, and informatics, Celera is strategically positioned to discover new therapeutic targets and diagnostic markers for disease. The acquisition of Axys Pharmaceuticals in late calendar 2001 added a significant preclinical small molecule pipeline, as well as an outstanding staff of biologists and structural and medicinal chemists experienced in drug discovery and lead optimization. Celera has restructured by eliminating nonstrategic businesses and infrastructure, and by adding new management to focus on therapeutic discovery. In April we entered into a marketing and distribution agreement for the Celera Discovery System(TM) (CDS) with Applied Biosystems' Knowledge Business. Under this agreement Celera will continue to receive revenue from its existing customers and will also receive royalties on sales of various new Knowledge Business products. Celera will also retain access to data and other intellectual property for the benefit of its discovery programs. We intend to maintain relationships with these existing customers, fully support them for the term of their subscriptions, and explore opportunities to expand these relationships. APPLERA CORPORATION Annual Report 2002 5 Executive appointments designed to further accelerate our efforts include the hiring of several senior executives with extensive experience in therapeutics, including Robert Booth, Ph.D., as our new head of R&D. With more than 20 years in the pharmaceutical industry, Dr. Booth has a solid track record of leading successful programs to discover new therapeutic compounds and to advance them into clinical trials. He is well qualified to integrate and lead our staff of almost 300 researchers. Our most advanced preclinical programs include our collaboration with Merck & Co. to develop small molecule inhibitors of Cathepsin K, a protease target that has been shown to play a role in osteoporosis. Our collaboration with Aventis Pharmaceuticals on inhibitors of Cathepsin S has advanced to a similar stage, with compounds identified for development in multiple inflammation and autoimmune disease indications. We are also working on a number of promising unpartnered programs in antithrombotic therapeutics, specifically around the coagulation enzyme, Factor VIIa, and in oncology. Our industrial-scale proteomics facility is now operational as well. As results from this unique integration of cell biology, protein chemistry, mass spectrometry, and informatics emerge over the next year, we are optimistic that Celera will identify targets for therapeutic intervention as well as protein-based diagnostic markers that may be of interest to Celera Diagnostics. Taken together, Celera's technology platforms, its growing small molecule pipeline, and our plan to expand our product development team over the coming year demonstrate our commitment to building shareholder value through successful drug discovery. /s/ Kathy Ordonez - --------------------------- Kathy Ordonez President Celera Genomics Group CELERA DIAGNOSTICS In its first full year of operation, Celera Diagnostics has made significant progress toward our goal of improving human health by discovering, developing, and commercializing novel diagnostic tests that allow for earlier intervention and more successful disease therapy. During fiscal 2002, we ramped up to a fully functional organization of approximately 175 employees, and we now possess top talent and diagnostic expertise in the areas of discovery, product development, manufacturing, quality, clinical affairs, regulatory, and marketing. Our experienced management team works well together and shares a common vision concerning how to proceed. Fiscal 2002 was a year of foundation building at Celera Diagnostics. We upgraded our facility in Alameda, California, and built out our high-volume discovery laboratories for genotyping and gene expression. We integrated the molecular diagnostics team from Applied Biosystems, a dedicated group of people who created the products and technology that serve as Celera Diagnostics' entry into the market. We also filed a 510(k) on our ViroSeq(TM) HIV-1 Genotyping System with the U.S. Food and Drug Administration. The ViroSeq system is designed to detect drug resistance and assist physicians in prescribing effective treatment regimes. We also made significant progress in building the infrastructure for a cost-effective, industrial-scale method for conducting gene-disease association studies, which are expected to yield novel diagnostic products based on their ability to fill high-value and as yet unmet medical needs. In the first of these studies, for Alzheimer's disease, we are searching for genetic factors in differential diagnoses of senility. In the long term, we believe this information may help tailor treatment as the effectiveness of Alzheimer's medications improves. During the coming fiscal 6 APPLERA CORPORATION Annual Report 2002 year, we plan to complete the Alzheimer's study, and at least three additional large-scale disease association studies. These studies, augmented by new data from the Applera Genomics Initiative, will be integral to our development of novel diagnostic products. Through our recently announced profit-sharing alliance with Abbott Laboratories, one of the world's largest diagnostics companies, we now have a commercialization partner, which should ensure that customers around the world have access to our products. Celera Diagnostics is teaming with Abbott to develop, manufacture, and market a broad range of in vitro molecular diagnostic products for disease detection, disease progression monitoring, and therapy selection. At Celera Diagnostics, we will focus on genetic marker discovery, new marker validation, and assay development, while Abbott will focus on product development, sales, and marketing. Both companies will contribute existing product sales to the alliance and collaborate on the development of new tests to be provided to physicians and their patients through hospitals and clinical laboratories throughout the world. In the coming fiscal year, we expect continued revenue growth from our current products, including our analyte-specific reagents (ASRs) for cystic fibrosis, which detect mutations that have been associated with the disease. Select clinical laboratories have started evaluating our next-generation ASRs for cystic fibrosis testing, while we continue to develop ASRs for hepatitis viral load and genotyping testing. We are optimistic that we can move Celera Diagnostics toward profitability over the next several years through a combination of new genetic and cancer tests under development, as well as tests for the infectious disease market supported by Abbott. We are also encouraged by the promise of proteomics-based diagnostics products currently under development in conjunction with Celera Genomics. Fiscal 2002 has been an exciting year of progress as we work with our partners to develop novel, actionable diagnostics that will drive new advances in health care. We look forward to an exciting and successful fiscal 2003. /s/ Kathy Ordonez - ---------------------------- Kathy Ordonez President Celera Diagnostics APPLERA CORPORATION Annual Report 2002 7 APPLERA CORPORATION Financial Review
Selected Consolidating Financial Data 9 - 10 Management's Discussion and Analysis 11 - 45 Discussion of Applera Corporation 18 Discussion of Applied Biosystems Group 22 Discussion of Celera Genomics Group 26 Discussion of Celera Diagnostics 29 Market Risks 30 Outlook 31 Forward-Looking Statements 32 Financial Statements 46 - 49 Consolidated Statements of Operations 46 Consolidated Statements of Financial Position 47 Consolidated Statements of Cash Flows 48 Consolidated Statements of Stockholders' Equity 49 Notes to Consolidated Financial Statements 50 - 83 Report of Management 84 Report of Independent Accountants 84
8 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Selected Consolidating Financial Data
(Dollar amounts in thousands except per share amounts) Fiscal years ended June 30, 1998 1999 2000 2001 2002 =================================================================================================================================== Financial Operations Net revenues Applied Biosystems group $ 940,095 $1,221,691 $ 1,388,100 $ 1,619,495 $ 1,604,019 Celera Genomics group 4,211 12,541 42,747 89,385 120,886 Celera Diagnostics 1,587 9,206 Eliminations (17,335) (59,812) (66,341) (32,893) Applera Corporation 944,306 1,216,897 1,371,035 1,644,126 1,701,218 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations Applied Biosystems group $ 24,009 $ 148,365 $ 186,247 $ 212,391 $ 168,481 Celera Genomics group (8,315) (44,894) (92,737) (186,229) (211,772) Celera Diagnostics (4,960) (44,763) Eliminations (6,674) 1,986 6,032 47,473 Applera Corporation 15,694 96,797 95,496 27,234 (40,581) - ----------------------------------------------------------------------------------------------------------------------------------- Per Share Information Applera Corporation Income per share from continuing operations Basic $ 0.32 Diluted $ 0.31 Dividends per share $ 0.68 $ 0.51 - ----------------------------------------------------------------------------------------------------------------------------------- Applied Biosystems Group Income per share from continuing operations Basic $ 0.74 $ 0.90 $ 1.01 $ 0.80 Diluted $ 0.72 $ 0.86 $ 0.96 $ 0.78 Dividends per share $ 0.0425 $ 0.17 $ 0.17 $ 0.17 - ----------------------------------------------------------------------------------------------------------------------------------- Celera Genomics Group Net loss per share Basic and diluted per share $ (0.89) $ (1.73) $ (3.07) $ (3.21) =================================================================================================================================== Other Information Cash and cash equivalents and short-term investments Applied Biosystems group $ 84,091 $ 236,530 $ 394,608 $ 392,459 $ 470,981 Celera Genomics group 71,491 1,111,034 995,558 888,922 Eliminations Applera Corporation 84,091 308,021 1,505,642 1,388,017 1,359,903 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets Applied Biosystems group $1,128,937 $1,347,550 $ 1,698,156 $ 1,677,887 $ 1,818,582 Celera Genomics group 6,339 344,720 1,413,257 1,220,136 1,250,044 Celera Diagnostics 14,164 21,826 Eliminations (172,963) (28,098) (24,329) (15,053) Applera Corporation 1,135,276 1,519,307 3,083,315 2,887,858 3,075,399 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term debt Applied Biosystems group $ 33,726 $ 31,452 $ 36,115 $ - $ - Celera Genomics group 46,000 17,983 Eliminations Applera Corporation 33,726 31,452 82,115 17,983 - -----------------------------------------------------------------------------------------------------------------------------------
The selected financial data should be read in conjunction with Applera Corporation's consolidated financial statements and related notes thereto. The recapitalization of the Company on May 6, 1999 resulted in the issuance of two new classes of common stock called Applera Corporation - Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics Group Common Stock. APPLERA CORPORATION Annual Report 2002 9 APPLERA CORPORATION Selected Consolidating Financial Data--continued The Applied Biosystems group per share data and the Celera Genomics group per share data reflect all stock splits. Celera Diagnostics was established in fiscal 2001 as a 50/50 joint venture between the Applied Biosystems group and the Celera Genomics group. This venture is focused on the discovery, development and commercialization of novel diagnostics tests. The loss from continuing operations of Celera Diagnostics does not include the tax benefit recorded by the Celera Genomics group associated with such loss, as the Celera Genomics group recorded 100% of Celera Diagnostics' losses in fiscal 2001 and 2002. A number of items impact the comparability of Applera Corporation's data from continuing operations. Before-tax amounts include: Applied Biosystems Group o Restructuring, other merger costs, and acquisition-related costs of $48.1 million for fiscal 1998, $6.1 million for fiscal 1999, and $2.1 million for fiscal 2000; o Acquired in-process research and development charges of $28.9 million for fiscal 1998 and $2.2 million for fiscal 2002; o Net gains on investments of $1.6 million for fiscal 1998, $6.1 million for fiscal 1999, $48.6 million for fiscal 2000, and $15.0 million for fiscal 2001, and net losses on investments of $8.2 million for fiscal 2002; o Tax benefit and valuation allowance reductions of $22.2 million for fiscal 1999; o Charges for the impairment of assets of $14.5 million for fiscal 1999; o A restructuring reserve adjustment of $9.2 million for fiscal 1999 relating to excess fiscal 1998 restructuring liabilities; o Charges related to the acceleration of certain long-term compensation programs as a result of the attainment of performance targets of $9.1 million for fiscal 1999 and $45.0 million for fiscal 2000; o Charges of $4.6 million for fiscal 1999 relating to the recapitalization of the Company; o A charge of $3.5 million for a donation to the Company's charitable foundation for fiscal 1999; o A foreign currency hedge contract-related gain of $2.3 million for fiscal 1999; and o A gain of $8.2 million on the sale of real estate for fiscal 2000. Celera Genomics Group o Charges of $4.6 million for fiscal 1999 relating to the recapitalization of the Company; o A charge relating to the acceleration of certain long-term compensation programs as a result of the attainment of performance targets of $1.0 million for fiscal 1999; o Charges for the impairment of assets of $69.1 million for fiscal 2001 and $15.6 million for fiscal 2002 and charges relating to excess lease space and severance costs of $13.1 million for fiscal 2002; o A loss from the Celera Genomics group's interest in Celera Diagnostics of $5.0 million for fiscal 2001 and $44.7 million for fiscal 2002; o Losses on investments of $6.0 million for fiscal 2002; and o A charge for acquired in-process research and development of $99.0 million for fiscal 2002. 10 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis Discussion of Operations Results of Operations--2002 Compared With 2001 The purpose of the following management's discussion and analysis is to provide an overview of the business of Applera Corporation ("Applera" or "our company") to help facilitate the understanding of significant factors influencing the historical operating results, financial condition and cash flows and also to convey our expectations of the potential impact of known trends, events or uncertainties that may impact future results. You should read this discussion in conjunction with our company's consolidated financial statements and related notes. Historical results and percentage relationships are not necessarily indicative of operating results for future periods. Overview Our company is comprised of three business segments: the Applied Biosystems group, the Celera Genomics group, and Celera Diagnostics. The Applied Biosystems group develops and markets instrument-based systems, reagents, software, and contract services to the life science industry and research community. Customers use these tools to analyze nucleic acids ("DNA" and "RNA") and proteins to make scientific discoveries, develop new pharmaceuticals, and conduct standardized testing. The Celera Genomics group is engaged principally in integrating advanced technologies to discover and develop new therapeutics. The Celera Genomics group intends to leverage its capabilities in proteomics, bioinformatics and genomics to identify and validate drug targets and diagnostic marker candidates, and to discover novel therapeutic candidates. Its Celera Discovery System(TM) ("CDS") online platform, marketed exclusively through the Knowledge Business of the Applied Biosystems group, is an integrated source of information based on the human genome and other biological and medical sources. Celera Diagnostics was established in the fourth quarter of fiscal 2001 as a 50/50 joint venture between the Applied Biosystems group and the Celera Genomics group. This venture is focused on the discovery, development and commercialization of novel diagnostics tests. Financial results of Celera Diagnostics for fiscal 2001 included three months of operations. In fiscal 1999, following a recapitalization, we created two classes of common stock referred to as "tracking" stocks. Tracking stock is a class of stock of a corporation intended to "track" or reflect the performance of a specific business within the corporation. Applera Corporation - Applied Biosystems Group Common Stock ("Applera - Applied Biosystems stock") is listed on the New York Stock Exchange under the ticker symbol "ABI" and is intended to reflect the relative performance of the Applied Biosystems group. Applera Corporation - Celera Genomics Group Common Stock ("Applera - Celera stock") is listed on the New York Stock Exchange under the ticker symbol "CRA" and is intended to reflect the relative performance of the Celera Genomics group. There is no single security that represents the performance of Applera Corporation as a whole, nor is there a separate security traded for Celera Diagnostics. Holders of Applera - Applied Biosystems stock and Applera - Celera stock are stockholders of Applera. The Applied Biosystems group and the Celera Genomics group are not separate legal entities, and holders of these stocks are stockholders of a single company, Applera. As a result, holders of these stocks are subject to all of the risks associated with an investment in Applera and all of its businesses, assets, and liabilities. The Applied Biosystems group and the Celera Genomics group do not have separate Boards of Directors. Applera has one Board of Directors, which will make any decision in accordance with its good faith business judgment that the decision is in the best interests of Applera and all of its stockholders as a whole. Our company's fiscal year ends on June 30. The company has elected not to present separate full financial statements for the Applied Biosystems group or the Celera Genomics group but instead will present financial information for each group in Note 14 to our consolidated financial statements, Segment, Geographic, Customer and Consolidating Information. This revised presentation is intended to facilitate stockholder understanding and analysis of our company and its business segments. Management's discussion and analysis addresses the consolidated financial results followed by the discussions of our three segments. The following noteworthy developments occurred at our company since the beginning of fiscal 2002: Applied Biosystems Group o In November 2001, the Applied Biosystems group completed the acquisition of Boston Probes, Inc. This acquisition was intended to further the development of the Applied Biosystems group's platform for analysis of genetic information. o In February 2002, the Applied Biosystems group and Amersham plc announced a court-mediated settlement in patent litigation between the parties. o In March 2002, the Applied Biosystems group and MDS Inc. announced a favorable ruling in a patent infringement lawsuit against Micromass. o During the third quarter of fiscal 2002, the Applied Biosystems group introduced the commercial version of the 4700 Proteomics Analyzer with TOF/TOF(TM) Optics for high-throughput proteomics. APPLERA CORPORATION Annual Report 2002 11 APPLERA CORPORATION Management's Discussion and Analysis--continued o Effective April 1, 2002, the Applied Biosystems group and the Celera Genomics group entered into an agreement pursuant to which the Applied Biosystems group has become the exclusive distributor of CDS, beginning July 1, 2002, operated by the Celera Genomics group. The Applied Biosystems group is integrating CDS and other genomic and biological information into a Knowledge Business to include genomic assays and related content, as well as other information-rich products, services, and analytical tools to meet the needs of its customers. o In April 2002, the Applied Biosystems group introduced the ABI 3730 and ABI 3730xl DNA Analyzers, which are expected to allow for more cost- effective, large-scale genome sequencing programs. o In May 2002, the Applied Biosystems group, with its partner MDS Inc., introduced the Q Trap(TM) LC/MS/MS system. This system identifies proteins and peptides in proteomics research and small molecule drug metabolites important in therapeutic development. Both the 3730 analyzers and the Q Trap(TM) are expected to increase customer productivity. o In July 2002, the Applied Biosystems group announced the launch of its Assays-on-Demand(TM) products, believed to be the first commercial product line to emerge from genomic data from both the public and private sector human genome sequence projects. Celera Genomics Group o In November 2001, the Celera Genomics group completed the acquisition of Axys Pharmaceuticals, Inc. The Axys acquisition was intended to accelerate the Celera Genomics group's evolution as a drug discovery and development business. o In April 2002, Kathy Ordonez was appointed President of the Celera Genomics group in addition to her role as President of Celera Diagnostics. o Effective April 1, 2002, the Celera Genomics group and the Applied Biosystems group entered into an agreement pursuant to which the Applied Biosystems group has become the exclusive distributor of CDS, beginning July 1, 2002, from which the Celera Genomics group is entitled to earn royalties from the sale of certain Knowledge Business products for the ten-year term of the agreement. o In fiscal 2002, the Celera Genomics group sold its plant and animal genotyping businesses. o In June 2002, the Celera Genomics group announced the restructuring of its organization to align with its drug discovery and development strategy. o In July 2002, The Celera Genomics group announced that Robert Booth, Ph.D. will be joining the Celera Genomics group in August 2002, as Senior Vice President of Research & Development, responsible for integrating and leading all of the Celera Genomics group's therapeutic discovery and development activities and its R&D staff of approximately 300 people. Celera Diagnostics o In June 2002, Celera Diagnostics and Abbott Laboratories announced an alliance to develop, manufacture and market a range of in vitro molecular diagnostic products for disease detection, disease progression monitoring and therapy selection. This alliance is expected to double Celera Diagnostics' R&D resources and provide access to Abbott's distribution network for diagnostic products. Critical Accounting Policies Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as disclosure of contingent assets and liabilities. Although we evaluate these estimates, which are based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, on an on-going basis, actual results could differ from these estimates under different assumptions or conditions. We believe that, of the significant accounting policies discussed in Note 1 to our consolidated financial statements, the following accounting policies require management's most difficult, subjective or complex judgments: o Revenue recognition; o Asset impairment and valuation allowances; o Allocation of purchase price to acquired assets and liabilities in business combinations; o Restructuring; o Allocations to the Applied Biosystems group, the Celera Genomics group, and Celera Diagnostics; and o Related party transactions. Revenue Recognition The Applied Biosystems group records revenue generally at the time of shipment of products or performance of services. Concurrently, it records provisions for warranty, returns, and installation based on historical experience and anticipated product performance. Revenue is not recognized at the time of shipment of products in situations where risks and rewards of ownership are transferred to the customer at a point other than shipment due to either the shipping terms or the existence of an acceptance clause. The Celera Genomics group recognizes revenue on subscription fees for access to the Online/Information Business databases ratably over the contracted period. The Celera Genomics group recognizes revenue and profit on long-term contracts in accordance with the percentage-of-completion method. Under this method, 12 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued revenue is recognized based on either the costs incurred compared to total costs expected to be incurred as work is performed or on the relative costs for a completed phase compared to the estimate of total expected contract costs when delivery and/or acceptance provisions are present. Revenue from short-term contracts is recognized upon completion. The percentage-of- completion method relies on estimates of total expected contract revenues and costs. Material changes in estimated costs to complete could have a material impact on the profitability of such long-term contracts in future periods. Asset Impairment and Valuation Allowances Inventory Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Reserves for obsolescence and excess inventory are provided based on historical experience and estimates of future product demand. If actual demand is less favorable than our estimates, inventory write-downs may be required. Investments Publicly traded minority equity investments are recorded at fair value, with the difference between cost and fair value recorded to other comprehensive income within stockholders' equity. When the fair value of these investments declines below cost, and the decline is viewed as other-than-temporary, the cost basis is written down to fair value which becomes the new cost basis, and the write-down is included in current earnings. We determine whether a decline in fair value is other-than-temporary based on the extent to which cost exceeds fair value, the duration of the market decline, the intent to hold the investment, and the financial health of, and specific prospects for, the investee. Deferred tax asset We record a valuation allowance against deferred tax assets if it is more likely than not that we will not be able to utilize these assets to offset future taxes. This valuation allowance is based on estimates of future taxable profits and losses and tax planning strategies. Subsequent revisions to estimates of future taxable profits and losses and tax planning strategies could change the amount of the deferred tax asset we would be able to realize in the future, and therefore could increase or decrease the valuation allowance. Long-lived assets, including goodwill In July 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," and as a result no longer amortize goodwill. Instead, we test goodwill for impairment at the reporting unit level, at least annually, by determining the fair value of the reporting unit and comparing it with its book value. A reporting unit is the lowest level of an entity that is a business and can be distinguished from other activities, operations, and assets of the entity. If, during the annual impairment review, the book value of the reporting unit exceeds the fair value, the implied fair value of the reporting unit's goodwill is compared with the carrying amount of the unit's goodwill. If the carrying amount exceeds the implied fair value, goodwill is written down to its implied fair value. SFAS No. 142 requires management to estimate the fair value of each reporting unit, as well as the fair value of the assets and liabilities of each reporting unit, other than goodwill. The implied fair value of goodwill is determined as the difference between the fair value of a reporting unit, taken as a whole, and the fair value of the assets and liabilities of such reporting unit. We review other long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Events which could trigger an impairment review include, among others, a decrease in the market value of an asset, the asset's inability to generate income from operations and positive cash flow in future periods, a decision to change the manner in which an asset is used, a physical change to the asset or a change in business climate. We calculate estimated future undiscounted cash flows, before interest and taxes, of the related operation and compare it to the carrying value of the asset in determining whether impairment potentially exists. If a potential impairment exists, a calculation is performed to determine the fair value of the long-lived asset. This calculation is based upon a valuation model and discount rate commensurate with the risks involved. Third party appraised values may also be used in determining whether impairment potentially exists. Future adverse changes in market conditions or poor operating results of a related reporting unit may require us to record an impairment charge in the future. Allocation of Purchase Price to Acquired Assets and Liabilities in Business Combinations The cost of an acquired business is assigned to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition. We assess fair value using a variety of methods, including the use of independent appraisers, present value models, and estimation of current selling prices and replacement values. Amounts recorded as intangible assets, including acquired in-process research and development ("IPR&D"), are based upon assumptions and estimates regarding the amount and timing of projected revenues and costs, appropriate risk-adjusted discount rates, as well as assessing the competition's ability to commercialize products before we can. Also, upon acquisition, we determine the estimated economic lives of the acquired intangible assets for amortization purposes. Actual results may vary from projected results. APPLERA CORPORATION Annual Report 2002 13 APPLERA CORPORATION Management's Discussion and Analysis--continued Restructuring From time to time, we may undertake actions to improve profitability and cash flow performance, as appropriate. Upon approval of a restructuring plan by management, we will expense costs related to the plan that do not benefit future periods. These costs could include estimates of severance and termination benefits, facility-related expenses, elimination or reduction of product lines, asset-related write-offs, and termination of contractual obligations, among other items. We will periodically review these cost estimates and adjust the restructuring liability, as appropriate. During fiscal 2002, the Celera Genomics group recorded a liability based on management's estimates related to sublease activities for office space associated with its Paracel business. We will evaluate the commercial real estate market conditions periodically to determine if estimates of the amount and timing of future sublease income are reasonable based on current and expected commercial real estate market conditions and actual sublease activity. If we determine that the estimates for sublease proceeds have significantly changed, an adjustment to the liability would be recognized in the period in which such determination was made. In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Exit or Disposal Activities." Please refer to Recently Issued Accounting Standards in this MD&A for further discussion. Allocations to the Applied Biosystems Group, the Celera Genomics Group, and Celera Diagnostics The attribution of the assets, liabilities, revenues and expenses to the Applied Biosystems group, the Celera Genomics group, or Celera Diagnostics is primarily based on specific identification of the businesses included in each business segment. Where specific identification is not practical, other methods and criteria, which require the use of judgments and estimates, are used that we believe are equitable and provide a reasonable estimate of the assets, liabilities, revenues and expenses attributable to each business segment. It is not practical to specifically identify the portion of corporate overhead expenses attributable to each of the businesses. As a result, we allocate these corporate overhead expenses primarily based upon headcount, total expenses, or revenues attributable to each business. During the fourth quarter of fiscal 2001, Celera Diagnostics was established as a joint venture between the Applied Biosystems group and the Celera Genomics group. Refer to Note 14 to our consolidated financial statements for more information regarding Celera Diagnostics. The Applied Biosystems group contributed its molecular diagnostics business as part of its initial contribution to the joint venture. The Celera Genomics group and the Applied Biosystems group account for their investments in Celera Diagnostics under the equity method of accounting, with the Celera Genomics group recording 100 percent of the initial losses, up to $300 million, in its income statement as loss from joint venture. The Celera Genomics group and the Applied Biosystems group will share losses incurred by Celera Diagnostics in excess of $300 million equally. Celera Diagnostics has accumulated net losses of $49.7 million through June 30, 2002. Celera Diagnostics' profits, if any, will be shared in the ratio of 65 percent to the Celera Genomics group and 35 percent to the Applied Biosystems group until the cumulative profits of Celera Diagnostics equal the initial losses. Once cumulative profits exceed initial losses up to $300 million, Celera Diagnostics' profits will be shared equally between the groups. To determine earnings per share, the earnings allocated to each class of common stock are determined by our Board of Directors. This determination is generally based on the net income or loss amounts of the corresponding group determined in accordance with accounting principles generally accepted in the United States of America, consistently applied. The management and allocation policies applicable to the attribution of assets, liabilities, revenues and expenses to the businesses may be modified or rescinded, or additional policies may be adopted, at the sole discretion of our Board of Directors at any time without stockholder approval. Our Board of Directors would make any decision in accordance with its good faith business judgment that its decision is in the best interests of our company and all of its stockholders as a whole. A decision to modify or rescind the management and allocation policies, or adopt additional policies, could have different effects on holders of Applera - - Applied Biosystems stock and holders of Applera - Celera stock or could result in a benefit or detriment to one class of stockholders compared to the other class. Related Party Transactions The Applied Biosystems group is a supplier of instruments and consumables to the Celera Genomics group and Celera Diagnostics. The Celera Genomics group makes its genomic information and bioinformatic tools available to the Applied Biosystems group and Celera Diagnostics. The Applied Biosystems group, the Celera Genomics group or Celera Diagnostics may sell or lease products to, or perform services for, one another at fair value to be used in the purchasing business' commercial activities. The selling business records revenues on these transactions when the product is shipped, as the service is performed, or over the term of the lease, as applicable. 14 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued The Applera businesses also may jointly undertake a project, such as the Applera Genomics Initiative, where the total costs and benefits of the project are shared. Shipments of products or performance of services related to such joint projects are not recorded as revenue by any of the businesses, but instead are included, at cost, in the total project costs that are shared based on each business' expected benefit. Our businesses may perform services for one another, which are not directly attributable to either businesses' revenue generating activities. In these cases, the business performing the services charges the benefiting business the cost of performing the services, including overhead. Effective April 1, 2002, the Applied Biosystems group entered into an agreement pursuant to which the Applied Biosystems group has become the exclusive distributor of CDS, beginning July 1, 2002, operated by the Celera Genomics group. As a result of this arrangement, the Applied Biosystems group is integrating CDS and other genomic and biological information into a Knowledge Business. In exchange for marketing and distribution rights to CDS and other genomic and biological information and access to CDS and related content, the Applied Biosystems group will provide the Celera Genomics group with royalty payments on revenues generated by sales of certain products of the Knowledge Business from July 1, 2002 through the end of fiscal 2012. The royalty rate is progressive, up to a maximum of 5%, with the level of sales through fiscal 2008. The royalty rate becomes a fixed percentage of sales starting in fiscal 2009, and the rate declines each succeeding fiscal year through fiscal 2012. Assays-on-Demand(TM), Assays-by-Design(SM), certain reagents for arrays, and new database subscriptions sold by the Knowledge Business are the products subject to royalties. The Celera Genomics group will continue to be responsible for the performance of its obligations under all contracts relating to its information products and services either existing on the effective date of the marketing and distribution agreement or which were entered into during a transition period ended June 30, 2002 (as well as renewals, if any, of these contracts) and will receive all revenues and other benefits under, and be responsible for all costs and expenses associated with, such contracts. Assuming the Celera Genomics group continues to perform under its existing contracts, the Applied Biosystems group will reimburse the Celera Genomics group if earnings before interest, taxes, depreciation, and amortization from these contracts during the four fiscal years ending with fiscal year 2006 are below $62.5 million and the shortfall is due to business initiatives of the Applied Biosystems group. Events Impacting Comparability Acquisitions and Investments Paracel During the fourth quarter of fiscal 2000, we acquired Paracel, Inc. in a stock-for-stock transaction and accounted for this acquisition under the purchase method of accounting. Paracel produces advanced genomic and text analysis technologies. Its products include a hardware accelerator for sequence comparison, a hardware accelerator for text search, and sequence analysis software tools. Approximately 1.6 million shares of Applera - Celera stock were issued in exchange for the outstanding shares of Paracel common stock not previously owned by us. At the time of the acquisition, we owned 14% of Paracel. The net assets and results of operations of Paracel have been allocated to the Celera Genomics group. Axys Pharmaceuticals and Boston Probes We acquired Axys Pharmaceuticals, Inc. and Boston Probes, Inc. during the second quarter of fiscal 2002. The results of operations for these acquired businesses, which were accounted for under the purchase method of accounting, have been included in the consolidated financial statements since the date of acquisition. The net assets and results of operations of Axys have been allocated to the Celera Genomics group. The net assets and results of operations of Boston Probes have been allocated to the Applied Biosystems group. A discussion of significant acquisitions and investments is provided in Note 2 to our consolidated financial statements. Acquired Research and Development During fiscal 2002, we recorded charges to write-off the value of acquired IPR&D in connection with the Axys and Boston Probes acquisitions. The Applied Biosystems group recorded a charge of $2.2 million relating to Boston Probes and the Celera Genomics group recorded a charge of $99.0 million relating to Axys. As of the acquisition dates, the technological feasibility of the related projects had not been established, and it was determined that the acquired projects had no future alternative uses. The amounts attributed to acquired IPR&D were based on independent appraisals and were developed using an income approach. The in-process technologies were valued using a discounted cash flow model on a project-by-project basis. The Axys projects acquired as part of the acquisition are in various stages of research and development and will require additional research and development efforts by the Celera Genomics group or our collaborators before any eventual products can be marketed, if ever. These efforts include extensive pre- clinical and clinical testing APPLERA CORPORATION Annual Report 2002 15 APPLERA CORPORATION Management's Discussion and Analysis--continued and are subject to lengthy regulatory review and approval by the United States Food and Drug Administration. The nature and timing of these remaining efforts are dependent upon successful testing and approval of the products as well as maintaining the existing collaborative relationships and entering into new collaborative relationships. If collaboration partners terminate or elect to cancel their agreements or otherwise fail to conduct their collaborative activities in a timely manner, the development or commercialization process could be delayed or abandoned. The following table briefly describes the Axys IPR&D projects.
