APPLIED BIOSYSTEMS Selected Financial Data
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C>
=====================================================================================================================
Financial Operations
Net revenues $ 642,059 $ 767,465 $ 940,095 $ 1,221,691 $ 1,388,100
Income from continuing operations 3,899 132,739 24,009 148,365 186,247
Per share of common stock
Basic .74 .90
Diluted .72 .86
Income (loss) from discontinued
operations (net of income taxes) (37,833) 27,906 40,694 79,058
Net income (loss) (33,934) 160,645 64,703 227,423 186,247
Per share of common stock
Basic 1.13 .90
Diluted 1.10 .86
Dividends per share .0425 .17
=====================================================================================================================
Other Information
Cash and short-term investments $ 121,145 $ 217,222 $ 84,091 $ 236,530 $ 394,608
Working capital 226,414 355,163 289,151 274,638 395,149
Capital expenditures 27,125 57,646 68,172 92,077 95,475
Total assets 809,856 1,003,810 1,128,937 1,347,550 1,698,156
Note payable to the
Celera Genomics group 150,000
Long-term debt 33,694 59,152 33,726 31,452 36,115
Total allocated debt 89,801 89,068 45,825 35,363 51,808
Group equity 373,116 507,734 565,507 534,332 934,364
=====================================================================================================================
</TABLE>
The selected financial data should be read with the combined financial
statements and the consolidated financial statements.
The recapitalization of the Company on May 6, 1999 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. The PE
Biosystems group is currently doing business as Applied Biosystems and will seek
formal approval of a change to this name at the 2000 annual meeting. The PE
Biosystems group is referred to as Applied Biosystems.
Per share data reflects the two-for-one stock splits effective July 1999 and
February 2000.
A number of items impact the comparability of the data from continuing
operations. Before-tax amounts include:
o Restructuring, other merger costs, and acquisition-related costs of $17.5
million for fiscal 1996, $48.1 million for fiscal 1998, $6.1 million for
fiscal 1999, and $2.1 million for fiscal 2000;
o A restructuring reserve adjustment of $9.2 million for fiscal 1999 relating to
excess fiscal 1998 restructuring liabilities;
o Gains on investments of $11.7 million for fiscal 1996, $64.9 million for
fiscal 1997, $1.6 million for fiscal 1998, $6.1 million for fiscal 1999, and
$48.6 million for fiscal 2000;
o Acquired research and development charges of $31.8 million for fiscal 1996 and
$28.9 million for fiscal 1998;
o Charges for the impairment of assets of $9.9 million for fiscal 1996, $.7
million for fiscal 1997, and $14.5 million for fiscal 1999;
o Tax benefit and valuation allowance reductions of $22.2 million for fiscal
1999;
o A charge of $3.5 million for a donation to the Company's charitable foundation
for fiscal 1999;
o Foreign currency hedge contract-related gain of $2.3 million for fiscal 1999;
o Charges of $4.6 million for fiscal 1999 relating to the recapitalization of
the Company;
o Charges relating to the acceleration of certain long-term compensation
programs as a result of the attainment of performance targets of $9.1 million
for fiscal 1999 and $45.0 million for fiscal 2000; and
o A gain of $8.2 million on the sale of real estate for fiscal 2000.
================================================================================
9 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Management's Discussion and Analysis
Management's Discussion of
Continuing Operations
PE Corporation ("PE" or "our 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 Corporation-PE Biosystems Group Common Stock
("PE Biosystems stock") and PE Corporation-Celera Genomics Group Common Stock
("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 PE Biosystems group is currently
doing business as Applied Biosystems and will seek formal approval of a change
to this name at our company's 2000 annual meeting. We refer to the PE Biosystems
group as Applied Biosystems. The Celera Genomics group is engaged principally in
the generation, sale, and support of genomic information and enabling data
management and analysis software. The Celera Genomics group's customers use this
information for commercial applications in the pharmaceutical and life sciences
industries in the specific areas of target identification, drug discovery, and
drug development. The Celera Genomics group also provides gene discovery,
genotyping, and related genomics services. The Celera Genomics group has
recently expanded its business into the emerging fields of functional genomics,
in particular, proteomics and personalized health/medicine.
You should read this discussion with the 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 Applied
Biosystems, developed, manufactured, marketed, sold, and serviced analytical
instruments used in a variety of markets. The aggregate consideration received
from the sale was $425 million, consisting of $275 million in cash and one-year
secured promissory notes in the aggregate principal amount of $150 million
bearing interest at a rate of 5% per annum. The promissory notes were collected
in fiscal 2000. In fiscal 1999, our company recognized a net gain on disposal of
discontinued operations of $100.2 million, net of $87.8 million of income taxes.
Amounts previously reported for Analytical Instruments were reclassified and
stated as discontinued operations. See Note 15 to Applied Biosystems' combined
financial statements.
Events Impacting Comparability
Acquisitions, Investments, and Dispositions
On January 22, 1998, our company acquired PerSeptive Biosystems, Inc. The
acquisition was accounted for as a pooling of interests and, accordingly,
Applied Biosystems' financial results were restated to include the combined
operations.
Our company acquired Molecular Informatics, Inc. and a 14.5% interest, and
approximately 52% of the voting rights, in Tecan AG during the second quarter of
fiscal 1998. The results of operations for these acquisitions, each of which was
accounted for as a purchase, were included in Applied Biosystems' combined
financial statements since the date of 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 Applied Biosystems' combined financial statements.
Restructuring and Other Special Charges
During fiscal 2000, Applied Biosystems incurred $2.1 million of before-tax costs
associated with acquisitions which were not consummated.
In fiscal 1999, Applied Biosystems was allocated non-recurring before-tax
special charges of $4.6 million. These costs were incurred in connection with
the recapitalization of our company. Applied Biosystems 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 Applied Biosystems' 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 Applied
Biosystems 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, Applied Biosystems 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, Applied Biosystems recorded a $9.2 million
reduction of charges required to implement the fiscal 1998 plan. A discussion of
the restructuring program is provided in Note 14 to Applied Biosystems' combined
financial statements.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 10
<PAGE>
APPLIED BIOSYSTEMS Management's Discussion and Analysis continued
Acquired Research and Development
During the second quarter of fiscal 1998, Applied Biosystems 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. The product was released in
September 1998. As of the acquisition date, BioMERGE 3.0's functional scope was
defined and the requirements assessment had been completed. The product 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 rate 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, Applied Biosystems 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.
Gain on Investments
Fiscal 2000 included a before-tax gain of $48.6 million related to the sale of
minority equity investments. Fiscal 1999 and 1998 included before-tax gains of
$4.5 million and $1.6 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
company's interest in Tecan. See Note 2 to Applied Biosystems' combined
financial statements.
Other Events Impacting Comparability
Fiscal 2000 and 1999 included charges of $45.0 million and $9.1 million,
respectively, to selling, general and administrative expenses, for costs related
to the acceleration of certain long-term compensation programs as a result of
the attainment of performance targets.
During the fourth quarter of fiscal 2000, Applied Biosystems recorded a gain of
$8.2 million to other income, net from the sale of real estate. 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.
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 Applied Biosystems' selling, general and
administrative expenses.
The effective income tax rate for fiscal 1999 included certain tax benefit and
valuation allowance reductions of $22.2 million. See Note 4 to Applied
Biosystems' combined financial statements for a discussion of income taxes.
Results of Continuing Operations--2000 Compared With 1999
Applied Biosystems reported income from continuing operations of $186.2 million
for fiscal 2000 compared with $148.4 million for fiscal 1999. On a comparable
basis, excluding the special items previously described from both fiscal years
and Tecan from the prior fiscal year, income from continuing operations
increased 35.4% to $186.2 million for fiscal 2000 compared with $137.5 million
for fiscal 1999. This increase is attributable primarily to the growth in net
revenues and lower operating expenses as a percentage of net revenues.
================================================================================
11 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Management's Discussion and Analysis continued
Net revenues were $1.4 billion for fiscal 2000 compared with $1.2 billion for
fiscal 1999. Excluding the results of Tecan for the prior fiscal year, net
revenues increased 24.0%. Increased net revenues for sequence detection systems,
including reagents and instrument systems for gene expression analysis and
single nucleotide polymorphism ("SNP") detection, mass spectrometry products,
and DNA sequencing consumables were contributors. The effects of foreign
currency translation decreased net revenues by approximately $1.8 million
compared with the prior fiscal year as weakness in the euro was essentially
offset by strengthening of the Japanese yen. Net revenues from leased
instruments and shipments of consumables and project materials to the Celera
Genomics group were $59.8 million for fiscal 2000, or 4.3% of Applied
Biosystems' net revenues. For fiscal 1999, net revenues from leased instruments,
shipments of instruments and consumables, and contracted R&D services to the
Celera Genomics group were $17.3 million and represented less than 2% of Applied
Biosystems' net revenues.
