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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
OR
[ ] Transition Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
For the transition period from ________ to _______
Commission File Number 1-4389
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PE Corporation
(Exact name of registrant as specified in its charter)
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DELAWARE 06-1534213
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
761 Main Avenue, Norwalk, Connecticut 06859-0001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-762-1000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of class on which registered
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PE Corporation - PE Biosystems Group New York Stock Exchange
Common Stock (par value $0.01 per share) Pacific Stock Exchange
PE Corporation - Celera Genomics Group New York Stock Exchange
Common Stock (par value $0.01 per share) Pacific Stock Exchange
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Securities registered pursuant to Section 12 (g) of the Act:
Title of class
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Class G Warrants
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of September 20, 1999, 102,965,548 shares of PE Corporation - PE
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 approximately $7,777,122,000. As of September 20, 1999,
25,804,698 shares of PE 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 approximately
$1,213,628,000.
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DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders for Fiscal Year ended June 30, 1999 - Parts I, II,
and IV.
Proxy Statement for Annual Meeting of Stockholders dated September 10,
1999 - Part III.
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PART I
Item 1. BUSINESS
(a) General Development of Business.
PE Corporation (hereinafter referred to as "Registrant") was
incorporated in 1998 under the laws of the State of Delaware, and is successor
to The Perkin-Elmer Corporation, which was incorporated in 1939 under the laws
of the State of New York. On January 21, 1999, Registrant's board of directors
approved the agreement and plan of merger implementing the recapitalization of
The Perkin-Elmer Corporation, its merger with a subsidiary of Registrant, and
the establishment of two classes of common stock that track each business group
of Registrant. These measures were approved by the shareholders of The
Perkin-Elmer Corporation on April 27, 1999, and the merger was completed in May,
1999. Registrant conducts its business through two groups: PE Biosystems Group
and Celera Genomics Group. Registrant maintains a corporate staff to provide
accounting, tax, legal, and other internal services.
PE Biosystems Group is engaged in: (1) research, development,
manufacture, sale, and support of instrument systems, reagents, and software and
(2) related consulting and contract research and development services. PE
Biosystems Group's products are used primarily in the pharmaceutical,
biotechnology, environmental testing, food, human identification, agriculture,
and chemical manufacturing industries. Universities, government agencies, and
other non-profit organizations engaged in research activities also use the PE
Biosystems Group's products.
Celera Genomics Group is engaged principally in the generation,
compilation, sale, and support of genomic information and related information
management and analysis software; discovery, validation, and licensing of
proprietary gene products, genetic markers, and information concerning genetic
variability; and related consulting and contract research and development
services.
On May 28, 1999, Registrant sold its Analytical Instruments business to
EG&G, Inc. for $425 million, $275 million of which was in cash and $150 million
of which is in one year notes, subject to post-closing adjustments pursuant to
the terms of the agreement with EG&G, Inc.
On June 2, 1999, Registrant sold its equity interest in Tecan AG in a
public offering in Switzerland and private placement outside of Switzerland.
On June 17, 1999, the Board of Directors of Registrant announced that
PE Biosystems Group Common Stock would split, and each holder of record on July
12, 1999, of such Common Stock would receive an additional share of such Common
Stock, for each share held, by way of a stock dividend.
(b) Financial Information About Industry Segments.
A summary of net revenues from external customers and long-lived assets
attributable to each of the Registrant's industry segments for the fiscal years
ended June 30, 1999, 1998, and 1997 is incorporated herein by reference to Note
6 on Page 62, Note 5 on Pages 88-89, and Note 6 on Pages 122-123 of the Annual
Report to Stockholders for the fiscal year ended June 30, 1999.
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(c) Narrative Description of Business
PE BIOSYSTEMS GROUP
PE Biosystems Group is a world leader in the development, manufacture,
sale, and service of instrument systems and associated consumable products for
life science research and related applications. Its products are used in various
applications including the synthesis, amplification, purification, isolation,
analysis, and sequencing of nucleic acids, proteins, and other biological
molecules.
PE Biosystems Group currently consists of four business units and a
shared service organization consisting of human resources, finance, sales,
marketing communications, manufacturing, legal, quality control, and advanced
research. It also receives from Registrant general and administrative services,
such as executive management, human resources, legal, accounting and auditing,
tax, treasury, strategic planning, and environmental services. The business
units that make up PE Biosystems Group are: Applied Biosystems, PerSeptive
Biosystems, PE Informatics, and Tropix. Each unit is responsible for the
development and marketing of products within its particular area of business.
The business units serve substantially the same customer base but have little
overlap in their product offerings. As a result, PE Biosystems Group is able to
enhance the operating efficiency of these units through cross-selling and
reduced administrative costs.
Background
All living organisms contain four basic biomolecules: nucleic acids,
which include DNA and RNA; proteins; carbohydrates; and lipids. Biomolecules are
typically much larger and more complex than common molecules. These structural
differences make the analysis of biomolecules significantly more complex than
the analysis of smaller compounds. Although all of these biomolecules are
critical for a cell to function normally, historically, key advances in
therapeutics have come from an understanding of proteins or DNA. DNA molecules
provide instructions that ultimately control the synthesis of proteins within a
cell. 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 between 4
million nucleotides for simple bacteria and 3.5 billion base pairs of
nucleotides or more for human beings.
Increasingly, and principally driven by the "biotechnology revolution,"
researchers are developing an understanding of and focusing on 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 estimated 50,000 to 150,000
genes that make up the human genome.
Individual research efforts generally fall into two broad categories,
sequencing and sizing. In sequencing procedures, the goal is to determine the
exact order of the individual
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nucleotides in a DNA strand so that this information can be related to the
genetic activity influenced by that piece of DNA. In DNA sizing, a particular
fragment of a DNA molecule, isolated from a specific sample, is tested to
determine whether it contains a particular category of size or nucleotide order.
This testing does not seek to determine the complete structure of the segment,
but rather merely tries to determine if the particular piece is a certain length
or contains a specific short sequence.
Genetic research is expected to increase in the near future in part
because of a need by the pharmaceutical and biotechnology industries to
accelerate their drug discovery and development efforts. This need has also
created a demand for increased automation and efficiency in pharmaceutical and
biotechnology laboratories. PE Biosystems Group's products address this need by
combining the detection capabilities of bioanalytical instruments with advances
in automation.
Applied Biosystems. Applied Biosystems ("AB"), the genetic analysis and genomics
technology unit of PE Biosystems Group, develops, markets, and services
instrument systems for nucleic acid synthesis, Polymerase Chain Reaction
("PCR,") DNA sequencing, genetic analysis, and cellular detection. These
products and services are used in both research and commercial applications for
purifying, analyzing, synthesizing, sequencing, and amplifying genetic material.
AB's products can be broadly classified into the following categories:
o PCR Products. PCR is a process in which a short strand of DNA is
duplicated, or "amplified," so that it can be more readily
detected and analyzed. AB's PCR amplification instruments,
otherwise known as thermal cyclers, include 24, 48, and 96 sample
amplification systems, several combination thermal cyclers and PCR
detection systems, various reagents, and software. AB recently
released a dual 384 sample thermal cycler which is expected to
complement its Model 3700 DNA Analyzer and fill a significant
market need for laboratories involved in high volume genomic
research.
The Sequence Detection Systems product line, introduced in 1996,
uses a unique PCR reagent discovered by the Roche Group and
developed by AB, TaqMan(R), to quantitatively detect PCR products
during the thermal cycling process. This product line, which
includes the Model 7700, has been widely accepted in the
pharmaceutical discovery research market.
o Genetic Analysis. Genetic analysis primarily uses electrophoresis
techniques for separating molecules based on their differential
mobility in an electric field. AB's genetic analysis products
generally perform both DNA sequencing and fragment analysis.
DNA sequencing is used to determine the exact order of nucleotides
that make up a strand of DNA. Typically, fluorescent tags are used
to generate labeled products, each with a different colored tag.
The tagged fragments are run through an electrophoresis gel and
are detected at the bottom of the gel. DNA fragment analyzers are
then used to determine the size, quantity, or pattern of DNA
fragments. Fragment analysis applications include gene mapping and
forensic typing, using microsatellite markers, single-strand
conformation polymorphism analysis to screen for unknown mutations
within genes, and oligonucleotide (synthetic nucleotide) ligation
assay analysis to detect known mutations within certain genes.
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AB's DNA sequencing products include a sequencer expandable to 96
capillaries (Model 377), a one capillary sequencer (Model 310),
sequencing reagents, and analysis software. These products have
been used by researchers to analyze DNA fragments in genetic
linkage studies and for comparative sequencing in human diagnostic
and food contamination applications. PE Biosystems Group's Model
377 DNA Sequencer accounted for 5.93%, 12.49%, and 15.45% of
Registrant's consolidated revenues in fiscal years 1999, 1998, and
1997, respectively.
A newly developed product is the Model 3700 DNA Analyzer. This
product is designed to enable applications requiring tens of
thousands of samples produced weekly by combining proven capillary
electrophoresis hardware and separation polymer chemistry with new
detection technology and automation. The Model 3700 DNA Analyzer
is the principal instrument used by the Celera Genomics Group for
its sequencing projects.
o DNA Synthesis. DNA synthesizers produce synthetic DNA for genetic
analysis. The synthetic DNA is used for PCR and DNA sequencing
primers and is also used in drug discovery applications. AB
currently markets several models of synthesizers and supporting
reagents. It also provides custom synthesis, in which
oligonucleotides are made-to-order and shipped to customers.
o PNA. AB has an exclusive license to manufacture and sell peptide
nucleic acid ("PNA") for molecular biology research and various
other applications. PNA is a synthetic copy of a DNA molecule with
a modified uncharged peptide-like "backbone." The unique chemical
structure of PNA enhances its affinity and specificity as a DNA or
RNA probe.
o Applied Markets. AB has formed product development and marketing
groups to develop products and services specially designed for
individual markets. The focus of these groups is in the food and
environmental testing and human identification (mainly forensic)
markets.
The Molecular Microbiology group within AB is principally
responsible for the development and marketing of technologies for
bacterial and fungal detection, characterization, and
identification. This group has developed the MicroSeq 16S rDNA
Bacterial Sequencing Kit to sequence information to accurately
identify microorganisms. Additional TaqMan(R) Pathogen Detection
Kits relying on Sequence Detection Systems instrument platforms
are also under development by this group to establish rapidly the
presence of bacterial contamination.
The Human Identification group within AB develops systems that are
used by crime laboratories and other agencies to identify
individuals based on their DNA. These systems are most often used
in cases of violent crime where DNA found at the crime scene is
matched with DNA from suspects, and there is growing potential for
DNA databases of known criminals. The systems are also used in the
identification of human remains at disaster sites.
o Human Diagnostics. AB has a license from the Roche Group to use
PCR techniques in the development and marketing of products for
human diagnostics based on fluorescent sequencing. Products
developed for human diagnostics fall into the following general
categories: immunology; genetic disease carrier identification;
infectious disease; and cancer. PE Biosystems Group expects to
develop tests based on this technology to support HLA typing in
bone marrow transplants and for HIV
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resistance diagnosis. Tests have also been developed for carrier
identification for cystic fibrosis, fragile X syndrome, and loss
of heterozygosity associated with specific forms of colorectal
cancer.
o Cellular Detection Systems. Through its strategic alliance with
BD, Inc. (formerly named Biometric Imaging, Inc.), AB is
co-developing a fluorometric microvolume assay technology
system. This instrument system uses proprietary scanning
technology to detect and measure fluorescence associated with
objects as small as a single cell. This system is expected to
satisfy market needs in pharmaceutical development for a
cell-based, high throughput screening system.
PerSeptive Biosystems. PerSeptive Biosystems ("PB" or "PerSeptive") develops,
manufactures, and markets proprietary consumable products and instrument systems
for the purification, analysis, and synthesis of proteins and related molecules.
The study of the role of proteins, which are the mediators of most chemical
reactions within a cell, in the evolution of a disease, or in evaluating a
drug's ability to modulate the disease by binding to those specific proteins, is
a crucial step in understanding the ways diseases develop in the body.
PerSeptive's products are used in the life science markets to reduce the time
and cost required for the discovery, development, and manufacture of
pharmaceutical products.
PB's products can be broadly classified into the following categories:
o Mass Spectrometry. PerSeptive's mass spectrometry products are
used for the analysis of both large molecules such as proteins and
small molecules including those that might be used as drugs. These
systems may be sold and used on a stand alone basis or coupled
with a liquid chromatograph ("LC/MS"). LC/MS systems are able to
separate and analyze the components of complex mixtures. All mass
spectrometry systems include an ionization source which creates
charged molecules and a mass separation/detection component which
separates these charged molecules on the basis of their mass, and
detects their presence.
Until recently, mass spectrometry was not very useful for the
analysis of large molecules of biological importance such as
proteins because the classical methods for creating ions caused
these complex molecules to disintegrate into many small pieces.
This resulted in the destruction of the information about the
original large molecule. The mass separation component was also
problematic because it was not possible to distinguish between
large molecules of nearly the same mass. The PE Biosystems Group
believes that its delayed extraction technology used in its
Matrix-Assisted, Laser Desorption Ionization Time-of-flight
("MALDI-TOF") mass spectrometer overcomes those deficiencies for
the analysis of proteins and many other large molecules of
biological importance.
Since MALDI-TOF instruments are not directly coupled to separation
devices such as high pressure liquid chromatographs ("HPLC"),
mixtures are often separated, purified, and collected before
analysis. This is often accomplished with PerSeptive's
purification products such as the Integral 100Q, an integrated
separation device which gives rapid separation of proteins or
other large molecules. MALDI-TOF instruments are expected to be
critical in the expanding field of proteomics, or large scale
studies of many proteins simultaneously.
Mass spectrometry systems are also used to identify and quantify
smaller molecules and are especially important for the measurement
of drugs and their metabolites, which are compounds resulting from
the body's acting upon the drug, in bodily fluids
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such as blood or urine. This information is required for FDA and
other regulatory agencies for the approval of drugs. This
application is very demanding because the amounts of the drugs and
their metabolites are very low and the mixtures are very complex.
In order to analyze this mixture, scientists use LC/MS/MS systems,
which consist of an HPLC which separates the components of the
mixture, usually an extract of blood or urine, and is coupled
directly to two mass separation components in tandem. The use of a
general mass separation device followed by a second, more
specific, device allows the detection to be more specific, so
there are fewer potential interferences. For these instruments, it
is important to get as much of the sample as possible to become
charged so that sensitivity will be maximized. This is done with
components which have been developed and refined by PE Sciex, a
joint venture between Registrant and MDS Health Group Limited. PE
Sciex has also developed the MS/MS portion of the instrument which
creates the sensitivity and specificity required for this
demanding application.
o Purification. As the human genome is sequenced and becomes known,
the information obtained will be used to study the expression
profiles of genes (proteins). Consequently, tens of thousands of
proteins will need to be purified and characterized because these
proteins may be used as drug targets or as therapeutics.
PerSeptive's purification products can be incorporated readily
into any stage of the development process of a pharmaceutical
product and offer productivity advantages over conventional
counterparts.
PerSeptive's patented Perfusion Chromatography technology uses
proprietary flow-through particles and BioCad(R) Chromatography
workstation to reduce the time necessary for the purification and
analysis of biomolecules. This technology separates biomolecules
10 to 1000 times faster than conventional liquid chromatography or
HPLC without compromising resolution or capacity. PerSeptive's
Vision(TM) Workstation is the first robotic-equipped HPLC platform
introduced to the life science markets that allows for the
separation of proteins followed by analysis of the fractions
collected in an unattended operation. Together, the automated
platform and flow-through particles are designed to increase
throughput and efficiency for the purification of biomolecules.
o Protein Sequencing and Synthesis. Protein sequencers provide
information about the amino acids that make up a given protein by
chemically disassembling the protein and analyzing its components.
PerSeptive's Procise Protein Sequencing system uses Edman protein
sequencing chemistry to disassemble a protein one amino acid at a
time to render the sequence of that protein.
Synthetically produced peptides are used in understanding antibody
reactions and as potential drugs or drug analogs. PerSeptive's
Solaris(TM) 530 is an automated chemical synthesis system that
assembles organic compounds for screening or analysis.
PerSeptive's Pioneer(TM) Peptide Synthesis system is designed to
assemble amino acids for the synthesis of peptides, peptide
analogs, and small proteins. PerSeptive also manufactures and
sells proprietary reagents and fine chemicals for use with these
and other products.
PE Informatics. PE Informatics, the information management unit of PE Biosystems
Group, develops, markets, and distributes bioinformatics software for the
pharmaceutical, biotechnology, and agrochemical industries. PE Informatics
provides a comprehensive software system researchers can use to manage and
analyze genomic data. Its products include software for science professionals
who analyze gene sequences in an effort to discover and develop drugs and
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perform clinical trials. These products are necessary to meet the need for
software and services to manage, integrate, and analyze the vast amounts of
information related to bioscience discovery processes.
Bioinformatics is a new science that enables researchers to transform
massive amounts of data into an organized knowledge database. PE Informatics'
customers are typically attempting breakthroughs in gene mapping, drug
discovery, drug development, and molecular diagnostics, and its products provide
the vehicles for transforming raw data into the organized body of knowledge that
enables those breakthrough discoveries. The business is dedicated to the
development of infrastructure software for genome data collection and
management, gene mapping, drug discovery, and clinical and diagnostic genetic
research.
PE Informatics currently provides genomic data management products for
both discovery and development.
Discovery oriented products include: BioMerge(TM), a product that
allows research groups to store, retrieve, and analyze genetic information;
BioLIMS(TM), a product that manages automated DNA sequencing for AB's products;
and SQL*GT(TM), a product for sample tracking and sample management for high
throughput laboratories.
Development-oriented products include: SQL*Lims(R), a product designed
to optimize information processing and provide information management tools for
the analytical laboratory; and TurboChrom(TM) Client/Server Chromatography Data
System which delivers distributed computing resources across an entire
organization, while managing key data processes centrally.
Tropix. Tropix develops, manufactures, and markets chemiluminescent substrates
and related products for the life science markets. 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. Tropix also licenses its technology to
companies selling bioanalytical and clinical diagnostic tests.
Chemiluminescence is the conversion of chemical energy stored within a
molecule into light. Chemiluminescent enzyme substrates are used that emit light
in the presence of a target substance that is "labeled" or connected to an
enzyme.
Tropix's products include reagents and chemiluminescent plate readers
which measure light emitted by a sample. Tropix also operates a facility devoted
to drug discovery services for the pharmaceutical, biotech, and agricultural
markets. The services offered by this facility include custom assay development
using proprietary technologies and high throughput drug screening with an
initial capacity of 100,000 tests per day.
PE Sciex Joint Venture. The PE Biosystems Group is engaged in the manufacture
and sale of mass spectrometry instrument systems through its PE Sciex joint
venture with MDS Health Group Limited of Canada. Under this agreement PE
Biosystems Group has the exclusive worldwide distribution rights to the LC/MS
products manufactured for the venture by MDS Health Group Limited.
Marketing and Distribution
The markets for PE Biosystems Group's 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. Each of
these markets has unique requirements and expectations that PE
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Biosystems Group seeks to address in its product offerings. PE Biosystems
Group's customers are continually searching for processes and systems that can
perform tests faster, more efficiently, and at lower costs. PE Biosystems Group
believes that its focus on automated and high throughput systems enables it to
respond to this need.
The size and growth of PE Biosystems Group's markets are influenced by
a number of factors, including:
o technological innovation in bioanalytical practice;
o government funding for basic and disease-related research, such as in
heart disease, AIDS, and cancer;
o application of biotechnology in basic agriculture 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, PE Biosystems Group 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 the PE Biosystems Group's foreign based sales and service
staff, although some sales are made directly from the United States to foreign
customers. In some foreign countries, sales are made through various
representative and distributorship arrangements. The PE Biosystems Group owns or
leases sales and service offices in strategic regional locations in the United
States and in foreign countries through its foreign sales subsidiaries and
distribution operations. None of the PE Biosystems Group's products are
distributed through retail outlets.
Raw Materials
There are no specialized raw materials that are particularly essential
to the operation of the PE Biosystems Group's business. The PE Biosystems
Group's 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. The
PE Biosystems Group 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 the PE Biosystems Group normally secures long-term supply
contracts. In some cases, if a supplier discontinues a product, it could
temporarily interrupt the business of the PE Biosystems Group.
Patents, Licenses, and Franchises
The PE Biosystems Group 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 in the PE Biosystems Group's products or that fall within its
fields of interest. Some licenses under patents have been granted to, and
received from, other entities. The PE Biosystems Group has certain rights from
the Roche Group under patents relating to PCR, one of which expires in 2004. The
PE Biosystems Group also has rights under a patent issued to the California
Institute of Technology relating to DNA sequencing which expires
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in 2009. In the Registrant's opinion, no other single patent or license, or
group of patents or licenses, or any franchise, is material to PE Biosystems
Group's business as a whole.
From time to time, the PE Biosystems Group has asserted that various
competitors and others are infringing its patents; and similarly, from time to
time, others have asserted that the PE Biosystems Group was infringing patents
owned by them. In most cases, these claims are settled by mutual agreement on a
satisfactory basis and result in the granting of licenses by or to the PE
Biosystems Group.
The PE Biosystems Group has also established a licensing program that
provides industry access to certain of its intellectual property.
Backlog
The PE Biosystems Group's total recorded backlog on June 30, 1999, was
$186.3 million, which included $23.3 million of orders from the Celera Genomics
Group. On June 30, 1998, the PE Biosystems Group's total recorded backlog was
$119.3 million. It is the PE Biosystems Group's 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 2000.
Competition
The industry segments in which the PE Biosystems Group operates are
highly competitive and are characterized by the application of advanced
technology. A number of the PE Biosystems Group's 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 the PE Biosystems Group is engaged.
PE Biosystems Group's principal competition comes from specialized
manufacturers that have strengths in narrow segments of the life science
markets. PE Biosystems Group 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 the PE
Biosystems Group's relative market position in its industry segment, the PE
Biosystems Group is confident it is one of the principal manufacturers in its
fields, marketing a broad line of instruments and life science systems.
Research, Development, and Engineering
The PE Biosystems Group is actively engaged in basic and applied
research, development, and engineering programs designed to develop new products
and to improve existing products. Research, development, and engineering
expenditures for the PE Biosystems Group totaled $143.6 million in fiscal 1999,
$109.9 million in fiscal 1998, and $78.1 million in fiscal 1997. The Registrant
spent $189.3 million in fiscal 1999, $120.2 million in fiscal 1998, and $82.1
million in fiscal 1997 on company-sponsored research, development, and
engineering activities.
The PE Biosystems Group's new products originate from four sources:
internal research and development programs; external collaborative efforts with
individuals in academic institutions and technology companies; devices or
techniques that are generated in customers' laboratories; and business and
technology acquisitions.
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Research and development projects at PE Biosystems Group 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 spectroscopy.
Environmental Matters
The PE Biosystems Group 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 the PE Biosystems Group operates or maintains facilities. The PE
Biosystems Group believes any liability and compliance with all environmental
regulations will have no material effect on its business, and no material
capital expenditures are expected for environmental control.
Employees
As of June 30, 1999, the PE Biosystems Group employed approximately
3,364 persons worldwide (not including 140 corporate staff employees). None of
the PE Biosystems Group's United States employees are subject to collective
bargaining agreements.
CELERA GENOMICS GROUP
The Celera Genomics Group is engaged principally in the generation,
sale, and support of genomic information, and related information management and
analysis software; discovery, validation, and licensing of proprietary gene
products, genetic markers, and information concerning genetic variability; and
related consulting and contract research and development services.
Registrant and Dr. J. Craig Venter, a leading genomic scientist and
founder of The Institute for Genomic Research ("TIGR"), announced the intent to
form the Celera Genomics business in May, 1998. The business commenced
operations in August, 1998. Celera Genomics Group was formed for the purpose of
generating and commercializing genomic information to accelerate the
understanding of biological processes and to assist pharmaceutical,
biotechnology, and life science research entities in areas of research
including:
o new drugs and improved drug development processes;
o novel genes and factors that regulate and control gene expression;
and
o interrelationships between genetic variability, disease, and drug
response.
A key to the Celera Genomics Group's strategy is the sequencing of the
human genome, which it expects to be completed in calendar year 2001. The
underlying human genetic sequence will be the basis for the Celera Genomics
Group's development of a value-added, integrated information and discovery
system. The system will include increasing layers of functional information,
such as gene expression data, comparative data from other model organisms (such
as Drosophila (fruit fly) and mouse), genetic variation, and ultimately gene
function. Users of the information and discovery system will have the ability to
view, browse, and analyze the data in an integrated way that should assist
scientists and commercial enterprises in accelerating their understanding of the
human genetic code. The Group anticipates using its genomic data as a platform
upon which to develop tools and services. The Celera Genomics Group anticipates
that
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this genomic data, together with such tools and services, will become a
comprehensive scientific and medical resource for a wide range of customers,
including pharmaceutical, biotechnology, and other private entities and academic
and other life science research institutions.
Other genomics companies have focused on strategies that emphasize
finding and sequencing particular genes within the human genome to find specific
drug or disease targets. In contrast, the Celera Genomics Group plans to
sequence the entire human genome using whole genome "shotgun sequencing," a
unique sequencing strategy designed to produce genomic data rapidly and
efficiently. The Celera Genomics Group's goal is to create a comprehensive
knowledge base of the human genome that will allow multiple scientific and
commercial applications. The Celera Genomics Group believes that its shotgun
sequencing strategy will not only accelerate the discovery of new genes, but
will help generate genomic information that has not yet been the focus of
research. This information includes rarely expressed genes and the proteins they
code for and other factors, such as regulatory regions, that control gene
expression.
Dr. Venter and his team at TIGR were the first to apply the whole
genome shotgun sequencing strategy to the sequencing of several genomes,
including the first three in history. To date, ten of the 26 microbial genomes
that have been completely sequenced and are (or are expected to be) in the
public domain have been sequenced by TIGR using this strategy.
The Celera Genomics Group includes the GenScope product line, which
Registrant acquired in February 1997. GenScope is a provider of genomics-related
products and services, gene discovery, target discovery and validation, efficacy
and safety assessment, and pharmacogenomics study services. GenScope's core
technology, GeneTag(TM), is a proprietary process for analysis of gene
expression. This technology provides a method by which to compare many samples
in order to quickly identify which genes are affected by a disease or treatment.
The Celera Genomics Group also includes the AgGen product line which
was formed by Registrant in July, 1997, for the purpose of developing an
application group specializing in providing services to the agriculture market.
AgGen provides genotyping and genomic services for plant and animal breeding
programs.
The Celera Genomics Group anticipates adding significant value to its
information products by providing software tools and analysis capabilities to
facilitate access to the data and by annotating them with interpretive
information, including information resulting from collaborations with key life
science researchers.
The Celera Genomics Group anticipates generating genomic information as
a platform for developing the following products and services:
o Genomic information databases consisting of comprehensive and
integrated human sequence information and information from other
model organisms;
o Software systems and tools to facilitate customer access, viewing,
browsing, analysis, and discovery;
o Polymorphism data and assay services for the pharmaceutical and
health care industry, including through, among other things,
collaborative service agreements using the polymorphism data
resulting from the Celera Genomics Group's sequencing;
o Gene discovery services in collaboration with customers to pursue
novel discoveries;
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o Other business extensions, involving the Celera Genomics Group's own
gene discoveries, population genetics analysis, sequencing of
additional genomes, and contract sequencing; and
o Advanced genomics technologies, including technologies offered by
GenScope, such as gene expression profiling, high throughput DNA
sequencing, complementary DNA (cDNA) cloning, and bioinformatics, to
accelerate drug discovery and development efforts.
The Celera Genomics Group expects to derive its revenues primarily from
access fees from database customers, fees for collaborative polymorphic
services, fees from collaborative gene discovery arrangements, genotyping, and
genomic services, and, in certain cases, from licensing intellectual property.
The Celera Genomics Group expects to offer its information products on
a subscription basis for multiple year subscriptions. The information products
will include a variety of databases, including the Human Gene Index, the
Drosophila Genome Database, the Human Genome Database, a Gene Expression
Database, a Comparative Genomics Database that would include data from model
organisms, and additional databases over time.
The structure of customer subscriptions, including the databases to be
offered, the access fees to be charged, the intellectual property terms, and the
nature of any services provided to customers, will vary according to customer
requirements and are expected to change over time. The Celera Genomics Group
expects to continue to generate revenues through gene expression analysis and
genotyping services.
The Celera Genomics Group expects to sell access to its genomics
information to customers for their internal use. For certain information
products, the Celera Genomics Group does not expect to seek intellectual
property rights from customers on such use. For these products, this policy
should promote use of its information by a wide variety of users and will
distinguish the Celera Genomics Group from other genomics companies that seek
intellectual property rights in their customers' discoveries based solely upon
access to those companies' database information. The Celera Genomics Group
expects to collaborate with customers to identify targets that can be used in
the discovery and development of new diagnostics and drugs and in the
development of polymorphism information. For such collaborations, the Celera
Genomics Group intends to share with its customers intellectual property rights
on discoveries resulting from those collaborations.
The Celera Genomics Group has adopted a policy to make available, to
the research community for free, the basic reference human sequence information
generated by its sequencing and assembly efforts. The Celera Genomics Group
intends to make available this information on a quarterly basis in the form of
unordered consensus human sequence data in excess of specified lengths.
The data that the Celera Genomics Group releases publicly will be
available, in a searchable format, via its web site. The ultimate form of data
release will be affected by, among other things, the evolution of intellectual
property law and the Celera Genomics Group's assessment of the likelihood that
other organizations may seek to obtain the Celera Genomics Group's data and
resell it to their own customers. The Celera Genomics Group believes that
current efforts by some companies to obtain data made publicly available for the
purpose of private resale may continue, and that the need to protect the value
of its information while honoring its intention to share this data with the
research community will affect its data disclosure strategy.
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After completion of sequencing, the Celera Genomics Group expects to
release a detailed ordered consensus human genome assembly.
The Celera Genomics Group believes that disclosing consensus sequence
data will not affect the value of its information products and services to
customers and will encourage researchers to use its data and ultimately become
the Celera Genomics Group's customers. The Celera Genomics Group will make
available to its customers, on a subscription basis, the assets that are most
responsible for the value of its products and services extensive integrated
genomic information systems, including proprietary annotations, certain
polymorphism information, comparative genomics information, search tools and
algorithms, and assay and other services.
Commercial Applications of Genomics
The Celera Genomics Group expects that the use of genomic information
will transform life sciences by increasing the understanding of biological
processes and allowing scientists to target specific processes once a given
genome has been mapped. The commercial markets that the Celera Genomics Group
believes will benefit from genomic information include (i) pharmaceutical drug
discovery and development including molecular toxicology and pharmacogenomics
(which focuses on identifying genetic variances among patients that may affect
the efficacy of drug treatment), (ii) medical diagnostics (risk assessment and
personalized medicine), (iii) agriculture, and (iv) other applied markets.
Raw Materials
There are no specialized raw materials that are particularly essential
to the operation of the Celera Genomic Group's business. The Celera Genomics
Group's 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. The Celera Genomics Group depends on the PE Biosystems
Group for several critical materials, including reagents and capillary arrays,
required for sequencing. For certain of these materials, the PE Biosystems Group
is the sole supplier, and for other materials the Celera Genomics Group believes
that the PE Biosystems Group provides the highest quality materials available.
Any interruption in the availability of these materials could adversely affect
and, in some cases, shut down sequencing operations.
Patents, Licenses and Franchises
The Celera Genomics Group's business and competitive position is
dependent, in part, upon its ability to protect its database information,
proprietary gene sequence methods, software technology, and the novel genes it
identifies. The Celera Genomics Group's commercial success will be affected by,
but is not directly dependent on, the ability to obtain patent protection on
genes and polymorphisms discovered by it and/or by the Celera Genomics Group's
customers on their own behalf and by collaborators. The Celera Genomics Group
plans to seek intellectual property protection, including copyright protection,
for the information and discovery system, including its content, and the
software and methods it creates to manage, store, analyze, and search novel
information.
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The Celera Genomics Group's current plan is to apply for patent
protection upon the identification of candidate novel genes, novel gene
fragments, and their biological function or utility. The Celera Genomics Group
also plans to apply for patent protection for certain novel polymorphisms. This
plan includes applying for claims to the gene sequences as well as equivalent
sequences and their variant forms. Although obtaining patent protection based on
partial gene sequences might enhance the Celera Genomics Group's business, the
Celera Genomics Group does not believe that its commercial success will be
materially dependent on its ability to do so. When gene discovery or analysis
has been performed on behalf of customers or collaborators, the Celera Genomics
Group anticipates that these patent rights will be jointly owned by the Celera
Genomics Group and the customer or collaborator. If a gene product was
developed, the Celera Genomics Group anticipates it would receive various forms
of consideration including license fees, milestone payments, and royalty
payments on sales of the gene product and related products.
The granting of patents on genomic discoveries is uncertain worldwide
and is currently under review and revision in many countries. Moreover,
publication of information concerning partial gene sequences prior to the time
that the Celera Genomics Group applies for patent protection based on the
full-length gene sequences or different partial gene sequences in the same gene
may affect the Celera Genomics Group's ability to obtain patent protection.
Certain court decisions suggest that disclosure of a partial sequence may not be
sufficient to support the patentability of a full-length sequence and that
patent claims to a partial sequence may not cover a full-length sequence
inclusive of that partial sequence.
In January, 1997, TIGR, in collaboration with the National Center for
Biological Information, disclosed full-length DNA sequences assembled from
expressed sequence tags (ESTs) available in publicly accessible databases or
sequenced at TIGR. The National Human Genome Research Institute also plans to
release sequence information to the public. Such disclosures might limit the
scope of the Celera Genomics Group's claims or make subsequent discoveries
related to full-length genes unpatentable. While the Celera Genomics Group
believes that the publication of sequence data will not preclude it or others
from being granted patent protection on genes, there can be no assurances that
such publication has not affected and will not affect the ability to obtain
patent protection.
The Celera Genomics Group can not ensure that these or other
uncertainties will not result in changes in, or interpretations of, the patent
laws that will adversely affect its patent position. The Celera Genomics Group
anticipates that there could be significant litigation in the industry regarding
genomic patent and other intellectual property rights. If the Celera Genomics
Group becomes involved in such litigation, it could consume a substantial
portion of the Celera Genomics Group's resources.
The Celera Genomics Group also intends to rely on trade secret
protection for its confidential and proprietary information. The Celera Genomics
Group believes it has developed proprietary procedures for sequencing and
analyzing genes and for assembling the genes in their naturally occurring order.
In addition, the Celera Genomics Group believes it has developed novel methods
for searching and identifying particularly important regions of genetic
information or whole genes of interest. The Celera Genomics Group currently
intends to protect these methods and procedures by trade secret and patent
protection where appropriate.
The Celera Genomics Group has taken security measures to protect its
databases concerning genes identified by it, including entering confidentiality
agreements with employees and academic collaborators who are provided or have
access to confidential or proprietary
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<PAGE>
information. The Celera Genomics Group continues to explore ways to further
enhance the security for its data, including copyright protection for its
databases.
Intellectual property derived from gene-profiling services provided to
current customers is owned by the customers. The Celera Genomics Group has
retained rights to markers for clinical research, human and animal diagnostics,
or pharmacogenomics. Service agreements negotiated to date have also provided
for clinical milestones and royalty payments on products derived from the
deliverables in gene discovery contracts.
Backlog
The Celera Genomics Group's total recorded backlog on June 30, 1999,
was $13.9 million. It is the Group's 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 2000.
Competition
The Celera Genomics Group believes that it has competitive advantages
that differentiate it from other genomic companies. These advantages should
enable it to sequence and assemble the large and complex human genome and to
build and market its information products and services. The advantages include
(i) expertise of key scientific personnel; (ii) the whole genome shotgun
sequencing strategy, including faster access to genomic sequence information
that has not been previously produced by other public or private initiatives,
comprehensive genomic information, and more comprehensive polymorphism data;
(iii) advanced genomics and computing technology, including a unique sequencing
facility, early access to PE Biosystems Group's technologies and products,
incorporation of gene expression technology, and a strategic alliance with
Compaq Computer Corporation to provide Celera Genomics Group with information
technology integrated hardware, software, networking, and services solutions;
and (iv) Registrant's resources and market experience.
The Celera Genomics Group's principal competitors will be those public
and private entities that are currently or intend to become involved in
providing genomic information and related genomic analysis capabilities in such
areas as genetic variability and gene discovery. The Celera Genomics Group's
market and financial success will be dependent, in large part, upon its ability
to maintain a competitive position in each of these areas. There are also a
number of companies with which the Celera Genomics Group will indirectly compete
in particular lines of business, such as in gene discovery and the development
of drug targets. In addition, some of the Celera Genomics Group's potential
customers, such as pharmaceutical companies, may choose to develop technologies
and information similar to those offered by the Celera Genomics Group. There
have been published reports of a proposed consortium of pharmaceutical companies
to create and make public polymorphism information. Finally, new technologies
that improve the gene analysis and discovery process may emerge over time and
could compete with those being developed by the Celera Genomics Group, or
otherwise affect its business strategy.
Some competitors may add data made available to the public by the
Celera Genomics Group to their own databases for resale to their customers. To
control this, the Celera Genomics Group intends to seek contractual and
intellectual property protection.
The Celera Genomics Group does not believe it is competing with the
U.S. government's efforts to sequence the human genome, and has sought to
coordinate its efforts with those funded
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by the U.S. government. The acceleration of the Human Genome Project may assist
the Celera Genomics Group in its own sequencing and assembly effort by releasing
sequence data into the public domain. The Celera Genomics Group has signed a
Memorandum of Understanding with the publicly funded Berkeley Drosophila Genome
Project Group to sequence and assemble the Drosophila genome. The Celera
Genomics Group expects to continue to seek ways to supplement and benefit from
coordinating its activities with those of the National Institute of Health and
the Department of Energy.
Research and Development
The Celera Genomics Group is actively engaged in basic and applied
research and development programs designed to develop new products. Research and
development expenditures for the Celera Genomics Group totaled $48.4 million in
fiscal 1999, $10.3 million in fiscal 1998, and $4.0 million in fiscal 1997. The
Registrant spent $189.3 million in fiscal 1999, $120.2 million in fiscal 1998,
and $82.1 million in fiscal 1997 on company-sponsored research, development, and
engineering activities.
The Celera Genomics Group's new products will originate from three
sources: internal research and development programs, external collaborative
efforts or alliances, and business and technology acquisitions.
Environmental Matters
Celera Genomics Group 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 the Celera Genomics Group operates or maintains facilities. The Celera
Genomics Group believes any liability and compliance with all environmental
regulations will have no material effect on its business, and no material
capital expenditures are expected for environmental control.
Employees
The Celera Genomics Group had approximately 359 employees as of June
30, 1999 (not including 140 corporate staff employees). The Celera Genomics
Group's employees are not subject to any collective bargaining agreements.
(d) Financial Information About Foreign and Domestic Operations.
A summary of net revenues from external customers and long-lived
assets attributed to each of Registrant's geographic areas for the fiscal years
1999, 1998, and 1997 is incorporated herein by reference to Note 6 on Page 62,
Note 5 on Pages 88-89, and Note 6 on Pages 122-123 of the Annual Report to
Stockholders for the fiscal year ended June 30, 1999.
Registrant's consolidated net revenues from external customers in
countries other than the United States for fiscal years 1999, 1998, and 1997
were $607.9 million, $487.2 million, and $418.4 million, or 50.0%, 51.6%, and
54.5% respectively, of Registrant's consolidated net revenues.
All of the Registrant's manufacturing facilities outside the
continental United States are located in the United Kingdom, Japan, and
Singapore.
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There are currently no material foreign exchange controls or similar
limitations restricting the repatriation to the United States of capital
earnings from operations outside the United States.
Item 2. PROPERTIES
Properties
PE Biosystems Group
The PE Biosystems Group owns or leases various facilities for
manufacturing, research and development, and administrative purposes. All of
these facilities are maintained in good working order and, except for those held
for sale or lease, are used in the ordinary course of business.
The following is a list of facilities owned or leased by the PE
Biosystems Group.
<TABLE>
<CAPTION>
Owned or
Leased
(Expiration
Date(s) of
Location (Approximate Floor Area in Sq. Ft.) Leases)
- -------------------------------------------- -------
<S> <C>
Foster City, CA (543,000)* Leased (1999-2007)
San Jose, CA (81,000) Owned
Bedford, MA (28,000) Leased (2000)
Framingham, MA (196,000) Leased (2009)
Santa Fe, NM (14,000) Leased (1999-2005)
Houston, TX (21,000) Leased (1999)
Warrington, England (22,000) Owned
Singapore (30,000) Leased (1999)
Narita, Japan (24,000) Owned
</TABLE>
*Consists of three principal facilities totaling 330,000 square feet,
and additional facilities totaling 213,000 square feet. 30,000 square feet of
such space is leased to Celera Genomics Group.
The PE Biosystems Group also leases space in several industrial centers
for use as regional sales and service offices, technical demonstration centers,
and warehouses. The PE Biosystems Group also owns undeveloped land in Vacaville,
California.
Celera Genomics Group
The Celera Genomics Group's headquarters are in Rockville, Maryland,
where its administrative facilities, sequencing facility, laboratories, and
bioinformatics facilities are located. The headquarters are located in two
adjacent buildings in Rockville, Maryland with approximately 220,000 square feet
owned by the Celera Genomics Group. The Celera Genomics Group also subleases
from PE Biosystems Group approximately 30,000 square feet in Foster City,
California, which sublease expires in January, 2008, and leases space in Davis,
California, from third parties as follows: approximately 13,000 square feet,
which lease expires in June, 2001, and 15,000 square feet, which lease expires
in July 2000.
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Other Facilities
<TABLE>
<CAPTION>
Owned or
Leased
(Expiration
Date(s) of
Location (Approximate Floor Area in Sq. Ft.) Leases)
- -------------------------------------------- -------
<S> <C>
Norwalk, CT (402,000)** Owned
Wilton, CT (263,000)** Owned
</TABLE>
- -----------
** Registrant utilizes approximately 154,000 square feet of space in
its facilities in Norwalk and Wilton, Connecticut for corporate staff and
related support functions. The remaining facilities in Norwalk and Wilton,
approximately 511,000 square feet, are leased to EG&G, Inc. (approximately
340,000), Lamorte Burns, Inc. (approximately 42,000), or are currently vacant.
All such facilities in Connecticut are being held for sale.
Item 3. LEGAL PROCEEDINGS
Registrant has been named as a defendant in various legal actions
arising from the conduct of Registrant's normal business activities. Although
the amount of any liability that might arise with respect to any of these
matters cannot be accurately predicted, the resulting liability, if any, will
not, in the opinion of management of Registrant, have a material adverse effect
on the financial statements of Registrant.
On March 13, 1998, Registrant filed a patent infringement action
against Amersham Pharmacia Biotech, Inc. ("Amersham") and Molecular Dynamics,
Inc. ("Molecular Dynamics") in the United States District Court for the Northern
District of California. Registrant asserts that two of its patents (U.S.
5,207,886 and U.S. 4,811,218) are infringed by reason of Molecular Dynamics' and
Amersham's sale of certain DNA analysis systems (e.g., the MegaBACE 1000
System). In response, the defendants have asserted various affirmative defenses
and several counterclaims, including that Registrant's PE Biosystems Group is
infringing two patents (U.S. 5,091,562 and U.S. 5,459,325) owned by or licensed
to Molecular Dynamics by selling the ABI PRISM(TM) 377 DNA Sequencing Systems.
On April 2, 1998, Amersham filed a patent infringement action against
Registrant in the United States District Court for the Northern District of
California. The complaint alleges that Registrant is directly, contributorily,
or by inducement infringing U.S. Patent No. 5,688,648 ("the '648 patent"),
entitled "Probes Labeled with Energy Transfer Coupled Dyes." The complaint seeks
declaratory judgment that the use of the PE BigDye(TM) Primer and BigDye(TM)
Terminator kits would infringe the '648 patent, as well as injunctive and
monetary relief. Registrant answered the complaint, alleging that the '648
patent is invalid and that Registrant has not infringed the '648 patent.
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On October 19, 1998, Amersham filed a patent infringement action
against the Celera Genomics Group in the United States District Court for the
District of Delaware. The complaint alleges that the Celera Genomics Group is
directly, contributorily, or by inducement, infringing the '648 patent. The
complaint seeks a declaratory judgment that the use of the Perkin-Elmer
BigDye(TM) Primer and BigDye(TM) Terminator kits would infringe this patent, as
well as injunctive and monetary relief. The Celera Genomics Group answered the
complaint, alleging that this patent is invalid and that the Celera Genomics
Group has not infringed this patent.
While the BigDye(TM) detection technology is a preferred technology
with which to carry out the Celera Genomics Group's planned DNA sequencing
activities, a number of viable alternatives exist. For example, the PE
Biosystems Group currently markets DNA sequencing reagents that do not
incorporate BigDye(TM) fluorescent labels, but rather utilize alternative
labels. Therefore, even in the event of an unfavorable outcome to this
litigation, the Celera Genomics Group would be able to carry out its planned
large-scale DNA sequencing program and would not experience a material adverse
effect on its business.
On May 21, 1998, Amersham filed a patent infringement action against
Registrant in the United States District Court for the Southern District of New
York. The complaint alleges that Registrant is infringing, contributing to the
infringement, and inducing the infringement of U.S. Patent No. 4,707,235 ("the
'235 patent") entitled "Electrophoresis Method and Apparatus having Continuous
Detection Means." The complaint seeks injunctive and monetary relief. Registrant
answered the Complaint, alleging that the '235 patent is invalid and that
Registrant has not infringed the '235 patent.
Registrant is a party to the action United States v. Davis, pending in
the United States District Court for the District of Rhode Island. Registrant
was found liable to the cross-complainant, United Technologies Corporation
("UTC"), by the District Court in December 1998. Registrant believes the amount
of such liability to be less than $200,000, which will be determined when all
appeals have been concluded. UTC is expected to appeal the District Court's
decision.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders of The Perkin-Elmer Corporation was
held on April 27, 1999. The matters voted on and the votes were as follows:
Proposal 1 - Recapitalization Proposal
Proposal 2 - Adoption of PE Corporation/PE Biosystems Group
1999 Stock Incentive Plan
Proposal 3 - Adoption of PE Corporation/Celera Genomics Group
1999 Stock Incentive Plan
<TABLE>
<CAPTION>
--------------------------------------------------------------------
VOTES FOR AGAINST ABSTENTIONS
--------------------------------------------------------------------
<S> <C> <C> <C>
Proposal 1 37,721,060 5,911,186 165,924
--------------------------------------------------------------------
Proposal 2 41,422,806 2,198,828 176,536
--------------------------------------------------------------------
Proposal 3 33,959,491 9,660,124 178,555
--------------------------------------------------------------------
</TABLE>
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Market Information.
The principal United States market where Registrant's PE Biosystems
Group Common Stock and Celera Genomics Group Common Stock are traded is the New
York Stock Exchange, although such stock is also traded on the Pacific Stock
Exchange.
The following information, which appears in Registrant's Annual Report
to Stockholders for the fiscal year ended June 30, 1999, is hereby incorporated
by reference in this Form 10-K: the high and low sales prices of PE Biosystems
Group Common Stock and Celera Genomics Group Common Stock for the period from
May 6, 1999 through June 30, 1999, and for the Common Stock of The Perkin-Elmer
Corporation for each quarterly period during fiscal year 1999 through May 5,
1999, and fiscal year 1998 (Note 13, Pages 69-70, Note 10, Page 94, and Note 13,
Pages 131-132 of the Annual Report to Stockholders for the fiscal year ended
June 30, 1999).
(b) Holders.
On September 20, 1999, the approximate number of holders of PE
Biosystems Group Common Stock was 6,433, and the approximate number of holders
of Celera Genomics Group Common Stock was 6,064. The approximate number of
holders is based upon the actual number of holders registered in the books of
Registrant 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 numbers of shares held by non-affiliates shown
on the cover of this Form 10-K was made on the assumption that there were no
affiliates other than executive officers and directors.
(c) Dividends.
The amount of quarterly dividends during fiscal years 1999 and 1998
(Note 13, Pages 69-70, and Note 13, Pages 131-132 of Registrant's Annual Report
to Stockholders for the fiscal year ended June 30, 1999) is hereby incorporated
by reference in this Form 10-K.
(d) Sale of Unregistered Securities
Registrant has sold no securities during the fiscal year ended June 30,
1999, that were not registered under the Securities Act of 1933.
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(e) Investment Considerations Relating to Registrant's Capital
Structure
Stockholders of Registrant are stockholders of one company and, therefore,
financial effects on one group could adversely affect the other.
Holders of PE Biosystems Group Common Stock and Celera Genomics Group
Common Stock are stockholders of a single company. The PE Biosystems Group and
the Celera Genomics Group are not separate legal entities. As a result,
stockholders are subject to all of the risks of an investment in Registrant and
all of its businesses, assets, and liabilities. The creation of the PE
Biosystems Group Common Stock and Celera Genomics Group Common Stock and the
allocation of assets and liabilities and stockholders' equity between the PE
Biosystems Group and Celera Genomics Group did not result in the distribution or
spin-off to stockholders of any of the assets or liabilities and did not affect
ownership of the assets or responsibility for the liabilities or those of the
subsidiaries. The assets attributed to one group could be subject to the
liabilities of the other group, whether such liabilities arise from lawsuits,
contracts, or indebtedness that Registrant attributes to the other group. If
Registrant is unable to satisfy one group's liabilities out of the assets
attributed to it, Registrant may be required to satisfy those liabilities with
assets Registrant has attributed to the other group.
Financial effects from one group that affect the 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 certain preferred stock will reduce the funds
Registrant can pay as dividends on each class of common stock under Delaware
law. Stockholders should read the consolidated financial information with the
financial information provided for each group.
Holders of group common stock have limited rights related to their group.
Holders of PE Biosystems Group Common Stock and Celera Genomics Group
Common Stock have only the rights customarily held by common stockholders. They
have only the following rights related to their corresponding group:
o certain rights with regard to dividends and liquidation;
o requirements for a mandatory dividend, redemption, or conversion upon the
disposition of all or substantially all of the assets of their
corresponding group; and
o a right to vote on matters as a separate voting class in the limited
circumstances provided under Delaware law, by stock exchange rules, or as
determined by Registrant's board of directors.
Separate meetings will not be held for holders of PE Biosystems Group Common
Stock and Celera Genomics Group Common Stock.
Celera Genomics Group Common influence on the outcome of stockholder voting.
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PE Biosystems Group Common Stock has a substantial majority of the
voting power of both classes of common stock. Except in limited circumstances
requiring 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 such vote--even if the matter involves a divergence
or conflict of the interests of the holders of the PE Biosystems Group Common
Stock and Celera Genomics Group Common Stock. These matters may include mergers
and other extraordinary transactions.
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 board of directors
requires a separate vote on a matter by the holders of either the
PE Biosystems Group Common Stock or the 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.
Holders of only one class of common stock cannot ensure that their voting
power will be sufficient to protect their interests.
Since relative voting power per share of PE Biosystems Group Common
Stock and 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 only one of the two
classes of common stock cannot ensure that their voting power will be
sufficient to protect their interests.
Stockholders may not have any remedies for breach of fiduciary duties if any
action by directors and officers has a disadvantageous effect on either class of
common stock.
Stockholders may not have any remedies if any action or decision of the
Registrant's board of directors or officers has a disadvantageous effect on the
PE Biosystems Group Common Stock or Celera Genomics Group Common Stock compared
to the other class of common stock.
Recent cases in Delaware involving tracking stocks have established
that decisions by directors or officers involving differing treatment of
tracking stocks are judged under the business judgment rule unless self-interest
is shown. The business judgment rule provides that, 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 with respect to
any matter having different effects on holders of Celera Genomics Group Common
Stock and holders of PE Biosystems Group Common Stock would be a defense to any
challenge to such determination made by or on behalf of the holders of either
class of stock. Because of the business judgment rule, holders of a class of
stock who are disadvantaged by an action of Registrant's directors or officers
may not be able to successfully make claims alleging breach of fiduciary duty.
Stock ownership could cause directors and officers to favor one group over the
other.
As a policy, the board of directors will periodically monitor
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<PAGE>
the ownership of shares of PE Biosystems Group Common Stock and Celera Genomics
Group Common Stock by the directors and senior officers, and option grants to
them, so that their interests are generally aligned with the two classes of
common stock and with their duty to act in the best interests of Registrant and
its stockholders as a whole. However, because the actual value of their
interests in the PE Biosystems Group Common Stock and Celera Genomics Group
Common Stock is anticipated to vary significantly, it is possible that they
could favor one group over the other due to their stock and option holdings.
The board of directors may pay more or less dividends on group common stock than
if that group was a separate company.
Subject to the limitations referred to below, the board of directors
has the authority to declare and pay dividends on the PE Biosystems Group Common
Stock and Celera Genomics Group Common Stock in any amount and could, in its
sole discretion, declare and pay dividends exclusively on the PE Biosystems
Group Common Stock, exclusively on the Celera Genomics Group Common Stock, or on
both, in equal or unequal amounts. The board of directors will not be 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 board of directors to pay more or less
dividends on the common stock relating to the other group than if that other
group was a stand-alone corporation. In addition, Delaware law and Registrant's
certificate of incorporation impose limitations on the amount of dividends which
may be paid on each class of common stock.
Proceeds of mergers or consolidations may be allocated unfavorably.
The terms of Registrant's common stock do not contain any provisions
governing how consideration to be received by holders of PE Biosystems Group
Common Stock and Celera Genomics Group Common Stock in connection
with a merger or consolidation involving Registrant is to be allocated among
holders of each class of common stock. The board of directors will determine the
percentage of consideration to be allocated to holders of each class of common
stock in any such transaction. Such percentage may be materially more or less
than that which might have been allocated to such holders had the board of
directors chosen a different method of allocation.
Holders of either class of common stock may be adversely affected by a
conversion of group common stock.
The board of directors could, in its sole discretion and without
stockholder approval, determine to convert shares of Celera Genomics Group
Common Stock into shares of PE Biosystems 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. Any such conversion would dilute the interests
in Registrant of the holders of the class of common stock being issued in the
conversion. It could also give holders of shares of the class of common stock
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.
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<PAGE>
Proceeds of newly issued Celera Genomics Group Common Stock could be allocated
to the PE Biosystems Group even if the Celera Genomics Group requires financing.
If and to the extent the PE Biosystems Group has an equity interest in
the Celera Genomics Group at the time of any sale of Celera Genomics Group
Common Stock, the board of directors could allocate some or all of the proceeds
of that sale to the PE Biosystems Group. Any such decision could favor one group
over the other group. For example, the decision to allocate the proceeds to the
PE Biosystems Group may adversely affect the Celera Genomics Group's ability to
obtain funds to finance it growth strategies.
Allocation of corporate opportunities could favor one group over the other.
Registrant's board of directors may be required to allocate corporate
opportunities between the groups. In some cases, the directors could determine
that a corporate opportunity, such as a business that Registrant is acquiring,
should be shared by the groups. Any such decisions could favor one group at the
expense of the other.
Groups may compete with each other to the detriment of their businesses.
The existence of two separate classes of common stock will not prevent
the groups from competing with each other. Any competition between the two
groups could be detrimental to the businesses of either or both of the groups.
Under a board of directors' policy, groups will generally not engage in the
principal businesses of the other. However, Registrant's Chief Executive Officer
or the board of directors will permit indirect competition between the groups
based on his or its good faith business judgment that such competition is in the
best interests of Registrant and all of the stockholders as a whole. In
addition, the groups may compete in a business that is not a principal business
of the other group.
The board may change Registrant's management and allocation policies without
stockholder approval to the detriment of either group.
The board of directors may modify or rescind Registrant'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 PE Biosystems
Group Common Stock and holders of Celera Genomics Group Common Stock or could
result in a benefit or detriment to one class of stockholders compared to the
other class. Registrant's board of directors will make any such decision in
accordance with its good faith business judgment that the decision is in the
best interests of Registrant and all of the stockholders as a whole.
Either group may finance the other group on terms unfavorable to one of the
groups.
Registrant anticipates that there will be a transfer of cash and other
property between groups to finance their business activities. The group
providing the financing will be subject to the risks relating to the group
receiving the financing. Registrant 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 the PE Biosystems Group's equity interest in
the Celera Genomics Group; or
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<PAGE>
o as a sale of assets between groups.
The board of directors has not adopted specific criteria for
determining when Registrant will reallocate pooled debt or preferred stock,
transfer cash or other property as a loan or repayment, increase or decrease an
equity interest, or sell assets. These determinations, including the terms of
any transactions accounted for as debt, could be unfavorable to either group
transferring or receiving the cash or other property. The 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.
Registrant cannot assure stockholders that any terms that are fixed for
debt will approximate those that could have been obtained by the borrowing group
if it were a stand-alone corporation.
Celera Genomics Group may not be fully reimbursed for PE Biosystems Group's use
of its tax benefits and could be charged with higher future taxes than if it
were a stand-alone tax payer.
Registrant's management and allocation policies provide that tax
benefits generated but not used by the Celera Genomics Group may be used by the
PE Biosystems Group. The aggregate amount reimbursed to the Celera Genomics
Group for such use may not exceed $75 million. All subsequent tax benefits in
excess of this amount will not be credited to the Celera Genomics Group and the
Celera Genomics Group will not be reimbursed for those tax benefits, unless the
Celera Genomics Group could have used those tax benefits had it been a
stand-alone company. Accordingly, any tax benefits that can not be used by the
Celera Genomics Group will not be carried forward to reduce its future taxes.
This could result in the Celera Genomics Group being charged a greater portion
of the total corporate tax liability in the future than would have been the case
if the Celera Genomics Group had retained its tax benefits.
Holders of group common stock may receive less consideration upon a sale of
assets than if the group were a separate company.
If a disposition of all or substantially all of the assets of either
group occurs, Registrant must, subject to certain exceptions:
o distribute to holders of the class of common stock relating to such group
an amount equal to the net proceeds of such disposition, or
o convert at a 10% premium such common stock 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, certain costs of that
disposition, including corporate level taxes, might not be payable in connection
with that acquisition. As a result, stockholders of the separate, independent
company might receive a greater amount than the net proceeds that would be
received by holders of the class of common stock relating to that group if the
assets of such group were sold. In addition, Registrant can not assure
stockholders that the net proceeds per share of
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<PAGE>
the common stock relating to that group will be equal to or more than the market
value per share of such common stock prior to or after announcement of a
disposition.
Registrant'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 Registrant by acquiring
shares of common stock having a majority of the voting power of all shares of
common stock outstanding. Such a 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 such voting power, only shares of that class. The
PE Biosystems Group Common Stock has a substantial majority of the voting power.