============================================================================================================================= Development Development Status and Value at Status at Nature/Timing of Remaining Acquisition Project Acquisition Efforts at June 30, 2002 Date ============================================================================================================================= (in millions) Partnered Projects: Cathepsin S: Collaboration with Aventis Pre-clinical Investigational New Drug ("IND") enabling $ 37.7 Pharmaceuticals Products, Inc. with the studies studies announced in January 2002; objective of discovery and development Expect to continue pre-clinical studies of small molecule drugs that inhibit during calendar 2002. Our portion of Cathepsin S, a human cysteine protease collaboration completed in April 2002. associated with certain inflammatory and autoimmune diseases, such as asthma and atherosclerosis Cathepsin K: Collaboration with Merck & Co., Inc. to Pre-clinical Expect to identify additional safety 26.6 develop small molecule inhibitors of studies assessment candidate(s) and carry out Cathepsin K for the treatment of further pre-clinical efficacy, safety osteoporosis and toxicology studies during calendar 2002. Our portion of collaboration expected to be completed in December 2002. Tryptase: Collaboration with Bayer AG to identify Pre-clinical Expect to continue pre-clinical studies 14.9 oral tryptase inhibitors for the studies during calendar 2002. Our portion of treatment of asthma collaboration completed in January 2002. - ----------------------------------------------------------------------------------------------------------------------------- Total for partnered projects $ 79.2 - ----------------------------------------------------------------------------------------------------------------------------- Unpartnered Projects: Cathepsin F: Development of compounds for inflammatory Pre-clinical Expect to continue pre-clinical studies $ 8.9 diseases such as asthma and rheumatoid studies through calendar 2002. IND enabling arthritis studies expected in calendar 2003. Urokinase: Oncology program focused on development Pre-clinical Project is no longer being pursued. 4.7 of inhibitors of the protease urokinase studies to interfere with angiogenesis and metastasis processes Serm-beta: Oncology program utilizing licenses Pre-clinical Expect to complete pre-clinical studies 4.3 granted by Celgene Corp. for exclusive studies during calendar 2002. rights to selective estrogen receptor- beta modulators Factors VIIa & Xa: Development of oral and parenteral Pre-clinical Expect to complete pre-clinical studies 1.9 therapeutics for blood clotting studies during calendar 2002. disorders, such as deep vein thrombosis, stroke, and myocardial infarction or heart attack - ----------------------------------------------------------------------------------------------------------------------------- Total for unpartnered projects $ 19.8 - ----------------------------------------------------------------------------------------------------------------------------- $ 99.0 =============================================================================================================================
16 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued As of June 30, 2002, the Celera Genomics group's portion of the estimated costs to complete the partnered projects is not expected to be significant. The costs to complete the unpartnered projects are dependent on decisions of how to commercialize, such as whether to partner the project, and at what stage to partner. The Celera Genomics group has initiated a review of the unpartnered pre-clinical projects that may lead to revised prioritization, resourcing and strategy to move toward clinical trials and commercialization. As a result, actual results may vary from the valuation assumptions outlined in Note 2 to our consolidated financial statements. Restructuring and Other Special Charges During the fourth quarter of fiscal 2002, the Celera Genomics group recorded a before-tax charge of $2.8 million related to the restructuring of its organization to focus on drug discovery and development. The charge related to a workforce reduction. Additionally, during fiscal 2002, the Celera Genomics group recorded a before- tax charge of $25.9 million related to the Paracel business. This charge was comprised of $23.0 million recorded in other special charges primarily for the impairment of goodwill and other intangible assets and a provision for the estimated cost of excess lease space. This charge also included $2.9 million recorded in cost of sales for impairment of Paracel inventory. The charge resulted from Paracel's unfavorable performance against the lowered profitability outlook for the business established during the fourth quarter of fiscal 2001, at the time of the initial charge described below. During the fourth quarter of fiscal 2001, the Celera Genomics group recorded a before-tax, non-cash charge of $69.1 million for the impairment of goodwill and other intangible assets associated with Paracel. This special charge reduced the carrying value of the net assets of Paracel to their estimated fair value at that time. Management based the need for this assessment on Paracel's substantially lower than originally anticipated performance and the future outlook of this business. During fiscal 2000, we incurred $2.1 million of before-tax costs associated with acquisitions for the Applied Biosystems group which were not consummated. Investments During the fourth quarter of fiscal 2002, the Applied Biosystems group recorded $8.2 million and the Celera Genomics group recorded $6.0 million of before-tax charges for other-than-temporary impairments of minority equity investments, net of gains from sales. The Applied Biosystems group recorded before-tax gains of $15.0 million during fiscal 2001 and $48.6 million during fiscal 2000 related to the sales of minority equity investments. Other Events Impacting Comparability Fiscal 2000 included charges of $45.0 million to selling, general and administrative expenses for costs related to the acceleration of certain long- term compensation programs as a result of the attainment of performance targets. This charge was allocated to the Applied Biosystems group. During the fourth quarter of fiscal 2000, the Applied Biosystems group recorded a gain of $8.2 million in other income from the sale of real estate. APPLERA CORPORATION Annual Report 2002 17 APPLERA CORPORATION Management's Discussion and Analysis--continued Discussion of Applera Corporation's Consolidated Operations Results of Operations--2002 Compared With 2001
Net Income (Loss) (Dollar amounts in millions) 2001 2002 ================================================================================ Net income before special items $ 84.7 $ 92.6 After-tax effect of special items: Acquired IPR&D charges (101.2) Paracel-related charges (67.2) (21.0) Gain (loss) on investments 9.7 (9.2) Restructuring charge (1.8) - -------------------------------------------------------------------------------- Net income (loss) $ 27.2 $ (40.6) ================================================================================
Excluding special items, net income increased 9.3% in fiscal 2002 due to increased net revenues and the non-amortization of goodwill, which were partially offset by lower interest income and higher R&D expenses. On a group basis, excluding the special items, the Applied Biosystems group reported net income of $176.0 million for fiscal 2002 compared with $202.6 million for fiscal 2001, and the Celera Genomics group reported a net loss of $86.1 million for fiscal 2002 compared with a net loss of $119.0 million for fiscal 2001. Our net revenues increased 3.5% in fiscal 2002. Net revenues increased 5.6% in the United States, 0.9% in Europe, and 5.0% in Asia Pacific, and decreased 16.7% in Latin America and other markets, compared with the prior fiscal year. The effects of foreign currency reduced net revenues by approximately $13 million, or 1%, when comparing fiscal 2002 with fiscal 2001. On a segment basis, net revenues for the Applied Biosystems group were $1,604.0 million for fiscal 2002 and $1,619.5 million for fiscal 2001. The Celera Genomics group reported net revenues of $120.9 million for fiscal 2002 compared with $89.4 million for fiscal 2001. Celera Diagnostics reported net revenues of $9.2 million for fiscal 2002 compared with $1.6 million for fiscal 2001. Please read our discussion of segments for further information on their financial results. Gross margin as a percentage of net revenues was 53.0% for fiscal 2002 compared with 52.5% for fiscal 2001. Fiscal 2002 gross margin included $2.9 million of inventory-related write-offs related to the Paracel business. Excluding the special charge, gross margin increased to 53.2% of revenues. The higher gross margin percentage for fiscal 2002 was due primarily to increased subscription revenues for the Celera Genomics group, changes in product mix at the Applied Biosystems group, and price increases in certain product lines of the Applied Biosystems group, partially offset by lower margins from increased revenue generated by contract sequencing at the Celera Genomics group and the negative effects of foreign currency. Our SG&A expenses, as a percentage of net revenues, decreased to 25.8% for fiscal 2002 compared with 26.8% for fiscal 2001 primarily due to revenue growth as well as the refocus towards drug discovery at the Celera Genomics group, partially offset by increased expenses at Celera Diagnostics as it increased its staff to meet business objectives. On a segment basis, SG&A expenses for the Applied Biosystems group were $379.2 million for fiscal 2002 and $380.6 million for fiscal 2001. SG&A expenses for the Celera Genomics group were $50.4 million for fiscal 2002 compared with $58.3 million for fiscal 2001. SG&A expenses for Celera Diagnostics were $8.7 million for fiscal 2002 and $1.1 million for fiscal 2001. R&D expenses increased $58.5 million to $381.9 million for fiscal 2002 as compared to fiscal 2001 due primarily to spending on: our Applera Genomics Initiative, a collaboration for which expenses have been shared equally among our businesses, for commercializing products from information obtained through analysis of the human genome; diagnostics programs associated with the Celera Diagnostics business; the continued development of new products and technologies by the Applied Biosystems group; therapeutic discovery programs at the Celera Genomics group; and higher compensation-related expenses. These increases were partially offset by lower R&D expenses associated with genome sequencing programs conducted by the Celera Genomics group. On a segment basis, R&D expenses for the Applied Biosystems group were $219.6 million for fiscal 2002 and $184.5 million for fiscal 2001. R&D expenses for the Celera Genomics group were $132.7 million for fiscal 2002 compared with $164.7 million for fiscal 2001. R&D expenses for Celera Diagnostics were $39.0 million for fiscal 2002 and $4.5 million for fiscal 2001. We recorded non-cash amortization expenses of $7.4 million in fiscal 2002 compared to $43.9 million in fiscal 2001 relating to the amortization of goodwill and other intangible assets. Effective July 1, 2001, we adopted the provisions of SFAS No. 142, and as a result, we did not amortize goodwill during fiscal 2002. Refer to Note 1 to our consolidated financial statements for a further discussion. Interest income decreased $35.4 million for fiscal 2002, primarily attributable to lower average interest rates during fiscal 2002 as compared to fiscal 2001. Other income (expense), net was an expense of $5.1 million for fiscal 2002, which consisted primarily of our share of losses from equity method investments and other non-operating costs, partially offset by a net gain on the sale of the Celera Genomics group's AgGen plant genotyping business. Other income (expense), net was an expense of $6.7 million for fiscal 2001, which was primarily related to costs associated with our foreign currency risk management program. Excluding the special items and the amortization of goodwill primarily related to Paracel, the effective 18 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued income tax rate was 20% for fiscal 2002 compared with 26% for fiscal 2001. The lower effective income tax rate in fiscal 2002 was primarily due to the implementation of certain tax planning strategies allowing for the use of foreign tax credits. In addition to the use of foreign tax credits, the effective income tax rate for fiscal 2002 was favorably impacted by R&D tax credits and tax benefits of export operations when comparing the effective income tax rate to the federal statutory rate of 35%. The fiscal 2001 effective income tax rate also benefited from the same items as in fiscal 2002, as well as relatively higher income in foreign tax jurisdictions with lower rates than the federal statutory rate. An analysis of the differences between the federal statutory income tax rate and the effective income tax rate is provided in Note 3 to our consolidated financial statements. Results of Operations--2001 Compared With 2000
Net Income (Dollar amounts in millions) 2000 2001 ================================================================================ Net income before special items $ 95.5 $ 84.7 After-tax effect of special items: Asset impairment (67.2) Long-term compensation programs (35.5) Acquisition-related costs (1.4) Gain on investments 31.6 9.7 Gain on sale of real estate 5.3 - -------------------------------------------------------------------------------- Net income $ 95.5 $ 27.2 ================================================================================
Excluding special items, net income decreased 11.3% in fiscal 2001 due to increased investment in research and development activities, the amortization of goodwill and intangibles primarily due to Paracel, and the negative effects of foreign currency. These increased expenses were partially offset by growth in net revenues, higher interest income, and lower SG&A expenses as a percentage of net revenues. On a group basis, excluding the special items from both fiscal years, the Applied Biosystems group reported net income of $202.6 million for fiscal 2001 compared with $186.2 million for fiscal 2000, and the Celera Genomics group reported a net loss of $119.0 million for fiscal 2001 compared with a net loss of $92.7 million for fiscal 2000. Our net revenues increased 19.9% in fiscal 2001. Geographically, we reported revenue growth in all regions for fiscal 2001 compared with fiscal 2000. Net revenues increased 19.0% in the United States, 16.1% in Europe, 24.3% in Asia Pacific, and 41.9% in Latin America and other markets, compared with the prior fiscal year. The effects of foreign currency reduced net revenues by approximately $46 million, or 3%, when comparing fiscal 2001 with fiscal 2000, due primarily to weakness in the euro, the British pound and the Japanese yen. On a group basis, net revenues for the Applied Biosystems group were $1.6 billion for fiscal 2001 compared with $1.4 billion for fiscal 2000. The Celera Genomics group reported net revenues of $89.4 million for fiscal 2001 compared with $42.7 million for fiscal 2000. Gross margin as a percentage of net revenues decreased to 52.5% for fiscal 2001 compared with 54.5% for fiscal 2000 due primarily to investment in new products and the negative effects of foreign currency. Excluding the long-term compensation charge from fiscal 2000, SG&A expenses increased 12.3% in fiscal 2001 as compared with fiscal 2000 due to higher planned worldwide selling and marketing expenses commensurate with growth in revenues and orders. On a group basis, SG&A expenses for the Applied Biosystems group were $380.6 million for fiscal 2001 compared with $393.9 million for fiscal 2000. SG&A expenses for the Celera Genomics group were $58.3 million for fiscal 2001 and $43.0 million for fiscal 2000. R&D expenses increased $67.8 million for fiscal 2001 as compared to fiscal 2000 primarily due to investment in new products and technologies such as novel, high-throughput instruments for gene and protein studies and related consumable products, as well as increased expenses attributed to the development of the Celera Genomics group's discovery program and gene discovery work and the acceleration of its capabilities in proteomics and functional genomics. Substantially offsetting the fiscal 2001 increases in R&D expenses was the change in classification of the costs of certain activities, previously performed for R&D purposes, to cost of sales as such activities evolved into commercial business for the Celera Genomics group during fiscal 2001. On a group basis, R&D expenses for the Applied Biosystems group were $184.5 million for fiscal 2001 and $141.2 million for fiscal 2000. R&D expenses for the Celera Genomics group were $164.7 million for fiscal 2001 compared with $148.6 million for fiscal 2000. We recorded non-cash amortization expenses of $43.9 million in fiscal 2001 compared to $4.2 million in fiscal 2000 relating to the amortization of goodwill and other intangibles, primarily due to Paracel, which was acquired during the fourth quarter of fiscal 2000. The higher interest expense for fiscal 2000 reflected the financing of the purchase of the Celera Genomics group's Rockville, Maryland facilities. The financing, entered into during the first quarter of fiscal 2000, was repaid in the second quarter of fiscal 2001. Interest income increased $40.9 million primarily due to higher average cash and cash equivalents and short-term investments in fiscal 2001. Interest income in fiscal 2000 included interest on a $150 million note receivable relating to the sale of the Analytical Instruments business. The note, which was outstanding for most of fiscal 2000, was collected in the fourth quarter of fiscal 2000. For fiscal 2001, other income (expense), net was an expense of $6.7 million, which related primarily to our APPLERA CORPORATION Annual Report 2002 19 APPLERA CORPORATION Management's Discussion and Analysis--continued foreign currency management program. For fiscal 2000, other income (expense), net was income of $3.4 million, which related primarily to a gain on the sale of real estate, and was partially offset by costs associated with our foreign currency management program. We adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective July 1, 2000. See Note 10 to our consolidated financial statements for further discussion of our policy for financial instruments. Our effective income tax rate was 63% for fiscal 2001 compared with 30% for fiscal 2000. Excluding the special items in both fiscal years and the amortization of goodwill primarily relating to Paracel, the effective tax rate was 26% for fiscal 2001 compared with 24% for fiscal 2000. An analysis of the differences between the federal statutory income tax rate and the effective income tax rate is provided in Note 3 to our consolidated financial statements. Discussion of Consolidated Financial Resources and Liquidity We had cash and cash equivalents and short-term investments of $1.4 billion at June 30, 2002 and 2001. We maintain a $100 million revolving credit agreement with four banks that expires on April 20, 2005, under which there are no outstanding borrowings. Cash provided by operating activities has been our primary source of funds. We believe that existing funds, cash generated from operations, and existing sources of debt financing are adequate to satisfy our normal operating cash flow needs, planned capital expenditure requirements, and dividends for the foreseeable future. However, we may raise additional capital from time to time.
(Dollar amounts in millions) 2001 2002 ================================================================================ Cash and cash equivalents and short-term investments $ 1,388.0 $ 1,359.9 Total debt 45.2 18.3 Working capital 1,454.4 1,385.3 Debt to total capitalization 2.1% 0.8% ================================================================================
During fiscal 2002, in connection with the Axys acquisition, we assumed $26.0 million of 8% senior secured convertible notes, of which $10.0 million was subsequently repaid. Also during fiscal 2002, we repaid a yen 3.8 billion, or $29.0 million, loan upon its scheduled maturity. During fiscal 2000, we obtained financing of $46 million, specifically for the purchase of the Celera Genomics group's Rockville, Maryland facilities. We repaid this debt during fiscal 2001. Cash and cash equivalents in fiscal 2002 decreased as cash generated by operating activities and proceeds from stock issuances was used to purchase capital assets, invest in short-term investments, acquire Boston Probes, repay debt, pay dividends and purchase common stock for treasury.
(Dollar amounts in millions) 2000 2001 2002 ================================================================================ Net cash from operating activities $ 108.2 $ 86.4 $ 212.9 Net cash from investing activities (455.0) (408.9) (259.4) Net cash from financing activities 1,030.7 (20.0) (120.4) ================================================================================
Net cash from operating activities for fiscal 2002 was $126.5 million higher than the fiscal 2001 level. This increase was primarily due to strong working capital management, partially offset by lower income-related cash flows. Accounts payable and other liabilities increased in fiscal 2002 due to increases in the accruals for compensation and benefits and taxes other than income. Accounts payable and other liabilities decreased in fiscal 2001 due to the timing of income tax payments and higher compensation costs accrued at the end of fiscal 2000 relating to the acceleration of certain long-term compensation programs. Capital expenditures, net of disposals, were $114.1 million in fiscal 2002, $177.3 million in fiscal 2001, and $123.6 million in fiscal 2000. Fiscal 2002 capital expenditures included the Applied Biosystems group's facilities expansion in Pleasanton, CA and capital spending related to the expansion of laboratory facilities for therapeutics research and development purposes for the Celera Genomics group as well as software purchases for both groups. Fiscal 2001 capital expenditures were primarily due to the Applied Biosystems group's purchase of the property in Pleasanton, California, where the facilities expansion is occurring, for approximately $54 million, capital expenditures for production equipment related primarily to oligonucleotide manufacturing, and other capital spending related to the construction of laboratory facilities for the Applied Biosystems group. Fiscal 2001 capital expenditures also included payments for building improvements and equipment related to the development of a laboratory to support the Celera Genomics group's proteomics and discovery capabilities efforts and costs related to internally developed software. Capital expenditures in fiscal 2000 included $8.6 million related to improvement of our information technology infrastructure and $21.6 million for the acquisition of an airplane. Fiscal 2000 capital expenditures also included payments of $8.1 million for software licenses and expenditures associated with the continued development of the laboratories, facilities, and data center at the Celera Genomics group's Rockville, Maryland facilities. Cash paid in connection with our acquisitions and investments in equity interests of other companies was $41.9 million in fiscal 2002, $8.9 million in fiscal 2001, and $23.0 million in fiscal 2000. We acquired the remaining 87% of Boston Probes, not previously owned, for approximately $37 million in fiscal 2002. Net cash 20 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued proceeds from the sale of minority equity investments and real estate were $5.2 million in fiscal 2002, $15.5 million in fiscal 2001, and $82.8 million in fiscal 2000. We purchased short-term investments with funds received in fiscal 2000 from the follow-on public offering of Applera - Celera stock. In fiscal 2002, we purchased $69.0 million of Applera - Applied Biosystems stock and $0.9 million of Applera - Celera stock for treasury. $3.0 million of Applera - Applied Biosystems stock and $0.9 million of Applera - Celera stock was subsequently reissued for stock plans. For information regarding our company's financial obligations and commitments, see Notes 8 and 9 to our consolidated financial statements. APPLERA CORPORATION Annual Report 2002 21 APPLERA CORPORATION Management's Discussion and Analysis--continued Discussion of Segments' Operations, Financial Resources and Liquidity Applied Biosystems Group Results of Operations--2002 Compared With 2001
% Increase/ (Dollar amounts in millions) 2001 2002 (Decrease) =============================================================================================== Net revenues $ 1,619.5 $ 1,604.0 (1.0%) Cost of sales 774.5 768.5 (0.8%) - ----------------------------------------------------------------------------------------------- Gross margin 845.0 835.5 (1.1%) SG&A expenses 380.6 379.2 (0.4%) R&D 184.5 219.6 19.0% Acquired research and development 2.2 - ----------------------------------------------------------------------------------------------- Operating income 279.9 234.5 (16.2%) Gain (loss) on investments, net 15.0 (8.6) (157.3%) Interest expense (1.3) (0.9) (30.8%) Interest income 16.8 13.1 (22.0%) Other income (expense), net (5.9) (0.6) (89.8%) - ----------------------------------------------------------------------------------------------- Income before income taxes 304.5 237.5 (22.0%) Provision for income taxes 92.1 69.0 (25.1%) - ----------------------------------------------------------------------------------------------- Net income $ 212.4 $ 168.5 (20.7%) ===============================================================================================
As previously described in events impacting comparability, fiscal 2002 and 2001 results were impacted by the following pre-tax items: o Gains related to the sale of investments of $15.0 million in fiscal 2001; o $8.2 million charge for other-than-temporary impairment of minority equity investments in fiscal 2002; and o $2.2 million charge to write-off acquired IPR&D in fiscal 2002. The following table presents the operating results for the Applied Biosystems group excluding these special items from both fiscal years.
% Increase/ (Dollar amounts in millions) 2001 2002 (Decrease) ===================================================================================================== Net revenues $ 1,619.5 $ 1,604.0 (1.0%) Cost of sales 774.5 768.5 (0.8%) - ----------------------------------------------------------------------------------------------------- Gross margin 845.0 835.5 (1.1%) SG&A expenses 380.6 379.2 (0.4%) R&D 184.5 219.6 19.0% - ----------------------------------------------------------------------------------------------------- Operating income 279.9 236.7 (15.4%) Loss on investments, net (0.4) Interest expense (1.3) (0.9) (30.8%) Interest income 16.8 13.1 (22.0%) Other income (expense), net (5.9) (0.6) (89.8%) - ----------------------------------------------------------------------------------------------------- Income before income taxes 289.5 247.9 (14.4%) Provision for income taxes 86.9 71.9 (17.3%) - ----------------------------------------------------------------------------------------------------- Net income $ 202.6 $ 176.0 (13.1%) - ----------------------------------------------------------------------------------------------------- Percentage of net revenues: Gross margin 52.2% 52.1% SG&A expenses 23.5% 23.6% R&D 11.4% 13.7% Operating income 17.3% 14.8% Effective income tax rate 30% 29% =====================================================================================================
Net income, on a comparable basis excluding special items, decreased in fiscal 2002 primarily due to lower revenues and higher R&D expenses. The negative effects of foreign currency reduced net income by approximately $3 million, or 1%, as compared with fiscal 2001. Net revenues from the Celera Genomics group, primarily from leased instruments and consumables shipments, were $22.4 million for fiscal 2002, or 1.4% of the Applied Biosystems group's net revenues, and $64.1 million for fiscal 2001, or 4.0% of net revenues. The negative effects of currency reduced net revenues during fiscal 2002 by approximately $13 million, or 1%, as compared to fiscal 2001. The following table sets forth the Applied Biosystems group's revenues geographically for the fiscal years ended June 30:
% Increase/ (Dollar amounts in millions) 2001 2002 (Decrease) ================================================================================ United States $ 812.4 $ 762.3 (6.2%) Europe 419.9 439.2 4.6% Asia Pacific 341.1 355.7 4.3% Latin America and other markets 46.1 46.8 1.5% - -------------------------------------------------------------------------------- Total $ 1,619.5 $ 1,604.0 ================================================================================
For fiscal 2002, revenues from instrument sales were $762.9 million, a decrease of 6.2% from $813.3 million in the prior fiscal year. The decrease in instrument sales was caused primarily by weakened economic and equity market conditions for biotechnology companies, as well as from significant placements of the ABI PRISM(R) 3700 DNA Analyzer at large genome centers during fiscal 2001. These factors were partially offset by significant increases in sales of Sequence Detection Systems ("SDS") instruments for gene expression and single nucleotide polymorphism ("SNP") analysis and strong increases in revenues from mass spectrometry systems in fiscal 2002 compared to fiscal 2001. The mass spectrometry revenue increase was led by the API 4000 triple-quadrupole mass spectrometer for studies of drug metabolism and pharmacokinetics, which began shipping in the fourth quarter of fiscal 2001. Consumables sales increased to $601.4 million in fiscal 2002 from $592.1 million in fiscal 2001, an increase of 1.6%. Sales of consumables were strong in TaqMan(R) reagents for gene expression and SNP analysis. DNA sequencing consumables sales declined largely due to a lower rate of growth in our installed sequencer base and lower sales of DNA sequencing consumables to the Celera Genomics group and five large academic genome labs. Reagent dilution, a shift of much of the Celera Genomics group's sequencing capacity to the Applera Genomics Initiative, for which the Applied Biosystems group does not recognize revenue, and a winding down of the sequencing phase of the Japanese Millennium Project contributed to the decline in consumables. Revenues from other sources, which included service contracts, royalties, licenses, and contract research, 22 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued increased 12.0% to $239.7 million in fiscal 2002 from $214.1 million in fiscal 2001. Additionally, the following table sets forth the Applied Biosystems group's revenues by product categories for the fiscal years ended June 30:
(Dollar amounts in millions) 2001 2002 % Change ================================================================================================= DNA sequencing products $ 724.6 $ 602.9 (16.8%) % of total revenues 44.7% 37.6% SDS and other applied genomics products 262.1 322.6 23.1% % of total revenues 16.2% 20.1% Mass spectrometry 222.7 285.2 28.1% % of total revenues 13.8% 17.8% Core DNA synthesis and PCR products 253.1 236.9 (6.4%) % of total revenues 15.6% 14.8% Other 157.0 156.4 (0.4%) % of total revenues 9.7% 9.7% - ------------------------------------------------------------------------------------------------- Total $ 1,619.5 $ 1,604.0 (1.0%) =================================================================================================
Revenues from DNA sequencing products decreased due to lower sales of the ABI PRISM(R) 3700 DNA Analyzer during fiscal 2002 as compared to fiscal 2001, lower sales of DNA sequencing consumables to the Celera Genomics group and five large academic genome labs, and reagent dilution. Revenues from SDS and other applied genomics products increased due to sales of the ABI PRISM(R) 7000 systems, which were introduced in fiscal 2002. The increase in mass spectrometry sales was led by the API 4000 triple-quadrupole mass spectrometer as previously noted. Gross margin, as a percentage of net revenues, declined slightly in fiscal 2002 primarily due to lower license fee income in fiscal 2002 as compared to the prior fiscal year and the negative effects of foreign currency, partially offset by price increases in certain product lines and changes in product mix. As a percentage of sales, SG&A expenses were relatively flat in comparison to fiscal 2001. R&D expenses in fiscal 2002 increased primarily due to the continued development of new products and technologies such as novel, high-throughput instruments for gene and protein studies, including the ABI 3730 and ABI 3730xl DNA Analyzers, SDS systems, the 4700 Proteomics Analyzer with TOF/ TOF(TM) Optics, ICAT(TM) software, Assays-on-Demand(TM) and QTrap(TM) introduced during fiscal 2002, and related consumable products. Additionally, R&D expenses included $18.2 million in fiscal 2002 related to the Applied Biosystems group's participation in the Applera Genomics Initiative, the costs of which are shared among our three businesses. The Applera Genomics Initiative, which includes the resequencing of genes and regulatory regions at the Celera Genomics group, validation of SNP's at the Applied Biosystems group, and disease gene association studies at Celera Diagnostics, commenced during the first quarter of fiscal 2002 and is expected to be substantially completed by the end of the second quarter of fiscal 2003. Interest income decreased in fiscal 2002 primarily due to lower average interest rates, partially offset by larger average cash balances during fiscal 2002 compared with fiscal 2001. Other income (expense), net was a higher expense in fiscal 2001, due primarily to changes in time value of foreign currency options, used as part of the Applied Biosystems group's foreign currency risk management program, which were expensed during fiscal 2001. During the fourth quarter of fiscal 2001, the FASB issued guidance that allowed deferral of these changes in the option's time value in other comprehensive income. As a result, the change in time value of options has not been recorded in other income (expense), net during fiscal 2002. See Note 10 to our consolidated financial statements for a further discussion of cash flow hedges. The effective income tax rate decreased during fiscal 2002 due to the implementation of certain tax planning strategies allowing for the utilization of foreign tax credits. Results of Operations--2001 Compared With 2000
% Increase/ (Dollar amounts in millions) 2000 2001 (Decrease) ==================================================================================================== Net revenues $ 1,388.1 $ 1,619.5 16.7% Cost of sales 637.7 774.5 21.5% - ---------------------------------------------------------------------------------------------------- Gross margin 750.4 845.0 12.6% SG&A expenses 393.9 380.6 (3.4%) R&D 141.2 184.5 30.7% Restructuring and other charges 2.1 (100.0%) - ---------------------------------------------------------------------------------------------------- Operating income 213.2 279.9 31.3% Gain on investments, net 48.6 15.0 (69.1%) Interest expense (8.1) (1.3) (84.0%) Interest income 18.6 16.8 (9.7%) Other income (expense), net 3.4 (5.9) (273.5%) - ---------------------------------------------------------------------------------------------------- Income before income taxes 275.7 304.5 10.4% Provision for income taxes 89.5 92.1 2.9% - ---------------------------------------------------------------------------------------------------- Net income $ 186.2 $ 212.4 14.1% ====================================================================================================
As previously described in events impacting comparability, fiscal 2001 and 2000 results were impacted by the following pre-tax items: o $2.1 million of costs for acquisitions not consummated during fiscal 2000; o $48.6 million in fiscal 2000 and $15.0 million in fiscal 2001 of gains related to the sale of minority equity investments; o $45.0 million of costs related to the acceleration of long-term compensation programs in fiscal 2000; and o $8.2 million of gain related to the sale of real estate in fiscal 2000. APPLERA CORPORATION Annual Report 2002 23 APPLERA CORPORATION Management's Discussion and Analysis--continued The following table presents the operating results for the Applied Biosystems group excluding these special items from both fiscal years.
% Increase/ (Dollar amounts in millions) 2000 2001 (Decrease) ==================================================================================================== Net revenues $ 1,388.1 $ 1,619.5 16.7% Cost of sales 637.7 774.5 21.5% - ---------------------------------------------------------------------------------------------------- Gross margin 750.4 845.0 12.6% SG&A expenses 348.9 380.6 9.1% R&D 141.2 184.5 30.7% - ---------------------------------------------------------------------------------------------------- Operating income 260.3 279.9 7.5% Interest expense (8.1) (1.3) (84.0%) Interest income 18.6 16.8 (9.7%) Other income (expense), net (4.8) (5.9) 22.9% - ---------------------------------------------------------------------------------------------------- Income before income taxes 266.0 289.5 8.8% Provision for income taxes 79.8 86.9 8.9% - ---------------------------------------------------------------------------------------------------- Net income $ 186.2 $ 202.6 8.8% ==================================================================================================== Percentage of net revenues: Gross margin 54.1% 52.2% SG&A expenses 25.1% 23.5% R&D 10.2% 11.4% Operating income 18.8% 17.3% Effective income tax rate 30% 30% ====================================================================================================
The Applied Biosystems group's 8.8% increase in net income in fiscal 2001, excluding special items, was primarily attributable to the growth in net revenues, lower selling, general and administrative expenses as a percentage of net revenues and lower interest expense, partially offset by higher R&D expenses. The negative effects of foreign currency reduced net income by approximately $18 million, or 10%, as compared with fiscal 2000. The effects of foreign currency reduced net revenues by approximately $46 million, or 3%, when comparing fiscal 2001 with fiscal 2000 primarily due to weakness in the euro, the British pound and the Japanese yen. Net revenues from the Celera Genomics group, primarily from leased instruments and consumables shipments, were $64.1 million for fiscal 2001, or 4.0% of the Applied Biosystems group's net revenues, and $59.8 million for fiscal 2000, or 4.3%. Geographically, the Applied Biosystems group reported revenue growth in all regions for fiscal 2001 compared with fiscal 2000. Net revenues increased 16.4% in the United States, 11.7% in Europe, 24.3% in Asia Pacific, and 16.4% in Latin America and other markets, during fiscal 2001 as compared with fiscal 2000. Excluding the effects of foreign currency, revenues grew approximately 21.1% in Europe and 27.5% in Asia Pacific. For fiscal 2001, revenues from instrument sales were $813.3 million, an increase of 7.7% from $755.2 million in fiscal 2000. The increase in instrument sales resulted primarily from the introductions of products for genetic analysis, sequence detection, and mass spectrometry. The new instrument introductions included in these product lines that contributed to the growth were the ABI PRISM(R) 3100 Genetic Analyzer, introduced in the latter part of fiscal 2000, and the ABI PRISM(R) 7900 HT Sequence Detection System and the API 4000(TM) LC/MS/MS/ System, both of which were introduced during fiscal 2001. Instrument sales growth was restrained in the latter half of fiscal 2001 due to the economic slowdown that resulted in lower demand from commercial customers. Consumables sales grew to $592.1 million during fiscal 2001 from $473.7 million during fiscal 2000, a 25.0% increase, reflecting continued demand during fiscal 2001 for sequencing and sequence detection reagents. Revenues from other sources, which included service contracts, royalties, licenses, and contract research, increased 34.5% to $214.1 million from $159.2 million in fiscal 2000. Gross margin as a percentage of net revenues declined due primarily to investment in new products during fiscal 2001, including start-up costs related to product testing and validation for a substantial expansion in oligonucleotide production capacity. This expansion was designed to meet expected customer demand for assays for gene expression and SNPs. The negative effects of foreign currency also contributed to the decline in gross margin as a percentage of net revenues. Excluding the long-term compensation charge for fiscal 2000, SG&A expenses increased in fiscal 2001 due to higher planned worldwide selling and marketing expenses commensurate with the growth in revenues and orders. As a percentage of net revenues, SG&A expenses decreased, excluding the long-term compensation charge, primarily due to the realization of economies of scale. R&D expenses increased in fiscal 2001 as a result of investment in new products and technologies such as novel, high-throughput instruments for gene and protein studies and related consumable products. The increase in R&D expenses as a percentage of net revenues was primarily due to the investment in new products, as well as the negative effects of currency on revenues, as R&D costs are predominantly based in U.S. dollars. Excluding the negative effect of foreign currency and the special charge from the prior fiscal year, operating income increased approximately 15% in fiscal 2001. Excluding the effects of foreign currency changes in fiscal 2001 and the long-term compensation charge in fiscal 2000, operating income as a percentage of net revenues was 18% for fiscal 2001 compared with 19% in fiscal 2000. The higher interest expense for fiscal 2000 reflected interest on the $150 million note payable to the Celera Genomics group. The note was paid in the fourth quarter of fiscal 2000. The decrease in interest income was primarily due to the collection of the $150 million note relating to the sale of the Analytical Instruments business in the fourth quarter of fiscal 2000, substantially offset by larger average cash balances and higher average interest rates for fiscal 2001 compared with fiscal 2000. 24 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued In both fiscal years, excluding special items, other income (expense), net related primarily to costs associated with our foreign currency management program. The Applied Biosystems group adopted SFAS No. 133 effective July 1, 2000. See Note 10 to our consolidated financial statements for further discussion of our policy for financial instruments. Discussion of Financial Resources and Liquidity The Applied Biosystems group had cash and cash equivalents and short-term investments of $471.0 million at June 30, 2002 and $392.5 million at June 30, 2001. Our company maintains a $100 million revolving credit agreement with four banks that expires on April 20, 2005, under which there are no outstanding borrowings. Cash provided by operating activities has been the Applied Biosystems group's primary source of funds. The Applied Biosystems group believes that existing funds, cash generated from operations, and existing sources of debt financing are adequate to satisfy its normal operating cash flow needs, planned capital expenditure requirements, and dividends for the foreseeable future. However, we may raise additional capital from time to time and allocate it to the Applied Biosystems group. We manage the investment of surplus cash and the issuance and repayment of short-term and long-term debt for the Applied Biosystems group and the Celera Genomics group and allocate activity within these balances to the group which uses or generates such resources.
(Dollar amounts in millions) 2001 2002 ================================================================================ Cash and cash equivalents and short-term investments $ 392.5 $ 471.0 Total debt 45.2 0.3 Working capital 505.9 549.8 Debt to total capitalization 4% -% ================================================================================
During the third quarter of fiscal 2002, the Applied Biosystems group repaid its yen 3.8 billion, or $29.0 million, loan upon its scheduled maturity. Cash and cash equivalents in fiscal 2002 increased as cash generated from operating activities and proceeds from stock issuances were only partially expended for capital assets, investments, including Boston Probes, debt repayments and dividends.
(Dollar amounts in millions) 2000 2001 2002 ================================================================================ Net cash from operating activities $ 166.9 $ 141.7 $ 300.6 Net cash from investing activities 117.6 (134.1) (152.2) Net cash from financing activities (98.9) 3.7 (128.2) ================================================================================
Net cash from operating activities for fiscal 2002 was $158.9 million higher than the fiscal 2001 level. This increase was primarily due to strong working capital management, partially offset by lower income-related cash flows. Working capital benefited from strong receivable collection efforts as evidenced by the Applied Biosystems group's days sales outstanding of 72 days at June 30, 2002 compared to 79 days at June 30, 2001, calculated on a consistent basis. Inventory on hand was 3.3 months at June 30, 2002 compared to 3.2 months at June 30, 2001. Accounts payable and other liabilities increased in fiscal 2002 due primarily to increases in the accruals for compensation and benefits. Accounts payable and other liabilities decreased in fiscal 2001 due to the timing of income tax payments and higher compensation costs accrued at the end of fiscal 2000 relating to the acceleration of certain long-term compensation programs. Capital expenditures, net of disposals, were $88.3 million in fiscal 2002, $143.7 million in fiscal 2001, and $94.4 million in fiscal 2000. Fiscal 2002 capital expenditures included approximately $47 million for the expansion of facilities, primarily in Pleasanton, CA and the United Kingdom, as well as purchases of production and laboratory equipment for these facilities. Fiscal 2001 capital expenditures were primarily due to the purchase of property in Pleasanton, California for approximately $54 million, capital expenditures for production equipment related primarily to oligonucleotide manufacturing, and other capital spending related to the construction of laboratory facilities. Capital expenditures in fiscal 2000 included $8.6 million related to improvement of our information technology infrastructure and $21.6 million for the acquisition of an airplane. Cash paid in connection with acquisitions and investments in equity interest of other companies was $37.2 million in fiscal 2002, $5.9 million in fiscal 2001, and $20.7 million in fiscal 2000. The Applied Biosystems group acquired the remaining 87% of Boston Probes, not previously owned, for approximately $37 million in fiscal 2002. The Applied Biosystems group collected the $150 million note resulting from the sale of the Analytical Instruments business during fiscal 2000. In fiscal 2002, our company purchased $69.0 million of Applera - Applied Biosystems stock for treasury, of which $3.0 million was subsequently reissued for stock plans. During fiscal 2000, the Applied Biosystems group transferred the $150 million received on the collection of the promissory note associated with the sale of the Analytical Instruments business to satisfy the note payable to the Celera Genomics group. In connection with the Celera Genomics group's acquisition of Paracel during fiscal 2000, the transfer of the Paracel shares allocated to the Applied Biosystems group resulted in a $27.3 million cash payment from the Celera Genomics group, which represented the fair market value of those shares at the transfer date. APPLERA CORPORATION Annual Report 2002 25 APPLERA CORPORATION Management's Discussion and Analysis--continued Celera Genomics Group Results of Operations--2002 Compared With 2001
% Increase/ (Dollar amounts in millions) 2001 2002 (Decrease) ================================================================================================== Net revenues $ 89.4 $ 120.9 35.2% Cost of sales 43.0 51.9 20.7% R&D 164.7 132.7 (19.4%) SG&A expenses 58.3 50.4 (13.6%) Amortization of goodwill and intangible assets 43.9 7.4 (83.1%) Other special charges 69.1 25.8 (62.7%) Acquired research and development 99.0 - -------------------------------------------------------------------------------------------------- Operating loss (289.6) (246.3) (15.0%) Loss on investments, net (6.0) Interest expense (0.8) (0.6) (25.0%) Interest income 63.5 31.9 (49.8%) Other income (expense), net (0.8) (4.6) 475.0% Loss from joint venture (5.0) (44.7) - -------------------------------------------------------------------------------------------------- Loss before income taxes (232.7) (270.3) 16.2% Benefit for income taxes 46.5 58.5 25.8% - -------------------------------------------------------------------------------------------------- Net loss $ (186.2) $ (211.8) 13.7% ==================================================================================================
As previously described in events impacting comparability, fiscal 2002 and 2001 results were impacted by the following pre-tax items: o $69.1 million in fiscal 2001 and $25.9 million, including $2.9 million recorded in cost of sales, in fiscal 2002 of charges related to the Paracel business; o $99.0 million charge to write-off acquired IPR&D in fiscal 2002; o $2.8 million charge for restructuring the business in fiscal 2002; and o $6.0 million charge for other-than-temporary impairment of minority equity investments in fiscal 2002. The following table presents the operating results for the Celera Genomics group excluding these special items from both fiscal years.