Geographically, excluding the net revenues of Tecan for fiscal 1999, Applied
Biosystems reported revenue growth in all regions for fiscal 2000 compared with
the prior fiscal year. Net revenues increased 21.6% in the United States, 18.5%
in Europe, 35.8% in the Far East, and 50.7% in Latin America and other markets.
Excluding the favorable effects of foreign currency translation in Japan, net
revenues increased approximately 23% in the Far East, partly reflecting
increased government funding for genomics-related research. Excluding the
negative effects of foreign currency translation in Europe, net revenues
increased by approximately 27%.
Gross margin as a percentage of net revenues was 54.1% for fiscal 2000 compared
with 53.9% for fiscal 1999. Excluding Tecan and the asset impairment charge from
the prior fiscal year, gross margin as a percentage of net revenues was 54.1%
for fiscal 1999.
SG&A expenses were $393.9 million for fiscal 2000 compared with $335.9 million
for fiscal 1999, an increase of 17.3%. On a comparable basis, excluding the
long-term compensation charges for fiscal 2000 and 1999, Tecan, and the $3.5
million charge for a contribution to our company's charitable foundation for
fiscal 1999, SG&A expenses for Applied Biosystems increased 20.5%. This increase
was due to higher planned worldwide selling and marketing expenses commensurate
with the higher revenue growth. As a percentage of net revenues, excluding the
special charges from both fiscal years and Tecan from the prior fiscal year,
SG&A expenses were 25.1% for fiscal 2000 compared with 25.9% for fiscal 1999.
R&D expenses were $141.2 million for fiscal 2000 compared with $133.5 million
for fiscal 1999, an increase of 5.7%. Excluding Tecan from the prior fiscal
year, R&D expenses for fiscal 2000 increased 18.4% compared with fiscal 1999. As
a percentage of net revenues, excluding Tecan from fiscal 1999, R&D expenses
were 10.2% for fiscal 2000 compared with 10.7% for the prior fiscal year. The
prior fiscal year's R&D expense level was higher as a percentage of net revenues
due to the development of new products released in the second half of fiscal
1999.
During fiscal 2000, Applied Biosystems incurred $2.1 million of costs associated
with acquisitions which were not consummated. Merger-related period costs of
$6.1 million were incurred during fiscal 1999 for training, relocation, and
communication in connection with the integration of PerSeptive into Applied
Biosystems. During the fourth quarter of fiscal 1999, Applied Biosystems
completed the restructuring actions associated with integration of PerSeptive
following the acquisition. 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, Applied Biosystems recorded a $9.2 million
reduction of charges required to implement the fiscal 1998 plan. See Note 14 to
Applied Biosystems' combined financial statements for a discussion of the
restructuring. Also during fiscal 1999, Applied Biosystems was allocated a
non-recurring charge of $4.6 million for costs incurred in connection with the
recapitalization of our company. These costs included investment banking and
professional fees.
<TABLE>
<CAPTION>
Operating Income
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Operating income before
special items $ 216.5 $ 260.3
Asset impairment (14.5)
Long-term compensation
programs (9.1) (45.0)
Charitable foundation
contribution (3.5)
Restructuring and other
merger costs, net 3.1
Recapitalization costs (4.6)
Acquisition-related costs (2.1)
-------------------------------------------------------------
Operating income $ 187.9 $ 213.2
=============================================================
</TABLE>
Operating income increased to $213.2 million for fiscal 2000 compared with
$187.9 million for the prior fiscal year. On a comparable basis, excluding the
special items previously described from both fiscal years and Tecan from the
prior fiscal year, operating income increased 32.0% for fiscal 2000 compared
with fiscal 1999. Applied Biosystems benefited from increased revenues as a
result of strong worldwide demand and lower operating expenses as a percentage
of net revenues, partially as a result of a slower than planned increase in
staffing during the fiscal year. Operating income as a percentage of net
revenues, excluding the special items from both fiscal years and Tecan from the
prior fiscal year, increased to 18.8% for fiscal 2000 compared with 17.6% for
fiscal 1999.
Fiscal 2000 and 1999 included before-tax gains of $48.6 million and $4.5
million, respectively, related to the sale of minority equity investments.
Fiscal 1999 also included a gain of $1.6 million related to the sale of our
company's interest in Tecan.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 12
<PAGE>
APPLIED BIOSYSTEMS Management's Discussion and Analysis continued
Interest expense was $8.1 million for fiscal 2000 compared with $4.5
million for the prior fiscal year. This increase was primarily due to the
interest on the $150 million note payable to the Celera Genomics group. Interest
income was $18.6 million for fiscal 2000, compared with $2.3 million for the
prior fiscal year. The increase in interest income was due to the interest on
the note receivable related to the sale of the Analytical Instruments business,
higher balances of cash and cash equivalents, and higher interest rates.
Other income, net for fiscal 2000 was $3.4 million, primarily related to a gain
on the sale of real estate, and was partially offset by costs associated with a
portion of our company's foreign currency management program. Other income, net
was $.5 million for fiscal 1999, which related primarily 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 effective income tax rate was 32% for fiscal 2000 compared with 16% for
fiscal 1999. Excluding special items in both fiscal years and Tecan in fiscal
1999, the effective income tax rate was 30% for fiscal 2000 compared with 29%
for the prior fiscal year. The effective income tax rate for fiscal 1999
included the release of valuation allowances of $17.4 million. Because the sale
of the Analytical Instruments business had been completed, the valuation
allowance was reduced as management believed that it was more likely than not
that the deferred tax assets to which the valuation allowance related would be
realized. An analysis of the differences between the federal statutory income
tax rate and the effective income tax rate is provided in Note 4 to Applied
Biosystems' combined financial statements.
For fiscal 1999, Applied Biosystems incurred minority interest expense of $13.4
million relating to our company's 14.5% financial interest in Tecan.
Results of Continuing Operations--1999 Compared With 1998
Applied Biosystems 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 $1.2 billion for fiscal 1999 compared with $940.1 million for
fiscal 1998, an increase of 30.0%. Excluding the results of Tecan, net revenues
for fiscal 1999 increased 25.9% compared with fiscal 1998. The effects of
foreign currency translation increased net revenues by less than 1% compared
with fiscal 1998. Net revenues from shipments to the Celera Genomics group were
$17.3 million for fiscal 1999 and represented less than 2% of Applied
Biosystems' net revenues. There were no revenues from shipments to the Celera
Genomics group for fiscal 1998.
Geographically, excluding the net revenues of Tecan, Applied Biosystems reported
revenue growth in all regions for fiscal 1999 compared with fiscal 1998.
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 fiscal 1998.
Demand for Applied Biosystems' 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 from both fiscal 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 fiscal 1998. 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.
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
fiscal 1998.
R&D expenses increased 26.6% to $133.5 million for fiscal 1999 compared with
$105.5 million for fiscal 1998. Excluding Tecan, expenses increased 19.5%
compared with fiscal 1998 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 fiscal
1998.
During fiscal 1998, $48.1 million of before-tax charges were recorded for
restructuring and other merger-related costs to integrate PerSeptive into
Applied Biosystems 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
================================================================================
13 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Management's Discussion and Analysis continued
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, Applied Biosystems 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, Applied Biosystems recorded a $9.2 million
reduction of charges required to implement the fiscal 1998 plan. See Note 14 to
Applied Biosystems' combined financial statements for a discussion of the
restructuring.
During fiscal 1999, Applied Biosystems was allocated a before-tax special charge
of $4.6 million for costs incurred in connection with the recapitalization of
our company. Applied Biosystems and the Celera Genomics group were each
allocated 50% of the $9.2 million total recapitalization costs incurred by our
company.