As a result, it is possible for an acquirer to obtain control by purchasing only
shares of the PE Biosystems Group Common Stock.
Decisions by 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 the PE Biosystems Group Common Stock and the 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 board of directors
or the management that investors perceive as affecting differently one class of
common stock compared to the other. These decisions could involve changes to the
management and allocation policies, transfers of assets between groups,
allocations of corporate opportunities, and financing resources between groups
and changes between dividend policies.
Investors may not value common stock based on group financial information and
policies
Registrant can not assure stockholders that investors will value the PE
Biosystems Group Common Stock and the Celera Genomics Group Common Stock based
on the reported financial results and prospects of the separate groups or the
dividend policies established by the board of directors with respect to such
groups.
Provisions governing common stock could discourage a change of control and the
payment of a premium for stockholders' shares.
The Stockholder Rights Plan, adopted by Registrant, could prevent
stockholders from profiting from an increase in the market value of their shares
as a result of a change in control of Registrant by delaying or preventing such
change in control. The existence of two classes of common stock could also
present complexities and could, in certain circumstances, pose obstacles,
financial and otherwise, to an acquiring person. In addition, certain provisions
of the Delaware law, Registrant's certificate of incorporation, and its by-laws
may also deter hostile takeover attempts.
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<PAGE>
Changes in federal tax law could result in taxation of issuances of common
stock.
Changes in federal tax law, such as those proposed by the Clinton
Administration in early 1999, could impose a corporate level tax on the issuance
of stock similar to the Celera Genomics Group Common Stock or the PE Biosystems
Group Common Stock. If this proposal is enacted, Registrant could be subject to
tax on an issuance of Celera Genomics Group Common Stock or PE Biosystems Group
Common Stock after the date of enactment.
Under Registrant's certificate of incorporation, Registrant may convert
the Celera Genomics Group Common Stock or the PE Biosystems Group Common Stock
into shares of the other class without any premium if there are adverse U.S.
federal income tax law developments. The proposal of the Clinton Administration
would be such an adverse development if it is implemented or receives certain
legislative action.
Item 6. SELECTED FINANCIAL DATA
Registrant hereby incorporates by reference in this Form 10-K, Pages
37, 73, and 96 of Registrant's Annual Report to Stockholders for the fiscal year
ended June 30, 1999.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Registrant hereby incorporates by reference in this Form 10-K, Pages
38-47, 74-79, and 97-109 of Registrant's Annual Report to Stockholders for the
fiscal year ended June 30, 1999.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Registrant hereby incorporates by reference in this Form 10-K, Pages
42-43 and 102-103, Note 12 on Pages 67-69, and Note 12 on Pages 129-131 of
Registrant's Annual Report to Stockholders for the fiscal year ended June 30,
1999.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and the supplementary financial
information included in Registrant's Annual Report to Stockholders for the
fiscal year ended June 30, 1999 are incorporated by reference in this
Form 10-K: the combined Financial Statements and the reports thereon of
PricewaterhouseCoopers LLP dated July 30, 1999, the Consolidated Financial
Statements and the report thereon of PricewaterhouseCoopers LLP dated July 30,
1999, and Pages 48-72, 80-95, and 110-134 of said Annual Report, including Note
13, Pages 69-70, Note 10, Page 94, and Note 13, Pages 131-132, which contains
unaudited quarterly financial information.
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<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Registrant has not changed its public accounting firm within 24 months
prior to June 30, 1999, the date of Registrant's most recent financial
statements. There have been no unresolved disagreements on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
(a) Identification and Background of Directors.
Registrant hereby incorporates by reference in this Form 10-K, Pages
3-4 of Registrant's Proxy Statement dated September 10, 1999, in connection with
its Annual Meeting of Stockholders to be held on October 21, 1999.
(b) Identification of Executive Officers.
The following is a list of Registrant's executive officers, their ages,
and their positions and offices with the Registrant, as of September 21, 1999.
<TABLE>
<CAPTION>
Name Age Present Positions and Year First Elected
<S> <C> <C>
Peter Barrett .......... 46 Vice President, Celera Genomics Group (1998)
Samuel E. Broder ....... 54 Vice President, Celera Genomics Group (1999)
Ugo D. DeBlasi ......... 37 Controller, Celera Genomics Group (1999)
Ronald D. Edelstein .... 50 Vice President and Chief Information Officer (1998)
Elaine J. Heron ........ 51 Vice President PE Biosystems Group (1998)
Michael W. Hunkapiller . 50 Senior Vice President (1998); President, PE Biosystems Group (1994)
Vikram Jog ............. 43 Corporate Controller (1999)
Joseph E. Malandrakis .. 54 Vice President, PE Biosystems Group (1993)
William B. Sawch ....... 44 Senior Vice President, General Counsel and Secretary (1993)
Gregory T. Schiffman ... 41 Controller, PE Biosystems Group (1999)
Joyce A. Sziebert ...... 50 Vice President, Human Resources (1999)
J. Craig Venter ........ 52 Senior Vice President and President, Celera Genomics Group (1998)
Tony L. White .......... 53 Chairman, President, and Chief Executive Officer (1995)
Dennis L. Winger ....... 51 Senior Vice President and Chief Financial Officer (1997)
</TABLE>
Each of the foregoing named officers was either elected at the last
organizational meeting of the Board of Directors, or elected by the Board since
that date. The term of each officer will expire on October 21, 1999, the date of
the next scheduled organizational meeting of the Board of Directors, unless
renewed for another year.
(c) Identification of Certain Significant Employees.
Not applicable.
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<PAGE>
(d) Family Relationships.
To the best of Registrant's knowledge and belief, there is no family
relationship between any of Registrant's directors, executive officers, or
persons nominated or chosen by Registrant to become a director or an executive
officer.
(e) Business Experience.
With respect to the business experience of Registrant's directors and
persons nominated to become directors, Registrant hereby incorporates by
reference in this Report on Form 10-K, Pages 3-4 of Registrant's Proxy Statement
dated September 10, 1999, in connection with its Annual Meeting of Stockholders
to be held on October 21, 1999. With respect to the executive officers of
Registrant, each such officer has been employed by Registrant or a subsidiary in
one or more executive or managerial capacities for at least the past five years,
with the exception of Dr. Broder, Mr. Edelstein, Dr. Heron, Mr. Jog, Ms.
Sziebert, Dr. Venter, Mr. Schiffman, Mr. White, and Mr. Winger.
Dr. Broder was elected Vice President of Registrant on August 19, 1999.
Prior to his employment by Registrant in August, 1998, Dr. Broder was Senior
Vice President of IVAX Corporation for three years, and from 1989 to 1995 he
served as director of the National Cancer Institute.
Mr. Edelstein was elected Vice President of Registrant on June 18,
1998. Prior to his employment by Registrant in June 1998, Mr. Edelstein served
as Vice President and Chief Information Officer of Witco Corporation, a
manufacturer of specialty chemicals, for seven years.
Dr. Heron was elected Vice President of Registrant on December 21,
1995. She was most recently appointed Vice President and General Manager of
Registrant's Applied Biosystems business in July 1998. Previously Dr. Heron
served as Vice President, Worldwide Sales, Service, and Marketing since December
1995. She had served as Vice President of Marketing at Affymetrix, Inc., a
supplier of genetic analysis equipment, for the year prior to this appointment
and previously was Director of Marketing for Applied Biosystems beginning in
1990.
Mr. Jog was elected Corporate Controller of Registrant on August 19,
1999. Prior to his employment by Registrant in July, 1999, Mr. Jog served as
Vice President and Controller of Hercules Incorporated, a manufacturer of
chemicals, for seven years.
Mr. Schiffman was elected Controller of Registrant's PE Biosystems
Group on August 19, 1999. Prior to his employment by Registrant in June, 1998,
Mr. Schiffman was employed by Hewlett Packard Corporation, a diversified
electronics manufacturer, for ten years, most recently as controller and
manufacturing manager of the company's NetMetrix Division.
Ms. Sziebert was elected Vice President of Registrant on January 21,
1999. Prior to her employment by Registrant in January, 1999, Ms. Sziebert
served as Vice President, World Wide Human Resources of Cypress Semiconductor,
Inc., a semiconductor manufacturer, for five years.
Mr. White was elected Chairman, President, and Chief Executive Officer
of Registrant in September 1995. Prior to his joining Registrant, he was
Executive Vice President and a member of the Office of the Chief Executive of
Baxter International Inc. He also served as Group Vice
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<PAGE>
President of Baxter International Inc. from 1986 to 1992. Mr. White is also a
director of C.R. Bard, Inc., Ingersoll-Rand Company, and Tecan AG.
Mr. Winger was elected Senior Vice President and Chief Financial
Officer of Registrant on October 16, 1997. Prior to his employment by Registrant
in September, 1997, Mr. Winger was employed by Chiron Corporation, which
conducts research and development in the fields of biological proteins, gene
therapy, and combinatorial chemistry, where he was Senior Vice President,
Finance and Administration, and Chief Financial Officer since 1989.
Dr. Venter was elected Senior Vice President of Registrant and
President, Celera Genomics Group, on November 19, 1998. Prior to his employment
by Registrant in August, 1998, Dr. Venter was employed by the Institute for
Genomic Research (TIGR), which conducts research and development in genes, where
he was founder, Chairman, and President for six years, and where he remains as
Chairman.
(f) Involvement in Certain Legal Proceedings.
To the best of Registrant's knowledge and belief, none of Registrant'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 Registrant.
(g) Compliance with Section 16(a) of the Securities Exchange Act of
1934.
Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference to Page 10 of Registrant's
Proxy Statement dated September 10, 1999, in connection with its Annual Meeting
of Stockholders to be held on October 21, 1999.
Item 11. EXECUTIVE COMPENSATION
Registrant hereby incorporates by reference in this Form 10-K, Pages
10-22 of Registrant's Proxy Statement dated September 10, 1999, in connection
with its Annual Meeting of Stockholders to be held on October 21, 1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners.
Registrant hereby incorporates by reference in this Form 10-K, Pages
8-10 of Registrant's Proxy Statement dated September 10, 1999, in connection
with its Annual Meeting of Stockholders to be held on October 21, 1999.
(b) Security Ownership of Management.
Information concerning the security ownership of management is hereby
incorporated by reference to Pages 8-10 of Registrant's Proxy Statement dated
September 10, 1999, in connection with its Annual Meeting of Stockholders to be
held on October 21, 1999.
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<PAGE>
(c) Changes in Control.
Registrant knows of no arrangements, including any pledge by any person
of securities of Registrant, the operation of which may at a subsequent date
result in a change in control of Registrant.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is hereby incorporated by reference to pages 21-22 of Registrant's Proxy
Statement dated September 10, 1999, in connection with its Annual Meeting of
Stockholders to be held on October 21, 1999.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The following financial statements, together with the report thereon of
PricewaterhouseCoopers LLP dated July 30, 1999, appearing in Registrant's Annual
Report to Stockholders for the fiscal year ended June 30, 1999, are incorporated
by reference in this 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, 1999, is not to
be deemed filed as part of this report on Form 10-K.
PE Biosystems Group
- -------------------
<TABLE>
<CAPTION>
Annual Report
Page No.
-------------
<S> <C>
Combined Statements of Operations
Fiscal years 1999, 1998, and 1997................. 48
Combined Statements of Financial Position
At June 30, 1999 and 1998......................... 49
Combined Statements of Cash Flows
Fiscal years 1999, 1998, and 1997................. 50
Combined Statements of Group Equity and
and Comprehensive Income (Loss)
Fiscal years 1999, 1998, and 1997................. 51
Notes to Combined Financial Statements..................... 52-71
Report of Management....................................... 72
Report of PricewaterhouseCoopers LLP....................... 72
</TABLE>
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<PAGE>
Celera Genomics Group
- ---------------------
<TABLE>
<CAPTION>
Annual Report
Page No.
-------------
<S> <C>
Combined Statements of Operations
Fiscal years 1999, 1998, and 1997................. 80
Combined Statements of Financial Position
At June 30, 1999 and 1998......................... 81
Combined Statements of Cash Flows
Fiscal years 1999, 1998, and 1997................. 82
Combined Statements of Group Equity
Fiscal years 1999, 1998, and 1997................. 83
Notes to Combined Financial Statements..................... 84-94
Report of Management....................................... 95
Report of PricewaterhouseCoopers LLP....................... 95
</TABLE>
PE Corporation
- --------------
<TABLE>
<CAPTION>
Annual Report
Page No.
-------------
<S> <C>
Consolidated Statements of Operations
Fiscal years 1999, 1998, and 1997................. 110
Consolidated Statements of Financial Position
At June 30, 1999 and 1998 ........................ 111
Consolidated Statements of Cash Flows
Fiscal years 1999, 1998, and 1997................. 112
Consolidated Statements of
Stockholders' Equity and Comprehensive Income (Loss)
Fiscal years 1999, 1998, and 1997................. 113
Notes to Consolidated Financial Statements ................ 114-133
Report of Management....................................... 134
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<PAGE>
Report of PricewaterhouseCoopers LLP....................... 134
</TABLE>
(a) 2. Financial Statement Schedules.
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, 1999. 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.
PE Biosystems Group
- -------------------
<TABLE>
<CAPTION>
10-K Page No.
-------------
<S> <C>
Report of Independent Accountants on Financial
Statement Schedule.................................... 41
Schedule II - Valuation and Qualifying Accounts and
Reserves.............................................. 42
</TABLE>
PE Corporation
- --------------
<TABLE>
<CAPTION>
10-K Page No.
-------------
<S> <C>
Report of Independent Accountants on Financial
Statement Schedule................................... 43
Schedule II - Valuation and Qualifying Accounts and
Reserves.............................................. 44
</TABLE>
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<PAGE>
(a) 3. Exhibits.
Exhibit
No.
- --------
2(1) Purchase Agreement dated as of March 8, 1999 between The Perkin Elmer
Corporation and EG&G, Inc. (incorporated by reference to Exhibit 2.1)
to Current Report on Form 8-K of Registrant dated May 28, 1999
(Commission file number 1-4389).
2(2) Agreement and Plan of Merger, dated August 23, 1997, among the
Registrant, Seven Acquisition Corp. and PerSeptive Biosystems, Inc.
(incorporated by reference to Exhibit 2 to Current Report on Form 8-K
of the Registrant dated August 23, 1997 (Commission file number
1-4389)).
2(3) Stock Option Agreement, dated as of August 23, 1997, between the
Registrant and PerSeptive Biosystems, Inc. (incorporated by reference
to Exhibit 10 to the Registrant's Current Report on Form 8-K dated
August 23, 1997 (Commission File No. 1-4389)).
2(4) 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 Registrant's
Registration Statement on Form S-4 (No. 333-67797) ).
3(i) Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1999 (Commission file number
1-4389)).
3(ii) By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to
Registrant's Quarterly Report on form 10-Q for the fiscal quarter ended
March 31, 1999 (Commission file number 1-4389)).
4(1) Three Year Credit Agreement dated June 1, 1994, among Morgan Guaranty
Trust Company, certain banks named in such Agreement, and the
Registrant, as amended July 20, 1995 (incorporated by reference to
Exhibit 4(1) to Annual Report on Form 10-K of the Registrant for fiscal
year ended June 30, 1995 (Commission file number 1-4389)).
4(2) Amendment dated March 31, 1996 to the Three Year Credit Agreement dated
as of June 1, 1994, among Morgan Guaranty Trust Company, certain banks
named in such Agreement, and the Registrant, as amended July 20, 1995
(incorporated by reference to Exhibit 4(2) to Annual Report on Form
10-K of the Registrant for fiscal year ended June 30, 1997 (Commission
file number 1-4389)).
4(3) Rights Agreement between Registrant and BankBoston, N.A. (incorporated
by reference to Exhibit 4.1 to Registrant's Registration Statement on
Form S-4 (No. 333-67797)).
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 Registrant 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 Registrant'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 Registrant's Registration Statement on
Form S-8 (No. 333-15189)).*
10(4) The Perkin-Elmer Corporation 1996 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 99 to the Registrant's
Registration Statement on Form S-8 (No. 333-15259)).*
10(5) The Perkin-Elmer Corporation 1997 Stock Incentive Plan (incorporated by
reference to Exhibit 99 to the Registrant's Registration Statement on
Form S-8 (No. 333-38713)).*
10(6) PerSeptive Biosystems, Inc. 1989 Stock Plan, as amended August 1, 1991
(incorporated by reference to Exhibit 3(I) of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1998 (Commission file number 1-4389)).*
10(7) PerSeptive Biosystems, Inc. 1992 Stock Plan, as amended January 20,
1997 (incorporated by reference to Exhibit 4.1 to the Quarterly Report
on Form 10-Q of PerSeptive Biosystems, Inc. for the fiscal quarter
ended March 29, 1997 (Commission file No. 0-20032)).*
10(8) Molecular Informatics, Inc. 1997 Equity Ownership Plan (incorporated by
reference to Exhibit 99 to the Registrant's Registration Statement on
Form S-8 (Commission file No. 333-42683)).*
-36-
<PAGE>
10(9) PE Corporation/PE Biosystems Group 1999 Stock Incentive Plan
(incorporated by reference to Annex III to the Proxy Statement and
Prospectus included in Registrant's Registration Statement on Form S-4
(No. 333-67797)).*
10(10) PE Corporation/Celera Genomics Group 1999 Stock Incentive Plan
(incorporated by reference to Annex IV to the Proxy Statement and
Prospectus included in Registrant's Registration Statement on Form S-4
(No. 333-67797)).*
10(11) Agreement dated September 12, 1995, between Registrant and Tony L.
White (incorporated by reference to Exhibit 10(21) to Annual Report on
Form 10-K of the Registrant for the fiscal year ended June 30, 1995
(Commission file number 1-4389)).*
10(12) Deferred Compensation Contract dated September 15, 1994, between
Registrant and Michael W. Hunkapiller (incorporated by reference to
Exhibit 10(7) to Annual Report on Form 10-K of the Registrant for the
fiscal year ended June 30, 1995 (Commission file number 1-4389)).*
10(13) Change of Control Agreement dated September 12, 1995 between Registrant
and Tony L. White (incorporated by reference to Exhibit 10(16) to
Annual Report on Form 10-K of the Registrant for the fiscal year ended
June 30, 1995 (Commission file number 1-4389)).*
10(14) Employment Agreement dated November 16, 1995, between Registrant and
Michael W. Hunkapiller (incorporated by reference to Exhibit 10(11) to
Annual Report on Form 10-K of the Registrant for fiscal year ended
June 30, 1996 (Commission file number 1-4389)).*
10(15) Employment Agreement dated November 16, 1995, between Registrant and
William B. Sawch (incorporated by reference to Exhibit 10(16) to Annual
Report on Form 10-K of the Registrant for fiscal year ended June 30,
1998 (Commission file number 1-4389)).*
10(16) Employment Agreement dated September 25, 1997, between Registrant and
Dennis L. Winger (incorporated by reference to Exhibit 10(17) to Annual
Report on Form 10-K of the Registrant for the fiscal year ended June
30, 1998 (Commission file number 1-4389)).*
10(17) Letter Agreement dated June 24, 1997, between Registrant and Dennis L.
Winger.(incorporated by reference to Exhibit 10(18) to Annual Report on
Form 10-K of the Registrant for the fiscal year ended June 30, 1998
(Commission file number 1-4389)).*
10(18) Deferred Compensation Contract dated July 15, 1993 between Registrant
and William B. Sawch (incorporated by reference to Exhibit 10(19) to
Annual Report on Form 10-K of the Registrant for the fiscal year ended
June 30, 1998 (Commission file number 1-4389)).*
10(20) Agreement dated April 28, 1999 between Registrant and J. Craig Venter.*
10(21) Pledge Agreement and Promissory Note between Registrant and Michael W.
Hunkapiller (incorporated by reference to Exhibit 10 to Quarterly
Report on Form 10-Q of the Registrant for the quarter ended March 31,
1996 (Commission file number 1-4389)).*
10(22) Contingent Compensation Plan for Key Employees of The Perkin-Elmer
Corporation, as amended through August 1, 1990 (incorporated by
reference to Exhibit 10(5) to Annual Report on Form 10-K of the
Registrant for the fiscal year ended July 31, 1992 (Commission file
number 1-4389)).*
10(23) The Perkin-Elmer Corporation Supplemental Retirement Plan as amended
through August 1, 1991 (incorporated by reference to Exhibit 10(6) to
Annual Report on Form 10-K of the Registrant for the fiscal year ended
July 31, 1991 (Commission file number 1-4389)).*
10(24) The Excess Benefit Plan of The Perkin-Elmer Corporation dated August 1,
1984, as amended through June 30, 1993 (incorporated by reference to
Exhibit 10(17) to Annual Report on Form 10-K of the Registrant for the
fiscal year ended June 30, 1993 (Commission file number 1-4389)).*
10(25) 1993 Director Stock Purchase and Deferred Compensation Plan as amended
through January 21, 1999 (incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q of the Registrant for the quarter ended
March 31, 1999 (Commission file number 1-4389)).*
10(26) The Performance Unit Bonus Plan of The Perkin-Elmer Corporation
(incorporated by reference to Exhibit 10(21) to Annual Report on Form
10-K of the Registrant for the fiscal year ended June 30, 1997
(Commission file number 1-4389)).*
-37-
<PAGE>
10(27) 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 Registrant for the fiscal year ended June 30, 1997
(Commission file number 1-4389)).
10(28) Deferred Compensation Plan, as amended and restated effective as of
January 1, 1998 (incorporated by reference to Exhibit 4 to the
Registrant's Registration Statement on Form S-8 (No. 333-45187).*
11 Computation of Net Income (Loss) per Share for the three years ended
June 30, 1999 (incorporated by reference to Note 1 to Consolidated
Financial Statements of Annual Report to Stockholders for the fiscal
year ended June 30, 1999).
13 Annual Report to Stockholders for the fiscal year ended June 30, 1999
(to the extent incorporated herein by reference).
21 List of Subsidiaries.
23 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule for the twelve months ended June 30, 1999.
27.2 Restated Financial Data Schedule for the three months ended September
30, 1998.
27.3 Restated Financial Data Schedule for the twelve months ended June 30,
1998.
27.4 Restated Financial Date Schedule for the nine months ended March 31,
1998.
27.5 Restated Financial Data Schedule for the six months ended December 31,
1997.
27.6 Restated Financial Data Schedule for the three months ended September
30, 1997.
27.7 Restated Financial Data Schedule for the twelve months ended June 30,
1997.
* Management plan or compensatory plan or arrangement
Note: None of the Exhibits listed in Item 14(a) 3 above, except Exhibit 23, is
included with this Form 10-K Annual Report. Registrant will furnish a copy of
any such Exhibit upon written request to the Secretary at the address on the
cover of this Form 10-K Annual Report accompanied by payment of $3.00 U.S. for
each Exhibit requested.
(b) Reports on Form 8-K.
During the quarter ended June 30, 1999 Registrant filed a Current
Report on Form 8-K dated May 20, 1999, and filed June 14, 1999, to report under
Item 2 thereof the sale of Registrant's Analytical Instruments business, and to
report under Item 7 thereof certain pro forma financial information.
-38-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PE CORPORATION
By /s/ WB Sawch
--------------------------------------
William B. Sawch
Senior Vice President, General Counsel
and Secretary
Date: September 20, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Tony L. White September 22, 1999
- ------------------------------------
Tony L. White
Chairman of the Board of Directors, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ DL Winger September 17, 1999
- ------------------------------------
Dennis L. Winger
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Vikram Jog September 17, 1999
- ------------------------------------
Vikram Jog
Corporate Controller
(Principal Accounting Officer)
-39-
<PAGE>
/s/ Joseph F. Abely, Jr September 20, 1999
- -------------------------------------
Joseph F. Abely, Jr.
Director
/s/ Richard H. Ayers September 16, 1999
- ------------------------------------
Richard H. Ayers
Director
/s/ Jean-Luc Belingard September 20, 1999
- ------------------------------------
Jean-Luc Belingard
Director
/s/ Robert H. Hayes September 20, 1999
- ------------------------------------
Robert H. Hayes
Director
/s/ Arnold J. Levine September 20, 1999
- ------------------------------------
Arnold J. Levine
Director
/s/ Theodore E. Martin September 17, 1999
- ------------------------------------
Theodore E. Martin
Director
/s/ Georges C. St. Laurent, Jr. September 17, 1999
- ------------------------------------
Georges C. St. Laurent, Jr.
Director
/s/ Carolyn W. Slayman September 20, 1999
- ------------------------------------
Carolyn W. Slayman
Director
/s/ Orin R. Smith September 20, 1999
- ------------------------------------
Orin R. Smith
Director
/s/ James R. Tobin September 20, 1999
- ------------------------------------
James R. Tobin
Director
</TABLE>
-40-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of PE Corporation
Our audits of the combined financial statements of the PE Biosystems
Group referred to in our report dated July 30, 1999 appearing in the 1999 Annual
Report to Stockholders of PE Corporation (which report and combined 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, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related combined financial statements.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
Stamford, Connecticut
July 30, 1999
-41-
<PAGE>
PE BIOSYSTEMS GROUP
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
<S> <C>
Balance at June 30, 1996 ......................... $4,515
Charged to income in fiscal year 1997 ............ 655
Deductions from reserve in fiscal year 1997 ...... (1,330)
Balance at June 30, 1997 ......................... 3,840
Charged to income in fiscal year 1998 ............ 1,518
Deductions from reserve in fiscal year 1998 ...... (1,070)
Acquired Business (2) ............................ 495
Balance at June 30, 1998 (1) ..................... 4,783
Charged to income in fiscal year 1999 ............ 2,101
Divested Business (2) ............................ (449)
Deductions from reserve in fiscal year 1999 ...... (1,917)
Balance at June 30, 1999 (1) ..................... $4,518
</TABLE>
(1) Deducted in the Combined Statements of Financial Position from accounts
receivable.
(2) See Note 2 to the Combined Financial Statements.
SCHEDULE II
-42-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of PE Corporation
Our audits of the consolidated financial statements of PE Corporation
referred to in our report dated July 30, 1999 appearing in the 1999 Annual
Report to Stockholders of PE 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, the 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 30, 1999
-43-
<PAGE>
PE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
<S> <C>
Balance at June 30, 1996 ......................... $4,515
Charged to income in fiscal year 1997 ............ 655
Deductions from reserve in fiscal year 1997 ...... (1,330)
Balance at June 30, 1997 ......................... 3,840
Charged to income in fiscal year 1998 ............ 1,518
Deductions from reserve in fiscal year 1998 ...... (1,070)
Acquired Business (2) ............................ 495
Balance at June 30, 1998 (1) ..................... 4,783
Charged to income in fiscal year 1999 ............ 2,101
Divested Business (2) ............................ (449)
Deductions from reserve in fiscal year 1999 ...... (1,917)
Balance at June 30, 1999 (1) ..................... $4,518
</TABLE>
(1) Deducted in the Consolidated Statements of Financial Position from accounts
receivable.
(2) See Note 2 to the Consolidated Financial Statements.
SCHEDULE II
-44-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10(20) Agreement dated April 28, 1999 between Registrant and J. Craig Venter.*
13 Annual Report to Stockholders for the fiscal year ended June 30, 1999
(to the extent incorporated herein by reference).
21 List of Subsidiaries.
23 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule for the twelve months ended June 30, 1999.
27.2 Restated Financial Data Schedule for the three months ended September
30, 1998.
27.3 Restated Financial Data Schedule for the twelve months ended June 30,
1998.
27.4 Restated Financial Date Schedule for the nine months ended March 31,
1998.
27.5 Restated Financial Data Schedule for the six months ended December 31,
1997.
27.6 Restated Financial Data Schedule for the three months ended September
30, 1997.
27.7 Restated Financial Data Schedule for the twelve months ended June 30,
1997.
-45-
Dr. J. Craig Venter
President
Celera Genomics
45 West Gude Drive
Rockville, MD 02850
Dear Dr. Venter:
On behalf of PE Corporation through its Celera Genomics Unit (the "Company"), I
am pleased to confirm the terms and conditions of our agreement regarding your
bonus arrangements.
Your bonus program commenced as of July 1, 1998 and consists of four (4)
periods, each of which is twelve (12) months long ending on June 30 in each of
the years 1999 through 2002 (the "Bonus Periods").
Your bonus entitlement for each Bonus Period is $1,525,000 and will be paid to,
or on your behalf, as follows:
(a) You must be an employee of the Company on the first and last days of each
Bonus Period, except in the event of your death or disability (as defined
for purposes of determining eligibility for Social Security disability
benefits) in any Bonus Period.
(i) In the event of your death or disability, your entitlement (if any)
will be prorated for the period of time during the Bonus Period during
which you were actively employed by the Company.
(b) The closing price of PE Corporation - Celera Genomics Group Common Stock
(the "Celera Stock") on the New York Stock Exchange must exceed $17.12 per
share on at least 1 day in each Bonus Period; provided, however, in the
event of your death or disability, the stock price must be attained within
90 days after either of said events, even if said 90 days extends into the
next Bonus Period, unless the stock price was attained earlier in the Bonus
Period in which your death or disability occurs.
(c) If the stock price requirement of paragraph (b) above is not satisfied in
any Bonus Period, your bonus entitlement ($1,525,000) for such Bonus Period
will be carried over into one or more succeeding Bonus Periods and will be
paid with, and in addition to, any entitlements attributable to the first
Bonus Period in which the Celera Stock price exceeds $17.12 per share.
(i) Notwithstanding paragraph (a) above, the carried over amount will be
paid to you, or on your behalf, even if you are not employed on the
last day of the subsequent Bonus Period and are otherwise ineligible
for any entitlement for such subsequent Bonus Period.
<PAGE>
-2-
(d) Payment of any amounts owing to you under this Agreement shall be made as
soon as practicable after the end of the Bonus Period to which the payment
relates; provided, however, any carried over amounts to which you may
become entitled shall be paid as soon as practicable after the closing
price of the Celera Stock exceeds $17.12 as provided in paragraph (b)
above.
(i) In the event of your death, any such amounts shall be paid to your
designated beneficiary, or if none, to your estate.
(e) In lieu of current payments described in paragraph (d) above, you may elect
to defer part or all of each Bonus Year's entitlement pursuant to the
provisions of The Perkin-Elmer Corporation Deferred Compensation Plan by
making an irrevocable election prior to the beginning of each Bonus Period;
provided, however, for the Bonus Period ending June 30, 1999, any deferral
election must be made within 10 days of your agreement and acceptance of
the terms and conditions stated herein.
This letter constitutes the complete agreement between us in respect to your
bonus arrangements. If you are in agreement, please so indicate by signing and
returning the original of this letter. A signed copy is provided for your
records.
Very truly yours,
PE CORPORATION
By: /s/ Tony L. White
-----------------------
Chairman, President and
Chief Executive Officer
The foregoing agreement is
hereby accepted and agreed to.
By: /s/ J. Craig Venter
-----------------------
Signature
4/28/99
-----------------------
Date
PE Biosystems Group
Selected Financial Data
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Operations
Net revenues $1,221,691 $ 940,095 $ 767,465 $642,059 $543,945
Income from continuing operations 148,365 24,009 132,739 3,899 38,569
Per share of common stock
Basic 1.48
Diluted 1.44
Income (loss) from discontinued
operations (net of income taxes) 79,058 40,694 27,906 (37,833) 7,738
Net income (loss) 227,423 64,703 160,645 (33,934) 46,307
Per share of common stock
Basic 2.27
Diluted 2.21
Dividends per share .085
- ------------------------------------------------------------------------------------------------------------------
Other Information
Cash and short-term investments $ 236,530 $ 84,091 $ 217,222 $121,145 $103,826
Working capital 274,638 289,151 355,163 226,414 256,607
Capital expenditures 92,077 68,172 57,646 27,125 33,891
Total assets 1,347,550 1,128,937 1,003,810 809,856 797,970
Note payable to the Celera Genomics group 150,000
Long-term debt 31,452 33,726 59,152 33,694 64,524
Total allocated debt 35,363 45,825 89,068 89,801 123,224
Group equity 534,332 565,507 507,734 373,116 369,807
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The selected financial data should be read with the combined financial
statements and the consolidated financial statements.
On May 6, 1999, The Perkin-Elmer Corporation was merged into a subsidiary of PE
Corporation, a new Delaware corporation. The recapitalization of the Company
resulted in the issuance of two new classes of common stock called PE
Corporation-PE Biosystems Group Common Stock and PE Corporation-Celera Genomics
Group Common Stock.
On June 17, 1999, the Board of Directors announced a two-for-one split of PE
Biosystems group common stock. The two-for-one stock split was effected in the
form of a 100% stock dividend paid to stockholders of record as of the close of
business on July 12, 1999. All PE Biosystems group share and per share data
reflect this split.
A number of items impact the comparability of the data from
continuing operations. Before-tax amounts include:
o Charges of $13.7 million for fiscal 1999 relating to the recapitalization and
transformation of the Company;
o Restructuring and other merger costs of $6.1 million for fiscal 1999, $48.1
million for fiscal 1998, $17.5 million for fiscal 1996, and $15.5 million for
fiscal 1995;
o Restructuring reserve adjustment of $9.2 million for fiscal 1999 relating to
excess fiscal 1998 restructuring liabilities;
o Gains on investments of $6.1 million for fiscal 1999, $1.6 million for fiscal
1998, $64.9 million for fiscal 1997, $11.7 million for fiscal 1996, and $20.8
million for fiscal 1995;
o Acquired research and development charges of $28.9 million for fiscal 1998 and
$31.8 million for fiscal 1996;
o Charges for the impairment of assets of $14.5 million for fiscal 1999, $.7
million for fiscal 1997, and $9.9 million for fiscal 1996;
o Foreign currency hedge contract related gain of $2.3 million for fiscal 1999;
o Tax benefit and valuation allowance reductions of $22.2 million for fiscal
1999; and
o A charge of $3.5 million for a donation to the Company's charitable foundation
for fiscal 1999.
37
<PAGE>
PE Biosystems Group
Management's Discussion and Analysis
Management's Discussion of
Continuing Operations
The PE Corporation ("PE" or "the Company") is comprised of two separate business
segments in continuing operations: the PE Biosystems group and the Celera
Genomics group. The performance of these businesses is reflected separately by
two classes of common stock: PE Biosystems stock and Celera Genomics stock. The
PE Biosystems group manufactures and markets biochemical instrument systems and
associated consumable products for life science research and related
applications. The Celera Genomics group is engaged principally in the
generation, sale and support of genomic information databases and related
information management and analysis software; discovery, validation and
licensing of proprietary gene products, genetic markers and information
regarding genetic variability; and related consulting and contract research and
development services.
You should read this discussion with our combined financial statements and
consolidated financial statements. Historical results and percentage
relationships are not necessarily indicative of operating results for any future
periods.
Throughout the following discussion of operations we refer to the impact on our
reported results of the movement in foreign currency exchange rates from one
reporting period to another as "foreign currency translation."
Discontinued Operations
Effective May 28, 1999, PE completed the sale of its Analytical Instruments
business to EG&G, Inc. Analytical Instruments, formerly a unit of the PE
Biosystems group, develops, manufactures, markets, sells, and services
analytical instruments used in a variety of markets. As part of the sale, the
rights to the "Perkin-Elmer" name were transferred to EG&G.
The aggregate consideration received by our company was $425 million, consisting
of $275 million in cash and one-year secured promissory notes in the aggregate
principal amount of $150 million which bear interest at a rate of 5% per annum.
Our company recognized a net gain on disposal of discontinued operations of
$100.2 million, net of $87.8 million of income taxes. The transaction is subject
to post-closing adjustments pursuant to the terms of the agreement with EG&G.
Amounts previously reported for Analytical Instruments have been reclassified
and stated as discontinued operations. See Note 15 to the PE Biosystems group
combined financial statements.
Events Impacting Comparability
Acquisitions, Investments, and Dispositions
On January 22, 1998, we acquired PerSeptive. The acquisition was accounted for
as a pooling of interests and, accordingly, the PE Biosystems group's financial
results were restated to include the combined operations.
We acquired Molecular Informatics and a 14.5% interest, and approximately 52% of
the voting rights, in Tecan during the second quarter of fiscal 1998. The
results of operations for these acquisitions, each of which was accounted for as
a purchase, have been included in the combined financial statements since the
date of each respective acquisition. During the fourth quarter of fiscal 1999,
our company divested its interest in Tecan. A before-tax gain of $1.6 million
was recognized on the sale.
A discussion of significant acquisitions, investments, and dispositions is
provided in Note 2 to the PE Biosystems group combined financial statements.
Restructuring and Other Special Charges
In fiscal 1999, the PE Biosystems group was allocated non-recurring before-tax
special charges of $4.6 million. These costs were incurred in connection with
the recapitalization of our company. The PE Biosystems group and the Celera
Genomics group were each allocated 50% of the $9.2 million total
recapitalization costs incurred by our company. See Note 1 to the PE Biosystems
group combined financial statements for a discussion of the recapitalization.
During fiscal 1998, $48.1 million of before-tax charges were recorded for
restructuring and other merger costs to integrate PerSeptive into the PE
Biosystems group following the acquisition. The objectives of the integration
plan were to lower PerSeptive's cost structure by reducing excess manufacturing
capacity, achieve broader worldwide distribution of PerSeptive's products, and
combine sales, marketing, and administrative functions. The charge included:
$33.9 million for restructuring the combined operations; $8.6 million for
transaction costs; and $4.1 million of inventory-related write-offs, recorded in
cost of sales, associated with the rationalization of certain product lines.
Additional merger-related period costs of $6.1 million for fiscal 1999 and $1.5
million for fiscal 1998 were incurred for training, relocation, and
communication in connection with the integration.
During the fourth quarter of fiscal 1999, the PE Biosystems group completed the
restructuring actions. The cost to implement the program were $9.2 million below
the $48.1 million charge recorded for fiscal 1998. As a result, during the
fourth quarter of fiscal 1999, the PE Biosystems group recorded a $9.2 million
reduction of charges required to implement the fiscal 1998 plan. A discussion of
the PE Biosystems group's restructuring program is provided in Note 10 to the PE
Biosystems group combined financial statements.
38
<PAGE>
PE Biosystems Group
Management's Discussion and Analysis continued
Acquired Research and Development
In the second quarter of fiscal 1998, we expensed $28.9 million of the Molecular
Informatics acquisition cost as in-process research and development,
representing 53.6% of the purchase price. This amount was attributed and
supported by a discounted probable cash flow analysis on a project-by-project
basis. At the acquisition date, the technological feasibility of the acquired
technology had not been established and the acquired technology had no future
alternative uses.
We attributed approximately 10% of the in-process research and development value
to BioLIMS, a software system that manages data, initiates analysis programs,
and captures the results in a centralized, relational database for sequencing
instruments; 6% to GA SFDB, a client-side add-on product to several existing
gene sequencing instruments; 38% to BioMERGE, a client-server management and
integration system that organizes proprietary, public and third-party results in
a single relational database for the drug discovery and genomic research
markets; 9% to BioCLINIC, a client-server management and integration system that
organizes proprietary, public and third-party results generated from DNA and
protein sequence analysis in a single database for the clinical trials phase of
drug development; and 37% to SDK, an open architecture software platform from
which all of Molecular Informatics' future software applications were expected
to be derived.
As of the acquisition date, all of the major functionality for BioLIMS 2.0 had
been completed and the product was subsequently released in September 1998. As
of the acquisition date, BioLIMS 3.0 was in the design and scoping phase. As of
the acquisition date, GA SFDB was in early alpha phase and had been completed
concurrent with the development of BioLIMS 2.0 and was released in September
1998. As of the acquisition date, BioMerge's 3.0 functional scope was defined
and the requirements assessment had been completed and was subsequently released
in November 1998. As of the acquisition date, the BioCLINIC product requirements
had been specified and discussions had begun with two potential customers to
begin the specific software modifications. Development efforts were terminated
in April 1998 due to unsuccessful marketing efforts. As of the acquisition date,
the SDK requirements assessment had been completed and the functional scope had
been defined.
We attributed $11.8 million of the purchase price to core technology and
existing products, primarily related to the BioMERGE product. We applied a
risk-adjusted discount to the project's cash flows of 20% for existing
technology and 23% for in-process technology. The risk premium of 3% for
in-process technologies was determined by management based on the associated
risks of releasing these in-process technologies versus the existing
technologies for the emerging bioinformatics software industry. The significant
risks associated with these products include the limited operating history of
Molecular Informatics, uncertainties surrounding the market acceptance of such
in-process products, competitive threats from other bioinformatics companies and
other risks. Management is primarily responsible for estimating the fair value
of such existing and in-process technology.
Asset Impairment
During the fourth quarter of fiscal 1999, the PE Biosystems group incurred a
$14.5 million charge to cost of sales for the impairment of intangible assets
associated with the Molecular Informatics business. This impairment resulted
primarily from a decline in management's assessment of future cash flows from
this business which included the discontinuance of certain product lines in the
fourth quarter.
During fiscal 1997, a $.7 million charge was recorded to cost of sales for the
write-down of certain impaired assets.
See Note 1 to the PE Biosystems group combined financial statements.
Gain on Investments
Fiscal 1999, 1998, and 1997 included before-tax gains of $4.5 million, $1.6
million, and $64.9 million, respectively, related to the sale and release of
contingencies on minority equity investments. As previously described, fiscal
1999 also included a before tax gain of $1.6 million related to the sale of our
interest in Tecan. See Note 2 to the PE Biosystems group combined financial
statements.
Other Events Impacting Comparability
During the fourth quarter of fiscal 1999, the PE Biosystems group was allocated
a $9.1 million charge, recorded to selling, general and administrative expenses,
for costs related to the acceleration of certain long-term compensation programs
as a result of the recapitalization of our company and the attainment of
performance targets.
During the fourth quarter of fiscal 1999, PE made a $3.5 million donation to our
company's charitable foundation, which supports educational and other charitable
programs. The charge was recorded to the PE Biosystems group's selling, general
and administrative expenses.
A gain of $2.3 million related to foreign currency hedge contracts was
recognized in other income, net during the fourth quarter of fiscal 1999.
The effective income tax rate for fiscal 1999 included certain tax benefit and
valuation reductions of $22.2 million. See Note 4 to the PE Biosystems group
combined financial statements.
39
<PAGE>
PE Biosystems Group
Management's Discussion and Analysis continued
Results of Continuing Operations--1999 Compared With 1998
The PE Biosystems group reported income from continuing operations of $148.4
million for fiscal 1999 compared with $24.0 million for fiscal 1998. On a
comparable basis, excluding the special items previously described, income from
continuing operations increased 44.8% to $137.5 million for fiscal 1999 compared
with $95.2 million for fiscal 1998.
Net revenues were $1,221.7 million for fiscal 1999 compared with $940.1 million
for fiscal 1998, an increase of 30.0%. Excluding the results of Tecan, revenues
increased 25.9% compared with the prior year. The effects of foreign currency
translation increased net revenues by less than 1% compared with the prior year.
Net revenues from shipments to the Celera Genomics group were $17.3 million for
fiscal 1999 and represented less than 2% of the group's net revenues. There were
no revenues to the Celera Genomics group for fiscal 1998.
Geographically, excluding the net revenues of Tecan, the PE Biosystems group
reported revenue growth in all regions for fiscal 1999 compared with the prior
year. Revenues increased 32.5% in the United States, 19.5% in Europe, 20.9% in
the Far East and 12.6% in Latin America and other markets, compared with the
prior year. Demand for the PE Biosystems group's new ABI PRISM(R) 3700 DNA
Analyzer, which began shipping in the second quarter of fiscal 1999, was strong.
Shipments for sequence detection systems and liquid chromatography/mass
spectrometry ("LC/MS") products also contributed to the growth.
Gross margin as a percentage of net revenues was 53.9% for fiscal 1999 compared
with 54.1% for fiscal 1998. Fiscal 1999 gross margin included $14.5 million for
the impairment of intangible assets associated with the Molecular Informatics
business. Fiscal 1998 gross margin included $4.1 million of inventory-related
write-offs associated with the rationalization of certain product lines in
connection with the acquisition of PerSeptive. On a comparable basis, excluding
the special items for both years, gross margin as a percentage of net revenues
was 55.1% for fiscal 1999 and 54.5% for fiscal 1998. The improved gross margin
was primarily the result of a change in product mix. Increased unit sales of
reagents to support genetic analysis systems, increased royalty revenues, and
continued demand in instrument sales of higher margin genetic analysis product
offerings contributed to the growth.
SG&A expenses were $335.9 million for fiscal 1999 compared with $276.7 million
for fiscal 1998, an increase of 21.4%. Excluding Tecan, SG&A expenses increased
15.6% for fiscal 1999 compared with the prior year. Fiscal 1999 expenses
included a charge of $9.1 million for costs related to the acceleration of
certain long-term compensation programs as a result of the recapitalization of
our company and the attainment of performance targets. Fiscal 1999 expenses also
included $3.5 million for a contribution to our company's charitable foundation
which supports educational and other charitable programs. On a comparable basis,
excluding the special items, SG&A expenses increased 10.8%. This increase was
due to higher planned expenses, reflecting the growth in sales and orders. As a
percentage of net revenues, excluding Tecan and the special items, SG&A expenses
were 25.9% for fiscal 1999 compared with 29.4% for the prior year.
R&D expenses increased 26.6% to $133.5 million for fiscal 1999. Excluding Tecan,
expenses increased 19.5% compared with the prior year in support of the
introduction of new products and the acceleration of product development. As a
percentage of net revenues, excluding Tecan, R&D expenses were 10.7% for fiscal
1999 compared with 11.2% for the prior year.
During fiscal 1998, $48.1 million of before-tax charges were recorded for
restructuring and other merger costs to integrate PerSeptive into the PE
Biosystems group following the acquisition. The objectives of the integration
plan were to lower PerSeptive's cost structure by reducing excess manufacturing
capacity, achieve broader worldwide distribution of PerSeptive's products, and
combine sales, marketing, and administrative functions. The charge included:
$33.9 million for restructuring the combined operations; $8.6 million for
transaction costs; and $4.1 million of inventory-related write-offs, recorded
in cost of sales, associated with the rationalization of certain product lines.
Additional merger-related period costs of $6.1 million for fiscal 1999 and $1.5
million for fiscal 1998 were incurred for training, relocation, and
communication costs.
The $33.9 million restructuring charge included $13.8 million for
severance-related costs and workforce reductions of approximately 170 employees,
consisting of 114 employees in production labor and 56 employees in sales and
administrative support. The remaining $20.1 million represented facility
consolidation and asset-related write-offs that included: $11.7 million for
contract and lease terminations and facility-related expenses in connection with
the reduction of excess manufacturing capacity; $3.2 million for dealer
termination payments, sales office consolidations, and consolidation of sales
and administrative support functions; and $5.2 million for the write-off of
certain tangible and intangible assets and the termination of certain
contractual obligations. Transaction costs of $8.6 million included
acquisition-related investment banking and professional fees.
During the fourth quarter of fiscal 1999, the PE Biosystems group completed the
restructuring actions. The costs to implement the program were $9.2 million
below the $48.1 million charge recorded for fiscal 1998. As a result, during the
fourth quarter of fiscal 1999, the PE Biosystems group recorded a $9.2 million
reduction of charges required to implement the fiscal 1998 plan. See Note 10 to
the PE Biosystems group combined financial statements.
During fiscal 1999, the PE Biosystems group was allocated a before-tax special
charge of $4.6 million for costs incurred in connection with the
recapitalization of our company. The PE Biosystems group and the Celera Genomics
group were each allocated 50% of the $9.2 million total recapitalization costs
incurred by our company. These costs included investment banking and
professional fees.
40
<PAGE>
PE Biosystems Group
Management's Discussion and Analysis continued
Fiscal 1998 included $28.9 million of purchased in-process research and
development associated with our company's acquisition of Molecular Informatics
for the PE Biosystems group.
<TABLE>
<CAPTION>
Operating Income
(Dollar amounts in millions) 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Operating income before special items $216.5 $130.4
Asset impairment (14.5)
Long-term compensation programs (9.1)
Charitable foundation contribution (3.5)
Restructuring and other
merger costs, net 3.1 (48.1)
Recapitalization costs (4.6)
Acquired research and development (28.9)
- -----------------------------------------------------------
Operating income $187.9 $ 53.4
- -----------------------------------------------------------
</TABLE>
Operating income increased to $187.9 million for fiscal 1999 compared with $53.4
million for the prior year. On a comparable basis, excluding the results of
Tecan and the special items previously described, operating income increased
60.7% for fiscal 1999 compared with the prior year. The PE Biosystems group
benefited from increased revenues, higher gross margins, and lower operating
expenses as a percentage of net revenues. Higher operating income from
sequencing, mapping systems, and LC/MS products were the primary contributors.
The effects of currency translation for the PE Biosystems group increased
operating income by less than 1% for fiscal 1999 compared with the prior year.
Operating income as a percentage of net revenues, excluding the results of Tecan
and the special items, increased to 17.6% for fiscal 1999 compared with 13.8%
for the prior year.
For fiscal 1999 and 1998, the PE Biosystems group recorded gains of $4.5 million
and $1.6 million, respectively, on the sale and release of contingencies on
minority equity investments. Fiscal 1999 also included a gain of $1.6 million
related to the sale of our interest in Tecan.
Interest expense was $4.5 million for fiscal 1999 compared with $4.9 million for
the prior year. This decrease was primarily due to the refinancing of
PerSeptive's 8-1/4% Convertible Subordinated Notes ("the Perseptive Notes") and
lower average interest rates. Fiscal 1999 included $.7 million of interest
expense with the Celera Genomics group. Interest income was $2.3 million for
fiscal 1999 compared with $5.9 million for the prior year, primarily because of
lower average cash balances during the year.
Other income, net for fiscal 1999 was $.5 million compared with $3.1 million for
the prior year. Fiscal 1999 other income, net primarily related to the
revaluation of foreign exchange contracts and a legal settlement that were
partially offset by the loss on the disposal of certain assets and other
non-operating costs. The other income, net for fiscal 1998 resulted from a gain
on the sale of certain operating and non-operating assets.
The effective income tax rate was 16% for fiscal 1999 and 50% for fiscal 1998.
Excluding Tecan, and the special items, the effective income tax rate was 29%
for fiscal 1999 and 25% for fiscal 1998. The effective income tax rate for
fiscal 1999 included the release of valuation allowances of $17.4 million. The
valuation allowance was reduced because management believes, now that the sale
of the Analytical Instruments business has been completed, that it is more
likely than not that the deferred tax assets to which the valuation allowance
related will be realized. An analysis of the differences between the federal
statutory income tax rate and the effective tax rate is provided in Note 4 to
the PE Biosystems group combined financial statements.
The PE Biosystems group incurred minority interest expense of $13.4 million for
fiscal 1999 and $5.6 million for fiscal 1998 relating to our company's 14.5%
financial interest in Tecan. As previously indicated, our company divested its
interest in Tecan during the fourth quarter of fiscal 1999.
Results of Continuing Operations--1998 Compared With 1997
The PE Biosystems group reported income from continuing operations of $24.0
million for fiscal 1998 compared with $132.7 million for fiscal 1997. On a
comparable basis, excluding the special items previously described, income from
continuing operations increased 23.2% to $95.2 million for fiscal 1998 compared
with $77.1 million for fiscal 1997.
Net revenues were $940.1 million for fiscal 1998 compared with $767.5 million
for fiscal 1997, an increase of 22.5%. Excluding Tecan, net revenues increased
15.9% compared with the prior year. The effects of currency translation
decreased net revenues by approximately $33 million, or 4%, compared with the
prior year, as the U.S. dollar strengthened against most European and Far
Eastern currencies. On a worldwide basis, excluding Tecan and the effects of
currency translation, revenues would have increased approximately 20% compared
with the prior year. Increased demand for genetic analysis, LC/MS, and
polymerase chain reaction product lines was the primary contributor.
All geographic markets reported increased revenues over the prior year.
Excluding Tecan, net revenues in the United States, Europe, and the Far East
increased 24.0%, 10.7%, and 4.6%, respectively. Before the effects of currency
translation, and excluding Tecan, revenues in Europe and the Far East would have
increased approximately 18% and 14%, respectively, compared with the prior year.
The PE Biosystems group believes slower Japanese government funding in the
second half of fiscal 1998 and the lack of a supplemental budget, which added to
fiscal 1997 revenues, contributed to a lower growth rate of only 3% in the
Japanese market.
Gross margin as a percentage of net revenues was 54.1% for fiscal 1998 compared
with 52.9% for fiscal 1997. Fiscal 1998 gross margin included $4.1 million of
inventory-related write-offs associated with the rationalization of certain
product lines in connection with the acquisition of PerSeptive. Fiscal 1997
included a charge of $.7 million for the write-down of certain other assets.
Excluding the special items, gross margin as a percentage of net revenues
increased to 54.5% for fiscal 1998. Benefits realized from the sale
41
<PAGE>
PE Biosystems Group
Management's Discussion and Analysis continued
of higher-margin genetic analysis products and increased royalty revenues in the
United States more than offset the negative effects of currency translation.
SG&A expenses were $276.7 million for fiscal 1998 compared with $227.7 million
for the prior year. The 21.5% increase in expenses, or 14.7% excluding Tecan,
was due to higher planned worldwide selling and marketing expenses commensurate
with the substantially higher revenue and order growth. Before the effects of
currency translation and excluding Tecan, SG&A expenses increased approximately
18% compared with the prior year. As a percentage of net revenues, SG&A expenses
for the PE Biosystems group were essentially unchanged at 29.4% for fiscal 1998
compared with 29.7% for the prior year.
R&D expenses of $105.5 million for fiscal 1998 increased 35.0% over the prior
year, or 27.7% excluding Tecan. R&D spending increased 40.6%, or 33.3% excluding
Tecan, over the prior year as the PE Biosystems group continued its product
development efforts and preparation for new product launches. As a percentage of
net revenues, R&D expenses increased to 11.2% compared with 10.2% for the prior
year.
Fiscal 1998 included $28.9 million of purchased in-process research and
development associated with the acquisition of Molecular Informatics.
<TABLE>
<CAPTION>
Operating Income
(Dollar amounts in millions) 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Operating income before special items $130.4 $101.0
Asset impairment (.7)
Restructuring and other merger costs (48.1)
Acquired research and development (28.9)
- ---------------------------------------------------------------
Operating income $ 53.4 $100.3
- ---------------------------------------------------------------
</TABLE>
Operating income decreased to $53.4 million for fiscal 1998 compared with $100.3
million for fiscal 1997. Excluding the special charges for restructuring and
other merger costs, acquired research and development, and the impairment of
assets, operating income increased $29.4 million, or 29.1%, primarily as a
result of increased volume and improved margins. A 23.5% increase in operating
income from higher-margin sequencing and mapping systems was the primary
contributor. Excluding Tecan, operating income before special items increased
21.6% compared with the prior year. Before the effects of currency translation
and excluding Tecan, fiscal 1998 operating income increased 38.5% compared with
the prior year. Geographically, excluding Tecan, fiscal 1998 operating income
before special items increased 48.0% in the United States, 20.1% in the Far
East, and 8.0% in Europe compared with fiscal 1997. As a percentage of net
revenues, operating income before special items increased to 13.8% for fiscal
1998 compared with 13.2% for the prior year.
For fiscal 1998 and 1997, the PE Biosystems group recorded gains of $1.6 million
and $64.9 million, respectively, on the sale and release of contingencies on
minority equity investments. See Note 2 to the PE Biosystems group combined
financial statements.
Interest expense was $4.9 million for fiscal 1998 compared with $5.9 million for
the prior year. The decrease was primarily due to the refinancing of the
PerSeptive Notes together with slightly lower outstanding debt balances and
lower average interest rates. Interest income was $5.9 million for fiscal 1998
compared with $8.8 million for the prior year, primarily because of lower cash
balances resulting from the use of cash to fund the PE Biosystems group's
continued investments and acquisitions, as well as from lower interest rates.
Other income, net for fiscal 1998 of $3.1 million, primarily related to the sale
of certain operating and non-operating assets, compared with other income, net
of $1.9 million for the prior year.
Our effective income tax rate was 50% for fiscal 1998 and 22% for fiscal 1997.
Excluding Tecan in fiscal 1998, and special items in fiscal 1998 and fiscal
1997, the effective income tax rate was 25% for fiscal 1998 compared with 27%
for fiscal 1997. Increased earnings in low tax jurisdictions reduced our tax
rate for fiscal 1998. An analysis of the differences between the federal
statutory income tax rate and the effective rate is provided in Note 4 to the PE
Biosystems group combined financial statements.
Minority interest expense of $5.6 million was recognized in fiscal 1998 relating
to our company's 14.5% financial interest in Tecan. See Note 2 to the PE
Biosystems group combined financial statements.
Market Risk
The PE Biosystems group operates internationally, with manufacturing and
distribution facilities in various countries throughout the world. For fiscal
1999 and fiscal 1998, the PE Biosystems group derived approximately 50% and 52%,
respectively, of its revenues from countries outside of the United States.
Results continue to be affected by market risk, including fluctuations in
foreign currency exchange rates and changes in economic conditions in foreign
markets.
The risk management strategy for the PE Biosystems group utilizes derivative
financial instruments, including forwards, swaps, purchased options, and
synthetic forward contracts to hedge certain foreign currency and interest rate
exposures, with the intent of offsetting losses and gains that occur on the
underlying exposures with gains and losses on the derivatives. The PE Biosystems
group does not use derivative financial instruments for trading or other
speculative purposes, nor is the PE Biosystems group a party to leveraged
derivatives. At June 30, 1999 and June 30, 1998, outstanding hedge contracts
covered approximately 80% of the estimated foreign currency exposures related to
cross-currency cash flows to be realized over the next twelve months. The
outstanding hedges were a combination of forward, option, and synthetic forward
contracts maturing over the next twelve months.
We performed sensitivity analyses as of June 30, 1999 and June 30, 1998.
Assuming a hypothetical adverse change of 10% in foreign exchange rates, i.e., a
weakening of the U.S. Dollar, at June 30, 1999 and June 30, 1998, we calculated
hypothetical losses in future cash flows of $6.1 million and $4.1 million,
respectively.
42
<PAGE>
PE Biosystems Group
Management's Discussion and Analysis continued
We calculated the hypothetical losses by comparing the difference between the
change in market value of both the foreign currency contracts outstanding and
the underlying exposures being hedged at June 30, 1999 and June 30, 1998,
assuming the 10% adverse change in exchange rates. Actual gains and losses in
the future could, however, differ materially from these analyses, based on
changes in the timing and amount of foreign currency exchange rate movements and
actual exposures and hedges.
Interest rate swaps are used to hedge underlying debt obligations. In fiscal
1997, PE executed an interest rate swap, allocated to the PE Biosystems group,
in conjunction with PE entering into a five-year Japanese Yen debt obligation.