% Increase/ (Dollar amounts in millions) 2001 2002 (Decrease) ================================================================================================== Net revenues $ 89.4 $ 120.9 35.2% Cost of sales 43.0 49.0 14.0% R&D 164.7 132.7 (19.4%) SG&A expenses 58.3 50.4 (13.6%) Amortization of goodwill and intangible assets 43.9 7.4 (83.1%) - -------------------------------------------------------------------------------------------------- Operating loss (220.5) (118.6) (46.2%) Interest expense (0.8) (0.6) (25.0%) Interest income 63.5 31.9 (49.8%) Other income (expense), net (0.8) (4.6) 475.0% Loss from joint venture (5.0) (44.7) - -------------------------------------------------------------------------------------------------- Loss before income taxes (163.6) (136.6) (16.5%) Benefit for income taxes 44.6 50.5 13.2% - -------------------------------------------------------------------------------------------------- Net loss $ (119.0) $ (86.1) (27.6%) ================================================================================================== Effective income tax rate 27% 37% ==================================================================================================
Excluding special charges, the Celera Genomics group's net loss decreased in fiscal 2002 primarily from operating growth in the Online/Information Business, the completion of R&D related genome sequencing programs, and the non-amortization of goodwill during fiscal 2002. Partially offsetting these factors were recognition of losses from the investment in the Celera Diagnostics joint venture with the Applied Biosystems group and lower interest income. Online/Information Business revenues increased to $72.7 million in fiscal 2002 compared with $48.4 million for fiscal 2001 as a result of increased database subscription agreements from commercial and academic customers. The remaining revenue increase resulted primarily from increased genomic services and collaborations. Revenues during fiscal 2002 were impacted by the Celera Genomics group's decision to forego new contract sequencing and service business unrelated to drug discovery and utilize its sequencing capacity to support the Applera Genomics Initiative. Excluding the special charge, cost of sales increased primarily due to the increased use of sequencing capacity for commercial activities. R&D expenses associated with therapeutic discovery programs, including the Axys programs, proteomics, and discovery informatics increased in fiscal 2002 in comparison to the prior fiscal year. R&D spending also increased as a result of increased expenses associated with the Applera Genomics Initiative. These increases were more than offset by lower R&D expenses for whole genome sequencing and an increased use of sequencing capacity for commercial activity in fiscal 2002 as compared to the prior fiscal year. R&D expenses also decreased due to the transfer of personnel to the Applied Biosystems group effective July 1, 2001. Refer to Note 14 to our consolidated financial statements for further information. SG&A expenses decreased in fiscal 2002 primarily due to a realignment of activities toward drug discovery and development, partially offset by the acquisition of Axys during the second quarter of fiscal 2002. Corporate expenses and administrative shared services were $1.6 million lower for fiscal 2002 compared with fiscal 2001. Non-cash amortization expenses in both fiscal years related to the amortization of intangible assets primarily from the Axys and Paracel acquisitions. Fiscal 2001 expense also included the amortization of goodwill primarily related to the Paracel acquisition. Effective July 1, 2001, the Celera Genomics group adopted the provisions of SFAS No. 142, and as a result, no longer amortizes goodwill. The decrease in interest income in fiscal 2002 was primarily attributable to lower average interest rates and lower cash and cash equivalents and short- term investments balances during fiscal 2002. 26 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued Other income (expense), net in fiscal 2002 consisted primarily of the Celera Genomics group's share of losses from equity method investments and other non- operating costs, partially offset by a net gain on the sale of the Celera Genomics group's AgGen plant and animal genotyping business. Loss from joint venture reflected the loss recognized by the Celera Genomics group as a result of its interest in Celera Diagnostics, which was established in the fourth quarter of fiscal 2001. The increase in the effective income tax benefit rate in fiscal 2002 was primarily attributable to the amortization of nondeductible goodwill in fiscal 2001. Results of Operations--2001 Compared With 2000 As previously described in events impacting comparability, fiscal 2001 results were impacted by the $69.1 million charge for the impairment of goodwill and other intangible assets related to the Paracel business. The following table presents the operating results for the Celera Genomics group excluding this special item from fiscal 2001.
% Increase/ (Dollar amounts in millions) 2000 2001 (Decrease) ================================================================================================ Net revenues $ 42.7 $ 89.4 109.4% Cost of sales 15.0 43.0 186.7% R&D 148.6 164.7 10.8% SG&A expenses 43.0 58.3 35.6% Amortization of goodwill and intangible assets 4.2 43.9 945.2% - ------------------------------------------------------------------------------------------------ Operating loss (168.1) (220.5) 31.2% Interest expense (2.1) (0.8) (61.9%) Interest income 27.5 63.5 130.9% Other income (expense), net (0.8) Loss from joint venture (5.0) - ------------------------------------------------------------------------------------------------ Loss before income taxes (142.7) (163.6) 14.6% Benefit for income taxes 50.0 44.6 (10.8%) - ------------------------------------------------------------------------------------------------ Net loss $ (92.7) $(119.0) 28.4% ================================================================================================ Effective income tax rate 35% 27% ================================================================================================
Excluding the special charge in fiscal 2001, the Celera Genomics group's net loss increased due primarily to amortization of goodwill and intangibles primarily caused by the Paracel acquisition, increased investment in research and development activities, and expansion of sales and marketing capabilities. These increased expenses were partially offset by higher net revenues and higher interest income. The increased revenues for the Celera Genomics group in fiscal 2001 resulted primarily from database subscription agreements with commercial and academic customers, as well as revenues from genomic services and collaborations. The acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed to the increase in net revenues. As the Celera Genomics group's activities developed into a commercial business, costs for activities previously performed as R&D in fiscal 2000 were appropriately classified as cost of sales during fiscal 2001. The increase in cost of sales during fiscal 2001 is also due to the inclusion of Paracel in the Celera Genomics group's results for the entire twelve months in fiscal 2001. Increased R&D expenses in fiscal 2001 were primarily attributed to the development of the Celera Genomics group's discovery program and gene discovery work as well as the acceleration of its capabilities in proteomics and functional genomics. R&D expenses also increased as a result of the expansion of scientific and annotation research teams and bioinformatics and software engineering staff. During the latter half of fiscal 2001, the Celera Genomics group shifted its research spending to expand its technical capabilities for therapeutic and diagnostic discovery, as the completion of major strategic whole genome sequences has resulted in a lower level of R&D investment being necessary to support the Celera Genomics group's on-line information business. The acquisition of Paracel during the fourth quarter of fiscal 2000 also contributed to the increase in R&D expenses. Substantially offsetting the fiscal 2001 increases in R&D expenses was the change in classification of the costs of certain activities, previously performed for R&D purposes, to cost of sales as such activities evolved into commercial business during fiscal 2001. SG&A expenses increased in fiscal 2001 primarily due to the acquisition of Paracel during the fourth quarter of fiscal 2000 and the Celera Genomics group's expansion of its sales and marketing capabilities. Corporate expenses and administrative shared services were $9.3 million for fiscal 2001 compared with $7.5 million for fiscal 2000. The increase in the amortization of goodwill and other intangibles in fiscal 2001 was primarily due to Paracel, which was acquired during the fourth quarter of fiscal 2000. During the fourth quarter of fiscal 2001, the Celera Genomics group recorded a before-tax, non-cash charge of $69.1 million for the impairment of goodwill and other intangible assets associated with Paracel. Interest expense in both fiscal years reflected the financing of the purchase of the Rockville, Maryland facilities. The financing, entered into during the first quarter of fiscal 2000, was repaid in the second quarter of fiscal 2001. The increase in interest income in fiscal 2001 was attributable to higher average cash and cash equivalents and short-term investments during fiscal 2001. Interest income in fiscal 2000 also reflected interest on a $150 million note receivable from the Applied Biosystems group, which was collected in the fourth quarter of fiscal 2000. Excluding amortization expense related to goodwill in both fiscal years and the special charge for the impairment of goodwill and other intangibles related to APPLERA CORPORATION Annual Report 2002 27 APPLERA CORPORATION Management's Discussion and Analysis--continued Paracel in fiscal 2001, the effective income tax rate for both fiscal years was 36%. Discussion of Financial Resources and Liquidity The Celera Genomics group had cash and cash equivalents and short-term investments of $888.9 million at June 30, 2002 and $995.6 million at June 30, 2001. Our company maintains a $100 million revolving credit agreement with four banks that expires on April 20, 2005, under which there are no outstanding borrowings. The Celera Genomics group believes that existing funds and existing sources of debt financing are adequate to satisfy its normal operating cash flow needs and planned capital expenditure requirements for the foreseeable future. However, we may raise additional capital from time to time and allocate it to the Celera Genomics group. We manage the investment of surplus cash and the issuance and repayment of short-term and long-term debt for the Celera Genomics group and the Applied Biosystems group and allocate activity within these balances to the group which uses or generates such resources.
(Dollar amounts in millions) 2001 2002 ================================================================================ Cash and cash equivalents and short-term investments $995.6 $888.9 Total debt 18.0 Working capital 945.1 840.3 Debt to total capitalization -% 1.6% ================================================================================
During fiscal 2002, in connection with the Axys acquisition, our company assumed $26.0 million of 8% senior secured convertible notes, of which $10.0 million was repaid. During fiscal 2000, our company obtained financing of $46 million, specifically for the purchase of the Rockville, Maryland facilities. This debt was repaid during fiscal 2001. Cash and cash equivalents in fiscal 2002 decreased as the Celera Genomics group funded operations, purchased capital assets, invested in short-term investments, repaid debt, and purchased common stock for treasury. Proceeds from stock issuances were used to partially fund these expenditures.
(Dollar amounts in millions) 2000 2001 2002 ================================================================================ Net cash from operating activities $ (58.3) $ (48.6) $ (49.9) Net cash from investing activities (572.9) (281.5) (145.1) Net cash from financing activities 1,129.6 (23.8) 7.8 ================================================================================
Net cash used in operating activities for fiscal 2002 was $1.3 million higher than the fiscal 2001 level. This increase in cash used was primarily due to the payment of liabilities assumed in the Axys' acquisition, partially offset by lower net cash operating losses. Capital expenditures, net of disposals, were $17.8 million in fiscal 2002, $33.8 million in fiscal 2001, and $29.5 million in fiscal 2000. Fiscal 2002 capital expenditures included payments for the expansion of laboratories for therapeutics research and development purposes as well as computer software. Fiscal 2001 capital expenditures included payments for building improvements and equipment related to the development of a laboratory to support the Celera Genomics group's proteomics and discovery capabilities efforts and costs related to internally developed software. Fiscal 2000 capital expenditures included payments of $8.1 million for software licenses acquired and expenditures associated with the continued development of the laboratories, facilities, and data center at the Celera Genomics group's Rockville, Maryland facilities. Cash paid in connection with acquisitions and investments was $48.3 million in fiscal 2002, $9.6 million in fiscal 2001, and $2.3 million in fiscal 2000. During fiscal 2002, the Celera Genomics group's cash investments were primarily related to the Celera Diagnostics joint venture. In fiscal 2001, the Celera Genomics group invested $5.5 million in the Celera Diagnostics joint venture and acquired an interest in Hubit Genomix for $4.1 million. In fiscal 2000, short-term investments were purchased with funds received from the follow-on public offering of Applera - Celera stock. In fiscal 2002, our company purchased $0.9 million of Applera - Celera stock for treasury, which was subsequently reissued for stock plans. In fiscal 2000, the Celera Genomics group received payment of the $150 million note from the Applied Biosystems group. In connection with the acquisition of Paracel, the transfer of the Paracel shares allocated to the Applied Biosystems group resulted in a $27.3 million cash payment to the Applied Biosystems group, which represented the fair market value of those shares at the transfer date. 28 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued Celera Diagnostics Results of Operations--2002 Compared With 2001
Three Months Ended Year Ended June 30, June 30, (Dollar amounts in millions) 2001 2002 ===================================================================================== Net revenues $ 1.6 $ 9.2 Cost of sales 1.0 6.2 R&D 4.5 39.0 SG&A 1.1 8.7 - ------------------------------------------------------------------------------------- Operating loss $ (5.0) $ (44.7) =====================================================================================
Celera Diagnostics was established in the fourth quarter of fiscal 2001 as a 50/50 joint venture between the Applied Biosystems group and the Celera Genomics group. This venture is focused on the discovery, development and commercialization of novel diagnostics tests. The financial results of Celera Diagnostics for fiscal 2001 included three months of operations. Revenues for fiscal 2002 increased over an annualized fiscal 2001 basis primarily due to higher sales of cystic fibrosis reagents. End-user product sales for fiscal 2002 were $11.6 million. In fiscal 2002, the Applied Biosystems group distributed Celera Diagnostics' products and recorded end- user sales. R&D activities for Celera Diagnostics include the development of diagnostics products, participation in the Applera Genomics Initiative through disease gene association studies, and lease payments on instruments and purchases of consumables from the Applied Biosystems group. SG&A expenses for fiscal 2002 reflected increased staffing to support its business objectives. Celera Diagnostics sold $8.7 million during fiscal 2002 and $1.5 million during fiscal 2001 of diagnostic products to the Applied Biosystems group under a distribution arrangement. For fiscal 2002, R&D expenses included $1.7 million of lease payments on instruments and purchases of consumables from the Applied Biosystems group. APPLERA CORPORATION Annual Report 2002 29 APPLERA CORPORATION Management's Discussion and Analysis--continued Market Risks We are exposed to potential loss from exposure to market risks represented principally by changes in foreign exchange rates, interest rates, and equity prices. We operate internationally, with manufacturing and distribution facilities in various countries throughout the world. For fiscal 2002, 2001 and 2000, we derived approximately 50% of our revenues from countries outside of the United States while a significant portion of the related costs are based in U.S. dollars. Results continue to be affected by market risk, including changes in economic conditions in foreign markets and fluctuations in foreign currency exchange rates, primarily the euro, Japanese yen, and British pound. Our foreign currency risk management strategy utilizes derivative instruments to hedge certain foreign currency forecasted revenues and to offset the impact of changes in foreign currency exchange rates on certain foreign currency- denominated receivables and payables. The principal objective of this strategy is to minimize the risks and/or costs associated with our global financial and operating activities. We utilize foreign exchange forward, option, and range forward contracts to manage our foreign currency exposures. Foreign exchange forward contracts commit us to buy or sell a foreign currency at a contracted rate on a specified future date. Option contracts grant us the right, but not the obligation, to buy or sell a foreign currency at a certain rate in exchange for a fee. Option contracts provide us with an effective hedge against a negative movement in foreign currencies at a fixed cost. Range forward contracts consist of simultaneous purchase and sale of options to create a range in which we can benefit from changes in currency rates. We generally use foreign exchange forward contracts to offset the impact of changes in foreign currency-denominated receivables and payables. In hedging certain foreign currency forecasted revenues where we have functional currency exposure, we use a combination of foreign exchange forward, option and range forward contracts in a cost beneficial manner. We do not use derivative financial instruments for trading or speculative purposes, nor are we a party to leveraged derivatives. We performed a sensitivity analysis as of June 30, 2002. Assuming a hypothetical adverse change of 10% in foreign exchange rates in relation to the U.S. dollar as of June 30, 2002, we calculated a hypothetical after-tax loss of $34.3 million. Our analysis included the change in value of the derivative financial instruments, along with the impact of translation on foreign currency-denominated assets and liabilities. Our analysis excluded the impact of translation of foreign currency-denominated forecasted sales. If foreign currency exchange rates actually change in a manner similar to the assumed change in the foregoing calculation, the hypothetical loss calculated would be more than offset by the recognition of higher U.S. dollar equivalent foreign revenues. Actual gains and losses in the future could, however, differ materially from this analysis, based on changes in the timing and amount of foreign currency exchange rate movements and actual exposures and hedges. In connection with the Axys acquisition in fiscal 2002, we assumed $26.0 million of 8% senior secured convertible notes, of which $10.0 million was repaid in January 2002. These notes mature on October 1, 2004. Also in connection with the Axys acquisition, we assumed a warrant to purchase 200,000 additional shares of Discovery Partners International, Inc. ("DPI") common stock at $8 per share and a Key Personnel Option Plan. The option plan gives certain employees rights to purchase a fixed and determinable amount of DPI common stock at a set exercise price. Options for employees to purchase 371,000 shares of DPI are included in this Plan. Both the warrants and the options meet the definition of a derivative under SFAS No. 133. As such, the instruments are marked to market and changes in market value are recorded in earnings. Assuming a hypothetical adverse change of 10% in the price of DPI shares as of June 30, 2002, we calculated a hypothetical after-tax loss of $0.1 million. We do not hedge our equity positions in other companies or our short-term investments. Our exposure on these instruments is limited to changes in quoted market prices. The fair value of our minority equity positions in other companies was $37.7 million at June 30, 2002. Impact of Inflation and Changing Prices Inflation and changing prices are continually monitored. We attempt to minimize the impact of inflation by improving productivity and efficiency through continual review of both manufacturing capacity and operating expense levels. When operating costs and manufacturing costs increase, we attempt to recover such costs by increasing, over time, the selling price of our products and services. We believe the effects of inflation have been appropriately managed and therefore have not had a material impact on our historic consolidated operations and resulting financial position. Recently Issued Accounting Standards In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 sets forth various modifications to existing accounting guidance which prescribes the conditions which must be met in order for costs associated with contract terminations, facility consolidations, employee relocations and terminations, including those associated with restructuring activities, to be accrued and recorded as liabilities in financial statements. SFAS No. 146 will be 30 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued required for exit or disposal activities initiated after December 31, 2002. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets, excluding goodwill, to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 also requires long- lived assets to be abandoned to be treated as held for use and depreciated over their remaining expected lives and broadens the presentation of discontinued operations in the income statement to a component of an entity rather than a segment of a business. SFAS No. 144 is effective for fiscal 2003 and will not materially change the methods used by our company to measure impairment losses on long-lived assets, but may result in more dispositions being reported as discontinued operations than is permitted under current accounting principles. Outlook Applied Biosystems Group Forecasting remains extremely challenging amid ongoing market uncertainty and unpredictable spending patterns in the pharmaceutical and biotechnology sectors. The Applied Biosystems group expects that revenue percentage growth in fiscal 2003 will be in the high single digits to low teens. The Applied Biosystems group continues to expect that growth in fiscal 2003 will be heavily influenced by the adoption of new products, including the 3730 product line, Assays-on-Demand(TM) products, Assays-by-Design(SM) services, the 3100- Avant system, and the Q TRAP(TM) system. Gross margin in fiscal 2003 is expected to approximate fiscal 2002 levels. Additionally, the Applied Biosystems group expects selling, general and administrative expenses to rise somewhat more slowly than revenue during fiscal 2003. While the Applied Biosystems group anticipates that the Applera Genomics Initiative will be largely completed by the end of calendar year 2002, spending for this initiative, as well as development costs related to the Knowledge Business, are expected to lead to significantly increased levels of overall R&D spending during the first two quarters of fiscal 2003. For fiscal 2003, the Applied Biosystems group expects R&D expenses to approximate 14 percent of revenue. This outlook includes approximately $12 million in expenses, the majority of which are expected to be spent during the first half of fiscal 2003, for the Applied Biosystems group's share of the Applera Genomics Initiative funding. The Applied Biosystems group expects the effective tax rate for fiscal 2003 to be approximately 29 percent. Future tax legislation may repeal or replace the existing U.S. export tax regime, as well as significantly change other international tax provisions of the Internal Revenue Code. Such changes may result in a change in the effective tax rate for the Applied Biosystems group. The Applied Biosystems group expects diluted earnings per share ("EPS") for fiscal 2003 to be in the range of $0.85 to $0.95. Despite our forecasted revenue growth, the Applied Biosystems group expects diluted EPS during the first and second quarters of fiscal 2003 to be approximately flat with the prior year due to the high levels of R&D spending anticipated during those periods. The Applied Biosystems group anticipates year-over-year EPS growth in the second half of fiscal 2003. Capital spending in fiscal 2003 is anticipated to be approximately $170 million, including approximately $80 million for the facilities expansion in Pleasanton, CA. Celera Genomics Group During fiscal 2003, the Celera Genomics group plans for its therapeutic programs to generate and identify differentially expressed proteins in lung cancer, and to validate a number of these proteins as therapeutic targets to proceed into small molecule screening and/or antibody development. The Celera Genomics group also intends to initiate a second disease-specific proteomics program. In addition, the Celera Genomics group expects to select compounds from its existing unpartnered preclinical programs to advance internally, or through collaborations. The Celera Genomics group's cash use in fiscal 2003 is expected to decrease to between $75 and $85 million, primarily due to anticipated reductions in SG&A expenses and increased operating margin from the Online/Information Business arrangement with the Applied Biosystems group. The Celera Genomics group anticipates one-time cash receipts of approximately $20 million during fiscal 2003. The Celera Genomics group anticipates R&D expenses for fiscal 2003 to be in the range of $130 to $140 million. Approximately 65 percent of R&D expenses are expected to be associated with drug discovery and development activities. The discovery R&D outlook includes approximately $12 million of expenses for the Celera Genomics group's share of the Applera Genomics Initiative, the majority of which are expected to be incurred in the first half of fiscal 2003. This outlook does not include any potential expenses for downstream pre- clinical or clinical development programs that may be added in the future. SG&A expenses are expected to be between $30 and $35 million, at least 30 percent below fiscal 2002 levels. Pre-tax losses related to the Celera APPLERA CORPORATION Annual Report 2002 31 APPLERA CORPORATION Management's Discussion and Analysis--continued Diagnostics joint venture are expected to be approximately $50 to $60 million. The Celera Genomics group anticipates total revenues for fiscal 2003 between $85 and $95 million, based on its decision not to pursue new service business. Revenues from CDS subscriptions and for Knowledge Business royalties are expected to be between $75 and $80 million. Celera Diagnostics For fiscal 2003, Celera Diagnostics anticipates end-user sales, including those from its alliance with Abbott Laboratories, in a range of $18 to $22 million. Effective October 1, 2002, Abbott Laboratories will assume distribution from the Applied Biosystems group and will record most end-user sales. End-user sales include sales of all products included in the alliance to the user of the product, whether recorded by Celera Diagnostics or Abbott Laboratories. This outlook assumes continued demand growth, both from new products and from higher sales of existing products, and successful product migration into the alliance. Celera Diagnostics plans to introduce new analyte specific reagents for cystic fibrosis and hepatitis and to complete at least three additional disease association studies. For fiscal 2003, Celera Diagnostics anticipates pretax losses of $50 to $60 million and net cash use in the range of $55 to $65 million, including capital spending of approximately $10 million. Forward-Looking Statements Certain statements contained in this report, including the Outlook section, are forward-looking and are subject to a variety of risks and uncertainties. These statements may be identified by the use of forward-looking words or phrases such as "believe," "expect," "intend," "anticipate," "should," "plan," "estimate," and "potential," among others. These forward-looking statements are based on our company's current expectations. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward- looking statements. In order to comply with the terms of the safe harbor, our company notes that a variety of factors could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our company's businesses include, but are not limited to: Factors Relating to the Applied Biosystems Group Rapidly changing technology in life sciences could make the Applied Biosystems group's product line obsolete unless it continues to improve existing products, develop new products, and pursue new market opportunities. A significant portion of the net revenues for the Applied Biosystems group each year is derived from products that did not exist in the prior year. The Applied Biosystems group's future success depends on its ability to continually improve its current products, develop and introduce, on a timely and cost-effective basis, new products that address the evolving needs of its customers, and pursue new market opportunities that develop as a result of technological and scientific advances in life sciences. The Applied Biosystems group's products are based on complex technology which is subject to rapid change as new technologies are developed and introduced in the marketplace. Unanticipated difficulties or delays in replacing existing products with new products could adversely affect the Applied Biosystems group's future operating results. The pursuit of new market opportunities will add further complexity and require additional management attention and resources as these markets are addressed. The Applied Biosystems group's new Knowledge Business may not be successful. In April 2002, the Applied Biosystems group became the exclusive distributor of the Celera Genomics group's Celera Discovery System and related human genomic and other biological and medical information under the terms of a 10- year marketing and distribution agreement. The Applied Biosystems group expects to integrate the Celera Discovery System and the Celera Genomics group's related information into a new Knowledge Business that combines current Applied Biosystems assay, human identification and forensics, and cell biology products with new biological information content and analytical tools. The Knowledge Business is an emerging business, and the Applied Biosystems group believes that in order for it to be successful the Applied Biosystems group may have to devote a significant amount of resources to researching, developing, marketing, and distributing Knowledge Business products and services. The market for these products and services is intensely competitive, and there can be no assurance that there will be market acceptance of the utility and value of the product and service offerings of the Knowledge Business. A significant portion of sales depends on customers' capital spending policies that may be subject to significant and unexpected decreases. A significant portion of the Applied Biosystems group's instrument product sales are capital purchases by its customers. The Applied Biosystems group's customers include pharmaceutical, environmental, research, biotechnology, and chemical companies, and the capital spending policies of these companies can have a significant effect on the demand for the Applied Biosystems group's products. These policies are based on a wide variety of factors, including the resources available to make purchases, the spending priorities among various types of research equipment, and policies regarding capital expenditures during recessionary periods. Any decrease in capital spending or change in spending policies of these companies could significantly reduce the demand for the Applied Biosystems group's products. 32 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued A substantial portion of the Applied Biosystems group's sales is to customers at universities or research laboratories whose funding is dependent on both the level and timing of funding from government sources. As a result, the timing and amount of revenues from these sources may vary significantly due to factors that can be difficult to forecast. Although research funding has increased during the past several years, grants have, in the past, been frozen for extended periods or otherwise become unavailable to various institutions, sometimes without advance notice. Budgetary pressures may result in reduced allocations to government agencies that fund research and development activities. If government funding necessary to purchase the Applied Biosystems group's products were to become unavailable to researchers for any extended period of time, or if overall research funding were to decrease, the business of the Applied Biosystems group could be adversely affected. The Applied Biosystems group is currently and could in the future be subject to claims for infringement of patents and other intellectual property rights. The Applied Biosystems group's products are based on complex, rapidly developing technologies. These products could be developed without knowledge of previously filed patent applications that mature into patents that cover some aspect of these technologies. In addition, there are relatively few decided court cases interpreting the scope of patent claims in these technologies, and the Applied Biosystems group's belief that its products do not infringe the technology covered by valid and enforceable patents could be successfully challenged by third parties. Also, in the course of its business, the Applied Biosystems group may from time to time have access to confidential or proprietary information of third parties, and these parties could bring a theft of trade secret claim against the Applied Biosystems group asserting that the Applied Biosystems group's products improperly use technologies which are not patented but which are protected as trade secrets. The Applied Biosystems group has been made a party to litigation regarding intellectual property matters, including the litigation described in the following paragraph, some of which, if determined adversely, could have a material adverse effect on the Applied Biosystems group. Due to the fact that the Applied Biosystems group's business depends in large part on rapidly developing and dynamic technologies, there remains a constant risk of intellectual property litigation affecting the group. The Applied Biosystems group has from time to time been notified that it may be infringing patents and other intellectual property rights of others. It may be necessary or desirable in the future to obtain licenses relating to one or more products or relating to current or future technologies, and the Applied Biosystems group cannot be assured that it will be able to obtain these licenses or other rights on commercially reasonable terms. MJ Research, Inc. has filed a lawsuit against the Company based on the allegation that four patents underlying the Applied Biosystems group's DNA sequencing instruments were invalidly obtained because one of the alleged inventors, whose work was funded in part by the United States government, was knowingly omitted from the patent applications. MJ Research claims to be suing in the name of the United States government although the government has to date declined to participate in the lawsuit. Promega Corporation has filed a lawsuit against the Company alleging that the Applied Biosystems group, along with certain other named defendants, is infringing two Promega patents due to the sale of forensic identification and paternity testing kits. Beckman Coulter, Inc. has filed a lawsuit against the Company alleging that the Applied Biosystems group is infringing three Beckman Coulter patents, although it has not identified the specific facts on which the allegation is based. At present, only the Promega litigation is scheduled for trial. If any of these matters does proceed to trial, the cost of the litigation, and the amount of management time that will be devoted to the litigation, will be significant. There can be no assurance that these matters will be resolved favorably, that the Company, the Applied Biosystems group, or the Celera Genomics group will not be enjoined from selling the products in question or other products as a result, or that any monetary or other damages assessed against the Company will not have a material adverse effect on the financial condition of the Company, the Applied Biosystems group, or the Celera Genomics group. Since the Applied Biosystems group's business is dependent on foreign sales, fluctuating currencies will make revenues and operating results more volatile. Approximately 50% of the Applied Biosystems group's net revenues during fiscal 2002 were derived from sales to customers outside of the United States. The majority of these sales were based on the relevant customer's local currency. A significant portion of the related costs for the Applied Biosystems group are based on the U.S. dollar. As a result, the Applied Biosystems group's reported and anticipated operating results and cash flows are subject to fluctuations due to material changes in foreign currency exchange rates that are beyond the Applied Biosystems group's control. Integrating acquired technologies may be costly and may not result in technological advances. The future growth of the Applied Biosystems group depends in part on its ability to acquire complementary technologies through acquisitions and investments. The consolidation of employees, operations, and marketing and distribution methods could present significant managerial challenges. For example, the Applied Biosystems group may encounter operational difficulties in the integration of manufacturing or other facilities. In addition, technological advances resulting from the integration of APPLERA CORPORATION Annual Report 2002 33 APPLERA CORPORATION Management's Discussion and Analysis--continued technologies may not be achieved as successfully or rapidly as anticipated, if at all. The Applied Biosystems group's Knowledge Business depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, and Internet applications and related tools and functions. Because the Applied Biosystems group's Knowledge Business requires manipulating and analyzing large amounts of data, and communicating the results of the analysis to its internal research personnel and to its customers via the Internet, the Applied Biosystems group depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that the Applied Biosystems group's hardware or software malfunctions or access to the Applied Biosystems group's data by internal Knowledge Business research personnel or Knowledge Business customers through the Internet is interrupted, the Knowledge Business could suffer. The Applied Biosystems group's computer and communications hardware is protected through physical and software safeguards. However, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, and similar events. In addition, the Knowledge Business online products are complex and sophisticated, and as such, could contain data, design, or software errors that could be difficult to detect and correct. Software defects could be found in current or future products. If the Applied Biosystems group fails to maintain and further develop the necessary computer capacity and data to support its computational needs and its customers' access to the Knowledge Business product offerings, it could experience a loss of or delay in revenues or market acceptance. In addition, any sustained disruption in Internet access provided by third parties could adversely affect the Knowledge Business. Electricity shortages and earthquakes could disrupt operations in California. The headquarters and principal operations of the Applied Biosystems group are located in Foster City, California. In 2001, the State of California experienced a statewide electricity shortage due to a variety of factors. Although some of the factors causing this shortage have been eliminated or mitigated, there are ongoing concerns about the availability of electricity in California, particularly during peak usage periods. Blackouts in Foster City, even of modest duration, could impair or cause a temporary suspension of the group's operations, including the manufacturing and shipment of new products. Power disruptions of an extended duration or high frequency could have a material adverse effect on operating results. In addition, Foster City is located near major California earthquake faults. The ultimate impact of earthquakes on the Applied Biosystems group, its significant suppliers, and the general infrastructure is unknown, but operating results could be materially affected in the event of a major earthquake. Factors Relating to the Celera Genomics Group The Celera Genomics group has incurred net losses to date and may not achieve profitability. The Celera Genomics group has accumulated net losses of $576.8 million as of June 30, 2002, and expects that it will continue to incur additional net losses for the foreseeable future. These cumulative losses are expected to increase as the Celera Genomics group continues to make investments in new technology and product development, including its investments in its therapeutics business and our Applera Genomics Initiative, as well as investments in diagnostics through Celera Diagnostics, its joint venture with the Applied Biosystems group. The Celera Genomics group will record all initial operating losses of Celera Diagnostics up to a maximum of $300 million, after which any additional operating losses would be shared equally by the Celera Genomics group and the Applied Biosystems group. As an early stage business, the Celera Genomics group faces significant challenges in expanding its operations into the therapeutics research and development business. As a result, there is a high degree of uncertainty that the Celera Genomics group will be able to achieve profitable operations. The Celera Genomics group has entered into an exclusive arrangement with the Applied Biosystems group to distribute the Celera Discovery System and related information as part of the Applied Biosystems group's new Knowledge Business, and the revenue that the Celera Genomics Group receives from the Applied Biosystems group will depend heavily on the Applied Biosystems group's ability to market and distribute its Knowledge Business products. Effective April 2002, the Applied Biosystems group became the exclusive distributor of Celera Discovery System and the Celera Genomics group's related human genomic and other biological and medical information under the terms of a ten-year marketing and distribution agreement. The Celera Genomics group expects that the Applied Biosystems group will integrate the Celera Discovery System and the related information into a new Knowledge Business that combines current Applied Biosystems assay, human identification and forensics, and cell biology products with new biological information content and analytical tools. Under the terms of the agreement, the Applied Biosystems group is obligated to pay a royalty to the Celera Genomics group based on sales, if any, of certain Knowledge Business products after July 1, 2002. Whether the Celera Genomics group actually receives any royalties from the Applied Biosystems group under this agreement, and the amount of these royalties, depends on the Applied Biosystems group's ability to successfully commercialize Knowledge Business products subject to the royalty. The Knowledge Business is an emerging business, and the Applied Biosystems group has not 34 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued proven its ability to successfully commercialize these products. The Celera Genomics group believes that in order for the Knowledge Business to be successful, the Applied Biosystems group may have to devote a significant amount of its resources to researching, developing, marketing, and distributing Knowledge Business products and services. However, the Celera Genomics group has no control over the amount and timing of the Applied Biosystems group's use of its resources, including for products subject to the Celera Genomics group's royalty. In addition, the market for these products is intensely competitive, and there can be no assurance that there will be market acceptance of the utility and value of the product offerings of the Knowledge Business. The Celera Genomics group does not intend to seek any new customers for its Celera Discovery System and related information products and services after June 30, 2002, and therefore its future revenues from these products and services will be limited. Under the terms of the marketing and distribution agreement between the Celera Genomics group and the Applied Biosystems group, the Celera Genomics group will receive all revenues under, and be responsible for all costs and expenses associated with, Celera Discovery System and related information contracts that were in effect on April 1, 2002, the effective date of the agreement, or which were entered into during a three- month transition period ended June 30, 2002 (as well as renewals of these contracts, if any). However, the revenue anticipated by Celera Genomics under these contracts could be adversely impacted as a result of changes made to Celera Discovery System products by or at the request of the Applied Biosystems group pursuant to the agreement, although the Applied Biosystems group has agreed to reimburse the Celera Genomics group for any shortfall in earnings before interest, taxes, depreciation, and amortization from these contracts below $62.5 million (as well as renewals, if any) during the four fiscal years ending with the 2006 fiscal year if the shortfall is due to these changes, provided the Celera Genomics group otherwise continues to perform under these contracts. However, during the term of the marketing and distribution agreement (other than the transition period), the Celera Genomics group will not be marketing Celera Discovery System products and services to, and will not be contracting with, new customers. Accordingly, except for the anticipated revenue under Celera Discovery System contracts existing on June 30, 2002 and renewals of these contracts, if any, and the Applied Biosystems' corresponding reimbursement obligation, the Celera Genomics group does not expect any revenues from Celera Discovery System and related products and services other than the potential royalty payments from the Applied Biosystems group under the marketing and distribution agreement. Although under certain contracts with existing Celera Discovery System customers the Celera Genomics group is entitled to milestone payments or future royalties based on products developed by its customers, the Celera Genomics group believes these arrangements are unlikely to produce any significant revenue for the group. The Celera Genomics group's ability to maintain its relationships with existing Celera Discovery System customers depends heavily on continued assembly and annotation of the human and mouse genomes. In June 2000, the Celera Genomics group and the Human Genome Project each announced the "first assembly" of the human genome, and in April 2001, the Celera Genomics group announced the assembly of the mouse genome. Assembly is the process by which individual fragments of DNA, the molecule that forms the basis of the genetic material in virtually all living organisms, are pieced together into their appropriate order and place on each chromosome within the genome. The Celera Genomics group's first assembly of the human genome covered approximately 95% of that genome, and its assembly of the mouse genome