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 1999
=============================================================
<S> <C> <C>
Operating income before
special items $ 130.4 $ 216.5
Asset impairment (14.5)
Long-term compensation
programs (9.1)
Charitable foundation
contribution (3.5)
Restructuring and other
merger costs, net (48.1) 3.1
Recapitalization costs (4.6)
Acquired research and
development (28.9)
-------------------------------------------------------------
Operating income $ 53.4 $ 187.9
=============================================================
</TABLE>
Operating income increased to $187.9 million for fiscal 1999 compared with $53.4
million for fiscal 1998. 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 fiscal 1998. Applied Biosystems 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
foreign currency translation for Applied Biosystems increased operating income
by less than 1% for fiscal 1999 compared with fiscal 1998. 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 fiscal 1998.
For fiscal 1999 and 1998, Applied Biosystems 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 company's interest in Tecan.
Interest expense was $4.5 million for fiscal 1999 compared with $4.9 million for
fiscal 1998. 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 associated
with the note payable to the Celera Genomics group. Interest income was $2.3
million for fiscal 1999 compared with $5.9 million for fiscal 1998, primarily
because of lower average cash balances during the fiscal year.
Other income, net for fiscal 1999 was $.5 million compared with $3.1 million for
fiscal 1998. 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.
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.
Because the sale of the Analytical Instruments business had been completed, the
valuation allowance was reduced as management believed that it was more likely
than not that the deferred tax assets to which the valuation allowance related
would be realized. An analysis of the differences between the federal statutory
income tax rate and the effective income tax rate is provided in Note 4 to
Applied Biosystems' combined financial statements.
Applied Biosystems 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.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 14
<PAGE>
APPLIED BIOSYSTEMS Management's Discussion and Analysis continued
Market Risk
Applied Biosystems operates internationally, with manufacturing and distribution
facilities in various countries throughout the world. For fiscal 2000 and 1999,
Applied Biosystems derived approximately 50% of its revenues from countries
outside of the United States. Results continue to be affected by market risk,
including fluctuations in foreign currency exchange rates and changes in
economic conditions in foreign markets.
The risk management strategy for Applied Biosystems utilizes derivative
financial instruments, including forward, swap, and purchased option 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, respectively, on the derivatives. Applied Biosystems does not use
derivative financial instruments for trading purposes, nor is Applied Biosystems
a party to leveraged derivatives. At June 30, 2000, outstanding hedge contracts
covered approximately 50% of the estimated foreign currency exposures to be
realized over the next twelve months. The outstanding hedges were a combination
of forward and option contracts maturing over this period.
We performed sensitivity analyses as of June 30, 2000 and June 30, 1999.
Assuming a hypothetical adverse change of 10% in foreign exchange rates in
relation to the U.S. dollar at June 30, 2000, we calculated a hypothetical loss
of $1.9 million when comparing the change in fair value of both the foreign
currency contracts outstanding and the underlying exposures being hedged.
Performing a similar hypothetical calculation at June 30, 1999, we calculated a
hypothetical loss of $6.1 million. These hypothetical analyses exclude the
impact of foreign currency translation on Applied Biosystems' operations. 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 Applied Biosystems, in
conjunction with our company 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, 2000,
the notional amount of indebtedness covered by the interest rate swap was yen
3.8 billion or $36.1 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.
Cash and cash equivalents were $394.6 million at June 30, 2000 and $236.5
million at June 30, 1999, with total debt of $51.8 million at June 30, 2000 and
$185.4 million at June 30, 1999. Fiscal 1999 debt included a $150.0 million note
payable to the Celera Genomics group, which was paid during fiscal 2000.
Working capital was $395.1 million at June 30, 2000 and $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 at June 30, 1999. Debt to total
capitalization decreased to 5% at June 30, 2000 from 26% at June 30, 1999.
Excluding the note payable, debt to total capitalization was 6% at June 30,
1999.
At September 30, 1998, our company allocated to the Celera Genomics group a $330
million short-term note payable from Applied Biosystems. The $330 million note
represented an allocation of our company's capital to the Celera Genomics group
and did not result in Applied Biosystems 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
Applied Biosystems 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. The new note payable was
for a term of one-year, bearing an interest rate of 5% per annum. During fiscal
2000, Applied Biosystems transferred the funds received upon collection of the
promissory notes associated with the sale of the Analytical Instruments business
to satisfy the note payable to the Celera Genomics group.
In addition, our Board of Directors adopted a financing policy, included in Note
1 to Applied Biosystems' combined financial statements, that permits Applied
Biosystems 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
Accounts receivable increased $61.2 million to $367.4 million at June 30, 2000
from $306.2 million at June 30, 1999, reflecting the growth in net revenues.
Other long-term assets increased to $469.4 million at June 30, 2000 from $247.1
million at June 30, 1999. The change was primarily a result of a net $251.5
million increase in minority equity investments, offset by a $28.3 million
decrease in non-current deferred tax asset.
================================================================================
15 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Management's Discussion and Analysis continued
The decrease in non-current deferred tax asset was primarily due to the increase
in the tax liability established for unrealized gains on equity securities of
minority investments.
The tax benefit payable to the Celera Genomics group increased to $16.7 million
at June 30, 2000 from $9.9 million at June 30, 1999. See Note 1 to Applied
Biosystems' combined financial statements.
Accounts payable increased to $173.6 million at June 30, 2000 from $147.7
million at June 30, 1999. The increase was primarily related to higher purchases
to support production and operating requirements as a result of revenue growth
in fiscal 2000.
Accrued salaries and wages increased $36.1 million to $79.4 million at June 30,
2000 from $43.3 million at June 30, 1999, primarily reflecting the timing of
payments.
Accrued taxes on income increased $17.3 million to $149.5 million at June 30,
2000 from $132.2 million at June 30, 1999, as a result of the increased income
before taxes in foreign tax jurisdictions.
Combined Statements of Cash Flows
Operating activities from continuing operations generated $166.9 million of cash
for fiscal 2000 compared with $102.4 million for fiscal 1999 and $74.9 million
for fiscal 1998. For fiscal 2000, effective working capital management was the
primary contributor to the increase in operating cash flow.
For fiscal 2000, net cash provided by investing activities from continuing
operations was $117.6 million, compared with $239.3 million for fiscal 1999. For
fiscal 2000, Applied Biosystems' capital expenditures were $95.5 million. The
capital expenditures included $8.6 million related to improvement of its
information technology infrastructure and $21.6 million for the acquisition of a
new corporate airplane. Applied Biosystems realized net cash proceeds of $82.8
million from the sale of minority equity investments and real estate during
fiscal 2000. Applied Biosystems invested $20.7 million in minority investments
in fiscal 2000. The $150 million note receivable resulting from the sale of the
Analytical Instruments business was collected during fiscal 2000.
For fiscal 1999, Applied Biosystems 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 its 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. During fiscal 1998, Applied Biosystems 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 its information technology infrastructure, and
$98.0 million for acquisitions and investments, primarily Tecan and Molecular
Informatics.
Net cash used by financing activities was $98.9 million for fiscal 2000 compared
with $146.4 million for fiscal 1999. For fiscal 2000, Applied Biosystems
received $43.4 million of proceeds from stock issued for stock plans compared
with $94.9 million for fiscal 1999. Fiscal 1999 included $2.2 million for the
purchase of shares of common stock for treasury. No shares were repurchased
during fiscal 2000 or 1998. Dividends paid were $26.4 million for fiscal 2000
and $34.2 million for fiscal 1999. Increases in loans payable were $6.7 million
for fiscal 2000 compared with a reduction in loans payable and principal
payments on long-term debt of $16.4 million for fiscal 1999. During fiscal 2000,
Applied Biosystems transferred the $150 million received on the collection of
the promissory notes associated with the sale of the Analytical Instruments
business to satisfy the note payable to the Celera Genomics group. In connection
with the Celera Genomics group's acquisition of Paracel, Inc. during fiscal
2000, the transfer of the Paracel shares allocated to Applied Biosystems
resulted in a $27.3 million cash payment from the Celera Genomics group, which
represented the fair market value of those shares at the transfer date. See Note
2 to Applied Biosystems' combined financial statements for a discussion of the
Paracel transaction. Net cash allocated for fiscal 1999 to the Celera Genomics
group was $188.5 million, representing payments against the $330 million note
payable established at September 30, 1998 and cash funding for the first quarter
of fiscal 1999.
During fiscal 1998, Applied Biosystems received $33.6 million of proceeds from
stock issued for stock plans. These were more than offset by stockholder
dividend payments of $39.1 million and a reduction in loans payable and
principal payments on long-term debt of $32.2 million. 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 1998 to the Celera Genomics
group was $10.5 million.