Under the terms of the swap agreement, PE pays a fixed rate of interest at 2.1%
and receives a floating LIBOR interest rate. At June 30, 1999, the notional
amount of indebtedness covered by the interest rate swap was Yen 3.8 billion or
$31.5 million. The maturity date of the swap coincides with the maturity of the
Yen loan in March 2002. A change in interest rates would have no impact on our
reported interest expense and related cash payments because the floating rate
debt and fixed rate swap contract have the same maturity and are based on the
same rate index.
Management's Discussion of Financial Resources and Liquidity
The following discussion of financial resources and liquidity focuses on the
Combined Statements of Financial Position and the Combined Statements of Cash
Flows.
All historical cash and debt balances prior to the recapitalization of our
company were allocated to the PE Biosystems group, as the results of the Celera
Genomics group were not significant for any of the historical periods presented
prior to the recapitalization.
Cash and cash equivalents of continuing operations were $236.5 million at June
30, 1999 and $82.9 million at June 30, 1998, with total debt of $185.4 million
at June 30, 1999 and $45.8 million at June 30, 1998. Fiscal 1999 debt included a
$150.0 million note payable to the Celera Genomics group.
Working capital was $274.6 million at June 30, 1999. Excluding the $150.0
million note payable to the Celera Genomics group, working capital was $424.6
million. Working capital was $289.2 million at June 30, 1998. Excluding the
current net assets of discontinued operations, working capital was $149.2
million. Debt to total capitalization increased to 26% at June 30, 1999 from 7%
at June 30, 1998. Excluding the note payable at June 30, 1999, debt to
total capitalization decreased to 6% as a result of a decrease in loans payable.
At September 30, 1998, our company allocated to the Celera Genomics group a $330
million short-term note payable of the PE Biosystems group. The $330 million
note represented an allocation of our company's capital to the Celera Genomics
group and did not result in the PE Biosystems group holding an equity interest
in the Celera Genomics group. Accordingly, no interest was ascribed to the note.
The allocation of capital represented management's decision to allocate a
portion of our company's capital to the Celera Genomics group and the remaining
capital to the PE Biosystems group prior to the effective date of the
recapitalization. The note payable was liquidated on May 28, 1999, in exchange
for a portion of the proceeds received from the sale of the Analytical
Instruments business and a new note payable to the Celera Genomics group for
$150 million was established. The new note payable is for a term of one-year,
bears an interest rate of 5% per annum, and is payable on demand without
penalty. At June 30, 1999, the outstanding balance of the note payable was $150
million.
In addition, our board of directors has adopted a financing policy, included in
Note 1 to the PE Biosystems group combined financial statements, which will
permit the PE Biosystems group to make loans to the Celera Genomics group and to
make equity contributions to the Celera Genomics group in exchange for an equity
interest in the Celera Genomics group.
Significant Changes in the Combined Statements of Financial Position
Effective May 28, 1999, our company completed the sale of our Analytical
Instruments business to EG&G. The aggregate consideration received by our
company was $425 million, consisting of $275 million in cash and one-year
secured promissory notes in the aggregate principal amount of $150 million,
which bear interest at a rate of 5% per annum.
Accounts receivable increased by $78.0 million and the inventory balance
increased by $12.7 million from June 30, 1998 to June 30, 1999. On a comparable
basis, excluding Tecan from the June 30, 1998 balance, accounts receivable and
inventory levels increased by $99.5 million and $22.4 million, respectively,
from June 30, 1998 to June 30, 1999, reflecting the growth in net revenues and
backlog.
Prepaid expenses and other current assets increased to $75.8 million at June 30,
1999 from $61.8 million at June 30, 1998, or $57.2 million excluding Tecan. The
increase of $18.6 million, excluding Tecan, related primarily to the growth in
non-trade receivables, royalties and prepaid dealer commissions.
Other long-term assets decreased to $247.1 million at June 30, 1999 from $262.8
million at June 30, 1998. Excluding Tecan from the June 30, 1998 balance, other
long-term assets increased $31.7 million. The change was primarily a result of a
$9.4 million increase in prepaid pension assets, a net $17.0 million increase in
our equity investments, a $15.6 million increase in non-current deferred tax
asset, offset by the write-off of $14.5 million of impaired intangible assets
associated with the Molecular Informatics business.
We reduced our total deferred tax asset and related valuation allowance from
$115.5 million and $62.8 million at June 30, 1998 to $112.1 million and $37.5
million at June 30, 1999. This resulted in an overall increase to the total
deferred tax asset after valuation allowance of $21.9 million. The valuation
allowance relates primarily to foreign and domestic tax loss carryforwards,
domestic tax credit carryforwards and other domestic deferred tax assets. A
portion of
43
<PAGE>
PE Biosystems Group
Management's Discussion and Analysis continued
the valuation allowance is attributable to tax loss and credit carryforwards and
other deferred tax assets which we acquired as part of the purchase of
PerSeptive in fiscal 1998. In evaluating our need for a valuation allowance, we
considered all available positive and negative evidence, including historical
information supplemented by information about future years. We evaluate the need
for the valuation allowance periodically for each tax-paying component in each
tax jurisdiction. The following factors significantly influenced our conclusion
regarding the need for a valuation allowance: (1) the limitation under the
Internal Revenue Code on the amount of annual utilization of domestic loss
carryforwards and credits of PerSeptive, and (2) the various expiration dates of
the foreign loss carryforwards.
At June 30, 1999, the PE Biosystems group had a $9.9 million tax benefit payable
to the Celera Genomics group. See Note 1 to the PE Biosystems group combined
financial statements.
Accounts payable increased to $147.7 million at June 30, 1999 from $119.1
million at June 30, 1998. Excluding Tecan from the June 30, 1998 balance,
accounts payable increased $33.1 million. The increase resulted primarily from
higher purchases to support production and operating requirements.
Accrued salaries and wages increased $13.5 million to $43.3 million at June 30,
1999 from $29.8 million at June 30, 1998. Excluding Tecan from the June 30, 1998
balance, accrued salaries and wages increased $16.8 million reflecting the
timing of payments.
Accrued taxes on income increased $52.3 million to $132.2 million at June 30,
1999 compared with $79.9 million at June 30, 1998. Excluding Tecan from the June
30, 1998 balance, accrued taxes on income increased $56.1 million as a result of
the tax on the gain from the sale of the Analytical Instruments business in
foreign tax jurisdictions.
Other accrued expenses increased by $35.4 million to $156.6 million at June 30,
1999 from $121.2 million at June 30, 1998. Excluding Tecan from the June 30,
1998 balance, other accrued expenses increased by $41.8 million as a result of
higher warranty and installation accruals, reflecting the increase in volume, an
increase in deferred revenues, and higher benefit and certain compensation
accruals.
At June 30, 1998, $43.8 million of minority interest was recognized in
connection with Tecan. During the fourth quarter of fiscal 1999 our company
divested its interest in Tecan.
Combined Statements of Cash Flows
Operating activities from continuing operations generated $102.4 million of cash
for fiscal 1999 compared with $74.9 million for fiscal 1998 and $76.5 million
for fiscal 1997. For fiscal 1999, higher income-related cash flow and increased
operating liabilities were only partially offset by cash used for operating
assets.
For fiscal 1999, net cash provided by investing activities from continuing
operations was $239.3 million, compared with net cash used of $125.7 million for
fiscal 1998. During fiscal 1999, the PE Biosystems group generated $325.8
million in net cash proceeds from the sale of various assets. Net cash proceeds
included $275.0 million from the sale of the Analytical Instruments business,
$30.0 million from the sale of Tecan, and $20.8 million from the sale of
minority equity investments and certain non-operating assets. The proceeds were
partially offset by $92.1 million of capital expenditures, which included $12.9
million as part of the strategic program to improve our information technology
infrastructure, $17.5 million for the acquisition of an airplane, and $10.6
million of capital equipment leased to the Celera Genomics group. For fiscal
1999, $4.0 million was used for various acquisitions and investments.
For fiscal 1998, net cash used by investing activities from continuing
operations was $125.7 million, compared with net cash provided by investing
activities of $47.8 million for fiscal 1997. During fiscal 1998, the PE
Biosystems group generated $19.5 million in net cash proceeds from the sale of
assets and $9.7 million from the collection of a note receivable. The proceeds
were more than offset by $68.2 million of capital expenditures, which included
$33.7 million as part of the strategic program to improve our information
technology infrastructure, and $98.0 million for acquisitions and investments,
primarily Tecan and Molecular Informatics.
For fiscal 1997, the PE Biosystems group generated $99.7 million in net cash
proceeds from the sale of our company's equity interests in Etec Systems, Inc.
and Millennium Pharmaceuticals, Inc. and from the sale of certain other
non-operating assets. These proceeds were partially offset by $5.0 million used
for acquisitions and $57.6 million for capital expenditures that included $9.5
million for information technology infrastructure improvements and $12.1 million
for the acquisition of an airplane.
Net cash used by financing activities was $146.4 million for fiscal 1999
compared with $48.2 million for fiscal 1998. For fiscal 1999, the PE Biosystems
group received $94.9 million of proceeds from employee stock option plan
exercises compared with $33.6 million for fiscal 1998. Fiscal 1999 included $2.2
million for the purchase of shares of common stock for treasury. No shares were
repurchased during fiscal 1998. Dividends paid were $34.2 million for fiscal
1999 and $39.1 million for fiscal 1998. Reduction in allocated loans payable and
principal payments on long-term debt was $16.4 million for fiscal 1999, compared
with $32.2 million for fiscal 1998. The fiscal 1998 principal payment on
long-term debt included $24.7 million for the redemption of the PerSeptive
Notes. Net cash allocated for fiscal 1999 to the Celera Genomics group was
$188.5 million compared with $10.5 million for fiscal 1998. The fiscal 1999
amount represented payments against the $330 million note payable established at
September 30, 1998 and cash funding for the first quarter of fiscal 1999.
During fiscal 1997, the PE Biosystems group generated $1.8 million from the sale
of equity put warrants and $33.6 million in proceeds from employee stock plan
exercises. These were offset by stockholder dividends of $29.5 million for
fiscal 1997. Fiscal 1997 included $25.1 million for the purchase of shares of
common stock for treasury. Purchases of common stock for treasury were made in
support of PE's various stock plans.
44
<PAGE>
PE Biosystems Group
Management's Discussion and Analysis continued
During fiscal 1999, the PE Biosystems group made cash payments of $8.1 million
for obligations related to restructuring plans and other merger costs.
Restructuring liabilities remaining at June 30, 1999 were $5.8 million. See Note
10 to the PE Biosystems group combined financial statements. The funding for the
remaining restructuring liabilities will be from current cash balances and funds
generated from operating activities.
The PE Biosystems group believes its cash and short-term investments, funds
generated from operating activities, and available borrowing facilities are
sufficient to provide for its anticipated financing needs over the next two
years. At June 30, 1999, PE had unused credit facilities totaling $339 million.
Impact of Inflation and Changing Prices
Inflation and changing prices are continually monitored. The PE Biosystems group
attempts to minimize the impact of inflation by improving productivity and
efficiency through continual review of both manufacturing capacity and operating
expense levels. When operating costs and manufacturing costs increase, the PE
Biosystems group attempts to recover such costs by increasing, over time, the
selling price of its products and services. The PE Biosystems group believes the
effects of inflation have been appropriately managed and therefore have not had
a material impact on its historic operations and resulting financial position.
Year 2000
In fiscal 1997, PE initiated a worldwide program to assess the expected impact
of the Year 2000 date recognition problem on our existing internal computer
systems; our non-information technology systems, including embedded and process
control systems; our product offerings; and our significant suppliers. The
purpose of this program is to ensure the event does not have a material adverse
effect on our business operations.
The operations of the PE Biosystems group are included within this program. At
this time, PE is not able to determine the relative resources required to
implement this program in the PE Biosystems group. However, PE believes that a
substantial portion of the resources required were allocated to the PE
Biosystems group.
Regarding PE's existing internal computer systems, the program involves a mix of
purchasing new systems and modifying existing systems, with the emphasis on
replacement of applications developed in-house. Replacement projects are
currently underway, and are anticipated to be substantially completed for all
business-critical systems worldwide by December 31, 1999. The program includes
replacement of applications that, for reasons other than Year 2000
noncompliance, had been previously selected for replacement. The replacement
projects, which began in fiscal 1997, are expected to offer improved
functionality and commonality over current systems, while at the same time
addressing the Year 2000 problem.
With respect to PE's current product offerings, the program involves performing
an inventory of current products, assessing their compliance status, and
constructing a remediation plan where appropriate. Significant progress has been
made in each of these three phases and PE expects the PE Biosystems group's
current product offerings to be Year 2000 compliant by December 31, 1999. A
substantial portion of the PE Biosystems group's current product offerings is
Year 2000 compliant.
The program also addresses the Year 2000 compliance efforts of PE's significant
suppliers, vendors, and third-party interface systems. As part of this analysis,
PE has identified and prioritized these suppliers, vendors, and third parties
and has sought written assurances from them that they will be Year 2000
compliant. There can be no assurance that the systems of other companies with
which PE deals, or on which PE's systems rely will be timely converted, or that
any such failure to convert by another company could not have a material adverse
effect on PE. PE has not fully determined the extent to which PE's interface
systems may be impacted by third parties' systems, which may not be Year 2000
compliant but are addressing this issue in our contingency plans noted below.
As of June 1999, PE was over 90% complete in accomplishing the objectives
established in its program. PE's preliminary estimate of the total cost for this
multi-year program covering 3-4 years is approximately $150 million. This
includes amounts previously budgeted for information technology infrastructure
improvements and estimates of remediation costs on components not yet fully
assessed. Incremental spending has not been and is not expected to be material
because most Year 2000 compliance costs will be met with amounts that are
normally budgeted for procurement and maintenance of PE's information systems,
production, and facilities equipment. The redirection of spending to implement
Year 2000 compliance plans may in some instances delay productivity
improvements.
PE has also engaged a consulting firm to provide periodic assessments of PE's
Year 2000 project plans and progress. Because of the importance of addressing
the Year 2000 problem, PE has created a Year 2000 business continuity planning
team which has developed, and will continue to develop, business contingency
plans to address any issues that may not be corrected by implementation of PE's
Year 2000 compliance plan in a timely manner. Contingency plans include
identification of systems and third party risks, an analysis of strategies and
available resources to restore operations, and a recovery program that
identifies participants, processes, and significant equipment. If PE is not
successful in implementing its Year 2000 compliance plan, or there are delays in
and/or increased costs associated with implementing such changes, the Year 2000
problem could have a materially adverse effect on PE's consolidated results of
operations and financial condition.
45
<PAGE>
PE Biosystems Group
Management's Discussion and Analysis continued
At this stage of the process, PE believes that it is difficult to specifically
identify the cause of the most reasonable worst case Year 2000 scenario. A
reasonable worst case Year 2000 scenario would be the failure of significant
suppliers and vendors to have corrected their own Year 2000 issues which could
cause disruption of PE's operations and have a materially adverse effect on PE's
financial condition. The impact of such disruption cannot be estimated at this
time. In the event PE believes that any of its significant suppliers or vendors
are unlikely to be able to resolve their own Year 2000 issues, PE's contingency
plans include seeking additional sources of supply.
Euro Conversion
A single currency called the euro was introduced in Europe on January 1, 1999.
Eleven of the fifteen member countries of the European Union agreed to adopt the
euro as their common legal currency on that date. Fixed conversion rates between
these participating countries' existing currencies (the "legacy currencies") and
the euro were established as of that date. The legacy currencies are scheduled
to remain legal tender as denominations of the euro until at least January 1,
2002, but not later than July 1, 2002. During this transition period, parties
may settle transactions using either the euro or a participating country's legal
currency.
The PE Biosystems group is currently evaluating the impact of the euro
conversion on its computer and financial systems, business processes, market
risk, and price competition. The PE Biosystems group does not expect this
conversion to have a material impact on its results of operations, financial
position, or cash flows.
Recently Issued Accounting Standards and Other
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The provisions of the statement require the
recognition of all derivatives 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 depends on the
intended use of the derivative and the resulting designation. The PE Biosystems
group is required to implement the statement in the first quarter of fiscal
2001. Management is currently analyzing the statement to determine the impact,
if any, on the combined financial statements.
We continue to apply APB No. 25 in accounting for our stock-based compensation
plans. Accordingly, no compensation expense has been recognized for these plans,
as all options have been issued at fair value. The effect of accounting for such
plans at fair value, under SFAS No. 123, "Accounting for Stock Based
Compensation," would be to decrease fiscal 1999 income from continuing
operations by $20.5 million and diluted earnings per share from continuing
operations by $.20. The method used to determine the fair value is the
Black-Scholes option pricing model. Accordingly, changes in dividend yield,
volatility, interest risks and option life could have a material effect on the
fair value. See Note 8 to the PE Biosystems group combined financial statements
for a more detailed discussion regarding the accounting for stock-based
compensation at fair value.
Outlook
The PE Biosystems group expects to continue to grow and maintain profitability
for fiscal 2000 on the strength of robust demand and several new products.
Fiscal 2000 will focus on growing product lines across a broad array of base
technologies and exploring the needs of evolving markets. Orders for genetic
analysis systems and reagents, sequence detection systems, and mass spectroscopy
products continue to be strong. At June 30, 1999, backlog increased to
approximately $200 million.
We remain concerned about adverse currency effects because approximately 50% of
our revenues were derived from regions outside the United States for fiscal
1999.
Forward-Looking Statements
Certain statements contained in this report, including the Outlook section, are
forward-looking and are subject to a variety of risks and uncertainties. These
statements may be identified by the use of forward-looking words or phrases such
as "believe," "expect," "anticipate," "should," "planned," "estimated," and
"potential," among others. These forward-looking statements are based on our
current expectations. The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for such forward-looking statements. In order to comply
with the terms of the safe harbor, we note that a variety of factors could cause
our actual results and experience to differ materially from the anticipated
results or other expectations expressed in such forward-looking statements. The
risks and uncertainties that may affect the operations, performance,
development, and results of our businesses include, but are not limited to:
Rapidly changing technology in life sciences could make PE Biosystems' product
line obsolete unless it continues to improve existing products and develop new
products. A significant portion of the net revenues for PE Biosystems each year
is derived from products that did not exist in the prior year. PE Biosystems'
future success will depend on its ability to continually improve its current
products and to develop and introduce, on a timely and cost-effective basis, new
products that address the evolving needs of its customers. PE 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 PE Biosystems' future operating results.
A significant portion of sales depends on customers' capital spending policies
and government funding which may be subject to significant and unexpected
decreases. A significant portion of PE Biosystems' instrument product sales are
capital purchases by its customers. PE Biosystems' customers include
pharmaceutical,
46
<PAGE>
PE Biosystems Group
Management's Discussion and Analysis continued
environmental, research and chemical companies, and the capital spending
policies of these companies can have a significant effect on the demand for PE
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 PE Biosystems' products.
In addition, a substantial portion of PE 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, particularly in the United States and
Japan, may result in reduced allocations to government agencies that fund
research and development activities. If government funding necessary to purchase
PE 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 PE Biosystems could be adversely affected.
Due to rapidly-developing technology and lack of legal precedents, PE
Biosystems' products could be subject to claims for patent infringement. PE
Biosystems' products are based on complex, rapidly-developing technologies.
These products could be developed without knowledge of previously filed but
unpublished patent applications that cover some aspect of these technologies. In
addition, there are relatively few decided court cases interpreting the scope of
patent claims in these technologies. PE Biosystems could be made a party to
litigation regarding intellectual property matters in the future. PE Biosystems
has from time to time been notified that it may be infringing certain patents
and other intellectual property rights of others. It may be necessary or
desirable in the future to obtain licenses relating to one or more products or
relating to current or future technologies, and we cannot assure you that PE
Biosystems will be able to obtain these licenses or other rights on commercially
reasonable terms.
Since PE Biosystems' business is dependent on foreign sales, fluctuating
currencies will make our revenues and operating results more volatile.
Approximately 50% of PE Biosystems' net revenues during fiscal 1999 were derived
from sales to customers outside of the United States. The majority of these
sales was based on the relevant customer's local currency. As a result, PE
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 PE Biosystems' control.
Integrating acquired technologies may be costly and may not result in
technological advances. The future growth of PE Biosystems depends in part on
its ability to acquire complementary technologies through acquisitions and
investments. Since January 1, 1996, PE Biosystems has acquired a number of
companies, including PerSeptive Biosystems, Inc., Molecular Informatics, Inc.,
and Tropix, Inc., and made investments in others. The consolidation of
employees, operations, and marketing and distribution methods could present
significant managerial challenges. For example, PE 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.
Failure of PE Biosystems' Year 2000 compliance plan or failure of the compliance
plans of PE Biosystems' limited source suppliers could materially disrupt the
sales of affected products. In fiscal 1997, PE Biosystems initiated a world-wide
program to assess the expected impact of the Year 2000 date recognition problem
on our existing computer systems; non-information technology systems, including
embedded and process-control systems; product offerings; and significant
suppliers. Portions of this program are not expected to be completed until
December 31, 1999. If we are not successful in implementing our Year 2000
compliance plan, or if our limited source suppliers are not successful in
implementing compliance plans, the Year 2000 problem could materially disrupt PE
Biosystems' sales of affected products.
Earthquakes could disrupt operations in California. A significant portion of PE
Biosystems' operations is located near major California earthquake faults. The
ultimate impact of earthquakes on PE Biosystems, significant suppliers and the
general infrastructure is unknown, but operating results could be materially
affected in the event of a major earthquake.
47
<PAGE>
PE Biosystems Group
Combined Statements of Operations
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues $ 1,221,691 $ 940,095 $ 767,465
Cost of sales 562,867 431,738 361,315
- ---------------------------------------------------------------------------------------------------------------
Gross Margin 658,824 508,357 406,150
- ---------------------------------------------------------------------------------------------------------------
Selling, general and administrative 335,873 276,674 227,687
Research, development and engineering 133,525 105,485 78,141
Restructuring and other special charges 1,500 43,980
Acquired research and development 28,850
- ---------------------------------------------------------------------------------------------------------------
Operating Income 187,926 53,368 100,322
Gain on investments 6,126 1,605 64,850
Interest expense 4,503 4,905 5,859
Interest income 2,344 5,938 8,826
Other income, net 522 3,147 1,881
- ---------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 192,415 59,153 170,020
Provision for income taxes 30,688 29,547 37,281
Minority interest 13,362 5,597
- ---------------------------------------------------------------------------------------------------------------
Income From Continuing Operations 148,365 24,009 132,739
- ---------------------------------------------------------------------------------------------------------------
Discontinued Operations, Net of Income Taxes
Income (loss) from discontinued operations (21,109) 40,694 27,906
Gain on disposal of discontinued operations 100,167
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 227,423 $ 64,703 $ 160,645
- ---------------------------------------------------------------------------------------------------------------
Income per Share From Continuing Operations (see Note 1)
Basic $ 1.48
Diluted $ 1.44
Income per Share From Discontinued Operations
Basic $ .79
Diluted $ .77
Net Income per Share
Basic $ 2.27
Diluted $ 2.21
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the PE Biosystems group combined financial statements.
48
<PAGE>
PE Biosystems Group
Combined Statements of Financial Position
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
At June 30, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 236,530 $ 82,865
Short-term investments 1,226
Note receivable 150,000
Accounts receivable, less allowances for doubtful accounts of $4,518 ($4,783 - 1998) 306,225 228,229
Inventories 149,670 137,015
Prepaid expenses and other current assets 75,801 61,835
Current net assets of discontinued operations 139,959
- -------------------------------------------------------------------------------------------------------------------
Total current assets 918,226 651,129
Property, plant and equipment, net 182,183 159,127
Other long-term assets 247,141 262,754
Long-term net assets of discontinued operations 55,927
- -------------------------------------------------------------------------------------------------------------------
Total Assets $1,347,550 $1,128,937
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Group Equity
Current liabilities
Loans payable $ 3,911 $ 12,099
Note payable to the Celera Genomics group (see Note 3) 150,000
Tax benefit payable to the Celera Genomics group (see Note 1) 9,935
Accounts payable 147,704 119,067
Accrued salaries and wages 43,316 29,800
Accrued taxes on income 132,170 79,860
Other accrued expenses 156,552 121,152
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 643,588 361,978
Long-term debt 31,452 33,726
Other long-term liabilities 138,178 123,969
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 813,218 519,673
- -------------------------------------------------------------------------------------------------------------------
Minority interest 43,757
Commitments and contingencies (see Note 11)
Group Equity 534,332 565,507
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Group Equity $1,347,550 $1,128,937
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the PE Biosystems group combined financial statements.
49
<PAGE>
PE Biosystems Group
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities From Continuing Operations
Income from continuing operations $148,365 $ 24,009 $132,739
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities
Depreciation and amortization 44,309 35,278 25,405
Long-term compensation programs 14,680 6,853 9,103
Deferred income taxes (25,533) 10,234 (40,819)
Gains from the sale of assets (6,126) (3,052) (66,636)
Provision for restructured operations and other merger costs (9,200) 48,080
Acquired research and development 28,850
Asset impairment 14,464
Recapitalization costs 9,232
Changes in operating assets and liabilities
Increase in accounts receivable (105,018) (23,153) (43,169)
Increase in inventories (22,387) (21,362) (4,421)
Increase in prepaid expenses and other assets (43,207) (30,858) (6,712)
Increase in accounts payable and other liabilities 82,820 68 71,009
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 102,399 74,947 76,499
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activites From Continuing Operations
Additions to property, plant and equipment
(net of disposals of $9,614, $11,339, and $5,738, respectively) (82,463) (56,833) (51,908)
Acquisitions and investments, net (4,025) (97,998) (5,000)
Proceeds from the sale of assets, net 325,766 19,496 99,710
Proceeds from the collection of notes receivable 9,673 4,978
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activites 239,278 (125,662) 47,780
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash From Continuing Operations Before Financing Activities 341,677 (50,715) 124,279
- ---------------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Net cash provided (used) by operating activities (16,297) 10,084 39,781
Net cash used by investing activities (26,970) (40,639) (11,315)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash From Discontinued Operations Before Financing Activities (43,267) (30,555) 28,466
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable (9,572) (6,797) (4,914)
Proceeds from long-term debt 31,033
Principal payments on long-term debt (6,843) (25,449) (22,908)
Dividends (34,156) (39,072) (29,459)
Purchases of common stock for treasury (2,187) (25,126)
Proceeds from issuance of equity put warrants on PE Corporation common stock 1,846
Proceeds from stock issued for stock plans 94,894 33,629 33,637
Net cash allocated to the Celera Genomics group (188,535) (10,520) (26,172)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used For Financing Activities (146,399) (48,209) (42,063)
- ---------------------------------------------------------------------------------------------------------------------------
Elimination of PerSeptive results from
July 1, 1997 to September 30, 1997 (see Note 1) 2,590
Effect of Exchange Rate Changes on Cash 1,654 (3,274) 1,601
- ---------------------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 153,665 (130,163) 112,283
Cash and Cash Equivalents Beginning of Year 82,865 213,028 100,745
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Year $236,530 $ 82,865 $213,028
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the PE Biosystems group combined financial statements.
50
<PAGE>
PE Biosystems Group
Combined Statements of Group Equity
and Comprehensive Income (Loss)
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive Group
(Dollar amounts in thousands) Other Earnings Income (Loss) Equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 $308,125 $ 72,108 $ (7,117) $373,116
Comprehensive income
Net income 160,645 160,645
Other comprehensive income, net of tax
Foreign currency translation adjustments (4,125)
Minimum pension liability adjustment 28,660
Unrealized gain on investments, net 3,156
Sale of equity investment (23,245)
--------
Other comprehensive income 4,446 4,446
--------
Comprehensive income 165,091
--------
Cash dividends declared on PE Corporation common stock (29,536) (29,536)
Repurchases of PE Corporation common stock (25,126) (25,126)
Issuances under PE Corporation common stock plans 33,741 (1,459) 32,282
Tax benefit related to PE Corporation employee stock options 4,568 4,568
PE Corporation restricted stock plan 11,678 11,678
Sale of equity put warrants on PE Corporation common stock 1,846 1,846
Net cash allocated to the Celera Genomics group (26,172) (26,172)
Other 1,427 (1,440) (13)
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 310,087 200,318 (2,671) 507,734
Comprehensive income
Net income 64,703 64,703
Other comprehensive loss, net of tax
Foreign currency translation adjustments (2,747)
Minimum pension liability adjustment 354
Unrealized loss on investments, net (4,449)
--------
Other comprehensive loss (6,842) (6,842)
--------
Comprehensive income 57,861
--------
Cash dividends declared on PE Corporation common stock (31,604) (31,604)
Issuances under PE Corporation common stock plans 39,143 (3,468) 35,675
Tax benefit related to PE Corporation employee stock options 2,335 2,335
PE Corporation restricted stock plan 1,858 (136) 1,722
Elimination of PerSeptive results from
July 1,1997 to September 30, 1997 (see Note 1) 2,590 2,590
Net cash allocated to the Celera Genomics group (10,520) (10,520)
Other (286) (286)
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 342,903 232,117 (9,513) 565,507
Comprehensive income
Net income 227,423 227,423
Other comprehensive income, net of tax
Foreign currency translation adjustments (5,415)
Minimum pension liability adjustment (1,779)
Unrealized gain on investments, net 11,887
--------
Other comprehensive income 4,693 4,693
--------
Comprehensive income 232,116
--------
Cash dividends declared on PE Corporation common stock (25,479) (25,479)
Cash dividends declared on PE Biosystems common stock (8,677) (8,677)
Repurchases of PE Biosystems common stock (2,187) (2,187)
Issuances under PE Corporation common stock plans 89,550 (14,862) 74,688
Issuances under PE Biosystems common stock plans 20,157 (1,290) 18,867
Tax benefit related to PE Corporation employee stock options 15,735 15,735
PE Corporation restricted stock plan 1,090 1,207 2,297
Allocated capital to the Celera Genomics group (338,535) (338,535)
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $128,713 $410,439 $ (4,820) $534,332
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the PE Biosystems group combined financial statements.
51
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements
Note 1--Accounting Policies And Practices
Basis of Presentation
The PE Corporation ("PE" or the "Company") is comprised of two separate business
segments in continuing operations: the PE Biosystems group and the Celera
Genomics group. The PE Biosystems group manufactures and markets biochemical
instrument systems and associated consumable products for life science research
and related applications. The Celera Genomics group is engaged principally in
the generation, sale and support of genomic information databases and related
information management and analysis software; discovery, validation and
licensing of proprietary gene products, genetic markers and information
regarding genetic variability; and related consulting and contract research and
development services.
On January 22, 1998, the Company acquired PerSeptive Biosystems, Inc. The
acquisition was accounted for as a pooling of interests and, accordingly, the PE
Biosystems group's financial results were restated to include the combined
operations (see Note 2). The PE Biosystems group's fiscal year ended June 30 and
PerSeptive's fiscal year ended September 30. The fiscal 1998 Combined Statements
of Operations combined the PE Biosystems group's operating results for the
fiscal year ended June 30, 1998 with PerSeptive's operating results for the nine
months ended June 30, 1998 and the three months ended September 30, 1997
(PerSeptive's fiscal 1997 fourth quarter). The fiscal 1997 Combined Statements
of Operations combined the PE Biosystems group's results of operations for the
fiscal year ended June 30, 1997 with PerSeptive's results of operations for the
fiscal year ended September 30, 1997. In order to conform PerSeptive to a June
30 fiscal year-end in fiscal 1998, PerSeptive's results of operations for the
three months ended September 30, 1997 have been included in the PE Biosystems
group's Combined Statements of Operations for the fiscal years ended June 30,
1998 and 1997.
Recapitalization
On May 6, 1999, The Perkin-Elmer Corporation was merged into a subsidiary of PE
Corporation, a new Delaware corporation. The recapitalization of the Company
resulted in the issuance of two new classes of common stock called PE
Corporation-PE Biosystems Group Common Stock ("PE Biosystems stock") and PE
Corporation-Celera Genomics Group Common Stock ("Celera Genomics stock"). PE
Biosystems stock is intended to reflect separately the performance of the
established PE Biosystems' life sciences and the discontinued Analytical
instruments businesses ("PE Biosystems group"), and Celera Genomics stock is
intended to reflect separately the performance of the Celera Genomics business
("Celera Genomics group"). Each share of common stock of The Perkin-Elmer
Corporation was converted into one share of PE Biosystems stock and 0.5 of a
share of Celera Genomics stock.
The combined financial statements of the PE Biosystems group and the Celera
Genomics group (individually referred to as a "group") comprise all of the
accounts included in the corresponding consolidated financial statements of the
Company. Intergroup transactions between the PE Biosystems group and the Celera
Genomics group have not been eliminated in the PE Biosystems group combined
financial statements but have been eliminated in the PE Corporation consolidated
financial statements. The PE Biosystems group and the Celera Genomics group
combined financial statements have been prepared on a basis that management
believes to be reasonable and appropriate and reflect (1) the financial
position, results of operations, and cash flows of businesses that comprise each
of the groups, with all significant intragroup transactions and balances
eliminated, (2) in the case of the Celera Genomics group combined financial
statements, corporate assets and liabilities of the Company and related
transactions identified with the Celera Genomics group, including allocated
portions of the Company's debt and selling, general and administrative costs,
and (3) in the case of the PE Biosystems group combined financial statements,
all other corporate assets and liabilities and related transactions of the
Company, including allocated portions of the Company's debt and selling, general
and administrative costs.
Holders of PE Biosystems stock and Celera Genomics stock are stockholders of the
Company. The PE Biosystems group and the Celera Genomics group are not separate
legal entities. As a result, stockholders are subject to all of the risks
associated with an investment in the Company and all of its businesses, assets,
and liabilities. The issuance of PE Biosystems stock and Celera Genomics stock
and the allocations of assets and liabilities between the PE Biosystems group
and the Celera Genomics group did not result in a distribution or spin-off of
any assets or liabilities of the Company or otherwise affect ownership of any
assets or responsibility for the liabilities of the Company or any of its
subsidiaries. The assets the Company attributes to one group could be subject to
the liabilities of the other group, whether such liabilities arise from
lawsuits, contracts or indebtedness attributable to the other group. If the
Company is unable to satisfy one group's liabilities out of assets attributed to
it, the Company may be required to satisfy these liabilities with assets
attributed to the other group.
Financial effects arising from one group that affect the Company's 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
class of common stock relating to the other group. Any net losses of the PE
Biosystems group or the Celera Genomics group and dividends or distributions on,
or repurchases of, PE Biosystems stock or Celera Genomics stock or repurchases
of preferred stock of the Company will reduce the assets of the Company legally
available for payment of dividends.
The management and allocation policies applicable to the preparation of the
financial statements of the PE Biosystems group and the Celera Genomics group
may be modified or rescinded, or additional policies may be adopted, at the sole
discretion of the Board of Directors at any time without approval of the
stockholders. The PE Biosystems group's combined financial statements reflect
the application of the management and allocation policies adopted by the Board
of Directors to various corporate activities, as described
52
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
below. The PE Biosystems group's combined financial statements should be read in
conjunction with the Company's consolidated financial statements.
Financing Activities
As a matter of policy, the Company manages most financial activities of the PE
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 and the issuance and repayment of any preferred
stock. As the financing activities of the Celera Genomics group were not
significant for any of the periods prior to the recapitalization, all historical
cash and debt balances for those periods presented were allocated to the PE
Biosystems group.
The Board has adopted the following financing policy which will affect the
combined statements of the PE Biosystems group and the Celera Genomics group.
The Company will allocate the Company's debt between the PE Biosystems group and
the Celera Genomics group ("pooled debt") or, if the Company so determines, in
its entirety to a particular group. The Company will allocate preferred stock,
if issued, in a similar manner.
Cash allocated to one group that is used to repay pooled debt or redeem pooled
preferred stock will decrease 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 will, if so determined by the Board, decrease the
transferring group's allocated portion of the pooled debt or preferred stock
and, correspondingly, increase the recipient group's allocated portion of the
pooled debt or preferred stock.
Pooled debt will bear interest for group financial statement purposes at a rate
equal to the weighted average interest rate of the debt calculated on a
quarterly basis and applied to the average pooled debt balance during the
period. Preferred stock, if issued and if pooled in a manner similar to the
pooled debt, will bear dividends for group financial statement purposes at a
rate based on the weighted average dividend rate of the preferred stock
similarly calculated and applied. Any expense related to increases in pooled
debt or preferred stock will be reflected in the weighted average interest or
dividend rate of such pooled debt or preferred stock as a whole.
If the Company allocates debt for a particular financing in its entirety to one
group, that debt will bear interest for group financial statement purposes at
the rate determined by the Board. 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 Board, be
accounted for either as a short-term loan or as a long-term loan. Short-term
loans will 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
Board will determine the rate of interest for such loan. The Board will
establish the terms on which long-term loans between the groups will be made,
including interest rate, amortization schedule, maturity and redemption terms.
Although the Company may allocate its debt and preferred stock between groups,
the debt and preferred stock will remain obligations of the Company and all
stockholders of the Company will be subject to the risks associated with those
obligations.
In addition, cash allocated to the PE Biosystems group may be contributed to the
Celera Genomics group in exchange for an equity interest in the Celera Genomics
group.
Allocation of Corporate Overhead and Administrative Shared Services
A portion of the Company's corporate overhead (such as executive management,
human resources, legal, accounting, auditing, tax, treasury, strategic planning
and environmental services) has been allocated to the PE Biosystems group based
upon the use of services by that group. A portion of the Company's costs of
administrative shared services (such as information technology services) has
been allocated in a similar manner. Where determination based on use alone is
not practical, other methods and criteria were used that management believes are
equitable and provide a reasonable estimate of the cost attributable to the PE
Biosystems group. The totals for these allocations were $33.7 million, $38.1
million, and $34.4 million for fiscal 1999, 1998, and 1997, respectively. It is
not practicable to provide a detailed estimate of the expenses which would be
recognized if the PE Biosystems group were a separate legal entity.
Allocation of Federal and State Income Taxes
The federal income taxes of the Company and its subsidiaries which own assets
allocated between the groups are determined on a consolidated basis.
Consolidated federal income tax provisions and related tax payments or refunds
are allocated between the groups based principally on the taxable income and tax
credits directly attributable to each group. Such allocations reflect each
group's contribution (positive or negative) to the Company's consolidated
federal taxable income and the consolidated federal tax liability and tax credit
position. Tax benefits that cannot be used by the group generating those
benefits but can be used on a consolidated basis are credited to the group that
generated such benefits. Intergroup transactions will be taxed as if each group
were a stand alone Company. Tax benefits generated by the Celera Genomics group
commencing July 1, 1998, which then can be utilized on a consolidated basis,
will be credited to the Celera Genomics group
53
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
up to a maximum limit of $75 million. For the year ended June 30, 1999, $22.6
million of tax benefits were credited to the Celera Genomics group.
Had the groups filed separate tax returns, the provision (benefit) for income
taxes and net income (loss) for each group would not have differed from the
amounts reported in the groups' combined statements of operations for the years
ended June 30, 1999, 1998, and 1997. However, the amount of current and deferred
taxes and taxes payable or refundable allocated to each group in these
historical combined financial statements may differ from those that would have
been allocated to each group had they filed separate income tax returns.
Depending on the tax laws of the respective jurisdictions, state and local
income taxes are calculated on either a consolidated or combined basis between
the groups based on their respective contribution to such consolidated or
combined state taxable incomes. State and local income tax provisions and
related tax payments or refunds which are determined on a separate corporation
basis will be allocated between the groups in a manner designed to reflect the
respective contributions of the groups to the Company's separate or local
taxable income.
The discussion of the PE Biosystems group's income taxes (see Note 4) should be
read in conjunction with the Company's consolidated financial statements and
notes thereto.
Transfers of Assets Between Groups
Transfers of assets can be made between groups without stockholder approval.
Such transfers will be made at fair value, as determined by the Company's Board
of Directors. The consideration for such transfers may be paid by one group to
the other in cash or other consideration, as determined by the Company's Board
of Directors.
Dividends
For purposes of the historical (periods prior to the recapitalization) combined
financial statements of the PE Biosystems group and the Celera Genomics group,
all dividends declared and paid by the Company were allocated to the
PE Biosystems group.
Principles of Combination
The PE Biosystems group's combined financial statements have been prepared in
accordance with generally accepted accounting principles and, taken together
with the Celera Genomics group's combined financial statements, comprise all the
accounts included in the corresponding consolidated financial statements of the
Company. Intergroup transactions between the PE Biosystems group and the Celera
Genomics group have not been eliminated in the PE Biosystems group's combined
financial statements but have been eliminated in the PE Corporation consolidated
financial statements. The combined financial statements of each group reflect
the financial condition, results of operations, and cash flows of the businesses
included therein. The combined financial statements of the PE Biosystems group
include the assets and liabilities of the Company specifically identified with
or allocated to the PE Biosystems group. The preparation of the combined
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Certain amounts in the combined financial statements and
notes have been reclassified for comparative purposes.
Discontinued Operations
The PE Biosystems group's combined financial statements were restated to reflect
the net assets and operating results of the Analytical Instruments business as
discontinued operations for all periods presented (see Note 15). The net assets
have been reclassified in both the current and long-term asset sections of the
Combined Statements of Financial Position for all periods presented. The
operating results are reflected in the Combined Statements of Operations as
income (loss) from discontinued operations for all periods presented. The
accompanying notes, except Note 15, relate only to continuing operations.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The provisions of the statement require the
recognition of all derivatives 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 depends on the
intended use of the derivative and the resulting designation. The PE Biosystems
group is required to implement the statement in the first quarter of fiscal
2001. The PE Biosystems Group is currently analyzing the statement to determine
the impact, if any, on the combined financial statements.
Earnings per Share
Earnings per share information prior to the recapitalization is omitted from the
PE Biosystems group's Combined Statements of Operations because PE Biosystems
stock was not part of the capital structure of the Company until fiscal 1999.
Basic earnings per share is computed by dividing income from continuing
operations for the period by the weighted average number of shares of PE
Biosystems stock outstanding. Diluted earnings per share is computed by dividing
income from continuing operations for the period by the weighted average number
of shares of PE Biosystems stock outstanding including the dilutive effect of PE
Biosystems stock equivalents.
54
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
The following table presents a reconciliation of basic and diluted earnings per
share from continuing operations:
<TABLE>
<CAPTION>
(Amounts in thousands except per share amounts)
For the year ended June 30, 1999
- -----------------------------------------------------------------
<S> <C>
Weighted average number of common
shares used in the calculation of basic
earnings per share from continuing operations 100,406
Common stock equivalents 2,698
- -----------------------------------------------------------------
Shares used in the calculation of diluted earnings
per share from continuing operations 103,104
- -----------------------------------------------------------------
Income from continuing operations used in the
calculation of basic and diluted earnings
per share from continuing operations $148,365
Income per share from continuing operations
Basic $ 1.48
Diluted $ 1.44
- -----------------------------------------------------------------
</TABLE>
The reconciliation for fiscal 1998 and 1997 is omitted since PE Biosystems group
stock was not part of the capital structure of the Company.
Options to purchase 20,000 shares of PE Biosystems stock were outstanding at
June 30, 1999, but were not included in the computation of diluted earnings per
share because the effect was antidilutive.
On June 17, 1999, the Board of Directors announced a two-for-one split of PE
Biosystems stock. The two-for-one stock split was effected in the form of a 100%
stock dividend paid to stockholders of record as of the close of business on
July 12, 1999. All PE Biosystems share and per share data reflect this split.
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 group equity. Foreign currency revenues and expenses are translated
using monthly average exchange rates prevailing during the year. Foreign
currency transaction gains and losses, as well as translation adjustments of
foreign operations where the functional currency is the U.S. dollar, are
included in net income. Transaction gains and losses for the periods ended June
30, 1999, 1998, and 1997 were a loss of $5.6 million, a loss of $2.5 million,
and a gain of $1.5 million, respectively.
Derivative Financial Instruments
The Company uses derivative financial instruments to offset exposure to market
risks arising from changes in foreign currency exchange rates and interest
rates. Derivative financial instruments currently utilized by the Company
include foreign currency forward contracts, synthetic forward contracts, foreign
currency options, and an interest rate swap (see Note 12). All of the Company's
financial statement amounts have been allocated to the PE Biosystems group.
Cash, Short-Term Investments, and Marketable Securities
Cash equivalents consist of highly liquid debt instruments, time deposits, and
certificates of deposit with original maturities of three months or less. Time
deposits and certificates of deposit with original maturities of three months to
one year are classified as short-term investments. Short-term investments, which
include marketable securities, are recorded at cost, which generally
approximates market value.
Accounts Receivable
The Company periodically sells accounts receivable arising from business
conducted in Japan. During fiscal 1999, 1998, and 1997, the PE Biosystems group
was allocated all cash proceeds received of $40.5 million, $98.8 million, and
$65.7 million, respectively, from the sale of such receivables. The PE
Biosystems group accounts for such sales in accordance with SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" and believes it has adequately provided for any risk of loss
that may occur under these arrangements.
Investments
The equity method of accounting is used for investments in joint ventures that
are 20% to 50% owned and the cost method is used for investments that are less
than 20% owned. Minority equity investments are generally classified as
available-for-sale and carried at market value in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories at June 30, 1999 and 1998, included the following
components:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998
- --------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 42.8 $ 45.2
Work-in-process 10.3 7.3
Finished products 96.6 84.5
- --------------------------------------------------------
Total inventories $149.7 $137.0
- --------------------------------------------------------
</TABLE>
Property, Plant and Equipment, and Depreciation
Property, plant and equipment are recorded at cost and consisted of the
following at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998
- --------------------------------------------------------
<S> <C> <C>
Land $ 11.2 $ 11.7
Buildings and leasehold
improvements 88.6 92.1
Machinery and equipment 208.6 173.1
- --------------------------------------------------------
Property, plant and equipment,
at cost 308.4 276.9
Accumulated depreciation and
amortization 126.2 117.8
- --------------------------------------------------------
Property, plant and equipment, net $182.2 $159.1
- --------------------------------------------------------
</TABLE>
55
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
Major renewals and improvements that significantly add to productive capacity or
extend the life of an asset are capitalized. Repairs, maintenance, and minor
renewals and improvements are expensed when incurred.
Provisions for depreciation of owned property, plant and equipment are based
upon the expected useful lives of the assets and computed primarily by the
straight-line method. Leasehold improvements are amortized over their estimated
useful lives or the term of the applicable lease, whichever is less, using the
straight-line method. Internal-use software costs are amortized primarily over
the expected useful lives, not to exceed seven years.
Machinery and equipment included capitalized internal-use software, primarily
related to the Company's worldwide strategic program to improve its information
technology infrastructure, of $53.2 million and $43.3 million at June 30, 1999
and 1998, respectively. Net of accumulated amortization the capitalized
internal-use software was $43.4 million and $39.3 million at June 30, 1999 and
1998, respectively.
Capitalized Software
Internal software development costs, as used in the Company's products, 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. The 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, 1999 and 1998, capitalized software costs, net of accumulated
amortization, were $12.5 million and $ 4.4 million, respectively. Research and
development costs and other computer software maintenance costs related to
software development are expensed as incurred.
Intangible Assets
The excess of purchase price over the net asset value of companies acquired is
amortized on a straight-line method over periods not exceeding 40 years. Patents
and trademarks are amortized using the straight-line method over their expected
useful lives. At June 30, 1999 and 1998, other long-term assets included
goodwill, net of accumulated amortization, of $17.6 million and $69.8 million,
respectively. Accumulated amortization of goodwill was $6.6 million and $6.1
million at June 30, 1999 and 1998, respectively.
Asset Impairment
The PE Biosystems group reviews long-lived assets for impairment, in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. Assets are written
down to fair value when the carrying costs exceed this amount. During fiscal
1999, the PE Biosystems group recorded a $14.5 million charge to cost of sales
for the impairment of assets associated with the Molecular Informatics business
(see Note 2). During fiscal 1997, the PE Biosystems group recorded a $.7 million
charge to cost of sales charge for the write-down of certain impaired assets.
The impairment losses were determined based upon estimated future cash flows and
fair values.
Revenues
Revenues are recorded at the time of shipment of products or
performance of services. Revenues from service contracts are recorded as
deferred service contract revenues and reflected in net revenues over the term
of the contract, generally one year.
Research, Development and Engineering
Research, development and engineering costs are expensed when incurred.
Supplemental Cash Flow Information
Cash paid for interest and income taxes and significant non-cash investing and
financing activities for the following periods were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Interest $ 3.4 $ 5.7 $ 6.0
Interest paid to the
Celera Genomics group $ .2
Income taxes $ 30.3 $60.5 $31.3
Significant non-cash investing
and financing activities
Unrealized gain (loss) on
investments $ 11.9 $(4.4) $ 3.1
Note payable to the
Celera Genomics
group $150.0
Dividends declared not
paid $ 7.5
Common shares issued
in PerSeptive pooling 4.6
Minority interest assumed $41.3
- ----------------------------------------------------------------
</TABLE>
56
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
Note 2--Acquisitions, Investments,
and Dispositions
PerSeptive Biosystems, Inc.
The merger (the "Merger") of Seven Acquisition Corp., a wholly-owned subsidiary
of the Company, and PerSeptive was consummated on January 22, 1998. PerSeptive
develops, manufactures, and markets an integrated line of proprietary consumable
products and advanced instrumentation systems for the purification, analysis,
and synthesis of biomolecules. As a result of the Merger, PerSeptive, which was
the surviving corporation of the Merger, became a wholly-owned subsidiary of the
Company on that date. Each outstanding share of PerSeptive common stock was
converted into shares of the Company's common stock at an exchange ratio equal
to 0.1926. Accordingly, the Company issued 4.6 million shares of its common
stock for all outstanding shares of PerSeptive common stock. Each outstanding
option and warrant for shares of PerSeptive common stock was converted into
options and warrants for the number of shares of the Company's common stock that
would have been received if such options and warrants had been exercised
immediately prior to the effective time of the Merger. All shares of Series
A Redeemable Convertible Preferred Stock of PerSeptive outstanding immediately
prior to the effective time of the Merger were converted in accordance with
their terms into shares of PerSeptive common stock which were then converted
into shares of the Company's common stock. As a result of the Merger,
PerSeptive's 8-1/4% Convertible Subordinated Notes Due 2001 (the "PerSeptive
Notes") became convertible into shares of the Company's common stock. On March
23, 1998, the Company redeemed the PerSeptive Notes for a total of $26.1 million
representing $24.7 million of principal and $1.4 million of accrued interest and
premium relating to the PerSeptive Notes. Additionally, $2.5 million of the
principal amount of the PerSeptive Notes was converted by the holders thereof
into 35,557 shares of the Company's common stock.
The Merger qualified as a tax-free reorganization and has been accounted for as
a pooling of interests. Accordingly, the PE Biosystems group's financial results
have been restated to include the combined operations.
Combined and separate results of the PE Biosystems group and PerSeptive during
the periods preceding the Merger were as follows:
<TABLE>
<CAPTION>
PE Biosystems Adjust-
(Dollar amounts in millions) Group PerSeptive ment Combined
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Six Months Ended
December 31, 1997
(Unaudited)
Net revenues $356.8 $52.6 $409.4
Income (loss) from
continuing operations $ 17.2 $(5.4) $.6 $ 12.4
Fiscal Year Ended
June 30, 1997
Net revenues $671.0 $96.5 $767.5
Income from
continuing operations $117.5 $15.2 $132.7
- -----------------------------------------------------------------------------------------
</TABLE>
The adjustment for the six months ended December 31, 1997 reflects the inclusion
of PerSeptive's operating results within the Company's consolidated tax
provision. There were no material intercompany transactions between the PE
Biosystems group and PerSeptive during any period presented.
Tecan AG
The Company acquired a 14.5% interest and approximately 52% of the voting rights
in Tecan AG ("Tecan") in December 1997. Tecan is a world leader in the
development and manufacturing of automated sample processors, liquid handling
systems, and microplate photometry. Used in research, industrial, and clinical
markets, these products provide automated solutions for pharmaceutical drug
discovery, molecular biology, genomic testing, and clinical diagnostics. The
acquisition cost was $53.2 million in cash and was accounted for as a purchase
with a minority interest of $41.3 million. The excess purchase price over the
fair market value of the underlying assets was $46.2 million and was being
amortized over fifteen years.
During the fourth quarter of fiscal 1999, the Company divested its interest in
Tecan through a public offering in Switzerland and private sales outside of
Switzerland. Cash proceeds, net of transaction costs, from the divestiture were
$53.8 million. The PE Biosystems group recognized a before-tax gain of $1.6
million on the sale.
Molecular Informatics, Inc.
During the second quarter of fiscal 1998, the Company acquired Molecular
Informatics, Inc. ("Molecular Informatics"), a leader in the development of
infrastructure software for the pharmaceutical, biotechnology, and agrochemical
industries as well as for applied markets such as forensics and human
identification. The acquisition cost was $53.9 million and was accounted for as
a purchase. In connection with the acquisition, $28.9 million was expensed as
purchased in-process research and development, $9.0 million was allocated to
goodwill and $15.7 million was allocated to other intangible assets. The
amortization period was ten years for the goodwill and four to seven years for
the other intangible assets.
The $28.9 million expensed as in-process research and development represented
53.6% of the purchase price and was attributed and supported by a discounted
probable cash flow analysis on a project-by-project basis. At the acquisition
date, the technological feasibility of the acquired technology had not been
established and the acquired technology had no future alternative uses.
Approximately 10% of the in-process research and development value was
attributed to BioLIMS, a software system that manages data, initiates analysis
programs, and captures the results in a centralized, relational database for
sequencing instruments; 6% was attributed to GA SFDB, a client-side add-on
product to several existing gene sequencing instruments; 38% was attributed to
BioMERGE, a client-server management and integration system that organizes
proprietary, public, and third-party results in a single relational database for
the drug discovery and genomic research markets; 9% was attributed to BioCLINIC,
a client-server management and integration system that organizes proprietary,
public, and
57
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
third-party results generated from DNA and protein sequence analysis in a single
database for the clinical trials phase of drug development; and 37% was
attributed to SDK, an open architecture software platform from which all
of Molecular Informatics' future software applications were expected to be
derived.
As of the acquisition date, all of the major functionality for BioLIMS 2.0 had
been completed and the product was subsequently released in September 1998. As
of the acquisition date, BioLIMS 3.0 was in the design and scoping phase. As of
the acquisition date, GA SFDB was in early alpha phase and had been completed
concurrent with the development of BioLIMS 2.0 and was released in September
1998. As of the acquisition date, BioMerge 3.0 functional scope was defined and
the requirements assessment had been completed and was subsequently released in
November 1998. As of the acquisition date, the BioCLINIC product requirements
had been specified and discussions had begun with two potential customers to
begin the specific software modifications. Development efforts were terminated
in April 1998 due to unsuccessful marketing efforts. As of the acquisition date,
the SDK requirements assessment had been completed and the functional scope had
been defined.
At the date of the acquisition, management expected to complete the majority of
these projects and commence generating significant revenues in 1999. A total of
$11.8 million of the purchase price was attributed to core technology and
existing products, primarily related to the BioMERGE product. The risk-adjusted
discount rate applied to the project's cash flows was 20% for existing
technology and 23% for in-process technology. The risk premium of 3% for
in-process technologies was determined by management based upon the associated
risks of rolling out these in-process technologies versus the existing
technologies for the emerging bioinformatics software industry. The significant
risks associated with these products include the limited operating history of
Molecular Informatics, uncertainties surrounding market acceptance of such
in-process products, competitive threats from other bioinformatics companies,
and other risks. Management is primarily responsible for estimating the fair
value of such existing and in-process technology.
During the fourth quarter of fiscal 1999, the PE Biosystems group incurred a
$14.5 million charge to cost of sales for the impairment of intangible assets
associated with the Molecular Informatics business. This impairment resulted
primarily from a decline in management's assessment of future cash flows from
this business which included the discontinuance of certain product lines in the
fourth quarter. The charge to cost of sales included $5.6 million for the
write-down of goodwill and $8.9 million for the write-down of other intangible
assets. The remaining goodwill of $1.9 million and other intangible assets of
$1.9 million are being amortized over 4 years.
Biometric Imaging, Inc.
The Company acquired a minority equity interest in Biometric Imaging, Inc. for
$4.0 million during fiscal 1998. The collaboration was for the development and
manufacturing of a high-throughput screening system for use by pharmaceutical
research companies to accelerate the drug discovery process. The Company
received exclusive worldwide marketing rights for products developed for that
market.
During the third quarter of fiscal 1999, the PE Biosystems group recorded a
before-tax gain of $2.6 million on the sale of the Company's entire equity
interest in Biometric Imaging.
Other Acquisitions
During the fourth quarter of fiscal 1998, the Company made a minority equity
investment of $2.5 million in ACLARA BioSciences, Inc. The companies are
collaborating on the development of advanced genetic analysis systems.
The Company entered into a strategic partnership with Hyseq, Inc., acquiring a
minority equity interest for a cash investment of $5.0 million, during the
fourth quarter of fiscal 1997. Hyseq, Inc. applies proprietary DNA array
technology to develop gene-based therapeutic product candidates and diagnostic
products and tests. In the first quarter of fiscal 1998, the Company increased
its investment by $5.0 million.
The net assets and results of operations for the above acquisitions accounted
for under the purchase method have been included in the combined financial
statements of the PE Biosystems group since the date of each acquisition. The
pro forma effect of these acquisitions, individually or in the aggregate, on the
PE Biosystems group's combined financial statements was not significant.
Other Dispositions of Minority Equity Investments
Millennium Pharmaceuticals, Inc.
During fiscal 1999 and 1998, the PE Biosystems group recorded before-tax gains
of $1.9 million and $1.6 million, respectively, in connection with the release
of previously existing contingencies on shares of Millennium Pharmaceuticals,
Inc. ("Millennium") common stock. During fiscal 1997, the Company recognized a
before-tax gain of $ 27.5 million associated with the sale of approximately 50%
of its investment in Millennium and the release of previously existing
contingencies. The gain included $25.9 million from the Company's exchange of a
34% equity interest in ChemGenics Pharmaceuticals, Inc. for an approximate 6%
equity interest in Millennium.
Etec Systems, Inc.
During fiscal 1997, the PE Biosystems group recognized a before-tax gain of
$34.7 million from the sale of the Company's entire equity interest in Etec
Systems, Inc. Net cash proceeds from the sale were $45.8 million.