covered approximately 99% of that genome. The Celera Genomics group intends to continue updating the assembly of the human and mouse genomes as it continues to annotate these genomes. Annotation is the process of assigning features or characteristics to each chromosome. Each gene on each chromosome is given a name, its structural features are described, and proteins encoded by genes are classified into possible or known function. The Celera Genomics group's ability to maintain its relationship with the existing Celera Discovery System customers depends heavily upon the continued assembly and annotation of these genomes. Failure to continue to update the assembly and annotation efforts in a timely manner may have a material adverse effect on the Celera Genomics group's revenues. The Celera Genomics group's ability to develop and commercialize proprietary therapeutics is unproven. As the Celera Genomics group expands its therapeutics discovery and development business, it faces the difficulties inherent in developing and commercializing therapeutic products. It is possible that the Celera Genomics group's discovery and development efforts will not result in any commercial products or services. In particular, the Celera Genomics group and its collaborators are seeking to develop new therapeutic products based on information derived from the study of the genetic material of organisms, or genomics, and the study of proteins, or proteomics. These methods are unproven, as few therapeutic products based on genomic or proteomic discoveries have been developed and commercialized and, to date, no one has developed or commercialized any therapeutic products based on the Celera Genomics group's technologies. Therapeutic product candidates may never result in a commercialized product. All of the Celera Genomics group's therapeutic product candidates are in various APPLERA CORPORATION Annual Report 2002 35 APPLERA CORPORATION Management's Discussion and Analysis--continued stages of research and development and will require significant additional research and development efforts by the Celera Genomics group or its collaborators before they can be marketed. These efforts include extensive preclinical and clinical testing and lengthy regulatory review and clearance or approval by the United States Food and Drug Administration and comparable agencies in other countries. The development of the Celera Genomics group's new therapeutics products is highly uncertain and subject to a number of significant risks. To date, the Celera Genomics group has not commercialized a therapeutic product and the Celera Genomics group does not expect any of its therapeutic product candidates to be commercially available for a number of years, if ever. Therapeutic product candidates that appear to be promising at early stages of development may not be developed into commercial products, or may not be successfully marketed, for a number of reasons, including: o the Celera Genomics group or its collaborators may not successfully complete any research and development efforts; o the Celera Genomics group or its collaborators may not successfully build the necessary preclinical and clinical development organizations; o any therapeutic product candidates the Celera Genomics group or its collaborators develop may be found during preclinical testing or clinical trials to be ineffective or to cause harmful side effects; o the Celera Genomics group or its collaborators may fail to obtain required regulatory approvals for products they develop; o the Celera Genomics group or its collaborators may be unable to manufacture enough of any potential products at an acceptable cost and with appropriate quality; o the Celera Genomics group or its collaborators may fail to build necessary distribution channels; o the Celera Genomics group's or its collaborator's products may not be competitive with other existing or future products; o adequate reimbursement for the Celera Genomics group's or its collaborators products may not be available to physicians and patients from the government or insurance companies; and o the Celera Genomics group or its collaborators may be unable to obtain necessary intellectual property protection, or third parties may own proprietary rights that prevent the Celera Genomics group or its collaborators from commercializing their products. If the Celera Genomics group fails to maintain its existing collaborative relationships and enter into new collaborative relationships, or if collaborators do not perform under collaboration agreements, development of its therapeutic product candidates could be delayed. The Celera Genomics group's strategy for the discovery, development, clinical testing, manufacturing and commercialization of most of its therapeutic product candidates includes entering into collaborations with partners. Although the Celera Genomics group has expended, and continues to expend, time and money on internal research and development programs, it may be unsuccessful in creating therapeutic product candidates that would enable it to form additional collaborations and receive milestone and/or royalty payments from collaborators. Each of the Celera Genomics group's existing collaboration agreements may be canceled under certain circumstances. In addition, the amount and timing of resources to be devoted to research, development, eventual clinical trials and commercialization activities by the Celera Genomics group's collaborators are not within the Celera Genomics group's control. The Celera Genomics group cannot ensure that its collaborators will perform their obligations as expected. If any of the Celera Genomics group's collaborators terminate or elect to cancel their agreements or otherwise fail to conduct their collaborative activities in a timely manner, the development or commercialization of therapeutic products may be delayed or otherwise adversely affected. If in some cases the Celera Genomics group assumes responsibilities for continuing programs on its own after termination of a collaboration, the Celera Genomics group may be required to devote additional resources to product development and commercialization or the Celera Genomics group may need to cancel certain development programs. If the Celera Genomics group fails to satisfy regulatory requirements for any therapeutic product candidate, the Celera Genomics group will be unable to complete the development and commercialization of that product. The Celera Genomics group does not currently have the internal capability to move potential products through clinical testing, manufacturing and the approval processes of the United States Food and Drug Administration and comparable agencies in other countries. In the United States, either the Celera Genomics group or its collaborators must show through pre-clinical studies and clinical trials that each of the Celera Genomics group's therapeutic product candidates is safe and effective in humans for each indication before obtaining regulatory clearance from the United States Food and Drug Administration for the commercial sale of that product. Outside of the United States, the regulatory requirements vary from country to country. If the Celera Genomics group or its collaborator fails to adequately show the safety and effectiveness of a therapeutic product, regulatory clearance or approval could be delayed or denied. The results from pre-clinical studies may be different from the results that are obtained in large-scale clinical trials. The Celera 36 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued Genomics group cannot be certain that it will show sufficient safety and effectiveness in its clinical trials to allow it to obtain the needed regulatory clearance or approval. The regulatory review and approval process can take many years and require substantial expense and may not be successful. Many companies in the therapeutic industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier studies. Even if the Celera Genomics group obtains regulatory clearance or approval, it will be subject to certain risks and uncertainties relating to regulatory compliance, including: post-approval clinical studies and inability to meet the compliance requirements of the United States Food and Drug Administration's Good Manufacturing Practices regulations. In addition, identification of certain adverse side effects after a therapeutic product is on the market or the occurrence of manufacturing problems could cause subsequent suspension of product manufacture or withdrawal of approval, or could require reformulation of a therapeutic product, additional testing, or changes in labeling of the product. This could delay or prevent the Celera Genomics group from generating revenues from the sale of that therapeutic product. The Celera Genomics group's research and product development, including its proteomics efforts, depends on access to tissue samples and other biological materials. The Celera Genomics group will need access to human and other tissue samples from diseased and healthy individuals, other biological materials, and related clinical and other information, which may be in limited supply. The Celera Genomics group may not be able to obtain or maintain access to these materials and information on acceptable terms. In addition, government regulation in the United States and foreign countries could result in restricted access to, or use of, human and other tissue samples. If the Celera Genomics group loses access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on its use of the information generated from tissue samples, its business may be harmed. The pharmaceutical industry is intensely competitive and evolving. There is intense competition among pharmaceutical and biotechnology companies attempting to discover candidates for potential new therapeutic products. These companies may: o develop new therapeutic products in advance of the Celera Genomics group; o develop therapeutic products which are more effective or more cost- effective than those developed by the Celera Genomics group; o obtain regulatory approvals of their therapeutic products more rapidly than the Celera Genomics group; or o obtain patent protection or other intellectual property rights that would limit the Celera Genomics group's ability to develop and commercialize therapeutic products. Introduction of new products may expose the Celera Genomics group to product liability claims. New products developed by the Celera Genomics group or its collaborators could expose the Celera Genomics group to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of human therapeutic products. Product liability claims or product recalls, regardless of the ultimate outcome, could require the Celera Genomics group to spend significant time and money in litigation and to pay significant damages. Although the Celera Genomics group expects to seek and maintain product liability insurance to cover claims relating to the testing and use of therapeutic products, there can be no assurance that such insurance will be available on commercially reasonable terms, if at all, or that the amount of coverage obtained will be adequate to cover losses from any particular claim. The therapeutics discovery and development business is highly technical, and there is a competitive market for personnel with the necessary expertise to develop and expand the Celera Genomics group's therapeutics business. The Celera Genomics group believes that in order to develop and commercialize therapeutic products, it will need to recruit and retain scientific and management personnel having specialized training or advanced degrees, or otherwise having the technical background, necessary for an understanding of therapeutic products. There is a shortage of qualified scientific and management who possess this technical background. The Celera Genomics group competes for these personnel with other pharmaceutical and biotechnology companies, academic institutions and government entities. If the Celera Genomics group is unable to retain and attract qualified scientific and management personnel, the growth of the group's therapeutics discovery and development business could be delayed or curtailed. The Celera Genomics group could incur liabilities relating to hazardous materials that it uses in its research and development activities. The Celera Genomics group's research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive materials. In the event of an accidental contamination or injury from these materials, the Celera Genomics group could be held liable for damages in excess of its resources. The Celera Genomics group's business depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, and Internet applications and APPLERA CORPORATION Annual Report 2002 37 APPLERA CORPORATION Management's Discussion and Analysis--continued related tools and functions. Because the Celera Genomics group's business requires manipulating and analyzing large amounts of data, and communicating the results of the analysis to its internal research personnel and to its customers via the Internet, the Celera Genomics group depends on the continuous, effective, reliable, and secure operation of its computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that the Celera Genomics group's hardware or software malfunctions or access to the Celera Genomics group's data by the Celera Genomics group's internal research personnel or customers through the Internet is interrupted, its business could suffer. The Celera Genomics group's computer and communications hardware is protected through physical and software safeguards. However, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, and similar events. In addition, the Celera Genomics group's online products are complex and sophisticated, and as such, could contain data, design, or software errors that could be difficult to detect and correct. Software defects could be found in current or future products. If the Celera Genomics group fails to maintain and further develop the necessary computer capacity and data to support its computational needs and its customers' therapeutics discovery and research efforts, it could experience a loss of or delay in revenues. In addition, any sustained disruption in Internet access provided by third parties could adversely affect the Celera Genomics group's business. The Celera Genomics group's competitive position depends on maintaining its intellectual property protection and obtaining licenses to intellectual property it may need from others. The Celera Genomics group's ability to compete and to achieve and maintain profitability depends on its ability to protect its proprietary discoveries or technology, in large part, through obtaining and enforcing patent rights, obtaining copyright protection, maintaining its trade secrets, and operating without infringing the intellectual property rights of others. The Celera Genomics group's ability to obtain patent protection for the inventions it makes is uncertain. The patentability of biotechnology and pharmaceutical inventions involves complex factual and legal questions. As a result, it is difficult to predict whether patents will issue or the breadth of claims that will be allowed in biotechnology and pharmaceutical patents. This may be particularly true with regard to the patenting of gene sequences, gene functions, and genetic variations. In this regard, the United States Patent and Trademark Office has adopted guidelines for use in the review of the utility of inventions, particularly biotechnology inventions. These guidelines increased the amount of evidence required to demonstrate utility in order to obtain a patent in the biotechnology field, making patent protection more difficult to obtain. Although others have been successful in obtaining patents to biotechnology inventions, since the adoption of these guidelines, these patents have been issued with increasingly less frequency. As a result, patents may not issue from patent applications that the Celera Genomics group may own or license if the applicant is unable to satisfy the new guidelines. The United States Patent and Trademark Office has issued several patents to third parties covering inventions involving single nucleotide polymorphisms ("SNPs"), naturally occurring genetic variations that scientists believe can be correlated with susceptibility to disease, disease prognosis, therapeutic efficiency, and therapeutic toxicity. These inventions are subject to the same new guidelines as other biotechnology inventions. In addition, the Celera Genomics group may need to obtain rights to patented SNPs in order to develop, use and sell analyses of the overall human genome or particular full-length genes. These licenses may not be available to the Celera Genomics group on commercially acceptable terms, or at all. In some instances, patent applications in the United States are maintained in secrecy until a patent issues. In most instances, the content of United States and international patent applications is made available to the public approximately 18 months after the application's filing date. As a result, the Celera Genomics group cannot be certain that others have not filed patent applications for inventions covered by the Celera Genomics group's patent applications or that the Celera Genomics group inventors were the first to make the invention. Accordingly, the Celera Genomics group's patent applications may be preempted or the Celera Genomics group may have to participate in interference proceedings before the United States Patent and Trademark Office. These proceedings determine the priority of invention and the right to a patent for the claimed invention in the United States. Furthermore, lawsuits may be necessary to enforce any patents issued to the Celera Genomics group or to determine the scope and validity of the rights of third parties. Lawsuits and interference proceedings, even if they are successful, are expensive to pursue, and the Celera Genomics group could use a substantial amount of its financial resources in either case. An adverse outcome could subject the Celera Genomics group to significant liabilities to third parties and require the Celera Genomics group to license disputed rights from third parties or to cease using the technology. The Celera Genomics group may be dependent on protecting its proprietary databases through copyright law to prevent other organizations from taking information from those databases and copying and reselling it. Copyright law currently provides uncertain protection regarding the copying and resale of factual data. Changes in copyright law could either expand or reduce the extent to which the Celera Genomics group 38 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued and its customers are able to protect their intellectual property. Accordingly, the Celera Genomics group is uncertain as to whether it can prevent such copying or resale through copyright law. The Celera Genomics group also relies on trade secret protection for its confidential and proprietary information and procedures, including procedures related to sequencing genes and to searching and identifying important regions of genetic information. The Celera Genomics group protects its trade secrets through recognized practices, including access control, confidentiality and nonuse agreements with employees, consultants, collaborators and customers, and other security measures. These confidentiality and nonuse agreements may be breached, however, and the Celera Genomics group may not have adequate remedies for a breach. In addition, the Celera Genomics group's trade secrets may otherwise become known or be independently developed by competitors. Accordingly, it is unclear whether the Celera Genomics group's trade secrets will provide adequate protection. Disputes may arise in the future with regard to the ownership of rights to any invention developed with collaborators. These and other possible disagreements with collaborators could lead to delays in the achievement of milestones or receipt of royalty payments or in research, development and commercialization of the Celera Genomics group's products. In addition, these disputes could require or result in lawsuits or arbitration. Lawsuits and arbitration are time-consuming and expensive. Even if the Celera Genomics group wins, the cost of these proceedings could adversely affect its business, financial condition and operating results. The Celera Genomics group may infringe the intellectual property rights of third parties and may become involved in expensive intellectual property litigation. The intellectual property rights of biotechnology companies, including the Celera Genomics group, are generally uncertain and involve complex legal, scientific and factual questions. The Celera Genomics group's success in therapeutics discovery and development may depend, in part, on its ability to operate without infringing the intellectual property rights of others and to prevent others from infringing its intellectual property rights. There has been substantial litigation regarding patents and other intellectual property rights in the biotechnology and pharmaceutical industries. The Celera Genomics group may become a party to patent litigation or proceedings at the United States Patent and Trademark Office to determine its patent rights with respect to third parties. Interference proceedings may be necessary to establish which party was the first to make the invention sought to be patented. The Celera Genomics group may become involved in patent litigation against third parties to enforce its patent rights, to invalidate patents held by the third parties, or to defend against these claims. The cost to the Celera Genomics group of any patent litigation or similar proceeding could be substantial, and it may absorb significant management time. If infringement litigation against the Celera Genomics group is resolved unfavorably to the Celera Genomics group, the Celera Genomics group may be enjoined from manufacturing or selling its products or services without a license from a third party. The Celera Genomics group may not be able to obtain a license on commercially acceptable terms, or at all. Ethical, legal and social issues related to the use of genetic information and genetic testing may cause less demand for the Celera Genomics group's products. Genetic testing has raised issues regarding confidentiality and the appropriate uses of the resulting information. For example, concerns have been expressed regarding the use of genetic test results by insurance carriers or employers to discriminate on the basis of this information, resulting in barriers to the acceptance of genetic tests by consumers. This could lead to governmental authorities calling for limits on or regulation of the use of genetic testing or prohibiting testing for genetic predisposition to certain diseases, particularly those that have no known cure. Any of these scenarios could reduce the potential markets for products of the Celera Genomics group. Future acquisitions and other transactions may absorb significant resources, may be unsuccessful and could dilute the holders of Applera - Celera stock. As part of the Celera Genomics group's strategy, it expects to pursue acquisitions, investments and other strategic relationships and alliances. Acquisitions, investments and other strategic relationships and alliances may involve significant cash expenditures, debt incurrence, additional operating losses, and expenses that could have a material effect on the Celera Genomics group's financial condition and operating results. Acquisitions involve numerous other risks, including: o difficulties integrating acquired technologies and personnel into the business of the Celera Genomics group; o diversion of management from daily operations; o inability to obtain required financing on favorable terms; o entry into new markets in which the Celera Genomics group has little previous experience; o potential loss of key employees, key contractual relationships, or key customers of acquired companies or of the Celera Genomics group; and o assumption of the liabilities and exposure to unforeseen liabilities of acquired companies. APPLERA CORPORATION Annual Report 2002 39 APPLERA CORPORATION Management's Discussion and Analysis--continued It may be difficult for the Celera Genomics group to complete these transactions quickly and to integrate these businesses efficiently into its current business. Any acquisitions, investments or other strategic relationships and alliances by the Celera Genomics group may ultimately have a negative impact on its business and financial condition. For example, future acquisitions may not be as successful as originally anticipated and may result in special charges, such as the charges for impairment of Paracel goodwill, intangibles and other assets in the amount of $69.1 million during fiscal 2001 and $25.9 million during fiscal 2002 and for the Molecular Informatics business in the amount of $14.5 million during fiscal 1999. In addition, acquisitions and other transactions may involve the issuance of a substantial amount of Applera - Celera stock without the approval of the holders of Applera - Celera stock. Any issuances of this nature will be dilutive to holders of Applera - Celera stock. Applera - Celera stock price is highly volatile. The market price of Applera - Celera stock has been and may continue to be highly volatile due to the risks and uncertainties described in this section of this annual report, as well as other factors that may have affected or may in the future affect the market price, such as: o conditions and publicity regarding the genomics, biotechnology, pharmaceutical, or life sciences industries generally; o price and volume fluctuations in the stock market at large which do not relate to the Celera Genomics group's operating performance; and o comments by securities analysts or government officials, including with regard to the viability or profitability of the biotechnology sector generally or with regard to intellectual property rights of biotechnology companies, or the Celera Genomics group's failure to meet market expectations. The stock market has from time to time experienced extreme price and volume fluctuations that are unrelated to the operating performance of particular companies. In the past, companies that have experienced volatility have sometimes been the subjects of securities class action litigation. If litigation was instituted on this basis, it could result in substantial costs and a diversion of management's attention and resources. Our company is subject to a purported class action lawsuit relating to its 2000 offering of shares of Applera - Celera stock that may be expensive and time consuming. Our company and some of its officers were served in five lawsuits purportedly on behalf of purchasers of Applera - Celera stock in our company's follow-on public offering of Applera - Celera stock completed on March 6, 2000. In the offering, our company sold an aggregate of approximately 4.4 million shares of Applera - Celera stock at a public offering price of $225 per share. All of these lawsuits have been consolidated into a single case and an amended consolidated complaint was filed on August 21, 2001. The consolidated complaint generally alleges that the prospectus used in connection with the offering was inaccurate or misleading because it failed to adequately disclose the alleged opposition of the Human Genome Project and two of its supporters, the governments of the United States and the United Kingdom, to providing patent protection to our company's genomic-based products. Although the Celera Genomics group has never sought, or intended to seek, a patent on the basic human genome sequence data, the complaint also alleges that our company did not adequately disclose the risk that it would not be able to patent this data. The consolidated complaint seeks unspecified monetary damages, rescission, costs and expenses, and other relief as the court deems proper. Our company and the other defendants have filed a motion to dismiss the case, which motion is pending before the court. Although our company believes the asserted claims are without merit and intends to defend the case vigorously, the outcome of this or any other litigation is inherently uncertain. The defense of this case will require management attention and resources. Factors Relating to Celera Diagnostics, a Joint Venture between the Applied Biosystems Group and the Celera Genomics Group Celera Diagnostics' ability to develop and commercialize proprietary diagnostic products is unproven. Celera Diagnostics faces the difficulties inherent in developing and commercializing diagnostic products. It is possible that Celera Diagnostics' discovery and development efforts will not result in any commercial products or services. In particular, Celera Diagnostics and its collaborators are seeking to develop new diagnostic products based on information derived from the study of the genetic material of organisms, or genomics, and the study of proteins, or proteomics. This method carries inherent risks, as only a limited number of diagnostic products based on genomic or proteomic discoveries have been developed and commercialized to date. Diagnostic product candidates may never result in a commercialized product. Most of Celera Diagnostics' potential diagnostic products are in various stages of research and development and will require significant additional research and development efforts by Celera Diagnostics or its collaborators before they can be marketed. These efforts include extensive clinical testing and may require lengthy regulatory review and clearance or approval by the United States Food and Drug Administration and comparable agencies in other countries. The development of Celera Diagnostics' new diagnostics products is highly uncertain and subject to a number of significant risks. Diagnostic product candidates that appear to be promising at early stages of development may not be developed into commercial 40 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued products, or may not be successfully marketed, for a number of reasons, including: o Celera Diagnostics or its collaborators may not successfully complete any research and development efforts; o any diagnostic products Celera Diagnostics or its collaborators develop may be found during clinical trials to have limited medical value; o Celera Diagnostics or its collaborators may fail to obtain required regulatory approvals for products they develop; o Celera Diagnostics or its collaborators may be unable to manufacture enough of any potential products at an acceptable cost and with appropriate quality; o any diagnostic products Celera Diagnostics or its collaborators develop may not be competitive with other existing or future products; o adequate reimbursement for Celera Diagnostics' and its collaborators' products may not be available to physicians or patients from the government or insurance companies; and o Celera Diagnostics may be unable to obtain necessary intellectual property protection, or third parties may own proprietary rights that prevent Celera Diagnostics or its collaborators from commercializing their products. If Celera Diagnostics fails to satisfy regulatory requirements for any diagnostic product candidate, it may be unable to complete the development and commercialization of that product. Celera Diagnostics is currently developing its capability to move potential products through clinical testing, manufacturing, and the approval processes of the United States Food and Drug Administration and comparable agencies in other countries. In the United States, either Celera Diagnostics or its collaborators must show through pre- clinical studies and clinical trials that each of Celera Diagnostics' diagnostic product candidates is safe and effective for each indication before obtaining regulatory clearance from the United States Food and Drug Administration for the commercial sale of that product. Outside of the United States, the regulatory requirements vary from country to country. If Celera Diagnostics or its collaborator fails to adequately show the safety and effectiveness of a diagnostic product, regulatory clearance or approval could be delayed or denied. The results from pre-clinical studies may be different from the results that are obtained in large-scale clinical trials. Celera Diagnostics cannot be certain that it will show sufficient safety and effectiveness in its clinical trials to allow it to obtain the needed regulatory clearance or approval. The regulatory review and approval process can take many years and require substantial expense and may not be successful. A number of companies in the diagnostics industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier studies. Even if Celera Diagnostics obtains regulatory clearance or approval, it will be subject to certain risks and uncertainties relating to regulatory compliance, including: post-approval clinical studies and inability to meet the compliance requirements of the United States Food and Drug Administration's Good Manufacturing Practices (Quality System) regulations. In addition, the occurrence of manufacturing problems could cause subsequent suspension of product manufacture or withdrawal of approval, or could require reformulation of a diagnostic product, additional testing, or changes in labeling of the product. This could delay or prevent Celera Diagnostics from generating revenues from the sale of that diagnostic product. Celera Diagnostics' products may not be fully accepted by physicians and laboratories. Celera Diagnostics' growth and success will depend on market acceptance by physicians and laboratories of its products as clinically useful and cost-effective. Celera Diagnostics expects that most of its products will use genotyping and gene expression information to predict predisposition to diseases, disease progression or severity, or responsiveness to treatment. Market acceptance will depend on the widespread acceptance and use by doctors and clinicians of genetic testing for these purposes. The use of genotyping and gene expression information by doctors and clinicians for these purposes is relatively new. Celera Diagnostics cannot be certain that doctors and clinicians will want to use its products designed for these purposes. Even if genetic testing is accepted as a method to manage health care, Celera Diagnostics cannot be certain that its products will be accepted in the clinical diagnostic market. If genetic testing becomes widely accepted in the clinical diagnostic market, Celera Diagnostics cannot predict the extent to which doctors and clinicians may be willing to utilize Celera Diagnostics' products in providing patient care. Doctors and clinicians may prefer competing technologies and products that can be used for the same purposes as Celera Diagnostics' products. Ethical, legal and social issues related to the use of genetic information and genetic testing may cause less demand for Celera Diagnostics' products. Genetic testing has raised issues regarding confidentiality and the appropriate uses of the resulting information. For example, concerns have been expressed regarding the use of genetic test results by insurance carriers or employers to discriminate on the basis of this information, resulting in barriers to the acceptance of genetic tests by consumers. This could lead to governmental authorities calling for limits on or regulation of the use of genetic testing or prohibiting testing for genetic predisposition to certain diseases, APPLERA CORPORATION Annual Report 2002 41 APPLERA CORPORATION Management's Discussion and Analysis--continued particularly those that have no known cure. Any of these scenarios could reduce the potential markets for products of Celera Diagnostics. If insurance companies and other third-party payors do not reimburse doctors and patients for Celera Diagnostics' tests, its ability to sell its products to the clinical diagnostics market will be impaired. Sales of Celera Diagnostics' products will depend, in large part, on the availability of adequate reimbursement to users of those products from government insurance plans, including Medicare and Medicaid in the United States, managed care organizations, and private insurance plans. Physicians' recommendations to use diagnostic tests, as well as decisions by patients to pursue those tests, are likely to be influenced by the availability of reimbursement by insurance companies and other third party payors. Third-party payors are increasingly attempting to contain health care costs by limiting both the extent of coverage and the reimbursement rate for testing and treatment products and services. In particular, products and services that are determined to be investigational in nature or that are not considered "reasonably and necessary" for diagnosis or treatment may be denied reimbursement coverage. In addition, third-party payors are increasingly limiting reimbursement coverage for medical diagnostic products and, in many instances, are exerting pressure on medical suppliers to reduce their prices. Thus, third-party reimbursement may not be consistently available or financially adequate to cover the cost of Celera Diagnostics' products. This could limit the ability of Celera Diagnostics to sell its products, cause Celera Diagnostics to reduce the prices of its products, or otherwise adversely affect Celera Diagnostics' operating results. Because each third-party payor individually approves reimbursement, obtaining these approvals is a time-consuming and costly process that requires Celera Diagnostics to provide scientific and clinical support for the use of each of its products to each payor separately with no assurance that such approval will be obtained. This process can delay the broad market introduction of new products and could have a negative effect on Celera Diagnostics' revenues and operating results. If Celera Diagnostics fails to maintain its existing collaborative relationships and enter into new collaborative relationships, or if collaborators do not perform under collaboration agreements, development of its diagnostic products could be delayed. Celera Diagnostics' strategy for the discovery, development, clinical testing, manufacturing and commercialization of most of its diagnostic product candidates includes entering into collaborations with partners. Although Celera Diagnostics has expended, and continues to expend, time and money on internal research and development programs, it may be unsuccessful in creating diagnostic product candidates that would enable it to form additional collaborations. Celera Diagnostics has entered into a strategic alliance agreement with Abbott Laboratories for the joint discovery, development, manufacturing, and commercialization of nucleic acid-based diagnostic products. The Abbott Laboratories agreement may be terminated by the non-breaching party in the event of a material breach and, under certain circumstances, by either party in the event of a change in control of the other party. In addition, the amount and timing of resources to be devoted to research, development, eventual clinical trials and commercialization activities by Abbott are not within Celera Diagnostics' control. Future collaborations with other third parties are likely to be subject to similar terms and conditions. Celera Diagnostics cannot ensure that its collaborators will perform their obligations as expected. If any of Celera Diagnostics' collaborators terminate or elect to cancel their agreements or otherwise fail to conduct their collaborative activities in a timely manner, the development or commercialization of diagnostics products may be delayed or otherwise adversely affected. If in some cases Celera Diagnostics assumes responsibilities for continuing programs on its own after termination of a collaboration, Celera Diagnostics may be required to devote additional resources to product development and commercialization or Celera Diagnostics may need to cancel certain development programs. Celera Diagnostics does not have marketing capability in the clinical diagnostic market. Celera Diagnostics currently does not have a marketing organization. Accordingly, its ability to successfully sell its products will depend on its ability to either develop a marketing organization or work with Abbott Laboratories under their current agreement, or a combination of both. In jurisdictions where Celera Diagnostics uses third party distributors, its success will depend to a great extent on the efforts of the distributors. Celera Diagnostics has limited manufacturing capability and may encounter difficulties expanding Celera Diagnostics' operations. Celera Diagnostics has limited commercial manufacturing experience and capabilities. If product sales increase, Celera Diagnostics will have to increase the capacity of its manufacturing processes and facilities or rely on its collaborators, if any. Celera Diagnostics may encounter difficulties in scaling-up manufacturing processes and may be unsuccessful in overcoming such difficulties. In such circumstances, Celera Diagnostics' ability to meet product demand may be impaired or delayed. Celera Diagnostics' facilities are subject, on an ongoing basis, to the United States Food and Drug Administration's Good Manufacturing Practices (Quality System) regulations, international quality standards and 42 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued other regulatory requirements, including requirements for good manufacturing practices. Celera Diagnostics may encounter difficulties expanding Celera Diagnostics' manufacturing operations in accordance with these regulations and standards, which could result in a delay or termination of manufacturing or an inability to meet product demand. Celera Diagnostics is currently operating its manufacturing at an Applied Biosystems group facility, and intends to relocate these operations to a new facility currently under construction. Celera Diagnostics expects to operate its manufacturing out of a single facility for the foreseeable future, and it does not have alternative production plans in place or alternative facilities available should its existing manufacturing facility or its new manufacturing facility, after completion of and relocation to this facility, cease to function. Accordingly, Celera Diagnostics' business could be adversely affected by unexpected interruptions in manufacturing caused by events such as labor problems, equipment failures, or other factors, and the resulting inability to meet customer orders on a timely basis. Celera Diagnostics' research and product development depends on access to tissue samples and other biological materials. Celera Diagnostics needs access to human tissue samples from diseased and healthy individuals, other biological materials, and related clinical and other information, which may be in limited supply. Celera Diagnostics may not be able to obtain or maintain access to these materials and information on acceptable terms. In addition, government regulation in the United States and foreign countries could result in restricted access to, or use of, human tissue samples. If Celera Diagnostics loses access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on its use of the information generated from tissue samples, its business may be harmed. Single suppliers or a limited number of suppliers provide key components of Celera Diagnostics' products. If these suppliers fail to supply these components, Celera Diagnostics may be unable to satisfy product demand. Several key components of Celera Diagnostics' products come from, or are manufactured for Celera Diagnostics by, a single supplier or a limited number of suppliers. This applies in particular to components such as enzymes and fluorescent dyes. Celera Diagnostics acquires some of these and other key components on a purchase-order basis, meaning that the supplier is not required to supply Celera Diagnostics with specified quantities over longer periods of time or set-aside part of its inventory for Celera Diagnostics' forecasted requirements. Celera Diagnostics has not arranged for alternative supply sources for some of these components and it may be difficult to find alternative suppliers, especially to replace enzymes and fluorescent dyes. If Celera Diagnostics' product sales increase beyond the forecast levels, or if its suppliers are unable or unwilling to supply it on commercially acceptable terms, it may not have access to sufficient quantities of key components on a timely basis and may be unable to satisfy product demand. In addition, if any of the components of Celera Diagnostics' products are no longer available in the marketplace, it may be forced to further develop its products or technology to incorporate alternate components. The incorporation of new components into its products may require Celera Diagnostics to seek approvals from the FDA or foreign regulatory agencies prior to commercialization. Celera Diagnostics' competitive position depends on maintaining its intellectual property protection and obtaining licenses to intellectual property it may need from others. Celera Diagnostics' ability to compete and to achieve and maintain profitability depends on its ability to protect its proprietary discoveries or technology, in large part, through obtaining and enforcing patent rights, maintaining its trade secrets, and operating without infringing the intellectual property rights of others. Celera Diagnostics' ability to obtain patent protection for the inventions it makes is uncertain. The patentability of biotechnology inventions involves complex factual and legal questions. As a result, it is difficult to predict whether patents will issue or the breadth of claims that will be allowed in biotechnology and pharmaceutical patents. This may be particularly true with regard to the patenting of gene sequences, gene functions, and genetic variations. In this regard, the United States Patent and Trademark Office has adopted guidelines for use in the review of the utility of inventions, particularly biotechnology inventions. These guidelines increased the amount of evidence required to demonstrate utility in order to obtain a patent in the biotechnology field, making patent protection more difficult to obtain. Although others have been successful in obtaining patents to biotechnology inventions, since the adoption of these guidelines, these patents have been issued with increasingly less frequency. As a result, patents may not issue from patent applications that Celera Diagnostics may own or license if the applicant is unable to satisfy the new guidelines. In some instances, patent applications in the United States are maintained in secrecy until a patent issues. In most instances, the content of United States and international patent applications is made available to the public approximately 18 months after the application's filing date. As a result, Celera Diagnostics cannot be certain that others have not filed patent applications for inventions covered by Celera Diagnostics' patent applications or that Celera Diagnostics inventors were the first to make the invention. Accordingly, Celera Diagnostics' patent applications may be preempted or Celera Diagnostics may have to participate in interference proceedings before the United States Patent APPLERA CORPORATION Annual Report 2002 43 APPLERA CORPORATION Management's Discussion and Analysis--continued and Trademark Office. These proceedings determine the priority of invention and the right to a patent for the claimed invention in the United States. Furthermore, lawsuits may be necessary to enforce any patents issued to Celera Diagnostics or to determine the scope and validity of the patent rights of third parties. Lawsuits and interference proceedings, even if they are successful, are expensive to pursue, and Celera Diagnostics could use a substantial amount of its financial resources in either case. An adverse outcome could subject Celera Diagnostics to significant liabilities to third parties and require Celera Diagnostics to license disputed rights from third parties or to cease development or sales of a product. Celera Diagnostics also relies on trade secret protection for its confidential and proprietary information and procedures. Celera Diagnostics protects its trade secrets through recognized practices, including access control, confidentiality and nonuse agreements with employees, consultants, collaborators and customers, and other security measures. These confidentiality and nonuse agreements may be breached, however, and Celera Diagnostics may not have adequate remedies for a breach. In addition, Celera Diagnostics' trade secrets may otherwise become known or be independently developed by competitors. Accordingly, it is unclear whether Celera Diagnostics' trade secrets will provide adequate protection. Disputes may arise in the future with regard to the ownership of rights to any invention developed with collaborators. These and other possible disagreements with collaborators could lead to delays in the achievement of milestones or receipt of royalty payments or in research, development, and commercialization of Celera Diagnostics' products. In addition, these disputes could require or result in lawsuits or arbitration. Lawsuits and arbitration are time-consuming and expensive. Even if Celera Diagnostics wins, the cost of these proceedings could adversely affect its business, financial condition and operating results. Celera Diagnostics may infringe the intellectual property rights of third parties and may become involved in expensive intellectual property litigation. The intellectual property rights of biotechnology companies, including Celera Diagnostics, are generally uncertain and involve complex legal, scientific and factual questions. Celera Diagnostics' success in diagnostic discovery and development may depend, in part, on its ability to operate without infringing the intellectual property rights of others and to prevent others from infringing its intellectual property rights. There has been substantial litigation regarding patents and other intellectual property rights in the biotechnology and pharmaceutical industries. Celera Diagnostics may become a party to patent litigation or proceedings at the United States Patent and Trademark Office to determine its patent rights with respect to third parties. Interference proceedings may be necessary to establish which party was the first to make the invention sought to be patented. Celera Diagnostics may become involved in patent litigation against third parties to enforce its patent rights, to invalidate patents held by the third parties, or to defend against these claims. The cost to Celera Diagnostics of any patent litigation or similar proceeding could be substantial, and it may absorb significant management time. If infringement litigation against Celera Diagnostics is resolved unfavorably to Celera Diagnostics, Celera Diagnostics may be enjoined from manufacturing or selling its products or services without a license from a third party. Celera Diagnostics may not be able to obtain a license on commercially acceptable terms, or at all. Introduction of new products may expose Celera Diagnostics to product liability claims. New products developed by the Celera Diagnostics or its collaborators could expose Celera Diagnostics to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of human diagnostic products. In addition, clinicians, patients, third-party payors, and others may at times seek damages based on testing or analysis errors based on a technician's misreading of results, mishandling of the patient samples, or similar claims. Product liability claims or product recalls, regardless of the ultimate outcome, could require Celera Diagnostics to spend significant time and money in litigation and to pay significant damages. Although Celera Diagnostics expects to seek and maintain product liability insurance to cover claims relating to the testing and use of diagnostic products, there can be no assurance that such insurance will be available on commercially reasonable terms, if at all, or that the amount of coverage obtained will be adequate to cover losses from any particular claim. The diagnostics industry is intensely competitive and evolving. There is intense competition among health care, biotechnology, and diagnostic companies attempting to discover candidates for potential new diagnostic products. These companies may: o develop new diagnostic products in advance of Celera Diagnostics; o develop diagnostic products which are more effective or more cost- effective than those developed by Celera Diagnostics; o obtain regulatory approvals of their diagnostic products more rapidly than Celera Diagnostics; or o obtain patent protection or other intellectual property rights that would limit Celera Diagnostics' ability to develop and commercialize, or its customers' ability to use, Celera Diagnostics' diagnostic products. 44 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Management's Discussion and Analysis--continued Celera Diagnostics competes with entities in the United States and abroad that are engaged in the development and commercialization of products that provide genetic information. They include: o purveyors of genetic testing services, which are not subject to the same clinical validation requirements as Celera Diagnostics' products, and which do not require United States Food and Drug Administration or other regulatory approval, including Laboratory Corporation of America Holdings, Quest Diagnostics Inc., and Specialty Laboratories, Inc.; o manufacturers of analyte specific reagents and genotyping test kits; o purveyors of phenotyping assay services; and o manufacturers and distributors of DNA probe-based diagnostic systems. Electricity shortages and earthquakes could disrupt operations in California. The headquarters and principal operations of Celera Diagnostics are located in Alameda, California. In 2001, the State of California experienced a statewide electricity shortage due to a variety of factors. Although some of the factors causing this shortage have been eliminated or mitigated, there are ongoing concerns about the availability of electricity in California, particularly during peak usage periods. Blackouts in Alameda, even of modest duration, could impair or cause a temporary suspension of the Celera Diagnostics' operations, including the manufacturing and shipment of new products. Power disruptions of an extended duration or high frequency could have a material adverse effect on operating results. In addition, Alameda is located near major California earthquake faults. The ultimate impact of earthquakes on the Celera Diagnostics, its significant suppliers, and the general infrastructure is unknown, but operating results could be materially affected in the event of a major earthquake. APPLERA CORPORATION Annual Report 2002 45 APPLERA CORPORATION Consolidated Statements of Operations