During fiscal 2000, Applied Biosystems made cash payments of $3.5 million for
obligations related to restructuring plans. Restructuring liabilities remaining
at June 30, 2000 were $2.3 million. See Note 14 to Applied Biosystems' combined
financial statements. The funding for the remaining restructuring liabilities
will be from current cash balances and funds generated from operating
activities.
Our company's $100 million revolving credit agreement was replaced effective
April 20, 2000 with a new $100 million revolving credit agreement with four
banks that matures on
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 16
<PAGE>
APPLIED BIOSYSTEMS Management's Discussion and Analysis continued
April 20, 2005. Terms of this new revolving credit agreement are substantially
similar to those of the previous credit agreement.
Applied Biosystems believes its cash and cash equivalents, funds generated from
operating activities, and available borrowing facilities are sufficient to
provide for its anticipated financing needs for at least the next two years. At
June 30, 2000, our company had unused credit facilities totaling $341 million
which is available to the groups.
Impact of Inflation and Changing Prices
Inflation and changing prices are continually monitored. Applied Biosystems
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, Applied
Biosystems attempts to recover such costs by increasing, over time, the selling
price of its products and services. Applied Biosystems 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.
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.
Applied Biosystems is currently evaluating the impact of the euro conversion on
its computer and financial systems, business processes, market risk, and price
competition. Applied Biosystems does not expect this conversion to have a
material impact on its results of operations, financial position, or cash flows.
Recently Issued 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," amended in June 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The provisions of the statements 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. Applied Biosystems is required to implement the
statements in the first quarter of fiscal 2001. Applied Biosystems estimates
that, upon adoption, it will record an immaterial adjustment for a change in
accounting principles in its Combined Statements of Operations and in
accumulated other comprehensive income in the Combined Statements of Financial
Position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Applied Biosystems does not expect any
impact from the application of SAB No. 101.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation-An
Interpretation of Accounting Principles Board ("APB") Opinion No. 25." FIN No.
44 clarifies the following: the definition of an employee for purposes of
applying APB No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN No. 44 is
effective July 1, 2000, but certain conclusions in FIN No. 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000.
Management does not expect the application of FIN No. 44 to have a material
impact on Applied Biosystems' combined financial statements.
Applied Biosystems continues to apply APB No. 25 in accounting for stock-based
compensation plans. Accordingly, no compensation expense has been recognized for
these plans, as all options have been issued with an exercise price equal to
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
2000 income from continuing operations by $46.0 million and diluted earnings per
share from continuing operations by $.21. 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 8 to Applied Biosystems' combined financial
statements for a more detailed discussion regarding the accounting for
stock-based compensation.
Outlook
Applied Biosystems expects to continue to grow and maintain profitability in
fiscal 2001. Applied Biosystems should continue to benefit from its customers in
basic medical research, pharmaceutical development, and applied markets for
sophisticated, automated, and cost-effective life science tools.
================================================================================
17 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Management's Discussion and Analysis continued
Sales of Applied Biosystems' genetic analysis systems are increasingly moving
beyond the basic research markets to a wider group of commercial customers and
public agencies. Applied Biosystems should also benefit from shipments of new
high-throughput screening products such as the FMAT(TM) 8100 HTS System, the
NorthStar(TM) HTS Workstation, and the ABI PRISM(TM) 6700 Automated Nucleic Acid
Workstation. Applied Biosystems recently announced new products and initiatives
in proteomics and a new genetic analyzer system. Applied Biosystems expects that
the ABI PRISM(R) 3100 Genetic Analyzer and the forthcoming MALDI-Q-STAR(TM) for
proteomics will be important new products during fiscal 2001. During the next
year, Applied Biosystems expects to introduce other new products to serve unmet
customer needs in the areas of gene expression, SNP analysis, and proteomics.
We remain concerned about adverse currency effects because approximately 50% of
our revenues were derived from regions outside the United States in fiscal 2000.
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 Applied Biosystems'
product line obsolete unless it continues to improve existing products and
develop new products. A significant portion of the net revenues for Applied
Biosystems each year is derived from products that did not exist in the prior
year. Applied Biosystems' future success 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. Applied Biosystems' products are based on complex technology
which is subject to rapid change as new technologies are developed and
introduced in the marketplace. Unanticipated difficulties or delays in replacing
existing products with new products could adversely affect Applied Biosystems'
future operating results.
A significant portion of sales depends on customers' capital spending policies
which may be subject to significant and unexpected decreases. A significant
portion of Applied Biosystems' instrument product sales are capital purchases by
its customers. Applied Biosystems' customers include pharmaceutical,
environmental, research, and chemical companies, and the capital spending
policies of these companies can have a significant effect on the demand for
Applied Biosystems' products. These policies are based on a wide variety of
factors, including the resources available to make purchases, the spending
priorities among various types of research equipment, and policies regarding
capital expenditures during recessionary periods. Any decrease in capital
spending or change in spending policies of these companies could significantly
reduce the demand for Applied Biosystems' products.
A substantial portion of Applied Biosystems' sales is to customers at
universities or research laboratories whose funding is dependent on both the
level and timing of funding from government sources. As a result, the timing and
amount of revenues from these sources may vary significantly due to factors that
can be difficult to forecast. Although research funding has increased during the
past several years, grants have, in the past, been frozen for extended periods
or otherwise become unavailable to various institutions, sometimes without
advance notice. Budgetary pressures, 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
Applied Biosystems' products were to become unavailable to researchers for any
extended period of time, or if overall research funding were to decrease, the
business of Applied Biosystems could be adversely affected.
Due to rapidly developing technology and lack of legal precedents, Applied
Biosystems' products could be subject to claims for patent infringement and
trade secret theft. Applied 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, and Applied
Biosystems' belief that its products do not infringe the technology covered by
patents and patent applications could be successfully challenged by third
parties. Also, in the course of its business, Applied Biosystems may from time
to time have access to confidential or proprietary information of third parties,
and such parties could bring a theft of trade secret claim against Applied
Biosystems asserting that Applied Biosystems' products improperly utilize
technologies which are not patented but which are protected as trade secrets.
Applied Biosystems has been and could be in the future made a party to
litigation regarding intellectual property matters. Applied 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 Applied Biosystems
will be able to obtain these licenses or other rights on commercially reasonable
terms.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 18
<PAGE>
APPLIED BIOSYSTEMS Management's Discussion and Analysis continued
Since Applied Biosystems' business is dependent on foreign sales, fluctuating
currencies will make our revenues and operating results more volatile.
Approximately 50% of Applied Biosystems' net revenues during fiscal 2000 were
derived from sales to customers outside of the United States. The majority of
these sales were based on the relevant customer's local currency. As a result,
Applied Biosystems' reported and anticipated operating results and cash flows
are subject to fluctuations due to material changes in foreign currency exchange
rates that are beyond Applied Biosystems' control.
Integrating acquired technologies may be costly and may not result in
technological advances. The future growth of Applied Biosystems depends in part
on its ability to acquire complementary technologies through acquisitions and
investments. Since January 1, 1996, Applied 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, Applied Biosystems may encounter
operational difficulties in the integration of manufacturing or other
facilities. In addition, technological advances resulting from the integration
of technologies may not be achieved as successfully or rapidly as anticipated,
if at all.
Earthquakes could disrupt operations in California. A significant portion of
Applied Biosystems' operations is located near major California earthquake
faults. The ultimate impact of earthquakes on Applied Biosystems, significant
suppliers and the general infrastructure is unknown, but operating results could
be materially affected in the event of a major earthquake.