58
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
Note 3--Debt and Lines of Credit
Allocated Debt Activity
All historical debt activity of the Company was allocated to the PE Biosystems
group. Loans payable and long-term debt at June 30, 1999 and 1998 are summarized
below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998
- --------------------------------------------------------
<S> <C> <C>
Loans Payable
Short-term loans $ 3.9 $12.1
- --------------------------------------------------------
Long-Term Debt
Yen loan $31.5 $27.0
Other 6.7
- --------------------------------------------------------
Total long-term debt $31.5 $33.7
- --------------------------------------------------------
</TABLE>
The weighted average interest rates at June 30, 1999 and 1998 for loans payable
were 4.5% and 1.8%, respectively.
On March 23, 1998, the Company redeemed PerSeptive's 8-1/4% convertible
subordinated notes (see Note 2).
The Company maintains a Yen 3.8 billion variable rate long-term loan which
matures in March 2002. Through an interest rate swap agreement (see Note 12),
the effective interest rate for the loan is fixed at 2.1%.
The Company maintains a $100 million revolving credit agreement that matures on
June 1, 2000. Commitment and facility fees are based on leverage and interest
coverage ratios. Interest rates on amounts borrowed vary depending on whether
borrowings are undertaken in the domestic or Eurodollar markets. There were no
borrowings under the facility at June 30, 1999 or 1998.
At June 30, 1999, in addition to the $100 million revolving credit agreement,
the Company had $239 million of unused credit facilities for short-term
borrowings from domestic and foreign banks in various currencies. These credit
facilities consisted of uncommitted overdraft credit lines that are provided at
the discretion of local banks. A PE Corporation guarantee is usually required if
the local unit borrows any funds.
Under various debt and credit agreements, the Company is required to maintain
certain minimum net worth and interest coverage ratios.
There are no maturities of long-term debt scheduled for fiscal 2000, 2001, 2003,
or 2004. The Yen 3.8 billion loan matures in fiscal 2002.
Note Payable to the Celera Genomics Group
At September 30, 1998, the Company allocated to the Celera Genomics group a $330
million short-term note payable of the PE Biosystems group. The $330 million
note represented an allocation of the Company's capital to the Celera Genomics
group and did not result in the PE Biosystems group holding an equity interest
in the Celera Genomics group. Accordingly, no interest was ascribed to the note.
The allocation of capital represented management's decision to allocate a
portion of the Company's capital to the Celera Genomics group and the remaining
capital to the PE Biosystems group prior to the effective date of the
recapitalization. The group financial statements do not include any intergroup
equity interests. The note payable was liquidated on May 28, 1999 in exchange
for a portion of the proceeds received from the sale of the Analytical
Instruments business and a new note payable to the Celera Genomics group for
$150 million was established. The new note payable is for a term of one-year,
bears interest at a rate of 5% per annum, and is payable on demand without
penalty. At June 30, 1999, the outstanding balance of the note payable was $150
million.
Note 4--Income Taxes
Income before income taxes from continuing operations for fiscal 1999, 1998, and
1997 is summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
United States $ 36.5 $(25.2) $130.4
Foreign 155.9 84.4 39.6
- ---------------------------------------------------------------
Total $192.4 $ 59.2 $170.0
- ---------------------------------------------------------------
</TABLE>
The provision for income taxes from continuing operations included the PE
Biosystems group's allocated portion of income taxes currently payable and those
deferred because of differences between the financial statement and tax bases of
assets and liabilities. The PE Biosystems group's provision for income taxes
from continuing operations consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Currently Payable
Domestic $ 6.2 $ 8.3 $ 59.1
Foreign 23.5 17.7 18.7
- ---------------------------------------------------------------
Total currently payable 29.7 26.0 77.8
- ---------------------------------------------------------------
Deferred
Domestic (2.5) 6.1 (45.8)
Foreign 3.5 (2.6) 5.3
- ---------------------------------------------------------------
Total deferred 1.0 3.5 (40.5)
- ---------------------------------------------------------------
Total provision for income taxes
from continuing operations $30.7 $29.5 $ 37.3
- ---------------------------------------------------------------
</TABLE>
Significant components of deferred tax assets and liabilities from continuing
operations at June 30, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Inventories $ 2.3 $ 4.0
Postretirement and postemployment benefits 32.2 35.0
Other reserves and accruals 8.8 44.3
Tax credit and loss carryforwards 68.8 32.2
- ----------------------------------------------------------------
Subtotal 112.1 115.5
Valuation allowance (37.5) (62.8)
- ----------------------------------------------------------------
Total deferred tax assets 74.6 52.7
- ----------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 3.1
Other reserves and accruals 12.3 6.9
- ----------------------------------------------------------------
Total deferred tax liabilities 15.4 6.9
- ----------------------------------------------------------------
Total deferred tax assets, net $ 59.2 $ 45.8
- ----------------------------------------------------------------
</TABLE>
59
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
A reconciliation of the federal statutory tax to the PE Biosystems group's
continuing tax provision for fiscal 1999, 1998, and 1997 is set forth in the
following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
- -------------------------------------------------------------------
Tax at federal statutory rate $ 67.3 $20.7 $ 59.5
State income taxes (net of federal
benefit) .4 .1 .1
Effect on income from foreign
operations (21.4) 1.2 41.1
Effect on income from foreign sales
corporation (4.8) (2.5) (1.6)
Acquired research and development 10.1
Restructuring and other merger costs 5.2
Domestic temporary differences
for which benefit is recognized (17.4) (4.8) (56.6)
Utilization of net operating losses (7.7)
Effect of goodwill write-off 2.1 .4 .6
Recapitalization costs 1.6
Other 2.9 (.9) 1.9
- -------------------------------------------------------------------
Total provision for income taxes
from continuing operations $ 30.7 $29.5 $ 37.3
- -------------------------------------------------------------------
</TABLE>
The category "domestic temporary differences for which benefit is recognized"
reported in the table above reflects the current year benefit attributable to a
reduction in the valuation allowance. The benefit is primarily due to releases
of the valuation allowance in 1999 and 1997 in the amounts of $17.4 million and
$50.0 million, respectively. The remainder of the benefit resulted from the
utilization of domestic tax credit carryforwards and the recognition of various
other deferred tax assets that were previously subject to a valuation allowance.
During the fourth quarter of 1999 the Company reduced its domestic deferred tax
valuation allowance, resulting in the recognition of a $17.4 million deferred
tax benefit. The valuation allowance was reduced because management believes,
now that the sale of the Analytical Instrument business has been completed, that
it is more likely than not that the deferred tax assets to which the valuation
allowance related will be realized.
At June 30, 1999, the Company's worldwide valuation allowance of $37.5 million
related to foreign tax loss carryforwards, as well as the domestic tax loss
carryforwards, temporary differences and tax credit carryforwards recorded as a
result of the stock acquisition of PerSeptive in January 1998.
The Company's subsidiary, PerSeptive, has domestic loss carryforwards of
approximately $68 million that will expire between the years 2003 and 2012 which
have been allocated to the PE Biosystems group. 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 the acquisition. The PE Biosystems group also has been allocated
a consolidated domestic loss carryforward of $34 million which will expire in
2019 and loss carryforwards of approximately $28 million in various foreign
countries with varying expiration dates.
U.S. income taxes have not been provided on approximately $302 million of net
unremitted earnings from foreign subsidiaries since the Company intends to
permanently reinvest substantially all of such earnings in the operations of the
subsidiaries. These earnings include income from manufacturing operations in
Singapore, which is tax exempt through the year 2004. In those instances where
the Company expects to remit earnings, the effect on the PE Biosystems group's
results of operations, after considering available tax credits and amounts
previously accrued, was not significant.
The Company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. During the current year, the Company filed a petition
in the U.S. Tax Court which contested a deficiency asserted by the IRS for 1992.
The Company will vigorously contest the proposed adjustments. The Company
believes that adequate tax payments have been made and adequate accruals have
been recorded for all years.
Note 5--Retirement and Other Benefits
Pension Plans, Retiree Health Care, and
Life Insurance Benefits
The Company maintains or sponsors pension plans that cover a substantial portion
of all worldwide employees. Pension benefits earned are generally based on years
of service and compensation during active employment. However, the level of
benefits and terms of vesting may vary among plans. Pension plan assets are
administered by trustees and are principally invested in equity and fixed income
securities. The funding of pension plans is determined in accordance with
statutory funding requirements.
The Company's domestic pension plans cover a substantial portion of the U.S.
employees. During fiscal 1999, the plan was amended to terminate the accrual of
benefits under the plan as of June 30, 2004 and to improve the benefit for
participants who retire between the ages of 55 and 60. The pension plan is not
available to employees hired on or after July 1, 1999.
The postretirement plan provides certain health care and life insurance benefits
to domestic employees hired prior to January 1, 1993, who retire and satisfy
certain service and age requirements. Generally, medical coverage pays a stated
percentage of most medical expenses, reduced for any deductible and for payments
made by Medicare or other group coverage. The cost of providing these benefits
is shared with retirees. The plan is unfunded.
As the pension and postretirement activity attributable to the Celera Genomics
group was not material for the three years ended June 30, 1999, all pension and
postretirement amounts recognized in the Company's Consolidated Statements of
Financial Position were allocated to the PE Biosystems group.
60
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
The components of net pension and postretirement expenses for fiscal 1999, 1998,
and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Pension
Service cost $ 5.2 $ 4.8 $ 3.5
Interest cost 38.7 36.4 32.0
Expected return on plan assets (38.6) (35.6) (30.5)
Amortization of transition asset (1.9) (1.9) (1.2)
Amortization of prior service cost (.4)
Amortization of losses .5 .5 .8
Curtailments and settlements .1
- ------------------------------------------------------------------
Net periodic expense $ 3.6 $ 4.2 $ 4.6
- ------------------------------------------------------------------
Postretirement
Service cost $ .2 $ .1 $ .1
Interest cost 4.8 4.7 4.8
Amortization of gains (1.5) (1.2) (1.1)
- ------------------------------------------------------------------
Net periodic expense $ 3.5 $ 3.6 $ 3.8
- ------------------------------------------------------------------
</TABLE>
The following tables set forth the changes in the benefit obligations and the
plan assets and the funded status of the plans of continuing operations and the
amounts recognized in the PE Biosystems group's Combined Statements of Financial
Position at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Pension Postretirement
---------------- ----------------
(Dollar amounts in millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit
Obligation
Benefit obligation,
beginning of year $560.5 $488.9 $72.4 $71.3
Service cost 5.2 4.8 .2 .1
Interest cost 38.7 36.4 4.8 4.7
Participant contributions .1 .1
Benefits paid (30.8) (27.6) (5.3) (6.7)
Actuarial loss (gain) 17.7 21.6 (3.3) 1.5
Variable annuity
unit value change 2.8 26.6
Amendments (2.0) .4
Currency translation (.1) (.1)
Other 2.0 9.4 (6.3) 1.5
- -------------------------------------------------------------------------
Benefit obligation $594.1 $560.5 $62.5 $72.4
- -------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets,
beginning of year $561.8 $476.1 $ - $ -
Actual return on plan assets 56.8 96.7
Participant contributions .1 .1
Company contribution 11.4 15.6 5.3 6.7
Benefits paid (29.5) (26.6) (5.3) (6.7)
Currency translation (.1)
- -------------------------------------------------------------------------
Fair value of plan assets $600.6 $561.8 $ - $ -
- -------------------------------------------------------------------------
<CAPTION>
Pension Postretirement
---------------- ------------------
(Dollar amounts in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded Status
Reconciliation
Funded status $ 6.5 $ 1.3 $(62.5) $ (72.4)
Unrecognized prior
service gain (2.5) (2.1)
Unrecognized transition asset (2.2) (4.4)
Unrecognized losses (gains) 37.7 37.2 (23.2) (21.5)
- ---------------------------------------------------------------------------
Net amount recognized $ 39.5 $ 32.0 $(85.7) $ (93.9)
- ---------------------------------------------------------------------------
Amounts Recognized
in the Statement of
Financial Position
Prepaid benefit cost $ 48.3 $ 38.4 $ - $ -
Accrued benefit liability (11.6) (10.5) (85.7)
Intangible asset .7 3.7
Minimum pension
liability adjustment 2.1 .4
- ---------------------------------------------------------------------------
Net amount recognized $ 39.5 $ 32.0 $(85.7) $ (93.9)
- ---------------------------------------------------------------------------
</TABLE>
Other changes in benefit obligation represents changes in benefit obligation
related to the Analytical Instruments business for periods prior to the sale.
A minimum pension liability adjustment is required when the actuarial present
value of accumulated benefits exceeds plan assets and accrued pension
liabilities. The projected benefit obligation and accumulated benefit obligation
for the pension plans with accumulated benefit obligations in excess of plan
assets were $12.1 million and $11.6 million, respectively, at June 30, 1999, and
$12.2 million and $9.5 million, respectively, at June 30, 1998.
The following actuarial assumptions were used for the pension and postretirement
plans:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Domestic Plans
Discount rate 7-1/2% 8%
Compensation increase 5% 4%
Expected rate of return 7-1/2 - 9-1/4% 8-1/2 - 9-1/4%
- -----------------------------------------------------------
Foreign Plans
Discount rate 5 - 5-3/4% 5-1/2%
Compensation increase 4% 4-1/4%
Expected rate of return 6-1/2 - 9% 6-1/2%
- -----------------------------------------------------------
</TABLE>
For measurement purposes, an 8.2% annual rate of increase in the per capita cost
of covered health care benefits was assumed for plan year 2000, gradually
reducing to 5.5% in 2003 and thereafter. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
One-Percentage One-Percentage
(Dollar amounts in millions) Point Increase Point Decrease
- ----------------------------------------------------------------------
<S> <C> <C>
Effect on the total of service and
interest cost components $ .3 $ (.3)
Effect on postretirement benefit
obligation $5.0 $(5.0)
- ----------------------------------------------------------------------
</TABLE>
61
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
Savings Plan
The Company provides a 401(k) savings plan, for most 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 who are not eligible for the employee pension plan will receive an
extra 2% contribution in addition to the automatic 2% company contribution to
their employee savings plan accounts through June 30, 2004, while pension plan
participants will continue to receive the automatic 2% contribution. Company
contributions to this plan for continuing operations were $8.0 million, $5.7
million, and $4.6 million for fiscal 1999, 1998, and 1997, respectively, and
were allocated to the PE Biosystems group.
Postemployment Benefits
The Company provides certain postemployment benefits to eligible employees.
These benefits generally include severance, disability, and medical-related
costs paid after employment but before retirement.
Note 6--Segment, Geographic, and Customer Information
Business Segments
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The statement established annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products and services, geographic areas, and major
customers. The adoption of the statement did not affect the results of
operations or financial position of the PE Biosystems group.
The PE Biosystems group operates in one business segment, which is engaged in
the development, manufacture, sale and service of instrument systems and
associated consumable products for life science research and related
applications.
Geographic Areas
Information concerning principal geographical areas follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- --------------------------------------------------------
<S> <C> <C> <C>
Net Revenues From
External Customers
United States $ 596.5 $452.9 $349.1
Europe 370.1 291.9 239.9
Japan 154.8 129.5 118.8
Other Far East countries 56.1 42.0 40.9
Latin America and other 26.9 23.8 18.8
- --------------------------------------------------------
Combined $1,204.4 $940.1 $767.5
- --------------------------------------------------------
</TABLE>
Net revenues are attributable to geographic areas based on the region of
destination.
<TABLE>
<CAPTION>
At June 30,
-------------------------
(Dollar amounts in millions) 1999 1998
- --------------------------------------------------------
<S> <C> <C>
Long-Lived Assets
United States $172.6 $148.3
Europe 15.1 18.2
Japan 14.1 12.7
Other Far East countries .7 .5
Latin America and other .3 1.2
- --------------------------------------------------------
Combined $202.8 $180.9
- --------------------------------------------------------
</TABLE>
Long-lived assets exclude goodwill and other intangible assets.
Customer Information
The PE Biosystems group has a large and diverse customer base. No single
customer accounted for more than 10% of total net revenues during fiscal 1999,
1998, and 1997.
Note 7--Group Equity
PE Biosystems group stock represents a separate class of the Company's common
stock. Additional shares of PE Biosystems stock may be issued from time to time
upon exercise of stock options or at the discretion of the Company's Board of
Directors.
Treasury Stock
Common stock purchases have been made in support of the PE Biosystem group's
various stock plans. During fiscal 1999, 20,000 shares of PE Biosystems group
stock were purchased to support various stock plans.
Stock Purchase Warrants
As a result of the Merger with PerSeptive, each outstanding warrant for shares
of PerSeptive common stock was converted into warrants for the number of shares
of the Company's common stock that would have been received by the holder if
such warrants had been exercised immediately prior to the effective time of the
Merger.
As a result of the recapitalization, each outstanding warrant for shares of
PerSeptive common stock was further converted into warrants to acquire .3852
share of PE Biosystems stock and .0963 share of Celera Genomics stock. The
warrants are not separately exercisable into solely PE Biosystems stock or
Celera Genomics stock. The exercise price and expiration date of each warrant
were not affected by the recapitalization.
At June 30, 1999, there were warrants outstanding to purchase 107,598 shares of
PE Biosystems stock and 26,900 shares of Celera Genomics stock at an exercise
price of $32.87. The warrants expire in September, 2003.
Stockholders' Protection Rights Plan
In connection with the recapitalization, the Company adopted a new Stockholder
Rights Plan (the "Rights Agreement") to protect stockholders against abusive
takeover tactics. Under the Rights Agreement, the Company will issue one right
for each share of PE Biosystems stock (a "PE Biosystems Right"), which will
allow
62
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
holders to purchase one-thousandth of a share of a newly designated 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 each
share of Celera Genomics stock (a "Celera Genomics Right"), which will allow
holders to purchase one-thousandth of a share of a newly designated Series B
participating junior preferred stock of the Company at a purchase price of $125,
subject to adjustment (the "Series B Purchase Price").
A PE Biosystems Right or Celera Genomics Right will be exercisable only if a
person or group ("Acquiring Person"): (a) acquires 15% or more of the shares of
PE Biosystems stock then outstanding or 15% or more of the shares of Celera
Genomics 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 PE Biosystems Right and
each Celera Genomics Right will entitle its holder to purchase, for the Series A
Purchase Price or the Series B Purchase Price, 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 PE Biosystems
Right and each Celera Genomics Right will entitle its holder to purchase, for
the Series A Purchase Price or Series B Purchase Price, 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 to a
person or group becoming an Acquiring Person.
Capital Stock
The Company's authorized capital stock consists of 500 million shares of PE
Corporation-PE Biosystems group common stock, 225 million shares of PE
Corporation-Celera Genomics group common stock and 10 million shares of PE
Corporation preferred stock. Of the 10 million shares of preferred stock at June
30, 1999, the Company had designated 80,000 shares of two series of
participating junior preferred stock in connection with the Company's
stockholders' protection rights plan as previously described.
Note 8--Stock Plans
Stock Option Plans
Under the Company's stock option plans, officers and other key employees may be,
and directors are, granted options, each of which allows for the purchase of
existing common stock at a price of not less than 100% of fair market value at
the date of grant. Prior to the recapitalization, most option grants had a
two-year vesting schedule, whereby 50% of the option grant vested at the end of
each year from the date of grant. The Board of Directors has extended that
schedule for most options granted subsequent to the recapitalization whereby 25%
will vest annually, resulting in 100% vesting after four years. Options
generally expire ten years from the date of grant.
Transactions relating to the stock option plans of the Company are summarized
below:
<TABLE>
<CAPTION>
PE Corporation
------------------------
Weighted
Number of Average
Options Exercise Price
- --------------------------------------------------------
<S> <C> <C>
Fiscal 1997
Outstanding at June 30, 1996 3,822,535 $34.05
Granted 1,595,528 $59.78
Exercised 1,167,179 $29.73
Cancelled 95,281 $43.17
- --------------------------------------------------------
Outstanding at June 30, 1997 4,155,603 $45.03
Exercisable at June 30, 1997 2,254,052 $35.24
Fiscal 1998
Granted 1,997,041 $70.41
Exercised 780,994 $34.76
Cancelled 154,686 $71.42
- --------------------------------------------------------
Outstanding at June 30, 1998 5,216,964 $55.51
Exercisable at June 30, 1998 2,936,389 $43.12
Fiscal 1999
Granted 37,000 $86.61
Exercised 1,549,364 $45.74
Cancelled 108,914 $67.92
- --------------------------------------------------------
Outstanding at May 5, 1999 3,595,686 $60.23
Exercisable at May 5, 1999 2,639,696 $55.43
- --------------------------------------------------------
<CAPTION>
PE Biosystems Group
------------------------
Weighted
Number of Average
Options Exercise Price
- --------------------------------------------------------
<S> <C> <C>
Fiscal 1999
Outstanding at May 6, 1999 7,191,372 $27.33
Granted 2,948,046 $54.69
Exercised 687,316 $26.50
Cancelled 240,479 $32.76
- --------------------------------------------------------
Outstanding at June 30, 1999 9,211,623 $35.98
Exercisable at June 30, 1999 4,349,453 $24.68
- --------------------------------------------------------
</TABLE>
63
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
As a result of the recapitalization, each outstanding stock option under the
Company's stock option plans was converted into separately exercisable options
to acquire one share of PE Biosystems stock and 0.5 of a share of Celera
Genomics stock. The exercise price for the resulting PE Biosystems stock options
and Celera Genomics stock options was calculated by multiplying the exercise
price under the original option from which they were converted by a fraction,
the numerator of which was the opening price of PE Biosystems stock or Celera
Genomics stock, as the case may be, on May 6, 1999 (the first date such stocks
were traded on the New York Stock Exchange) and the denominator of which was the
sum of such PE Biosystems stock and Celera Genomics stock prices. However, the
aggregate intrinsic value of the options was not increased, and the ratio of the
exercise price per option to the market value per share was not reduced. In
addition, the vesting provisions and option periods of the original grants
remained the same on conversion.
The following table summarizes information regarding options outstanding and
exercisable for the PE Biosystems group at June 30, 1999:
<TABLE>
<CAPTION>
Weighted Average
--------------------
Contractual
Life
Number of Remaining Exercise
(Option Prices per Share) Options in Years Price
- --------------------------------------------------------
<S> <C> <C> <C>
Options Outstanding
At $.93 - $14.84 982,816 4.1 $11.25
At $14.85 - $29.68 1,355,230 5.8 $21.21
At $29.69 - $51.94 3,907,247 7.8 $33.08
At $51.95 - $74.21 2,966,330 9.8 $54.74
Options Exercisable
At $.93 - $14.84 927,537 4.1 $11.70
At $14.85 - $29.68 1,315,103 5.8 $21.01
At $29.69 - $51.94 2,087,553 7.8 $32.40
At $51.95 - $74.21 19,260 9.8 $62.90
- --------------------------------------------------------
</TABLE>
1999 Stock Incentive Plans
The PE Corporation/PE Biosystems Group 1999 Stock Incentive Plan (the "PE
Biosystems Group Plan") and the PE Corporation/Celera Genomics Group 1999 Stock
Incentive Plan (the "Celera Genomics Group Plan") were approved in April, 1999.
The PE Biosystems Group Plan authorizes grants of stock options, stock awards
and performance shares with respect to PE Biosystems stock. The Celera Genomics
Group Plan authorizes grants of stock options, stock awards and performance
shares with respect to Celera Genomics stock. Directors and certain officers and
key employees with responsibilities involving both the PE Biosystems group and
the Celera Genomics group may be granted awards under both incentive plans in a
manner which reflects their responsibilities. The Board of Directors believes
that granting participants awards tied to performance of the group in which the
participants work and, in certain cases the other group, is in the best interest
of the Company and its stockholders.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan offers domestic and certain foreign employees
the right to purchase shares of PE Biosystems stock and/or Celera Genomics stock
on a quarterly basis. The purchase price in the United States 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 foreign countries vary according to local practice and regulations.
Common stock issued under the Employee Stock Purchase Plan during fiscal 1999,
1998, and 1997 totaled 168,000 shares, 174,000 shares, and 111,000 shares,
respectively, of PE Corporation (predecessor) common stock. Additionally, 49,000
shares of PE Biosystems stock and 12,000 shares of Celera Genomics stock were
issued during fiscal 1999.
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 PE Biosystems
stock and Celera Genomics stock are made in a ratio approximately equal to the
number of shares of PE Biosystems stock and Celera Genomics stock outstanding.
The purchase price is the fair market value on the date of purchase. At June 30,
1999, the Company had approximately 85,000 shares of PE Biosystems stock and
approximately 43,000 shares of Celera Genomics stock available for issuance.
Restricted Stock
As part of the Company's stock incentive plans, key employees may be, and
non-employee directors are, granted shares of restricted stock that will vest
when certain continuous employment/service restrictions and/or specified
performance goals are achieved. The fair value of shares granted is generally
expensed over the restricted periods, which may vary depending on the estimated
achievement of performance goals.
As a result of the recapitalization, each share of restricted stock held was
redesignated as one share of PE Biosystems stock and 0.5 of a share of Celera
Genomics stock. Restricted stock granted prior to the recapitalization to key
employees and non-employee directors during fiscal 1999, 1998, and 1997 totaled
42,900 shares, 4,350 shares, and 42,000 shares, respectively, of PE Corporation
(predecessor) common stock. Compensation expense of continuing operations
recognized by the PE Biosystems group for these awards was $2.3 million, $1.8
million, and $9.1 million for fiscal 1999, 1998, and 1997, respectively.
Performance Unit Bonus Plan
The Company has a Performance Unit Bonus Plan whereby employees may be awarded
performance units in conjunction with an equal number of stock options. A
performance unit represents the right to receive a cash or stock payment from
the Company at
64
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
a specified date in the future. The amount of the payment is equal to the fair
market value of a share of common stock on the date of the grant. The
performance units vest upon shares of the Company's common stock attaining and
maintaining specified common stock price levels for a specified period, and are
payable on or after a specified future date subject to continued employment
through the date of payment. As of June 30, 1999, two series of performance
units totaling 498,399 units had been granted under the plan. Compensation
expense of continuing operations, pertaining to the first of the series, for the
PE Biosystems group was $4.4 million and $5.1 million for fiscal 1999 and 1998,
respectively.
At June 30, 1999, all stock price targets applicable to the first series of
performance units, totaling 294,499 units, net of cancellations, granted to
members of senior management under the Plan had been attained and the Company
became obligated to make payments under the Plan. In recognition of the efforts
of the participants in reaching these performance targets and the change in the
underlying securities of the Company as a result of the recapitalization of the
Company, the Board of Directors decided to accelerate these payments to fiscal
year 2000. The related stock options were not accelerated. Compensation expense
of continuing operations recognized by the PE Biosystems group as a result of
the acceleration of these payments totaled $9.1 million for fiscal 1999.
Accounting for Stock-Based Compensation
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," is applied in accounting for stock-based compensation plans.
Accordingly, no compensation expense has been recognized for its stock option
and employee stock purchase plans, as all options have been issued at fair
market value.
Pro forma net income and earnings per share information, as required by SFAS No.
123, "Accounting for Stock-Based Compensation," have been determined for
employee stock plans under the statement's fair value method. The fair value of
the options was estimated at grant date using a Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
For the year ended June 30, 1999
- --------------------------------------------------------
<S> <C>
Dividend yield .63%
Volatility 34.40%
Risk-free interest rates 5.25%
Expected option life in years 5.23
- --------------------------------------------------------
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. Pro forma information for
the year ended June 30, 1999 is presented below:
<TABLE>
<CAPTION>
(Dollar amounts in millions
except per share amounts) 1999
- --------------------------------------------------------
<S> <C>
Income from continuing operations
As reported $148.4
Pro forma $127.9
Basic earnings from continuing
operations per share
As reported $ 1.48
Pro forma $ 1.27
Diluted earnings from continuing
operations per share
As reported $ 1.44
Pro forma $ 1.24
- --------------------------------------------------------
</TABLE>
For the fiscal years ended June 30, 1998 and 1997, income from continuing
operations was $24.0 million and $132.7 million, respectively. Pro forma
information for fiscal 1998 and 1997 is omitted since PE Biosystems stock was
not part of the capital structure of the Company.
The weighted average fair value of PE Corporation options granted was $33.54,
$24.83, and $20.17 per share for fiscal 1999, 1998, and 1997, respectively. The
weighted average fair value of PE Biosystems options granted was $20.23 for
fiscal 1999.
Since PE Biosystems stock and Celera Genomics stock were not part of the capital
structure of the Company prior to May 6, 1999, there were no stock options
outstanding prior to that date. Therefore, the pro forma effect of PE Biosystems
stock options is not representative of what the effect will be in future years.
65
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
Note 9--Additional Information
The following table provides the major components of selected accounts of the
Combined Statements of Financial Position:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
At June 30, 1999 1998
- --------------------------------------------------------------
<S> <C> <C>
Other Long-Term Assets
Goodwill $ 17.6 $ 69.8
Other 229.5 193.0
- --------------------------------------------------------------
Total other long-term assets $247.1 $262.8
- --------------------------------------------------------------
Other Accrued Expenses
Deferred service contract revenues $ 39.7 $ 28.4
Restructuring liability 5.8 26.9
Other 111.1 65.9
- --------------------------------------------------------------
Total other accrued expenses $156.6 $121.2
- --------------------------------------------------------------
Other Long-Term Liabilities
Accrued postretirement benefits $ 80.2 $ 87.4
Other 58.0 36.6
- --------------------------------------------------------------
Total other long-term liabilities $138.2 $124.0
- --------------------------------------------------------------
</TABLE>
Note 10--Restructuring and
Other Merger Costs
During fiscal 1998, the PE Biosystems group recorded a $48.1 million before-tax
charge for restructuring and other merger costs to integrate PerSeptive into the
PE Biosystems group following the acquisition. The objectives of the integration
plan were to lower PerSeptive's cost structure by reducing excess manufacturing
capacity, achieve broader worldwide distribution of PerSeptive's products, and
combine sales, marketing, and administrative functions. The charge included:
$33.9 million for restructuring the combined operations; $8.6 million for
transaction costs; and $4.1 million of inventory-related write-offs, recorded in
cost of sales, associated with the rationalization of certain product lines.
Additional merger-related period costs of $6.1 million for fiscal 1999 and $1.5
million for fiscal 1998 were incurred for training, relocation, and
communication in connection with the integration.
The $33.9 million restructuring charge included $13.8 million for
severance-related costs and workforce reductions of approximately 170 employees,
consisting of 114 employees in production labor and 56 employees in sales and
administrative support. The remaining $20.1 million represented facility
consolidation and asset-related write-offs and included: $11.7 million for
contract and lease terminations and facility-related expenses in connection with
the reduction of excess manufacturing capacity; $3.2 million for dealer
termination payments, sales office consolidations, and consolidation of sales
and administrative support functions; and $5.2 million for the write-off of
certain tangible and intangible assets and the termination of certain
contractual obligations. Transaction costs of $8.6 million included
acquisition-related investment banking and professional fees.
During the fourth quarter of fiscal 1999, the PE Biosystems group completed the
restructuring actions. The costs to implement the program were $9.2 million
below the $48.1 million charge recorded for fiscal 1998. As a result, during the
fourth quarter of fiscal 1999, the PE Biosystems group recorded a $9.2 million
reduction of charges required to implement the fiscal 1998 plan.
The following table details the major components of the fiscal 1998
restructuring plan:
<TABLE>
<CAPTION>
Facility
Consolidation
and Asset
Related
(Dollar amounts in millions) Personnel Write-Offs Total
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision
Reduction of excess
manufacturing capacity $ 5.1 $11.7 $16.8
Consolidation of sales and
administrative support 8.7 3.2 11.9
Other 5.2 5.2
- ---------------------------------------------------------------------------------
Total provision $13.8 $20.1 $33.9
- ---------------------------------------------------------------------------------
Fiscal 1998 Activity
Reduction of excess
manufacturing capacity $ - $ .4 $ .4
Consolidation of sales and
administrative support .3 1.2 1.5
Other 5.1 5.1
- ---------------------------------------------------------------------------------
Total fiscal 1998 activity $ .3 $ 6.7 $ 7.0
- ---------------------------------------------------------------------------------
Fiscal 1999 Activity
Reduction of excess
manufacturing capacity $ .7 $ 6.9 $ 7.6
Adjustment to decrease liabilities
originally accrued for excess
manufacturing capacity 4.1 3.3 7.4
Consolidation of sales and
administrative support 3.4 .9 4.3
Adjustment to decrease liabilities
originally accrued for
consolidation of sales and
administrative support 1.8 1.8
- ---------------------------------------------------------------------------------
Total fiscal 1999 activity $10.0 $11.1 $21.1
- ---------------------------------------------------------------------------------
Balance At June 30, 1999
Reduction of excess
manufacturing capacity $ .3 $ 1.1 $ 1.4
Consolidation of sales and
administrative support 3.2 1.1 4.3
Other .1 .1
- ---------------------------------------------------------------------------------
Balance at June 30, 1999 $ 3.5 $ 2.3 $ 5.8
- ---------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
Note 11--Commitments and Contingencies
Future minimum payments at June 30, 1999 under non-cancelable operating leases
for real estate and equipment were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
- --------------------------------------------------------
<S> <C>
2000 $ 19.0
2001 21.7
2002 18.3
2003 15.1
2004 12.8
2005 and thereafter 49.8
- --------------------------------------------------------
Total $136.7
- --------------------------------------------------------
</TABLE>
Rental expense was $34.6 million for fiscal 1999, $28.7 million for fiscal 1998,
and $22.2 million for fiscal 1997.
In fiscal 1997, the Company entered into a fifteen-year non-cancelable lease for
a facility in Foster City, California, effective July 1, 2000. Total lease
payments over the fifteen-year period will be approximately $42 million.
As a result of the sale of the Analytical Instruments business, EG&G assumed the
responsibility for the Company's German employee pension obligations. In the
event EG&G fails to fulfill such German obligations, the employees may have
recourse against PE Corporation.
On March 13, 1998, the Company filed a patent infringement action against
Amersham Pharmacia Biotech, Inc. ("Amersham") and Molecular Dynamics, Inc. in
the United States District Court for the Northern District of California. The
Company asserts that two of its patents (U.S. 5,207,886 and U.S. 4,811,218) are
infringed by reason of Molecular Dynamics' and Amersham's sale of certain DNA
analysis systems (e.g., the MegaBACE 1000 System). In response, the defendants
have asserted various affirmative defenses and several counterclaims, including
that the Company is infringing two patents (U.S. 5,091,652 and U.S. 5,459,325)
owned by or licensed to Molecular Dynamics by selling the ABI PRISM 377 DNA
Sequencing Systems.
On April 2, 1998, Amersham filed a patent infringement action against the
Company in the United States District Court for the Northern District of
California. The complaint alleges that the Company is directly, contributorily
or by inducement infringing U.S. Patent No. 5,688,648 ("the '648 patent"),
entitled "Probes Labeled with Energy Transfer Coupled Dyes." The complaint seeks
declaratory judgment that the use of the PE BigDye(TM) Primer and BigDye(TM)
Terminator kits would infringe the '648 patent, as well as injunctive and
monetary relief. The Company answered the complaint, alleging that the '648
patent is invalid and that the Company has not infringed the '648 patent.
On May 21, 1998, Amersham filed a patent infringement action against the Company
in the United States District Court for the Southern District of New York. The
complaint alleges that the Company is infringing, contributing to the
infringement and inducing the infringement of U.S. Patent No. 4,707,235 ("the
'235 patent") entitled "Electrophoresis Method and Apparatus having Continuous
Detection Means." The complaint seeks injunctive and monetary relief. The
Company answered the complaint, alleging that the '235 patent is invalid and
that the Company does not infringe the '235 patent.
The Company has been named as a defendant in several legal actions, including
patent, commercial, and environmental, arising from the conduct of the PE
Biosystems group's normal business activities. Although the amount of any
liability that might arise with respect to any of these matters cannot be
accurately predicted, the resulting liability, if any, will not in the opinion
of management have a material adverse effect on the financial statements of the
PE Biosystems group or the Company.
The holders of PE Biosystems stock are stockholders of the Company and will
continue to be subject to all risks associated with an investment in the
Company, including any legal proceedings and claims affecting the Celera
Genomics group.
Note 12--Financial Instruments
Derivatives
The PE Biosystems group utilizes foreign exchange forward, option, and synthetic
forward contracts and an interest rate swap agreement to manage foreign currency
and interest rate exposures. The principal objective of these contracts is to
minimize the risks and/or costs associated with global financial and operating
activities. The PE Biosystems group does not use derivative financial
instruments for trading or other speculative purposes, nor is the PE Biosystems
group a party to leveraged derivatives.
Foreign Currency Risk Management
Foreign exchange forward, option, and synthetic forward contracts are used
primarily to hedge reported and anticipated cash flows resulting from the sale
of products in foreign locations. Option contracts outstanding at June 30, 1999
were purchased at a cost of $2.5 million. Under these contracts, the Company has
the right, but not the obligation, to purchase or sell foreign currencies at
fixed rates at various maturity dates. These contracts are utilized primarily
when the amount and/or timing of the foreign currency exposures are not certain.
Synthetic forward contracts outstanding at June 30, 1999 were purchased having
no up-front cost. Under these contracts, the Company may participate in some
favorable currency movements but is protected against adverse currency changes.
These contracts are used as an alternative to options to reduce the cost of the
Company's hedging program.
67
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
At June 30, 1999 and 1998, the Company had forward, option, and synthetic
forward contracts outstanding for the sale and purchase of foreign currencies at
fixed rates as summarized in the table below:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
(Dollar amounts
in millions) Sale Purchase Sale Purchase
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Japanese Yen $104.2 $ 6.0 $ 99.4 $ -
French Francs 4.3 16.9 .2
Australian Dollars 12.0 7.5
German Marks 25.4 17.2
Italian Lira 10.4 2.6 21.4 .8
British Pounds 18.6 50.6 27.0 12.6
Swiss Francs 7.5 .7 8.2 4.0
Swedish Krona 8.9 6.1
Danish Krona 8.1 5.3
Singapore Dollars 9.3 3.3 .2
Netherland Guilders 16.1
Euro 28.2
Other 17.1 21.3 .2
- --------------------------------------------------------
Total $254.0 $79.3 $230.5 $17.8
- --------------------------------------------------------
</TABLE>
Foreign exchange contracts are accounted for as hedges of firm commitments and
anticipated foreign currency transactions. With respect to firm commitments,
unrealized gains and losses are deferred and included in the basis of the
transaction underlying the commitment. Gains and losses on foreign currency
transactions are recognized in income and offset the foreign exchange losses and
gains, respectively, on the related transactions. The amount of the contracts
covering anticipated transactions is marked to market and recognized in income.
Interest Rate Risk Management
The Company maintains an interest rate swap in conjunction with a five-year
Japanese Yen debt obligation (see Note 3). The interest rate swap agreement
involves the payment of a fixed rate of interest and the receipt of a floating
rate of interest without the exchange of the underlying notional loan principal
amount. Under the terms of this contract, the Company will make fixed interest
payments of 2.1% while receiving interest at a LIBOR floating rate. No other
cash payments will be made unless the contract is terminated prior to maturity,
in which case the amount to be paid or received in settlement is established by
agreement at the time of termination. The agreed upon amount usually represents
the net present value at current interest rates of the remaining obligation to
exchange payments under the terms of the contract.
Based on the level of interest rates prevailing at June 30, 1999, the fair value
of the Company's floating rate debt approximated its carrying value. There would
be a payment of $1.0 million to terminate the related interest rate swap
contract, which would equal the unrealized loss. Unrealized gains or losses on
debt or interest rate swap contracts are not recognized for financial reporting
purposes unless the debt is retired or the contracts are terminated prior to
maturity.
A change in interest rates would have no impact on the Company's reported
interest expense and related cash payments because the floating rate debt and
fixed rate swap contract have the same maturity and are based on the same
interest rate index.
Concentration of Credit Risk
The forward contracts, options, synthetic forwards, and swaps used by the
Company in managing its foreign currency and interest rate exposures contain an
element of risk that the counterparties may be unable to meet the terms of the
agreements. However, the Company minimizes such 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.
Fair Value
The fair value of foreign currency forward, option and synthetic forward
contracts, as well as interest rate swaps, is estimated based on quoted market
prices of comparable contracts and reflects the amounts the Company would
receive (or pay) to terminate the contracts at the reporting date. The following
table presents notional amounts and fair values of the Company's derivatives at
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------- -----------------
(Dollar amounts Notional Fair Notional Fair
in millions) Amount Value Amount Value
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Forward contracts $187.9 $ 2.6 $123.9 $2.1
Purchased options $ 44.0 $ 3.4 $ 76.7 $1.3
Synthetic forwards $101.4 $ 2.9 $ 41.5 $1.7
Interest rate swap $ 31.5 $(1.0) $ 27.0 $(.9)
- --------------------------------------------------------
</TABLE>
68
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
The fair value of other significant financial instruments held or owed by the
Company is estimated using various methods. Cash and short-term investments
approximate their carrying amount due to the duration of these instruments. Fair
values of minority equity investments and notes receivable 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 other financial instruments at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(Dollar amounts Carrying Fair Carrying Fair
in millions) Amount Value Amount Value
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and short-term
investments $236.5 $236.5 $84.1 $84.1
Minority equity
investments $ 43.4 $ 43.4 $29.2 $29.2
Note receivable $150.0 $150.0
Short-term debt $ 3.9 $ 3.9 $12.1 $12.1
Note payable to the
Celera Genomics
group $150.0 $150.0
Long-term debt $ 31.5 $ 32.5 $33.7 $34.6
- ---------------------------------------------------------
</TABLE>
Net unrealized gains and losses on minority equity investments are reported as a
separate component of comprehensive income (loss).
Note 13--Quarterly Financial Information
(Unaudited)
The following is a summary of quarterly financial results:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- --------------- ------------- --------------
(Dollar amounts in millions
except per share amounts) 1999 1998 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $251.2 $194.1 $296.2 $215.3 $329.3 $247.5 $345.0 $283.2
Gross margin 139.0 100.4 163.8 120.7 177.9 131.3 178.1 156.0
Income (loss) from continuing operations 21.5 18.4 27.6 (6.1) 46.3 (16.9) 53.0 28.6
Income (loss) from discontinued operations (0.9) 3.9 (3.2) 13.4 5.2 12.3 77.9 11.1
Net income (loss) 20.6 22.3 24.4 7.3 51.5 (4.6) 130.9 39.7
- ---------------------------------------------------------------------------------------------------------------------
Dividends per share $ .085
Income per share from continuing operations
Basic $ .52
Diluted $ .50
Income per share from discontinued operations
Basic $ .76
Diluted $ .74
Net income per share
Basic $ 1.28
Diluted $ 1.24
- ---------------------------------------------------------------------------------------------------------------------
Price range of common stock
High $ 60-5/8
Low $ 50
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
Fiscal 1999 price ranges are for the period from May 6, 1999 through June 30,
1999. On May 6, 1999, the Perkin-Elmer Corporation was merged into PE
Corporation, a new Delaware corporation. The recapitalization of the company
resulted in the issuance of two new classes of common stock called PE
Corporation-PE Biosystems Group Common Stock and PE Corporation-Celera Genomics
Group Common Stock.
On June 17, 1999, the Board of Directors announced a two-for-one split of PE
Biosystems group common stock. The two-for-one stock split was effected in the
form of a 100% stock dividend paid to stockholders of record as of the close of
business on July 12, 1999. All PE Biosystems share and per share data reflect
this split.
Events Impacting Comparability
Fiscal 1999 First, second, third, and fourth quarter results included
before-tax costs of $.9 million, $1.1 million, $1.6 million, and $7.7 million,
respectively, related to acquisitions. The fourth quarter charge included a cost
of sales write-off of $14.5 million for the impairment of assets associated with
Molecular Informatics (see Note 1), and a $9.2 million reduction of liabilities
in connection with the PerSeptive acquisition (see Note 10). Second, third, and
fourth quarter results included before-tax costs of $1.1 million, $1.6 million,
and $12.1 million, respectively, in connection with the recapitalization and
transformation of the Company. Third and fourth quarter results included
before-tax gains of $2.6 million and $5.8 million, respectively, related to the
Company's investments. The fourth quarter included a before-tax gain of $2.3
million on foreign exchange contracts. Second and fourth quarter results
included certain tax benefits of $4.8 million and $17.4 million, respectively.
The tax benefit recorded in the fourth quarter reflects a reduction in the tax
valuation allowance (see Note 4). The aggregate after-tax effect of the above
items reduced first and second quarter income from continuing operations by $.8
million and $2.0 million, respectively, and increased third and fourth quarter
income from continuing operations by $4.1 million and $3.9 million,
respectively. The aggregate net effect of the above items for the fourth quarter
increased income from continuing operations by $.08 per diluted share.
Fiscal 1998 First and fourth quarter results included before-tax gains of $.8
million in each quarter relating to the release of contingencies on minority
equity investments (see Note 2). Second quarter results included a $28.9 million
before-tax charge for acquired research and development (see Note 2). Third and
fourth quarter results included before-tax charges for restructuring and other
merger costs of $47.0 million and $1.1 million, respectively (see Note 10).The
third quarter also included one-time royalty revenues and capitalized certain
legal expenses relating to the successful defense of certain patents. The net
effect of these items increased third quarter income from continuing operations
by approximately $4.2 million.
Note 14--Accumulated Other Comprehensive Income (Loss)
During fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." The provisions of this statement require disclosure of total
comprehensive income. Total comprehensive income includes net income, foreign
currency translation adjustments, unrealized gains and losses on
available-for-sale investments, and minimum pension liability adjustments.
Accumulated other comprehensive income (loss) for fiscal 1999, 1998, and 1997
was as follows:
<TABLE>
<CAPTION>
Foreign Unrealized Minimum
Currency Gain Pension
Translation (Loss) on Liability
(Dollar amounts in millions) Adjustments Investments Adjustment
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1996 $ (.9) $ 23.2 $ (29.4)
Activity (4.2) (20.1) 28.7
- --------------------------------------------------------------------------
Balance at June 30, 1997 (5.1) 3.1 (.7)
Activity (2.7) (4.5) .3
- --------------------------------------------------------------------------
Balance at June 30, 1998 (7.8) (1.4) (.4)
Activity (5.4) 11.9 (1.7)
- --------------------------------------------------------------------------
Balance at June 30, 1999 $ (13.2) $ 10.5 $ (2.1)
- --------------------------------------------------------------------------
</TABLE>
Note 15--Discontinued Operations
Effective May 28, 1999, the Company completed the sale of its Analytical
Instruments business to EG&G, Inc. Analytical Instruments, formerly a unit of
the Company's PE Biosystems group, develops, manufactures, markets, sells, and
services analytical instruments used in a variety of markets. As part of the
sale, the rights to the "Perkin-Elmer" name were transferred to EG&G.
The aggregate consideration received by the Company was $425 million, consisting
of $275 million in cash and one-year secured promissory notes in the aggregate
principal amount of $150 million which bear interest at a rate of 5% per annum.
The Company recognized a net gain on disposal of discontinued operations of
$100.2 million, net of $87.8 million of income taxes. The transaction is subject
to post-closing adjustments pursuant to the terms of the agreement with EG&G.
Summary results prior to discontinuance were as follows:
<TABLE>
<CAPTION>
For the Years Ended
For the Eleven June 30,
(Dollar amounts Months Ended ---------------
in millions) May 28, 1999 1998 1997
- --------------------------------------------------------
<S> <C> <C> <C>
Net revenues $479.4 $586.8 $604.9
Restructuring charges 13.0
Total costs and expenses 509.7 532.6 570.2
(Benefit) provision for
income taxes (9.2) 13.5 6.8
- --------------------------------------------------------
(Loss) income from
discontinued operations $(21.1) $ 40.7 $ 27.9
- --------------------------------------------------------
</TABLE>
70
<PAGE>
PE Biosystems Group
Notes to Combined Financial Statements continued
There were no remaining assets and liabilities within discontinued operations at
June 30, 1999. The components of net assets of discontinued operations included
in the Combined Statements of Financial Position at June 30, 1998 were as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998
- --------------------------------------------------------
<S> <C>
Current Assets
Accounts receivable, net $145.9
Inventories 103.0
Prepaid expenses and other current assets 35.2
Current Liabilities
Accounts payable 45.7
Accrued expenses 98.4
- --------------------------------------------------------
Current net assets 140.0
- --------------------------------------------------------
Long-term Assets
Property, plant and equipment, net 73.3
Other long-term assets 37.7
Long-term Liabilities
Other long-term liabilities 55.1
- --------------------------------------------------------
Long-term net assets 55.9
- --------------------------------------------------------
Net assets of discontinued operations $195.9
- --------------------------------------------------------
</TABLE>
Income Taxes
(Loss) income before income taxes of discontinued operations for the eleven
months ended May 28, 1999, and fiscal 1998 and 1997 is summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
United States $(36.2) $34.1 $22.7
Foreign 5.9 20.1 12.0
- ----------------------------------------------------------
Total $(30.3) $54.2 $34.7
- ----------------------------------------------------------
</TABLE>
The components of the (benefit) provision for income taxes of discontinued
operations for the eleven months ended May 28, 1999, and fiscal 1998 and 1997,
consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- --------------------------------------------------------
<S> <C> <C> <C>
Currently payable
Domestic $(13.7) $(3.7) $(1.0)
Foreign 4.5 7.8 5.1
- --------------------------------------------------------
Total currently payable (9.2) 4.1 4.1
- --------------------------------------------------------
Deferred
Domestic 4.9 4.8
Foreign 4.5 (2.1)
- --------------------------------------------------------
Total deferred 9.4 2.7
- --------------------------------------------------------
(Benefit) provision for
income taxes
from discontinued operations $ (9.2) $13.5 $ 6.8
- --------------------------------------------------------
</TABLE>
For the eleven months ended May 28, 1999, and fiscal 1998 and 1997, the
effective tax rates for discontinued operations were 30%, 25%, and 20%,
respectively. The difference between the effective tax rate and the statutory
tax rate of 35% was mainly attributed to benefits from the use of U.S.
alternative minimum tax credit carryforwards, the benefits from the use of a
foreign sales corporation and federal research tax credits, and restructuring
charges.
71
<PAGE>
PE Biosystems Group
Report of Management
To the Stockholders of
PE Corporation
Management is responsible for the accompanying combined financial statements,
which have been prepared in conformity with generally accepted accounting
principles. In preparing the financial statements, it is necessary for
management to make informed judgments and estimates which it believes are in
accordance with generally accepted accounting principles appropriate in 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 judgements are required
to assess and balance the costs and expected benefits of a system of internal
accounting controls. Adherence to these polices and procedures is reviewed
through a coordinated audit effort of the Company's internal audit staff and
independent accountants.
The Audit 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 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
PE Corporation
In our opinion, the accompanying combined statements of financial position and
the related combined statements of operations, of group equity and comprehensive
income (loss), and of cash flows present fairly, in all material respects, the
financial position of the PE Biosystems Group of PE Corporation at June 30, 1999
and 1998, and the results of its operations and its cash flows for each of the
three fiscal years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the management of PE Corporation; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards 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 the opinion expressed above.
As described above and more fully in Note 1 to the PE Biosystems Group combined
financial statements, the PE Biosystems Group is a group of PE Corporation;
accordingly, the combined financial statements of the PE Biosystems Group should
be read in conjunction with the audited financial statements of PE Corporation.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
July 30, 1999
72
<PAGE>
Celera Genomics Group
Selected Financial Data
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Operations
Net revenues $ 12,541 $ 4,211 $ 903 $ 159
Net loss (44,894) (8,315) (30,247) (2,589)
Per share of common stock
Basic and diluted (1.79)
- -------------------------------------------------------------------------------------------------------------------
Other Information
Cash and cash equivalents $ 71,491 $ - $ - $ -
Note receivable from the PE Biosystems group 150,000
Working capital (deficit) 192,803 (1,160) (421) (340)
Capital expenditures 94,541 3,648 411 1,073
Total assets 344,720 6,339 2,983 977
Group equity (deficit) 293,867 (1,259) (3,464) 611
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The selected financial data should be read with the combined financial
statements and the consolidated financial statements. There is no selected
financial data for fiscal 1995 since the Celera Genomics group commenced
business in fiscal 1996.
On May 6, 1999, The Perkin-Elmer Corporation was merged into a subsidiary of PE
Corporation, a new Delaware corporation. The recapitalization of the Company
resulted in the issuance of two new classes of common stock called PE
Corporation-Celera Genomics Group Common Stock and PE Corporation-PE Biosystems
Group Common Stock.
Items impacting the comparability of information included $5.6 million of
charges for fiscal 1999 relating to the recapitalization and transformation of
the Company; and acquired research and development charges of $26.8 million for
fiscal 1997 and $2.1 million for fiscal 1996.
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Management's Discussion and Analysis
Management's Discussion of Operations
The PE Corporation ("PE" or the "Company") is comprised of two separate business
segments in continuing operations: the Celera Genomics group and the PE
Biosystems group. The performance of these businesses is reflected separately by
two classes of common stock: Celera Genomics stock and PE Biosystems stock. The
Celera Genomics group was formed for the purpose of generating and
commercializing genomic information to accelerate the understanding of
biological processes and assisting pharmaceutical, biotechnology and life
science research entities. The Celera Genomics group is engaged principally in
the generation, sale and support of genomic information databases and related
information management and analysis software; discovery, validation and
licensing of proprietary gene products, genetic markers and information
regarding genetic variability; and related consulting and contract research and
development services. A key component of the Celera Genomics group's strategy is
the sequencing of the entire human genome, which it expects to be ready in
calendar year 2001. The PE Biosystems group manufactures and markets biochemical
instrument systems and associated consumable products for life science research
and related applications.
The Celera Genomics group also includes the business and operations of GenScope
and AgGen. GenScope provides genomic-related contract research and discovery
services, utilizing AFLP-based gene expression profiling technology. AgGen is a
provider of genetic analysis services for plant and animal breeding. The
purchase of Linkage Genetics, Inc. in 1997 and Zoogen Inc. in 1996 were combined
with our company's applied agriculture unit to form AgGen. In fiscal 1999, these
businesses were integrated into the core business of providing genomic
information, and related gene discovery and genomic services.
Operations prior to September 30, 1998 were principally funded from working
capital, collaborative arrangements and contract research services. Net losses
for fiscal 1999, 1998, and 1997 were $44.9 million, $8.3 million, and $30.2
million, respectively. Fiscal 1999 results reflected the significant increase in
R&D expenditures to support the genomic sequencing efforts. Fiscal 1999 included
a non-recurring before-tax cost of $4.6 million incurred in connection with the
recapitalization of our company and $1.0 million for costs related to the
acceleration of certain long-term compensation programs. Results through fiscal
1998 primarily reflected the operations of GenScope and AgGen. Fiscal 1997
results included charges of $26.8 million for purchased in-process research and
development. The Celera Genomics group anticipates that net losses will continue
and will increase through at least fiscal 2001.
You should read this discussion with our combined financial statements and
consolidated financial statements. Historical results and percentage
relationships are not necessarily indicative of operating results for any future
periods.
Events Impacting Comparability
Acquisitions and Investments
During the third quarter of fiscal 1999, our company acquired a 49% interest in
Agrogene S.A. for $1.2 million. The investment complements the Celera Genomics
group's automated DNA sequencing and genotyping services in the agricultural
field.
During the fourth quarter of fiscal 1997, our company acquired Linkage, Inc., a
provider of genetic analysis services in the agriculture industry. At the
acquisition date, the technological feasibility of the acquired technology had
not been established and the acquired technology had no future alternative uses.
The acquisition cost of $1.4 million was expensed as purchased in-process
research and development.
During the third quarter of fiscal 1997, our company acquired GenScope, Inc. for
$26.8 million. GenScope, founded in 1995, represented a development stage
venture with no operating history. GenScope had effectively no revenues and only
limited R&D contract services. At the acquisition date, technological
feasibility of the acquired technology right had not been established and the
acquired technology right had no future alternative uses. Our company obtained
the right to utilize AFLP-based gene expression profiling technology in the
field of human health, but did not obtain any core technology or other rights.
GenScope's limited balance sheet, with assets of approximately $.2 million, had
yet to deliver commercial value. Therefore, of the $26.8 million paid for
GenScope, $25.4 million was charged to purchased in-process technology and $1.4
million was allocated to technology rights attributable to GenScope's AFLP-based
gene expression profiling technology. AFLP is an enhancement of the polymerase
chain reaction ("PCR") process that allows selective analysis of any portion of
genetic material without the specific, prior sequence information normally
required for PCR. Of the $25.4 million expensed as in-process research and
development, $5.5 million represented a contingent liability due on the issuance
of a process patent for technology under development. Through June 30, 1999,
GenScope incurred approximately $12.2 million in additional research and
development costs to further develop the AFLP technology in the field of human
health. Our company anticipates spending an additional $2.2 million in fiscal
2000 to substantially complete such project.
Results of Operations--1999 Compared
With 1998
The Celera Genomics group reported a net loss of $44.9 million for fiscal 1999
compared with a net loss of $8.3 million for fiscal 1998. The significant
increase in the net loss reflected the establishment and start-up of operations
to support the expanded sequencing, data management, and software development
activities of the business.
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Celera Genomics Group
Management's Discussion and Analysis continued
Net revenues for the Celera Genomics group were $12.5 million for fiscal 1999
compared with $4.2 million for fiscal 1998. Net revenues for agricultural
genotyping and gene discovery services were $8.4 million for fiscal 1999, an
increase of $4.5 million over the prior period. The increase included $3.2
million attributable to a three-year contract to provide expression-based gene
discovery services in the agricultural market. The contract commenced in the
first quarter of fiscal 1999. Revenues from the Celera Genomics group's new
genomic information and database products were $2.8 million for fiscal 1999,
mainly from early access subscriptions. Revenues for genomic contract services
increased $1.0 million for fiscal 1999 as a result of increased contract
research services using AFLP technology.
R&D expenses increased $38.1 million to $48.4 million for fiscal 1999 from $10.3
million for fiscal 1998 primarily as a result of establishing and operating the
sequencing facility and computing center of the new genomic information
business.
SG&A expenses were $28.3 million for fiscal 1999 compared with $6.7 million for
the prior year. The increase resulted from expenses associated with the start-up
and ongoing operations of the new genomic information business. Corporate
overhead and administrative shared services were $5.1 million for fiscal 1999
compared with $1.7 million for fiscal 1998. Fiscal 1999 SG&A expenses included
$1.0 million for costs related to the acceleration of certain long-term
compensation programs as a result of the recapitalization of our company and the
attainment of performance targets.
During fiscal 1999, the Celera Genomics group was allocated a before-tax special
charge of $4.6 million for costs incurred in connection with the
recapitalization of our company. The Celera Genomics group and the PE Biosystems
group were each allocated 50% of the $9.2 million total recapitalization costs
incurred by our company. These costs included investment banking and
professional fees.
Interest income was $1.2 million for fiscal 1999. Interest income included $.5
million of interest on cash balances and $.7 million of interest on the $150
million note receivable from the PE Biosystems group.