(Dollar amounts in thousands except per share amounts) For the years ended June 30, 2000 2001 2002 =================================================================================================================================== Net Revenues $ 1,371,035 $ 1,644,126 $ 1,701,218 Cost of sales 624,099 780,712 798,987 - ----------------------------------------------------------------------------------------------------------------------------------- Gross Margin 746,936 863,414 902,231 - ----------------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative 436,911 440,059 438,369 Research, development and engineering 255,585 323,417 381,902 Amortization of goodwill and intangible assets 4,166 43,934 7,443 Other special charges 2,142 69,069 25,754 Acquired research and development 101,181 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Income (Loss) 48,132 (13,065) (52,418) Gain (loss) on investments, net 48,603 14,985 (14,496) Interest expense (3,501) (2,125) (1,461) Interest income 39,428 80,348 44,968 Other income (expense), net 3,446 (6,671) (5,143) - ----------------------------------------------------------------------------------------------------------------------------------- Income (Loss) Before Income Taxes 136,108 73,472 (28,550) Provision for income taxes 40,612 46,238 12,031 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 95,496 $ 27,234 $ (40,581) =================================================================================================================================== Applied Biosystems Group (see Note 1) Net Income $ 186,247 $ 212,391 $ 168,481 Basic per share $ 0.90 $ 1.01 $ 0.80 Diluted per share $ 0.86 $ 0.96 $ 0.78 =================================================================================================================================== Celera Genomics Group (see Note 1) Net Loss $ (92,737) $ (186,229) $ (211,772) Basic and diluted per share $ (1.73) $ (3.07) $ (3.21) ===================================================================================================================================
See accompanying notes to Applera Corporation's consolidated financial statements. 46 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Consolidated Statements of Financial Position
(Dollar amounts in thousands except share data) At June 30, 2001 2002 ================================================================================ Assets Current assets Cash and cash equivalents $ 608,535 $ 470,218 Short-term investments 779,482 889,685 Accounts receivable (net of allowances for doubtful accounts of $5,070 and $10,950, respectively) 400,803 406,244 Inventories, net 149,658 146,804 Prepaid expenses and other current assets 103,006 99,547 - -------------------------------------------------------------------------------- Total current assets 2,041,484 2,012,498 Property, plant and equipment, net 435,560 488,744 Other long-term assets 410,814 574,157 - -------------------------------------------------------------------------------- Total Assets $ 2,887,858 $ 3,075,399 ================================================================================ Liabilities And Stockholders' Equity Current liabilities Loans payable $ 14,678 $ 299 Current portion of long-term debt 30,480 Accounts payable 178,264 168,218 Accrued salaries and wages 64,854 82,165 Accrued taxes on income 83,016 101,209 Other accrued expenses 215,823 275,348 - -------------------------------------------------------------------------------- Total current liabilities 587,115 627,239 Long-term debt 17,983 Other long-term liabilities 152,432 205,234 - -------------------------------------------------------------------------------- Total Liabilities 739,547 850,456 - -------------------------------------------------------------------------------- Commitments and contingencies (see Note 9) Stockholders' Equity Capital stock Preferred stock Applera Corporation: $.01 par value; 10,000,000 shares authorized at June 30, 2001 and 2002; no shares issued and outstanding at June 30, 2001 and 2002 Common stock Applera Corporation - Applied Biosystems stock: $.01 par value; 211,473,057 shares and 212,829,871 shares issued at June 30, 2001 and 2002, respectively 2,115 2,128 Applera Corporation - Celera Genomics stock: $.01 par value; 61,693,504 shares and 70,963,471 shares issued at June 30, 2001 and 2002, respectively 617 710 Capital in excess of par value 1,832,000 2,086,929 Retained earnings 369,444 292,690 Accumulated other comprehensive loss (55,865) (91,574) Treasury stock, at cost (65,940) - -------------------------------------------------------------------------------- Total Stockholders' Equity 2,148,311 2,224,943 - -------------------------------------------------------------------------------- Total Liabilities And Stockholders' Equity $ 2,887,858 $ 3,075,399 ================================================================================
See accompanying notes to Applera Corporation's consolidated financial statements. APPLERA CORPORATION Annual Report 2002 47 APPLERA CORPORATION Consolidated Statements of Cash Flows
(Dollar amounts in thousands) For the years ended June 30, 2000 2001 2002 =================================================================================================================================== Operating Activities From Continuing Operations Net income (loss) $ 95,496 $ 27,234 $ (40,581) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 80,699 129,151 116,794 Asset impairments 69,069 15,563 Provisions for excess lease space and severance costs 13,106 Long-term compensation programs 10,535 6,082 5,240 Deferred income taxes (26,399) 15,981 (47,535) (Gains) losses from investments and sales of assets (56,801) (14,985) 14,095 Loss from equity method investees 4,789 Acquired research and development 101,181 Changes in operating assets and liabilities: Accounts receivable (72,538) (49,299) 15,824 Inventories (2,180) 997 1,257 Prepaid expenses and other assets (22,842) (34,446) (28,719) Accounts payable and other liabilities 102,234 (63,380) 41,843 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided By Operating Activities 108,204 86,404 212,857 - ----------------------------------------------------------------------------------------------------------------------------------- Investing Activities From Continuing Operations Additions to property, plant and equipment (net of disposals of $2,201, $8,526, and $1,629 respectively) (123,614) (177,336) (114,107) Purchases of short-term investments, net (541,127) (238,115) (108,628) Acquisitions and investments, net (23,023) (8,912) (41,901) Proceeds from the sale of assets, net 82,763 15,498 5,228 Proceeds from the collection of notes receivable 150,000 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Used By Investing Activities (455,001) (408,865) (259,408) - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Used By Operating Activities From Discontinued Operations (15,081) (2,860) (2,843) - ----------------------------------------------------------------------------------------------------------------------------------- Financing Activities Net change in loans payable 52,701 1,553 (23,721) Principal payments on long-term debt (46,000) (38,973) Dividends (26,358) (35,669) (36,020) Purchases of common stock for treasury (69,891) Net proceeds from follow-on stock offering 943,303 Proceeds from stock issued for stock plans 61,047 60,074 48,215 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) By Financing Activities 1,030,693 (20,042) (120,390) - ----------------------------------------------------------------------------------------------------------------------------------- Effect Of Exchange Rate Changes On Cash (12,334) (10,604) 31,467 - ----------------------------------------------------------------------------------------------------------------------------------- Net Change In Cash And Cash Equivalents 656,481 (355,967) (138,317) Cash And Cash Equivalents Beginning Of Year 308,021 964,502 608,535 - ----------------------------------------------------------------------------------------------------------------------------------- Cash And Cash Equivalents End Of Year $ 964,502 $ 608,535 $ 470,218 ===================================================================================================================================
See accompanying notes to Applera Corporation's consolidated financial statements. 48 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Consolidated Statements of Stockholders' Equity
Applera - Applera - Accumulated Applied Applied Applera - Capital in Other Biosystems Biosystems Celera Excess of Retained Comprehensive Treasury (Dollar amounts and shares in thousands) Stock Stock Par Value Earnings Income (Loss) Stock ============================================================================================================================ Balance At June 30, 1999 $ 1,027 $ 257 $ 507,341 $ 317,720 $ (4,820) $ - Comprehensive income Net income 95,496 Other comprehensive income: Foreign currency translation adjustments (25,196) Minimum pension liability adjustment (60) Unrealized gain on investments, net of reclassification adjustments 155,530 ------------- Other comprehensive income 130,274 Comprehensive income Cash dividends declared on Applera - Applied Biosystems stock (35,220) Issuances under stock plans 23 15 61,009 Issuances under Applera - Celera stock follow-on stock offering 44 943,259 Tax benefit related to employee stock options 65,708 Stock compensation 13,266 Celera Genomics group purchase business combination 16 125,077 Two-for-one stock split 1,037 261 (1,298) - ---------------------------------------------------------------------------------------------------------------------------- Balance At June 30, 2000 2,087 593 1,714,362 377,996 125,454 Comprehensive loss Net income 27,234 Other comprehensive loss: Foreign currency translation adjustments (34,203) Unrealized gain on hedge contracts, net of reclassification adjustments 11,158 Minimum pension liability adjustment (35,151) Unrealized loss on investments, net of reclassification adjustments (123,123) ------------- Other comprehensive loss (181,319) Comprehensive loss Cash dividends declared on Applera - Applied Biosystems stock (35,786) Issuances under stock plans 28 24 60,021 Tax benefit related to employee stock options 51,535 Stock compensation 6,082 - ---------------------------------------------------------------------------------------------------------------------------- Balance At June 30, 2001 2,115 617 1,832,000 369,444 (55,865) Comprehensive loss Net loss (40,581) Other comprehensive loss: Foreign currency translation adjustments 48,425 Unrealized loss on hedge contracts, net of reclassification adjustments (35,661) Minimum pension liability adjustment (17,005) Unrealized loss on investments, net of reclassification adjustments (31,468) ------------- Other comprehensive loss (35,709) Comprehensive loss Cash dividends declared on Applera - Applied Biosystems stock (35,972) Purchase of shares for treasury stock (68,950) Issuances under stock plans 13 38 52,684 (201) 2,987 Tax benefit related to employee stock options 15,172 Celera Genomics group purchase business combination 55 181,856 Stock compensation 5,217 23 - ---------------------------------------------------------------------------------------------------------------------------- Balance At June 30, 2002 $ 2,128 $ 710 $ 2,086,929 $ 292,690 $ (91,574) $(65,940) ============================================================================================================================ Applera - Celera Total Treasury Stockholders' (Dollar amounts and shares in thousands) Stock Equity ======================================================================= Balance At June 30, 1999 $ - $ 821,525 Comprehensive income Net income 95,496 Other comprehensive income: Foreign currency translation adjustments Minimum pension liability adjustment Unrealized gain on investments, net of reclassification adjustments Other comprehensive income 130,274 ------------- Comprehensive income 225,770 ------------- Cash dividends declared on Applera - Applied Biosystems stock (35,220) Issuances under stock plans 61,047 Issuances under Applera - Celera stock follow-on stock offering 943,303 Tax benefit related to employee stock options 65,708 Stock compensation 13,266 Celera Genomics group purchase business combination 125,093 Two-for-one stock split - ----------------------------------------------------------------------- Balance At June 30, 2000 2,220,492 Comprehensive loss Net income 27,234 Other comprehensive loss: Foreign currency translation adjustments Unrealized gain on hedge contracts, net of reclassification adjustments Minimum pension liability adjustment Unrealized loss on investments, net of reclassification adjustments Other comprehensive loss (181,319) ------------- Comprehensive loss (154,085) ------------- Cash dividends declared on Applera - Applied Biosystems stock (35,786) Issuances under stock plans 60,073 Tax benefit related to employee stock options 51,535 Stock compensation 6,082 - ----------------------------------------------------------------------- Balance At June 30, 2001 2,148,311 Comprehensive loss Net loss (40,581) Other comprehensive loss: Foreign currency translation adjustments Unrealized loss on hedge contracts, net of reclassification adjustments Minimum pension liability adjustment Unrealized loss on investments, net of reclassification adjustments Other comprehensive loss (35,709) ------------- Comprehensive loss (76,290) ------------- Cash dividends declared on Applera - Applied Biosystems stock (35,972) Purchase of shares for treasury stock (941) (69,891) Issuances under stock plans 941 56,462 Tax benefit related to employee stock options 15,172 Celera Genomics group purchase business combination 181,911 Stock compensation 5,240 - ----------------------------------------------------------------------- Balance At June 30, 2002 $ - $ 2,224,943 =======================================================================
See accompanying notes to Applera Corporation's consolidated financial statements. APPLERA CORPORATION Annual Report 2002 49 APPLERA CORPORATION Notes to Consolidated Financial Statements Note 1--Accounting Policies And Practices Principles of Consolidation The consolidated financial statements include the accounts of all majority- owned subsidiaries of Applera Corporation ("Applera" or "the Company"). All significant intracompany transactions and balances have been eliminated in consolidation. Certain prior year amounts in the consolidated financial statements and notes have been reclassified to conform to the current year presentation. Use of Estimates The preparation of the consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Recapitalization The recapitalization of the Company on May 6, 1999 resulted in the issuance of two new classes of common stock called Applera Corporation - Applied Biosystems Group Common Stock ("Applera - Applied Biosystems stock") and Applera Corporation - Celera Genomics Group Common Stock ("Applera - Celera stock"). Applera - Applied Biosystems stock is intended to reflect the relative performance of the Applied Biosystems business ("Applied Biosystems group"), and Applera - Celera stock is intended to reflect the relative performance of the Celera Genomics business ("Celera Genomics group"). Holders of Applera - Applied Biosystems stock and Applera - Celera stock are stockholders of the Company. The Applied Biosystems group and the Celera Genomics group (individually referred to as a "group") are not separate legal entities and holders of these stocks are stockholders of a single company, Applera. As a result, holders of these stocks are subject to all of the risks associated with an investment in the Company and all of its businesses, assets, and liabilities. Financial effects arising from one group that affect the Company's consolidated results of operations or consolidated financial condition could, if significant, affect the results of operations or financial condition of the other group and the per share market price of the class of common stock relating to the other group. Any net losses of the Applied Biosystems group or the Celera Genomics group and dividends or distributions on, or repurchases of, Applera - Applied Biosystems stock or Applera - Celera stock or repurchases of preferred stock of the Company will reduce the assets of the Company legally available for payment of dividends. Recently Issued Accounting Standards In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 sets forth various modifications to existing accounting guidance which prescribes the conditions which must be met in order for costs associated with contract terminations, facility consolidations, employee relocations and terminations, including those associated with restructuring activities, to be accrued and recorded as liabilities in financial statements. SFAS No. 146 will be required for exit or disposal activities initiated after December 31, 2002. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets, excluding goodwill, to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 also requires long- lived assets to be abandoned to be treated as held for use and depreciated over their remaining expected lives and broadens the presentation of discontinued operations in the income statement to a component of an entity rather than a segment of a business. SFAS No. 144 is effective for the Company's fiscal 2003 and will not materially change the methods used by the Company to measure impairment losses on long-lived assets, but may result in more dispositions being reported as discontinued operations than is permitted under current accounting principles. Earnings per Share Basic earnings per share for each class of common stock is computed by dividing the earnings allocated to each class of common stock by the weighted average number of outstanding shares of that class of common stock. Diluted earnings per share is computed by dividing the earnings allocated to each class of common stock by the weighted average number of outstanding shares of that class of common stock including the dilutive effect of common stock equivalents. Dilutive common stock equivalents primarily consist of employee stock options. The earnings allocated to each class of common stock are determined by the Company's Board of Directors. This determination is generally based on the net income or loss amounts of the corresponding group determined in accordance with accounting principles generally accepted in the United States of America, consistently applied. The Company believes this method of allocation is systematic and reasonable. The Board of Directors can, at its discretion, change the method of allocating earnings to each class of common stock at any time. 50 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued The following table presents a reconciliation of basic and diluted earnings (loss) per share:
Applied Biosystems Group Celera Genomics Group ---------------------------------- ------------------------------------ (Amounts in thousands except per share amounts) For the years ended June 30, 2000 2001 2002 2000 2001 2002 =================================================================================================================================== Weighted average number of common shares used in the calculation of basic earnings (loss) per share 207,010 210,188 211,626 53,725 60,718 66,047 Common stock equivalents 10,006 10,288 3,816 - ----------------------------------------------------------------------------------------------------------------------------------- Shares used in the calculation of diluted earnings (loss) per share 217,016 220,476 215,442 53,725 60,718 66,047 =================================================================================================================================== Net income (loss) used in the calculation of basic and diluted earnings (loss) per share $ 186,247 $ 212,391 $ 168,481 $ (92,737) $ (186,229) $ (211,772) Net income (loss) per share Basic $ 0.90 $ 1.01 $ 0.80 $ (1.73) $ (3.07) $ (3.21) Diluted $ 0.86 $ 0.96 $ 0.78 $ (1.73) $ (3.07) $ (3.21) ===================================================================================================================================
Options to purchase 5.9 million, 9.1 million, and 27.8 million shares of Applera - Applied Biosystems stock were outstanding at June 30, 2000, 2001, and 2002, respectively, but were not included in the computation of diluted earnings per share because the effect was antidilutive. Options and warrants to purchase 12.3 million, 14.7 million, and 13.1 million shares of Applera - Celera stock were outstanding at June 30, 2000, 2001, and 2002, respectively, but were not included in the computation of diluted earnings per share because the effect was antidilutive. All Applera - Applied Biosystems stock and Applera - Celera stock share and per share data reflects all stock splits. Foreign Currency Assets and liabilities of foreign operations, where the functional currency is the local currency, are translated into U.S. dollars at the fiscal year-end exchange rates. The related translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in the consolidated statements of financial position. Foreign currency revenues and expenses are translated using exchange rates prevailing during the fiscal year. Foreign currency transaction gains and losses are included in net income. Transaction gains and losses occur from fluctuations in exchange rates when assets and liabilities are denominated in currencies other than the functional currency of an entity. Net transaction gains (losses) for the fiscal years ended June 30, 2000, 2001, and 2002 were $(0.1) million, $(1.3) million, and $0.7 million, respectively. The net transaction gains and losses for fiscal 2001 and 2002 included the gains and losses on the revaluation of non- functional currency-denominated net assets offset by the losses and gains, respectively, on non-qualified hedges on these positions. See Note 10 for further information on the Company's hedging program. Derivative Financial Instruments The Company uses derivative financial instruments to offset exposure to market risks arising from changes in foreign currency exchange rates. Derivative financial instruments currently utilized by the Company include foreign exchange forward, option and range forward contracts (see Note 10). Cash and Cash Equivalents and Short-Term Investments Cash equivalents consist of highly liquid debt instruments, time deposits, and certificates of deposit with original maturities of three months or less at the date of purchase. Short-term investments, that are classified as available-for-sale, have maturities of less than one year and are carried at fair value with unrealized gains and losses included as a separate component of stockholders' equity, net of any related tax effect. The specific identification method is used to determine the cost of securities disposed of, with realized gains and losses recorded to other income, net. The fair value of short-term investments at June 30, 2001 and 2002 was as follows:
(Dollar amounts in millions) 2001 2002 ================================================================================ Certificates of deposit and time deposits $ 151.5 $ 107.8 Commercial paper 141.4 66.2 U.S. government and agency obligations 194.8 582.1 Corporate bonds 109.2 79.0 Asset backed securities 113.0 44.0 Foreign debt 69.6 10.6 - -------------------------------------------------------------------------------- Total short-term investments $ 779.5 $ 889.7 ================================================================================
At June 30, 2001, gross unrealized gains on short-term investments were $2.1 million and gross unrealized losses were $1.9 million. At June 30, 2002, gross unrealized gains on short-term investments were $1.9 million and gross unrealized losses were APPLERA CORPORATION Annual Report 2002 51 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued $0.1 million. Gross realized gains and losses were less than $1 million for the fiscal years ended June 30, 2001 and 2002. The Company also held trading securities at June 30, 2001 and 2002, which were recorded at fair value with realized and unrealized gains and losses included in income. During fiscal 2001 and 2002, $1.4 million and $1.3 million, respectively, of unrealized net losses were included in income. Investments Investments in business entities in which the Company has the ability to exercise significant influence over operating and financial policies (generally 20% to 50% ownership) are accounted for using the equity method of accounting. Under the equity method of accounting, investments are recorded at cost and adjusted for dividends and undistributed earnings and losses. Non-marketable equity instruments for which the Company does not have the ability to exercise significant influence ("minority equity investments") are accounted for using the cost method of accounting. Minority equity investments in public companies are generally classified as available-for-sale and carried at market value in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The specific identification method is used to determine the cost of securities disposed of. Under the cost method of accounting, investments in equity securities are carried at cost and are adjusted only for other-than-temporary declines in fair value, distributions of earnings and additional investments. In the fourth quarter of fiscal 2002, the Company recorded a $14.2 million pretax charge for an other-than-temporary impairment of minority equity investments. Inventories Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Inventories at June 30, 2001 and 2002 included the following components:
(Dollar amounts in millions) 2001 2002 ================================================================================ Raw materials and supplies $ 58.8 $ 71.3 Work-in-process 12.9 11.1 Finished products 78.0 64.4 - -------------------------------------------------------------------------------- Total inventories, net $ 149.7 $ 146.8 ================================================================================
During fiscal 2002, the Company recorded a charge of $2.9 million to cost of sales for the impairment of inventory related to the Celera Genomics group's Paracel business. Property, Plant and Equipment, and Depreciation Property, plant and equipment are recorded at cost and consisted of the following at June 30, 2001 and 2002:
(Dollar amounts in millions) 2001 2002 ================================================================================ Land $ 77.1 $ 77.4 Buildings and leasehold improvements 220.5 285.2 Machinery and equipment 279.8 329.7 Computer software and related licenses 95.2 103.9 - -------------------------------------------------------------------------------- Property, plant and equipment, at cost 672.6 796.2 Accumulated depreciation and amortization 237.0 307.5 - -------------------------------------------------------------------------------- Property, plant and equipment, net $435.6 $488.7 ================================================================================
Major renewals and improvements that significantly add to productive capacity or extend the life of an asset are capitalized. Repairs, maintenance, and minor renewals and improvements are expensed as incurred. The cost of assets and related depreciation is removed from the related accounts on the balance sheet when such assets are disposed of, and any related gains or losses are reflected in current earnings. Provisions for depreciation of owned property, plant and equipment are based upon the expected useful lives of the assets and computed primarily using the straight-line method. Leasehold improvements are amortized over their estimated useful lives or the term of the applicable lease, whichever is less, using the straight-line method. Useful lives are generally 30 to 40 years for buildings and three to seven years for machinery and equipment. Capitalized internal-use software costs are amortized primarily over the expected useful lives, not to exceed seven years. Depreciation expense for property, plant and equipment was $61.4 million, $72.2 million, and $88.7 million for the fiscal years ended June 30, 2000, 2001, and 2002, respectively. Capitalized Software Software development costs, for software used in the Company's products, which are incurred from the time technological feasibility of the software is established until the software is ready for its intended use, are capitalized and included in other long-term assets. These costs are amortized using the straight-line method over a maximum of three years or the expected life of the product, whichever is less. At June 30, 2001 and 2002, capitalized software costs, net of accumulated amortization, were $27.9 million and $28.7 million, respectively. Research and development costs and other computer software maintenance costs related to software development are expensed as incurred. 52 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Intangible Assets Intangible assets are amortized using the straight-line method over their expected useful lives. Intangible assets subject to amortization at June 30, 2002 included the following:
Gross Carrying Accumulated (Dollar amounts in millions) Amount Amortization Net ================================================================================== Patents $ 33.1 $ 8.6 $ 24.5 Acquired technology 66.2 28.1 38.1 Favorable operating leases 11.6 1.8 9.8 - ---------------------------------------------------------------------------------- Total $ 110.9 $ 38.5 $ 72.4 ==================================================================================
Aggregate amortization expense for the fiscal year ended June 30, 2002 was $17.0 million. Estimated aggregate amortization expense for each of the next five fiscal years ending June 30 for intangible assets recorded in the Statement of Financial Position as of June 30, 2002 is as follows:
Applied Celera (Dollar amounts Biosystems Genomics Celera Consol- in millions) Group Group Diagnostics idated ================================================================================== 2003 $ 9.5 $ 5.9 $ 1.9 $ 17.3 2004 9.1 2.9 1.9 13.9 2005 8.8 2.9 1.9 13.6 2006 8.5 1.1 1.9 11.5 2007 7.6 1.8 9.4 ==================================================================================
Goodwill Goodwill, representing the excess purchase price over the net asset value of companies acquired, was amortized using the straight-line method over periods not exceeding 20 years. Effective July 1, 2001, the Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." As a result, the Company has reclassified certain other intangible assets associated with its workforce to goodwill and no longer amortizes goodwill. Instead, goodwill is tested for impairment at the reporting unit level, at least annually, by determining the fair value of the reporting unit and comparing it with its book value. A reporting unit is the lowest level of an entity that is a business and can be distinguished from other activities, operations, and assets of the entity. If, during the annual impairment review, the book value of the reporting unit exceeds the fair value, the implied fair value of the reporting unit's goodwill is compared with the carrying amount of the unit's goodwill. If the carrying amount exceeds the implied fair value, goodwill is written down to its implied fair value. SFAS No. 142 requires management to estimate the fair value of each reporting unit, as well as the fair value of the assets and liabilities of each reporting unit, other than goodwill. The implied fair value of goodwill is determined as the difference between the fair value of a reporting unit, taken as a whole, and the fair value of the assets and liabilities of such reporting unit. The changes in the carrying amount of goodwill for the fiscal year ended June 30, 2002 were as follows:
Applied Celera Biosystems Genomics Consol- (Dollar amounts in millions) Group Group idated ========================================================================================== Balance as of June 30, 2001 $14.0 $ 10.4 $ 24.4 Goodwill acquired 22.7 2.2 24.9 Impairment losses (12.1) (12.1) Adjustment due to reclass of workforce to goodwill 2.2 2.2 - ------------------------------------------------------------------------------------------ Balance as of June 30, 2002 $36.7 $ 2.7 $ 39.4 ==========================================================================================
The following selected pro forma information for fiscal 2000 and 2001 assumes the provisions of SFAS No. 142 had been applied at the beginning of each of these fiscal years:
(Dollar amounts in millions except per share amounts) 2000 2001 ================================================================================ Applera net income $ 100.8 $ 69.2 - -------------------------------------------------------------------------------- Applied Biosystems Group Net income $ 188.1 $ 214.2 Basic per share $ 0.91 $ 1.02 Diluted per share $ 0.87 $ 0.97 - -------------------------------------------------------------------------------- Celera Genomics Group Net loss $ (89.2) $ (146.1) Basic and diluted per share $ (1.66) $ (2.41) ================================================================================
Impairment of Long-Lived Assets Other long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Events which could trigger an impairment review include, among others, a decrease in the market value of an asset, the asset's inability to generate income from operations and positive cash flow in future periods, a decision to change the manner in which an asset is used, a physical change to the asset or a change in business climate. The Company calculates estimated future undiscounted cash flows, before interest and taxes, of the related operation and compares it to the carrying value of the asset in determining whether impairment potentially exists. If a potential impairment exists, a calculation is performed to determine the fair value of the long-lived asset. This calculation is based upon a valuation model and discount rate commensurate with the risks involved. Third party appraised values may also be used in determining whether impairment potentially exists. During fiscal 2001 and 2002, the Company recorded charges of $69.1 million and $12.7 million, respectively, to other special charges for the impairment of long-lived assets associated with the Celera Genomics group's Paracel business (see Note 13). Revenues Revenues are generally recorded at the time of shipment of products or performance of services. Revenue is not APPLERA CORPORATION Annual Report 2002 53 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued recognized at the time of shipment of products in situations where risks and rewards of ownership are transferred to the customer at a point other than shipment due to either the shipping terms or the existence of an acceptance clause. Subscription fees for access to the Company's on-line information databases are recognized ratably over the contracted period. Revenue and profit on long-term contracts is recognized in accordance with the percentage-of-completion method. Under this method, revenue is recognized based on either the costs incurred compared to total costs expected to be incurred as work is performed or on the relative costs for a completed phase compared to the estimate of total expected contract costs when delivery and/or acceptance provisions are present. Revenue on short-term contracts is recognized upon completion. The percentage-of-completion method relies on estimates of total expected contract revenues and costs. Material changes in estimated costs to complete could have a material impact on the profitability of such long-term contracts in future periods. Research, Development and Engineering Research, development and engineering costs are expensed as incurred. Supplemental Cash Flow Information Cash paid for interest and income taxes and significant non-cash investing and financing activities for the following fiscal years were as follows:
(Dollar amounts in millions) 2000 2001 2002 ============================================================================== Interest $ 3.0 $ 1.8 $ 2.1 Income taxes $ 49.3 $95.2 $ 33.2 Significant non-cash investing and financing activities: Tax benefit related to employee stock options $ 65.7 $51.5 $ 15.2 Dividends declared not paid $ 8.9 $ 9.0 $ 8.9 Equity instruments issued in business combinations $125.1 $181.9 Debt and capital lease obligation assumed in the Axys acquisition $ 39.1 Stock issued for which proceeds were in-transit $ 8.2 ==============================================================================
Note 2--Acquisitions, Investments, and Dispositions Paracel, Inc. During the fourth quarter of fiscal 2000, the Company acquired Paracel, Inc. in a stock-for-stock transaction. Paracel produces advanced genomic and text analysis technologies. The net assets and results of operations of Paracel were included in the Company's consolidated financial statements from the date of acquisition, and were allocated to the Celera Genomics group. See Note 13 for a discussion of impairment and other special charges related to Paracel recorded by the Company. Axys Pharmaceuticals, Inc. During the second quarter of fiscal 2002, the Company acquired Axys Pharmaceuticals, Inc. in a stock-for-stock transaction. Axys is an integrated small molecule drug discovery and development company that was developing products for chronic therapeutic application through collaborations with pharmaceutical companies and had a proprietary product portfolio in oncology. The Company believes that the acquisition will accelerate the Celera Genomics group's evolution as a drug discovery and development business. The Company issued 5.5 million shares of Applera - Celera stock in exchange for all of the outstanding shares of Axys common stock. The acquisition was accounted for under the purchase method of accounting. The total purchase price for the acquisition was $188.4 million, which consisted of Applera - Celera stock valued at $170.3 million, stock options valued at $8.8 million, warrants valued at $2.8 million and transaction costs of $6.5 million. The purchase price was calculated using a $31.04 price per share of Applera - Celera stock, based upon a measurement date of July 17, 2001. This date, determined in accordance with Emerging Issues Task Force Abstracts Issue 99- 12, "Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination," represented the first date on which the exchange ratio was fixed under the merger agreement. The fair value of the options and warrants was calculated using the Black-Scholes pricing model. The purchase price of $188.4 million was allocated to tangible net assets and intangible assets as follows:
(Dollar amounts in millions) ================================================================================ Current assets $ 6.8 Long-term assets 118.7 Current liabilities (34.9) Long-term liabilities (20.7) - -------------------------------------------------------------------------------- Tangible net assets acquired, at approximate fair value 69.9 Acquired in-process research and development 99.0 Existing technology 7.9 Favorable operating leases 11.6 - -------------------------------------------------------------------------------- Total intangible assets 118.5 - -------------------------------------------------------------------------------- Total purchase price $ 188.4 ================================================================================
54 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued The recorded values of the intangible assets, other than the acquired in- process research and development ("IPR&D"), are being amortized over their expected period of benefit, which on a weighted average basis is 2.8 years. Included in long-term assets is a $61.3 million deferred tax asset, recorded in purchase accounting, for net operating loss carryforwards and other temporary differences of Axys expected to be utilized by the Company. Current liabilities included $4.2 million of contractual severance and involuntary termination costs, all of which has been paid prior to June 30, 2002. In connection with the acquisition, the Company assumed $26.0 million of 8% senior secured convertible notes (see Note 8). These notes are secured by approximately 6.7 million shares, or approximately 90%, of the Company's holding of Discovery Partners International, Inc. ("DPI") common stock. The Company received an approximate 30% interest in DPI, as of the acquisition date. This investment is accounted for under the equity method of accounting. Additionally, the Company assumed an existing Axys construction loan of $8.4 million related to its medicinal chemistry building located in South San Francisco, California (see Note 8). Subsequent to the acquisition, the Company repaid the construction loan and $10 million of the convertible notes. In connection with the acquisition of Axys, the Company allocated approximately $99.0 million of the purchase price to IPR&D. As of the acquisition date, the technological feasibility of the related projects had not been established, and it was determined that the acquired projects had no future alternative uses. The amounts attributed to acquired IPR&D were based on an independent appraisal and were developed using an income approach. The in-process technologies were valued using a discounted cash flow model on a project-by-project basis. This valuation incorporated a percentage of completion analysis using revenues allocated to in-process technologies. The risk-adjusted discount rate used to value the projects at acquisition ranged from 38% to 43%. The discount rates applied in the discounted cash flow model were risk adjusted, since the assumed periods of milestone receipts and assumed timing of product launch may vary significantly from the assumptions. The valuation assumptions were made solely for the purpose of calculating projected cash flows and valuing the intangible assets acquired at the date of acquisition. APPLERA CORPORATION Annual Report 2002 55 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued The following table briefly describes the IPR&D projects.