================================================================================
19 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Combined Statements of Operations
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1998 1999 2000
=================================================================================================================
<S> <C> <C> <C>
Net Revenues $ 940,095 $ 1,221,691 $ 1,388,100
Cost of sales 431,738 562,867 637,693
-----------------------------------------------------------------------------------------------------------------
Gross Margin 508,357 658,824 750,407
-----------------------------------------------------------------------------------------------------------------
Selling, general and administrative 276,674 335,873 393,889
Research, development and engineering 105,485 133,525 141,194
Restructuring and other special charges 43,980 1,500 2,142
Acquired research and development 28,850
-----------------------------------------------------------------------------------------------------------------
Operating Income 53,368 187,926 213,182
Gain on investments 1,605 6,126 48,603
Interest expense 4,905 4,503 8,126
Interest income 5,938 2,344 18,620
Other income, net 3,147 522 3,446
-----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 59,153 192,415 275,725
Provision for income taxes 29,547 30,688 89,478
Minority interest 5,597 13,362
-----------------------------------------------------------------------------------------------------------------
Income From Continuing Operations 24,009 148,365 186,247
-----------------------------------------------------------------------------------------------------------------
Discontinued Operations, Net Of Income Taxes
Income (loss) from discontinued operations 40,694 (21,109)
Gain on disposal of discontinued operations 100,167
-----------------------------------------------------------------------------------------------------------------
Net Income $ 64,703 $ 227,423 $ 186,247
=================================================================================================================
Income Per Share From Continuing Operations
(see Note 1)
Basic $ .74 $ .90
Diluted $ .72 $ .86
Income Per Share From Discontinued Operations
Basic $ .39
Diluted $ .38
Net Income Per Share
Basic $ 1.13 $ .90
Diluted $ 1.10 $ .86
=================================================================================================================
</TABLE>
See accompanying notes to Applied Biosystems' combined financial statements.
The PE Biosystems group is currently doing business as Applied Biosystems and
will seek formal approval of a change to this name at the 2000 annual meeting.
The PE Biosystems group is referred to as Applied Biosystems.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 20
<PAGE>
APPLIED BIOSYSTEMS Combined Statements of Financial Position
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
At June 30, 1999 2000
====================================================================================================
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 236,530 $ 394,608
Note receivable 150,000
Accounts receivable (less allowances for doubtful
accounts of $3,834 and $3,965, respectively) 306,225 367,370
Inventories 149,670 154,491
Prepaid expenses and other current assets 75,801 81,338
----------------------------------------------------------------------------------------------------
Total current assets 918,226 997,807
Property, plant and equipment, net 182,183 230,940
Other long-term assets 247,141 469,409
----------------------------------------------------------------------------------------------------
Total Assets $ 1,347,550 $ 1,698,156
====================================================================================================
Liabilities And Group Equity
Current liabilities
Loans payable $ 3,911 $ 15,693
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 16,702
Accounts payable 147,704 173,631
Accrued salaries and wages 43,316 79,409
Accrued taxes on income 132,170 149,505
Other accrued expenses 156,552 167,718
----------------------------------------------------------------------------------------------------
Total current liabilities 643,588 602,658
Long-term debt 31,452 36,115
Other long-term liabilities 138,178 125,019
----------------------------------------------------------------------------------------------------
Total Liabilities 813,218 763,792
----------------------------------------------------------------------------------------------------
Commitments and contingencies (see Note 10)
Group Equity 534,332 934,364
----------------------------------------------------------------------------------------------------
Total Liabilities And Group Equity $ 1,347,550 $ 1,698,156
====================================================================================================
</TABLE>
See accompanying notes to Applied Biosystems' combined financial statements.
The PE Biosystems group is currently doing business as Applied Biosystems and
will seek formal approval of a change to this name at the 2000 annual meeting.
The PE Biosystems group is referred to as Applied Biosystems.
================================================================================
21 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Combined Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 1998 1999 2000
================================================================================================================
<S> <C> <C> <C>
Operating Activities From Continuing Operations
Income from continuing operations $ 24,009 $ 148,365 $ 186,247
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Depreciation and amortization 35,278 44,309 54,513
Long-term compensation programs 6,853 14,680 9,652
Deferred income taxes 10,234 (25,533) (19,428)
Gains from sales of assets (3,052) (6,126) (56,801)
Provision for restructured operations and other
merger costs 48,080 (9,200)
Acquired research and development 28,850
Asset impairment 14,464
Changes in operating assets and liabilities
Increase in accounts receivable (23,153) (105,018) (62,186)
Increase in inventories (21,362) (22,387) (2,795)
Increase in prepaid expenses and other assets (30,858) (43,207) (22,396)
Increase in accounts payable and other liabilities 68 92,052 80,061
----------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 74,947 102,399 166,867
----------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment (net of
disposals of $11,339, $9,614, and $1,026, respectively) (56,833) (82,463) (94,449)
Acquisitions and investments, net (97,998) (4,025) (20,748)
Proceeds from the sale of assets, net 19,496 325,766 82,763
Proceeds from the collection of notes receivable 9,673 150,000
----------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Investing Activities (125,662) 239,278 117,566
----------------------------------------------------------------------------------------------------------------
Net Cash From Continuing Operations Before
Financing Activities (50,715) 341,677 284,433
----------------------------------------------------------------------------------------------------------------
Discontinued Operations
Net cash provided (used) by operating activities 10,084 (16,297) (15,081)
Net cash used by investing activities (40,639) (26,970)
----------------------------------------------------------------------------------------------------------------
Net Cash From Discontinued Operations Before
Financing Activities (30,555) (43,267) (15,081)
----------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable (6,797) (9,572) 6,701
Principal payments on long-term debt (25,449) (6,843)
Dividends (39,072) (34,156) (26,358)
Purchases of common stock for treasury (2,187)
Proceeds from stock issued for stock plans 33,629 94,894 43,434
Payment of note payable to the Celera Genomics group (150,000)
Net cash allocated (to) from the Celera Genomics group (10,520) (188,535) 27,283
----------------------------------------------------------------------------------------------------------------
Net Cash Used By Financing Activities (48,209) (146,399) (98,940)
----------------------------------------------------------------------------------------------------------------
Elimination of PerSeptive results from
July 1, 1997 to September 30, 1997 (see Note 1) 2,590
Effect Of Exchange Rate Changes On Cash (3,274) 1,654 (12,334)
----------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents (130,163) 153,665 158,078
Cash And Cash Equivalents Beginning Of Year 213,028 82,865 236,530
----------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 82,865 $ 236,530 $ 394,608
================================================================================================================
</TABLE>
See accompanying notes to Applied Biosystems' combined financial statements.
The PE Biosystems group is currently doing business as Applied Biosystems and
will seek formal approval of a change to this name at the 2000 annual meeting.
The PE Biosystems group is referred to as Applied Biosystems.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 22
<PAGE>
APPLIED BIOSYSTEMS Combined Statements of Group Equity and Comprehensive Income
<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, 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 employee stock options 2,335 2,335
Stock compensation 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 stock (25,479) (25,479)
Cash dividends declared on PE Biosystems stock (8,677) (8,677)
Issuances under PE Corporation stock plans 89,550 (14,862) 74,688
Issuances under PE Biosystems stock plans 20,157 (1,290) 18,867
Repurchases of PE Biosystems stock (2,187) (2,187)
Tax benefit related to employee stock options 15,735 15,735
Stock compensation 1,090 1,207 2,297
Allocated capital to the Celera Genomics group (338,535) (338,535)
-------------------------------------------------------------------------------------------------------------------
Balance At June 30, 1999 128,713 410,439 (4,820) 534,332
Comprehensive income
Net income 186,247 186,247
Other comprehensive income, net of tax
Foreign currency translation adjustments (25,196)
Minimum pension liability adjustment (60)
Unrealized gain on investments, net 155,522
---------
Other comprehensive income 130,266 130,266
---------
Comprehensive income 316,513
---------
Cash dividends declared on stock (35,220) (35,220)
Issuances under common stock plans 43,434 43,434
Tax benefit related to employee stock options 44,618 44,618
Stock compensation 5,190 5,190
Net cash allocated from the Celera Genomics group 27,283 27,283
Allocation of investment to the Celera Genomics group (1,786) (1,786)
-------------------------------------------------------------------------------------------------------------------
Balance At June 30, 2000 $ 247,452 $ 561,466 $ 125,446 $ 934,364
===================================================================================================================
</TABLE>
See accompanying notes to Applied Biosystems' combined financial statements.
The PE Biosystems group is currently doing business as Applied Biosystems and
will seek formal approval of a change to this name at the 2000 annual meeting.
The PE Biosystems group is referred to as Applied Biosystems.
================================================================================
23 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements
Note 1--Accounting Policies and Practices
Basis of Presentation
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 PE Biosystems group is currently doing business as
Applied Biosystems and will seek formal approval of a change to this name at the
Company's 2000 annual meeting. The PE Biosystems group is referred to as Applied
Biosystems. The Celera Genomics group is engaged principally in the generation,
sale, and support of genomic information and enabling data management and
analysis software. The Celera Genomics group's customers use this information
for commercial applications in the pharmaceutical and life sciences industries
in the specific areas of target identification, drug discovery, and drug
development. The Celera Genomics group also provides gene discovery, genotyping,
and related genomics services. The Celera Genomics group has recently expanded
its business into the emerging fields of functional genomics, in particular,
proteomics and personalized health/medicine.