The effective income tax rate was 34% for fiscal 1999 and 35% for fiscal 1998.
See Note 1 to the Celera Genomics group combined financial statements for a
discussion of allocations of federal and state income taxes.
Results of Operations--1998 Compared
With 1997
The Celera Genomics group reported a net loss of $8.3 million for fiscal 1998
compared with a net loss of $30.2 million for the prior year, or a net loss of
$3.4 million excluding the $26.8 million for purchased in-process research and
development charged in connection with the GenScope and Linkage acquisitions.
Net revenues for the Celera Genomics group were $4.2 million for fiscal 1998
compared with $.9 million for fiscal 1997. Revenues from genetic analysis
services increased to $3.9 million for fiscal 1998 primarily from the animal
business. Revenues were $.3 million in fiscal 1998 from contract research
utilizing AFLP-based gene expression profiling technology. Fiscal 1997 revenues
were entirely attributable to genetic analysis services.
R&D expenses were $10.3 million for fiscal 1998 compared with $4.0 million for
fiscal 1997. Fiscal 1997 included the operations of Linkage and GenScope from
the date of acquisition.
SG&A expenses were $6.7 million for fiscal 1998 compared with $2.2 million for
fiscal 1997. Fiscal 1998 included $1.7 million of corporate overhead and
administrative shared services. The amount of allocated corporate overhead and
shared services for fiscal 1997 was $.2 million. Fiscal 1997 included the
operations of Linkage and GenScope from the date of acquisition.
The effective income tax rate was 35% for both fiscal 1998 and fiscal 1997.
Fiscal 1997 included a tax benefit of $1.9 million on a before-tax loss of $32.1
million. The fiscal 1997 charge of $26.8 million for acquired research and
development was not deductible for tax purposes. See Note 1 to the Celera
Genomics group combined financial statements for a discussion of allocations of
federal and state income taxes.
Management's Discussion of Financial Resources and Liquidity
The development of the Celera Genomics group's products and services requires
substantial funding. No organization has ever attempted to combine in one
business organization all of the Celera Genomics group's businesses. At
September 30, 1998, our company allocated to the Celera Genomics group a $330
million short-term note receivable from the PE Biosystems group. The $330
million note represented an allocation of the Company's capital to the Celera
Genomics group and did not result in the PE Biosystems group holding an equity
interest in the Celera Genomics group. Accordingly, no interest was ascribed to
the note. The allocation of capital represented management's decision to
allocate a portion of our company's capital to the Celera Genomics group and the
remaining capital to the PE Biosystems group prior to the effective date of the
recapitalization. The note receivable was liquidated on May 28, 1999 in exchange
for a portion of the proceeds received from the sale of the Analytical
Instruments business and a new note receivable from the PE Biosystems group for
$150 million was established. The new note receivable is for a term of one year,
bears an interest rate of 5% per annum, and is payable on demand without
penalty. At June 30, 1999, the outstanding balance of the note receivable was
$150 million.
PE intends to allocate tax benefits to the Celera Genomics group for losses
incurred, resulting in up to $75 million of additional cash resources for the
Celera Genomics group. PE also intends to secure financing of $46 million in
fiscal 2000 specifically for the Rockville, Maryland facility acquired in fiscal
1999. Management
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Celera Genomics Group
Management's Discussion and Analysis continued
believes that the $330 million funding, allocated tax benefits, financing for
the facility, and anticipated revenues of the Celera Genomics group should be
sufficient to fund its current business objectives through 2001.
In addition, our board of directors has adopted a financing policy, included in
Note 1 to the Celera Genomics group combined financial statements, which will
permit the PE Biosystems group to make loans to the Celera Genomics group and to
make equity contributions to the Celera Genomics group in exchange for an equity
interest in the Celera Genomics group.
Significant Changes in the Combined Statements of Financial Position
Net property, plant and equipment increased $100.0 million to $104.2 million at
June 30, 1999. The increase was primarily a result of significant capital
expenditures to establish the Celera Genomics group's Rockville, Maryland
facilities.
At June 30, 1999, the Celera Genomics group had a $9.9 million tax benefit
receivable from the PE Biosystems group. This amount represents the tax benefit
for the fourth quarter of fiscal 1999. Management settles the tax benefit
receivable on a quarterly basis. See Note 1 to the Celera Genomics group
combined financial statements for a discussion of allocations of federal and
state income taxes.
Accounts payable increased by $19.4 million to $19.9 million at June 30, 1999 as
a result of the Celera Genomics group's rapid progress in establishing its
infrastructure. The balance at June 30, 1999 included $9.0 million for capital
expenditures, as previously described, and $5.2 million for purchases from the
PE Biosystems group.
Accrued salaries and wages increased $4.0 million to $4.2 million at June 30,
1999 from $.2 million at June 30, 1998. The increase reflected the growth in the
number of employees during fiscal 1999 and the timing of payments.
Deferred revenues were $12.0 million at June 30, 1999 compared with $.3 million
at June 30, 1998. The increase pertains primarily to early access subscriptions
to the new genomic information database product.
Other accrued expenses were $9.3 million at June 30, 1999, an increase of $8.2
million. At June 30, 1999, the Celera Genomics group accrued a liability of $2.5
million for its portion of our company's costs associated with the
recapitalization of PE and a liability of $1.3 million for certain long-term
compensation program costs.
Combined Statements of Cash Flows
Cash used by operating activities was $22.8 million for fiscal 1999 compared
with $6.9 million for the prior year. The increase in cash used by operating
activities resulted primarily from net operating losses and the tax benefit
receivable from the PE Biosystems group. This was offset partially by an
increase of $11.7 million in deferred revenues and an increase of $19.4 million
in accounts payable. For fiscal 1998, net cash used by operating activities was
$6.9 million compared with $3.1 million for fiscal 1997 reflecting higher net
operating losses for fiscal 1998.
Net cash used by investing activities of $95.8 million for fiscal 1999 was
comprised of capital expenditures of $94.5 million and an equity investment in
Agrogene of $1.2 million. Capital expenditures were $3.6 million for the prior
year. Capital expenditures increased significantly as a result of the
establishment and start-up of operations at the Celera Genomics group's
Rockville, Maryland facilities. Included in the increase was $46.3 million for
land and buildings to house its headquarters and $22.9 million for improvements
thereon. Additionally, the increase included $9.0 million for assets received
but not yet paid, $8.1 million related to data management software licenses and
$.9 million for facility-related items. Fiscal 1999 capital expenditures also
included $8.4 million for the PE Biosystems group's ABI PRISM(R) 3700 DNA
Analyzers and $1.6 million for other instrumentation purchased from the PE
Biosystems group. Net cash used by investing activities of $3.6 million for
fiscal 1998 primarily reflected our company's capital investment in the genomics
services business. Net cash used by investing activities for fiscal 1997 was
$23.1 million and related to the acquisition of GenScope in the third quarter of
fiscal 1997 and Linkage in the fourth quarter of fiscal 1997. See Note 2 to the
Celera Genomics group combined financial statements.
Net cash provided by financing activities was $190.0 million for fiscal 1999
reflecting the initial capitalization of $330 million offset partially by the
note receivable of $150 million. Net cash provided by financing activities for
fiscal 1998 was $10.5 million, attributable entirely to the funding of that
year's operations by PE.
Year 2000
In fiscal 1997, PE initiated a worldwide program to assess the expected impact
of the Year 2000 date recognition problem on our existing internal computer
systems; our non-information technology systems, including embedded and process
control systems; our product offerings; and our significant suppliers. The
operations of the Celera Genomics group are included within this program. The
purpose of this program is to ensure the event does not have a material adverse
effect on our business operations.
Regarding PE's existing internal computer systems, the program involves a mix of
purchasing new systems and modifying existing systems, with the emphasis on
replacement of applications developed in-house. Replacement projects are
currently underway, and are anticipated to be substantially completed for all
business-critical systems worldwide by December 31, 1999. The program includes
replacement of applications that, for reasons other than Year 2000
noncompliance, had been previously selected for replacement. The replacement
projects, which began in fiscal 1997, are expected to offer improved
functionality and commonality over current systems, while at the same time
addressing the Year 2000 problem.
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Celera Genomics Group
Management's Discussion and Analysis continued
With respect to PE's current product offerings, the program involves performing
an inventory of current products, assessing their compliance status, and
constructing a remediation plan where appropriate. All of the Celera Genomics
group's current product offerings are Year 2000 compliant.
The program also addresses the Year 2000 compliance efforts of PE's significant
suppliers, vendors, and third-party interface systems. As part of this analysis,
PE has identified and prioritized these suppliers, vendors, and third parties
and has sought written assurances from them that they will be Year 2000
compliant. There can be no assurance that the systems of other companies with
which PE deals, or on which PE's systems rely will be timely converted, or that
any such failure to convert by another company could not have a material adverse
effect on PE. PE has not fully determined the extent to which PE's interface
systems may be impacted by third parties' systems, which may not be Year 2000
compliant, but are addressing this issue in our contingency plans noted below.
As of June 1999, PE was over 90% complete in accomplishing the objectives
established in its program. PE's preliminary estimate of the total cost for this
multi-year program covering 3-4 years is approximately $150 million. This
includes amounts previously budgeted for information technology infrastructure
improvements and estimates of remediation costs on components not yet fully
assessed. Incremental spending has not been and is not expected to be material
because most Year 2000 compliance costs will be met with amounts that are
normally budgeted for procurement and maintenance of PE's information systems,
production, and facilities equipment. The redirection of spending to implement
Year 2000 compliance plans may in some instances delay productivity
improvements.
PE has also engaged a consulting firm to provide periodic assessments of PE's
Year 2000 project plans and progress. Because of the importance of addressing
the Year 2000 problem, PE has created a Year 2000 business continuity planning
team which has developed, and will continue to develop, business contingency
plans to address issues that may not be corrected by implementation of PE's Year
2000 compliance plan in a timely manner. Contingency plans include
identification of systems and third party risks, an analysis of strategies and
available resources to restore operations, and a recovery program that
identifies participants, processes, and significant equipment. If PE is not
successful in implementing its Year 2000 compliance plan, or there are delays in
and/or increased costs associated with implementing such changes, the Year 2000
problem could have a materially adverse effect on PE's consolidated results of
operations and financial condition.
At this stage of the process, PE believes that it is difficult to specifically
identify the cause of the most reasonable worst case Year 2000 scenario. A
reasonable worst case Year 2000 scenario would be the failure of significant
suppliers and vendors to have corrected their own Year 2000 issues which could
cause disruption of PE's operations and have a materially adverse effect on PE's
financial condition. The impact of such disruption cannot be estimated at this
time. In the event PE believes that any of its significant suppliers or vendors
are unlikely to be able to resolve their own Year 2000 issues, PE's contingency
plans include seeking additional sources of supply.
Recently Issued Accounting Standards
and Other
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The provisions of the statement require the
recognition of all derivatives 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 depends on the
intended use of the derivative and the resulting designation. The Celera
Genomics group is required to implement the statement in the first quarter of
fiscal 2001. The Celera Genomics group currently believes the statement will not
have a material impact on its combined financial statements.
We continue to apply APB No. 25 in accounting for our stock-based compensation
plans. Accordingly, no compensation expense has been recognized for these plans,
as all options have been issued at fair value. The effect of accounting for such
plans at fair value, under SFAS No. 123, "Accounting for Stock Based
Compensation," would be to increase fiscal 1999 net loss by $2.6 million and
diluted loss per share by $.10. The method used to determine the fair value is
the Black-Scholes option pricing model. Accordingly, changes in dividend yield,
volatility, interest risk and option life could have a material effect on the
fair value. See Note 7 to the Celera Genomics group combined financial
statements for a more detailed discussion regarding the accounting for
stock-based compensation at fair value.
Outlook
The Celera Genomics group expects to see an expansion in the customer base for
the new genomic information and database products, with corresponding increases
in revenues throughout fiscal 2000. Additionally, the group expects to benefit
from a three-year gene discovery agreement with Rhone-Poulenc Rorer ("RPR") to
identify therapeutic targets for a variety of human diseases by applying
AFLP-based gene expression profiling technology to RPR's disease model systems.
Under the terms of the agreement, RPR will pay upfront fees, as well as
milestone payments and royalties in connection with commercialization of any
drugs resulting from the alliance.
Despite the potential for increased revenues, the group expects that it will
continue to incur significant operating losses for fiscal 2000. Higher R&D
spending will be needed to support the expected ramp-up in sequencing
activities. Also, development costs associated with information management and
analysis software will
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Celera Genomics Group
Management's Discussion and Analysis continued
increase. Our company believes the Celera Genomics group has adequate funding to
meet its working capital requirements through 2001.
Forward-Looking Statements
Certain statements contained in this report, including the Outlook section, are
forward-looking and are subject to a variety of risks and uncertainties. These
statements may be identified by the use of forward-looking words or phrases such
as "believe," "expect," "anticipate," "should," "planned," "estimated," and
"potential," among others. These forward-looking statements are based on our
current expectations. The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for such forward-looking statements. In order to comply
with the terms of the safe harbor, we note that a variety of factors could cause
our actual results and experience to differ materially from the anticipated
results or other expectations expressed in such forward-looking statements. The
risks and uncertainties that may affect the operations, performance,
development, and results of our businesses include, but are not limited to:
Celera Genomics may not achieve profitability. Celera Genomics has earned small
amounts of revenues to date and expects that it will continue to incur net
operating losses at least through 2001. As a new business, Celera Genomics faces
significant challenges in simultaneously launching and integrating its
operations, pursuing key scientific goals, and attracting customers for its
information products and services. Celera Genomics has a small number of
customers, the revenues from which will offset only a small portion of its
expenses. In order to meet its business plan, Celera Genomics will require
additional customers in the next few years. In addition, even if Celera Genomics
is able to enter into contracts with additional customers, those contracts may
be subject to milestones that may not be achieved. As a result, there is a high
degree of uncertainty that Celera Genomics will be able to achieve profitable
operations.
Celera Genomics' business plan is unique and untested. No organization has ever
attempted to combine in one business organization all of Celera Genomics'
businesses. The creation of a genomics database targeted at a wide variety of
customers, from pharmaceutical companies to university researchers, has a number
of risks, including pricing and volume issues, technology and access concerns,
computer security, pursuit of key scientific goals, and protection of
intellectual property. As a result, the creation of a business that includes all
of Celera Genomics' businesses has unique risks.
Shotgun sequencing strategy has not yet been tested on the scale and complexity
of the human genome. Some genomic scientists have criticized Celera Genomics'
sequencing strategy, known as "whole genome shotgun sequencing," as having
limitations when applied on a large scale in sequencing the human genome. Others
have stated that the human genome cannot be sequenced using whole genome shotgun
sequencing. Although scientists at The Institute for Genomic Research have used
the whole genome shotgun strategy to sequence the genomes of other organisms,
the strategy has not been used to sequence a genome with the size and complexity
of the human genome. Failure to sequence or assemble the human genome in a
timely manner may have a material adverse effect on Celera Genomics' ability to
satisfy customer requirements and achieve its business goals.
New DNA sequencers may not perform at expected levels and the integration of
over 300 sequencers may be difficult. Celera Genomics' success is heavily
dependent on the successful operation of PE Biosystems' new DNA sequencer.
Celera Genomics plans to use more than 300 of the new DNA sequencers on a
full-time basis, a scale of operation never before attempted. Failure of the DNA
sequencers to perform at expected levels, or failure of Celera Genomics to
integrate successfully its DNA sequencers in its laboratory, would materially
adversely affect Celera Genomics' ability to sequence at the rate required to
complete the human genome on a timely basis, to achieve milestones in contracts
with customers, and to perform research services effectively.
Realizing revenues from polymorphism data may be difficult. Celera Genomics
believes that the polymorphisms it discovers will add considerable value to its
integrated information system. Polymorphism data reveals information about
genetic variability among individuals. Its use in the testing of new drugs and
the diagnosis of disease, however, is largely untested. Although there has been
some early success in linking certain polymorphisms to susceptibility to disease
and outcomes of drug therapy, pharmaceutical companies are not yet certain how
polymorphism data can be used, or if it can be used on a cost-effective basis,
in clinical trials or in drug development. Furthermore, public acceptance of the
use of polymorphism data is uncertain. Current and future patient privacy and
health care laws and regulations issued by the U.S. Food and Drug Administration
may also limit the use of this data.
The ability of Celera Genomics to protect its intellectual property rights will
affect its polymorphism program. Such protection is uncertain due to the
uncertainty of patent law relating to genomics in general and the novelty of
this particular aspect of genomics. In addition, Celera Genomics will be
dependent on new technology, including technology provided by PE Biosystems, to
make the use of polymorphism information cost-effective so as to make it
marketable to the public. This technology is still in early stages of
development and its application to this area remains uncertain.
Potential initial customers are limited in number and belong to a single
industry. Celera Genomics believes that for the next few years it will derive a
significant portion of its revenues from fees paid by pharmaceutical companies
and larger biotechnology companies for its information products and services.
Celera Genomics has also had preliminary discussions with certain universities
and similar research organizations about becoming customers, but expects this
market to develop at a slower rate. The number of potential subscribers for
Celera Genomics' products during this period may be limited due to their nature
and price. Pharmaceutical and biotechnology companies could decide not to
subscribe to some or all of Celera Genomics' information products or services,
or could decide to conduct their own polymorphism discovery and analysis or work
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Management's Discussion and Analysis continued
with Celera Genomics' competitors. There have been published reports of a
proposed consortium of pharmaceutical companies to create and make public
polymorphism information.
Scientific and management staff have unique expertise which is key to Celera
Genomics' commercial viability and which would be difficult to replace. Celera
Genomics is highly dependent on the principal members of its scientific and
management staff, particularly Dr. Venter, its President. For the sequencing and
assembly of the human genome, Celera Genomics believes the following members of
its staff are essential: Dr. Venter; Dr. Mark Adams, Vice President for Genome
Programs; and Drs. Eugene Myers and Granger Sutton, who are responsible for
assembling the genome. Additional members of its medical, scientific, and
bioinformatics staff are important to the development of information, tools, and
services required for implementation of its business plan, including Dr. Sam
Broder, Executive Vice President and Chief Medical Officer. The loss of any of
these persons' expertise would be difficult to replace and could have a material
adverse effect on Celera Genomics' ability to achieve its goals, particularly
the completion of its information products.
Celera Genomics' competitive position will depend on patent and copyright
protection, which may not be available for genomics information and technology.
Celera Genomics' ability to compete and to achieve profitability may be affected
by its ability to protect its proprietary technology and intellectual property.
While Celera Genomics will be primarily dependent on revenues from access fees
to its discovery and information system, obtaining patent protection may also be
important to its business. Patent law affecting Celera Genomics' business,
particularly gene sequences and polymorphisms, is uncertain.
Moreover, Celera Genomics may be dependent on protecting, through copyright law
or otherwise, its databases to prevent other organizations from taking
information from databases and copying and reselling it. Copyright law currently
provides uncertain protection to organizations like Celera Genomics that seek to
prevent others from reselling their data. Changes in copyright and patent law
could expand or reduce the extent to which Celera Genomics and its customers are
able to protect their intellectual property.
Public disclosure of genomic sequence data could jeopardize intellectual
property protection and have an adverse effect on the value of Celera Genomics'
products and services. Celera Genomics, the federally funded Human Genome
Project, and others engaged in similar research have committed to make available
to the public basic human sequence data. The release of sequence data could
undermine the ability of Celera Genomics and its customers to obtain
intellectual property protection. Customers may conclude that uncertainties of
such protection decrease the value of Celera Genomics' information products and
services and, as a result, it may not be able to charge fees sufficient to allow
it to achieve profitability.
Others may succeed in commercializing genomic information before Celera
Genomics. A number of companies, institutions, and government-financed entities
are engaged in various genomics initiatives. At least two other companies,
Genset, S.A. and Incyte Pharmaceuticals, Inc., have announced their intention to
market to the pharmaceutical industry products and services similar to those
being offered by Celera Genomics. Additional competitors may attempt to compete
with Celera Genomics in the future, including companies that may seek to resell
publicly available genomic data. In addition, there have been published reports
of a proposed consortium of pharmaceutical companies to create and make public
polymorphism information.
Expected rapid growth in the number of our employees could absorb valuable
management resources and be disruptive to the development of Celera Genoimics'
business. Celera Genomics expects to continue to grow the number of employees.
This growth will require substantial effort to hire new employees and train and
integrate them in Celera Genomics' business and to develop and implement
management information systems, financial controls and facility plans. In
addition, Celera Genomics will be required to create a sales and marketing
organization and develop customer support resources as sales of its information
products increase. Celera Genomics' inability to manage growth effectively would
have a materially adverse effect on its future operating results.
Integration of Genscope and AgGen could be difficult and costly. The success of
Celera Genomics depends in part on its ability to integrate the businesses of
GenScope and AgGen, which were previously operated by PE Biosystems. In
particular, we believe that coordinating the separate scientific research
efforts will be a challenge to Celera Genomics.
Failure of Celera Genomics' Year 2000 Compliance Plan could jeopardize Celera
Genomic's information products and services. In fiscal 1997, we initiated a
world-wide program to assess the expected impact of the Year 2000 date
recognition problem on our existing computer systems; non-information technology
systems, including embedded and process-control systems; product offerings; and
significant suppliers. Portions of this program are not expected to be completed
until December 31, 1999. If we are not successful in implementing our Year 2000
compliance plan, customers may encounter difficulty in accessing and searching
Celera Genomics' databases.
79
<PAGE>
Celera Genomics Group
Combined Statements of Operations
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues $ 12,541 $ 4,211 $ 903
- --------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Research and development 48,448 10,279 3,976
Selling, general and administrative 28,255 6,725 2,228
Special charges 4,616
Acquired research and development 26,801
- --------------------------------------------------------------------------------------------------------------------
Operating Loss (68,778) (12,793) (32,102)
Interest income 1,245
- --------------------------------------------------------------------------------------------------------------------
Loss Before Income Taxes (67,533) (12,793) (32,102)
Benefit for income taxes 22,639 4,478 1,855
- --------------------------------------------------------------------------------------------------------------------
Net Loss $(44,894) $(8,315) $(30,247)
- --------------------------------------------------------------------------------------------------------------------
Net Loss per Share (see Note 1)
Basic and diluted $ (1.79)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the Celera Genomics group combined financial
statements.
80
<PAGE>
Celera Genomics Group
Combined Statements of Financial Position
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
At June 30, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 71,491 $ -
Note receivable from the PE Biosystems group (see Note 6) 150,000
Tax benefit receivable from the PE Biosystems group (see Note 1) 9,935
Accounts receivable 3,276 756
Prepaid expenses and other current assets 3,454 138
- --------------------------------------------------------------------------------------------------------------------
Total current assets 238,156 894
Property, plant and equipment, net 104,192 4,198
Other long-term assets 2,372 1,247
- --------------------------------------------------------------------------------------------------------------------
Total Assets $344,720 $ 6,339
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Group Equity
Current liabilities
Accounts payable $ 19,861 $ 488
Accrued salaries and wages 4,179 236
Deferred revenues 12,032 250
Other accrued expenses 9,281 1,080
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 45,353 2,054
Other long-term liabilities 5,500 5,544
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities 50,853 7,598
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (see Note 9)
Group Equity (Deficit) 293,867 (1,259)
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Group Equity $344,720 $ 6,339
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the Celera Genomics group combined financial
statements.
81
<PAGE>
Celera Genomics Group
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net loss $(44,894) $(8,315) $(30,247)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization 3,757 650 241
Long-term compensation programs 2,802
Acquired research and development 26,801
Changes in operating assets and liabilities
Increase in tax benefit receivable from the PE Biosystems group (9,935)
Increase in accounts receivable (2,520) (354) (379)
Increase in prepaid expenses and other assets (3,458) (4) (82)
Increase in accounts payable and other liabilities 31,496 1,151 581
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used by Operating Activities (22,752) (6,872) (3,085)
- --------------------------------------------------------------------------------------------------------------------
Investing Activities
Additions to property, plant and equipment (94,541) (3,648) (411)
Acquisitions and investments, net (1,236) (22,676)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (95,777) (3,648) (23,087)
- --------------------------------------------------------------------------------------------------------------------
Financing Activities
Net cash allocated from the PE Biosystems group 188,535 10,520 26,172
Proceeds from stock issued for Celera Genomics group stock plans 1,485
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 190,020 10,520 26,172
- --------------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 71,491
Cash and Cash Equivalents Beginning of Year
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Year $ 71,491 $ - $ -
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the Celera Genomics group combined financial
statements.
82
<PAGE>
Celera Genomics Group
Combined Statements of Group Equity
<TABLE>
<CAPTION>
Accumulated Group
(Dollar amounts in thousands) Other Deficit Equity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1996 $ 3,200 $ (2,589) $ 611
Net loss (30,247) (30,247)
Net cash allocated from the PE Biosystems group 26,172 26,172
- --------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 29,372 (32,836) (3,464)
Net loss (8,315) (8,315)
Net cash allocated from the PE Biosystems group 10,520 10,520
- --------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 39,892 (41,151) (1,259)
Net loss (44,894) (44,894)
Net cash allocated from the PE Biosystems group 8,535 8,535
Allocated capital from the PE Biosystems group 330,000 330,000
Issuances under Celera Genomics group stock plans 1,485 1,485
- --------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $379,912 $(86,045) $293,867
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the Celera Genomics group combined financial
statements.
83
<PAGE>
Celera Genomics Group
Notes to Combined Financial Statements
Note 1--Accounting Policies and Practices
Basis of Presentation
The PE Corporation ("PE" or the "Company") is comprised of two separate business
segments in continuing operations: the Celera Genomics group and the PE
Biosystems group. The Celera Genomics group is engaged principally in the
generation, sale and support of genomic information databases and related
information management and analysis software; discovery, validation and
licensing of proprietary gene products, genetic markers and information
regarding genetic variability; and related consulting and contract research and
development services. The PE Biosystems group manufactures and markets
biochemical instrument systems and associated consumable products for life
science research and related applications.
Recapitalization
On May 6, 1999, The Perkin-Elmer Corporation was merged into a subsidiary of PE
Corporation, a new Delaware corporation. The recapitalization of the Company
resulted in the issuance of two new classes of common stock called PE
Corporation-Celera Genomics Group Common Stock ("Celera Genomics stock") and PE
Corporation-PE Biosystems Group Common Stock ("PE Biosystems stock."). Celera
Genomics stock is intended to reflect separately the performance of the Celera
Genomics business ("Celera Genomics group"), and PE Biosystems stock is intended
to reflect separately the performance of the established PE Biosystems' life
sciences and the discontinued Analytical Instrument businesses ("PE Biosystems
group"). Each share of common stock of The Perkin-Elmer Corporation was
converted into 0.5 of a share of Celera Genomics stock and one share of PE
Biosystems stock.
The combined financial statements of the Celera Genomics group and the PE
Biosystems group (individually referred to as a "group") comprise all of the
accounts included in the corresponding consolidated financial statements of the
Company. Intergroup transactions between the Celera Genomics group and the PE
Biosystems group have not been eliminated in the Celera Genomics group combined
financial statements but have been eliminated in the PE Corporation consolidated
financial statements. The Celera Genomics group and the PE Biosystems group
combined financial statements have been prepared on a basis that management
believes to be reasonable and appropriate and reflect (1) the financial
position, results of operations, and cash flows of businesses that comprise each
of the groups, with all significant intragroup transactions and balances
eliminated, (2) in the case of the Celera Genomics group combined financial
statements, corporate assets and liabilities of the Company and related
transactions identified with the Celera Genomics group, including allocated
portions of the Company's debt and selling, general and administrative costs,
and (3) in the case of the PE Biosystems group combined financial statements,
all other corporate assets and liabilities and related transactions of the
Company, including allocated portions of the Company's debt and selling, general
and administrative costs.
Holders of Celera Genomics stock and PE Biosystems stock are stockholders of the
Company. The Celera Genomics Group and the PE Biosystems group are not separate
legal entities. As a result, stockholders are subject to all of the risks
associated with an investment in the Company and all of its businesses, assets,
and liabilities. The issuance of Celera Genomics stock and PE Biosystems stock
and the allocations of assets and liabilities between the Celera Genomics group
and the PE Biosystems group did not result in a distribution or spin-off of any
assets or liabilities of the Company or otherwise affect ownership of any assets
or responsibility for the liabilities of the Company or any of its subsidiaries.
The assets the Company attributes to one group could be subject to the
liabilities of the other group, whether such liabilities arise from lawsuits,
contracts or indebtedness attributable to the other group. If the Company is
unable to satisfy one group's liabilities out of assets attributed to it, the
Company may be required to satisfy these liabilities with assets attributed to
the other group.
Financial effects arising from one group that affect the Company's 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
class of common stock relating to the other group. Any net losses of the Celera
Genomics group or the PE Biosystems group and dividends or distributions on, or
repurchases of, Celera Genomics stock or PE Biosystems stock or repurchases of
preferred stock of the Company will reduce the assets of the Company legally
available for payment of dividends.
The management and allocation policies applicable to the preparation of the
financial statements of the Celera Genomics group and the PE Biosystems group
may be modified or rescinded, or additional policies may be adopted, at the sole
discretion of the Board of Directors at any time without approval of the
stockholders. The Celera Genomics group's combined financial statements reflect
the application of the management and allocation policies adopted by the Board
to various corporate activities, as described below. The Celera Genomics group's
combined financial statements should be read in conjunction with the Company's
consolidated financial statements.
Financing Activities
As a matter of policy, the Company manages most financial activities of the
Celera Genomics group and the PE Biosystems group on a centralized basis. These
activities include the investment of surplus cash, the issuance and repayment of
short-term and long-term debt and the issuance and repayment of any preferred
stock. As the financing activities of the Celera Genomics group were not
significant for any of the periods prior to the recapitalization, all historical
cash and debt balances for those periods presented were allocated to the PE
Biosystems group.
The Board has adopted the following financing policy which will affect the
combined statements of the Celera Genomics group and the PE Biosystems group.
84
<PAGE>
Celera Genomics Group
Notes to Combined Financial Statements continued
The Company will allocate the Company's debt between the Celera Genomics group
and the PE Biosystems group ("pooled debt") or, if the Company so determines, in
its entirety to a particular group. The Company will allocate preferred stock,
if issued, in a similar manner.
Cash allocated to one group that is used to repay pooled debt or redeem pooled
preferred stock will decrease 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 will, if so determined by the Board, decrease the
transferring group's allocated portion of the pooled debt or preferred stock
and, correspondingly, increase the recipient group's allocated portion of the
pooled debt or preferred stock.
Pooled debt will bear interest for group financial statement purposes at a rate
equal to the weighted average interest rate of the debt calculated on a
quarterly basis and applied to the average pooled debt balance during the
period. Preferred stock, if issued and if pooled in a manner similar to the
pooled debt, will bear dividends for group financial statement purposes at a
rate based on the weighted average dividend rate of the preferred stock
similarly calculated and applied. Any expense related to increases in pooled
debt or preferred stock will be reflected in the weighted average interest or
dividend rate of such pooled debt or preferred stock as a whole.
If the Company allocates debt for a particular financing in its entirety to one
group, that debt will bear interest for group financial statement purposes at
the rate determined by the Board. 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 Board, be
accounted for either as a short-term loan or as a long-term loan. Short-term
loans will 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
Board will determine the rate of interest for such loan. The Board will
establish the terms on which long-term loans between the groups will be made,
including interest rate, amortization schedule, maturity and redemption terms.
Although the Company may allocate its debt and preferred stock between groups,
the debt and preferred stock will remain obligations of the Company and all
stockholders of the Company will be subject to the risks associated with those
obligations.
In addition, cash allocated to the PE Biosystems group may be contributed to the
Celera Genomics group in exchange for an equity interest in the Celera Genomics
group.
Allocation of Corporate Overhead and Administrative Shared Services
A portion of the Company's corporate overhead (such as executive management,
human resources, legal, accounting, auditing, tax, treasury, strategic planning
and environmental services) has been allocated to the Celera Genomics group
based upon the use of services by that group. A portion of the Company's costs
of administrative shared services (such as information technology services) has
been allocated in a similar manner. Where determination based on use alone is
not practical, other methods and criteria were used that management believes are
equitable and provide a reasonable estimate of the cost attributable to the
Celera Genomics group. The total of these allocations was $5.1 million, $1.7
million, and $.2 million for fiscal 1999, 1998, and 1997, respectively. It is
not practicable to provide a detailed estimate of the expenses which would be
recognized if the Celera Genomics group were a separate legal entity.
Allocation of Federal and State Income Taxes
The federal income taxes of the Company and its subsidiaries which own assets
allocated between the groups are determined on a consolidated basis.
Consolidated federal income tax provisions and related tax payments or refunds
are allocated between the groups based principally on the taxable income and tax
credits directly attributable to each group. Such allocations reflect each
group's contribution (positive or negative) to the Company's consolidated
federal taxable income and the consolidated federal tax liability and tax credit
position. Tax benefits that cannot be used by the group generating those
benefits but can be used on a consolidated basis are credited to the group that
generated such benefits. Intergroup transactions are taxed as if each group were
a stand alone company. Tax benefits generated by the Celera Genomics group
commencing July 1, 1998, which then can be utilized on a consolidated basis,
will be credited to the Celera Genomics group up to a maximum limit of $75
million. The Celera Genomics group generated $22.6 million of tax benefits for
the year ended June 30, 1999.
Had the groups filed separate tax returns, the provision (benefit) for income
taxes and net income (loss) for each group would not have differed from the
amounts reported in the groups' combined statements of operations for the years
ended June 30, 1999, 1998, and 1997. However, the amount of current and deferred
taxes and taxes payable or refundable allocated to each group in these
historical combined financial statements may differ from those that would have
been allocated to each group had they filed separate income tax returns.
Depending on the tax laws of the respective jurisdictions, state and local
income taxes are calculated on either a consolidated or combined basis between
the groups based on their respective contribution to such consolidated or
combined state taxable incomes. State and local income tax provisions and
related tax payments or refunds which are determined on a separate corporation
basis will be allocated between the groups in a manner designed to reflect the
respective contributions of the groups to the Company's separate or local
taxable income.
85
<PAGE>
Celera Genomics Group
Notes to Combined Financial Statements continued
The discussion of the Celera Genomics group's income taxes (see Note 3) should
be read in conjunction with the Company's consolidated financial statements and
the notes thereto.
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.
Dividends
For purposes of the historical (periods prior to the recapitalization) combined
financial statements of the Celera Genomics group and the PE Biosystems group,
all dividends declared and paid by the Company were allocated to the PE
Biosystems group.
Principles of Combination
The Celera Genomic group's combined financial statements have been prepared in
accordance with generally accepted accounting principles and, taken together
with the PE Biosystems group's combined financial statements, comprise all the
accounts included in the corresponding consolidated financial statements of the
Company. Intergroup transactions between the Celera Genomics group and the PE
Biosystems group have not been eliminated in the Celera Genomics group's
combined financial statements but have been eliminated in the PE Corporation
consolidated financial statements. The combined financial statements of each
group reflect the financial condition, results of operations, and cash flows of
the businesses included therein. The combined financial statements of the Celera
Genomics group include the assets and liabilities of the Company specifically
identified with or allocated to the Celera Genomics group. The preparation of
the combined financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Certain amounts in the combined financial
statements and notes have been reclassified for comparative purposes.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The provisions of the statement require the
recognition of all derivatives 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 depends on the
intended use of the derivative and the resulting designation. The Celera
Genomics group is required to implement the statement in the first quarter of
fiscal 2001. The Celera Genomics group currently believes the statement will not
have a material impact on its combined financial statements.
Earnings per Share
Earnings per share information prior to the recapitalization is omitted from the
Celera Genomics group's Combined Statements of Operations because Celera
Genomics stock was not part of the capital structure of the Company until fiscal
1999. Basic loss per share is computed by dividing net loss for the period by
the weighted average number of shares of Celera Genomics stock outstanding.
Diluted loss per share is computed by dividing net loss for the period by the
weighted average number of shares of Celera Genomics stock outstanding including
the dilutive effect of Celera Genomics stock equivalents.
The table below presents a reconciliation of basic and diluted loss per share:
<TABLE>
<CAPTION>
(Amounts in thousands except per share amounts)
For the year ended June 30, 1999
- --------------------------------------------------------
<S> <C>
Weighted average number of common
shares used in the calculation of basic
loss per share 25,100
Common stock equivalents
- --------------------------------------------------------
Shares used in the calculation of diluted
loss per share 25,100
- --------------------------------------------------------
Net loss used in the calculation of basic
and diluted loss per share $(44,894)
Net loss per share
Basic and diluted $ (1.79)
- --------------------------------------------------------
</TABLE>
The reconciliation for fiscal 1998 and 1997 is omitted since Celera Genomics
stock was not part of the capital structure of the Company.
Options and warrants to purchase 5.6 million shares of Celera Genomics stock
were outstanding at June 30, 1999, but were not included in the computation of
diluted loss per share because the effect was antidilutive.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments, time deposits, and
certificates of deposit with original maturities of three months or less.
Investments
The Company's investment in Agrogene is accounted for on the equity method.
86
<PAGE>
Celera Genomics Group
Notes to Combined Financial Statements continued
Property, Plant and Equipment, and Depreciation
Property, plant and equipment are recorded at cost and consisted of the
following at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998
- ----------------------------------------------------------
<S> <C> <C>
Land $ 10.0 $ -
Buildings and leasehold improvements 66.4 4.2
Machinery and equipment 33.3 1.7
- ----------------------------------------------------------
Property, plant and equipment, at cost 109.7 5.9
Accumulated depreciation and amortization 5.5 1.7
- ----------------------------------------------------------
Property, plant and equipment, net $104.2 $ 4.2
- ----------------------------------------------------------
</TABLE>
Major renewals and improvements that significantly add to productive capacity or
extend the life of an asset are capitalized. Repairs, maintenance, and minor
renewals and improvements are expensed when incurred.
Provisions for depreciation of owned property, plant and equipment are based
upon the expected useful lives of the assets and computed primarily by the
straight-line method. Leasehold improvements are amortized over their estimated
useful lives or the term of the applicable lease, whichever is less, using the
straight-line method. Internal-use software costs are amortized primarily over
the expected useful lives, not to exceed seven years.
Machinery and equipment included $8.1 million of data management software
licenses at June 30, 1999. There were no corresponding amounts at June 30, 1998.
Intangible Assets
The excess of purchase price over the net asset value of companies acquired is
amortized on a straight-line method over periods not exceeding 40 years.
Purchased technology rights are amortized using the straight-line method over
their expected useful lives.
At June 30, 1999, other long-term assets included goodwill, net of accumulated
amortization, of $.9 million. Accumulated amortization of goodwill was $.1
million at June 30, 1999. There was no goodwill at June 30, 1998.
At June 30, 1999 and 1998, other long-term assets included purchased technology
rights, net of accumulated amortization, of $1.1 million and $1.2 million,
respectively. Accumulated amortization of purchased technology rights was $.3
million and $.2 million at June 30, 1999 and 1998, respectively.
Revenues
Subscription fees for access to the Company's genome databases are recognized
ratably over the contracted period in accordance with the provisions of the
contract. Contract research service revenues are earned and recognized generally
on a percentage of completion or as contract research costs are incurred
according to the provisions of the underlying agreement. In some instances
revenue recognition may be contingent upon the achievement of certain milestones
at each anniversary date. Amounts received in advance of performance are
recorded as deferred revenue.
Research and Development
Costs incurred for internal, contract and grant-sponsored research and
development are expensed when incurred. Grant-sponsored research and development
expense was $.2 million for the year ended June 30, 1999.
Supplemental Cash Flow Information
Significant non-cash investing and financing activities were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999
- --------------------------------------------------------
<S> <C>
Capital expenditures liability $ 8.9
Note receivable from the PE Biosystems group $150.0
- --------------------------------------------------------
</TABLE>
Note 2--Acquisitions
GenScope, Inc.
During the third quarter of fiscal 1997, the Company acquired GenScope, Inc.,
for $26.8 million. GenScope, founded in 1995, represented a development stage
venture with no operating history. GenScope had effectively no revenues and only
limited R&D contract services. At the acquisition date, technological
feasibility of the acquired technology right had not been established and the
acquired technology right had no future alternative uses. The Company obtained
the right to utilize AFLP-based gene expression profiling technology in the
field of human health, but did not obtain any core technology or other rights.
GenScope's limited balance sheet, with assets of approximately $.2 million, had
yet to deliver commercial value. Accordingly, the Company recorded a charge of
$25.4 million attributable to the in-process technology purchased. The Company
based this amount upon the early development stage of this life science business
acquired, the technological hurdles to apply this technology to the field of
human health and the underlying cash flow projections. The acquisition
represented the purchase of development stage technology, not at the time
considered commercially viable in the health care applications that the Company
intends to pursue. The Company's intent was to first develop the technology into
a set of molecular screening tools for use in the enhancement of pharmaceutical
product development. The Company allocated $1.4 million of the purchase price to
technology rights attributable to GenScope's AFLP-based gene expression
profiling technology. AFLP is an enhancement of the polymerase chain reaction
("PCR") process that allows selective analysis of any portion of genetic
material without the specific, prior sequence information normally required for
PCR. Of the $25.4 million expensed as in-process research and development, $5.5
million represented a contingent liability due on the issuance of a process
patent for technology under development.
Other Acquisitions
During the third quarter of fiscal 1999, the Company acquired a 49% interest in
Agrogene S.A., an agricultural DNA testing laboratory in France for $1.2
million. The investment complements the Celera Genomics group's automated DNA
sequencing and geno-
87
<PAGE>
Celera Genomics Group
Notes to Combined Financial Statements continued
typing services in the agricultural field. The excess of cost over net assets
acquired of $1.0 million is being amortized on a straight-line basis over a 3
year period.
The Company acquired Linkage Genetics, Inc., a provider of genetic analysis
services in the agriculture industry, during the fourth quarter of fiscal 1997.
At the acquisition date, the technological feasibility of the acquired
technology had not been established and the acquired technology had no future
alternative uses. The cash acquisition cost of $1.4 million was accounted for as
a purchase. The entire acquisition cost was expensed as purchased in-process
research and development.
The net assets and results of operations for all of the above acquisitions were
accounted for under the purchase method and have been included in the combined
financial statements of the Celera Genomics group since the date of each
acquisition. The pro forma effect of these acquisitions, individually or in the
aggregate, on the Celera Genomics group combined financial statements was not
significant.
Note 3--Income Taxes
The income tax benefit included the Celera Genomics group's allocated portion of
the Company's consolidated provision for income taxes.
Loss before income taxes, consisting of losses generated in the United States,
for fiscal 1999, 1998, and 1997 was $67.5 million, $12.8 million, and $32.1
million, respectively. The current domestic income tax benefit for fiscal 1999,
1998, and 1997 was $22.6 million, $4.5 million, and $1.9 million, respectively.
A reconciliation of the federal statutory tax to the Celera Genomics group's tax
benefit for fiscal 1999, 1998, and 1997 is set forth in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
- -------------------------------------------------------------
Tax at federal statutory rate $23.6 $4.5 $11.2
Recapitalization costs (1.6)
Acquired research and development (9.3)
Miscellaneous .6 -
- -------------------------------------------------------------
Benefit for income taxes $22.6 $4.5 $ 1.9
- ------------------------------------------------------------
</TABLE>
Note 4--Retirement and Other Benefits
Pension
The Company maintains or sponsors a pension plan that cover certain employees of
the Celera Genomics group. Pension benefits earned are generally based on years
of service and compensation during active employment. Pension plan assets are
administered by a trustee and are principally invested in equity and fixed
income securities. The funding of the pension plan is determined in accordance
with statutory funding requirements.
The Company's domestic pension plans cover a substantial portion of the U.S.
employees. During fiscal 1999, the plan was amended to terminate the accrual of
benefits under the plan as of June 30, 2004 and to improve the benefit for
participants who retire between the ages of 55 and 60. The pension plan is not
available to employees hired on or after July 1, 1999.
Pension expense, consisting primarily of service cost, allocated to the Celera
Genomics group was less than $.1 million for fiscal 1999, $.1 million for fiscal
1998, and $.1 million for fiscal 1997.
Retiree Health Care and Life Insurance Benefits
The postretirement plan provides certain health care and life insurance benefits
to domestic employees hired prior to January 1, 1993, who retire and satisfy
certain service and age requirements. Generally, medical coverage pays a stated
percentage of most medical expenses, reduced for any deductible and for payments
made by Medicare or other group coverage. The cost of providing these benefits
is shared with retirees. The plan is unfunded. The postretirement benefit
expense allocated to the Celera Genomics group was not material for fiscal 1999,
1998, and 1997. Amounts allocated to the Celera Genomics group were less than
$.05 million for all periods presented.
Savings Plan
The Company provides a 401(k) savings plan, for domestic employees, with
automatic Company contributions of 2% of eligible compensation and a
dollar-for-dollar matching contribution of up to 4% of eligible compensation.
The Company contributions allocated to the Celera Genomics group for fiscal
1999, 1998, and 1997 were $.5 million, $.2 million and $.1 million,
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--Segment, Geographic, and
Customer Information
Business Segments and Geographic
In fiscal 1999, the PE Celera Genomics group adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The statement
established annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products and services, geographic
areas, and major customers. The adoption of the statement did not affect the
results of operations or financial position of the Celera Genomics group.
The Celera Genomics group operates in one business segment, which is engaged
principally in the generation, sale and support of genomic information database
and related information management and analysis software; discovery, validation
and licensing of proprietary gene products, genetic markers and information
con-
88
<PAGE>
Celera Genomics Group
Notes to Combined Financial Statements continued
cerning genetic variability; and related consulting and contract research and
development services. The Celera Genomics group operates primarily in the United
States.
Customer Information
Revenues from any single customer, comprising 10% or more of the total revenues
of the Celera Genomics group, were $3.1 million, $.4 million, and $.2 million,
for fiscal 1999, 1998, and 1997 respectively.
Note 6--Group Equity and Note Receivable
Celera Genomics stock represents a separate class of the Company's common stock.
Additional shares of Celera Genomics stock may be issued from time to time upon
exercise of stock options or at the discretion of the Company's Board of
Directors. There were no repurchases of Celera Genomics stock for fiscal 1999.
Note Receivable From the PE Biosystems Group
The initial capitalization of the Celera Genomics group included a $330 million
short-term note receivable from the PE Biosystems group established at September
30, 1998. The $330 million note represented an allocation of the Company's
capital to the Celera Genomics group and did not result in the PE Biosystems
group holding an equity interest in the Celera Genomics group. Accordingly, no
interest was ascribed to the note. The allocation of capital represented
management's decision to allocate a portion of the Company's capital to the
Celera Genomics group and the remaining capital to the PE Biosystems group prior
to the effective date of the recapitalization. The group financial statements do
not include any intergroup equity interests. The note receivable was liquidated
on May 28, 1999 in exchange for a portion of the proceeds received from the sale
of the Analytical Instruments business and a new note receivable from the PE
Biosystems group for $150 million was established. The new note receivable is
for a term of one-year, bears an interest rate of 5% per annum, and is payable
on demand without penalty. At June 30, 1999, the outstanding balance of the note
receivable was $150 million.
Tax Benefit Receivable From the PE Biosystems Group
The Company reimburses the Celera Genomics group for tax benefits generated.
These reimbursements are intended to provide additional cash resources to the
Celera Genomics group up to a maximum of $75 million. For fiscal 1999, the
Celera Genomics group generated $22.6 million of tax benefits. At June 30, 1999,
the tax benefit receivable was $9.9 million.
Third Party Equity Transaction
On June 30, 1999, the Company granted an option to purchase 1.3 million shares
of Celera Genomics group stock to a third party and entered into a one year
non-compete agreement with such party. The fair value of such option
approximated $7.2 million and will be amortized over the life of the non-compete
agreement.
Stock Purchase Warrants
On January 22, 1998, the Company acquired PerSeptive BioSystems, Inc. The
acquisition was accounted for as a pooling of interests, and the PE Biosystems
group's financial results were restated to include the combined operations. As a
result of the merger each outstanding warrant for shares of PerSeptive common
stock was converted into warrants for the number of shares of the Company's
common stock that would have been received by the holder if such warrants had
been exercised immediately prior to the effective time of the merger.
As a result of the recapitalization, each outstanding warrant for shares of
PerSeptive common stock was further converted into warrants to acquire .0963
share of Celera Genomics stock and .3852 share of PE Biosystems stock. The
warrants are not separately exercisable into solely Celera Genomics stock or PE
Biosystems stock. The exercise price and expiration date of each warrant were
not affected by the recapitalization.
At June 30, 1999, there were warrants outstanding to purchase 107,598 shares of
PE Biosystems stock and 26,900 shares of Celera Genomics stock at an exercise
price of $32.87. The warrants expire in September, 2003.
Stockholders' Protection Rights Plan
In connection with the recapitalization, the Company adopted a new Stockholder
Rights Plan (the "Rights Agreement") to protect stockholders against abusive
takeover tactics. Under the Rights Agreement, the Company will issue one right
for each share of Celera Genomics stock (a "Celera Genomics Right"), which will
allow holders to purchase one-thousandth of a share of a newly designated Series
B participating junior preferred stock of the Company at a purchase price of
$125, subject to adjustment (the "Series B Purchase Price"), and one right for
each share of PE Biosystems stock (a "PE Biosystems Right"), which will allow
holders to purchase one-thousandth of a share of a newly designated Series A
participating junior preferred stock of the Company at a purchase price of $425,
subject to adjustment (the "Series A Purchase Price").
A Celera Genomics Right or PE Biosystems Right will be exercisable only if a
person or group ("Acquiring Person"): (a) acquires 15% or more of the shares of
Celera Genomics stock then outstanding or 15% or more of the shares of PE
Biosystems 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 Celera Genomics Right
and each PE Biosystems Right will entitle its holder to purchase, for the Series
B Purchase Price or the Series A Purchase Price, a number of shares of the
related class of common stock of the Company having a market value equal to
twice such purchase price.
89
<PAGE>
Celera Genomics Group
Notes to Combined Financial Statements continued
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 Celera Genomics
Right and each PE Biosystems Right will entitle its holder to purchase, for the
Series B Purchase Price or Series A Purchase Price, 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 to a
person or group becoming an Acquiring Person.
Capital Stock
The Company's authorized capital stock consists of 225 million shares of PE
Corporation-Celera Genomics group common stock, 500 million shares of PE
Corporation-PE Biosystems group common stock and 10 million shares of PE
Corporation preferred stock. Of the 10 million shares of preferred stock at June
30, 1999, the Company had designated 80,000 shares of two series of
participating junior preferred stock in connection with the Company's
stockholders' protection rights plan as previously described.
Note 7--Stock Plans
Stock Option Plans
Under the Company's stock option plans, officers and other key employees may be,
and directors are, granted options, each of which allows for the purchase of
existing common stock at a price of not less than 100% of fair market value at
the date of grant. Prior to the recapitalization, most option grants had a
two-year vesting schedule, whereby 50% of the option grant vested at the end of
each year from the date of grant. The Board of Directors has extended that
schedule for most options granted subsequent to the recapitalization whereby 25%
will vest annually, resulting in 100% vesting after four years. Options
generally expire ten years from the date of grant.
Transactions relating to the stock option plans are summarized below:
<TABLE>
<CAPTION>
PE Corporation
------------------------
Weighted
Number of Average
Options Exercise Price
- -------------------------------------------------------
<S> <C> <C>
Fiscal 1997
Outstanding at June 30, 1996 3,822,535 $34.05
Granted 1,595,528 $59.78
Exercised 1,167,179 $29.73
Cancelled 95,281 $43.17
- -------------------------------------------------------
Outstanding at June 30, 1997 4,155,603 $45.03
Exercisable at June 30, 1997 2,254,052 $35.24
Fiscal 1998
Granted 1,997,041 $70.41
Exercised 780,994 $34.76
Cancelled 154,686 $71.42
- -------------------------------------------------------
Outstanding at June 30, 1998 5,216,964 $55.51
Exercisable at June 30, 1998 2,936,389 $43.12
Fiscal 1999
Granted 37,000 $86.61
Exercised 1,549,364 $45.74
Cancelled 108,914 $67.92
- -------------------------------------------------------
Outstanding at May 5, 1999 3,595,686 $60.23
Exercisable at May 5, 1999 2,639,696 $55.43
- -------------------------------------------------------
<CAPTION>
Celera Genomics Group
------------------------
Weighted
Number of Average
Options Exercise Price
- -------------------------------------------------------
<S> <C> <C>
Fiscal 1999
Outstanding at May 6, 1999 1,797,843 $11.04
Granted 3,976,018 $17.44
Exercised 140,894 $10.49
Cancelled 66,303 $13.34
- -------------------------------------------------------
Outstanding at June 30, 1999 5,566,664 $15.62
Exercisable at June 30, 1999 1,818,116 $12.78
- -------------------------------------------------------
</TABLE>
As a result of the recapitalization, each outstanding stock option under the
Company's stock option plans was converted into separately exercisable options
to acquire one share of PE Biosystems stock and 0.5 of a share of Celera
Genomics stock. The exercise price for the resulting PE Biosystems stock options
and Celera Genomics stock options was calculated by multiplying the exercise
price under the original option from which they were converted by a fraction,
the numerator of which was the opening price of PE Biosystems stock or Celera
Genomics stock, as the case may be, on May 6, 1999 (the first date such stocks
were traded on the New York Stock Exchange) and the denominator of which was the
sum of such PE Biosystems stock and Celera Genomics stock prices. However, the
aggregate intrinsic value of the options was not increased, and the ratio of the
exercise price per option to the market value per share was not reduced. In
addition, the vesting provision and option periods of the original grants has
remained the same on conversion.
90
<PAGE>
Celera Genomics Group
Notes to Combined Financial Statements continued
The following table summarizes information regarding options outstanding and
exercisable for the Celera Genomics group at June 30, 1999:
<TABLE>
<CAPTION>
Weighted Average
---------------------
Contractual
Life
Number of Remaining Exercise
(Option Prices Per Share) Options in Years Price
- ----------------------------------------------------------
<S> <C> <C> <C>
Options Outstanding
At $.37 - $12.10 600,294 5.1 $ 6.95
At $12.11 - $15.13 961,784 7.8 $13.39
At $15.14 - $17.12 3,652,464 9.5 $17.11
At $17.13 - $30.26 352,122 9.8 $21.00
Options Exercisable
At $.37 - $12.10 578,766 5.1 $ 6.98
At $12.11 - $15.13 523,132 7.8 $13.14
At $15.14 - $17.12 705,020 9.5 $17.10
At $17.13 - $30.26 11,198 9.8 $22.65
- ----------------------------------------------------------
</TABLE>
1999 Stock Incentive Plans
The PE Corporation/PE Biosystems Group 1999 Stock Incentive Plan (the "PE
Biosystems plan") and the PE Corporation/Celera Genomics Group 1999 Stock
Incentive Plan (the "Celera Genomics plan") were approved in April 1999. The
Celera Genomics plan authorizes grants of stock options, stock awards and
performance shares with respect to Celera Genomics stock. The PE Biosystems plan
authorizes grants of stock options, stock awards and performance shares with
respect to PE Biosystems stock. Directors and certain officers and key employees
with responsibilities involving both the PE Biosystems group and the Celera
Genomics group may be granted awards under both incentive plans in a manner
which reflects their responsibilities. The Board of Directors believes that
granting participants awards tied to performance of the group in which the
participants work and, in certain cases the other group, is in the best interest
of the Company and its stockholders.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan offers domestic and certain foreign employees
the right to purchase shares of Celera Genomics stock and/or PE Biosystems stock
on a quarterly basis. The purchase price in the United States is equal to the
lower of 85% of the average market price of such class of common stock on the
offering date or 85% of the average market price of the applicable class of
common stock on the last day of the purchase period. Provisions of the plan for
employees in foreign countries vary according to local practice and regulations.
Common stock issued under the Employee Stock Purchase Plan during fiscal 1999,
1998, and 1997 totaled 168,000 shares, 174,000 shares, and 111,000 shares,
respectively, of PE Corporation (predecessor) common stock. Additionally, 12,000
shares of Celera Genomics stock and 49,000 shares of PE Biosystems stock were
issued during fiscal 1999.
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 Celera Genomics
stock and PE Biosystems stock are made in a ratio approximately equal to the
number of shares of Celera Genomics stock and PE Biosystems stock outstanding.
The purchase price is the fair market value on the date of purchase. At June 30,
1999, the Company had approximately 43,000 shares of Celera Genomics stock and
approximately 85,000 shares of PE Biosystems stock available for issuance.
Restricted Stock
As part of the Company's stock incentive plans, key employees may be, and
non-employee directors are, granted shares of restricted stock that will vest
when certain continuous employment/service restrictions and/or specified
performance goals are achieved. The fair value of shares granted is generally
expensed over the restricted periods, which may vary depending on the estimated
achievement of performance goals.
As a result of the recapitalization, each share of restricted stock held was
redesignated as 0.5 of a share of Celera Genomics stock and one share of PE
Biosystems stock. Restricted stock granted prior to the recapitalization to key
employees and non-employee directors during fiscal 1999, 1998, and 1997 totaled
42,900 shares, 4,350 shares, and 42,000 shares, respectively, of PE Corporation
(predecessor) common stock.
Performance Unit Bonus Plan
The Company has a Performance Unit Bonus Plan whereby employees may be awarded
performance units in conjunction with an equal number of stock options. A
performance unit represents the right to receive a cash or stock payment from
the Company at a specified date in the future. The amount of the payment is
equal to the fair market value of a share of common stock on the date of the
grant. The performance units vest upon shares of the Company's common stock
attaining and maintaining specified stock price levels for a specified period,
and are payable on or after a specified future date subject to continued
employment through the date of payment. As of June 30, 1999 two series of
performance units totaling 498,399 units had been granted under the plan.
Compensation expense, pertaining to the first of the series, for the Celera
Genomics group was $.3 million for fiscal 1999.
At June 30, 1999, all stock price targets applicable to the first series of
performance units, totaling 294,499 units, net of cancellations, units initially
granted to members of senior management under the plan had been attained and the
Company became obligated to make payments under the plan. In recognition of the
efforts of the participants in reaching these performance targets and the change
in the underlying securities of the Company as a result of the recapitalization
of the Company, the Board of Directors decided to accelerate these payments to
fiscal year 2000. The
91
<PAGE>
Celera Genomics Group
Notes to Combined Financial Statements continued
related stock options were not accelerated. Compensation expense recognized by
the Celera Genomics group as a result of the acceleration of these payments
totaled $1.0 million for fiscal 1999.
Accounting for Stock-Based Compensation
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," is applied in accounting for stock-based compensation plans.
Accordingly, no compensation expense has been recognized for its stock option
and employee stock purchase plans, as all options have been issued at fair
market value.