Valuation Assumptions at Acquisition Date ------------------------------------------ Development Status at Project's Stage of Value at Acquisition Completion at Assumed Period Acquisition Project Date Acquisition Date of Milestone Receipts Date ================================================================================================================================== (Dollar amounts in millions) Cathepsin S: Collaboration with Aventis Pre-clinical studies 90% Years 1 - 7 from $ 37.7 Pharmaceuticals Products, Inc. with the date of acquisition objective of discovery and development of small molecule drugs that inhibit Cathepsin S, a human cysteine protease associated with certain inflammatory and autoimmune diseases, such as asthma and atherosclerosis Cathepsin K: Collaboration with Merck & Co., Inc. to Pre-clinical studies 91% Years 2 - 6 from 26.6 develop small molecule inhibitors of date of acquisition Cathepsin K for the treatment of osteoporosis Tryptase: Collaboration with Bayer AG to identify Pre-clinical studies 89% Years 3 - 8 from 14.9 oral tryptase inhibitors for the date of acquisition treatment of asthma Cathepsin F: Development of compounds for inflammatory Pre-clinical studies 28% Years 2 - 8 from 8.9 diseases such as asthma and rheumatoid date of acquisition arthritis Urokinase: Oncology program focused on development Pre-clinical studies 50% Years 2 - 8 from 4.7 of inhibitors of the protease urokinase date of acquisition to interfere with angiogenesis and metastasis processes Serm-beta: Oncology program utilizing licenses Pre-clinical studies 71% Years 3 - 7 from 4.3 granted by Celgene Corp. for exclusive date of acquisition rights to selective estrogen receptor- beta modulators Factors VIIa & Xa: Development of oral and parenteral Pre-clinical studies 54% Years 2 - 10 from 1.9 therapeutics for blood clotting date of acquisition disorders, such as deep vein thrombosis, stroke, and myocardial infarction or heart attack - ---------------------------------------------------------------------------------------------------------------------------------- $ 99.0 ==================================================================================================================================
56 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued For valuation purposes, the Company assumed that all projects would be partnered and the initial material net cash inflows would result from milestone payments. The Company also assumed there would be cash inflows resulting from royalties after product launch. Product launches were assumed to occur in five to nine years after the date of acquisition. The Celera Genomics group has initiated a review of the unpartnered pre- clinical programs that may lead to revised prioritization, resourcing and strategy to move toward clinical trials and commercialization. As a result, actual results may vary from the valuation assumptions outlined above. The net assets and results of operations of Axys have been included in the Company's consolidated financial statements since the date of the acquisition, and have been allocated to the Celera Genomics group. The following selected unaudited pro forma information for the Company has been prepared assuming the acquisition had occurred at the beginning of fiscal 2001 and gives effect to purchase accounting adjustments:
(Dollar amounts in millions except per share amounts) 2001 2002 ================================================================================ Net revenues $ 1,652.1 $ 1,703.8 Net loss $ (18.5) $ (63.4) ================================================================================ Applied Biosystems Group Net revenues $ 1,619.5 $ 1,604.0 Net income $ 212.4 $ 168.5 Basic per share $ 1.01 $ 0.80 Diluted per share $ 0.96 $ 0.78 ================================================================================ Celera Genomics Group Net revenues $ 97.3 $ 123.4 Net loss $ (232.0) $ (234.6) Basic and diluted per share $ (3.50) $ (3.44) ================================================================================
Upon consummation of the acquisition, the Celera Genomics group recorded a $99.0 million non-cash charge to write-off the value of acquired IPR&D, which has been excluded from the pro forma results above. Had the acquired IPR&D charge been excluded from the reported amounts for fiscal 2002, the Company would have reported net income of $58.4 million, the Celera Genomics group would have reported a net loss of $(112.8) million and a net loss per share of Applera - Celera stock of $(1.71). Included in the unaudited pro forma results for fiscal 2002 is a non-cash pretax charge of $10.8 million recorded by Axys, prior to the acquisition date, for the impairment of an investment accounted for under the cost method of accounting. This unaudited pro forma data is for informational purposes only and may not be indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of fiscal 2001 and fiscal 2002 or of the future operations of the combined companies. Boston Probes, Inc. During the second quarter of fiscal 2002, the Company acquired the remaining shares of Boston Probes, Inc. not previously owned, or approximately 87% of the outstanding shares, and certain intellectual property rights related to peptide nucleic acids, for approximately $37 million in cash. As a result of owning 100% of Boston Probes, the Company recorded goodwill of $22.7 million, other intangible assets of $21.8 million, and a charge to write-off the value of acquired IPR&D of $2.2 million. Other intangible assets are being amortized over their expected period of benefit, which is 7 years. The acquisition was accounted for under the purchase method of accounting. Boston Probes develops and commercializes products employing peptide nucleic acid ("PNA") probe technology and has developed novel chemistry platforms based on its PNA technology. The Company expects that this technology will be a key component of the Applied Biosystems group's Sequence Detection Systems, a proprietary technology platform for real-time analysis of genetic information. The net assets and results of operations of Boston Probes have been allocated to the Applied Biosystems group. Other Dispositions In fiscal 2000, the Company recognized before-tax gains of $41.0 million from the sale of a portion of its equity interest in Millennium Pharmaceuticals, Inc. Net cash proceeds from the sale were $48.0 million in fiscal 2000. APPLERA CORPORATION Annual Report 2002 57 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Note 3--Income Taxes Income (loss) before income taxes for fiscal 2000, 2001, and 2002 is summarized below:
(Dollar amounts in millions) 2000 2001 2002 =============================================================================== United States $(46.5) $(86.7) $(257.5) Foreign 182.6 160.2 228.9 - ------------------------------------------------------------------------------- Total $136.1 $ 73.5 $ (28.6) ===============================================================================
The Company's provision for income taxes for fiscal 2000, 2001, and 2002 consisted of the following:
(Dollar amounts in millions) 2000 2001 2002 =============================================================================== Currently Payable Domestic $ 18.4 $ 7.4 $ 36.5 Foreign 48.6 22.8 23.0 - ------------------------------------------------------------------------------- Total currently payable 67.0 30.2 59.5 - ------------------------------------------------------------------------------- Deferred Domestic (14.0) 12.1 (53.4) Foreign (12.4) 3.9 5.9 - ------------------------------------------------------------------------------- Total deferred (26.4) 16.0 (47.5) - ------------------------------------------------------------------------------- Total provision for income taxes $ 40.6 $ 46.2 $ 12.0 ===============================================================================
Significant components of deferred tax assets and liabilities at June 30, 2001 and 2002 are summarized below:
(Dollar amounts in millions) 2001 2002 =============================================================================== Deferred Tax Assets Inventories $ 4.3 $ 7.3 Postretirement and postemployment benefits 50.7 59.4 Unrealized losses on investments 12.4 Other accruals 12.8 36.5 Tax credit and loss carryforwards 134.0 116.9 Capitalized R&D expense 67.2 175.7 - -------------------------------------------------------------------------------- Subtotal 269.0 408.2 Valuation allowance (45.5) (42.7) - -------------------------------------------------------------------------------- Total deferred tax assets 223.5 365.5 - -------------------------------------------------------------------------------- Deferred Tax Liabilities Depreciation 16.0 23.0 Other accruals 1.4 11.6 Intangible assets 1.1 11.4 Unrealized gains on investments 29.6 - -------------------------------------------------------------------------------- Total deferred tax liabilities 48.1 46.0 - -------------------------------------------------------------------------------- Total deferred tax assets, net $ 175.4 $ 319.5 ===============================================================================
A reconciliation of the federal statutory tax to the Company's, the Applied Biosystems group's and the Celera Genomics group's tax provisions for fiscal 2000, 2001, and 2002 are set forth in the following table:
Applied Biosystems Group Celera Genomics Group ---------------------------- ---------------------------- (Dollar amounts in millions) 2000 2001 2002 2000 2001 2002 ============================================================================================================= Federal statutory rate 35% 35% 35% 35% 35% 35% ============================================================================================================= Tax at federal statutory rate $ 96.5 $ 106.6 $ 83.1 $ (49.9) $ (81.4) $ (94.6) State income taxes (net of federal benefit) 0.2 0.1 0.4 0.2 0.2 0.5 Effect on income taxes from foreign operations (6.3) (12.9) 3.0 0.1 Effect on income taxes from export operations (7.1) (10.3) (10.0) Reorganization, restructuring and other costs 6.5 1.4 Nondeductible goodwill and intangibles 0.3 0.4 1.1 0.2 34.9 38.0 R&D tax credit (6.0) (0.5) (1.1) (5.4) (2.9) (5.1) Valuation allowance 0.1 6.7 (4.1) 2.8 Long-term compensation 8.7 Other (3.4) 2.0 (3.4) 3.6 2.6 - ------------------------------------------------------------------------------------------------------------- Total provision for income taxes $ 89.5 $ 92.1 $ 69.0 $ (49.9) $ (46.4) $ (58.5) ============================================================================================================= Consolidated ----------------------------- 2000 2001 2002 ============================= Federal statutory rate 35% 35% 35% ============================= Tax at federal statutory rate $ 47.6 $ 25.7 $ (10.0) State income taxes (net of federal benefit) 0.4 0.3 0.9 Effect on income taxes from foreign operations (6.3) (12.9) 3.1 Effect on income taxes from export operations (7.1) (10.3) (10.0) Reorganization, restructuring and other costs 7.9 Nondeductible goodwill and intangibles 0.5 35.3 39.1 R&D tax credit (11.4) (3.4) (6.2) Valuation allowance 0.1 9.5 (4.1) Long-term compensation 8.7 Other 0.2 2.0 (0.8) - ----------------------------------------------------------------------------- Total provision for income taxes $ 40.6 $ 46.2 $ 12.0 =============================================================================
58 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued The valuation allowance decrease in fiscal 2002 was due to the Company's ability to realize a portion of its federal tax credit and foreign loss carryforward benefits. The valuation allowance was increased in fiscal 2001 principally as a result of foreign tax credits generated by the Company that management believed may not be realized before the end of the statutory carryforward period, due to significant domestic tax loss carryforwards. The fiscal 2001 increase in the valuation allowance was also due to foreign loss carryforwards that management believed may not be realized because the Company will not generate sufficient taxable income in each of the respective foreign countries to utilize the tax loss carryforwards. While a portion of the carryforward benefit was realized in fiscal 2002, management believes that the remaining carryforwards may not be realized before the end of the carryforward period. At June 30, 2002, the Company's worldwide valuation allowance of $42.7 million principally related to foreign tax loss carryforwards and domestic tax credit carryforwards. The Company has domestic loss carryforwards as a result of various acquisitions of approximately $89.3 million that will expire between the fiscal years 2008 and 2022. The amount of these net operating loss carryforwards that can be utilized annually to offset future taxable income or tax liability has been limited under the Internal Revenue Code as a result of these acquisitions. The Company also has domestic credit carryforwards of $69.0 million that will expire between fiscal 2004 and 2022, and loss carryforwards of approximately $37.1 million in various foreign countries with varying expiration dates. United States income taxes were not provided on approximately $417.1 million of net unremitted earnings from foreign subsidiaries since the Company intends to permanently reinvest substantially all of such earnings outside the U.S. However, if some portion of these earnings is remitted, the Company expects the effect of any remittance after considering available tax credits and amounts previously accrued not to be significant to the consolidated results of operations. These earnings include income from manufacturing operations in Singapore, which is tax-exempt through fiscal 2004. Note 4--Retirement and Other Benefits Pension Plans, Retiree Healthcare, and Life Insurance Benefits The Company maintains or sponsors pension plans that cover a portion of worldwide employees. Pension benefits earned are generally based on years of service and compensation during active employment. However, the level of benefits and terms of vesting may vary among plans. Pension plan assets are administered by trustees and are principally invested in equity and fixed income securities. The funding of pension plans is determined in accordance with statutory funding requirements. The Company's domestic pension plan covers a substantial portion of U.S. employees. The pension plan is not available to employees hired on or after July 1, 1999 and the accrual of future service benefits will terminate as of June 30, 2004. The postretirement benefit plan provides certain healthcare and life insurance benefits to domestic employees hired prior to January 1, 1993, who retire and satisfy certain service and age requirements. Generally, medical coverage pays a stated percentage of most medical expenses, reduced for any deductible and for payments made by Medicare or other group coverage. The cost of providing these benefits is shared with retirees. The plan is unfunded. The components of net pension and postretirement benefit expenses for fiscal 2000, 2001, and 2002 are set forth in the following table:
(Dollar amounts in millions) 2000 2001 2002 ============================================================================= Pension Service cost $ 7.7 $ 8.0 $ 10.0 Interest cost 44.1 48.7 42.4 Expected return on plan assets (45.7) (50.5) (44.2) Amortization of transition asset (2.4) (0.2) 0.4 Amortization of prior service cost (0.4) (0.5) (0.5) Amortization of losses 0.2 0.1 0.5 - ----------------------------------------------------------------------------- Net periodic expense $ 3.5 $ 5.6 $ 8.6 ============================================================================= Postretirement Benefit Service cost $ 0.3 $ 0.2 $ 0.2 Interest cost 4.6 4.8 4.8 Amortization of gains (1.8) (1.7) (1.0) - ----------------------------------------------------------------------------- Net periodic expense $ 3.1 $ 3.3 $ 4.0 =============================================================================
APPLERA CORPORATION Annual Report 2002 59 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued The following tables set forth the changes in the benefit obligations and the plan assets, the funded status of the plans, and the amounts recorded in the Company's Consolidated Statements of Financial Position at June 30, 2001 and 2002:
Pension Postretirement ------------------ ------------------- (Dollar amounts in millions) 2001 2002 2001 2002 ============================================================================================== Change In Benefit Obligation Benefit obligation, beginning of year $ 607.9 $ 590.2 $ 61.9 $ 66.3 Service cost 8.0 9.9 0.2 0.2 Interest cost 48.7 42.4 4.8 4.8 Participants' contributions 0.2 Benefits paid (37.1) (35.5) (5.6) (6.9) Actuarial (gain) loss 35.1 (0.6) 5.0 2.3 Variable annuity unit value change (70.5) (30.6) Addition of plan 6.2 Foreign currency translation (1.1) 1.8 Other (0.8) - ---------------------------------------------------------------------------------------------- Benefit obligation $ 590.2 $ 584.0 $ 66.3 $ 66.7 ============================================================================================== Change In Plan Assets Fair value of plan assets, beginning of year $ 615.0 $ 557.0 $ - $ - Actual return on plan assets (23.5) (14.9) Participants' contributions 0.2 Company contributions 0.8 3.0 5.6 6.9 Benefits paid (34.7) (33.9) (5.6) (6.9) Addition of plan 3.2 Foreign currency translation (0.5) 0.7 Other (0.1) - ---------------------------------------------------------------------------------------------- Fair value of plan assets $ 557.0 $ 515.3 $ - $ - ============================================================================================== Funded Status Reconciliation Funded status $ (33.2) $ (68.7) $ (66.3) $ (66.7) Unrecognized prior service gain (1.9) (1.4) Unrecognized transition asset 0.9 0.6 Unrecognized (gains) losses 66.6 93.6 (14.7) (11.4) - ---------------------------------------------------------------------------------------------- Net amount recognized $ 32.4 $ 24.1 $ (81.0) $ (78.1) ============================================================================================== Amounts Recognized In The Consolidated Statements Of Financial Position Prepaid benefit cost $ - $ 0.4 $ - $ - Accrued benefit liability (25.6) (60.5) (81.0) (78.1) Intangible asset 0.6 0.6 Minimum pension liability adjustment 57.4 83.6 - ---------------------------------------------------------------------------------------------- Net amount recognized $ 32.4 $ 24.1 $ (81.0) $ (78.1) ==============================================================================================
A minimum pension liability adjustment is required when the actuarial present value of accumulated plan benefits exceeds plan assets and accrued pension liabilities. The projected benefit obligation and the accumulated benefit obligation for the pension plans with accumulated benefit obligations in excess of plan assets were $582.5 million and $575.5 million, respectively, at June 30, 2001, with corresponding net plan assets having a fair value of $553.2 million. The projected benefit obligation and the accumulated benefit obligation for the pension plans with accumulated benefit obligations in excess of plan assets were $564.6 million and $557.2 million, respectively, at June 30, 2002, with corresponding net plan assets having a fair value of $506.6 million. The following actuarial assumptions were used for the pension and postretirement plans:
2001 2002 ================================================================================ Domestic Plans Discount rate 7 1/2% 7 1/4% Compensation increase 6% 5% Expected rate of return 7 1/2 - 9 1/4% 7 1/4 - 9% ================================================================================ Foreign Plans Discount rate 3% 2 1/2 - 5 3/4% Compensation increase 2% 1 1/2 - 4 1/4% Expected rate of return 4% 2 - 6 1/2% ================================================================================
60 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued For measurement purposes, a 10% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for plan year 2003, gradually reducing to 5.5% in 2011 and thereafter. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects on postretirement benefits:
One-Percentage- One-Percentage- (Dollar amounts in millions) Point Increase Point Decrease ================================================================================ Effect on the total of service and interest cost components $ 0.4 $ (0.4) Effect on postretirement benefit obligation $ 5.3 $ (4.6) ================================================================================
Savings Plans The Company provides a 401(k) savings plan, for domestic employees, with automatic Company contributions of 2% of eligible compensation and a dollar- for-dollar matching contribution of up to 4% of eligible compensation. Employees not eligible for the employee pension plan receive an extra 2% Company contribution in addition to the automatic 2% Company contribution through June 30, 2004, while pension plan participants continue to receive the automatic 2% contribution. The Company's contributions to this plan were $12.1 million, $16.3 million, and $19.3 million for fiscal 2000, 2001, and 2002, respectively. The Company recorded expenses for foreign defined contribution plans of $1.3 million, $1.8 million, and $2.0 million in fiscal 2000, 2001, and 2002, respectively. Postemployment Benefits The Company provides certain postemployment benefits to eligible employees. These benefits generally include severance, disability, and medical-related costs paid after employment but before retirement. Note 5--Stockholders' Equity Applera - Applied Biosystems stock was split two-for-one in July 1999 and February 2000. Applera - Celera stock was split two-for-one in February 2000. All such splits were in the form of stock dividends. Except for treasury stock data, all Applied Biosystems group and Celera Genomics group share data reflect these splits. Capital Stock The Company has two classes of common stock: Applera - Applied Biosystems stock and Applera - Celera stock. Applera - Applied Biosystems stock is intended to reflect the relative performance of the Applied Biosystems group, and Applera - Celera stock is intended to reflect the relative performance of the Celera Genomics group. Holders of Applera - Applied Biosystems stock and Applera - Celera stock are stockholders of the Company. The groups are not separate legal entities and holders of these stocks are stockholders of a single company, Applera. As a result, holders of these stocks are subject to all of the risks associated with an investment in the Company and all of its businesses, assets, and liabilities. At June 30, 2001 and 2002, the Company's authorized capital stock consisted of one billion shares of a class of common stock designated as Applera Corporation - Applied Biosystems Group Common Stock, 225 million shares of a class of common stock designated as Applera Corporation - Celera Genomics Group Common Stock, and 10 million shares of preferred stock. Of the 10 million authorized shares of preferred stock, the Company had designated 80,000 shares of two series of participating junior preferred stock in connection with the Company's Stockholder Protection Rights Agreement as described below. Treasury Stock Common stock repurchases have been made in support of the Company's various stock plans. The following table provides transactions relating to the Company's common stocks:
Applera - Applied Applera - Celera Biosystems Stock Stock ----------------------- --------------------- Treasury Treasury Issued stock Issued stock shares shares shares shares ======================================================================================================== Beginning balance at June 30, 2001 211,473,057 61,693,504 Issuances of shares for business combination 5,494,715 Purchases of shares for treasury stock 3,868,000 47,700 Issuances of shares under stock plans 1,321,002 (173,556) 3,767,515 (47,700) Issuances of shares for warrant exercises 35,812 7,737 - -------------------------------------------------------------------------------------------------------- Ending balance at June 30, 2002 212,829,871 3,694,444 70,963,471 ========================================================================================================
Stock Purchase Warrants As a result of the Company's acquisition of PerSeptive Biosystems, Inc. in 1998, the Company had approximately 230,000 warrants outstanding at June 30, 2002 at an exercise price of $12.66. Upon exercise of all of the warrants, the holders would receive approximately 177,000 shares of Applera - Applied Biosystems stock and approximately 44,000 shares of Applera - Celera stock. The warrants expire in September 2003. In connection with the acquisition of Axys, each outstanding warrant for shares of Axys common stock was converted into warrants issued by the Company for the number of shares of Applera - Celera stock that would have been received by the holder if such warrants had been exercised immediately prior to the effective date of the merger. At June 30, 2002, there were APPLERA CORPORATION Annual Report 2002 61 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued approximately 262,000 warrants outstanding at exercise prices ranging from $29.96 to $93.63, with a weighted average exercise price of $72.27 per share. These warrants expire at various dates during fiscal 2005. Stockholder Protection Rights Agreement In connection with the recapitalization of the Company, a Stockholder Protection Rights Agreement (the "Rights Agreement") was adopted to protect stockholders against abusive takeover tactics. Under the Rights Agreement, the Company will issue one right for every four shares of Applera - Applied Biosystems stock (an "Applera - Applied Biosystems Right"), which will allow holders to purchase one-thousandth of a share of Series A participating junior preferred stock of the Company at a purchase price of $425, subject to adjustment (the "Series A Purchase Price"), and one right for every two shares of Applera - Celera stock (an "Applera - Celera Right"), which will allow holders to purchase one-thousandth of a share of Series B participating junior preferred stock of the Company at a purchase price of $125, subject to adjustment (the "Series B Purchase Price"). An Applera - Applied Biosystems Right or an Applera - Celera Right will be exercisable only if a person or group ("Acquiring Person"): (a) acquires 15% or more of the shares of Applera - Applied Biosystems stock then outstanding or 15% or more of the shares of Applera - Celera stock then outstanding or (b) commences a tender offer that would result in such person or group owning such number of shares. If any person or group becomes an Acquiring Person, each Applera - Applied Biosystems Right and each Applera - Celera Right will entitle its holder to purchase, for the Series A Purchase Price or the Series B Purchase Price, as applicable, a number of shares of the related class of common stock of the Company having a market value equal to twice such purchase price. If following the time a person or group becomes an Acquiring Person, the Company is acquired in a merger or other business combination transaction and the Company is not the surviving corporation; any person consolidates or merges with the Company and all or part of the common stock is converted or exchanged for securities, cash, or property of any other person; or 50% or more of the Company's assets or earnings power is sold or transferred, each Applera - Applied Biosystems Right and each Applera - Celera Right will entitle its holder to purchase, for the Series A Purchase Price or Series B Purchase Price, as applicable, a number of shares of common stock of the surviving entity in any such merger, consolidation, or business combination or the purchaser in any such sale or transfer having a market value equal to twice the Series A Purchase Price or Series B Purchase Price. The rights are redeemable at the Company's option at one cent per right prior to a person or group becoming an Acquiring Person. Note 6--Stock Plans Stock Option Plans Under the Company's stock option plans, officers, directors, and other employees may be granted options, each of which allows for the purchase of shares of existing classes of common stock at a price of not less than 100% of fair market value at the date of grant. Most options vest 25% annually, resulting in 100% vesting after four years, and generally expire ten years from the date of grant. At June 30, 2002, 37.6 million shares of Applera - Applied Biosystems stock and 17.4 million shares of Applera - Celera stock were authorized for grant of options. Transactions relating to the stock option plans of the Company follow:
Applera -- Applied Biosystems Stock --------------------------- Weighted Number of Average Options Exercise Price ================================================================================ Fiscal 2000 Outstanding at June 30, 1999 18,423,246 $ 17.99 Granted 9,000,611 $ 86.06 Exercised 3,146,903 $ 12.37 Cancelled 661,236 $ 26.68 - -------------------------------------------------------------------------------- Outstanding at June 30, 2000 23,615,718 $ 44.04 Exercisable at June 30, 2000 9,879,917 $ 15.53 ================================================================================ Fiscal 2001 Granted 7,815,288 $ 32.69 Exercised 2,410,166 $ 14.10 Cancelled 1,099,092 $ 62.41 - -------------------------------------------------------------------------------- Outstanding at June 30, 2001 27,921,748 $ 42.61 Exercisable at June 30, 2001 10,689,250 $ 30.12 ================================================================================ Fiscal 2002 Granted 9,170,325 $ 21.72 Exercised 1,133,789 $ 11.44 Cancelled 1,917,820 $ 53.65 - -------------------------------------------------------------------------------- Outstanding at June 30, 2002 34,040,464 $ 37.40 Exercisable at June 30, 2002 14,142,628 $ 36.41 ================================================================================
62 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
Applera -- Celera Stock --------------------------- Weighted Number of Average Options Exercise Price ================================================================================ Outstanding at June 30, 1999 11,133,328 $ 7.81 Granted 2,838,848 $ 77.55 Exercised 1,392,069 $ 6.44 Cancelled 311,266 $ 11.04 - -------------------------------------------------------------------------------- Outstanding at June 30, 2000 12,268,841 $ 20.49 Exercisable at June 30, 2000 3,945,450 $ 7.47 ================================================================================ Fiscal 2001 Granted 2,445,678 $ 45.23 Exercised 1,298,815 $ 7.70 Cancelled 303,468 $ 60.43 - -------------------------------------------------------------------------------- Outstanding at June 30, 2001 13,112,236 $ 25.69 Exercisable at June 30, 2001 5,169,766 $ 14.81 ================================================================================ Fiscal 2002 Granted 3,479,808 $ 19.74 Exercised 3,320,895 $ 8.62 Cancelled 1,975,306 $ 48.86 - -------------------------------------------------------------------------------- Outstanding at June 30, 2002 11,295,843 $ 25.40 Exercisable at June 30, 2002 5,451,116 $ 21.55 ================================================================================
In connection with the acquisitions of Paracel in fiscal 2000 and Axys in fiscal 2002, the Company assumed Paracel's and Axys' stock option plans. Options granted to Paracel employees and directors prior to the acquisition of Paracel and assumed by the Company on the acquisition date have been included in the Applera - Celera stock options granted amount for fiscal 2000. Options granted to Axys employees and directors prior to the acquisition of Axys and assumed by the Company on the acquisition date have been included in the Applera - Celera stock options granted amount for fiscal 2002. The following tables summarize information regarding options outstanding and exercisable at June 30, 2002:
Weighted Average ---------------------- Contractual Life Number of Exercise Remaining (Option prices per share) Options Price in Years ======================================================================================== Applera -- Applied Biosystems Stock Options Outstanding At $ 1.82 - $ 20.00 6,471,918 $ 14.49 4.7 At $20.01 - $ 25.00 8,177,663 $ 21.10 9.5 At $25.01 - $ 30.00 10,798,264 $ 26.45 7.6 At $30.01 - $110.00 8,592,619 $ 83.91 7.4 ======================================================================================== Options Exercisable At $ 1.82 - $ 20.00 5,978,218 $ 14.74 At $20.01 - $ 25.00 42,788 $ 21.14 At $25.01 - $ 30.00 4,686,827 $ 26.79 At $30.01 - $110.00 3,434,795 $ 87.45 ========================================================================================
Weighted Average ---------------------- Contractual Life Number of Exercise Remaining (Option prices per share) Options Price in Years ======================================================================================== Applera -- Celera Stock Options Outstanding At $ 0.74 - $ 10.00 4,303,307 $ 7.48 5.5 At $10.01 - $ 20.00 2,953,776 $ 16.67 8.1 At $20.01 - $ 50.00 2,829,536 $ 29.91 6.9 At $50.01 - $135.00 1,209,224 $ 99.92 7.3 ======================================================================================== Options Exercisable At $ 0.74 - $ 10.00 3,345,569 $ 7.52 At $10.01 - $ 20.00 635,106 $ 12.26 At $20.01 - $ 50.00 938,729 $ 30.45 At $50.01 - $135.00 531,712 $105.25 ========================================================================================
1999 Stock Incentive Plans The Applera Corporation/Applied Biosystems Group 1999 Stock Incentive Plan (the "Applera - Applied Biosystems Group Plan") and the Applera Corporation/ Celera Genomics Group 1999 Stock Incentive Plan (the "Applera - Celera Group Plan") were first approved in April 1999. The Applera - Applied Biosystems Group Plan authorizes grants of stock options, stock awards, and performance shares with respect to Applera - Applied Biosystems stock. The Applera - Celera Group Plan authorizes grants of stock options, stock awards, and performance shares with respect to Applera - Celera stock. Directors, certain officers, and key employees with responsibilities involving both the Applied Biosystems group and the Celera Genomics group may be granted awards under both incentive plans in a manner which reflects their responsibilities. The Company's Board of Directors believes that granting awards tied to the performance of the group in which the participants work and, in certain cases the other group, is in the best interests of the Company and its stockholders. Employee Stock Purchase Plans The Company's employee stock purchase plans offer U.S. and certain non-U.S. employees the right to purchase shares of Applera - Applied Biosystems stock and/or Applera - Celera stock. The purchase price in the U.S. is equal to the lower of 85% of the average market price of the applicable class of common stock on the offering date or 85% of the average market price of such class of common stock on the last day of the purchase period. Provisions of the plan for employees in countries outside the U.S. vary according to local practice and regulations. Applera - Applied Biosystems stock issued under the employee stock purchase plans during fiscal 2000, 2001, and 2002 totaled 161,000 shares, 250,000 shares, and 451,000 shares, respectively. Applera - Celera stock issued under the employee stock purchase plans during fiscal 2000, 2001, and 2002 totaled 303,000 shares, 269,000 shares, and 443,000 shares, respectively. APPLERA CORPORATION Annual Report 2002 63 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Director Stock Purchase and Deferred Compensation Plan The Company has a Director Stock Purchase and Deferred Compensation Plan that requires non-employee directors of the Company to apply at least 50% of their annual retainer to the purchase of common stock. Purchases of Applera - Applied Biosystems stock and Applera - Celera stock are made in a ratio approximately equal to the number of shares of Applera - Applied Biosystems stock and Applera - Celera stock outstanding. The purchase price is the fair market value on the date of purchase. At June 30, 2002, the Company had approximately 328,000 shares of Applera - Applied Biosystems stock and approximately 82,000 shares of Applera - Celera stock available for issuance under this plan. Restricted Stock As part of the Company's stock incentive plans, employees may be, and non- employee directors are, granted shares of restricted stock that will vest when certain continuous employment/service restrictions and/or specified performance goals are achieved. The fair value of shares granted is generally expensed over the restricted periods. The periods may vary depending on the estimated achievement of performance goals. Restricted stock granted to employees and non-employee directors totaled 255,225 shares of Applera - Applied Biosystems stock and 63,900 shares of Applera - Celera stock during fiscal 2001 and 31,100 shares of Applera - Applied Biosystems stock and 91,700 shares of Applera - Celera stock during fiscal 2002. Compensation expense recognized by the Company for these awards was $6.5 million, $6.1 million, and $4.6 million for fiscal 2000, 2001, and 2002, respectively. Unearned compensation included in capital in excess of par value within stockholders' equity was $16.6 million at June 30, 2001 and $14.8 million at June 30, 2002. There was no unearned compensation included in stockholders' equity at June 30, 2000. Performance Unit Bonus Plan The Company adopted a Performance Unit Bonus Plan in fiscal 1997. The plan utilized stock options and a performance unit bonus pool. Performance units granted under the plan represented the right to receive a cash or stock payment from the Company at a specified date in the future. The amount of the payment was determined on the date of the grant. The performance units vested upon shares of the Company's common stock attaining and maintaining specified price levels for a specified period. In fiscal 2000, three series of performance units were granted under the plan and compensation expense of $53.1 million was recognized. Fiscal 2000 compensation expense included $45.0 million related to the acceleration of payments under the plan's three series as a result of the attainment of the performance targets. The vesting of the related stock options was not accelerated. The plan was modified in fiscal 2000 to replace the performance units with performance stock options. Performance stock options vest in equal portions upon the earlier of the shares of Applera - Applied Biosystems stock attaining and maintaining specified price levels for a specified period of time or after a specified future date upon attainment of performance targets and/or service requirements. The plan was further modified in fiscal 2002 to reinstate the issuance of performance units with the right to receive cash at a specified date in the future upon attainment of performance targets and/or service requirements. In fiscal 2002, seven series of performance units were granted under the plan and compensation expense of $0.9 million was recognized. No compensation expense pertaining to the plan was recognized in fiscal 2001. Accounting for Stock-Based Compensation Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and FASB Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of Accounting Principles Board Opinion No. 25" are applied in accounting for stock-based compensation plans. Accordingly, no compensation expense has been recognized for stock option and employee stock purchase plans, as all options have been issued at fair market value. Pro forma net income and earnings per share information, as required by SFAS No. 123, "Accounting for Stock-Based Compensation," have been determined for employee stock plans under the statement's fair value method. The fair value of the options was estimated at grant date using the Black-Scholes option pricing model with the following weighted average assumptions:
For the years ended June 30, 2000 2001 2002 =============================================================================== Applied Biosystems Group Dividend yield .17% .62% .92% Volatility 52.68% 71.91% 77.85% Risk-free interest rate 5.88% 6.53% 3.58% Expected option life in years 4.12 4 4 =============================================================================== Celera Genomics Group Dividend yield -% -% -% Volatility 99.30% 101.66% 101.17% Risk-free interest rate 6.21% 6.53% 3.71% Expected option life in years 3.5 3.5 3.5 ===============================================================================
For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. 64 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued The Company's pro forma information for the fiscal years ended June 30, 2000, 2001, and 2002 is presented below:
Applied Biosystems Group Celera Genomics Group --------------------------- ------------------------------ (Dollar amounts in millions except per share amounts) 2000 2001 2002 2000 2001 2002 =============================================================================================================== Net income (loss) As reported $ 186.2 $212.4 $168.5 $ (92.7) $ (186.2) $ (211.8) Pro forma $ 140.2 $115.6 $ 67.4 $ (106.6) $ (223.3) $ (242.3) Basic earnings (loss) per share As reported $ 0.90 $ 1.01 $ 0.80 $ (1.73) $ (3.07) $ (3.21) Pro forma $ 0.68 $ 0.55 $ 0.32 $ (1.98) $ (3.68) $ (3.67) Diluted earnings (loss) per share As reported $ 0.86 $ 0.96 $ 0.78 $ (1.73) $ (3.07) $ (3.21) Pro forma $ 0.65 $ 0.52 $ 0.31 $ (1.98) $ (3.68) $ (3.67) ===============================================================================================================
Applera Corporation ---------------------------- (Dollar amounts in millions) 2000 2001 2002 =============================================================================== Net income (loss) As reported $ 95.5 $ 27.2 $ (40.6) Pro forma $ 35.6 $ (106.6) $ (172.2) ===============================================================================
The weighted average fair value of Applera - Applied Biosystems stock options granted was $38.00, $19.94, and $12.36 for fiscal 2000, 2001, and 2002, respectively. The weighted average fair value of Applera - Celera stock options granted was $46.41, $32.79, and $13.84 for fiscal 2000, 2001, and 2002, respectively. Note 7--Additional Information Selected Accounts The following table provides the major components of selected accounts of the Consolidated Statements of Financial Position at June 30, 2001 and 2002:
(Dollar amounts in millions) 2001 2002 ================================================================================ Other Long-Term Assets Minority equity investments $ 111.1 $ 87.3 Goodwill 24.4 39.4 Noncurrent deferred tax asset 166.6 311.0 Other 108.7 136.5 - -------------------------------------------------------------------------------- Total other long-term assets $ 410.8 $ 574.2 ================================================================================ Other Accrued Expenses Deferred revenues $ 92.5 $ 115.3 Foreign currency hedge contracts 1.1 32.6 Other 122.2 127.4 - -------------------------------------------------------------------------------- Total other accrued expenses $ 215.8 $ 275.3 ================================================================================ Other Long-Term Liabilities Accrued postretirement benefits $ 75.5 $ 74.9 Accrued pension benefits 20.9 52.6 Other 56.0 77.7 - -------------------------------------------------------------------------------- Total other long-term liabilities $ 152.4 $ 205.2 ================================================================================