On January 22, 1998, the Company acquired PerSeptive Biosystems, Inc. The
acquisition was accounted for as a pooling of interests and, accordingly,
Applied Biosystems' financial results were restated to include the combined
operations (see Note 2). Applied Biosystems' fiscal year ended June 30 and
PerSeptive's fiscal year ended September 30. The fiscal 1998 Combined Statements
of Operations combined Applied Biosystems' operating results for the 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). 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 Applied Biosystems' Combined Statements
of Operations for the fiscal year ended June 30, 1998.
Recapitalization
The recapitalization of the Company on May 6, 1999 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 Applied Biosystems life sciences business
("Applied Biosystems"), and Celera Genomics stock is intended to reflect
separately the performance of the Celera Genomics business ("Celera Genomics
group"). As part of the recapitalization, 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 Applied Biosystems 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 Applied Biosystems and the Celera Genomics group
have not been eliminated in the Applied Biosystems combined financial statements
but have been eliminated in the PE Corporation consolidated financial
statements. Applied Biosystems 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 Applied Biosystems and
the Celera Genomics group, 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 Applied Biosystems' 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. Applied Biosystems 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 Applied Biosystems 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 Applied
Biosystems 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.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 24
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
The management and allocation policies applicable to the preparation of the
financial statements of Applied Biosystems 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. Applied Biosystems' combined financial statements reflect the
application of the management and allocation policies adopted by the Board of
Directors to various corporate activities, as described below. Applied
Biosystems' 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 Applied
Biosystems 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 Applied
Biosystems.
The Board of Directors has adopted the following financing policy which will
affect the combined statements of Applied Biosystems and the Celera Genomics
group.
The Company will allocate the Company's debt between Applied Biosystems 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 of Directors,
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 of Directors. If the Company allocates
preferred stock in its entirety to one group, the Company will charge the
dividend cost to that group in a similar manner. If the interest or dividend
cost is higher than the Company's actual cost, the other group will receive a
credit for an amount equal to the difference as compensation for the use of the
Company's credit capacity. Any expense related to debt or preferred stock of the
Company that is allocated in its entirety to a group will be allocated in whole
to that group.
Cash or other property that the Company allocates to one group that is
transferred to the other group, could, if so determined by the Board of
Directors, 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 of Directors will determine the rate of interest for such
loan. The Board of Directors 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 Applied Biosystems 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 Applied Biosystems 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 Applied
Biosystems. The totals for these allocations were $38.1 million, $33.7 million,
and $45.9 million for fiscal 1998, 1999, and 2000, respectively. It is not
practicable to provide a detailed estimate of the expenses which would be
recognized if Applied Biosystems 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
================================================================================
25 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
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 can then be utilized on a consolidated basis,
will be credited to the Celera Genomics group up to a limit of $75 million. As
of June 30, 2000, $68.5 million of tax benefits were credited to the Celera
Genomics group since July 1, 1998.
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, 1998, 1999, and 2000. 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 Applied Biosystems' 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 recapitalization) combined
financial statements of Applied Biosystems and the Celera Genomics group, all
dividends declared and paid by the Company were allocated to Applied Biosystems.
Principles of Combination
Applied Biosystems' 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 Applied Biosystems and the Celera
Genomics group have not been eliminated in Applied Biosystems' 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 Applied Biosystems
include the assets and liabilities of the Company specifically identified with
or allocated to Applied Biosystems. 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
Applied Biosystems' combined financial statements were restated to reflect the
net assets and operating results of the Analytical Instruments business as
discontinued operations (see Note 15). The operating results are reflected in
the Combined Statements of Operations as income (loss) from discontinued
operations for fiscal 1998 and fiscal 1999. The accompanying notes, except Note
15, relate only to continuing operations.
Recently Issued 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," amended in June 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The provisions of the statements 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. Applied Biosystems is required to implement the
statements in the first quarter of fiscal 2001. Applied Biosystems estimates
that, upon adoption, it will record an immaterial adjustment for a change in
accounting principles in the Combined Statements of Operations and in
accumulated other comprehensive income in the Combined Statements of Financial
Position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. SAB No. 101 is required to be
implemented in the fourth quarter of fiscal 2001. Applied Biosystems does not
expect any impact from the application of SAB No. 101.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 26
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation-An
Interpretation of Accounting Principles Board ("APB") Opinion No. 25." FIN No.
44 clarifies the following: the definition of an employee for purposes of
applying APB No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN No. 44 is
effective July 1, 2000, but certain conclusions in FIN No. 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000.
Management does not expect the application of FIN No. 44 to have a material
impact on Applied Biosystems' combined financial statements.
Earnings Per Share
Earnings per share information prior to the recapitalization is omitted from
Applied Biosystems' 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.
The following table presents a reconciliation of basic and diluted earnings per
share from continuing operations for the years ended June 30, 1999 and 2000:
<TABLE>
<CAPTION>
(Amounts in thousands except per share amounts) 1999 2000
=======================================================================
<S> <C> <C>
Weighted average number of
common shares used in the
calculation of basic earnings
per share from continuing
operations 200,811 207,010
Common stock equivalents 5,398 10,006
-----------------------------------------------------------------------
Shares used in the calculation of
diluted earnings per share from
continuing operations 206,209 217,016
=======================================================================
Income from continuing operations
used in the calculation of basic
and diluted earnings per share
from continuing operations $ 148,365 $ 186,247
Income per share from continuing
operations
Basic $ .74 $ .90
Diluted $ .72 $ .86
=======================================================================
</TABLE>
The reconciliation for fiscal 1998 is omitted since PE Biosystems stock was not
part of the capital structure of the Company.
Options to purchase 40,000 shares and 5.9 million shares of PE Biosystems stock
were outstanding at June 30, 1999 and 2000, respectively, but were not included
in the computation of diluted earnings per share because the effect was
antidilutive.
Applied Biosystems' share and per share data reflect the two-for-one stock
splits effective July 1999 and February 2000.
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 losses for the fiscal years ended June 30,
1998, 1999, and 2000 were $2.5 million, $5.6 million, and $.1 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, foreign currency options, and an
interest rate swap (see Note 11). All of the Company's derivative financial
instruments have been allocated to Applied Biosystems.
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.
Accounts Receivable
The Company periodically sold accounts receivable arising from business
conducted in Japan. During fiscal 1998, 1999, and 2000, Applied Biosystems was
allocated all cash proceeds received, $98.8 million, $40.5 million, and $7.8
million, respectively, from the sale of such receivables. There were no sales of
accounts receivable after July 28, 1999. Applied Biosystems accounted for such
sales in accordance with SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities."
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." The specific
identification method is used to determine the cost of securities disposed of.
================================================================================
27 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories at June 30, 1999 and 2000 included the following components:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Raw materials and supplies $ 42.8 $ 51.2
Work-in-process 10.3 6.3
Finished products 96.6 97.0
-------------------------------------------------------------
Total inventories $ 149.7 $ 154.5
=============================================================
</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 2000:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Land $ 11.2 $ 13.5
Buildings and leasehold
improvements 88.6 115.3
Machinery and equipment 208.6 267.8
-------------------------------------------------------------
Property, plant and equipment,
at cost 308.4 396.6
Accumulated depreciation and
amortization 126.2 165.7
-------------------------------------------------------------
Property, plant and equipment, net $ 182.2 $ 230.9
=============================================================
</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 7 years.
Machinery and equipment, which included capitalized internal-use software
primarily related to the Company's worldwide strategic program to improve its
information technology infrastructure, was $53.2 million and $61.8 million at
June 30, 1999 and 2000, respectively. Net of accumulated amortization, the
capitalized internal-use software was $43.4 million and $43.5 million at June
30, 1999 and 2000, respectively.
Capitalized Software
Internal software development costs, for software used in Applied Biosystems'
products, which are incurred from the time technological feasibility of the
software is established until the software is ready for its intended use, are
capitalized and included in other long-term assets. The costs are amortized
using the straight-line method over a maximum of 3 years or the expected life of
the product, whichever is less. At June 30, 1999 and 2000, capitalized software
costs, net of accumulated amortization, were $12.5 million and $21.3 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 20 years. Patents
and trademarks are amortized using the straight-line method over their expected
useful lives. At June 30, 1999 and 2000, other long-term assets included
goodwill, net of accumulated amortization, of $17.6 million and $15.8 million,
respectively. Accumulated amortization of goodwill was $6.6 million and $8.4
million at June 30, 1999 and 2000, respectively.