Pro forma net income and earnings per share information, as required by SFAS No.
123, "Accounting for Stock-Based Compensation," have been determined for
employee stock plans under the statement's fair value method. The fair value of
the options was estimated at grant date using a Black-Scholes option pricing
model with the following weighted average assumptions for the Celera Genomics
group:
<TABLE>
<CAPTION>
For the year ended June 30, 1999
- -------------------------------------------------------
<S> <C>
Dividend yield -%
Volatility 34.40%
Risk-free interest rates 5.0%
Expected option life in years 5.23
- -------------------------------------------------------
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period.
Pro forma information for the Celera Genomics group for fiscal 1999 is presented
below:
<TABLE>
<CAPTION>
(Dollar amounts in millions
except per share amounts) 1999
- --------------------------------------------------------
<S> <C>
Net loss
As reported $ (44.9)
Pro forma $ (47.5)
Basic and diluted loss per share
As reported $ (1.79)
Pro forma $ (1.89)
- --------------------------------------------------------
</TABLE>
For the fiscal years ended June 30, 1998 and 1997, the net loss was $8.3 million
and $30.2 million, respectively. Pro forma information for fiscal 1998 and 1997
is omitted since Celera Genomics stock was not part of the capital structure of
the Company.
The weighted average fair value of PE Corporation options granted was $33.54,
$24.83, and $20.17 per share for fiscal 1999, 1998, and 1997, respectively. The
weighted average fair value of Celera Genomics options granted was $8.26 for
fiscal 1999.
Since Celera Genomics stock and PE Biosystems were not part of the capital
structure of the Company prior to May 6, 1999, there were no stock options
outstanding prior to that date. Therefore, the pro forma effect of Celera
Genomics stock options is not representative of what the effect will be in
future years.
Note 8--Related Party Transactions
Sales of Products and Services Between Groups
A group will sell products or services to the other group on terms that would be
available from third parties in commercial transactions. If terms for such
transaction are not available, the purchasing group will pay fair value as
determined by the Board of Directors for such products and services or at the
cost (including overhead) of the selling group. For fiscal 1999, R&D expenses
included $15.2 million for purchases of instruments, lease payments on
instruments and the purchase of consumables, and $2.1 million of contracted R&D
services from the PE Biosystems group.
Access to Technology and Know-How
Each group will have free access to all Company technology and know-how
(excluding products and services of the other group) that may be useful in that
group's business, subject to obligations and limitations applicable to the
Company and to such exceptions that the Board of Directors may determine. The
groups will consult with each other on a regular basis concerning technology
issues that affect both groups. The costs of developing this technology remain
in the group responsible for its development.
Note 9--Commitments and Contingencies
Future minimum payments at June 30, 1999 under non-cancelable operating leases
for real estate and equipment were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
- -------------------------------------------------------
<S> <C>
2000 $20.7
2001 18.3
2002 1.6
2003
2004
2005 and thereafter
- -------------------------------------------------------
Total $40.6
- -------------------------------------------------------
</TABLE>
Rental expense was $8.5 million for fiscal 1999, $.3 million for fiscal 1998,
and $.1 million for fiscal 1997.
92
<PAGE>
Celera Genomics Group
Notes to Combined Financial Statements continued
On March 13, 1998, the Company filed a patent infringement action against
American Pharmacia Biotech, Inc. ("Amersham") and Molecular Dynamics, Inc. in
the United States District Court for the Northern District of California. The
Company asserts that two of its patents (U.S. 5,207,886 and U.S. 4,811,218) are
infringed by reason of Molecular Dynamics' and Amersham's sale of certain DNA
analysis systems (e.g., the MegaBACE 1000 System). In response, the defendants
have asserted various affirmative defenses and several counterclaims, including
that the Company is infringing two patents (U.S. 5,091,652 and U.S. 5,459,325)
owned by or licensed to Molecular Dynamics by selling the ABI PRISM(R) 377 DNA
Sequencing Systems.
On April 2, 1998, Amersham filed a patent infringement action against the
Company in the United States District Court for the Northern District of
California. The complaint alleges that the Company is directly, contributorily
or by inducement infringing U.S. Patent No. 5,688,648 ("the '648 patent"),
entitled "Probes Labeled with Energy Transfer Coupled Dyes." The complaint seeks
declaratory judgment that the use of the PE BigDye(TM) Primer and BigDye(TM)
Terminator kits would infringe the '648 patent, as well as injunctive and
monetary relief. The Company answered the complaint, alleging that the '648
patent is invalid and that the Company has not infringed the '648 patent.
On May 21, 1998, Amersham filed a patent infringement action against the Company
in the United States District Court for the Southern District of New York. The
complaint alleges that the Company is infringing, contributing to the
infringement and inducing the infringement of U.S. Patent No. 4,707,235 ("the
'235 patent") entitled "Electrophoresis Method and Apparatus having Continuous
Detection Means." The complaint seeks injunctive and monetary relief. The
Company answered the complaint, alleging that the '235 patent is invalid and
that the Company does not infringe the '235 patent.
The Company has been named as a defendant in several legal actions, including
patent, commercial, and environmental, arising from the conduct of normal
business activities. Although the amount of any liability that might arise with
respect to any of these matters cannot be accurately predicted, the resulting
liability, if any, will not in the opinion of management have a material adverse
effect on the financial statements of the Celera Genomics group or the Company.
The holders of Celera Genomics stock are stockholders of the Company and will
continue to be subject to all of the risks associated with an investment in the
Company, including any legal proceeding and claims affecting the PE Biosystems
group.
93
<PAGE>
Celera Genomics Group
Notes to Combined Financial Statements continued
Note 10--Quarterly Financial Information
(Unaudited)
The following is a summary of quarterly financial results:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(Dollar amounts in millions
except per share amounts) 1999 1998 1999 1998 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $3.9 $ .6 $ 1.7 $1.2 $ 1.8 $1.3 $ 5.1 $1.1
Operating loss (5.6) (1.4) (12.9) (2.1) (19.3) (3.6) (31.0) (5.7)
Net loss (3.6) (.9) (8.6) (1.4) (12.8) (2.3) (19.9) (3.7)
- --------------------------------------------------------------------------------------------------------------------------
Net loss per share
Basic and diluted $(.78)
- --------------------------------------------------------------------------------------------------------------------------
Price range of common stock
High $ 22-1/2
Low $ 14-3/16
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no dividends on Celera Genomics stock for the periods presented.
Fiscal 1999 price ranges are for the period from May 6, 1999 through June 30,
1999. On May 6, 1999, The Perkin-Elmer Corporation was merged into PE
Corporation, a new Delaware corporation. The recapitalization of the Company
resulted in the issuance of two new classes of common stock called PE
Corporation-Celera Genomics Group Common Stock and PE Corporation-PE Biosystems
Group Common Stock.
Events Impacting Comparability -- Fiscal 1999
Second, third, and fourth quarter results included before-tax costs of $.6
million, $.8 million, and $3.2 million, respectively in connection with the
recapitalization of the Company. Fourth quarter results also included before-tax
costs of $1.0 million for the Company's long-term compensation programs. The
aggregate after-tax effect of these items increased second, third, and fourth
quarter net loss by $.6 million, $.8 million, and $3.9 million, respectively,
and increased fourth quarter net loss by $.15 per diluted share.
94
<PAGE>
Celera Genomics Group
Report of Management
To the Stockholders of
PE Corporation
Management is responsible for the accompanying combined financial statements,
which have been prepared in conformity with generally accepted accounting
principles. In preparing the financial statements, it is necessary for
management to make informed judgments and estimates which it believes are in
accordance with generally accepted accounting principles appropriate in 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 judgements are required
to assess and balance the costs and expected benefits of a system of internal
accounting controls. Adherence to these polices and procedures is reviewed
through a coordinated audit effort of the Company's internal audit staff and
independent accountants.
The Audit 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 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
PE Corporation
In our opinion, the accompanying combined statements of financial position and
the related combined statements of operations, of group equity, and of cash
flows present fairly, in all material respects, the financial position of the
Celera Genomics Group of PE Corporation at June 30, 1999 and 1998, and the
results of its operations and its cash flows for each of the three fiscal years
in the period ended June 30, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
management of PE Corporation; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards 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 the opinion expressed above.
As described above and more fully in Note 1 to the Celera Genomics Group
combined financial statements, the Celera Genomics Group is a group of PE
Corporation; accordingly, the combined financial statements of the Celera
Genomics Group should be read in conjunction with the audited financial
statements of PE Corporation.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
July 30, 1999
95
<PAGE>
PE Corporation
Selected Financial Data
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Operations
Net revenues $1,216,897 $ 944,306 $ 768,368 $642,218 $543,945
Income from continuing operations 96,797 15,694 102,492 1,310 38,569
Per share of common stock
Basic .32 2.16 .03 .87
Diluted .31 2.07 .03 .85
Income (loss) from discontinued
operations (net of income taxes) 79,058 40,694 27,906 (37,833) 7,738
Net income (loss) 175,855 56,388 130,398 (36,523) 46,307
Per share of common stock
Basic 1.16 2.74 (.80) 1.04
Diluted 1.12 2.63 (.77) 1.02
Dividends per share .51 .68 .68 .68 .68
- ------------------------------------------------------------------------------------------------------------------
Attributable to PE Biosystems Group
Income from continuing operations $ 148,365 $ 24,009 $ 132,739 $ 3,899 $ 38,569
Per share of common stock
Basic 1.48
Diluted 1.44
Income (loss) from discontinued
operations (net of income taxes) 79,058 40,694 27,906 (37,833) 7,738
Net income (loss) 227,423 64,703 160,645 (33,934) 46,307
Per share of common stock
Basic 2.27
Diluted 2.21
Dividends per share .085
- ------------------------------------------------------------------------------------------------------------------
Attributable to Celera Genomics Group
Net loss $ (44,894) $ (8,315) $ (30,247) $ (2,589) $ -
Per share of common stock
Basic and diluted (1.79)
- ------------------------------------------------------------------------------------------------------------------
Other Information
Cash and short-term investments $ 308,021 $ 84,091 $ 217,222 $121,145 $103,826
Working capital 471,350 287,991 354,742 229,639 256,607
Capital expenditures 176,035 71,820 58,057 28,198 33,891
Total assets 1,519,307 1,135,276 1,006,793 809,856 797,970
Long-term debt 31,452 33,726 59,152 33,694 64,524
Total debt 35,363 45,825 89,068 89,801 123,224
Stockholders' equity 821,525 564,248 504,270 373,727 369,807
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The selected financial data should be read with the consolidated financial
statements.
On May 6, 1999, The Perkin-Elmer Corporation was merged into a subsidiary of PE
Corporation, a new Delaware corporation. The recapitalization of the Company
resulted in the issuance of two new classes of common stock called PE
Corporation-PE Biosystems Group Common Stock and PE Corporation-Celera Genomics
Group Common Stock.
On June 17, 1999, the Board of Directors announced a two-for-one split of PE
Biosystems group common stock. The two-for-one stock split was effected in the
form of a 100% stock dividend paid to stockholders of record as of the close of
business on July 12, 1999. All PE Biosystems group share and per share data
reflect this split.
A number of items impact the comparability of the data from continuing
operations. Before-tax amounts include:
o Charges of $19.3 million for fiscal 1999 relating to the recapitalization and
transformation of the Company;
o Restructuring and other merger costs of $6.1 million for fiscal 1999, $48.1
million for fiscal 1998, $17.5 million for fiscal 1996, and $15.5 million for
fiscal 1995;
o Restructuring reserve adjustment of $9.2 million for fiscal 1999 relating to
excess fiscal 1998 restructuring liabilities;
o Gains on investments of $6.1 million for fiscal 1999, $1.6 million for fiscal
1998, $64.9 million for fiscal 1997, $11.7 million for fiscal 1996, and $20.8
million for fiscal 1995;
o Acquired research and development charges of $28.9 million for fiscal 1998,
$26.8 million for fiscal 1997, and $33.9 million for fiscal 1996;
o Charges for the impairment of assets of $14.5 million for fiscal 1999, $.7
million for fiscal 1997, and $9.9 million for fiscal 1996;
o Foreign currency hedge contract related gain of $2.3 million for fiscal 1999;
o Tax benefit and valuation allowance reductions of $22.2 million for fiscal
1999; and
o A charge of $3.5 million for a donation to the Company's charitable foundation
for fiscal 1999.
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Management's Discussion and Analysis
Management's Discussion of Continuing Operations
The PE Corporation ("PE" or the "Company") is comprised of two separate business
segments in continuing operations: the PE Biosystems group and the Celera
Genomics group. The performance of these businesses is reflected separately by
two classes of common stock: PE Biosystems stock and Celera Genomics stock. The
PE Biosystems group manufactures and markets biochemical instrument systems and
associated consumable products for life science research and related
applications. The Celera Genomics group is engaged principally in the
generation, sale and support of genomic information databases and related
information management and analysis software; discovery, validation and
licensing of proprietary gene products, genetic markers and information
regarding genetic variability; and related consulting and contract research and
development services.
You should read this discussion with our consolidated financial statements.
Historical results and percentage relationships are not necessarily indicative
of operating results for any future periods.
Throughout the following discussion of operations we refer to the impact on our
reported results of the movement in foreign currency exchange rates from one
reporting period to another as "foreign currency translation."
Discontinued Operations
Effective May 28, 1999, we completed the sale of our Analytical Instruments
business to EG&G, Inc. ("EG&G"). Analytical Instruments, formerly a unit of our
PE Biosystems group, develops, manufactures, markets, sells, and services
analytical instruments used in a variety of markets. As part of the sale, the
rights to the "Perkin-Elmer" name were transferred to EG&G.
The aggregate consideration we received was $425 million, consisting of $275
million in cash and one-year secured promissory notes in the aggregate principal
amount of $150 million which bear interest at a rate of 5% per annum. We
recognized a net gain on disposal of discontinued operations of $100.2 million,
net of $87.8 million of income taxes. The transaction is subject to post-closing
adjustments pursuant to the terms of the agreement with EG&G.
Amounts previously reported for Analytical Instruments have been reclassified
and stated as discontinued operations. See Note 15 to the consolidated financial
statements.
Events Impacting Comparability
Acquisitions, Investments, and Dispositions
On January 22, 1998, we acquired PerSeptive Biosystems, Inc. ("PerSeptive"). The
acquisition was accounted for as a pooling of interests and, accordingly, our
financial results were restated to include the combined operations.
We acquired Molecular Informatics, Inc. ("Molecular Informatics") and a 14.5%
interest, and approximately 52% of the voting rights, in Tecan AG ("Tecan")
during the second quarter of fiscal 1998, and GenScope, Inc. ("GenScope") during
the third quarter of fiscal 1997. The results of operations for these
acquisitions, each of which was accounted for as a purchase, have been included
in the consolidated financial statements since the date of each respective
acquisition. During the fourth quarter of fiscal 1999, we divested our interest
in Tecan. A before-tax gain of $1.6 million was recognized on the sale.
A discussion of significant acquisitions, investments and dispositions is
provided in Note 2 to the consolidated financial statements.
Restructuring and Other Special Charges
In fiscal 1999, non-recurring before-tax costs of $9.2 million were incurred in
connection with the recapitalization of our company. See Note 1 to the
consolidated financial statements for a discussion of the recapitalization.
During fiscal 1998, $48.1 million of before-tax charges were recorded for
restructuring and other merger costs to integrate PerSeptive into PE following
the acquisition. The objectives of the integration plan were to lower
PerSeptive's cost structure by reducing excess manufacturing capacity, achieve
broader worldwide distribution of PerSeptive's products, and combine sales,
marketing, and administrative functions. The charge included: $33.9 million for
restructuring the combined operations; $8.6 million for transaction costs; and
$4.1 million of inventory-related write-offs, recorded in cost of sales,
associated with the rationalization of certain product lines. Additional
merger-related period costs of $6.1 million for fiscal 1999 and $1.5 million for
fiscal 1998, were incurred for training, relocation, and communication in
connection with the integration.
During the fourth quarter of fiscal 1999, we completed the restructuring
actions. The cost to implement the program were $9.2 million below the $48.1
million charge recorded for fiscal 1998. As a result, during the fourth quarter
of fiscal 1999, we recorded a $9.2 million reduction of charges required to
implement the fiscal 1998 plan. A discussion of our restructuring program is
provided in Note 10 to the consolidated financial statements.
Acquired Research and Development
During fiscal 1998 and 1997, we recorded charges of $28.9 million and $26.8
million, respectively, for purchased in-process research and development in
connection with certain acquisitions. See Note 2 to the consolidated financial
statements.
In the second quarter of fiscal 1998, we expensed $28.9 million of the Molecular
Informatics acquisition cost as in-process research and development,
representing 53.6% of the purchase price. This amount was attributed and
supported by a discounted probable cash flow analysis on a project-by-project
basis. At the acquisition
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Management's Discussion and Analysis continued
date, the technological feasibility of the acquired technology had not been
established and the acquired technology had no future alternative uses.
We attributed approximately 10% of the in-process research and development value
to BioLIMS, a software system that manages data, initiates analysis programs,
and captures the results in a centralized, relational database for sequencing
instruments; 6% to GA SFDB, a client-side add-on product to several existing
gene sequencing instruments; 38% to BioMERGE, a client-server management and
integration system that organizes proprietary, public and third-party results in
a single relational database for the drug discovery and genomic research
markets; 9% to BioCLINIC, a client-server management and integration system that
organizes proprietary, public and third-party results generated from DNA and
protein sequence analysis in a single database for the clinical trials phase of
drug development; and 37% to SDK, an open architecture software platform from
which all of Molecular Informatics' future software applications were expected
to be derived.
As of the acquisition date, all of the major functionality for BioLIMS 2.0 had
been completed and the product was subsequently released in September 1998. As
of the acquisition date, BioLIMS 3.0 was in the design and scoping phase. As of
the acquisition date, GA SFDB was in early alpha phase and had been completed
concurrent with the development of BioLIMS 2.0 and was released in September
1998. As of the acquisition date, BioMerge's 3.0 functional scope was defined
and the requirements assessment had been completed and was subsequently released
in November 1998. As of the acquisition date, the BioCLINIC product requirements
had been specified and discussions had begun with two potential customers to
begin the specific software modifications. Development efforts were terminated
in April 1998 due to unsuccessful marketing efforts. As of the acquisition date,
the SDK requirements assessment had been completed and the functional scope had
been defined.
We attributed $11.8 million of the purchase price to core technology and
existing products, primarily related to the BioMERGE product. We applied a
risk-adjusted discount to the project's cash flows of 20% for existing
technology and 23% for in-process technology. The risk premium of 3% for
in-process technologies was determined by management based on the associated
risks of releasing these in-process technologies versus the existing
technologies for the emerging bioinformatics software industry. The significant
risks associated with these products include the limited operating history of
Molecular Informatics, uncertainties surrounding the market acceptance of such
in-process products, competitive threats from other bioinformatics companies and
other risks. Management is primarily responsible for estimating the fair value
of such existing and in-process technology.
During the third quarter of fiscal 1997, we acquired GenScope for $26.8 million.
GenScope, founded in 1995, represented a development stage venture with no
operating history. GenScope had effectively no revenues and only limited R&D
contract services. At the acquisition date, technological feasibility of the
acquired technology right had not been established and the acquired technology
right had no future alternative uses. We obtained the right to utilize
AFLP-based gene expression profiling technology in the field of human health,
but did not obtain any core technology or other rights. GenScope's limited
balance sheet, with assets of approximately $.2 million, had yet to deliver
commercial value. Accordingly, we recorded a charge of $25.4 million
attributable to the in-process technology purchased. We based this amount upon
the early development stage of this life science business acquired, the
technological hurdles to apply this technology to the field of human health and
the underlying cash flow projections. The acquisition represented the purchase
of development stage technology, not at the time considered commercially viable
in the health care applications that we intend to pursue. Our intent was to
first develop the technology into a set of molecular screening tools for use in
the enhancement of pharmaceutical product development. We allocated $1.4 million
of the purchase price to technology rights attributable to GenScope's AFLP-based
gene expression profiling technology. AFLP is an enhancement of the polymerase
chain reaction ("PCR") process that allows selective analysis of any portion of
genetic material without the specific, prior sequence information normally
required for PCR. Of the $25.4 million expensed as in-process research and
development, $5.5 million represented a contingent liability due on the issuance
of a process patent for technology under development.
Through June 30, 1999, we incurred approximately $12.2 million in additional
research and development costs to further develop the AFLP technology in the
field of human health. We anticipate spending an additional $2.2 million in
fiscal 2000 to substantially complete such project. Such costs approximate those
anticipated at the date of acquisition.
Asset Impairment
During the fourth quarter of fiscal 1999, we incurred a $14.5 million charge to
cost of sales for the impairment of intangible assets associated with the
Molecular Informatics business. This impairment resulted primarily from a
decline in management's assessment of future cash flows from this business which
included the discontinuance of certain product lines in the fourth quarter.
During fiscal 1997, a $.7 million charge was recorded to cost of sales for the
write-down of certain impaired assets.
See Note 1 to the consolidated financial statements.
Gain on Investments
Fiscal 1999, 1998, and 1997 included before-tax gains of $4.5 million, $1.6
million, and $64.9 million, respectively, related to the sale and release of
contingencies on minority equity investments. As previously described, fiscal
1999 also included a before-tax gain of $1.6 million related to the sale of our
interest in Tecan. See Note 2 to the consolidated financial statements.
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Management's Discussion and Analysis continued
Other Events Impacting Comparability
During the fourth quarter of fiscal 1999, a $10.1 million charge was recorded to
selling, general and administrative expenses for costs related to the
acceleration of certain long-term compensation programs as a result of the
recapitalization of our company and the attainment of performance targets.
During the fourth quarter of fiscal 1999, we made a $3.5 million donation to our
company's charitable foundation, which supports educational and other charitable
programs. The charge was recorded to selling, general and administrative
expenses.
A gain of $2.3 million related to foreign currency hedge contracts was
recognized in other income, net during the fourth quarter of fiscal 1999.
The effective income tax rate for fiscal 1999 included certain tax benefit and
valuation allowance reductions of $22.2 million. See Note 4 to the consolidated
financial statements.
Results of Continuing Operations--1999 Compared With 1998
We reported income from continuing operations of $96.8 million for fiscal 1999
compared with $15.7 million for fiscal 1998. On a segment basis, the PE
Biosystems group reported income from continuing operations of $148.4 million
for fiscal 1999 compared with $24.0 million for fiscal 1998 and the Celera
Genomics group reported a net loss of $44.9 million for fiscal 1999, compared
with $8.3 million for fiscal 1998.
Income from continuing operations for our company, on a comparable basis
excluding the special items previously described, increased 4.0% to $91.4
million for fiscal 1999 compared with $87.9 million for fiscal 1998. On a
segment basis, the PE Biosystems group, excluding the special items, reported an
increase of 44.8% in income from continuing operations for fiscal 1999 compared
with the prior year. Excluding the fiscal 1999 special items allocated to the
Celera Genomics group of $4.6 million for costs incurred in connection with the
recapitalization and $1.0 million for costs related to the acceleration of
certain compensation programs, the group reported a net loss of $39.6 million
compared with $8.3 million for fiscal 1998.
Net revenues were $1,216.9 million for fiscal 1999 compared with $944.3 million
for fiscal 1998, an increase of 28.9%. On a segment basis, net revenues for the
PE Biosystems group increased 30.0% to $1,221.7 million for fiscal 1999,
compared with $940.1 million for the prior year. The Celera Genomics group
reported net revenues of $12.5 million for fiscal 1999, compared with $4.2
million for fiscal 1998.
Net revenues for the PE Biosystems group, excluding the results of Tecan,
increased 25.9% compared with the prior year. The effects of foreign currency
translation increased net revenues by less than 1% compared with the prior year.
Net revenues from shipments to the Celera Genomics group were $17.3 million for
fiscal 1999 and represented less than 2% of the group's net revenues. There were
no revenues to the Celera Genomics group for fiscal 1998. Geographically,
excluding the net revenues of Tecan, the PE Biosystems group reported revenue
growth in all regions for fiscal 1999 compared with the prior year. Revenues
increased 32.5% in the United States, 19.5% in Europe, 20.9% in the Far East and
12.6% in Latin America and other markets, compared with the prior year. Demand
for the PE Biosystems group's new ABI PRISM(R) 3700 DNA Analyzer, which began
shipping in the second quarter of fiscal 1999, was strong. Shipments for
sequence detection systems and liquid chromatography/mass spectrometry ("LC/MS")
products also contributed to the growth.
Net revenues for the Celera Genomics group increased $8.3 million for fiscal
1999 compared with the prior year. Revenues for contract research services
increased $4.5 million, relating primarily to expression-based gene discovering
services in the agricultural market, and $2.8 million from the group's new
genomic information and database products, mainly from early access
subscriptions.
Gross margin for our company as a percentage of net revenues was 54.1% for
fiscal 1999, compared with 54.3% for the prior year. The PE Biosystems group's
fiscal 1999 gross margin included $14.5 million for the impairment of intangible
assets associated with the Molecular Informatics business. Fiscal 1998 gross
margin included $4.1 million of inventory-related write-offs associated with the
rationalization of certain product lines in connection with the acquisition of
PerSeptive. On a comparable basis, excluding the special items for both years,
gross margin as a percentage of net revenues was 55.1% for fiscal 1999 and 54.5%
for fiscal 1998. The improved gross margin was primarily the result of a change
in product mix. Increased unit sales of reagents to support genetic analysis
systems, increased royalty revenues, and continued demand in instrument sales of
higher margin genetic analysis product offerings contributed to the growth.
SG&A expenses for our company were $364.1 million for fiscal 1999, compared with
$283.4 million for fiscal 1998, an increase of 28.5%. On a segment basis, SG&A
expenses were $335.9 million compared with $276.7 million for fiscal 1999 and
1998, respectively, for the PE Biosystems group, and $28.3 million compared with
$6.7 million for fiscal 1999 and 1998, respectively, for the Celera Genomics
group.
SG&A expenses for the PE Biosystems group, excluding Tecan, increased 15.6% for
fiscal 1999 compared with the prior year. Fiscal 1999 expenses included a charge
of $9.1 million for costs related to the acceleration of certain long-term
compensation programs as a result of the recapitalization of our company and the
attainment of performance targets. Fiscal 1999 expenses also included $3.5
million for a contribution to our company's charitable foundation which supports
educational and other charitable programs. On a comparable basis, excluding the
special items, SG&A expenses increased 10.8%. This increase was due to higher
planned expenses, reflecting the growth in sales and orders. As a percentage of
net revenues, excluding Tecan and the special items, SG&A expenses were 25.9%
for fiscal 1999 compared with 29.4% for the prior year.
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Management's Discussion and Analysis continued
The Celera Genomics group's SG&A expenses increased $21.5 million for fiscal
1999 compared with the prior year. The increase was primarily related to the
start-up and ongoing operations of the new genomic information business. SG&A
expenses for fiscal 1999 included $1.0 million for costs related to the
acceleration of certain compensation programs as a result of the
recapitalization of our company and the attainment of performance targets.
R&D expenses for our company were $179.3 million for fiscal 1999 compared with
$115.8 million for fiscal 1998, an increase of 54.9%. R&D expenses for the PE
Biosystems group increased 26.6% compared with the prior year to $133.5 million
for fiscal 1999. Excluding Tecan, expenses increased 19.5% compared with the
prior year in support of the introduction of new products and the acceleration
of product development. As a percentage of net revenues, excluding Tecan, R&D
expenses were 10.7% for fiscal 1999 compared with 11.2% for the prior year. The
Celera Genomics group's R&D expenses increased to $48.4 million for fiscal 1999
compared with $10.3 million for fiscal 1998, primarily as a result of
establishing and operating the sequencing facility and computing center of the
new genomic information business.
During fiscal 1998, $48.1 million of before-tax charges were recorded for
restructuring and other merger costs to integrate PerSeptive into the PE
Biosystems group of our company following the acquisition. The objectives of the
integration plan were to lower PerSeptive's cost structure by reducing excess
manufacturing capacity, achieve broader worldwide distribution of PerSeptive's
products, and combine sales, marketing, and administrative functions. The charge
included: $33.9 million for restructuring the combined operations; $8.6 million
for transaction costs; and $4.1 million of inventory-related write-offs,
recorded in cost of sales, associated with the rationalization of certain
product lines. Additional merger-related period costs of $6.1 million for fiscal
1999 and $1.5 million for fiscal 1998 were incurred for training, relocation,
and communication costs.
The $33.9 million restructuring charge included $13.8 million for
severance-related costs and workforce reductions of approximately 170 employees,
consisting of 114 employees in production labor and 56 employees in sales and
administrative support. The remaining $20.1 million represented facility
consolidation and asset-related write-offs that included: $11.7 million for
contract and lease terminations and facility-related expenses in connection with
the reduction of excess manufacturing capacity; $3.2 million for dealer
termination payments, sales office consolidations, and consolidation of sales
and administrative support functions; and $5.2 million for the write-off of
certain tangible and intangible assets and the termination of certain
contractual obligations. Transaction costs of $8.6 million included
acquisition-related investment banking and professional fees.
During the fourth quarter of fiscal 1999, our company completed the
restructuring actions. The costs to implement the program were $9.2 million
below the $48.1 million charge recorded for fiscal 1998. As a result, during the
fourth quarter of fiscal 1999, the PE Biosystems group recorded a $9.2 million
reduction of charges required to implement the fiscal 1998 plan. See Note 10
to the consolidated financial statements.
During fiscal 1999, our company recorded a before-tax special charge of $9.2
million for costs incurred in connection with the recapitalization of our
company. These costs included investment banking and professional fees. On a
segment basis, the PE Biosystems group and the Celera Genomics group were each
allocated 50% of the total costs.
Fiscal 1998 included $28.9 million of purchased in-process research and
development associated with our company's acquisition of Molecular Informatics
for the PE Biosystems group.
<TABLE>
<CAPTION>
Operating Income
(Dollar amounts in millions) 1999 1998
- --------------------------------------------------------------
<S> <C> <C>
Operating income before special items $142.8 $117.6
Asset impairment (14.5)
Long-term compensation programs (10.1)
Charitable foundation contribution (3.5)
Restructuring and other
merger costs, net 3.1 (48.1)
Recapitalization costs (9.2)
Acquired research and development (28.9)
- --------------------------------------------------------------
Operating income $108.6 $ 40.6
- --------------------------------------------------------------
</TABLE>
Operating income for our company increased to $108.6 million for fiscal 1999
compared with $40.6 million for fiscal 1998. On a comparable basis, excluding
the special items previously described, operating income increased 21.4% to
$142.8 million for fiscal 1999 compared with $117.6 million for the prior year.
On a segment basis, operating income for the PE Biosystems group increased to
$187.9 million for fiscal 1999 compared with $53.4 million for the prior year.
On a comparable basis, excluding the results of Tecan and the special items
previously described, operating income increased 60.7% for fiscal 1999 compared
with the prior year. The PE Biosystems group benefited from increased revenues,
higher gross margins, and lower operating expenses as a percentage of net
revenues. Higher operating income from sequencing, mapping systems, and LC/MS
products were the primary contributors. The effects of currency translation for
the PE Biosystems group increased operating income by less than 1% for fiscal
1999 compared with the prior year. Operating income as a percentage of net
revenues, excluding the results of Tecan and the special items, increased to
17.6% for fiscal 1999 compared with 13.8% for the prior year.
Operating loss for the Celera Genomics group was $68.8 million for fiscal 1999
compared with $12.8 million for fiscal 1998. Excluding the $4.6 million of
special charges for costs incurred in connection with the recapitalization and
the $1.0 million of costs related to the acceleration of certain long-term
compensation programs, the operating loss was $63.2 million for fiscal 1999.
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Management's Discussion and Analysis continued
For fiscal 1999 and 1998, the PE Biosystems group recorded gains of $4.5 million
and $1.6 million, respectively, on the sale and release of contingencies on
minority equity investments. Fiscal 1999 also included a gain of $1.6 million
related to the sale of our interest in Tecan.
Interest expense was $3.8 million for fiscal 1999 compared with $4.9 million for
the prior year. This decrease was primarily due to the refinancing of
PerSeptive's 8-1/4% Convertible Subordinated Notes ("the PerSeptive Notes") and
lower average interest rates. Interest income was $2.9 million for fiscal 1999
compared with $5.9 million for the prior year, primarily because of lower
average cash balances during the year.
Other income, net for fiscal 1999 was $.5 million compared with $3.1 million for
the prior year. Fiscal 1999 other income, net primarily related to the
revaluation of foreign exchange contracts and a legal settlement that were
partially offset by the loss on the disposal of certain assets and other
non-operating costs. The other income, net for fiscal 1998 resulted from a gain
on the sale of certain operating and non-operating assets.
The effective income tax rate was 4% for fiscal 1999 and 54% for fiscal 1998.
Excluding Tecan and the special items, the effective income tax rate was 25% for
fiscal 1999 and 24% for fiscal 1998. The effective income tax rate for fiscal
1999 included the release of valuation allowances of $17.4 million. The
valuation allowance was reduced because management believes, now that the sale
of the Analytical Instruments business has been completed, that it is more
likely than not that the deferred tax assets to which the valuation allowance
related will be realized. An analysis of the differences between the federal
statutory income tax rate and the effective tax rate is provided in Note 4 to
the consolidated financial statements.
The PE Biosystems group incurred minority interest expense of $13.4 million for
fiscal 1999 and $5.6 million for fiscal 1998 relating to our company's 14.5%
financial interest in Tecan. As previously indicated, we divested our interest
in Tecan during the fourth quarter of fiscal 1999.
Results of Continuing Operations--1998 Compared With 1997
We reported income from continuing operations of $15.7 million for fiscal 1998
compared with $102.5 million for the prior year. On a comparable basis,
excluding the special items previously described, income from continuing
operations was $87.9 million for fiscal 1998 compared with $73.7 million for
fiscal 1997.
On a segment basis, the PE Biosystems group reported income from continuing
operations of $24.0 million for fiscal 1998 compared with $132.7 million for
fiscal 1997. On a comparable basis, excluding the special items previously
described, income from continuing operations increased 23.2% to $95.0 million
for fiscal 1998 compared with $77.1 million for fiscal 1997. The Celera Genomics
group reported a net loss of $8.3 million for fiscal 1998 compared with $30.2
million for the prior year, or $3.4 million excluding the $26.8 million for
purchased research and development charged in connection with the GenScope
acquisition.
Net revenues for our company were $944.3 million for fiscal 1998 compared with
$768.4 million for the prior year, an increase of $22.9%. On a segment basis,
net revenues for the PE Biosystems group were $940.1 million for fiscal 1998
compared with $767.5 million for fiscal 1997, an increase of 22.5%. Celera
Genomics group's net revenues increased from $.9 million for fiscal 1997 to $4.2
million for fiscal 1998, primarily related to AgGen.
Net revenues for the PE Biosystems group, excluding Tecan, increased 15.9%
compared with the prior year. The effects of currency translation decreased net
revenues by approximately $33 million, or 4%, compared with the prior year, as
the U.S. dollar strengthened against most European and Far Eastern currencies.
On a worldwide basis, excluding Tecan and the effects of currency translation,
revenues would have increased approximately 20% compared with the prior year.
Increased demand for genetic analysis, LC/MS, and polymerase chain reaction
("PCR") product lines was the primary contributor. All geographic markets for
the PE Biosystems group reported increased revenues over the prior year.
Excluding Tecan, net revenues in the United States, Europe, and the Far East
increased 24.0%, 10.7%, and 4.6%, respectively. Before the effects of currency
translation, and excluding Tecan, revenues in Europe and the Far East would have
increased approximately 18% and 14%, respectively, compared with the prior year.
The PE Biosystems group believes slower Japanese government funding in the
second half of fiscal 1998 and the lack of a supplemental budget, which added to
fiscal 1997 revenues, contributed to a lower growth rate of only 3% in the
Japanese market.
Gross margin for our company as a percentage of net revenues was 54.3% for
fiscal 1998 compared with 53.0% for fiscal 1997. The PE Biosystems group's
fiscal 1998 gross margin included $4.1 million of inventory-related write-offs
associated with the rationalization of certain product lines in connection with
the acquisition of PerSeptive. Fiscal 1997 included a charge of $.7 million for
the write-down of certain other assets. Excluding the special items, gross
margin as a percentage of net revenues increased to 54.5% for fiscal 1998.
Benefits realized from the sale of higher-margin genetic analysis products and
increased royalty revenues in the United States more than offset the negative
effects of currency translation.
SG&A expenses for our company were $283.4 million for fiscal 1998 compared with
$229.9 million for fiscal 1997, an increase of 23.3%. On a segment basis, the PE
Biosystems group's SG&A expenses increased to $276.7 million for fiscal 1998
compared with $227.7 million for the prior year. The 21.5% increase in expenses,
or 14.7% excluding Tecan, was due to higher planned worldwide selling and
marketing expenses commensurate with the substantially higher revenue and order
growth. Before the effects of currency translation and excluding Tecan, SG&A
expenses increased approximately 18% compared with the prior year. As a
percentage of net revenues, SG&A expenses for the
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Management's Discussion and Analysis continued
PE Biosystems group were essentially unchanged at 29.4% for fiscal 1998 compared
with 29.7% for the prior year. SG&A expenses for the Celera Genomics group
increased from $2.2 million for fiscal 1997 to $6.7 million for fiscal 1998,
primarily reflecting the operations of the AgGen and GenScope businesses.
R&D expenses for our company increased to $115.8 million for fiscal 1998 from
$82.1 million for fiscal 1997. On a segment basis, R&D expenses for the PE
Biosystems group of $105.5 million increased 35.0% over the prior year, or 27.7%
excluding Tecan. R&D spending increased 40.6%, or 33.3% excluding Tecan, over
the prior year as the PE Biosystems group continued its product development
efforts and preparation for new product launches. As a percentage of net
revenues, the PE Biosystems group's R&D expenses increased to 11.2% compared
with 10.2% for the prior year. Celera Genomics group's R&D expenses were $10.3
million for fiscal 1998 compared with $4.0 million for fiscal 1997. Fiscal 1997
included the operations of GenScope and Linkage from the date of acquisition.
During fiscal 1998, $48.1 million of before-tax charges were recorded for
restructuring and other merger costs to integrate PerSeptive into the PE
Biosystems group of our company following the aquisition. Additional
merger-related period costs of $1.5 million for training, relocation, and
communication costs were recognized in the third and fourth quarters of fiscal
1998.
Fiscal 1998 included $28.9 million of purchased in-process research and
development associated with our company's acquisition of Molecular Informatics
for the PE Biosystems group. Fiscal 1997 included a charge of $26.8 million for
in-process research and development, related to our company's acquisitions of
GenScope and Linkage for the Celera Genomics group.
<TABLE>
<CAPTION>
Operating Income
(Dollar amounts in millions) 1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Operating income before special items $117.6 $ 95.7
Asset impairment (.7)
Restructuring and other merger costs (48.1)
Acquired research and development (28.9) (26.8)
- -------------------------------------------------------------
Operating income $ 40.6 $ 68.2
- -------------------------------------------------------------
</TABLE>
Operating income for our company was $40.6 million for fiscal 1998 compared with
$68.2 million for fiscal 1997. On a comparable basis, excluding the items
previously described, operating income increased to $117.6 million for fiscal
1998 compared with $95.7 million for the prior year, an increase of 22.9%.
On a segment basis, operating income for the PE Biosystems group decreased to
$53.4 million for fiscal 1998 compared with $100.3 million for fiscal 1997.
Excluding the special charges for restructuring and other merger costs, acquired
research and development, and the impairment of assets, operating income
increased $29.4 million, or 29.1%, primarily as a result of increased volume and
improved margins. A 23.5% increase in operating income from higher-margin
sequencing and mapping systems was the primary contributor. Excluding Tecan,
operating income before special items increased 21.6% compared with the prior
year. Before the effects of currency translation and excluding Tecan, fiscal
1998 operating income increased 38.5% compared with the prior year.
Geographically, excluding Tecan, fiscal 1998 operating income before special
items increased 48.0% in the United States, 20.1% in the Far East, and 8.0% in
Europe compared with fiscal 1997. As a percentage of net revenues, operating
income before special items increased to 13.9% for fiscal 1998 compared with
13.2% for the prior year.
Operating loss for the Celera Genomics group was $12.8 million for fiscal 1998
compared with $32.1 million for fiscal 1997. On a comparable basis, excluding
the $26.8 million charge for acquired research and development, the operating
loss for fiscal 1997 was $5.3 million.
For fiscal 1998 and 1997, the PE Biosystems group recorded gains of $1.6 million
and $64.9 million, respectively, on the sale and release of contingencies on
minority equity investments. See Note 2 to the consolidated financial
statements.
Interest expense was $4.9 million for fiscal 1998 compared with $5.9 million for
the prior year. The decrease was primarily due to the refinancing of the
PerSeptive Notes together with slightly lower outstanding debt balances and
lower average interest rates. Interest income was $5.9 million for fiscal 1998
compared with $8.8 million for the prior year, primarily because of lower cash
balances resulting from the use of cash to fund the PE Biosystems group's
continued investments and acquisitions, as well as from lower interest rates.
Other income, net for fiscal 1998 of $3.1 million, primarily related to the sale
of certain operating and non-operating assets, compared with other income, net
of $1.9 million for the prior year.
Our effective income tax rate was 54% for fiscal 1998 and 26% for fiscal 1997.
Excluding Tecan in fiscal 1998, and special items in fiscal 1998 and fiscal
1997, the effective income tax rate was 24% for fiscal 1998 compared with 27%
for fiscal 1997. Increased earnings in low tax jurisdictions reduced our tax
rate for fiscal 1998. An analysis of the differences between the federal
statutory income tax rate and the effective rate is provided in Note 4 to the
consolidated financial statements.
Minority interest expense of $5.6 million was recognized in fiscal 1998, by the
PE Biosystems group, relating to our company's 14.5% financial interest in
Tecan. See Note 2 to the consolidated financial statements.
Market Risk
The PE Biosystems group of our company operates internationally, with
manufacturing and distribution facilities in various countries throughout the
world. For fiscal 1999 and fiscal 1998, approximately 50% and 52%, respectively,
of revenues were derived from countries outside of the United States. Results
continue to be
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Management's Discussion and Analysis continued
affected by market risk, including fluctuations in foreign currency exchange
rates and changes in economic conditions in foreign markets.
Our risk management strategy utilizes derivative financial instruments,
including forwards, swaps, purchased options, and synthetic forward contracts to
hedge certain foreign currency and interest rate exposures, with the intent of
offsetting losses and gains that occur on the underlying exposures with gains
and losses on the derivatives. We do not use derivative financial instruments
for trading or other speculative purposes, nor is our company a party to
leveraged derivatives. At June 30, 1999 and June 30, 1998, outstanding hedge
contracts covered approximately 80% of the estimated foreign currency exposures
related to cross-currency cash flows to be realized over the next twelve months.
The outstanding hedges were a combination of forward, option, and synthetic
forward contracts maturing over the next twelve months.
We performed sensitivity analyses as of June 30, 1999 and June 30, 1998.
Assuming a hypothetical adverse change of 10% in foreign exchange rates, i.e., a
weakening of the U.S. Dollar, at June 30, 1999 and June 30, 1998, we calculated
hypothetical losses in future cash flows of $6.1 million and $4.1 million,
respectively. We calculated the hypothetical losses by comparing the difference
between the change in market value of both the foreign currency contracts
outstanding and the underlying exposures being hedged at June 30, 1999 and June
30, 1998, assuming the 10% adverse change in exchange rates. Actual gains and
losses in the future could, however, differ materially from these analyses,
based on changes in the timing and amount of foreign currency exchange rate
movements and actual exposures and hedges.
Interest rate swaps are used to hedge underlying debt obligations. In fiscal
1997, we executed an interest rate swap, allocated to the PE Biosystems group,
in conjunction with our entering into a five-year Japanese Yen debt obligation.
Under the terms of the swap agreement, we pay a fixed rate of interest at 2.1%
and receive a floating LIBOR interest rate. At June 30, 1999, the notional
amount of indebtedness covered by the interest rate swap was Yen 3.8 billion or
$31.5 million. The maturity date of the swap coincides with the maturity of the
Yen loan in March 2002. A change in interest rates would have no impact on our
reported interest expense and related cash payments because the floating rate
debt and fixed rate swap contract have the same maturity and are based on the
same rate index.
Management's Discussion of Financial Resources and Liquidity
The following discussion of financial resources and liquidity focuses on the
Consolidated Statements of Financial Position and the Consolidated Statements of
Cash Flows.
Cash and cash equivalents of continuing operations were $308.0 million at June
30, 1999 and $82.9 million at June 30, 1998, with total debt of $35.4 million at
June 30, 1999 and $45.8 million at June 30, 1998.
Working capital was $471.4 million at June 30, 1999 and $288.0 million at June
30, 1998. Excluding the current net assets of discontinued operations at June
30, 1998, working capital was $148.0 million. Debt to total capitalization
decreased to 4% at June 30, 1999 from 8% at June 30, 1998, as a result of a
decrease in loans payable.
Significant Changes in the Consolidated Statements of Financial Position
Effective May 28, 1999, we completed the sale of our Analytical Instruments
business to EG&G. The aggregate consideration received by our company was $425
million, consisting of $275 million in cash and one-year secured promissory
notes in the aggregate principal amount of $150 million which bear interest at a
rate of 5% per annum.
Accounts receivable increased by $78.1 million and the inventory balance
increased by $12.7 million from June 30, 1998 to June 30, 1999. On a comparable
basis, excluding Tecan from the June 30, 1998 balances, accounts receivable and
inventory levels increased by $99.6 million and $22.4 million, respectively,
from June 30, 1998 to June 30, 1999, reflecting the growth in net revenues and
backlog of the PE Biosystems group.
Prepaid expenses and other current assets increased to $79.3 million at June 30,
1999 from $62.0 million at June 30, 1998, or $57.2 million excluding Tecan. The
increase of $22.1 million, excluding Tecan, was related primarily to growth in
non-trade receivables, royalties and prepaid dealer commissions.
Other long-term assets decreased to $249.5 million at June 30, 1999 from $264.1
million at June 30, 1998. Excluding Tecan from the June 30, 1998 balance, other
long-term assets increased $32.8 million. The change was primarily a result of a
$9.4 million increase in prepaid pension assets, a net $17.0 million increase in
our equity investments, a $15.6 million increase in non-current deferred tax
asset, offset by the write-off of $14.5 million of impaired intangible assets
associated with the Molecular Informatics business.
We reduced our total deferred tax asset and related valuation allowance from
$115.5 million and $62.8 million at June 30, 1998 to $112.1 million and $37.5
million at June 30, 1999. This resulted in an overall increase to the total
deferred tax asset after valuation allowance of $21.9 million. The valuation
allowance relates primarily to foreign and domestic tax loss carryforwards,
domestic tax credit carryforwards and other domestic deferred tax assets. A
portion of the valuation allowance is attributable to tax loss and credit
carryforwards and other deferred tax assets which we acquired as part of the
purchase of PerSeptive in fiscal 1998. In evaluating our need for a valuation
allowance, we considered all available positive and negative evidence, including
historical information supplemented by information about future years. We
evaluate the need for the valuation allowance periodically for each tax-paying
component in each tax jurisdiction. The following factors significantly
influenced our conclusion regarding the need for a valuation allowance: (1) the
limitation under the Internal Revenue Code on the amount of
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Management's Discussion and Analysis continued
annual utilization of domestic loss carryforwards and credits of PerSeptive, and
(2) the various expiration dates of the foreign loss carryforwards.
Accounts payable increased to $165.1 million at June 30, 1999 from $119.6
million at June 30, 1998. Excluding Tecan from the June 30, 1998 balance,
accounts payable increased $50.0 million. The increase resulted primarily from
higher purchases to support production and operating requirements of the PE
Biosystems group and the rapid progress in establishing the infrastructure of
the Celera Genomics group.
Accrued salaries and wages increased $17.5 million to $47.5 million at June 30,
1999 from $30.0 million at June 30, 1998. Excluding Tecan from the June 30, 1998
balance, accrued salaries and wages increased $20.7 million reflecting the
timing of payments for both groups and the increased headcount of the Celera
Genomics group.
Accrued taxes on income increased $48.4 million to $128.3 million at June 30,
1999 from $79.9 million at June 30, 1998. Excluding Tecan from the June 30, 1998
balance, accrued taxes on income increased $52.2 million as a result of the tax
on the gain from the sale of the Analytical Instruments business in foreign tax
jurisdictions.
Other accrued expenses increased by $55.4 million to $177.9 million at June 30,
1999 from $122.5 million at June 30, 1998. Excluding Tecan from the June 30,
1998 balance, other accrued expenses increased by $61.7 million as a result of
higher warranty and installation accruals, reflecting the increase in volume of
the PE Biosystems group, an increase in deferred revenues, and higher benefit
and certain compensation accruals of both groups.
At June 30, 1998, $43.8 million of minority interest was recognized in
connection with Tecan. During the fourth quarter of fiscal 1999 we divested our
interest in Tecan.
Consolidated Statements of Cash Flows
Operating activities from continuing operations generated $69.1 million of cash
for fiscal 1999 compared with $68.1 million for fiscal 1998 and $73.4 million
for fiscal 1997. For fiscal 1999, higher income-related cash flow and increased
operating liabilities were only partially offset by cash used for operating
assets.
For fiscal 1999, net cash provided by investing activities from continuing
operations was $154.1 million, compared with net cash used of $129.3 million for
fiscal 1998. During fiscal 1999, we generated $325.8 million in net cash
proceeds from the sale of various assets. Net cash proceeds included $275.0
million from the sale of the Analytical Instruments business, $30.0 million from
the sale of Tecan, and $20.8 million from the sale of minority equity
investments and certain non-operating assets. The proceeds were partially offset
by $176.0 million of capital expenditures. Fiscal 1999 capital expenditures were
$92.1 million for the PE Biosystems group, which included $12.9 million as part
of the strategic program to improve our information technology infrastructure,
$17.5 million for the acquisition of an airplane, and $10.6 million of capital
equipment leased to the Celera Genomics group. Capital expenditures for the
Celera Genomics group were $94.5 million for fiscal 1999. The capital
expenditures included $46.3 million for the purchase of land and buildings in
Rockville, Maryland and $22.9 million for improvements thereon. For fiscal 1999,
$5.3 million was used for various acquisitions and investments. See Note 2 to
the consolidated financial statements.
For fiscal 1998, net cash used by investing activities from continuing
operations was $129.3 million compared with net cash provided by investing
activities of $24.7 million for fiscal 1997. During fiscal 1998, the PE
Biosystems group generated $19.5 million in net cash proceeds from the sale of
assets and $9.7 million from the collection of a note receivable. The proceeds
were more than offset by $71.8 million of capital expenditures by our company,
which included $33.7 million as part of the strategic program to improve our
information technology infrastructure, and $98.0 million for acquisitions and
investments, primarily Tecan and Molecular Informatics.
For fiscal 1997, we generated $99.7 million in net cash proceeds from the sale
of our company's equity interests in Etec Systems, Inc. and Millennium
Pharmaceuticals, Inc. and from the sale of certain other non-operating assets.
These proceeds were partially offset by $5.0 million used for acquisitions and
$58.1 million for capital expenditures that included $9.5 million for
information technology infrastructure improvements and $12.1 million for the
acquisition of an airplane.
Net cash provided by financing activities was $43.6 million for fiscal 1999
compared with net cash used of $37.7 million for fiscal 1998. For fiscal 1999,
we received $96.4 million of proceeds from employee stock option plan exercises
compared with $33.6 million for fiscal 1998. Fiscal 1999 included $2.2 million
for the purchase of shares of common stock for treasury. No shares were
repurchased during fiscal 1998. Dividends paid were $34.2 million for fiscal
1999 and $39.1 million for fiscal 1998. Reduction in loans payable and
principal payments on long-term debt were $16.4 million for fiscal 1999,
compared with $32.2 million for fiscal 1998. The fiscal 1998 principal payment
on long-term debt included $24.7 million for the redemption of the PerSeptive
Notes.
During fiscal 1997, we generated $1.8 million from the sale of equity put
warrants and $33.6 million of proceeds from employee stock plan exercises. These
were offset by stockholder dividends of $29.5 million. Fiscal 1997 included
$25.1 million for the purchase of shares of common stock for treasury. Purchases
of common stock for treasury were made in support of various stock plans.
During fiscal 1999, we made cash payments of $8.1 million for obligations
related to restructuring plans and other merger costs. Restructuring liabilities
remaining at June 30, 1999 were $5.8 million for the fiscal 1998 plan. See Note
10 to the consolidated financial statements. The funding for the remaining
restructuring liabilities will be from current cash balances and funds generated
from operating activities.
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Management's Discussion and Analysis continued
We believe our cash and short-term investments, funds generated from operating
activities, and available borrowing facilities are sufficient to provide for our
anticipated financing needs over the next two years. At June 30, 1999, we had
unused credit facilities totaling $339 million.
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 operations and
resulting financial position.
Year 2000
In fiscal 1997, we initiated a worldwide program to assess the expected impact
of the Year 2000 date recognition problem on our existing internal computer
systems; our non-information technology systems, including embedded and process
control systems; our product offerings; and our significant suppliers. The
purpose of this program is to ensure the event does not have a material adverse
effect on our business operations.
Regarding our existing internal computer systems, the program involves a mix of
purchasing new systems and modifying existing systems, with the emphasis on
replacement of applications developed in-house. Replacement projects are
currently underway, and are anticipated to be substantially completed for all
business-critical systems worldwide by December 31, 1999. The program includes
replacement of applications that, for reasons other than Year 2000
noncompliance, had been previously selected for replacement. The replacement
projects, which began in fiscal 1997, are expected to offer improved
functionality and commonality over current systems, while at the same time
addressing the Year 2000 problem.
With respect to our current product offerings, the program involves performing
an inventory of current products, assessing their compliance status, and
constructing a remediation plan where appropriate. Significant progress has been
made in each of these three phases and we expect our current product offerings
to be Year 2000 compliant by December 31, 1999. A substantial portion of the PE
Biosystems group's current product offerings is Year 2000 compliant. All of
Celera Genomics group's current product offerings are Year 2000 compliant.
The program also addresses the Year 2000 compliance efforts of our significant
suppliers, vendors, and third-party interface systems. As part of this analysis,
we identified and prioritized these suppliers, vendors, and third parties and
have sought written assurances from them that they will be Year 2000 compliant.
There can be no assurance that the systems of other companies with which we
deal, or on which our systems rely will be timely converted, or that any such
failure to convert by another company could not have a material adverse effect
on our company. We have not fully determined the extent to which our interface
systems may be impacted by third parties' systems, which may not be Year 2000
compliant but are addressing this issue in our contingency plans noted below.
As of June 1999, we were over 90% complete in accomplishing the objectives
established in our program. Our preliminary estimate of the total cost for this
multi-year program covering 3-4 years is approximately $150 million. This
includes amounts previously budgeted for information technology infrastructure
improvements and estimates of remediation costs on components not yet fully
assessed. Incremental spending has not been and is not expected to be material
because most Year 2000 compliance costs will be met with amounts that are
normally budgeted for procurement and maintenance of PE's information systems,
production, and facilities equipment. The redirection of spending to implement
Year 2000 compliance plans may in some instances delay productivity
improvements.
We have also engaged a consulting firm to provide periodic assessments of our
Year 2000 project plans and progress. Because of the importance of addressing
the Year 2000 problem, we have created a Year 2000 business continuity planning
team which has developed, and will continue to develop, business contingency
plans to address any issues that may not be corrected by implementation of our
Year 2000 compliance plan in a timely manner. Contingency plans include
identification of systems and third party risks, an analysis of strategies and
available resources to restore operations, and a recovery program that
identifies participants, processes, and significant equipment. If we are not
successful in implementing our Year 2000 compliance plan, or there are delays in
and/or increased costs associated with implementing such changes, the Year 2000
problem could have a materially adverse effect on our consolidated results of
operations and financial condition.
At this stage of the process, we believe that it is difficult to specifically
identify the cause of the most reasonable worst case Year 2000 scenario. A
reasonable worst case Year 2000 scenario would be the failure of significant
suppliers and vendors to have corrected their own Year 2000 issues which could
cause disruption of our operations and have a materially adverse effect on our
financial condition. The impact of such disruption cannot be estimated at this
time. In the event we believe that any of our significant suppliers or vendors
are unlikely to be able to resolve their own Year 2000 issues, our contingency
plans include seeking additional sources of supply.
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Management's Discussion and Analysis continued
Euro Conversion
A single currency called the euro was introduced in Europe on January 1, 1999.
Eleven of the fifteen member countries of the European Union agreed to adopt the
euro as their common legal currency on that date. Fixed conversion rates between
these participating countries' existing currencies (the "legacy currencies") and
the euro were established as of that date. The legacy currencies are scheduled
to remain legal tender as denominations of the euro until at least January 1,
2002, but not later than July 1, 2002. During this transition period, parties
may settle transactions using either the euro or a participating country's legal
currency.
We are currently evaluating the impact of the euro conversion on our computer
and financial systems, business processes, market risk, and price competition.
We do not expect this conversion to have a material impact on our results of
operations, financial position, or cash flows.
Recently Issued Accounting Standards
and Other
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The provisions of the statement require the
recognition of all derivatives 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 depends on the
intended use of the derivative and the resulting designation. We are required to
implement the statement in the first quarter of fiscal 2001. Management is
currently analyzing the statement to determine the impact, if any, on the
consolidated financial statements.
We continue to apply APB No. 25 in accounting for our stock-based compensation
plans. Accordingly, no compensation expense has been recognized for these plans,
as all options have been issued at fair value. The effect of accounting for such
plans at fair value, under SFAS No. 123, "Accounting for Stock Based
Compensation," would be to decrease fiscal 1999 income from continuing
operations by $23.1 million. The effect of accounting for such plans at fair
value would be to decrease the PE Biosystems group's fiscal 1999 income from
continuing operations by $.20 per diluted share, and to increase the Celera
Genomics group's fiscal 1999 net loss by $.10 per diluted share. The method used
to determine the fair value is the Black-Scholes option pricing model.
Accordingly, changes in dividend yield, volatility, interest risks and option
life could have a material effect on the fair value. See Note 8 to the
consolidated financial statements for a more detailed discussion regarding the
accounting for stock-based compensation at fair value.
Outlook
The PE Biosystems group expects to continue to grow and maintain profitability
for fiscal 2000 on the strength of robust demand and several new products.
Fiscal 2000 will focus on growing product lines across a broad array of base
technologies and exploring the needs of evolving markets. Orders for genetic
analysis systems and reagents, sequence detection systems, and mass spectroscopy
products continue to be strong. At June 30, 1999, backlog increased to
approximately $200 million.