Minority equity investments consist of common stock in publicly-traded companies and common stock and preferred stock in privately-held companies. Unrealized gains and losses on publicly-traded companies were $69.9 million and $3.8 million, respectively, at June 30, 2001 and $16.0 million and $0.2 million, respectively, at June 30, 2002. Related Party Transactions In June 1999, the Company granted fully vested options to purchase 2.6 million shares of Applera - Celera stock at a price of $6.42 per share to The Institute of Genomic Research ("TIGR") and entered into a one-year non-compete agreement with such party. The fair value of such options approximated $7.2 million and was amortized over the life of the non-compete agreement. The fair value of these options were determined under the Black-Scholes pricing model using a volatility assumption of 40%, an expected option life of two years, and a risk-free interest rate of 5.75%. As of June 30, 2002, TIGR held approximately 1.4 million of these options. The former President of the Celera Genomics group through January 2002 was also the Chairman of the Board of Trustees of TIGR. Also, an immediate family member of the former President of the Celera Genomics group serves as TIGR's President and is on TIGR's Board of Trustees. During fiscal 2001, the Celera Genomics group entered into an agreement to perform sequencing services for TIGR and recognized revenues and collected cash of $7.0 million related to such services. Additionally, during fiscal 2001 and 2002, the Applied Biosystems group recognized revenues of $7.0 million and $4.7 million from TIGR, of which $1.5 million was receivable as of June 30, 2002. Note 8--Debt And Lines Of Credit Short-term debt and long-term debt at June 30, 2001 and 2002 are summarized as follows:
(Dollar amounts in millions) 2001 2002 ================================================================================ Short-Term Debt Loans payable $ 14.7 $ 0.3 Current portion of long-term debt 30.5 - -------------------------------------------------------------------------------- Total short-term debt $ 45.2 $ 0.3 ================================================================================ Long-Term Debt Other debt $ - $ 18.0 - -------------------------------------------------------------------------------- Total long-term debt $ - $ 18.0 ================================================================================
The weighted average interest rates at June 30, 2001 and 2002 for short-term loans payable were 0.5% and 3.4%, respectively. APPLERA CORPORATION Annual Report 2002 65 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued The Company repaid its yen 3.8 billion, or $29.0 million, loan upon its scheduled maturity in March 2002. In connection with its acquisition of Axys, the Company assumed $26.0 million of 8% senior secured convertible notes. These notes mature on October 1, 2004. Interest is payable quarterly and the principal is payable at maturity as a lump sum. Holders of notes having an aggregate principal amount of $10 million exercised their right following the acquisition to require the Company to repurchase such notes, which the Company did in January 2002. The remaining notes are convertible at any time into 307,101 shares of Applera - Celera stock at a conversion price of $52.10 per share. These notes are secured by 6.7 million shares, or approximately 90%, of the Company's holding of DPI common stock, which was received as part of the acquisition. Additionally, the Company assumed an existing Axys construction loan of $8.4 million related to its medicinal chemistry building located in South San Francisco, California, which was subsequently repaid following the acquisition. The Company maintains a $100 million revolving credit agreement with four banks that expires on April 20, 2005. Commitment and facility fees are based on public debt ratings, or net worth and leverage ratios. Interest rates on amounts borrowed vary depending on whether borrowings are undertaken in the domestic or eurodollar markets. There were no outstanding borrowings under the facility at June 30, 2001 or 2002. Under various debt and credit agreements, the Company is required to maintain certain minimum net worth and leverage ratios. The Company was in compliance with all such covenants as of June 30, 2002. Note 9--Commitments and Contingencies Future minimum payments at June 30, 2002 under non-cancelable operating leases for real estate and equipment were as follows:
(Dollar amounts in millions) ========================================================================== 2003 $ 51.8 2004 42.1 2005 29.1 2006 21.2 2007 15.8 2008 and thereafter 67.3 - -------------------------------------------------------------------------- Total $ 227.3 ==========================================================================
Rental expense was $45.2 million for fiscal 2000, $65.2 million for fiscal 2001, and $68.2 million for fiscal 2002. During fiscal 2002, the Company recorded provisions of $10.1 million for the estimated cost of excess lease space associated with the Celera Genomics group's Paracel business (see Note 13). Pension benefits As part of the divestiture of the Analytical Instruments business in fiscal 1999, the pension benefits for employees of a former German subsidiary are being paid by the purchaser of the Analytical Instruments business. However, the Company has guaranteed payment of these pension benefits should the purchaser fail to do so, as these benefits were not transferable to the buyer under German law. The guaranteed payment obligation, which approximated $41.9 million at June 30, 2002, is not expected to have a material adverse effect on the Company's consolidated financial position or results of operations. Litigation The Company is involved in various legal proceedings from time to time, including actions with respect to commercial, intellectual property, antitrust, environmental, securities, and employment matters. The Company believes that it has meritorious defenses against the claims currently asserted against it and intends to defend them vigorously. Following is a description of certain claims currently being defended by the Company. The Company and some of its officers were served in five lawsuits between April and May, 2000, purportedly on behalf of purchasers of Applera - Celera stock in the Company's follow-on public offering of Applera - Celera stock completed on March 6, 2000. In the offering, the Company sold an aggregate of approximately 4.4 million shares of Applera - Celera stock at a public offering price of $225 per share. All of these lawsuits have been consolidated into a single case and are pending in the United States District Court for the District of Connecticut, and an amended consolidated complaint was filed on August 21, 2001. The consolidated complaint generally alleges that the prospectus used in connection with the offering was inaccurate or misleading because it failed to adequately disclose the alleged opposition of the Human Genome Project and two of its supporters, the governments of the United States and the United Kingdom, to providing patent protection to the Company's genomic-based products. Although the Celera Genomics group has never sought, or intended to seek, a patent on the basic human genome sequence data, the complaint also alleges that the Company did not adequately disclose the risk that it would not be able to patent this data. The consolidated complaint seeks monetary damages, rescission, costs and expenses, and other relief as the court deems proper. A motion to dismiss the complaint is pending. The Company is involved in several litigation matters with MJ Research, Inc., commencing with the Company's filing claims against MJ Research based on its alleged infringement of certain polymerase chain reaction, or PCR, patents. On December 21, 2000, MJ Research filed an action against the Company in 66 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued the United States District Court for the District of Columbia. The complaint is based on the allegation that the patents underlying the Company's DNA sequencing instruments were invalidly obtained because one of the alleged inventors, whose work was funded in part by the United States government, was knowingly omitted from the patent applications. The Company patents at issue are U.S. Patent Nos. 5,171,534, 5,821,058, 6,200,748, and 4,811,218. The complaint asserts violations of the federal False Claims Act and the federal Bayh Dole Act, invalidity and unenforceability of the patents at issue, patent infringement, and various other civil claims against Applera. MJ Research is seeking monetary damages, costs and expenses, injunctive relief, transfer of ownership of the patents in dispute, and other relief as the court deems proper. MJ Research claims to be suing in the name of the United States government although the government has to date declined to participate in the suit. On April 24, 2001, Promega Corporation filed a patent infringement action against the Company, Lifecodes Corporation, Cellmark Diagnostics, and Genomics International Corporation in the United States District Court for the Western District of Wisconsin. The complaint alleges that the defendants are infringing Promega's U.S. Patent Nos. 6,221,598 and 5,843,660, both entitled "Multiplex Amplification of Short Tandem Repeat Loci," due to the defendants' sale of forensic identification and paternity testing kits. Promega is seeking monetary damages, costs and expenses, injunctive relief, and other relief as the court deems proper. The defendants answered the complaint on July 9, 2001, and the Company asserted counterclaims alleging that Promega is infringing the Company's U.S. Patent No. 6,200,748, entitled "Tagged Extendable Primers and Extension Products," due to Promega's sale of forensic identification and paternity testing kits. The trial in this case is currently scheduled for November 18, 2002. On July 3, 2002, Beckman Coulter, Inc., filed a patent infringement action against the Company in the United States District Court for the Central District of California. The complaint alleges that the Company is infringing Beckman Coulter's U.S. Patent Nos. RE 37,606 and 5,421,980, both entitled "Capillary Electrophoresis Using Replaceable Gels," and U.S. Patent No. 5,552,580, entitled "Heated Cover Device," although it does not identify the specific facts on which this allegation is based. Beckman Coulter is seeking monetary damages, costs and expenses, injunctive relief, and other relief as the court deems proper. The Company has not made any accrual in its consolidated financial statements for any potential losses in the cases described above because it believes that an adverse determination is not probable, and potential losses cannot be reasonably estimated, in any of these cases. However, the outcome of litigation is inherently uncertain, and the Company cannot be sure that it will prevail in any of the cases described above or in the Company's other current litigation. An adverse determination in certain of the Company's current litigation, particularly the cases described above, could have a material adverse effect on the consolidated financial statements of the Company. Note 10--Financial Instruments In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," amended in June 2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements require the recognition of all derivative financial instruments as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative is determined by the intended use of the derivative and the resulting designation. The Company adopted these statements effective July 1, 2000. The cumulative effect of adoption resulted in an immaterial adjustment to the consolidated financial statements. The Company's foreign currency risk management strategy utilizes derivative instruments to hedge certain foreign currency forecasted revenues and to offset the impact of changes in foreign currency exchange rates on certain foreign currency-denominated receivables and payables. The principal objective of this strategy is to minimize the risks and/or costs associated with the Company's global financing and operating activities. The Company utilizes foreign exchange forward, option, and range forward contracts to manage its foreign currency exposures. The Company does not use derivative financial instruments for trading or speculative purposes or for activities other than risk management, nor is it a party to leveraged derivatives. The fair value of foreign currency derivative contracts is recorded in either prepaid expenses and other current assets or other accrued expenses in the Consolidated Statements of Financial Position. Cash Flow Hedges The Company's international sales are typically denominated in the customers' local (non-U.S. dollar) currency. The Company uses foreign exchange forward, option, and range forward contracts to hedge a portion of forecasted international sales not denominated in U.S. dollars. The Company utilizes hedge accounting on derivative contracts that are considered highly effective in offsetting the changes in fair value of the forecasted sales transactions caused by the movements in foreign currency exchange rates. These contracts are designated as cash flow hedges and the effective portion of the change in the fair value of these contracts is recorded in APPLERA CORPORATION Annual Report 2002 67 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued other comprehensive income (loss) in the Consolidated Statements of Financial Position until the underlying external forecasted transaction affects earnings. At that time, the gain or loss on the derivative instrument, which had been deferred in accumulated other comprehensive income (loss), is reclassified to net revenues in the Consolidated Statements of Operations. During fiscal 2001 and 2002, the Company recognized net gains of $17.8 million and $17.4 million, respectively, in net revenues from derivative instruments designated as cash flow hedges of anticipated sales. At June 30, 2002, $29.3 million of net derivative losses ($24.5 million net of deferred taxes) recorded in accumulated other comprehensive income (loss) are expected to be reclassified to earnings during the next twelve months. During the fourth quarter of fiscal 2001, the FASB's Derivative Implementation Group ("DIG") issued guidance that would allow a company to defer in other comprehensive income, all or part of the changes in the option's time value for option-based hedging strategies that are perfectly or highly effective. The Company changed its methodology of accounting for currency options during the fourth quarter of fiscal 2001 based on this new guidance from the DIG. Prior to this new guidance, any changes in the time value component of a currency option were recognized in earnings in the period in which they occurred. For fiscal 2001, the Company recognized expense of $3.4 million included in other income (expense), net in the Consolidated Statements of Operations, which represented the change in the time value component of the fair value of option contracts designated as cash flow hedges. Other Foreign Currency Derivatives The Company also uses derivative financial instruments to hedge against the adverse effects that foreign currency exchange rate fluctuations may have on its foreign currency-denominated net asset positions. The gains and losses on these derivatives are expected to largely offset transaction losses and gains, respectively, on the underlying foreign currency-denominated assets and liabilities, both of which are recorded in other income (expense), net in the Consolidated Statement of Operations. Concentration of Credit Risk The forward contracts and options used by the Company in managing its foreign currency exposures contain an element of risk in that the counterparties may be unable to meet the terms of the agreements. However, the Company minimizes this risk by limiting the counterparties to a diverse group of highly-rated major domestic and international financial institutions with which the Company has other financial relationships. The Company is exposed to potential losses in the event of non-performance by these counterparties; however, the Company does not expect to record any losses as a result of counterparty default. The Company does not require and is not required to place collateral for these financial instruments. Other financial instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents, short-term investments, and accounts receivable. The Company minimizes the risk related to cash and cash equivalents and short-term investments by utilizing highly-rated financial institutions that invest in a broad and diverse range of financial instruments. The Company has established guidelines relative to credit ratings and maturities that seek to maintain safety and liquidity. Concentration of credit risk with respect to accounts receivable is limited due to the Company's large and diverse customer base, which is dispersed over differing geographic areas. Allowances are maintained for potential credit losses and such losses have historically been within management's expectations. Fair Value The fair value of significant financial instruments held or owned by the Company is estimated using various methods. Fair values of cash and cash equivalents approximate their carrying amount. The fair values of short-term investments and minority equity investments are estimated based on quoted market prices, if available, or quoted market prices of financial instruments with similar characteristics. The fair value of debt is based on the current rates offered to the Company for debt of similar remaining maturities. The following table presents the carrying amounts and fair values of the Company's significant financial instruments at June 30, 2001 and 2002: 68 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued
2001 2002 ----------------- ----------------- Carrying Fair Carrying Fair (Dollar amounts in millions) Amount Value Amount Value =========================================================================================== Cash and cash equivalents $608.5 $ 608.5 $470.2 $470.2 Short-term investments $779.3 $ 779.5 $887.9 $889.7 Currency forwards and options $ 2.6 $ 20.3 $ (4.7) $(29.2) Interest rate swap $ - $ (0.5) $ - $ - Other investments $ 9.0 $ 9.0 $ 17.1 $ 17.1 Minority equity investments $ 45.0 $ 111.1 $ 21.9 $ 37.7 Short-term debt $(45.2) $ (44.7) $ (0.3) $ (0.3) Long-term debt $ - $ - $(18.0) $(18.0) ===========================================================================================
Net unrealized gains and losses on short-term investments and minority equity investments are reported as a separate component of accumulated other comprehensive income (loss) in the Consolidated Statements of Financial Position. Note 11--Quarterly Financial Information (Unaudited) The following is a summary of quarterly financial results:
First Quarter Second Quarter Third Quarter Fourth Quarter (Dollar amounts in millions ------------------- ------------------- ------------------- ------------------- except per share amounts) 2001 2002 2001 2002 2001 2002 2001 2002 ======================================================================================================================= Consolidated Net revenues $ 367.4 $ 387.9 $ 413.3 $ 437.2 $ 447.1 $ 434.4 $ 416.3 $ 441.7 Gross margin 198.2 201.3 213.5 230.9 236.3 231.5 215.4 238.5 Net income (loss) 24.4 17.0 27.5 (61.4) 28.3 (2.9) (53.0) 6.7 ======================================================================================================================= Applied Biosystems Group Net revenues $ 363.6 $ 366.6 $ 411.0 $ 411.1 $ 439.8 $ 409.0 $ 405.1 $ 417.3 Gross margin 193.9 187.2 213.2 214.4 231.2 216.4 206.7 217.5 Net income 49.1 32.2 58.0 49.0 57.7 49.1 47.6 38.2 Dividends per share $ .0425 $ .0425 $ .0425 $ .0425 $ .085 $ .0425 $ .0425 Net income per share Basic $ 0.23 $ 0.15 $ 0.28 $ 0.23 $ 0.27 $ 0.23 $ 0.23 $ 0.18 Diluted 0.22 0.15 0.26 0.23 0.26 0.23 0.22 0.18 ======================================================================================================================= Celera Genomics Group Net revenues $ 18.3 $ 27.3 $ 20.3 $ 35.0 $ 23.4 $ 30.5 $ 27.4 $ 28.1 Net loss (25.7) (15.6) (29.7) (117.9) (29.1) (49.5) (101.7) (28.8) Net loss per share Basic and diluted $ (0.43) $ (0.25) $ (0.49) $ (1.82) $ (0.48) $ (0.72) $ (1.66) $ (0.42) ======================================================================================================================= Celera Diagnostics Net revenues $ 1.8 $ 1.9 $ 2.6 $ 1.6 $ 2.9 Net loss $ (9.4) $ (8.5) $ (12.4) $ (5.0) $ (14.5) ======================================================================================================================= Price range of common stock Applied Biosystems Group High $ 126.75 $ 30.45 $ 133.31 $ 40.42 $ 94.25 $ 39.28 $ 36.15 $ 23.99 Low $ 64.75 $ 20.20 $ 75.00 $ 23.41 $ 18.49 $ 19.05 $ 24.50 $ 15.00 Celera Genomics Group High $ 118.56 $ 39.95 $ 100.50 $ 30.93 $ 54.90 $ 27.00 $ 49.90 $ 20.70 Low $ 80.19 $ 19.30 $ 29.25 $ 23.00 $ 24.00 $ 19.45 $ 26.20 $ 10.82 =======================================================================================================================
There were no dividends on Applera - Celera stock for the periods presented. APPLERA CORPORATION Annual Report 2002 69 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Events Impacting Comparability Fiscal 2001 First and second quarter results of the Applied Biosystems group included before-tax non-recurring gains of $12.0 million and $3.0 million, respectively, primarily related to the sale of the Company's minority equity investments. The fourth quarter results of the Celera Genomics group included a before-tax charge of $69.1 million for the impairment of goodwill and other intangibles related to Paracel. Fiscal 2002 Second quarter results included a charge of $99.0 million for the immediate write-off of the value of acquired IPR&D related to the Celera Genomics group's acquisition of Axys. Second quarter results also included a charge of $2.2 million for the immediate write-off of the value of acquired IPR&D related to the Applied Biosystems group's acquisition of Boston Probes. The third quarter results of the Celera Genomics group included a before-tax charge of $25.9 million related to Paracel. The fourth quarter results of the Applied Biosystems group included before-tax losses on investments of $8.2 million. The fourth quarter results of the Celera Genomics group included before-tax losses on investments of $6.0 million and a before-tax charge of $2.8 million for severance. Note 12--Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss), net of tax, for fiscal 2000, 2001, and 2002 was as follows:
Unrealized Unrealized Gain Foreign Accumulated Gain (Loss) on Currency Minimum Other (Loss) on Hedge Translation Pension Comprehensive (Dollar amounts in millions) Investments Contracts Adjustments Liability Income (Loss) =================================================================================================================== Balance at June 30, 1999 $ 10.5 $ - $ (13.2) $ (2.1) $ (4.8) Change in net unrealized gains on investments, net of tax expense of $106.3 187.2 187.2 Net unrealized gains reclassified into earnings, net of tax expense of $17.0 (31.6) (31.6) Foreign currency translation adjustment (25.2) (25.2) Minimum pension liability adjustment, net of tax benefit of $1.2 (0.1) (0.1) - ------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2000 166.1 (38.4) (2.2) 125.5 - ------------------------------------------------------------------------------------------------------------------- Change in net unrealized losses on investments, net of tax benefit of $61.1 (113.5) (113.5) Net unrealized gains reclassified into earnings, net of tax expense of $5.2 (9.7) (9.7) Change in net unrealized gains on hedge contracts, net of tax expense of $12.4 22.7 22.7 Net unrealized gains reclassified into earnings, net of tax expense of $6.3 (11.5) (11.5) Foreign currency translation adjustment (34.2) (34.2) Minimum pension liability adjustment, net of tax benefit of $18.9 (35.2) (35.2) - ------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2001 42.9 11.2 (72.6) (37.4) (55.9) - ------------------------------------------------------------------------------------------------------------------- Change in net unrealized losses on investments, net of tax benefit of $21.7 (40.3) (40.3) Net unrealized losses reclassified into earnings, net of tax benefit of $4.8 8.9 8.9 Change in net unrealized losses on hedge contracts, net of tax benefit of $5.8 (23.9) (23.9) Net unrealized gains reclassified into earnings, net of tax expense of $5.6 (11.8) (11.8) Foreign currency translation adjustment 48.4 48.4 Minimum pension liability adjustment, net of tax benefit of $9.2 (17.0) (17.0) - ------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2002 $ 11.5 $ (24.5) $ (24.2) $ (54.4) $ (91.6) ===================================================================================================================
70 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued The currency translation adjustments are not currently adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Note 13--Other Special Charges In fiscal 2001, the Celera Genomics group recorded a $69.1 million charge to other special charges for the impairment of goodwill and other intangible assets associated with Paracel, a business acquired during the fourth quarter of fiscal 2000. Due to Paracel's substantially lower than originally anticipated performance and the future outlook of this business, management performed an assessment of future cash flows and determined that it was necessary to record an impairment charge to reduce the carrying value of Paracel's net assets to their estimated fair value. This charge included $63.7 million for the write-down of goodwill and $5.4 million for the write- down of other intangible assets. In fiscal 2002, the Celera Genomics group recorded an additional $25.9 million charge related to Paracel. This charge was comprised of $12.7 million for asset impairments, provisions of $10.1 million for the estimated cost of excess lease space and $0.2 million for severance costs, all included in other special charges. The charge also included $2.9 million for impairment of Paracel inventory included in cost of sales. These charges resulted from Paracel's unfavorable performance against the lowered profitability outlook for the business established during fiscal 2001 at the time of the initial charge. The asset impairment charges recorded during fiscal 2002 were for the write- off of the remaining goodwill of $12.1 million, other intangible assets of $0.5 million, and leasehold improvements of $0.1 million. These charges were determined by management through a revised assessment of future cash flows and, as a result, reduced the carrying value of Paracel's net assets to their estimated fair value. Excess lease costs reflect the estimated loss associated with the remaining contractual obligations under a non-cancelable lease arrangement and certain costs associated with the expected sublease of the portion of the facility not occupied by the Paracel business, net of estimated sublease income, for the remainder of the lease, which expires in fiscal 2011. Cash payments associated with the excess lease were $0.4 million during fiscal 2002. Severance and related benefits, granted to 19 employees terminated during fiscal 2002, have substantially been paid as of June 30, 2002. During the fourth quarter of fiscal 2002, the Celera Genomics group recorded a restructuring charge of $2.8 million for severance costs associated with the termination of 132 employees primarily within the functional areas of DNA sequencing, data management and analysis support, sales, and general administration. This restructuring plan was undertaken to realign the organization with the Celera Genomics group's drug discovery strategy and to reduce infrastructure previously built to support whole genome sequencing and the acquisition of customers for the Online/Information Business. All actions under this plan were taken as of June 30, 2002. Cash payments associated with this restructuring plan were $0.7 million during fiscal 2002. The remaining cash payments are expected to be paid during fiscal 2003. Note 14--Segment, Geographic, Customer And Consolidating Information Business Segments The Company is organized based on the products and services that it offers. The Company operates in the life science industry through three reportable segments: the Applied Biosystems group, the Celera Genomics group, and Celera Diagnostics. The Applied Biosystems group and the Celera Genomics group are collectively referred to as the groups. The Applied Biosystems group develops and markets instrument-based systems, reagents, software, and contract services to the life science industry and research community. Customers use these tools to analyze nucleic acids ("DNA" and "RNA") and proteins to make scientific discoveries, develop new pharmaceuticals, and to conduct standardized testing. The Celera Genomics group is engaged principally in integrating advanced technologies to discover and develop new therapeutics. The Celera Genomics group intends to leverage its capabilities in proteomics, bioinformatics, and genomics to identify and validate drug targets and diagnostic marker candidates, and to discover novel therapeutic candidates. Its Celera Discovery System(TM) ("CDS") online platform, marketed exclusively through the Knowledge Business of the Applied Biosystems group, is an integrated source of information based on the human genome and other biological and medical sources. Celera Diagnostics was established in fiscal 2001 as a 50/50 joint venture between the Applied Biosystems group and the Celera Genomics group. This venture is focused on the discovery, development and commercialization of novel diagnostics tests. Refer to the consolidating information section of this note for additional information regarding the segments. APPLERA CORPORATION Annual Report 2002 71 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Geographic Areas Information concerning principal geographical areas for fiscal 2000, 2001, and 2002 follows:
(Dollar amounts in millions) 2000 2001 2002 ====================================================================================== Net Revenues From External Customers United States $ 681.0 $ 810.2 $ 855.8 Europe 376.0 436.6 440.6 Japan 213.6 260.3 272.0 Other Far East countries 60.8 80.8 86.0 Latin America and other 39.6 56.2 46.8 - -------------------------------------------------------------------------------------- Consolidated $ 1,371.0 $ 1,644.1 $ 1,701.2 ======================================================================================
Net revenues are attributable to geographic areas based on the region of destination. Information concerning long-lived assets at June 30, 2001 and 2002 follows:
(Dollar amounts in millions) 2001 2002 ================================================================================ Long-Lived Assets United States $ 403.4 $ 439.8 Europe 17.5 34.2 Japan 14.6 14.8 Other Far East countries 3.1 3.0 Latin America and other 0.6 0.5 - -------------------------------------------------------------------------------- Consolidated $ 439.2 $ 492.3 ================================================================================
Long-lived assets exclude goodwill and other intangible assets. Customer Information The Company has a large and diverse customer base. No single customer accounted for more than 10% of total net revenues during fiscal 2000, 2001, and 2002. Consolidating Information Presented below is the Company's consolidating financial information, including the allocation of expenses between the segments in accordance with the Company's allocation policies, as well as other related party transactions, such as sales of products between segments and interest income and expense on intercompany borrowings. Earnings attributable to each group are determined by the Company's Board of Directors. This determination is generally based on net income or loss amounts of the corresponding group determined in accordance with accounting principles generally accepted in the United States of America. The management and allocation policies applicable to the attribution of assets, liabilities, revenues and expenses to the segments may be modified or rescinded, or additional policies may be adopted, at the sole discretion of the Company's Board of Directors at any time without stockholder approval. The Board of Directors would make any decision in accordance with its good faith business judgment that its decision is in the best interests of the Company and all of its stockholders as a whole. The attribution of the assets, liabilities, revenues and expenses to each segment is primarily based on specific identification of the businesses included in each segment. Where specific identification is not practical, other methods and criteria are used that management believes are equitable and provide a reasonable estimate of the assets, liabilities, revenues and expenses attributable to each segment. Intersegment Revenues Sales of products and services from one segment to another within the Company are recorded as intersegment revenues and are eliminated in determining consolidated net revenues of the Company. These sales are made on terms that would be available from third parties in commercial transactions. If terms for such transactions are not available, the purchasing group will pay fair value as determined by the Company's Board of Directors for such products and services or at the cost (including overhead) of the selling group. For fiscal 2000, 2001, and 2002, the Applied Biosystems group recorded net revenues from leased instruments, shipments of consumables and project materials, and contracted R&D services to the Celera Genomics group of $59.8 million, $64.1 million, and $22.4 million, respectively. For fiscal 2001 and 2002, the Applied Biosystems group purchased $1.5 million and $8.7 million, respectively, of diagnostics products from Celera Diagnostics under a distribution arrangement. During fiscal 2002, the Applied Biosystems group recorded revenues from leased instruments and shipments of consumables to Celera Diagnostics of $1.7 million. Access to Technology and Know-How Each segment has free access to all of the Company's technology and know-how (excluding products and services of the other group) that may be useful in that segment's business, subject to obligations and limitations applicable to the Company and to such exceptions that the Company's Board of Directors may determine. The segments consult with each other on a regular basis concerning technology issues that affect each segment. The costs of developing technology remain in the segment responsible for its development. Allocation of Corporate Overhead and Administrative Shared Services The Company's shared corporate services (such as executive management, human resources, legal, accounting, auditing, tax, treasury, strategic planning and environmental services) and related balance sheet amounts have been allocated to the segments based 72 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued upon identification of such services specifically benefiting each segment. A portion of the Company's costs of administrative shared services (such as information technology services) has been allocated in a similar manner. Where determination based on specific usage alone is not practical, other methods and criteria were used that management believes are equitable and provide a reasonable estimate of the cost attributable to each group. It is not practical to specifically identify a portion of corporate overhead expenses attributable to each of the segments. As a result, the Company allocates such corporate overhead expenses primarily based upon headcount, total expenses, and revenues attributable to each business. Management believes that the allocation methods developed are reasonable and have been consistently applied. Joint Transactions Between Segments The segments may from time to time engage in transactions jointly, including with third parties. Research and development and other services performed by one segment for a joint venture or other collaborative arrangement will be charged at fair value, as determined by the Company's Board of Directors. The Applera businesses also may jointly undertake a project, such as the Applera Genomics Initiative, where the total costs and benefits of the project are shared. Allocation of Federal and State Income Taxes The federal income taxes of the Company and its subsidiaries that own assets allocated between the groups are determined on a consolidated basis using the asset and liability approach prescribed by SFAS No. 109, "Accounting for Income Taxes." If management had utilized the separate return basis of accounting for taxes, the tax provision for the Applied Biosystems group would not have changed, but more likely than not, a significant valuation allowance would have been recorded by the Celera Genomics group. The federal income tax provisions and related tax payments or refunds are allocated between the groups based on a consolidated return approach taking into account each group's relative contribution (positive or negative) to the Company's consolidated federal taxable income, tax liability and tax credit position. Intersegment transactions are taxed as if each segment were a stand-alone company. Tax benefits that cannot be used by the group generating those benefits, but can be used on a consolidated basis, are transferred to the group that can utilize such benefits. Existing tax benefits acquired by either group in a business combination that are utilized by the other group will be reimbursed to the group that acquired such benefits. Tax benefits generated by the Celera Genomics group commencing July 1, 1998, which could be utilized on a consolidated basis, were reimbursed by the Applied Biosystems group to the Celera Genomics group up to a limit of $75 million. Pursuant to the terms of the Celera Diagnostics joint venture, the Applied Biosystems group reimburses the Celera Genomics group for tax benefits generated by Celera Diagnostics to the extent such tax benefits are utilized by the Applied Biosystems group. These tax benefits are not subject to the $75 million limit described above. As a result of the above tax allocation policy, during fiscal 2001 and 2002, the Celera Genomics group generated tax benefits of $32.2 million and $19.0 million, respectively, that were utilized by the Applied Biosystems group with no reimbursement to the Celera Genomics group. The amounts utilized by the Applied Biosystems group that were not reimbursed to the Celera Genomics group were recorded to allocated net worth of each group in the following Consolidating Statements of Financial Position. Depending on the tax laws of the respective jurisdictions, state and local income taxes are calculated on either a separate, consolidated, or combined basis. State and local income tax provisions and related tax payments or refunds are allocated between the groups in a manner designed to reflect the respective contributions of the groups to the Company's state or local taxable income. Financing Activities As a matter of policy, the Company manages most financing activities of the Applied Biosystems group and the Celera Genomics group on a centralized basis. These activities include the investment of surplus cash, the issuance and repayment of short-term and long-term debt, treasury stock repurchases, and the issuance and repayment of any preferred stock. The Company's Board of Directors has adopted the following financing policy that affects the financial results of the Applied Biosystems group and the Celera Genomics group. The Company allocates the Company's debt between the groups ("pooled debt") or, if the Company so determines, in its entirety to a particular group. The Company will allocate preferred stock, if issued, in a similar manner. Cash allocated to one group that is used to repay pooled debt or redeem pooled preferred stock decreases such group's allocated portion of the pooled debt or preferred stock. Cash or other property allocated to one group that is transferred to the other group, if so determined by the Company's Board of Directors, decreases the transferring group's allocated portion of the pooled debt or preferred stock and, correspondingly, increases the recipient group's allocated portion of the pooled debt or preferred stock. Pooled debt bears interest for the groups at a rate equal to the weighted average interest rate of the debt APPLERA CORPORATION Annual Report 2002 73 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued calculated on a quarterly basis and applied to the average pooled debt balance during the period. Preferred stock, if issued and if pooled in a manner similar to the pooled debt, will bear dividends for the groups at a rate based on the weighted average dividend rate of the preferred stock similarly calculated and applied. Any expense related to increases in pooled debt or preferred stock will be reflected in the weighted average interest or dividend rate of such pooled debt or preferred stock as a whole. If the Company allocates debt for a particular financing in its entirety to one group, that debt will bear interest for that group at a rate determined by the Company's Board of Directors. If the Company allocates preferred stock in its entirety to one group, the Company will charge the dividend cost to that group in a similar manner. If the interest or dividend cost is higher than the Company's actual cost, the other group will receive a credit for an amount equal to the difference as compensation for the use of the Company's credit capacity. Any expense related to debt or preferred stock of the Company that is allocated in its entirety to a group will be allocated in whole to that group. Cash or other property that the Company allocates to one group that is transferred to the other group could, if so determined by the Company's Board of Directors, be accounted for either as a short-term loan or as a long-term loan. Short-term loans bear interest at a rate equal to the weighted average interest rate of the Company's pooled debt. If the Company does not have any pooled debt, the Company's Board of Directors will determine the rate of interest for such loan. The Company's Board of Directors establishes the terms on which long-term loans between the groups will be made, including interest rate, amortization schedule, maturity, and redemption terms. In addition, cash allocated to the Applied Biosystems group may be reallocated to the Celera Genomics group in exchange for Celera Genomics Designated Shares as provided under the Company's Certificate of Incorporation. The number of Celera Genomics Designated Shares issued would be determined by dividing the amount of cash reallocated by the average market value of Applera - Celera stock over the 20-trading day period immediately prior to the date of the reallocation. As a result of such a reallocation, a relative percentage of future earnings or losses of the Celera Genomics