Asset Impairment
Applied Biosystems 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, Applied Biosystems recorded a $14.5 million charge to cost of sales
for the impairment of assets associated with the Molecular Informatics business
(see Note 2). The impairment loss was 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.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 28
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined 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 was as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Interest $ 5.7 $ 3.4 $ .9
Interest paid to the
Celera Genomics group $ .2 $ 6.8
Income taxes $ 60.5 $ 30.3 $ 48.2
Tax benefits paid to the
Celera Genomics group $ 39.1
Significant non-cash investing
and financing activities
Unrealized gain (loss)
on investments $ (4.4) $ 11.9 $ 155.5
Note payable to the
Celera Genomics group $ 150.0
Dividends declared not paid $ 8.9
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 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 (predecessor) common stock at an exchange
ratio equal to 0.1926. Accordingly, the Company issued 4.6 million shares of its
(predecessor) 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 (predecessor) 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 (predecessor)
common stock. As a result of the merger, PerSeptive's 8-1/4% Convertible
Subordinated Notes due 2001 became convertible into shares of the Company's
(predecessor) 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 (predecessor) common stock. The merger qualified as a tax-free
reorganization and was accounted for as a pooling of interests.
Tecan AG
The Company acquired a 14.5% interest and approximately 52% of the voting rights
in Tecan AG during the second quarter of fiscal 1998. Tecan is a leader in the
development and manufacturing of automated sample processors, liquid handling
systems, and microplate photometry. 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 15 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. Net cash proceeds from the divestiture were $53.8 million. Applied
Biosystems recognized a before-tax gain of $1.6 million on the divestiture.
Molecular Informatics, Inc.
In fiscal 1998, the Company acquired Molecular Informatics, Inc., 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 10 years for the goodwill and 4
to 7 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 to 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
================================================================================
29 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
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. The product was released in
September 1998. As of the acquisition date, BioMerge 3.0's functional scope was
defined and the requirements assessment had been completed. The product 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, 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.
In fiscal 1999, Applied Biosystems 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.
Millennium Pharmaceuticals, Inc.
In fiscal 2000, Applied Biosystems recognized a before-tax gain of $41.0 million
from the sale of a portion of the Company's equity interest in Millennium
Pharmaceuticals, Inc. Net cash proceeds from the sale were $48.0 million. During
fiscal 1999 and 1998, Applied Biosystems 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 common stock.
Boston Probes, Inc.
In fiscal 2000, the Company made a minority equity investment of $6.0 million in
Boston Probes, Inc. Additionally, the Company committed to make term loans in
the aggregate of up to $2.0 million, subject to market terms and conditions. The
loan commitment and the loan maturity may not extend beyond May 1, 2003. Applied
Biosystems and Boston Probes are collaborating on the development and
commercialization of products employing peptide nucleic acid technology. The
acquisition was accounted for under the cost method and was included in Applied
Biosystems' Combined Statements of Financial Position.
Epoch Biosciences, Inc.
The Company made a minority equity investment in Epoch Biosciences, Inc. of $1.0
million in fiscal 2000. The Company also converted into equity $1.0 million of
funds advanced to Epoch as part of a licensing transaction in fiscal 1999. Epoch
is a biomedical company utilizing nucleoside and nucleotide chemistry to develop
molecular tools for genetic analysis. The acquisition was accounted for under
the cost method and was included in Applied Biosystems' Combined Statements of
Financial Position.
Illumina, Inc.
In fiscal 2000, the Company made a minority equity investment of $5.0 million in
Illumina, Inc. and will provide a portion of the research and development
funding for a strategic collaboration. The strategic collaboration is for the
purpose of developing, manufacturing, and marketing array-based systems for
high-throughput DNA analysis. Under the agreement, Applied Biosystems and
Illumina will jointly develop systems based on Illumina's BeadArray technology
and Applied Biosystems' proprietary DNA chemistry. The acquisition was accounted
for under the cost method and was included in Applied Biosystems' Combined
Statements of Financial Position.
ACLARA BioSciences, Inc.
The Company made a minority equity investment of $2.5 million in ACLARA
BioSciences, Inc. in fiscal 1998. Applied Biosystems and ACLARA are
collaborating on the development of advanced genetic analysis systems. In fiscal
1999 and fiscal 2000, the Company increased its investment by $3.0 million and
$5.0 million, respectively. The acquisition was accounted for under the cost
method and was included in Applied Biosystems' Combined Statements of Financial
Position.
Biometric Imaging, Inc.
In fiscal 1998, the Company acquired a minority equity investment in Biometric
Imaging, Inc. for $4.0 million. Applied Biosystems and Biometric Imaging were
collaborating on 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. In fiscal 1999, Applied
Biosystems recorded a
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 30
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
before-tax gain of $2.6 million on the sale of the Company's entire equity
interest in Biometric Imaging. Net cash proceeds from the sale were $6.6
million.
Hyseq, Inc.
In fiscal 1997, the Company entered into a strategic relationship with Hyseq,
Inc., acquiring a minority equity interest for a cash investment of $5.0
million. Hyseq applies proprietary DNA array technology to develop gene-based
therapeutic product candidates and diagnostic products and tests. In fiscal
1998, Applied Biosystems increased its investment by $5.0 million. During the
fourth quarter of fiscal 2000, Applied Biosystems recognized a before-tax gain
of $4.4 million from the sale of a portion of the Company's equity interest in
Hyseq. Net cash proceeds from the sale were $6.4 million.
Paracel, Inc.
The Company issued approximately 1.6 million shares of Celera Genomics stock in
exchange for all the outstanding shares of Paracel common stock not previously
owned by the Company. At the time of the acquisition, the Company owned 14% of
Paracel, which was allocated to Applied Biosystems. The transfer of the Paracel
shares to the Celera Genomics group resulted in a $27.3 million cash payment to
Applied Biosystems, which represented the fair market value of those shares at
the transfer date. The Celera Genomics group recorded the previously owned
investment at the Company's original cost value. The transfer of the original
cost value and the $27.3 million cash payment was recorded as an adjustment to
group equity in Applied Biosystems' Combined Statements of Financial Position
and the Celera Genomics group's Combined Statements of Financial Position.
Other Dispositions
In fiscal 2000, Applied Biosystems recognized a before-tax gain of $3.3 million
from the sale of the Company's equity interest in various other companies. Net
cash proceeds from the sales were $4.3 million.
Note 3--Debt and Lines of Credit
Allocated Debt Activity
Loans payable and long-term debt at June 30, 1999 and 2000 are summarized as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Loans Payable
Short-term loans $ 3.9 $ 15.7
=============================================================
Long-Term Debt
Yen loan $ 31.5 $ 36.1
=============================================================
</TABLE>
The weighted average interest rates at June 30, 1999 and 2000 for loans payable
were 4.5% and .6%, respectively.
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 11),
the effective interest rate for the loan is fixed at 2.1%.
The Company's $100 million revolving credit agreement was replaced effective
April 20, 2000 with a new $100 million revolving credit agreement with four
banks that matures on April 20, 2005. Commitment and facility fees are based on
public debt ratings, or net worth and leverage ratios. Interest rates on amounts
borrowed vary depending on whether borrowings are undertaken in the domestic or
eurodollar markets. There were no borrowings outstanding under the facility at
June 30, 2000.
At June 30, 2000, in addition to the $100 million revolving credit facility, the
Company had $241 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 various local banks. A PE Corporation guarantee is usually
required if a local unit borrows any funds.
Under various debt and credit agreements, the Company is required to maintain
certain minimum net worth and leverage ratios.
There are no maturities of long-term debt scheduled for fiscal 2001, 2003, 2004,
or 2005. 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 note payable of Applied Biosystems. The $330 million note represented an
allocation of the Company's capital to the Celera Genomics group and did not
result in Applied Biosystems holding an equity interest in the Celera Genomics
group. This 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 Applied Biosystems 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. The new note payable was for a term of one year, bearing an
interest rate of 5% per annum, and was payable on demand without penalty. The
new note was paid during fiscal 2000.