We remain concerned about adverse currency effects because approximately 50% of
the PE Biosystems group's revenues were derived from regions outside the United
States for fiscal 1999.
The Celera Genomics group expects to see an expansion of its customer base for
the new genomic information and database products, with corresponding increases
in revenues throughout fiscal 2000. Additionally, the group expects to benefit
from a three-year gene discovery agreement with Rhone-Poulenc Rorer ("RPR") to
identify therapeutic targets for a variety of human diseases by applying
GenScope's proprietary technology to RPR's disease model systems.
Despite the potential for increased revenues, the Celera Genomics group expects
that it will continue to incur significant operating losses for fiscal 2000.
Higher R&D spending will be needed to support the expected ramp-up in sequencing
activities. Also, development costs associated with information management and
analysis software will increase. We believe the Celera Genomics group has
adequate funding to meet its working capital requirements through 2001.
Forward-Looking Statements
Certain statements contained in this report, including the Outlook section, are
forward-looking and are subject to a variety of risks and uncertainties. These
statements may be identified by the use of forward-looking words or phrases such
as "believe," "expect," "anticipate," "should," "planned," "estimated," and
"potential," among others. These forward-looking statements are based on our
current expectations. The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for such forward-looking statements. In order to comply
with the terms of the safe harbor, we note that a variety of factors could cause
our actual results and experience to differ materially from the anticipated
results or other expectations expressed in such forward-looking statements. The
risks and uncertainties that may affect the operations, performance,
development, and results of our businesses include, but are not limited to:
Factors Relating to PE Biosystems
Rapidly changing technology in life sciences could make PE Biosystems' product
line obsolete unless it continues to improve existing products and develop new
products. A significant portion of the net revenues for PE Biosystems each year
is derived from products that did not exist in the prior year. PE Biosystems'
future success will depend on its ability to continually improve
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Management's Discussion and Analysis continued
its current products and to develop and introduce, on a timely and
cost-effective basis, new products that address the evolving needs of its
customers. PE 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 PE Biosystems' future operating
results.
A significant portion of sales depends on customers' capital spending policies
and government funding which may be subject to significant and unexpected
decreases. A significant portion of PE Biosystems' instrument product sales are
capital purchases by its customers. PE Biosystems' customers include
pharmaceutical, environmental, research and chemical companies, and the capital
spending policies of these companies can have a significant effect on the demand
for PE 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 PE Biosystems' products.
In addition, a substantial portion of PE 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, particularly in the United States and
Japan, may result in reduced allocations to government agencies that fund
research and development activities. If government funding necessary to purchase
PE 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 PE Biosystems could be adversely affected.
Due to rapidly-developing technology and lack of legal precedents, PE
Biosystems' products could be subject to claims for patent infringement. PE
Biosystems' products are based on complex, rapidly-developing technologies.
These products could be developed without knowledge of previously filed but
unpublished patent applications that cover some aspect of these technologies. In
addition, there are relatively few decided court cases interpreting the scope of
patent claims in these technologies. PE Biosystems could be made a party to
litigation regarding intellectual property matters in the future. PE Biosystems
has from time to time been notified that it may be infringing certain patents
and other intellectual property rights of others. It may be necessary or
desirable in the future to obtain licenses relating to one or more products or
relating to current or future technologies, and we cannot assure you that PE
Biosystems will be able to obtain these licenses or other rights on commercially
reasonable terms.
Since PE Biosystems' business is dependent on foreign sales, fluctuating
currencies will make our revenues and operating results more volatile.
Approximately 50% of PE Biosystems' net revenues during fiscal 1999 were derived
from sales to customers outside of the United States. The majority of these
sales was based on the relevant customer's local currency. As a result, PE
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 PE Biosystems' control.
Integrating acquired technologies may be costly and may not result in
technological advances. The future growth of PE Biosystems depends in part on
its ability to acquire complementary technologies through acquisitions and
investments. Since January 1, 1996, PE Biosystems has acquired a number of
companies, including PerSeptive Biosystems, Inc., Molecular Informatics, Inc.,
and Tropix, Inc., and made investments in others. The consolidation of
employees, operations, and marketing and distribution methods could present
significant managerial challenges. For example, PE 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.
Failure of PE Biosystems' Year 2000 compliance plan or failure of the compliance
plans of PE Biosystems' limited source suppliers could materially disrupt the
sales of affected products. In fiscal 1997, PE Biosystems initiated a world-wide
program to assess the expected impact of the Year 2000 date recognition problem
on our existing computer systems; non-information technology systems, including
embedded and process-control systems; product offerings; and significant
suppliers. Portions of this program are not expected to be completed until
December 31, 1999. If we are not successful in implementing our Year 2000
compliance plan, or if our limited source suppliers are not successful in
implementing compliance plans, the Year 2000 problem could materially disrupt PE
Biosystems' sales of affected products.
Earthquakes could disrupt operations in California. A significant portion of PE
Biosystems' operations is located near major California earthquake faults. The
ultimate impact of earthquakes on PE Biosystems, 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 Celera Genomics
Celera Genomics may not achieve profitability. Celera Genomics has earned small
amounts of revenues to date and expects that it will continue to incur net
operating losses at least through 2001. As a new business, Celera Genomics faces
significant challenges in simultaneously launching and integrating its
operations, pursuing key scientific goals, and attracting customers for its
information products and services. Celera Genomics has a small number of
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Management's Discussion and Analysis continued
customers, the revenues from which will offset only a small portion of its
expenses. In order to meet its business plan, Celera Genomics will require
additional customers in the next few years. In addition, even if Celera Genomics
is able to enter into contracts with additional customers, those contracts may
be subject to milestones that may not be achieved. As a result, there is a high
degree of uncertainty that Celera Genomics will be able to achieve profitable
operations.
Celera Genomics' business plan is unique and untested. No organization has ever
attempted to combine in one business organization all of Celera Genomics'
businesses. The creation of a genomics database targeted at a wide variety of
customers, from pharmaceutical companies to university researchers, has a number
of risks, including pricing and volume issues, technology and access concerns,
computer security, pursuit of key scientific goals, and protection of
intellectual property. As a result, the creation of a business that includes all
of Celera Genomics' businesses has unique risks.
Shotgun sequencing strategy has not yet been tested on the scale and complexity
of the human genome. Some genomic scientists have criticized Celera Genomics'
sequencing strategy, known as "whole genome shotgun sequencing," as having
limitations when applied on a large scale in sequencing the human genome. Others
have stated that the human genome cannot be sequenced using whole genome shotgun
sequencing. Although scientists at The Institute for Genomic Research have used
the whole genome shotgun strategy to sequence the genomes of other organisms,
the strategy has not been used to sequence a genome with the size and complexity
of the human genome. Failure to sequence or assemble the human genome in a
timely manner may have a material adverse effect on Celera Genomics' ability to
satisfy customer requirements and achieve its business goals.
New DNA sequencers may not perform at expected levels and the integration of
over 300 sequencers may be difficult. Celera Genomics' success is heavily
dependent on the successful operation of PE Biosystems' new DNA sequencer.
Celera Genomics plans to use more than 300 of the new DNA sequencers on a
full-time basis, a scale of operation never before attempted. Failure of the DNA
sequencers to perform at expected levels, or failure of Celera Genomics to
integrate successfully its DNA sequencers in its laboratory, would materially
adversely affect Celera Genomics' ability to sequence at the rate required to
complete the human genome on a timely basis, to achieve milestones in contracts
with customers, and to perform research services effectively.
Realizing revenues from polymorphism data may be difficult. Celera Genomics
believes that the polymorphisms it discovers will add considerable value to its
integrated information system. Polymorphism data reveals information about
genetic variability among individuals. Its use in the testing of new drugs and
the diagnosis of disease, however, is largely untested. Although there has been
some early success in linking certain polymorphisms to susceptibility to disease
and outcomes of drug therapy, pharmaceutical companies are not yet certain how
polymorphism data can be used, or if it can be used on a cost-effective basis,
in clinical trials or in drug development. Furthermore, public acceptance of the
use of polymorphism data is uncertain. Current and future patient privacy and
health care laws and regulations issued by the U.S. Food and Drug Administration
may also limit the use of this data.
The ability of Celera Genomics to protect its intellectual property rights will
affect its polymorphism program. Such protection is uncertain due to the
uncertainty of patent law relating to genomics in general and the novelty of
this particular aspect of genomics. In addition, Celera Genomics will be
dependent on new technology, including technology provided by PE Biosystems, to
make the use of polymorphism information cost-effective so as to make it
marketable to the public. This technology is still in early stages of
development and its application to this area remains uncertain.
Potential initial customers are limited in number and belong to a single
industry. Celera Genomics believes that for the next few years it will derive a
significant portion of its revenues from fees paid by pharmaceutical companies
and larger biotechnology companies for its information products and services.
Celera Genomics has also had preliminary discussions with certain universities
and similar research organizations about becoming customers, but expects this
market to develop at a slower rate. The number of potential subscribers for
Celera Genomics' products during this period may be limited due to their nature
and price. Pharmaceutical and biotechnology companies could decide not to
subscribe to some or all of Celera Genomics' information products or services,
or could decide to conduct their own polymorphism discovery and analysis or work
with Celera Genomics' competitors. There have been published reports of a
proposed consortium of pharmaceutical companies to create and make public
polymorphism information.
Scientific and management staff have unique expertise which is key to Celera
Genomics' commercial viability and which would be difficult to replace. Celera
Genomics is highly dependent on the principal members of its scientific and
management staff, particularly Dr. Venter, its President. For the sequencing and
assembly of the human genome, Celera Genomics believes the following members of
its staff are essential: Dr. Venter; Dr. Mark Adams, Vice President for Genome
Programs; and Drs. Eugene Myers and Granger Sutton, who are responsible for
assembling the genome. Additional members of its medical, scientific, and
bioinformatics staff are important to the development of information, tools, and
services required for implementation of its business plan, including Dr. Sam
Broder, Executive Vice President and Chief Medical Officer. The loss of any of
these persons' expertise would be difficult to replace and could have a material
adverse effect on Celera Genomics' ability to achieve its goals, particularly
the completion of its information products.
Celera Genomics' competitive position will depend on patent and copyright
protection, which may not be available for genomics information and technology.
Celera Genomics' ability to compete and to achieve profitability may be affected
by its ability to protect its proprietary technology and intellectual property.
While Celera Genomics will be primarily dependent on revenues from access
108
<PAGE>
PE Corporation
Management's Discussion and Analysis continued
fees to its discovery and information system, obtaining patent protection may
also be important to its business. Patent law affecting Celera Genomics'
business, particularly gene sequences and polymorphisms, is uncertain.
Moreover, Celera Genomics may be dependent on protecting, through copyright law
or otherwise, its databases to prevent other organizations from taking
information from databases and copying and reselling it. Copyright law currently
provides uncertain protection to organizations like Celera Genomics that seek to
prevent others from reselling their data. Changes in copyright and patent law
could expand or reduce the extent to which Celera Genomics and its customers are
able to protect their intellectual property.
Public disclosure of genomic sequence data could jeopardize intellectual
property protection and have an adverse effect on value of Celera Genomics'
products and services. Celera Genomics, the federally funded Human Genome
Project, and others engaged in similar research have committed to make available
to the public basic human sequence data. The release of sequence data could
undermine the ability of Celera Genomics and its customers to obtain
intellectual property protection. Customers may conclude that uncertainties of
such protection decrease the value of Celera Genomics' information products and
services and, as a result, it may not be able to charge fees sufficient to allow
it to achieve profitability.
Others may succeed in commercializing genomic information before Celera
Genomics. A number of companies, institutions, and government-financed entities
are engaged in various genomics initiatives. At least two other companies,
Genset, S.A. and Incyte Pharmaceuticals, Inc., have announced their intention to
market to the pharmaceutical industry products and services similar to those
being offered by Celera Genomics. Additional competitors may attempt to compete
with Celera Genomics in the future, including companies that may seek to resell
publicly available genomic data. In addition, there have been published reports
of a proposed consortium of pharmaceutical companies to create and make public
polymorphism information.
Expected growth in the number of our employees could absorb valuable management
resources and be disruptive to the development of Celera Genomics' business.
Celera Genomics expects to continue to grow the number of employees. This growth
will require substantial effort to hire new employees and train and integrate
them in Celera Genomics' business and to develop and implement management
information systems, financial controls and facility plans. In addition, Celera
Genomics will be required to create a sales and marketing organization and
develop customer support resources as sales of its information products
increase. Celera Genomics' inability to manage growth effectively would have a
materially adverse effect on its future operating results.
Integration of GenScope and AgGen could be difficult and costly. The success of
Celera Genomics depends in part on its ability to integrate the businesses of
GenScope and AgGen, which were previously operated by PE Biosystems. In
particular, we believe that coordinating the separate scientific research
efforts will be a challenge to Celera Genomics.
Failure of Celera Genomics' Year 2000 Compliance Plan could jeopardize Celera
Genomic's information products and services. In fiscal 1997, we initiated a
world-wide program to assess the expected impact of the Year 2000 date
recognition problem on our existing computer systems; non-information technology
systems, including embedded and process-control systems; product offerings; and
significant suppliers. Portions of this program are not expected to be completed
until December 31, 1999. If we are not successful in implementing our Year 2000
compliance plan, customers may encounter difficulty in accessing and searching
Celera Genomics' databases.
109
<PAGE>
PE Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues $1,216,897 $944,306 $768,368
Cost of sales 558,813 431,738 361,315
- --------------------------------------------------------------------------------------------------------------------
Gross Margin 658,084 512,568 407,053
- --------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 364,128 283,399 229,915
Research, development and engineering 179,275 115,764 82,117
Restructuring and other special charges 6,116 43,980
Acquired research and development 28,850 26,801
- --------------------------------------------------------------------------------------------------------------------
Operating Income 108,565 40,575 68,220
Gain on investments 6,126 1,605 64,850
Interest expense 3,783 4,905 5,859
Interest income 2,869 5,938 8,826
Other income, net 522 3,147 1,881
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 114,299 46,360 137,918
Provision for income taxes 4,140 25,069 35,426
Minority interest 13,362 5,597
- --------------------------------------------------------------------------------------------------------------------
Income From Continuing Operations 96,797 15,694 102,492
- --------------------------------------------------------------------------------------------------------------------
Discontinued Operations, Net of Income Taxes
Income (loss) from discontinued operations (21,109) 40,694 27,906
Gain on disposal of discontinued operations 100,167
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 175,855 $ 56,388 $130,398
- --------------------------------------------------------------------------------------------------------------------
Attributable to PE Biosystems Group (see Note 1)
Income From Continuing Operations $ 148,365 $ 24,009 $132,739
Basic per share $ 1.48
Diluted per share $ 1.44
Income From Discontinued Operations $ 79,058 $ 40,694 $ 27,906
Basic per share $ .79
Diluted per share $ .77
Net Income $ 227,423 $ 64,703 $160,645
Basic per share $ 2.27
Diluted per share $ 2.21
- --------------------------------------------------------------------------------------------------------------------
Attributable to Celera Genomics Group (see Note 1)
Net Loss $ (44,894) $ (8,315) $(30,247)
Basic and diluted per share $ (1.79)
- --------------------------------------------------------------------------------------------------------------------
PE Corporation (see Note 1)
Income From Continuing Operations
Basic per share $ .32 $ 2.16
Diluted per share $ .31 $ 2.07
Income From Discontinued Operations
Basic per share $ .84 $ .58
Diluted per share $ .81 $ .56
Net Income
Basic per share $ 1.16 $ 2.74
Diluted per share $ 1.12 $ 2.63
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
110
<PAGE>
PE Corporation
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
(Dollar amounts in thousands except share data)
At June 30, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 308,021 $ 82,865
Short-term investments 1,226
Note receivable 150,000
Accounts receivable, less allowances for doubtful accounts of $4,518 ($4,783 - 1998) 307,056 228,985
Inventories 149,670 137,015
Prepaid expenses and other current assets 79,255 61,973
Current net assets of discontinued operations 139,959
- --------------------------------------------------------------------------------------------------------------------
Total current assets 994,002 652,023
Property, plant and equipment, net 275,792 163,325
Other long-term assets 249,513 264,001
Long-term net assets of discontinued operations 55,927
- --------------------------------------------------------------------------------------------------------------------
Total Assets $1,519,307 $1,135,276
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Loans payable $ 3,911 $ 12,099
Accounts payable 165,120 119,555
Accrued salaries and wages 47,495 30,036
Accrued taxes on income 128,261 79,860
Other accrued expenses 177,865 122,482
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 522,652 364,032
Long-term debt 31,452 33,726
Other long-term liabilities 143,678 129,513
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities 697,782 527,271
- --------------------------------------------------------------------------------------------------------------------
Minority interest 43,757
Commitments and contingencies (see Note 11)
Stockholders' Equity
Capital stock
Preferred stock
PE Corporation: $.01 par value; 10,000,000 shares and no shares authorized
at June 30, 1999 and 1998, respectively; no shares issued at June 30,
1999 and 1998
PE Corporation (predecessor): $1.00 par value; no shares and 1,000,000
shares authorized at June 30, 1999 and 1998, respectively; no shares
issued at June 30, 1999 and 1998
Common stock
PE Corporation - PE Biosystems group: $.01 par value; 500,000,000 shares and
no shares authorized at June 30, 1999 and 1998, respectively;
102,707,006 shares and no shares issued and outstanding at June 30, 1999
and 1998, respectively 1,027
PE Corporation - Celera Genomics group: $.01 par value; 225,000,000 shares
and no shares authorized at June 30, 1999 and 1998, respectively;
25,658,020 shares and no shares issued and outstanding
at June 30, 1999 and 1998, respectively 257
PE Corporation (predecessor): $1.00 par value; no shares and 180,000,000 shares
authorized at June 30, 1999 and 1998, respectively; no shares and 50,148,384
shares issued and outstanding at June 30, 1999 and 1998, respectively 50,148
Capital in excess of par value 507,341 379,974
Retained earnings 317,720 190,966
Accumulated other comprehensive loss (4,820) (9,513)
Treasury stock, at cost
PE Corporation common stock (shares: 1999 - none, 1998 - 831,213) (47,327)
- --------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 821,525 564,248
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $1,519,307 $1,135,276
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
111
<PAGE>
PE Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities From Continuing Operations
Income from continuing operations $ 96,797 $ 15,694 $102,492
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities
Depreciation and amortization 48,066 35,928 25,646
Long-term compensation programs 17,482 6,853 9,103
Deferred income taxes (25,533) 10,234 (40,819)
Gains from the sale of assets (6,126) (3,052) (66,636)
Provision for restructured operations and other merger costs (9,200) 48,080
Acquired research and development 28,850 26,801
Asset impairment 14,464
Recapitalization costs 9,232
Changes in operating assets and liabilities
Increase in accounts receivable (105,093) (23,507) (43,548)
Increase in inventories (22,387) (21,362) (4,421)
Increase in prepaid expenses and other assets (46,665) (30,862) (6,794)
Increase in accounts payable and other liabilities 98,027 1,219 71,590
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 69,064 68,075 73,414
- --------------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment
(net of disposals of $9,614, $11,339, and $5,738, respectively) (166,421) (60,481) (52,319)
Acquisitions and investments, net (5,261) (97,998) (27,676)
Proceeds from the sale of assets, net 325,766 19,496 99,710
Proceeds from the collection of notes receivable 9,673 4,978
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 154,084 (129,310) 24,693
- --------------------------------------------------------------------------------------------------------------------
Net Cash From Continuing Operations Before Financing Activities 223,148 (61,235) 98,107
- --------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Net cash provided (used) by operating activities (16,297) 10,084 39,781
Net cash used by investing activities (26,970) (40,639) (11,315)
- --------------------------------------------------------------------------------------------------------------------
Net Cash From Discontinued Operations Before Financing Activities (43,267) (30,555) 28,466
- --------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable (9,572) (6,797) (4,914)
Proceeds from long-term debt 31,033
Principal payments on long-term debt (6,843) (25,449) (22,908)
Dividends (34,156) (39,072) (29,459)
Purchases of common stock for treasury (2,187) (25,126)
Proceeds from issuance of equity put warrants 1,846
Proceeds from stock issued for stock plans 96,379 33,629 33,637
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 43,621 (37,689) (15,891)
- --------------------------------------------------------------------------------------------------------------------
Elimination of PerSeptive results from
July 1, 1997 to September 30, 1997 (see Note 1) 2,590
Effect of Exchange Rate Changes on Cash 1,654 (3,274) 1,601
- --------------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 225,156 (130,163) 112,283
Cash and Cash Equivalents Beginning of Year 82,865 213,028 100,745
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Year $308,021 $ 82,865 $213,028
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
112
<PAGE>
PE Corporation
Consolidated Statements of Stockholders' Equity
and Comprehensive Income (Loss)
<TABLE>
<CAPTION>
PE PE Celera
Corporation Biosystems Genomics Capital In
Common Common Common Excess Of Retained
(Dollar amounts and shares in thousands) Stock Stock Stock Par Value Earnings
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 50,026 $ - $ - $ 358,454 $ 69,519
Comprehensive income
Net income 130,398
Other comprehensive income, net of tax
Foreign currency translation adjustments
Minimum pension liability adjustment
Unrealized gain on investments, net
Sale of equity investment
Other comprehensive income
Comprehensive income
Cash dividends declared (29,536)
Repurchases of common stock
Issuances under stock plans 61 2,065 (1,459)
Tax benefit related to employee stock options 4,568
Restricted stock plan 6,098
Sale of equity put warrants 1,846
Other 35 1,392 (1,440)
- -------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 50,122 374,423 167,482
Comprehensive income
Net income 56,388
Other comprehensive loss, net of tax
Foreign currency translation adjustments
Minimum pension liability adjustment
Unrealized loss on investments, net
Other comprehensive loss
Comprehensive income
Cash dividends declared (31,604)
Issuances under stock plans 26 1,358 (3,468)
Tax benefit related to employee stock options 2,335
Restricted stock plan 1,858 (136)
Elimination of PerSeptive results from
July 1, 1997 to September 30, 1997 (see Note 1) 2,590
Other (286)
- -------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 50,148 379,974 190,966
Comprehensive income
Net income 175,855
Other comprehensive income, net of tax
Foreign currency translation adjustments
Minimum pension liability adjustment
Unrealized gain on investments, net
Other comprehensive income
Comprehensive income
Cash dividends declared on PE Corporation common stock (25,479)
Cash dividends declared on PE Biosystems common stock (8,677)
PE Corporation restricted stock plan (883) 1,207
Tax benefit related to employee stock options 15,735
Issuances under PE Corporation common stock plans 873 43,323 (14,862)
Recapitalization (May 6, 1999) (51,021) 510 255 50,256
Repurchases of PE Biosystems common stock
Issuances under PE Biosystems common stock plans 3 17,967 (1,290)
Issuances under Celera Genomics common stock plans 2 1,483
PE Biosystems two-for-one stock split 514 (514)
- -------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ - $ 1,027 $ 257 $ 507,341 $ 317,720
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Accumulated Total
Other Treasury Treasury Stock-
Comprehensive Stock Stock holders'
(Dollar amounts and shares in thousands) Income (Loss) At Cost Shares Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 $ (7,117) $(97,155) (2,701) $ 373,727
Comprehensive income
Net income 130,398
Other comprehensive income, net of tax
Foreign currency translation adjustments (4,125)
Minimum pension liability adjustment 28,660
Unrealized gain on investments, net 3,156
Sale of equity investment (23,245)
--------
Other comprehensive income 4,446 4,446
--------
Comprehensive income 134,844
--------
Cash dividends declared (29,536)
Repurchases of common stock (25,126) (428) (25,126)
Issuances under stock plans 31,615 1,146 32,282
Tax benefit related to employee stock options 4,568
Restricted stock plan 5,580 187 11,678
Sale of equity put warrants 1,846
Other (13)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 (2,671) (85,086) (1,796) 504,270
Comprehensive income
Net income 56,388
Other comprehensive loss, net of tax
Foreign currency translation adjustments (2,747)
Minimum pension liability adjustment 354
Unrealized loss on investments, net (4,449)
--------
Other comprehensive loss (6,842) (6,842)
--------
Comprehensive income 49,546
--------
Cash dividends declared (31,604)
Issuances under stock plans 37,759 965 35,675
Tax benefit related to employee stock options 2,335
Restricted stock plan 1,722
Elimination of PerSeptive results from
July 1, 1997 to September 30, 1997 (see Note 1) 2,590
Other (286)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 (9,513) (47,327) (831) 564,248
Comprehensive income
Net income 175,855
Other comprehensive income, net of tax
Foreign currency translation adjustments (5,415)
Minimum pension liability adjustment (1,779)
Unrealized gain on investments, net 11,887
--------
Other comprehensive income 4,693 4,693
--------
Comprehensive income 180,548
--------
Cash dividends declared on PE Corporation common stock (25,479)
Cash dividends declared on PE Biosystems common stock (8,677)
PE Corporation restricted stock plan 1,973 42 2,297
Tax benefit related to employee stock options 15,735
Issuances under PE Corporation common stock plans 45,354 789 74,688
Recapitalization (May 6, 1999)
Repurchases of PE Biosystems common stock (2,187) (20) (2,187)
Issuances under PE Biosystems common stock plans 2,187 20 18,867
Issuances under Celera Genomics common stock plans 1,485
PE Biosystems two-for-one stock split
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ (4,820) $ - - $ 821,525
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
113
<PAGE>
PE 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 PE Corporation ("PE" or "the Company"). The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Certain amounts in the consolidated financial statements
and notes have been reclassified for comparative purposes.
On January 22, 1998, the Company acquired PerSeptive Biosystems, Inc. The
acquisition was accounted for as a pooling of interests and, accordingly, the
Company's financial results were restated to include the combined operations
(see Note 2). The Company's fiscal year ended June 30 and PerSeptive's fiscal
year ended September 30. The fiscal 1998 Consolidated Statements of Operations
combined the Company's operating results for the fiscal year ended June 30, 1998
with PerSeptive's operating results for the nine months ended June 30, 1998 and
the three months ended September 30, 1997 (PerSeptive's fiscal 1997 fourth
quarter). The fiscal 1997 Consolidated Statements of Operations combined the
Company's results of operations for the fiscal year ended June 30, 1997 with
PerSeptive's results of operations for the fiscal year ended September 30, 1997.
In order to conform PerSeptive to a June 30 fiscal year-end in fiscal 1998,
PerSeptive's results of operations for the three months ended September 30, 1997
have been included in the Company's Consolidated Statements of Operations for
the fiscal years ended June 30, 1998 and 1997.
Recapitalization
On May 6, 1999, The Perkin-Elmer Corporation was merged into a subsidiary of PE
Corporation, a new Delaware corporation. The recapitalization of the Company
resulted in the issuance of two new classes of common stock called PE
Corporation-PE Biosystems Group Common Stock ("PE Biosystems stock") and PE
Corporation-Celera Genomics Group Common Stock ("Celera Genomics stock"). PE
Biosystems stock is intended to reflect separately the performance of the
established PE Biosystems' life sciences and the discontinued Analytical
Instruments businesses ("PE Biosystems group"), and Celera Genomics stock is
intended to reflect separately the performance of the Celera Genomics business
("Celera Genomics group"). Each share of common stock of The Perkin-Elmer
Corporation was converted into one share of PE Biosystems stock and 0.5 of a
share of Celera Genomics stock.
Holders of PE Biosystems stock and Celera Genomics stock are stockholders of the
Company. The PE Biosystems group and the Celera Genomics group are not separate
legal entities. As a result, stockholders are subject to all of the risks
associated with an investment in the Company and all of its businesses, assets,
and liabilities.
Financial effects arising from one group that affect the Company's 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
class of common stock relating to the other group. Any net losses of the PE
Biosystems group or the Celera Genomics group and dividends or distributions on,
or repurchases of, PE Biosystems stock or Celera Genomics stock or repurchases
of preferred stock of the Company will reduce the assets of the Company legally
available for payment of dividends.
The Company has presented financial statements of each group in addition to the
Company's consolidated financial information in order to assist investors in
making informed financial decisions.
Discontinued Operations
The Company's consolidated financial statements were restated to reflect the net
assets and operating results of the Analytical Instruments business as
discontinued operations for all periods presented (see Note 15). The net assets
have been reclassified in both the current and long-term asset sections of the
Consolidated Statements of Financial Position for all periods presented. The
operating results are reflected in the Consolidated Statements of Operations as
income (loss) from discontinued operations for all periods presented. The
accompanying notes, except Note 15, relate only to continuing operations.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The provisions of the statement require the
recognition of all derivatives 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 depends on the
intended use of the derivative and the resulting designation. The Company is
required to implement the statement in the first quarter of fiscal 2001. The
Company is currently analyzing the statement to determine the impact, if any, on
the consolidated financial statements.
Earnings per Share
Basic earnings per share is computed by dividing income from continuing
operations for the period by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing income from
continuing operations for the period by the weighted average number of common
shares outstanding including the dilutive effect of common stock equivalents.
114
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
The following tables present a reconciliation of basic and diluted earnings per
share from continuing operations:
<TABLE>
<CAPTION>
Celera
PE Biosystems Genomics
Group Group
------------------------
(Amounts in thousands except
per share amounts)
For the year ended June 30, 1999 1999
- -------------------------------------------------------------
<S> <C> <C>
Weighted average number of common
shares used in the calculation of
basic earnings (loss) per share
from continuing operations 100,406 25,100
Common stock equivalents 2,698
- -------------------------------------------------------------
Shares used in the calculation of
diluted earnings (loss) per share
from continuing operations 103,104 25,100
- -------------------------------------------------------------
Income from continuing operations
used in the calculation of basic
and diluted earnings (loss) per
share from continuing operations $148,365 $(44,894)
Income (loss) per share from
continuing operations
Basic $ 1.48 $ (1.79)
Diluted $ 1.44 $ (1.79)
- -------------------------------------------------------------
<CAPTION>
PE Corporation
-------------------
(Amounts in thousands except
per share amounts)
For the years ended June 30, 1998 1997
- -------------------------------------------------------------
<S> <C> <C>
Weighted average number of common
shares used in the calculation of
basic earnings per share
from continuing operations 48,560 47,517
Common stock equivalents 1,592 1,996
- -------------------------------------------------------------
Shares used in the calculation of
diluted earnings per share
from continuing operations 50,152 49,513
- -------------------------------------------------------------
Income from continuing operations
used in the calculation of basic
and diluted earnings per
share from continuing operations $ 15,694 $ 102,492
Income per share from
continuing operations
Basic $ .32 $ 2.16
Diluted $ .31 $ 2.07
- -------------------------------------------------------------
</TABLE>
Options to purchase 20,000 shares of PE Biosystems stock were outstanding at
June 30, 1999, but were not included in the computation of diluted earnings per
share because the effect was antidilutive. Options and warrants to purchase 5.6
million shares of Celera Genomics stock were outstanding at June 30, 1999, but
were not included in the computation of diluted loss per share because the
effect was antidilutive. Options and warrants to purchase 1.4 million, and .2
million shares of the Company's common stock were outstanding at June 30, 1998,
and 1997, respectively, but were not included in the computation of diluted
earnings per share because the effect was antidilutive.
On June 17, 1999, the Board of Directors announced a two-for-one split of PE
Biosystems group common stock. The two-for-one stock split was effected in the
form of a 100% stock dividend paid to stockholders of record as of the close of
business on July 12, 1999. All PE Biosystems share and per share data reflect
this split.
Foreign Currency
Assets and liabilities of foreign operations, where the functional
currency is the local currency, are translated into U.S. dollars at the fiscal
year-end exchange rates. The related translation adjustments are recorded as a
separate component of stockholders' equity. Foreign currency revenues and
expenses are translated using monthly average exchange rates prevailing during
the year. Foreign currency transaction gains and losses, as well as translation
adjustments of foreign operations where the functional currency is the U.S.
dollar, are included in net income. Transaction gains and losses for the periods
ended June 30, 1999, 1998, and 1997 were a loss of $5.6 million, a loss of $2.5
million, and a gain of $1.5 million, respectively.
Derivative Financial Instruments
The Company uses derivative financial instruments to offset exposure to market
risks arising from changes in foreign currency exchange rates and interest
rates. Derivative financial instruments currently utilized by the Company
include foreign currency forward contracts, synthetic forward contracts, foreign
currency options, and an interest rate swap (see Note 12).
Cash, Short-Term Investments, and Marketable Securities
Cash equivalents consist of highly liquid debt instruments, time deposits, and
certificates of deposit with original maturities of three months or less. Time
deposits and certificates of deposit with original maturities of three months to
one year are classified as short-term investments. Short-term investments, which
include marketable securities, are recorded at cost, which generally
approximates market value.
Accounts Receivable
The Company periodically sells accounts receivable arising from business
conducted in Japan. During fiscal 1999, 1998, and 1997, the Company received
cash proceeds of $40.5 million, $98.8 million, and $65.7 million, respectively,
from the sale of such receivables. The Company accounts for such sales in
accordance with SFAS 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" and believes it has adequately
provided for any risk of loss that may occur under these arrangements.
115
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
Investments
The equity method of accounting is used for investments in joint ventures that
are 20% to 50% owned and the cost method is used for investments that are less
than 20% owned. Minority equity investments are generally classified as
available-for-sale and carried at market value in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories at June 30, 1999 and 1998, included the following
components:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998
- -------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 42.8 $ 45.2
Work-in-process 10.3 7.3
Finished products 96.6 84.5
- -------------------------------------------------------
Total inventories $149.7 $137.0
- -------------------------------------------------------
</TABLE>
Property, Plant and Equipment, and Depreciation
Property, plant and equipment are recorded at cost and consisted of the
following at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998
- -------------------------------------------------------
<S> <C> <C>
Land $ 21.2 $ 11.7
Buildings and leasehold improvements 154.9 96.3
Machinery and equipment 231.4 174.9
- -------------------------------------------------------
Property, plant and equipment, at cost 407.5 282.9
Accumulated depreciation and
amortization 131.7 119.6
- -------------------------------------------------------
Property, plant and equipment, net $275.8 $163.3
- -------------------------------------------------------
</TABLE>
Major renewals and improvements that significantly add to productive capacity or
extend the life of an asset are capitalized. Repairs, maintenance, and minor
renewals and improvements are expensed when incurred.
Provisions for depreciation of owned property, plant and equipment are based
upon the expected useful lives of the assets and computed primarily by the
straight-line method. Leasehold improvements are amortized over their estimated
useful lives or the term of the applicable lease, whichever is less, using the
straight-line method. Internal-use software costs are amortized primarily over
the expected useful lives, not to exceed seven years.
Machinery and equipment includes capitalized internal-use software, primarily
related to the Company's worldwide strategic program to improve its information
technology infrastructure, of $53.2 million and $43.3 million at June 30, 1999
and 1998, respectively. Net of accumulated amortization the capitalized
internal-use software was $43.4 million and $39.3 million at June 30, 1999 and
1998, respectively.
Capitalized Software
Internal software development costs, as used in the Company's products, that 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. The 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, 1999 and 1998, capitalized software costs, net of accumulated
amortization, were $12.5 million and $4.4 million, respectively. Research and
development costs and other computer software maintenance costs related to
software development are expensed as incurred.
Intangible Assets
The excess of purchase price over the net asset value of companies acquired is
amortized on a straight-line method over periods not exceeding 40 years. Patents
and trademarks are amortized using the straight-line method over their expected
useful lives. At June 30, 1999 and 1998, other long-term assets included
goodwill, net of accumulated amortization, of $18.5 million and $69.8 million,
respectively. Accumulated amortization of goodwill was $6.7 million and $6.1
million, at June 30, 1999 and 1998, respectively.
Asset Impairment
The Company reviews long-lived assets for impairment, in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. Assets are written-down to
fair value when the carrying costs exceed this amount. During fiscal 1999, the
Company's PE Biosystems group recorded a $14.5 million charge to cost of sales
for the impairment of assets associated with the Molecular Informatics business
(see Note 2). During fiscal 1997, the Company's PE Biosystems group recorded a
$.7 million charge to cost of sales for the write-down of certain impaired
assets. The impairment losses were determined based upon estimated future cash
flows and fair values.
Revenues
Revenues are recorded at the time of shipment of products or performance of
services. Revenues from service contracts are recorded as deferred service
contract revenues and reflected in net revenues over the term of the contract,
generally one year. Subscription fees for access to the Company's genome
databases are recognized ratably over the contracted period in accordance with
the provisions of the contract. Contract research service revenues are earned
and recognized generally on a percentage of completion or as contract research
costs are incurred according to the provisions of the underlying agreement. In
some instances revenue recognition may be contingent upon the achievement of
certain milestones at each anniversary date. Amounts received in advance of
performance are recorded as deferred revenue.
Research, Development and Engineering
Research, development and engineering costs are expensed when incurred.
116
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
Supplemental Cash Flow Information
Cash paid for interest and income taxes and significant non-cash investing and
financing activities for the following periods were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
Interest $ 3.4 $ 5.7 $ 6.0
Income taxes $30.3 $60.5 $31.3
Significant non-cash investing
and financing activities
Unrealized gains (loss)
on investments $11.9 $(4.4) $ 3.1
Dividends declared not
paid $ 7.5
Common shares issued
in PerSeptive pooling 4.6
Minority interest assumed $41.3
- -------------------------------------------------------------
</TABLE>
Note 2--Acquisitions, Investments, and Dispositions
Perseptive Biosystems, Inc.
The merger (the "Merger") of Seven Acquisition Corp., a wholly-owned subsidiary
of the Company, and PerSeptive was consummated on January 22, 1998. PerSeptive
develops, manufactures, and markets an integrated line of proprietary consumable
products and advanced instrumentation systems for the purification, analysis,
and synthesis of biomolecules. As a result of the Merger, PerSeptive, which was
the surviving corporation of the Merger, became a wholly-owned subsidiary of the
Company on that date. Each outstanding share of PerSeptive common stock was
converted into shares of the Company's common stock at an exchange ratio equal
to 0.1926. Accordingly, the Company issued 4.6 million shares of its common
stock for all outstanding shares of PerSeptive common stock. Each outstanding
option and warrant for shares of PerSeptive common stock was converted into
options and warrants for the number of shares of the Company's common stock that
would have been received if such options and warrants had been exercised
immediately prior to the effective time of the Merger. All shares of Series A
Redeemable Convertible Preferred Stock of PerSeptive outstanding immediately
prior to the effective time of the Merger were converted in accordance with
their terms into shares of PerSeptive common stock which were then converted
into shares of the Company's common stock. As a result of the Merger,
PerSeptive's 8-1/4% Convertible Subordinated Notes Due 2001 (the "PerSeptive
Notes") became convertible into shares of the Company's common stock. On March
23, 1998, the Company redeemed the PerSeptive Notes for a total of $26.1 million
representing $24.7 million of principal and $1.4 million of accrued interest and
premium relating to the PerSeptive Notes. Additionally, $2.5 million of the
principal amount of the PerSeptive Notes was converted by the holders thereof
into 35,557 shares of the Company's common stock.
The Merger qualified as a tax-free reorganization and has been accounted for as
a pooling of interests. Accordingly, the Company's financial results have been
restated to include the combined operations.
Combined and separate results of the Company and PerSeptive during the periods
preceding the Merger were as follows:
<TABLE>
<CAPTION>
(Dollar amounts Adjust-
in millions) PE PerSeptive ment Combined
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Six Months Ended
December 31, 1997
(Unaudited)
Net revenues $358.7 $ 52.6 $411.3
Income (loss) from
continuing operations $ 14.9 $ (5.4) $.6 $ 10.1
Fiscal Year Ended
June 30, 1997
Net revenues $671.9 $ 96.5 $768.4
Income from
continuing operations $ 87.3 $ 15.2 $102.5
- -----------------------------------------------------------------------
</TABLE>
The adjustment for the six months ended December 31, 1997 reflects the inclusion
of PerSeptive's operating results within the Company's consolidated tax
provision. There were no material intercompany transactions between the Company
and PerSeptive during any period presented.
Tecan AG
The Company acquired a 14.5% interest and approximately 52% of the voting rights
in Tecan AG ("Tecan") in December 1997. Tecan is a world leader in the
development and manufacturing of automated sample processors, liquid handling
systems, and microplate photometry. Used in research, industrial, and clinical
markets, these products provide automated solutions for pharmaceutical drug
discovery, molecular biology, genomic testing, and clinical diagnostics. The
acquisition cost was $53.2 million in cash and was accounted for as a purchase
with a minority interest of $41.3 million. The excess purchase price over the
fair market value of the underlying assets was $46.2 million and was being
amortized over fifteen years.
During the fourth quarter of fiscal 1999, the Company divested its interest in
Tecan through a public offering in Switzerland and private sales outside of
Switzerland. Cash proceeds, net of transaction costs, from the divestiture were
$53.8 million. The Company recognized a before-tax gain of $1.6 million on the
sale.
117
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
Molecular Informatics, Inc.
During the second quarter of fiscal 1998, the Company acquired Molecular
Informatics, Inc. ("Molecular Informatics"), a leader in the development of
infrastructure software for the pharmaceutical, biotechnology, and agrochemical
industries as well as for applied markets such as forensics and human
identification. The acquisition cost was $53.9 million and was accounted for as
a purchase. In connection with the acquisition, $28.9 million was expensed as
purchased in-process research and development, $9.0 million was allocated to
goodwill and $15.7 million was allocated to other intangible assets. The initial
amortization period was ten years for the goodwill and four to seven years for
the other intangible assets.
The $28.9 million expensed as in-process research and development represented
53.6% of the purchase price and was attributed and supported by a discounted
probable cash flow analysis on a project-by-project basis. At the acquisition
date, the technological feasibility of the acquired technology had not been
established and the acquired technology had no future alternative uses.
Approximately 10% of the in-process research and development value was
attributed to BioLIMS, a software system that manages data, initiates analysis
programs, and captures the results in a centralized, relational database for
sequencing instruments; 6% was attributed to GA SFDB, a client-side add-on
product to several existing gene sequencing instruments; 38% was attributed to
BioMERGE, a client-server management and integration system that organizes
proprietary, public, and third-party results in a single relational database for
the drug discovery and genomic research markets; 9% was attributed to BioCLINIC,
a client-server management and integration system that organizes proprietary,
public, and third-party results generated from DNA and protein sequence analysis
in a single database for the clinical trials phase of drug development; and 37%
was attributed to SDK, an open architecture software platform from which all of
Molecular Informatics' future software applications were expected to be derived.
As of the acquisition date, all of the major functionality for BioLIMS 2.0 had
been completed and the product was subsequently released in September 1998. As
of the acquisition date, BioLIMS 3.0 was in the design and scoping phase. As of
the acquisition date, GA SFDB was in early alpha phase and had been completed
concurrent with the development of BioLIMS 2.0 and was released in September
1998. As of the acquisition date, BioMerge 3.0 functional scope was defined and
the requirements assessment had been completed and was subsequently released in
November 1998. As of the acquisition date, the BioCLINIC product requirements
had been specified and discussions had begun with two potential customers to
begin the specific software modifications. Development efforts were terminated
in April 1998 due to unsuccessful marketing efforts. As of the acquisition date,
the SDK requirements assessment had been completed and the functional scope had
been defined.
At the date of the acquisition, management expected to complete the majority of
these projects and commence generating significant revenues in 1999. A total of
$11.8 million of the purchase price was attributed to core technology and
existing products, primarily related to the BioMERGE product. The risk-adjusted
discount rate applied to the projects' cash flows was 20% for existing
technology and 23% for in-process technology. The risk premium of 3% for
in-process technologies was determined by management based upon the associated
risks of rolling out these in-process technologies versus the existing
technologies for the emerging bioinformatics software industry. The significant
risks associated with these products include the limited operating history of
Molecular Informatics, uncertainties surrounding market acceptance of such
in-process products, competitive threats from other bioinformatics companies,
and other risks. Management is primarily responsible for estimating the fair
value of such existing and in-process technology.
During the fourth quarter of fiscal 1999, the Company incurred a $14.5 million
charge to cost of sales for the impairment of intangible assets associated with
the Molecular Informatics business. This impairment resulted primarily from a
decline in management's assessment of future cash flows from this business which
included the discontinuance of certain product lines in the fourth quarter. The
charge to cost of sales included $5.6 million for the write-down of goodwill and
$8.9 million for the write-down of other intangible assets. The remaining
goodwill of $1.9 million and other intangible assets of $1.9 million are being
amortized over 4 years.
Biometric Imaging, Inc.
The Company acquired a minority equity interest in Biometric Imaging, Inc. for
$4.0 million during fiscal 1998. The collaboration was for the development and
manufacturing of a high-throughput screening system for use by pharmaceutical
research companies to accelerate the drug discovery process. The Company
received exclusive worldwide marketing rights for products developed for that
market.
During the third quarter of fiscal 1999, the Company recorded a before-tax gain
of $2.6 million on the sale of its entire equity interest in Biometric Imaging.
GenScope, Inc.
During the third quarter of fiscal 1997, the Company acquired GenScope, Inc.,
for $26.8 million. GenScope, founded in 1995, represented a development stage
venture with no operating history. GenScope had effectively no revenues and only
limited R&D contract services. At the acquisition date, technological
feasibility of the acquired technology right had not been established and the
acquired technology right had no future alternative uses. The Company obtained
the right to utilize AFLP-based gene expression profiling technology in the
field of human health, but did not obtain any core technology or other rights.
GenScope's limited balance sheet, with assets of approximately $.2 million, had
yet to deliver commercial value. Accordingly, the Company recorded a charge of
$25.4 million attributable to the in-process technology purchased. The Company
based this amount upon the early development stage of this life science business
acquired, the technological hurdles to the application of this technology to the
field of human health and the underlying cash flow projections. The acquisition
118
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
represented the purchase of development stage technology, not at the time
considered commercially viable in the health care applications that the Company
intends to pursue. The Company's intent was to first develop the technology into
a set of molecular screening tools for use in the enhancement of pharmaceutical
product development. The Company allocated $1.4 million of the purchase price to
technology rights attributable to GenScope's AFLP-based gene expression
profiling technology. AFLP is an enhancement of the polymerase chain reaction
("PCR") process that allows selective analysis of any portion of genetic
material without the specific, prior sequence information normally required for
PCR. Of the $25.4 million expensed as in-process research and development, $5.5
million represented a contingent liability due on the issuance of a process
patent for technology under development.
Other Acquisitions
During the fourth quarter of fiscal 1998, the Company made a minority equity
investment of $2.5 million in ACLARA BioSciences, Inc. The companies are
collaborating on the development of advanced genetic analysis systems.
The Company entered into a strategic partnership with Hyseq, Inc., acquiring a
minority equity interest for an initial cash investment of $5.0 million, during
the fourth quarter of fiscal 1997. Hyseq, Inc. applies proprietary DNA array
technology to develop gene-based therapeutic product candidates and diagnostic
products and tests. In the first quarter of fiscal 1998, the Company increased
its investment by $5.0 million.
The net assets and results of operations for the above acquisitions accounted
for under the purchase method have been included in the consolidated financial
statements since the date of each acquisition. The pro forma effect of these
acquisitions, individually or in the aggregate, on the Company's consolidated
financial statements was not significant.
Other Dispositions of Minority Equity Investments
Millennium Pharmaceuticals, Inc.
During fiscal 1999 and 1998, the Company recorded before-tax gains of $1.9
million and $1.6 million, respectively, in connection with the release of
previously existing contingencies on shares of Millennium Pharmaceuticals, Inc.
("Millennium") common stock. During fiscal 1997, the Company recognized a
before-tax gain of $27.5 million associated with the sale of approximately 50%
of its investment in Millennium and the release of previously existing
contingencies. The gain included $25.9 million from the Company's exchange of a
34% equity interest in ChemGenics Pharmaceuticals, Inc. for an approximate 6%
equity interest in Millennium.
Etec Systems, Inc.
During fiscal 1997, the Company recognized a before-tax gain of $34.7 million
from the sale of the Company's entire equity interest in Etec Systems, Inc. Net
cash proceeds from the sale were $45.8 million.
Note 3--Debt and Lines of Credit
Loans payable and long-term debt at June 30, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998
- -------------------------------------------------------
<S> <C> <C>
Loans Payable
Short-term loans $ 3.9 $12.1
- -------------------------------------------------------
Long-Term Debt
Yen loan $31.5 $27.0
Other 6.7
- -------------------------------------------------------
Total long-term debt $31.5 $33.7
- -------------------------------------------------------
</TABLE>
The weighted average interest rates at June 30, 1999 and 1998 for loans payable
were 4.5%, and 1.8%, respectively.
On March 23, 1998, the Company redeemed PerSeptive's 8-1/4% convertible
subordinated notes (see Note 2).
The Company maintains a Yen 3.8 billion variable rate long-term loan which
matures in March 2002. Through an interest rate swap agreement (see Note 12),
the effective interest rate for the loan is fixed at 2.1%.
The Company maintains a $100 million revolving credit agreement that matures on
June 1, 2000. Commitment and facility fees are based on leverage and interest
coverage ratios. Interest rates on amounts borrowed vary depending on whether
borrowings are undertaken in the domestic or Eurodollar markets. There were no
borrowings under the facility at June 30, 1999 or 1998.
At June 30, 1999, in addition to the $100 million revolving credit agreement,
the Company had $239 million of unused credit facilities for short-term
borrowings from domestic and foreign banks in various currencies. These credit
facilities consist of uncommitted overdraft credit lines that are provided at
the discretion of local banks. A PE Corporation guarantee is usually required if
the local unit borrows any funds.
Under various debt and credit agreements, the Company is required to maintain
certain minimum net worth and interest coverage ratios.
There are no maturities of long-term debt scheduled for fiscal 2000, 2001, 2003,
or 2004. The Yen 3.8 billion loan matures in fiscal 2002.
119
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
Note 4--Income Taxes
Income before income taxes from continuing operations for fiscal 1999, 1998, and
1997 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
United States $(41.6) $(38.0) $ 98.3
Foreign 155.9 84.4 39.6
- ---------------------------------------------------------
Total $114.3 $ 46.4 $137.9
- ---------------------------------------------------------
</TABLE>
The components of the provision for income taxes from continuing operations for
fiscal 1999, 1998, and 1997 consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
Currently Payable
Domestic $ 6.1 $ 3.8 $ 57.2
Foreign 23.5 17.8 18.7
- ----------------------------------------------------------
Total currently payable 29.6 21.6 75.9
- ----------------------------------------------------------
Deferred
Domestic (29.1) 6.1 (45.8)
Foreign 3.6 (2.6) 5.3
- ----------------------------------------------------------
Total deferred (25.5) 3.5 (40.5)
- ----------------------------------------------------------
Total provision for income taxes
from continuing operations $ 4.1 $25.1 $ 35.4
- ----------------------------------------------------------
</TABLE>
Significant components of deferred tax assets and liabilities from continuing
operations at June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Inventories $ 2.3 $ 4.0
Postretirement and postemployment benefits 32.2 35.0
Other reserves and accruals 8.8 44.3
Tax credit and loss carryforwards 68.8 32.2
- ----------------------------------------------------------------
Subtotal 112.1 115.5
Valuation allowance (37.5) (62.8)
- ----------------------------------------------------------------
Total deferred tax assets 74.6 52.7
- ----------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 3.1
Other reserves and accruals 12.3 6.9
- ----------------------------------------------------------------
Total deferred tax liabilities 15.4 6.9
- ----------------------------------------------------------------
Total deferred tax assets, net $59.2 $ 45.8
- ----------------------------------------------------------------
</TABLE>
A reconciliation of the federal statutory tax to the Company's continuing tax
provision for fiscal 1999, 1998 and 1997 is set forth in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
- ---------------------------------------------------------------
Tax at federal statutory rate $40.0 $16.2 $48.3
State income taxes (net of
federal benefit) .4 .1 .1
Effect on income from foreign
operations (21.4) 1.2 41.1
Effect on income from foreign
sales corporation (4.9) (2.5) (1.6)
Acquired research and development 10.1 9.4
Restructuring and other merger
costs 5.2
Domestic temporary differences for
which benefit is recognized (17.4) (4.8) (56.6)
Utilization of net operating
losses (7.7)
Effect of goodwill write-off 1.2 .4 .6
Recapitalization costs 3.3
Other 2.9 (.8) 1.8
- ---------------------------------------------------------------
Total provision for income
taxes from continuing
operations $ 4.1 $25.1 $35.4
- ---------------------------------------------------------------
</TABLE>
The category "domestic temporary differences for which benefit is recognized"
reported in the table above reflects the current year benefit attributable to a
reduction in the valuation allowance. The benefit is primarily due to releases
of the valuation allowance in 1999 and 1997 in the amounts of $17.4 million and
$50.0 million, respectively. The remainder of the benefit resulted from the
utilization of domestic tax credit carryforwards and the recognition of various
other deferred tax assets that were previously subject to a valuation allowance.
During the fourth quarter of fiscal year 1999 the Company reduced its domestic
deferred tax valuation allowance, resulting in a recognition of $17.4 million
deferred tax benefit. The valuation allowance was reduced because management
believes, now that the sale of the Analytical Instruments business has been
completed, that it is more likely than not that the deferred tax assets to which
the valuation allowance related will be realized.
At June 30, 1999, the Company's worldwide valuation allowance of $37.5 million
related to foreign tax loss carryforwards, as well as the domestic tax loss
carryforwards, temporary differences and tax credit carryforwards recorded as a
result of the stock acquisition of PerSeptive in January 1998.
The Company's subsidiary, PerSeptive, has domestic loss carryforwards of
approximately $68 million that will expire between the years 2003 and 2012. 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 the acquisition. The Company also has a
con-
120
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
solidated domestic loss carryforward of approximately $34 million that will
expire in 2019 and loss carryforwards of approximately $28 million in various
foreign countries with varying expiration dates.
U.S. income taxes have not been provided on approximately $302 million of net
unremitted earnings from foreign subsidiaries since the Company intends to
permanently reinvest substantially all of such earnings in the operations of the
subsidiaries. These earnings include income from manufacturing operations in
Singapore, which is tax exempt through the year 2004. In those instances where
the Company expects to remit earnings, the effect on the results of operations,
after considering available tax credits and amounts previously accrued, was not
significant.
The Company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. During the current year, the Company filed a petition
in the U.S. Tax Court which contested a deficiency asserted by the IRS for 1992.
The Company will vigorously contest the proposed adjustments. The Company
believes that adequate tax payments have been made and adequate accruals have
been recorded for all years.
Note 5--Retirement and Other Benefits
Pension Plans, Retiree Health Care, and
Life Insurance Benefits
The Company maintains or sponsors pension plans that cover a substantial portion
of all worldwide employees. Pension benefits earned are generally based on years
of service and compensation during active employment. However, the level of
benefits and terms of vesting may vary among plans. Pension plan assets are
administered by trustees and are principally invested in equity and fixed income
securities. The funding of pension plans is determined in accordance with
statutory funding requirements.
The Company's domestic pension plans cover a substantial portion of the U.S.
employees. During fiscal 1999, the plan was amended to terminate the accrual of
benefits under the plan as of June 30, 2004 and to improve the benefit for
participants who retire between the ages of 55 and 60. The pension plan is not
available to employees hired on or after July 1, 1999.
The postretirement plan provides certain health care 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 expenses for fiscal 1999, 1998,
and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Pension
Service cost $ 5.2 $ 4.9 $ 3.6
Interest cost 38.7 36.4 32.0
Expected return on plan assets (38.6) (35.6) (30.5)
Amortization of transition
asset (1.9) (1.9) (1.2)
Amortization of prior service
cost (.4)
Amortization of losses .5 .5 .8
Curtailments and settlements .1
- --------------------------------------------------------------
Net periodic expense $ 3.6 $ 4.3 $ 4.7
- --------------------------------------------------------------
Postretirement
Service cost $ .2 $ .1 $ .1
Interest cost 4.8 4.7 4.8
Amortization of gains (1.5) (1.2) (1.1)
- --------------------------------------------------------------
Net periodic expense $ 3.5 $ 3.6 $ 3.8
- --------------------------------------------------------------
</TABLE>
The following tables set forth the changes in the benefit obligations and the
plan assets, and the funded status of the plans of continuing operations and the
amounts recognized in the Company's Consolidated Statements of Financial
Position at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Pension Postretirement
--------------- ------------------
(Dollar amounts
in millions) 1999 1998 1999 1998
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit
Obligation
Benefit obligation,
beginning of year $560.5 $488.9 $72.4 $71.3
Service cost 5.2 4.9 .2 .1
Interest cost 38.7 36.4 4.8 4.7
Participant
contributions .1 .1
Benefits paid (30.8) (27.6) (5.3) (6.7)
Actuarial loss (gain) 17.7 21.6 (3.3) 1.5
Variable annuity
unit value change 2.8 26.6
Amendments (2.0) .4
Currency translation (.1) (.1)
Other 2.0 9.3 (6.3) 1.5
- ----------------------------------------------------------
Benefit obligation $594.1 $560.5 $62.5 $72.4
- ----------------------------------------------------------
</TABLE>
121
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
<TABLE>
<CAPTION>
Pension Postretirement
--------------- ------------------
(Dollar amounts
in millions) 1999 1998 1999 1998
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Plan Assets
Fair value of plan
assets,
beginning of year $561.8 $476.1 $ - $ -
Actual return on
plan assets 56.8 96.7
Participants
contributions .1 .1
Company contribution 11.4 15.6 5.3 6.7
Benefits paid (29.5) (26.6) (5.3) (6.7)
Currency translation (.1)
- ----------------------------------------------------------------
Fair value of plan
assets $600.6 $561.8 $ - $ -
- ----------------------------------------------------------------
Funded Status
Reconciliation
Funded status $ 6.5 $ 1.3 $(62.5) $(72.4)
Unrecognized prior
service gain (2.5) (2.1)
Unrecognized transition
asset (2.2) (4.4)
Unrecognized
losses (gains) 37.7 37.2 (23.2) (21.5)
- ----------------------------------------------------------------
Net amount
recognized $ 39.5 $ 32.0 $(85.7) $(93.9)
- ----------------------------------------------------------------
Amounts Recognized
in the Statement of
Financial Position
Prepaid benefit cost $ 48.3 $ 38.4 $ - $ -
Accrued benefit
liability (11.6) (10.5) (85.7) (93.9)
Intangible asset .7 3.7
Minimum pension
liability adjustment 2.1 .4
- ----------------------------------------------------------------
Net amount
recognized $ 39.5 $ 32.0 $(85.7) $(93.9)
- ----------------------------------------------------------------
</TABLE>
Other changes in benefit obligation represents changes in benefit obligation
related to the Analytical Instruments business for periods prior to the sale.
A minimum pension liability adjustment is required when the actuarial present
value of accumulated benefits exceeds plan assets and accrued pension
liabilities. The projected benefit obligation and accumulated benefit obligation
for the pension plans with accumulated benefit obligations in excess of plan
assets were $12.1 million and $11.6 million, respectively, at June 30, 1999, and
$12.2 million and $9.5 million, respectively, at June 30, 1998.