group would be attributed to the Applied Biosystems group. Although the Company may allocate its debt and preferred stock between the groups, the debt and preferred stock remain obligations of the Company and all stockholders of the Company are subject to the risks associated with those obligations. Transfers of Assets Between Groups Transfers of assets can be made between groups without stockholder approval. Such transfers will be made at fair value, as determined by the Company's Board of Directors. The consideration for such transfers may be paid by one group to the other in cash or other consideration, as determined by the Company's Board of Directors. Celera Diagnostics The Applied Biosystems group contributed its existing molecular diagnostics business to Celera Diagnostics as part of its initial contribution to the joint venture. The Celera Genomics group contributed, among other things, access to its genome databases and agreed to fund all of the cash operating losses of Celera Diagnostics up to a maximum of $300 million ("initial losses"), after which, operating losses, if any, will be shared equally by the groups. Celera Diagnostics' profits, if any, will be shared in the ratio of 65 percent to the Celera Genomics group and 35 percent to the Applied Biosystems group until the cumulative profits of Celera Diagnostics equal the initial losses. Subsequently, profits and losses and cash flows would be shared equally. Capital expenditures and working capital requirements of the joint venture will be funded equally by the groups. The Applied Biosystems group will reimburse the Celera Genomics group for all tax benefits generated by Celera Diagnostics to the extent such tax benefits are utilized by the Applied Biosystems group. During fiscal 2001 and 2002, the Applied Biosystems group paid $1.7 million and $15.7 million, respectively, to the Celera Genomics group for the utilization of tax benefits generated by Celera Diagnostics. The groups account for their investments in Celera Diagnostics under the equity method of accounting, with the Celera Genomics group recording 100 percent of the initial losses in its income statement as loss from joint venture. For fiscal 2001 and 2002, the Celera Genomics group recorded 100% of the losses of Celera Diagnostics in its net loss. Additionally, the Celera Genomics group recorded the tax benefit associated with the loss generated by Celera Diagnostics. During fiscal 2001 and 2002, the Celera Genomics group funded $4.4 million and $41.3 million, respectively, of operating losses of Celera Diagnostics. During fiscal 2001 and 2002, the groups each funded $1.1 million and $2.3 million, respectively, for capital expenditures and working capital needs related to Celera Diagnostics. There is no financial information presented for Celera Diagnostics for fiscal 2000, since the joint venture was established effective April 1, 2001. In the event of liquidation of the assets attributable to Celera Diagnostics, including sale of such assets, the proceeds upon liquidation would be distributed to the 74 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued groups based on a proportion similar to their relative investment accounts. If the proceeds upon liquidation are in excess of the groups' combined investment accounts, the excess liquidation proceeds would be shared in the ratio of 65 percent to the Celera Genomics group and 35 percent to the Applied Biosystems group until the cumulative amount of the distributed excess proceeds equals the initial losses funded by the Celera Genomics group. Any additional liquidation proceeds would be allocated equally to the Celera Genomics group and the Applied Biosystems group. Online Marketing and Distribution Agreement Effective April 1, 2002, the Applied Biosystems group entered into an agreement to become the exclusive distributor of the Celera Discovery System(TM) ("CDS") online platform operated by the Celera Genomics group. As a result of this arrangement, the Applied Biosystems group is integrating CDS and other genomic and biological information into its Knowledge Business. In exchange for marketing and distribution rights to CDS and other genomic and biological information and access to CDS and related content, the Applied Biosystems group will provide the Celera Genomics group with royalty payments on revenues generated by sales of certain products of the Knowledge Business from July 1, 2002 through the end of fiscal 2012. The royalty rate is progressive, up to a maximum of 5%, with the level of sales through fiscal 2008. The royalty rate becomes a fixed percentage of sales starting in fiscal 2009, and the rate declines each succeeding fiscal year through fiscal 2012. Assays-on-Demand(TM), Assays-by-Design(SM), certain reagents for arrays, and new database subscriptions sold by the Knowledge Business are the products subject to royalties. The Celera Genomics group will continue to be responsible for the performance of its obligations under all contracts relating to its information products and services either existing on the effective date of the marketing and distribution agreement or which are entered into during a transition period ended June 30, 2002 (as well as renewals, if any, of these contracts) and will receive all revenues and other benefits under, and be responsible for all costs and expenses associated with, such contracts. Assuming the Celera Genomics group continues to perform under its existing contracts, the Applied Biosystems group will reimburse the Celera Genomics group if earnings before interest, taxes, depreciation, and amortization from these contracts during the four fiscal years ending with fiscal year 2006 are below $62.5 million and the shortfall is due to business initiatives of the Applied Biosystems group. Transfer of Business Unit from the Celera Genomics Group to the Applied Biosystems Group Effective July 1, 2001, the Company transferred the assets, liabilities and personnel of a business unit from the Celera Genomics group to the Applied Biosystems group. The Company's Board of Directors determined that the assets of the business transferred and the liabilities of the business assumed by the Applied Biosystems group constituted fair value for the transfer. The net assets were transferred at recorded book value as an increase to the Applied Biosystems group's allocated net worth and a decrease to the Celera Genomics group's allocated net worth. The Applied Biosystems group is utilizing the resources of this business unit for initiatives, including validation of single nucleotide polymorphisms, among others. In the following tables, the "Eliminations" column represents the elimination of intergroup activity and the loss on Celera Diagnostics, which is included once, in the "Celera Diagnostics" column, and again net within the "Celera Genomics group" column as "Loss from joint venture." APPLERA CORPORATION Annual Report 2002 75 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Consolidating Statement of Operations For the Year Ended June 30, 2002
Applied Celera Biosystems Genomics Celera (Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated =============================================================================================================== Net revenues from external customers $ 1,579,907 $ 120,837 $ 474 $ - $ 1,701,218 Intersegment revenues 24,112 49 8,732 (32,893) - --------------------------------------------------------------------------------------------------------------- Net Revenues 1,604,019 120,886 9,206 (32,893) 1,701,218 Cost of sales 768,516 51,898 6,230 (27,657) 798,987 - --------------------------------------------------------------------------------------------------------------- Gross Margin 835,503 68,988 2,976 (5,236) 902,231 - --------------------------------------------------------------------------------------------------------------- Selling, general and administrative 340,561 42,768 6,644 48,396 438,369 Corporate allocated expenses 38,648 7,675 2,073 (48,396) Research, development and engineering 219,630 132,655 39,022 (9,405) 381,902 Amortization of intangible assets 7,443 7,443 Other special charges 25,754 25,754 Acquired research and development 2,200 98,981 101,181 - --------------------------------------------------------------------------------------------------------------- Operating Income (Loss) 234,464 (246,288) (44,763) 4,169 (52,418) Loss on investments, net (8,536) (5,960) (14,496) Interest expense (886) (575) (1,461) Interest income 13,063 31,905 44,968 Other income (expense), net (601) (4,542) (5,143) Loss from joint venture (44,763) 44,763 - --------------------------------------------------------------------------------------------------------------- Income (Loss) Before Income Taxes 237,504 (270,223) (44,763) 48,932 (28,550) Provision (benefit) for income taxes 69,023 (58,451) 1,459 12,031 - --------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 168,481 $ (211,772) $ (44,763) $ 47,473 $ (40,581) ===============================================================================================================
76 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Consolidating Statement of Financial Position At June 30, 2002
Applied Celera Biosystems Genomics Celera (Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated ==================================================================================================================== Assets Current assets Cash and cash equivalents $ 441,328 $ 28,890 $ - $ - $ 470,218 Short-term investments 29,653 860,032 889,685 Accounts receivable, net 376,375 29,950 177 (258) 406,244 Inventories, net 142,876 1,860 2,215 (147) 146,804 Prepaid expenses and other current assets 81,759 17,082 764 (58) 99,547 - -------------------------------------------------------------------------------------------------------------------- Total current assets 1,071,991 937,814 3,156 (463) 2,012,498 Property, plant and equipment, net 354,536 127,024 8,746 (1,562) 488,744 Other long-term assets 392,055 185,206 9,924 (13,028) 574,157 - -------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,818,582 $ 1,250,044 $ 21,826 $ (15,053) $ 3,075,399 ==================================================================================================================== Liabilities and Stockholders' Equity Current liabilities Loans payable $ 299 $ - $ - $ - $ 299 Accounts payable 152,959 12,276 3,241 (258) 168,218 Accrued salaries and wages 65,187 13,585 3,393 82,165 Accrued taxes on income 92,972 8,237 101,209 Other accrued expenses 210,731 63,409 1,266 (58) 275,348 - -------------------------------------------------------------------------------------------------------------------- Total current liabilities 522,148 97,507 7,900 (316) 627,239 Long-term debt 17,983 17,983 Other long-term liabilities 171,203 33,936 95 205,234 - -------------------------------------------------------------------------------------------------------------------- Total Liabilities 693,351 149,426 7,995 (316) 850,456 - -------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 1,125,231 1,100,618 13,831 (14,737) 2,224,943 - -------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 1,818,582 $ 1,250,044 $ 21,826 $ (15,053) $ 3,075,399 ====================================================================================================================
APPLERA CORPORATION Annual Report 2002 77 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Consolidating Statement of Cash Flows For the Year Ended June 30, 2002
Applied Celera Biosystems Genomics Celera (Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated =================================================================================================================== Operating Activities From Continuing Operations Net income (loss) $ 168,481 $ (211,772) $ (44,763) $ 47,473 $ (40,581) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 81,184 36,499 3,259 (4,148) 116,794 Asset impairments 15,563 15,563 Provisions for excess lease space and severance costs 13,106 13,106 Long-term compensation programs 3,799 1,441 5,240 Deferred income taxes (12,431) (26,700) (8,404) (47,535) Losses from investments and sales of assets 8,536 5,559 14,095 Loss from joint venture and equity method investees 49,552 (44,763) 4,789 Nonreimbursable utilization of intergroup tax benefits 18,994 (18,994) Acquired research and development 2,200 98,981 101,181 Changes in operating assets and liabilities: Accounts receivable 27,258 (5,739) (177) (5,518) 15,824 Inventories (455) 1,174 559 (21) 1,257 Prepaid expenses and other assets (27,460) 1,962 (3,279) 58 (28,719) Accounts payable and other liabilities 30,515 (10,501) 6,506 15,323 41,843 - ------------------------------------------------------------------------------------------------------------------ Net Cash Provided (Used) By Operating Activities 300,621 (49,869) (37,895) 212,857 - ------------------------------------------------------------------------------------------------------------------ Investing Activities From Continuing Operations Additions to property, plant and equipment, net (88,274) (17,809) (8,024) (114,107) Purchases of short-term investments, net (29,653) (78,975) (108,628) Acquisitions and investments, net (39,473) (48,347) 45,919 (41,901) Proceeds from the sale of assets, net 5,228 5,228 - ------------------------------------------------------------------------------------------------------------------ Net Cash Used By Investing Activities (152,172) (145,131) (8,024) 45,919 (259,408) - ------------------------------------------------------------------------------------------------------------------ Net Cash Used By Operating Activities From Discontinued Operations (2,843) (2,843) - ------------------------------------------------------------------------------------------------------------------ Financing Activities Net change in loans payable (15,278) (8,443) (23,721) Principal payments on long-term debt (28,973) (10,000) (38,973) Dividends (36,020) (36,020) Net cash funding from groups 45,919 (45,919) Purchases of common stock for treasury (68,950) (941) (69,891) Proceeds from stock issued for stock plans 21,017 27,198 48,215 - ------------------------------------------------------------------------------------------------------------------ Net Cash Provided (Used) By Financing Activities (128,204) 7,814 45,919 (45,919) (120,390) - ------------------------------------------------------------------------------------------------------------------ Effect Of Exchange Rate Changes On Cash 31,467 31,467 - ------------------------------------------------------------------------------------------------------------------ Net Change In Cash And Cash Equivalents 48,869 (187,186) (138,317) Cash And Cash Equivalents Beginning Of Year 392,459 216,076 608,535 - ------------------------------------------------------------------------------------------------------------------ Cash And Cash Equivalents End Of Year $ 441,328 $ 28,890 $ - $ - $ 470,218 ===================================================================================================================
78 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Consolidating Statement of Operations For the Year Ended June 30, 2001
Applied Celera Biosystems Genomics Celera (Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated =================================================================================================================== Net revenues from external customers $ 1,555,346 $ 88,680 $ 100 $ - $ 1,644,126 Intersegment revenues 64,149 705 1,487 (66,341) - ------------------------------------------------------------------------------------------------------------------- Net Revenues 1,619,495 89,385 1,587 (66,341) 1,644,126 Cost of sales 774,475 42,990 986 (37,739) 780,712 - ------------------------------------------------------------------------------------------------------------------- Gross Margin 845,020 46,395 601 (28,602) 863,414 - ------------------------------------------------------------------------------------------------------------------- Selling, general and administrative 337,871 49,057 1,077 52,054 440,059 Corporate allocated expenses 42,797 9,257 (52,054) Research, development and engineering 184,491 164,693 4,484 (30,251) 323,417 Amortization of goodwill and intangible assets 43,934 43,934 Other special charges 69,069 69,069 - ------------------------------------------------------------------------------------------------------------------- Operating Income (Loss) 279,861 (289,615) (4,960) 1,649 (13,065) Gain on investments, net 14,985 14,985 Interest expense (1,296) (829) (2,125) Interest income 16,767 63,581 80,348 Other income (expense), net (5,832) (839) (6,671) Loss from joint venture (4,960) 4,960 - ------------------------------------------------------------------------------------------------------------------- Income (Loss) Before Income Taxes 304,485 (232,662) (4,960) 6,609 73,472 Provision (benefit) for income taxes 92,094 (46,433) 577 46,238 - ------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 212,391 $ (186,229) $ (4,960) $ 6,032 $ 27,234 ===================================================================================================================
APPLERA CORPORATION Annual Report 2002 79 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Consolidating Statement of Financial Position At June 30, 2001
Applied Celera Biosystems Genomics Celera (Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated ==================================================================================================================== Assets Current assets Cash and cash equivalents $ 392,459 $ 216,076 $ - $ - $ 608,535 Short-term investments 779,482 779,482 Accounts receivable, net 382,560 24,019 (5,776) 400,803 Inventories, net 140,813 6,239 2,774 (168) 149,658 Prepaid expenses and other current assets 98,124 4,838 44 103,006 - -------------------------------------------------------------------------------------------------------------------- Total current assets 1,013,956 1,030,654 2,818 (5,944) 2,041,484 Property, plant and equipment, net 315,356 123,497 2,417 (5,710) 435,560 Other long-term assets 348,575 65,985 8,929 (12,675) 410,814 - -------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,677,887 $ 1,220,136 $ 14,164 $ (24,329) $ 2,887,858 ==================================================================================================================== Liabilities and Stockholders' Equity Current liabilities Loans payable $ 14,678 $ - $ - $ - $ 14,678 Current portion of long-term debt 30,480 30,480 Accounts payable 162,104 21,024 912 (5,776) 178,264 Accrued salaries and wages 49,553 15,088 213 64,854 Accrued taxes on income 82,717 2,561 (2,262) 83,016 Other accrued expenses 168,552 46,907 364 215,823 - -------------------------------------------------------------------------------------------------------------------- Total current liabilities 508,084 85,580 1,489 (8,038) 587,115 Other long-term liabilities 128,592 23,840 152,432 - -------------------------------------------------------------------------------------------------------------------- Total Liabilities 636,676 109,420 1,489 (8,038) 739,547 - -------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 1,041,211 1,110,716 12,675 (16,291) 2,148,311 - -------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 1,677,887 $ 1,220,136 $ 14,164 $ (24,329) $ 2,887,858 ====================================================================================================================
80 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Consolidating Statement of Cash Flows For the Year Ended June 30, 2001
Applied Celera Biosystems Genomics Celera (Dollar amounts in thousands) Group Group Diagnostics Eliminations Consolidated ================================================================================================================== Operating Activities From Continuing Operations Net income (loss) $ 212,391 $ (186,229) $ (4,960) $ 6,032 $ 27,234 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 66,794 65,503 549 (3,695) 129,151 Asset impairments 69,069 69,069 Long-term compensation programs 4,477 1,605 6,082 Deferred income taxes 20,488 (8,449) 3,942 15,981 Gains from sales of assets (14,985) (14,985) Loss from joint venture 4,960 (4,960) Nonreimbursable utilization of intergroup tax benefits 32,197 (32,197) Changes in operating assets and liabilities: Tax benefit receivable from the Applied Biosystems group 16,702 (16,702) Accounts receivable (42,279) (9,083) 2,063 (49,299) Inventories 4,231 (2,903) (499) 168 997 Prepaid expenses and other assets (34,327) (158) 39 (34,446) Accounts payable and other liabilities (107,315) 32,629 32 11,274 (63,380) - ------------------------------------------------------------------------------------------------------------------ Net Cash Provided (Used) By Operating Activities 141,672 (48,551) (4,839) (1,878) 86,404 - ------------------------------------------------------------------------------------------------------------------ Investing Activities From Continuing Operations Additions to property, plant and equipment, net (143,663) (33,817) (1,734) 1,878 (177,336) Purchases of short-term investments, net (238,115) (238,115) Acquisitions and investments, net (5,912) (9,573) 6,573 (8,912) Proceeds from the sale of assets, net 15,498 15,498 - ------------------------------------------------------------------------------------------------------------------ Net Cash Used By Investing Activities (134,077) (281,505) (1,734) 8,451 (408,865) - ------------------------------------------------------------------------------------------------------------------ Net Cash Used By Operating Activities From Discontinued Operations (2,860) (2,860) - ------------------------------------------------------------------------------------------------------------------ Financing Activities Net change in loans payable 1,553 1,553 Principal payments on long-term debt (46,000) (46,000) Dividends (35,669) (35,669) Net cash funding from groups 6,573 (6,573) Proceeds from stock issued for stock plans 37,836 22,238 60,074 - ------------------------------------------------------------------------------------------------------------------ Net Cash Provided (Used) By Financing Activities 3,720 (23,762) 6,573 (6,573) (20,042) - ------------------------------------------------------------------------------------------------------------------ Effect Of Exchange Rate Changes On Cash (10,604) (10,604) - ------------------------------------------------------------------------------------------------------------------ Net Change In Cash And Cash Equivalents (2,149) (353,818) (355,967) Cash And Cash Equivalents Beginning Of Year 394,608 569,894 964,502 - ------------------------------------------------------------------------------------------------------------------ Cash And Cash Equivalents End Of Year $ 392,459 $ 216,076 $ - $ - $ 608,535 ==================================================================================================================
APPLERA CORPORATION Annual Report 2002 81 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Consolidating Statement of Operations For the Year Ended June 30, 2000
Applied Celera Biosystems Genomics (Dollar amounts in thousands) Group Group Eliminations Consolidated ===================================================================================================== Net revenues from external customers $ 1,328,288 $ 42,747 $ - $ 1,371,035 Intersegment revenues 59,812 (59,812) - ----------------------------------------------------------------------------------------------------- Net Revenues 1,388,100 42,747 (59,812) 1,371,035 Cost of sales 637,693 15,045 (28,639) 624,099 - ----------------------------------------------------------------------------------------------------- Gross Margin 750,407 27,702 (31,173) 746,936 - ----------------------------------------------------------------------------------------------------- Selling, general and administrative 348,037 35,553 53,321 436,911 Corporate allocated expenses 45,852 7,469 (53,321) Research, development and engineering 141,194 148,620 (34,229) 255,585 Amortization of goodwill and intangible assets 4,166 4,166 Other special charges 2,142 2,142 - ----------------------------------------------------------------------------------------------------- Operating Income (Loss) 213,182 (168,106) 3,056 48,132 Gain on investments, net 48,603 48,603 Interest expense (1,386) (2,115) (3,501) Interest income 18,620 20,808 39,428 Intergroup interest income (expense) (6,740) 6,740 Other income (expense), net 3,446 3,446 - ----------------------------------------------------------------------------------------------------- Income (Loss) Before Income Taxes 275,725 (142,673) 3,056 136,108 Provision (benefit) for income taxes 89,478 (49,936) 1,070 40,612 - ----------------------------------------------------------------------------------------------------- Net Income (Loss) $ 186,247 $ (92,737) $ 1,986 $ 95,496 =====================================================================================================
82 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Notes to Consolidated Financial Statements--continued Consolidating Statement of Cash Flows For the Year Ended June 30, 2000
Applied Celera Biosystems Genomics (Dollar amounts in thousands) Group Group Eliminations Consolidated ===================================================================================================== Operating Activities From Continuing Operations Net income (loss) $ 186,247 $ (92,737) $ 1,986 $ 95,496 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 54,513 29,575 (3,389) 80,699 Long-term compensation programs 9,652 883 10,535 Deferred income taxes (19,428) (6,971) (26,399) Gains from sales of assets (56,801) (56,801) Changes in operating assets and liabilities: Tax benefit receivable from the Applied Biosystems group (6,767) 6,767 Accounts receivable (62,186) (11,620) 1,268 (72,538) Inventories (2,795) 615 (2,180) Prepaid expenses and other assets (22,396) (446) (22,842) Accounts payable and other liabilities 80,061 29,138 (6,965) 102,234 - ----------------------------------------------------------------------------------------------------- Net Cash Provided (Used) By Operating Activities 166,867 (58,330) (333) 108,204 - ----------------------------------------------------------------------------------------------------- Investing Activities From Continuing Operations Additions to property, plant and equipment, net (94,449) (29,498) 333 (123,614) Purchases of short-term investments, net (541,127) (541,127) Acquisitions and investments, net (20,748) (2,275) (23,023) Proceeds from the sale of assets, net 82,763 82,763 Proceeds from the collection of notes receivable 150,000 150,000 - ----------------------------------------------------------------------------------------------------- Net Cash Provided (Used) By Investing Activities 117,566 (572,900) 333 (455,001) - ----------------------------------------------------------------------------------------------------- Net Cash Used By Operating Activities From Discontinued Operations (15,081) (15,081) - ----------------------------------------------------------------------------------------------------- Financing Activities Net change in loans payable 6,701 46,000 52,701 Dividends (26,358) (26,358) Net proceeds from follow-on stock offering 943,303 943,303 Proceeds from stock issued for stock plans 43,434 17,613 61,047 Payment of intergroup note (150,000) 150,000 Net cash allocated (to) from the groups 27,283 (27,283) - ----------------------------------------------------------------------------------------------------- Net Cash Provided (Used) By Financing Activities (98,940) 1,129,633 1,030,693 - ----------------------------------------------------------------------------------------------------- Effect Of Exchange Rate Changes On Cash (12,334) (12,334) - ----------------------------------------------------------------------------------------------------- Net Change In Cash And Cash Equivalents 158,078 498,403 656,481 Cash And Cash Equivalents Beginning Of Year 236,530 71,491 308,021 - ----------------------------------------------------------------------------------------------------- Cash And Cash Equivalents End Of Year $ 394,608 $ 569,894 $ - $ 964,502 =====================================================================================================
APPLERA CORPORATION Annual Report 2002 83 APPLERA CORPORATION Report of Management and Report of Independent Accountants Report of Management To the Stockholders of Applera Corporation Management is responsible for the accompanying consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, it is necessary for management to make informed judgments and estimates which it believes are appropriate under the circumstances. Financial information presented elsewhere in this annual report is consistent with that in the financial statements. In meeting its responsibility for preparing reliable financial statements, the Company maintains a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with corporate policy and management authorization. The Company believes its accounting controls provide reasonable assurance that errors or irregularities which could be material to the financial statements are prevented or would be detected within a timely period. In designing such control procedures, management recognizes judgments are required to assess and balance the costs and expected benefits of a system of internal accounting controls. Adherence to these policies and procedures is reviewed through a coordinated audit effort of the Company's internal audit staff and independent accountants. The Audit/Finance Committee of the Board of Directors is comprised solely of outside directors and is responsible for overseeing and monitoring the quality of the Company's accounting and auditing practices. The independent accountants and internal auditors have full and free access to the Audit/ Finance Committee and meet periodically with the committee to discuss accounting, auditing, and financial reporting matters. /s/ Dennis L. Winger - -------------------------------- Dennis L. Winger Senior Vice President and Chief Financial Officer /s/ Tony L. White - -------------------------------- Tony L. White Chairman, President, and Chief Executive Officer Report of Independent Accountants To the Stockholders and Board of Directors of Applera Corporation In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of operations, of stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of Applera Corporation and its subsidiaries at June 30, 2002 and 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" in fiscal 2002. /s/ PricewaterhouseCoopers LLP - -------------------------------- PricewaterhouseCoopers LLP Stamford, Connecticut July 25, 2002 84 APPLERA CORPORATION Annual Report 2002 APPLERA CORPORATION Directors and Officers BOARD OF DIRECTORS Tony L. White Chairman, President, and Chief Executive Officer Applera Corporation Director since 1995 (1) Richard H. Ayers Retired Chairman and Chief Executive Officer The Stanley Works Director since 1988 (1,2) Jean-Luc Belingard President Beaufour Ipsen Group Director since 1993 (3,4,5) Robert H. Hayes, Ph.D. Philip Caldwell Professor, Emeritus Harvard Business School Director since 1985 (1,2,5) Arnold J. Levine, Ph.D. Visiting Professor Institute for Advanced Studies Director since 1999 (3,4,5) Theodore E. Martin Retired President and Chief Executive Officer Barnes Group Inc. Director since 1999 (2) Carolyn W. Slayman, Ph.D. Sterling Professor and Deputy Dean Yale University School of Medicine Director since 1994 (1,3,4,5) Orin R. Smith Retired Chairman and Chief Executive Officer Engelhard Corporation Director since 1995 (3,4) Georges C. St. Laurent, Jr. Principal St. Laurent Properties Former Chief Executive Officer Western Bank Director since 1996 (3,4,5) James R. Tobin President and Chief Executive Officer Boston Scientific Corporation Director since 1999 (2) Committee Memberships: 1 Executive Committee 2 Audit/Finance Committee 3 Management Resources Committee 4 Nominating/Corporate Governance Committee 5 Technology Advisory Committee CORPORATE OFFICERS Tony L. White* Chairman, President, and Chief Executive Officer David S. Block, M.D. Vice President Celera Genomics Robert F.G. Booth, Ph.D. Vice President Celera Genomics Samuel E. Broder, M.D. Vice President Celera Genomics Patrick T. Carroll Vice President Applied Biosystems Ugo D. DeBlasi Finance Celera Genomics Paul D. Grossman Intellectual Property Applied Biosystems Michael W. Hunkapiller, Ph.D.* Senior Vice President and President Applied Biosystems Vikram Jog Corporate Controller Robert C. Jones Vice President Applied Biosystems Barbara J. Kerr* Vice President Human Resources Victor K. Lee Intellectual Property Celera Diagnostics Thomas P. Livingston Secretary Wayne W. Montgomery Intellectual Property Celera Genomics Sandeep Nayyar Finance Applied Biosystems Tama Olver Vice President and Chief Information Officer Kathy Ordonez* Senior Vice President and President Celera Genomics and Celera Diagnostics John S. Ostaszewski Treasurer Robert P. Ragusa Vice President Applied Biosystems William B. Sawch* Senior Vice President and General Counsel Deborah A. Smeltzer Vice President Applied Biosystems Thomas J. White, Ph.D. Vice President Celera Diagnostics Dennis L. Winger* Senior Vice President and Chief Financial Officer * Member, Management Executive Committee APPLERA CORPORATION Annual Report 2002 85 APPLERA CORPORATION Stockholder Information PRINCIPAL OFFICES Applera Corporation 301 Merritt 7 Norwalk, CT 06851-1070 T 203.840.2000 www.applera.com Mailing Address: Applera Corporation 301 Merritt 7 P.O. Box 5435 Norwalk, CT 06856-5435 Applied Biosystems 850 Lincoln Centre Drive Foster City, CA 94404 T 650.570.6667 www.appliedbiosystems.com Celera Genomics 45 West Gude Drive Rockville, MD 20850 T 240.453.3000 www.celera.com Celera Diagnostics 1401 Harbor Bay Parkway Alameda, CA 94502 T 510.749.4200 www.celeradiagnostics.com STOCKHOLDER RESPONSE CENTER EquiServe Trust Company, N.A., the stockholder services and transfer agent, will answer questions about accounts, certificates, and dividends. Please call toll-free: 800.730.4001 or write to: EquiServe Trust Company, N.A. P.O. Box 43010 Providence, RI 02940-3010 www.equiserve.com DIVIDEND REINVESTMENT The Applied Biosystems Dividend Reinvestment Plan provides owners of Applera-Applied Biosystems stock with a convenient, automatic, and inexpensive way to purchase additional shares. For information and an enrollment form, contact EquiServe Trust Company at the address above. STOCKHOLDER PUBLICATIONS Applera Corporation information, including quarterly earnings releases, is available by calling 800.762.6923. This menu-driven system allows callers to receive specific news releases by fax within minutes of a request. Corporate publications, including the annual report, proxy statement, and Securities and Exchange Commission filings (Forms 10-K, 10-Q, etc.), may also be requested and will be sent by mail. STOCK EXCHANGE LISTINGS The Applera-Applied Biosystems and Applera-Celera Genomics stocks are listed on the New York and Pacific exchanges under the symbols ABI and CRA, respectively. FORM 10-K A copy of the annual report to the Securities and Exchange Commission on Form 10-K may be obtained without charge by writing to the Secretary at the 301 Merritt 7 corporate address. INFORMATION VIA INTERNET Internet users can access information on Applera Corporation, its public announcements, including press releases, quarterly conference calls, products, and services, and other items of interest, at the following address: www.applera.com Alternatively, you may request this information by writing to: Applera Corporation Corporate Communications 850 Lincoln Centre Drive Foster City, CA 94404 ANNUAL MEETING The Annual Meeting of Stockholders will be held on Thursday, October 17, 2002, at 9:30 a.m. at 301 Merritt 7, Norwalk, CT 06851. INVESTOR RELATIONS Vice President, Investor Relations Peter Dworkin Investment professionals should call 650.554.2449. CORPORATE COMMUNICATIONS Vice President, Corporate Communications Carolyn E. Christenson News media representatives and others seeking general information should call 650.554.2636. TRADEMARKS AB (Design), API 4000, Applera, Assays-by-Design, Assays-on-Demand, Celera, Celera Diagnostics, Celera Discovery System, Celera Genomics, the Celera Spirit, and ViroSeq are trademarks and ABI PRISM, Applied Biosystems, BigDye are registered trademarks of Applera Corporation or its subsidiaries in the United States and certain other countries. Q TRAP is a trademark of Applied Biosystems/MDS SCIEX Instruments MDS Inc. TaqMan is a registered trademark of Roche Molecular Systems, Inc. ICAT is a trademark of the University of Washington, exclusively licensed to the Applied Biosystems Group of Applera Corporation. EQUAL EMPLOYMENT OPPORTUNITY AND AFFIRMATIVE ACTION Applera Corporation has long been committed to Equal Employment Opportunity and Affirmative Action. A policy of positive action is the foundation of this commitment and is typified at Applera Corporation by programs directed toward responsible community involvement. (c)2002 Applera Corporation 86 APPLERA CORPORATION Annual Report 2002 Applera Corporation 301 Merritt 7 [Applera Corporation Logo] Norwalk, CT 06851 tel 203.840.2000 www.applera.com 121PU05-01 EX-21 10 b320198ex21.txt SUBSIDIARIES OF APPLERA CORPORATION EXHIBIT 21 SUBSIDIARIES OF APPLERA CORPORATION AS OF JUNE 30, 2002
State or Jurisdiction Name of Incorporation or Organization - ---- -------------------------------- Applera Overseas Corporation (New York, USA) Applied Biosystems Pty Ltd. (Australia) Applied Biosystems (Canada) Limited (Canada) Applied Biosystems/MDS SCIEX Instruments (1) (Canada) Applied Biosystems (Thailand) Limited (Thailand) PE AG (Switzerland) Applera France S.A. (France) PE (Sweden) AB (Sweden) PE Stockholm AB (Sweden) Applied Biosystems OY (Finland) Applera Holding BV (The Netherlands) Applera Finance BV (The Netherlands) Nelson Analytical GmbH (Germany) Applera Europe BV (The Netherlands) Applied Biosystems Holdings Limited (UK) Perkin-Elmer (UK) Pension Trustees Limited (UK) Applied Biosystems Ltd (UK) PE GB Ltd. (UK) Applera Polska Sp.zo.o. (Poland) Applera Magyarorszag Kft (Hungary) Applera Czech Republic s.r.o. (Czech Republic) Agrogene S.A. (2) (France) PE Genscope GmbH (Switzerland) Spartan Ltd. (3) (Channel Isles) Listronagh Company (Ireland) Applied Biosystems Asia Pte. Ltd. (Singapore) Applied Biosystems Malaysia Sdn. Bhd. (Malaysia) Applera Holding GmbH (Germany) Applera South Africa (PTY) Limited (South Africa) PE Manufacturing GmbH (Germany) AB Manufacturing GmbH (Germany) Applera Austria Handels GmbH (Austria) Applied Biosystems Hong Kong, Ltd. (Hong Kong) Applied Biosystems do Brasil Ltda. (Brazil) PE Biosystems ZAO (Russia) Applied Biosystems Korea LLC (4) (Korea) PE Corporation (NY) (New York, USA) Applied Biosystems de Mexico S. de R.L. de C.V. (8) (Mexico) Applera Insurance Company Limited (8) (Bermuda) PE FSC, Inc. (8) (U.S.Virgin Islands) Applera Hispania SA (8) (Spain) Applera International, Inc. (Delaware, USA) PE Korea Corporation (Delaware, USA)) Applied Biosystems Taiwan Corporation (Delaware, USA) PE Overseas Ltd. (Cayman Islands) Applied Biosystems China, Inc. (Delaware, USA)
State or Jurisdiction Name of Incorporation or Organization - ---- -------------------------------- GenScope, Inc. (Delaware, USA) PE AgGen, Inc. (Utah, USA) PerSeptive Biosystems, Inc. (Delaware, USA) Applera Deutschland GmbH (Germany) Applied Biosystems Japan, Ltd. (Japan) PerSeptive Biosystems (UK) Ltd. (UK) PerSeptive Biosystems (Canada) Ltd. (Canada) GC Biotechnologies LLC (5) (Delaware, USA) Shanghai GeneCore Biotechnologies Company, Ltd. (China) PNA Diagnostics ApS (Denmark) Boston Probes, Inc. (6) (Delaware, USA) Procera Science, Inc. (Delaware, USA) Paracel, Inc. (California, USA) Paracel Limited (UK) Axys Pharmaceuticals, Inc. (Delaware, USA) Genos Biosciences, Inc. (1) (Delaware, USA) Foster City Holdings, LLC (Delaware, USA) Celera Diagnostics, LLC (7) (Delaware, USA) Rockville Holdings, LLC (Delaware, USA) Celera Diagnostics, LLC (7) (Delaware, USA)
- ---------------- Note: Entities directly owned by subsidiaries of Applera Corporation are indented and listed below their immediate parent. Ownership is 100% unless otherwise indicated. (1) 50.0% ownership (2) 49.0% ownership (3) 51.0% ownership by Applera Overseas Corporation, and 49% by Applera Europe BV (indirectly wholly owned by Applera Corporation) (4) 80.0% ownership by Applera Overseas Corporation, and 20% by PE Corporation (NY) (indirectly wholly owned by Applera Corporation) (5) 98.0% ownership (6) 72.4% ownership by PE Corporation (NY), 15.1% by PNA Diagnostics ApS, and 12.5% by Applera Corporation (indirectly wholly owned by Applera Corporation) (7) 50.0% ownership by Foster City Holdings, LLC and 50% ownership by Rockville Holdings, LLC (indirectly wholly owned by Applera Corporation) (8) Applera Corporation consummated an internal reorganization of certain of its assets effective as of the end of its 2002 fiscal year. As part of this reorganization, ownership of these entities has been transferred by PE Corporation (NY) to Applera Corporation subject to obtaining necessary governmental clearances. Applera Corporation conducts its business through its Applied Biosystems Group, its Celera Genomics Group, and its Celera Diagnostics joint venture between these two groups. Applera Corporation and its direct and indirect wholly owned subsidiaries conduct business under the names of these businesses and variants thereof. In addition, Boston Probes, Inc., Paracel, Inc., and Axys Pharmaceuticals, Inc. may from time to time conduct business under their respective corporate names and variants thereof. Applied Biosystems/MDS SCIEX Instruments and Agrogene S.A. conduct business under their respective company names and variants thereof. GC Biotechnologies LLC and its subsidiary Shanghai GeneCore Biotechnologies Company, Ltd. conduct business under both of their company names and variants thereof. EX-23 11 b320198_ex23.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-39549, 333-92225, and 333-72858) and Form S-8 (Nos. 33-25218, 33-50847, 33-50849, 33-58778, 333-15189, 333-15259, 333-38713, 333-38881, 333-42683, 333-68147, 333-82679, 333-82677, 333-91771, 333-91951, 333-91955, 333-35080, 333-51644, 333-51648, 333-73980, 333-74252, and 333-74254) of Applera Corporation of our report dated July 25, 2002 relating to the consolidated financial statements which appears in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated July 25, 2002 relating to the financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Stamford, Connecticut September 26, 2002 EX-99.1 12 b320198ex99_1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICE Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Applera Corporation (the "Company") on Form 10-K for the year ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Tony L. White, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Tony L. White - ----------------------------- Chief Executive Officer Date: September 27, 2002 EX-99.2 13 b320198ex99_2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Applera Corporation (the "Company") on Form 10-K for the year ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dennis L. Winger, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Dennis L. Winger - ---------------------------- Chief Financial Officer Date: September 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----