The following actuarial assumptions were used for the Company's pension and
postretirement plans:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Domestic Plans
Discount rate 7-1/2% 8%
Compensation increase 5% 4%
Expected rate of return 7-1/2 - 9-1/4% 8-1/2 - 9-1/4%
- ------------------------------------------------------------
Foreign Plans
Discount rate 5 - 5-3/4% 5-1/2%
Compensation increase 4% 4-1/4%
Expected rate of return 6-1/2 - 9% 6-1/2%
- ------------------------------------------------------------
</TABLE>
For measurement purposes, an 8.2% annual rate of increase in the per capita cost
of covered health care benefits was assumed for plan year 2000, gradually
reducing to 5.5% in 2003 and thereafter. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
One-Percentage One-Percentage
(Dollar amounts in millions) Point Increase Point Decrease
- ----------------------------------------------------------------------
<S> <C> <C>
Effect on the total of service and
interest cost components $ .3 $ (.3)
Effect on postretirement benefit
obligation $5.0 $(5.0)
- ----------------------------------------------------------------------
</TABLE>
Savings Plan
The Company provides a 401(k) savings plan, for most 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 who are not eligible for the employee pension plan receive an extra 2%
contribution in addition to the automatic 2% company contribution to their
employee savings plan accounts through June 30, 2004, while pension plan
participants will continue to receive the automatic 2% contribution. The
Company's contributions to this plan for continuing operations were $8.5
million, $5.9 million, and $4.7 million for fiscal 1999, 1998, and 1997,
respectively.
Postemployment Benefits
The Company provides certain postemployment benefits to eligible employees.
These benefits generally include severance, disability, and medical-related
costs paid after employment but before retirement.
Note 6--Segment, Geographic, and
Customer Information
Business Segments
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The statement established annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products and services, geographic areas, and major
customers. The adoption of the statement did not affect the results of
operations or financial position of the Company.
122
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
The Company operates in the life science industry through two reportable
segments, the PE Biosystems group and the Celera Genomics group. The PE
Biosystems group is engaged in the development, manufacture, sale and service of
instrument systems and associated consumable products for life science research
and related applications. The Celera Genomics group is engaged in the
generation, sale and support of genomic information and related information
management and analysis software; discovery, validation and licensing of
proprietary gene products, genetic markers and information concerning genetic
variability; and related consulting and contract research and development
services.
As a result of the recapitalization, the Company established two separate
stocks to track the individual performance of the reportable segments. Operating
income (loss) excludes other income (expense), gain on investments, net interest
income, provision (benefit) for income taxes, and minority interest. The
accounting policies of the operating segments are the same as those described in
Note 1. Sales of products and services between segments are based on terms that
would be available from third parties in commercial transactions. Other consists
of the elimination of intersegment activity. Other total assets of $173.0
million includes the elimination of $150 million Celera Genomics group note
receivable from the PE Biosystems group.
Segment information follows:
<TABLE>
<CAPTION>
PE Celera
Biosystems Genomics Consoli-
(Dollar amounts in millions) Group Group Other dated
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net revenues from
external customers $1,204.4 $ 12.5 $ - $1,216.9
Intersegment revenues 17.3 (17.3)
- ------------------------------------------------------------------------------------------
Total revenues $1,221.7 $ 12.5 $ (17.3) $1,216.9
- ------------------------------------------------------------------------------------------
Operating income (loss) $ 187.9 $(68.8) $ (10.5) $ 108.6
Depreciation and
amortization expense $ 44.3 $ 3.8 $ 48.1
Capital expenditures $ 92.0 $ 94.5 $ (10.5) $ 176.0
Total assets $1,347.6 $344.7 $ (173.0) $1,519.3
- ------------------------------------------------------------------------------------------
1998
Net revenues from
external customers $ 940.1 $ 4.2 $ - $ 944.3
Operating income (loss) $ 53.4 $(12.8) $ 40.6
Depreciation and
amortization expense $ 35.2 $ .7 $ 35.9
Capital expenditures $ 68.2 $ 3.6 $ 71.8
Total assets $1,128.9 $ 6.4 $1,135.3
- ------------------------------------------------------------------------------------------
1997
Net revenues from
external customers $ 767.5 $ .9 $ - $ 768.4
Operating income (loss) $ 100.3 $(32.1) $ 68.2
Depreciation and
amortization expense $ 25.4 $ .2 $ 25.6
Capital expenditures $ 57.7 $ .4 $ 58.1
Total assets $1,003.8 $ 3.0 $1,006.8
- ------------------------------------------------------------------------------------------
</TABLE>
Events Impacting Comparability
PE Biosystems Group
Fiscal 1999 operating income included before-tax costs of $13.7 million related
to the recapitalization and transformation of the Company, $6.1 million for
restructuring and other merger costs, $14.5 million for the impairment of
assets, and $3.5 million of donations to the Company's charitable foundation,
offset by a $9.2 million reduction of charges required to implement the fiscal
1998 restructuring plan. Fiscal 1998 operating income included $48.1 million
related to restructuring and other merger costs and $28.9 million for acquired
research and development. Fiscal 1997 operating income included $.7 million
related to the impairment of assets.
Celera Genomics Group
Fiscal 1999 operating loss included before-tax costs of $5.6 million related to
the recapitalization and transformation of the Company. Fiscal 1997 operating
loss included $26.8 million for acquired research and development.
Geographic Areas
Information concerning principal geographical areas follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- -------------------------------------------------------
<S> <C> <C> <C>
Net Revenues From
External Customers
United States $ 609.0 $457.1 $350.0
Europe 370.1 291.9 239.9
Japan 154.8 129.5 118.8
Other Far East countries 56.1 42.0 40.9
Latin America and other 26.9 23.8 18.8
- -------------------------------------------------------
Consolidated $1,216.9 $944.3 $768.4
- -------------------------------------------------------
</TABLE>
Net revenues are attributable to geographic areas based on the region of
destination.
<TABLE>
<CAPTION>
At June 30,
----------------
(Dollar amounts in millions) 1999 1998
- -------------------------------------------------------
<S> <C> <C>
Long-Lived Assets
United States $266.2 $152.5
Europe 15.1 18.2
Japan 14.1 12.7
Other Far East countries .7 .5
Latin America and other .3 1.2
- -------------------------------------------------------
Consolidated $296.4 $185.1
- -------------------------------------------------------
</TABLE>
Long-lived assets exclude goodwill and other intangible assets.
Customer Information
The Company has a large and diverse customer base. No single customer accounted
for more than 10% of total net revenues during fiscal 1999, 1998, and 1997.
123
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
Note 7--Stockholders' Equity
Treasury Stock
Common Stock purchases have been made in support of the Company's various stock
plans and as part of a general share repurchase authorization. During fiscal
1999, 20,000 shares of PE Biosystems group stock were purchased to support
various stock plans. There were no share purchases in fiscal 1998. During fiscal
1997, the Company purchased .4 million shares of common stock to support various
stock plans.
Stock Purchase Warrants
As a result of the Merger with PerSeptive, each outstanding warrant for shares
of PerSeptive common stock was converted into warrants for the number of shares
of the Company's common stock that would have been received by the holder if
such warrants had been exercised immediately prior to the effective time of the
Merger.
As a result of the recapitalization, each outstanding warrant for shares of
PerSeptive common stock was further converted into warrants to acquire .3852
share of PE Biosystems stock and .0963 share of Celera Genomics stock. The
warrants are not separately exercisable into solely PE Biosystems stock or
Celera Genomics stock. The exercise price and expiration date of each warrant
were not affected by the recapitalization.
At June 30, 1999, there were warrants outstanding to purchase 107,598 shares of
PE Biosystems stock and 26,900 shares of Celera Genomics stock at an exercise
price of $32.87. The warrants expire in September, 2003.
Equity Put Warrants
During the first quarter of fiscal 1997, the Company sold in a private placement
600,000 put warrants on shares of its common stock. Each warrant obligated the
Company to purchase the shares from the holder, at specified prices, if the
closing price of the common stock was below the exercise price on the maturity
date. The cash proceeds from the sale of the put warrants were $1.8 million and
have been included in capital in excess of par value. During fiscal 1997, all
600,000 warrants expired unexercised. No equity put warrants were sold in fiscal
1999 and 1998.
Stockholders' Protection Rights Plan
In connection with the recapitalization, the Company adopted a new Stockholder
Rights Plan (the "Rights Agreement") to protect stockholders against abusive
takeover tactics. Under the Rights Agreement, the Company will issue one right
for each share of PE Biosystems stock (a "PE Biosystems Right"), which will
allow holders to purchase one-thousandth of a share of a newly designated 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
each share of Celera Genomics stock (a "Celera Genomics Right"), which will
allow holders to purchase one-thousandth of a share of a newly designated Series
B participating junior preferred stock of the Company at a purchase price of
$125, subject to adjustment (the "Series B Purchase Price").
A PE Biosystems Right or Celera Genomics Right will be exercisable only if a
person or group ("Acquiring Person"): (a) acquires 15% or more of the shares of
PE Biosystems stock then outstanding or 15% or more of the shares of Celera
Genomics 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 PE Biosystems Right and
each Celera Genomics Right will entitle its holder to purchase, for the Series A
Purchase Price or the Series B Purchase Price, 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 PE Biosystems
Right and each Celera Genomics Right will entitle its holder to purchase, for
the Series A Purchase Price or Series B Purchase Price, 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 to a
person or group becoming an Acquiring Person.
Capital Stock
The Company's authorized capital stock consists of 500 million shares of PE
Corporation-PE Biosystems group common stock, 225 million shares of PE
Corporation-Celera Genomics group common stock and 10 million shares of PE
Corporation preferred stock. Of the 10 million shares of preferred stock at June
30, 1999, the Company had designated 80,000 shares of two series of
participating junior preferred stock in connection with the Company's
stockholders' protection rights plan as previously described.
124
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
Note 8--Stock Plans
Stock Option Plans
Under the Company's stock option plans, officers and other key employees may be,
and directors are, granted options, each of which allows for the purchase of
existing common stock at a price of not less than 100% of fair market value at
the date of grant. Prior to the recapitalization, most option grants had a
two-year vesting schedule, whereby 50% of the option grant vested at the end of
each year from the date of the grant. The Board of Directors has extended that
schedule for most options granted subsequent to the recapitalization whereby 25%
will vest annually, resulting in 100% vesting after four years. Options
generally expire ten years from the date of grant.
Transactions relating to the stock option plans of the Company follow:
<TABLE>
<CAPTION>
PE Corporation
------------------------
Weighted
Number of Average
Options Exercise Price
- --------------------------------------------------------
<S> <C> <C>
Fiscal 1997
Outstanding at June 30, 1996 3,822,535 $34.05
Granted 1,595,528 $59.78
Exercised 1,167,179 $29.73
Cancelled 95,281 $43.17
- --------------------------------------------------------
Outstanding at June 30, 1997 4,155,603 $45.03
Exercisable at June 30, 1997 2,254,052 $35.24
Fiscal 1998
Granted 1,997,041 $70.41
Exercised 780,994 $34.76
Cancelled 154,686 $71.42
- --------------------------------------------------------
Outstanding at June 30, 1998 5,216,964 $55.51
Exercisable at June 30, 1998 2,936,389 $43.12
Fiscal 1999
Granted 37,000 $86.61
Exercised 1,549,364 $45.74
Cancelled 108,914 $67.92
- --------------------------------------------------------
Outstanding at May 5, 1999 3,595,686 $60.23
Exercisable at May 5, 1999 2,639,696 $55.43
- --------------------------------------------------------
<CAPTION>
PE Biosystems Group
------------------------
Weighted
Number of Average
Options Exercise Price
- --------------------------------------------------------
<S> <C> <C>
Fiscal 1999
Outstanding at May 6, 1999 7,191,372 $27.33
Granted 2,948,046 $54.69
Exercised 687,316 $26.50
Cancelled 240,479 $32.76
- --------------------------------------------------------
Outstanding at June 30, 1999 9,211,623 $35.98
Exercisable at June 30, 1999 4,349,453 $24.68
- --------------------------------------------------------
<CAPTION>
Celera Genomics Group
------------------------
Weighted
Number of Average
Options Exercise Price
- --------------------------------------------------------
<S> <C> <C>
Fiscal 1999
Outstanding at May 6, 1999 1,797,843 $11.04
Granted 3,976,018 $17.44
Exercised 140,894 $10.49
Cancelled 66,303 $13.34
- --------------------------------------------------------
Outstanding at June 30, 1999 5,566,664 $15.62
Exercisable at June 30, 1999 1,818,116 $12.78
- --------------------------------------------------------
</TABLE>
As a result of the recapitalization, each outstanding stock option under the
Company's stock option plans was converted into separately exercisable options
to acquire one share of PE Biosystems stock and 0.5 of a share of Celera
Genomics stock. The exercise price for the resulting PE Biosystems stock options
and Celera Genomics stock options was calculated by multiplying the exercise
price under the original option from which they were converted by a fraction,
the numerator of which was the opening price of PE Biosystems stock or Celera
Genomics stock, as the case may be, on May 6, 1999 (the first date such stocks
were traded on the New York Stock Exchange) and the denominator of which was the
sum of such PE Biosystems stock and Celera Genomics stock prices. However, the
aggregate intrinsic value of the options was not increased, and the ratio of the
exercise price per option to the market value per share was not reduced. In
addition, the vesting provisions and option periods of the original grants
remained the same on conversion.
The following tables summarize information regarding options outstanding and
exercisable at June 30, 1999:
<TABLE>
<CAPTION>
Weighted Average
-----------------------
Contractual
Life
Number of Remaining Exercise
(Option Prices per Share) Options in Years Price
- -----------------------------------------------------------
<S> <C> <C> <C>
PE Biosystems Group
Options Outstanding
At $.93 - $14.84 982,816 4.1 $11.25
At $14.85 - $29.68 1,355,230 5.8 $21.21
At $29.69 - $51.94 3,907,247 7.8 $33.08
At $51.95 - $74.21 2,966,330 9.8 $54.74
Options Exercisable
At $.93 - $14.84 927,537 4.1 $11.70
At $14.85 - $29.68 1,315,103 5.8 $21.01
At $29.69 - $51.94 2,087,553 7.8 $32.40
At $51.95 - $74.21 19,260 9.8 $62.90
- -----------------------------------------------------------
</TABLE>
125
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
<TABLE>
<CAPTION>
Weighted Average
-----------------------
Contractual
Life
Number of Remaining Exercise
(Option Prices per Share) Options in Years Price
- -----------------------------------------------------------
<S> <C> <C> <C>
Celera Genomics Group
Options Outstanding
At $.37 - $12.10 600,294 5.1 $ 6.95
At $12.11 - $15.13 961,784 7.8 $13.39
At $15.14 - $17.12 3,652,464 9.5 $17.11
At $17.13 - $30.26 352,122 9.8 $21.00
Options Exercisable
At $.37 - $12.10 578,766 5.1 $ 6.98
At $12.11 - $15.13 523,132 7.8 $13.14
At $15.14 - $17.12 705,020 9.5 $17.10
At $17.13 - $30.26 11,198 9.8 $22.65
- -----------------------------------------------------------
</TABLE>
1999 Stock Incentive Plans
The PE Corporation/PE Biosystems Group 1999 Stock Incentive Plan (the "PE
Biosystems Group Plan") and the PE Corporation/Celera Genomics Group 1999 Stock
Incentive Plan (the "Celera Genomics Group Plan") were approved in April, 1999.
The PE Biosystems Group Plan authorizes grants of stock options, stock awards
and performance shares with respect to PE Biosystems stock. The Celera Genomics
Group Plan authorizes grants of stock options, stock awards and performance
shares with respect to Celera Genomics stock. Directors and certain officers and
key employees with responsibilities involving both the PE Biosystems group and
the Celera Genomics group may be granted awards under both incentive plans in a
manner which reflects their responsibilities. The Board of Directors believes
that granting participants awards tied to performance of the group in which the
participants work and, in certain cases the other group, is in the best interest
of the Company and its stockholders.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan offers domestic and certain foreign employees
the right to purchase shares of PE Biosystems stock and/or Celera Genomics stock
on a quarterly basis. The purchase price in the United States 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 foreign countries vary according to local practice and regulations.
Common stock issued under the Employee Stock Purchase Plan during fiscal 1999,
1998, and 1997 totaled 168,000 shares, 174,000 shares, and 111,000 shares,
respectively of PE Corporation (predecessor) common stock. Additionally, 49,000
shares of PE Biosystems stock and 12,000 shares of Celera Genomics stock were
issued during fiscal 1999.
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 PE Biosystems
stock and Celera Genomics stock are made in a ratio approximately equal to the
number of shares of PE Biosystems stock and Celera Genomics stock outstanding.
The purchase price is the fair market value on the date of purchase. At June 30,
1999, the Company had approximately 85,000 shares of PE Biosystems stock and
approximately 43,000 shares of Celera Genomics stock available for issuance.
Restricted Stock
As part of the Company's stock incentive plans, key employees may be, and
non-employee directors are, granted shares of restricted stock that will vest
when certain continuous employment/service restrictions and/or specified
performance goals are achieved. The fair value of shares granted is generally
expensed over the restricted periods, which may vary depending on the estimated
achievement of performance goals.
As a result of the recapitalization, each share of restricted stock held was
redesignated as one share of PE Biosystems stock and 0.5 of a share of Celera
Genomics stock. Restricted stock granted prior to the recapitalization to key
employees and non-employee directors during fiscal 1999, 1998, and 1997 totaled
42,900 shares, 4,350 shares, and 42,000 shares, respectively, of PE Corporation
(predecessor) common stock. Compensation expense of continuing operations
recognized by the Company for these awards was $2.3 million, $1.8 million, and
$9.1 million for fiscal 1999, 1998, and 1997, respectively.
Performance Unit Bonus Plan
The Company has a Performance Unit Bonus Plan whereby employees may be awarded
performance units in conjunction with an equal number of stock options. A
performance unit represents the right to receive a cash or stock payment from
the Company at a specified date in the future. The amount of the payment is
equal to the fair market value of a share of common stock on the date of the
grant. The performance units vest upon shares of the Company's common stock
attaining and maintaining specified common stock price levels for a specified
period, and are payable on or after a specified future date subject to continued
employment through the date of payment. As of June 30, 1999, two series of
performance units totaling 498,399 units had been granted under the plan.
Compensation expense of continuing operations, pertaining to the first of the
series, was $4.4 million and $5.1 million for fiscal 1999 and 1998,
respectively.
At June 30, 1999, all stock price targets applicable to the first series of
performance units, totaling 294,499 units net of cancellations, granted to
members of senior management under the Plan had been attained and the Company
became obligated to make
126
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
payments under the Plan. In recognition of the efforts of the participants in
reaching these performance targets and the change in the underlying securities
of the Company as a result of the recapitalization of the Company, the Board of
Directors decided to accelerate these payments to fiscal year 2000. The related
stock options were not accelerated. Compensation expense of continuing
operations recognized as a result of the acceleration of these payments totaled
$10.1 million for fiscal 1999.
Accounting for Stock-Based Compensation
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," is applied in accounting for stock-based compensation plans.
Accordingly, no compensation expense has been recognized for its stock option
and employee stock purchase plans, as all options have been issued at fair
market value.
Pro forma net income and earnings per share information, as required by SFAS No.
123, "Accounting for Stock-Based Compensation," have been determined for
employee stock plans under the statement's fair value method. The fair value of
the options was estimated at grant date using a Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
For the years ended June 30, 1999 1998 1997
- -----------------------------------------------------------
<S> <C> <C> <C>
PE Biosystems Group
Dividend yield .63%
Volatility 34.40%
Risk-free interest rates 5.25%
Expected option life in years 5.23
- -----------------------------------------------------------
Celera Genomics Group
Dividend yield -%
Volatility 34.40%
Risk-free interest rates 5.00%
Expected option life in years 5.23
- -----------------------------------------------------------
PE Corporation
Dividend yield .62% .94% .85%
Volatility 34.40% 27.00% 29.07%
Risk-free interest rates 4.71% 5.64% 6.42%
Expected option life in years 5.23 5.70 5.12
- -----------------------------------------------------------
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information for the years ended June 30, 1999, 1998, and 1997 is presented
below:
<TABLE>
<CAPTION>
Celera
PE Biosystems Genomics
Group Group
------------- --------
(Dollar amounts in millions
except per share amounts) 1999 1999
- ----------------------------------------------------------------
<S> <C> <C>
Income (loss) from
continuing operations
As reported $148.4 $(44.9)
Pro forma $127.9 $(47.5)
Basic earnings (loss) from
continuing operations
per share
As reported $ 1.48 $(1.79)
Pro forma $ 1.27 $(1.89)
Diluted earnings (loss) from
continuing operations
per share
As reported $ 1.44 $(1.79)
Pro forma $ 1.24 $(1.89)
- ----------------------------------------------------------------
<CAPTION>
PE Corporation
----------------------------
(Dollar amounts in millions
except per share amounts) 1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from
continuing operations
As reported $ 96.8 $ 15.7 $102.5
Pro forma $ 73.7 $(15.0) $ 92.3
Basic earnings (loss) from
continuing operations
per share
As reported $ .32 $ 2.16
Pro forma $ (.31) $ 1.94
Diluted earnings (loss) from
continuing operations
per share
As reported $ .31 $ 2.07
Pro forma $ (.31) $ 1.86
- ----------------------------------------------------------------
</TABLE>
Pro forma information for PE Biosystems group and Celera Genomics group for
fiscal 1998 and 1997 is omitted since PE Biosystems stock and Celera Genomics
stock were not part of the capital structure of the Company.
The weighted average fair value of PE Corporation options granted was $33.54,
$24.83, and $20.17 per share for fiscal 1999, 1998, and 1997, respectively. The
weighted average fair value of PE Biosystems options granted and Celera Genomics
options granted was $20.23 and $8.26 for fiscal 1999, respectively.
127
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
Since PE Biosystems stock and Celera Genomics stock were not part of the capital
structure of the Company prior to May 6, 1999, there were no stock options
outstanding prior to that date. Therefore, the pro forma effect of PE Biosystems
stock options and Celera Genomics stock options is not representative of what
the effect will be in future years.
Note 9--Additional Information
Selected Accounts
The following table provides the major components of selected accounts of the
Consolidated Statements of Financial Position:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
At June 30, 1999 1998
- --------------------------------------------------------
<S> <C> <C>
Other Long-Term Assets
Goodwill $ 18.5 $ 69.8
Other 231.0 194.2
- --------------------------------------------------------
Total other long-term assets $249.5 $264.0
- --------------------------------------------------------
Other Accrued Expenses
Deferred revenues $ 51.7 $ 28.7
Restructuring liability 5.8 26.9
Other 120.4 66.9
- --------------------------------------------------------
Total other accrued expenses $177.9 $122.5
- --------------------------------------------------------
Other Long-Term Liabilities
Accrued postretirement benefits $ 80.2 $ 87.4
Other 63.5 42.1
- --------------------------------------------------------
Total other long-term liabilities $143.7 $129.5
- --------------------------------------------------------
</TABLE>
Related Party Transactions
One of the Company's directors is a former employee of the Roche Group, a
pharmaceutical manufacturer and strategic partner of the Company in the
biotechnology field. The Company made payments to the Roche Group and its
affiliates, for the purchase of reagents and consumables, of $98.3 million,
$72.5 million, and $68.2 million in fiscal 1999, 1998, and 1997, respectively.
Third Party Equity Transaction
On June 30, 1999, the Company granted an option to purchase 1.3 million shares
of Celera Genomics group stock to a third party and entered into a one year
non-compete agreement with such party. The fair value of such option
approximated $7.2 million and will be amortized over the life of the non-compete
agreement.
Note 10--Restructuring and
Other Merger Costs
During fiscal 1998, the Company recorded a $48.1 million before-tax charge for
restructuring and other merger costs to integrate PerSeptive into the Company
following the acquisition. The objectives of the integration plan were to lower
PerSeptive's cost structure by reducing excess manufacturing capacity, achieve
broader worldwide distribution of PerSeptive's products, and combine sales,
marketing, and administrative functions. The charge included: $33.9 million for
restructuring the combined operations; $8.6 million for transaction costs; and
$4.1 million of inventory-related write-offs, recorded in costs of sales,
associated with the rationalization of certain product lines. Additional
merger-related period costs of $6.1 million for fiscal 1999 and $1.5 million for
fiscal 1998 were incurred for training, relocation, and communication in
connection with the integration.
The $33.9 million restructuring charge included $13.8 million for
severance-related costs and workforce reductions of approximately 170 employees,
consisting of 114 employees in production labor and 56 employees in sales and
administrative support. The remaining $20.1 million represented facility
consolidation and asset-related write-offs and included: $11.7 million for
contract and lease terminations and facility-related expenses in connection with
the reduction of excess manufacturing capacity; $3.2 million for dealer
termination payments, sales office consolidations, and consolidation of sales
and administrative support functions; and $5.2 million for the write-off of
certain tangible and intangible assets and the termination of certain
contractual obligations. Transaction costs of $8.6 million included
acquisition-related investment banking and professional fees.
During the fourth quarter of fiscal 1999, the Company completed the
restructuring actions. The costs to implement the program were $9.2 million
below the $48.1 million charge recorded for fiscal 1998. As a result, during the
fourth quarter of fiscal 1999, the Company recorded a $9.2 million reduction of
charges required to implement the fiscal 1998 plan.
The following table details the major components of the fiscal 1998
restructuring plan:
<TABLE>
<CAPTION>
Facility
Consolidation
and Asset
Related
(Dollar amounts in millions) Personnel Write-Offs Total
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision
Reduction of excess
manufacturing capacity $ 5.1 $11.7 $16.8
Consolidation of sales and
administrative support 8.7 3.2 11.9
Other 5.2 5.2
- ---------------------------------------------------------------------------------
Total provision $13.8 $20.1 $33.9
- ---------------------------------------------------------------------------------
Fiscal 1998 Activity
Reduction of excess
manufacturing capacity $ - $ .4 $ .4
Consolidation of sales and
administrative support .3 1.2 1.5
Other 5.1 5.1
- ---------------------------------------------------------------------------------
Total fiscal 1998 activity $ .3 $ 6.7 $ 7.0
- ---------------------------------------------------------------------------------
</TABLE>
128
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
<TABLE>
<CAPTION>
Facility
Consolidation
and Asset
Related
(Dollar amounts in millions) Personnel Write-Offs Total
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal 1999 Activity
Reduction of excess
manufacturing capacity $ .7 $ 6.9 $ 7.6
Adjustment to decrease liabilities
originally accrued for excess
manufacturing capacity 4.1 3.3 7.4
Consolidation of sales and
administrative support 3.4 .9 4.3
Adjustment to decrease
liabilities originally accrued
for consolidation of sales
and administrative support 1.8 1.8
- ---------------------------------------------------------------------------------
Total fiscal 1999 activity $10.0 $11.1 $21.1
- ---------------------------------------------------------------------------------
Balance At June 30, 1999
Reduction of excess
manufacturing capacity $ .3 $ 1.1 $ 1.4
Consolidation of sales and
administrative support 3.2 1.1 4.3
Other .1 .1
- ---------------------------------------------------------------------------------
Balance at June 30, 1999 $ 3.5 $ 2.3 $ 5.8
- ---------------------------------------------------------------------------------
</TABLE>
Note 11--Commitments and Contingencies
Future minimum payments at June 30, 1999 under non-cancelable operating leases
for real estate and equipment were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
- --------------------------------------------------------
<S> <C>
2000 $ 21.2
2001 23.9
2002 19.9
2003 15.1
2004 12.8
2005 and thereafter 49.8
- --------------------------------------------------------
Total $142.7
- --------------------------------------------------------
</TABLE>
Rental expense was $43.1 million for fiscal 1999, $29.0 million in fiscal 1998,
and $22.3 million for fiscal 1997.
In fiscal 1997, the Company entered into a fifteen-year non-cancelable lease for
a facility in Foster City, California, effective July 1, 2000. Total lease
payments over the fifteen-year period will be approximately $42 million.
As a result of the sale of the Analytical Instruments business, EG&G assumed the
responsibility for the Company's German employee pension obligations. In the
event EG&G fails to fulfill such German obligations, the employees may have
recourse against PE Corporation.
On March 13, 1998, the Company filed a patent infringement action against
Amersham Pharmacia Biotech, Inc. ("Amersham") and Molecular Dynamics, Inc. in
the United States District Court for the Northern District of California. The
Company asserts that two of its patents (U.S. 5,207,886 and U.S. 4,811,218) are
infringed by reason of Molecular Dynamics' and Amersham's sale of certain DNA
analysis systems (e.g., the MegaBACE 1000 System). In response, the defendants
have asserted various affirmative defenses and several counterclaims, including
that the Company is infringing two patents (U.S. 5,091,562 and U.S. 5,459,325)
owned by or licensed to Molecular Dynamics by selling the ABI PRISM(R) 377 DNA
Sequencing Systems.
On April 2, 1998, Amersham filed a patent infringement action against the
Company in the United States District Court for the Northern District of
California. The complaint alleges that the Company is directly, contributorily
or by inducement infringing U.S. Patent No. 5,688,648 ("the '648 patent"),
entitled "Probes Labeled with Energy Transfer Coupled Dyes." The complaint seeks
declaratory judgment that the use of the PE BigDye(TM) Primer and BigDye(TM)
Terminator kits would infringe the '648 patent, as well as injunctive and
monetary relief. The Company answered the complaint, alleging that the '648
patent is invalid and that the Company has not infringed the '648 patent.
On May 21, 1998, Amersham filed a patent infringement action against the Company
in the United States District Court for the Southern District of New York. The
complaint alleges that the Company is infringing, contributing to the
infringement and inducing the infringement of U.S. Patent No. 4,707,235 ("the
'235 patent") entitled "Electrophoresis Method and Apparatus having Continuous
Detection Means." The complaint seeks injunctive and monetary relief. The
Company answered the Complaint, alleging that the '235 patent is invalid and
that the Company does not infringe the '235 patent.
The Company has been named as a defendant in several legal actions, including
patent, commercial, and environmental, arising from the conduct of its normal
business activities. Although the amount of any liability that might arise with
respect to any of these matters cannot be accurately predicted, the resulting
liability, if any, will not in the opinion of management have a material adverse
effect on the financial statements of the Company.
Note 12--Financial Instruments
Derivatives
The Company utilizes foreign exchange forward, option, and synthetic forward
contracts and an interest rate swap agreement to manage foreign currency and
interest rate exposures. The principal objective of these contracts is to
minimize the risks and/or costs associated with global financial and operating
activities. The Company does not use derivative financial instruments for
trading or other speculative purposes, nor is the Company a party to leveraged
derivatives.
Foreign Currency Risk Management
Foreign exchange forward, option, and synthetic forward contracts are used
primarily to hedge reported and anticipated cash flows resulting from the sale
of products in foreign locations. Option contracts outstanding at June 30, 1999
were purchased at a cost of
129
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
$2.5 million. Under these contracts, the Company has the right, but not the
obligation, to purchase or sell foreign currencies at fixed rates at various
maturity dates. These contracts are utilized primarily when the amount and/or
timing of the foreign currency exposures are not certain. Synthetic forward
contracts outstanding at June 30, 1999 were purchased having no up-front cost.
Under these contracts, the Company may participate in some favorable currency
movements but is protected against adverse currency changes. These contracts are
used as an alternative to options to reduce the cost of the Company's hedging
program.
At June 30, 1999 and 1998, the Company had forward, option, and synthetic
forward contracts outstanding for the sale and purchase of foreign currencies at
fixed rates as summarized in the table below:
<TABLE>
<CAPTION>
1999 1998
--------------- -------------
(Dollar amounts
in millions) Sale Purchase Sale Purchase
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Japanese Yen $104.2 $ 6.0 $ 99.4 $ -
French Francs 4.3 16.9 .2
Australian Dollars 12.0 7.5
German Marks 25.4 17.2
Italian Lira 10.4 2.6 21.4 .8
British Pounds 18.6 50.6 27.0 12.6
Swiss Francs 7.5 .7 8.2 4.0
Swedish Krona 8.9 6.1
Danish Krona 8.1 5.3
Singapore Dollars 9.3 3.3 .2
Netherland Guilder 16.1
Euro 28.2
Other 17.1 21.3 .2
- --------------------------------------------------------
Total $254.0 $79.3 $230.5 $17.8
- --------------------------------------------------------
</TABLE>
Foreign exchange contracts are accounted for as hedges of firm commitments and
anticipated foreign currency transactions. With respect to firm commitments,
unrealized gains and losses are deferred and included in the basis of the
transaction underlying the commitment. Gains and losses on foreign currency
transactions are recognized in income and offset the foreign exchange losses and
gains, respectively, on the related transactions. The amount of the contracts
covering anticipated transactions is marked to market and recognized in income.
Interest Rate Risk Management
The Company maintains an interest rate swap in conjunction with a five-year
Japanese Yen debt obligation (see Note 3). The interest rate swap agreement
involves the payment of a fixed rate of interest and the receipt of a floating
rate of interest without the exchange of the underlying notional loan principal
amount. Under the terms of this contract, the Company will make fixed interest
payments of 2.1% while receiving interest at a LIBOR floating rate. No other
cash payments will be made unless the contract is terminated prior to maturity,
in which case the amount to be paid or received in settlement is established by
agreement at the time of termination. The agreed upon amount usually represents
the net present value at current interest rates of the remaining obligation to
exchange payments under the terms of the contract.
Based on the level of interest rates prevailing at June 30, 1999, the fair value
of the Company's floating rate debt approximated its carrying value. There would
be a payment of $1.0 million to terminate the related interest rate swap
contract, which would equal the unrealized loss. Unrealized gains or losses on
debt or interest rate swap contracts are not recognized for financial reporting
purposes unless the debt is retired or the contracts are terminated prior to
maturity. A change in interest rates would have no impact on the Company's
reported interest expense and related cash payments because the floating rate
debt and fixed rate swap contract have the same maturity and are based on the
same interest rate index.
Concentration of Credit Risk
The forward contracts, options, synthetic forwards, and swaps used by the
Company in managing its foreign currency and interest rate exposures contain an
element of risk that the counterparties may be unable to meet the terms of the
agreements. However, the Company minimizes such 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.
Fair Value
The fair value of foreign currency forward, option and synthetic forward
contracts, as well as interest rate swaps, is estimated based on quoted market
prices of comparable contracts and reflects the amounts the Company would
receive (or pay) to terminate the contracts at the reporting date. The following
table presents notional amounts and fair values of the Company's derivatives at
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(Dollar amounts Notional Fair Notional Fair
in millions) Amount Value Amount Value
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Forward contracts $187.9 $ 2.6 $123.9 $2.1
Purchased options $ 44.0 $ 3.4 $ 76.7 $1.3
Synthetic forwards $101.4 $ 2.9 $ 41.5 $1.7
Interest rate swap $ 31.5 $(1.0) $ 27.0 $(.9)
- ----------------------------------------------------------
</TABLE>
The fair value of other significant financial instruments held or owed by the
Company is estimated using various methods. Cash and short-term investments
approximate their carrying amount due to the duration of these instruments. Fair
values of minority equity investments and notes receivable 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 other financial instruments at June 30, 1999 and 1998:
130
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(Dollar amounts Carrying Fair Carrying Fair
in millions) Amount Value Amount Value
- -------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and short-term
investments $308.0 $308.0 $84.1 $84.1
Minority equity
investments $ 43.4 $ 43.4 $29.2 $29.2
Note receivable $150.0 $150.0
Short-term debt $ 3.9 $ 3.9 $12.1 $12.1
Long-term debt $ 31.5 $ 32.5 $33.7 $34.6
- -------------------------------------------------------
</TABLE>
Net unrealized gains and losses on minority equity investments are reported as a
separate component of comprehensive income (loss).
Note 13--Quarterly Financial Information (Unaudited)
The following is a summary of quarterly financial results:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- --------------- ------------- --------------
(Dollar amounts in millions
except per share amounts) 1999 1998 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $254.7 $194.7 $288.5 $216.6 $325.8 $248.7 $347.8 $284.3
Gross margin 142.5 101.0 157.8 122.0 176.2 132.5 181.7 157.1
Income (loss) from continuing operations 17.9 17.5 18.2 (7.4) 31.3 (19.3) 29.4 24.9
Income (loss) from discontinued operations (0.9) 3.9 (3.2) 13.4 5.2 12.3 77.9 11.1
Net income (loss) 17.0 21.4 15.0 6.0 36.5 (7.0) 107.3 36.0
- ------------------------------------------------------------------------------------------------------------------------------
Attributable to PE Corporation
Dividends per share $ .17 $ .17 $ .17 $ .17 $ .17 $ .17 $ .17
Income (loss) per share from continuing
operations
Basic .36 .37 .36 (.15) .62 (.40) .51
Diluted .36 .35 .36 (.15) .60 (.40) .49
Income (loss) per share from discontinued
operations
Basic (.02) .08 (.06) .27 .10 .26 .22
Diluted (.02) .08 (.06) .27 .10 .26 .22
Net income (loss) per share
Basic .34 .45 .30 .12 .72 (.14) .73
Diluted .34 .43 .30 .12 .70 (.14) .71
- ------------------------------------------------------------------------------------------------------------------------------
Attributable to PE Biosystems Group
Dividends per share $ .085
Income per share from continuing operations
Basic $ .52
Diluted $ .50
Income per share from discontinued operations
Basic $ .76
Diluted $ .74
Net income per share
Basic $ 1.28
Diluted $ 1.24
- ------------------------------------------------------------------------------------------------------------------------------
Attributable to Celera Genomics Group
Net loss per share:
Basic $ (.78)
Diluted $ (.78)
- ------------------------------------------------------------------------------------------------------------------------------
Price range of common stock
PE Corporation (through May 5, 1999)
High $70-15/16 $86-1/8 $100-11/16 $ 74 $110-1/2 $ 76 $117-1/2 $ 75-1/8
Low $ 54-1/2 $72-1/8 $ 65 $59-1/4 $ 87-7/8 $55-13/16 $ 96-1/2 $58-11/16
PE Biosystems Group
High $ 60-5/8
Low $ 50
Celera Genomics Group
High $ 22-1/2
Low $14-3/16
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
131
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
Fiscal 1999 price ranges for PE Biosystems group common stock and Celera
Genomics group common stock are for the period from May 6, 1999 through June 30,
1999. On May 6, 1999, the Company recapitalized its former common stock into PE
Biosystems group common stock and Celera Genomics group common stock. Therefore,
neither the PE Biosystems group nor the Celera Genomics group had common stock
issued or outstanding for periods prior to May 6, 1999.
On June 17, 1999, the Board of Directors announced a two-for-one split of PE
Biosystems group common stock. The two-for-one stock split was effected in the
form of a 100% stock dividend paid to stockholders of record as of the close of
business on July 12, 1999. All PE Biosystems share and per share data reflect
this split.
Events Impacting Comparability
Fiscal 1999 First, second, third, and fourth quarter results included
before-tax costs of $.9 million, $1.1 million, $1.6 million, and $7.7 million,
respectively, related to acquisitions. The fourth quarter charge included a cost
of sales write-off of $14.5 million for the impairment of assets associated with
Molecular Informatics (see Note 1) and a $9.2 million reduction of liabilities
in connection with the PerSeptive acquisition (see Note 10). Second, third, and
fourth quarter results included before-tax costs of $1.1 million, $1.6 million,
and $16.7 million, respectively, in connection with the recapitalization and
transformation of the Company. Third and fourth quarter results included
before-tax gains of $2.6 million and $5.8 million, respectively, related to the
Company's investments. The fourth quarter included a before-tax gain of $2.3
million on foreign exchange contracts. Second and fourth quarter results
included certain tax benefits of $4.8 million and $17.4 million, respectively.
The tax benefit recorded in the fourth quarter reflects a reduction in the PE
Biosystems' group tax valuation allowance (see Note 4). The aggregate after-tax
effect of the above items reduced first and second quarter income from
continuing operations by $.8 million and $2.0 million, respectively, and
increased third and fourth quarter income from continuing operations by $4.1
million and $3.9 million, respectively. The aggregate net effect of the above
items reduced first and second quarter income from continuing operations by $.01
and $.04 per diluted share, respectively, and increased third quarter income
from continuing operations by $.08 per diluted share. The aggregate net effect
of the above items for the fourth quarter increased income from continuing
operations for the PE Biosystems group by $.08 per diluted share, and increased
Celera Genomics group net loss by $.15 per diluted share.
Fiscal 1998 First and fourth quarter results included before-tax gains of $.8
million in each quarter, or $.02 and $.01 per diluted share after-tax,
respectively, relating to the release of contingencies on minority equity
investments (see Note 2). Second quarter results included a $28.9 million
before-tax charge, or $.57 per diluted share after-tax, for acquired research
and development (see Note 2). Third and fourth quarter results included
before-tax charges for restructuring and other merger costs of $47.0 million and
$1.1 million, respectively, or $.85 and $.02 per diluted share after-tax,
respectively (see Note 10). The third quarter also included one-time royalty
revenues and capitalized certain legal expenses relating to the successful
defense of certain patents. The net effect of these items increased third
quarter income from continuing operations by approximately $4.2 million, or $.08
per diluted share.
Note 14--Accumulated Other Comprehensive Income (Loss)
During fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." The provisions of this statement require disclosure of total
comprehensive income. Total comprehensive income includes net income, foreign
currency translation adjustments, unrealized gains and losses on
available-for-sale investments, and minimum pension liability adjustments.
Accumulated other comprehensive income (loss) for fiscal 1999, 1998, and 1997
was as follows:
<TABLE>
<CAPTION>
Foreign Unrealized Minimum
Currency Gain Pension
Translation (Loss) on Liability
(Dollar amounts in millions) Adjustments Investments Adjustment
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1996 $ (.9) $ 23.2 $(29.4)
Activity (4.2) (20.1) 28.7
- -------------------------------------------------------------------------
Balance at June 30, 1997 (5.1) 3.1 (.7)
Activity (2.7) (4.5) .3
- -------------------------------------------------------------------------
Balance at June 30, 1998 (7.8) (1.4) (.4)
Activity (5.4) 11.9 (1.7)
- -------------------------------------------------------------------------
Balance at June 30, 1999 $(13.2) $ 10.5 $ (2.1)
- -------------------------------------------------------------------------
</TABLE>
Note 15--Discontinued Operations
Effective May 28, 1999, the Company completed the sale of its Analytical
Instruments business to EG&G, Inc. Analytical Instruments, formerly a unit of
the Company's PE Biosystems group, develops, manufactures, markets, sells, and
services analytical instruments used in a variety of markets. As part of the
sale, the rights to the "Perkin-Elmer" name were transferred to EG&G.
The aggregate consideration received by the Company was $425 million, consisting
of $275 million in cash and one-year secured promissory notes in the aggregate
principal amount of $150 million which bear interest at a rate of 5% per annum.
The Company recognized a net gain on disposal of discontinued operations of
$100.2 million, net of $87.8 million of income taxes. The transaction is subject
to post-closing adjustments pursuant to the terms of the agreement with EG&G.
132
<PAGE>
PE Corporation
Notes to Consolidated Financial Statements continued
Summary results prior to discontinuance were as follows:
<TABLE>
<CAPTION>
For the Years Ended
For the Eleven June 30,
(Dollar amounts Months Ended ---------------
in millions) May 28, 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $479.4 $586.8 $604.9
Restructuring charges 13.0
Total costs and expenses 509.7 532.6 570.2
(Benefit) provision for income
taxes (9.2) 13.5 6.8
- --------------------------------------------------------------
(Loss) income from discontinued
operations $(21.1) $ 40.7 $ 27.9
- --------------------------------------------------------------
</TABLE>
There were no remaining assets and liabilities within discontinued operations at
June 30, 1999. The components of net assets of discontinued operations included
in the Consolidated Statements of Financial Position at June 30, 1998 were as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998
- --------------------------------------------------------
<S> <C>
Current Assets
Accounts receivable, net $ 145.9
Inventories 103.0
Prepaid expenses and other current assets 35.2
Current Liabilities
Accounts payable 45.7
Accrued expenses 98.4
- --------------------------------------------------------
Current net assets 140.0
- --------------------------------------------------------
Long-term Assets
Property, plant and equipment, net 73.3
Other long-term assets 37.7
Long-term Liabilities
Other long-term liabilities 55.1
- --------------------------------------------------------
Long-term net assets 55.9
- --------------------------------------------------------
Net assets of discontinued operations $195.9
- --------------------------------------------------------
</TABLE>
Income Taxes
(Loss) income before income taxes of discontinued operations for the eleven
months ended May 28, 1999, and fiscal 1998 and 1997 is summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- --------------------------------------------------------
<S> <C> <C> <C>
United States $(36.2) $34.1 $22.7
Foreign 5.9 20.1 12.0
- --------------------------------------------------------
Total $(30.3) $54.2 $34.7
- --------------------------------------------------------
</TABLE>
The components of the (benefit) provision for income taxes of discontinued
operations for the eleven months ended May 28, 1999 and fiscal 1998 and 1997,
consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Currently Payable
Domestic $(13.7) $(3.7) $(1.0)
Foreign 4.5 7.8 5.1
- --------------------------------------------------------------
Total currently (receivable)
payable (9.2) 4.1 4.1
- --------------------------------------------------------------
Deferred
Domestic 4.9 4.8
Foreign 4.5 (2.1)
- --------------------------------------------------------------
Total deferred 9.4 2.7
- --------------------------------------------------------------
(Benefit) provision for
income taxes
from discontinued
operations $ (9.2) $13.5 $ 6.8
- --------------------------------------------------------------
</TABLE>
For the eleven months ended May 28, 1999, and fiscal 1998 and 1997, the
effective tax rates for discontinued operations were 30%, 25%, and 20%,
respectively. The difference between the effective tax rate and the statutory
tax rate of 35% was mainly attributed to benefits from the use of U.S.
alternative minimum tax credit carryforwards, the benefits from the use of a
foreign sales corporation and federal research tax credits, and restructuring
charges.
133
<PAGE>
PE Corporation
Report of Management
To the Stockholders of
PE Corporation
Management is responsible for the accompanying consolidated financial
statements, which have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements, it is necessary
for management to make informed judgments and estimates which it believes are in
accordance with generally accepted accounting principles appropriate in 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 judgements are required
to assess and balance the costs and expected benefits of a system of internal
accounting controls. Adherence to these polices and procedures is reviewed
through a coordinated audit effort of the Company's internal audit staff and
independent accountants.
The Audit 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 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
PE Corporation
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of stockholders' equity
and comprehensive income (loss), and of cash flows present fairly, in all
material respects, the financial position of PE Corporation and its subsidiaries
at June 30, 1999 and 1998, and the results of their operations and their cash
flows for each of the three fiscal years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles. 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
generally accepted auditing standards 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 the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
July 30, 1999
134
SUBSIDIARIES OF THE PE CORPORATION
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
State or Jurisdiction
Name of Incorporation or Organization
---- --------------------------------
<S> <C>
PE Overseas Corporation (New York, USA)
PE Biosystems Pty Limited (Australia)
PE (Canada) Limited (Canada)
PE Sciex* (Canada)
PE Taiwan Corporation (Delaware, USA)
PE Biosystems (Thailand) Limited (Thailand)
PE AG (Switzerland)
PE Biosystems Japan, Ltd. (Japan)
PE France S.A. (France)
Perkin-Elmer (Sweden) AB (Sweden)
Perkin-Elmer AB (Sweden)
Perkin-Elmer OY (Finland)
PE Holding BV (The Netherlands)
PE Holdings Limited (UK)
Perkin-Elmer (UK) Pension Trustees Limited (UK)
Perkin-Elmer Limited (UK)
Spartan Ltd. (Channel Isles)
Listronagh Company (Ireland)
Applied Biosystems Ltd. (UK)
Perkin-Elmer BV (The Netherlands)
Perkin-Elmer Europe BV (The Netherlands)
Perkin-Elmer Belgium NV (Belgium)
PE Czech Republic s.r.o (Czech Republic)
PE Hungary Kft (Hungary)
PE Genscope GmbH (Switzerland)
Perkin-Elmer GenScope Belgium BVBA (Belgium)
Perkin-Elmer Instruments Asia Pte. Ltd. (Singapore)
Perkin-Elmer Instruments (Malaysia) SDN. BHD. (Malaysia)
Perkin-Elmer Holding GmbH (Germany)
Perkin-Elmer South Africa (PTY) Limited (South Africa)
Bodenseewerk Perkin-Elmer GmbH (Germany)
Perkin-Elmer GmbH (Austria)
Perkin-Elmer Hong Kong, Ltd. (Hong Kong)
Perkin-Elmer Analytical and Biochemical
Instruments (Beijing) Co., Ltd. (China)
PE do Brasil Ltda. (Brazil)
<PAGE>
SUBSIDIARIES OF THE PE CORPORATION
EXHIBIT 21
LIST OF SUBSIDIARIES
State or Jurisdiction
Name of Incorporation or Organization
---- --------------------------------
PE International, Inc. (Delaware, USA)
PE Korea Corporation (Delaware, USA)
PE de Mexico SA (Mexico)
Perkin-Elmer Overseas Ltd. (Cayman Islands)
PECO Insurance Company Limited (Bermuda)
PE China, Inc. (Delaware, USA)
Perkin-Elmer FSC, Inc. (U.S.Virgin Islands)
PE Biosystems Hispania SA (Spain)
Hitachi Perkin-Elmer, Ltd. (Inactive)** (Japan)
Tropix, Inc. (Delaware, USA)
GenScope, Inc. (Delaware, USA)
PE AgGen, Inc. (Utah, USA)
Applied Biosystems GmbH (Germany)
PerSeptive Biosystems, Inc. (Delaware, USA)
PerSeptive Biosystems GmbH (Germany)
Nihon PerSeptive KK (Japan)
PerSeptive International Holdings (Delaware, USA)
PerSeptive Biosystems (France) Ltd. (Delaware, USA)
PerSeptive Biosystems (UK) Ltd. (UK)
PerSeptive Biosystems (Canada) Ltd. (Canada)
PerSeptive Technologies II Corporation (Delaware, USA)
GC Biotechnologies LLC+ (Delaware, USA)
Agrogene S.A.** (France)
</TABLE>
- --------------------------------
Note: Persons directly owned by subsidiaries of PE Corporation are
indented and listed below their immediate parent.
* 50% ownership
** 49% ownership
+ 47.5% ownership
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-3 (Nos. 333-39549 and 333-67797) and Form S-8
(Nos. 2-95451, 33-25218, 33-44191, 33-50847, 33-50849, 33-58778, 333-15189,
333-152259, 333-38713, 333-38881, 333-42683, 333-45187, 333-82679, 333-82677,
and 333-71419) of PE Corporation of our reports dated July 30, 1999 on the
combined financial statements of PE Biosystems Group, the combined financial
statements of Celera Genomics Group and the consolidated financial statements of
PE Corporation, which appear in the Annual Report to Stockholders which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our reports dated July 30, 1999 relating to the
Financial Statement Schedules, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- --------------------------------
PricewaterhouseCoopers LLP
Stamford, Connecticut
September 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Operations for the Twelve Months Ended June 30, 1999
and the Consolidated Statement of Financial Position at June 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 308,021
<SECURITIES> 0
<RECEIVABLES> 311,574
<ALLOWANCES> (4,518)
<INVENTORY> 149,670
<CURRENT-ASSETS> 994,002
<PP&E> 407,471
<DEPRECIATION> 131,679
<TOTAL-ASSETS> 1,519,307
<CURRENT-LIABILITIES> 522,652
<BONDS> 0
0
0
<COMMON> 1,284
<OTHER-SE> 820,241
<TOTAL-LIABILITY-AND-EQUITY> 1,519,307
<SALES> 1,216,897
<TOTAL-REVENUES> 1,216,897
<CGS> 558,813
<TOTAL-COSTS> 558,813
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,101
<INTEREST-EXPENSE> 3,783
<INCOME-PRETAX> 114,299
<INCOME-TAX> 4,140
<INCOME-CONTINUING> 96,797
<DISCONTINUED> 79,058
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 175,855
<EPS-BASIC> 0<F1>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Basic earnings per share - PE Biosystems Group 2.27
Basic loss per share - Celera Genomics Group (1.79)
<F2>Diluted earnings per share - PE Biosystems Group 2.21
Diluted loss per share - Celera Genomics Group (1.79)
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Operations for the Three Months Ended
September 30, 1998 and the Condensed Consolidated Statement of Financial
Position at September 30, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 71,848
<SECURITIES> 0
<RECEIVABLES> 244,916
<ALLOWANCES> (4,922)
<INVENTORY> 159,122
<CURRENT-ASSETS> 681,775
<PP&E> 300,042
<DEPRECIATION> 127,251
<TOTAL-ASSETS> 1,180,286
<CURRENT-LIABILITIES> 389,830
<BONDS> 0
0
0
<COMMON> 50,148
<OTHER-SE> 529,840
<TOTAL-LIABILITY-AND-EQUITY> 1,180,286
<SALES> 254,720
<TOTAL-REVENUES> 254,720
<CGS> 112,229
<TOTAL-COSTS> 112,229
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 142
<INTEREST-EXPENSE> 802
<INCOME-PRETAX> 28,894
<INCOME-TAX> 7,898
<INCOME-CONTINUING> 17,888
<DISCONTINUED> (879)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,009
<EPS-BASIC> .34
<EPS-DILUTED> .34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Operations for the Twelve Months Ended
June 30, 1998 and the Consolidated Statement of Financial Position at June 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 82,865
<SECURITIES> 0
<RECEIVABLES> 233,768
<ALLOWANCES> (4,783)
<INVENTORY> 137,015
<CURRENT-ASSETS> 652,023
<PP&E> 282,884
<DEPRECIATION> 119,559
<TOTAL-ASSETS> 1,135,276
<CURRENT-LIABILITIES> 364,032
<BONDS> 0
0
0
<COMMON> 50,148
<OTHER-SE> 514,100
<TOTAL-LIABILITY-AND-EQUITY> 1,135,276
<SALES> 944,306
<TOTAL-REVENUES> 944,306
<CGS> 431,738
<TOTAL-COSTS> 431,738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,518
<INTEREST-EXPENSE> 4,905
<INCOME-PRETAX> 46,360
<INCOME-TAX> 25,069
<INCOME-CONTINUING> 15,694
<DISCONTINUED> 40,694
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,388
<EPS-BASIC> 1.16
<EPS-DILUTED> 1.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Operations for the Nine Months Ended
March 31, 1998 and the Condensed Consolidated Statement of Financial Position at
March 31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 84,946
<SECURITIES> 0
<RECEIVABLES> 209,631
<ALLOWANCES> (5,325)
<INVENTORY> 129,515
<CURRENT-ASSETS> 654,229
<PP&E> 288,706
<DEPRECIATION> 120,471
<TOTAL-ASSETS> 1,109,740
<CURRENT-LIABILITIES> 376,339
<BONDS> 0
0
0
<COMMON> 50,148
<OTHER-SE> 479,754
<TOTAL-LIABILITY-AND-EQUITY> 1,109,740
<SALES> 659,959
<TOTAL-REVENUES> 659,959
<CGS> 304,505
<TOTAL-COSTS> 304,505
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,099
<INTEREST-EXPENSE> 3,940
<INCOME-PRETAX> 9,382
<INCOME-TAX> 15,612
<INCOME-CONTINUING> (9,164)
<DISCONTINUED> 29,589
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,425
<EPS-BASIC> .42
<EPS-DILUTED> .42
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Operations for the Six Months Ended
December 31, 1997 and the Condensed Consolidated Statement of Financial Position
at December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 93,787
<SECURITIES> 0
<RECEIVABLES> 214,246
<ALLOWANCES> (4,960)
<INVENTORY> 129,635
<CURRENT-ASSETS> 647,149
<PP&E> 267,830
<DEPRECIATION> 99,905
<TOTAL-ASSETS> 1,084,661
<CURRENT-LIABILITIES> 342,425
<BONDS> 0
0
0
<COMMON> 50,149
<OTHER-SE> 468,757
<TOTAL-LIABILITY-AND-EQUITY> 1,084,661
<SALES> 411,246
<TOTAL-REVENUES> 411,246
<CGS> 188,313
<TOTAL-COSTS> 188,313
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 417
<INTEREST-EXPENSE> 2,701
<INCOME-PRETAX> 21,036
<INCOME-TAX> 10,923
<INCOME-CONTINUING> 10,113
<DISCONTINUED> 17,278
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,391
<EPS-BASIC> .57
<EPS-DILUTED> .55
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Operations for the Three Months Ended
September 30, 1997 and the Condensed Consolidated Statement of Financial
Position at September 30, 1997 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 171,489
<SECURITIES> 0
<RECEIVABLES> 183,703
<ALLOWANCES> (4,165)
<INVENTORY> 115,146
<CURRENT-ASSETS> 652,086
<PP&E> 246,089
<DEPRECIATION> 94,920
<TOTAL-ASSETS> 1,006,229
<CURRENT-LIABILITIES> 307,020
<BONDS> 0
0
0
<COMMON> 50,122
<OTHER-SE> 469,522
<TOTAL-LIABILITY-AND-EQUITY> 1,006,229
<SALES> 194,696
<TOTAL-REVENUES> 194,696
<CGS> 93,714
<TOTAL-COSTS> 93,714
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 124
<INTEREST-EXPENSE> 1,275
<INCOME-PRETAX> 21,334
<INCOME-TAX> 3,785
<INCOME-CONTINUING> 17,549
<DISCONTINUED> 3,872
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,421
<EPS-BASIC> .45
<EPS-DILUTED> .43
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Operations for the Twelve Months Ended June 30, 1997
and the Consolidated Statement of Financial Position at June 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 213,028
<SECURITIES> 0
<RECEIVABLES> 182,725
<ALLOWANCES> (3,840)
<INVENTORY> 111,069
<CURRENT-ASSETS> 673,581
<PP&E> 223,145
<DEPRECIATION> 94,782
<TOTAL-ASSETS> 1,006,793
<CURRENT-LIABILITIES> 318,839
<BONDS> 0
0
0
<COMMON> 50,122
<OTHER-SE> 454,148
<TOTAL-LIABILITY-AND-EQUITY> 1,006,793
<SALES> 768,368
<TOTAL-REVENUES> 768,368
<CGS> 361,315
<TOTAL-COSTS> 361,315
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 655
<INTEREST-EXPENSE> 5,859
<INCOME-PRETAX> 137,918
<INCOME-TAX> 35,426
<INCOME-CONTINUING> 102,492
<DISCONTINUED> 27,906
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 130,398
<EPS-BASIC> 2.74
<EPS-DILUTED> 2.63
</TABLE>