Note 4--Income Taxes
Income (loss) before income taxes from continuing operations for fiscal 1998,
1999, and 2000 is summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
United States $ (25.2) $ 36.5 $ 93.1
Foreign 84.4 155.9 182.6
-------------------------------------------------------------
Total $ 59.2 $ 192.4 $ 275.7
=============================================================
</TABLE>
================================================================================
31 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
The provision for income taxes from continuing operations includes Applied
Biosystems' allocated portion of income taxes currently payable and those
deferred because of differences between the financial statement and tax bases of
assets and liabilities. Applied Biosystems' provision for income taxes from
continuing operations for fiscal 1998, 1999, and 2000 consisted of the
following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Currently Payable
Domestic $ 8.3 $ 6.2 $ 60.3
Foreign 17.7 23.5 48.6
-------------------------------------------------------------
Total currently payable 26.0 29.7 108.9
-------------------------------------------------------------
Deferred
Domestic 6.1 (2.5) (7.0)
Foreign (2.6) 3.5 (12.4)
-------------------------------------------------------------
Total deferred 3.5 1.0 (19.4)
-------------------------------------------------------------
Total provision for income
taxes from continuing
operations $ 29.5 $ 30.7 $ 89.5
=============================================================
</TABLE>
Significant components of deferred tax assets and liabilities from continuing
operations at June 30, 1999 and 2000 are summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Deferred Tax Assets
Inventories $ 2.3 $ 4.0
Postretirement and
postemployment benefits 32.2 31.4
Other reserves and accruals 8.8 9.7
Tax credit and loss carryforwards 68.8 136.1
-------------------------------------------------------------
Subtotal 112.1 181.2
Valuation allowance (37.5) (37.2)
-------------------------------------------------------------
Total deferred tax assets 74.6 144.0
-------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 3.1 14.5
Other reserves and accruals 12.3 4.9
Unrealized gains on investments 89.2
-------------------------------------------------------------
Total deferred tax liabilities 15.4 108.6
-------------------------------------------------------------
Total deferred tax assets, net $ 59.2 $ 35.4
=============================================================
</TABLE>
A reconciliation of the federal statutory tax to Applied Biosystems' continuing
tax provision for fiscal 1998, 1999, and 2000 is set forth in the following
table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
=============================================================
Tax at federal statutory rate $ 20.7 $ 67.3 $ 96.5
State income taxes (net of
federal benefit) .1 .4 .2
Effect on income taxes from
foreign operations 1.2 (21.4) (6.2)
Effect on income taxes from
foreign sales corporation (2.5) (4.8) (7.1)
Acquired research and
development 10.1
Reorganization,
restructuring, and
other costs 5.2 6.5
Domestic temporary
differences for which
benefit is recognized (4.8) (17.4)
Effect of goodwill amor-
tization and write-off .4 2.1 .3
R&D tax credit (6.0)
Long-term compensation 8.7
Recapitalization costs 1.6
Other (.9) 2.9 (3.4)
-------------------------------------------------------------
Total provision for income
taxes from continuing
operations $ 29.5 $ 30.7 $ 89.5
=============================================================
</TABLE>
The category "domestic temporary differences for which benefit is recognized"
reported in the preceding table reflects the fiscal 1998 and 1999 benefit
attributable to a reduction in the valuation allowance. The benefit is primarily
due to release of the valuation allowance in fiscal 1999 in the amount of $17.4
million. The valuation allowance was reduced in fiscal 1999 because management
believed, once the sale of the Analytical Instruments business was completed,
that it was more likely than not that the deferred tax assets to which the
valuation allowance related would be realized. The fiscal 1998 benefit resulted
from the utilization of domestic tax credit carryforwards and reversing
temporary differences and the recognition of various other deferred tax assets
that were previously subject to a valuation allowance.
At June 30, 2000, the Company's worldwide valuation allowance of $37.2 million
related to foreign tax loss carryforwards, as well as domestic tax loss
carryforwards, temporary differences, and tax credit carryforwards.
PerSeptive has domestic loss carryforwards of approximately $68 million that
will expire between the fiscal years 2003 and 2012 which were allocated to
Applied Biosystems. 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.
Applied Biosystems also was allocated a consolidated domestic loss carryforward
of $173.0
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 32
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
million and domestic tax credit carryforwards of $36.7 million, which will
expire between the fiscal years 2005 and 2020, and loss carryforwards of
approximately $49 million in various foreign countries with varying expiration
dates.
U.S. income taxes were not provided on approximately $352 million of net
unremitted earnings from foreign subsidiaries since the Company intends to
permanently reinvest substantially all of such earnings outside the U.S. These
earnings include income from manufacturing operations in Singapore, which is
tax-exempt through fiscal 2004. In those instances where the Company expects to
remit earnings, the effect on Applied Biosystems' results of operations, after
considering available tax credits and amounts previously accrued, is not
significant.
The Company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. On December 17, 1998, the Company filed a petition in
the U.S. Tax Court which contested a deficiency asserted by the IRS for fiscal
1992. The Company has entered into settlement discussions with the IRS Appeals
Office in order to determine whether this dispute can be resolved on a favorable
basis to the Corporation without the necessity of a trial. 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 Healthcare, 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 plan covers a substantial portion of U.S.
employees. During fiscal 1999, the plan was amended to terminate the accrual of
benefits 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 benefit plan provides certain healthcare and life insurance
benefits to domestic employees hired prior to January 1, 1993, who retire and
satisfy certain service and age requirements. Generally, medical coverage pays a
stated percentage of most medical expenses, reduced for any deductible and for
payments made by Medicare or other group coverage. The cost of providing these
benefits is shared with retirees. The plan is unfunded.
As the pension and postretirement activity attributable to the Celera Genomics
group was not material for the two years ended June 30, 1999, all pension and
postretirement amounts recognized in the Company's Consolidated Statements of
Financial Position were allocated to Applied Biosystems.
The components of net pension and postretirement benefit expenses for fiscal
1998, 1999, and 2000 are set forth in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Pension
Service cost $ 4.8 $ 5.2 $ 7.4
Interest cost 36.4 38.7 44.0
Expected return on
plan assets (35.6) (38.6) (45.6)
Amortization of transition
asset (1.9) (1.9) (2.4)
Amortization of prior
service cost (.4) (.4)
Amortization of losses .5 .5 .2
Curtailments and
settlements .1
-------------------------------------------------------------
Net periodic expense $ 4.2 $ 3.6 $ 3.2
=============================================================
Postretirement Benefit
Service cost $ .1 $ .2 $ .3
Interest cost 4.7 4.8 4.6
Amortization of gains (1.2) (1.5) (1.8)
-------------------------------------------------------------
Net periodic expense $ 3.6 $ 3.5 $ 3.1
=============================================================
</TABLE>
================================================================================
33 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
The following tables set forth the changes in the benefit obligations and the
plan assets, the funded status of the plans, and the amounts recognized in
Applied Biosystems' Combined Statements of Financial Position at June 30, 1999
and 2000:
<TABLE>
<CAPTION>
Pension Postretirement
--------------- ---------------
(Dollar amounts in millions) 1999 2000 1999 2000
=====================================================================
<S> <C> <C> <C> <C>
Change In Benefit
Obligation
Benefit obligation,
beginning of year $ 560.5 $ 594.1 $ 72.4 $ 62.5
Service cost 5.2 7.4 .2 .3
Interest cost 38.7 44.0 4.8 4.6
Participants' contributions .1
Benefits paid (30.8) (36.7) (5.3) (5.4)
Actuarial (gain) loss 17.7 7.9 (3.3) (.1)
Variable annuity unit
value change 2.8 (12.9)
Addition of plan 3.9
Amendments (2.0)
Currency translation (.1) (.2)
Other 2.0 (6.3)
---------------------------------------------------------------------
Benefit obligation $ 594.1 $ 607.5 $ 62.5 $ 61.9
=====================================================================
Change In Plan Assets
Fair value of plan assets,
beginning of year $ 561.8 $ 600.6 $ - $ -
Actual return on plan
assets 56.8 47.9
Participants' contributions .1
Company contribution 11.4 5.3 5.4
Benefits paid (29.5) (34.3) (5.3) (5.4)
Addition of plan 1.0
Currency translation (.2)
---------------------------------------------------------------------
Fair value of plan assets $ 600.6 $ 615.0 $ - $ -
=====================================================================
Funded Status
Reconciliation
Funded status $ 6.5 $ 7.5 $ (62.5) $ (61.9)
Unrecognized prior
service gain (2.5) (2.0)
Unrecognized transition
asset (obligation) (2.2) .9
Unrecognized (gains)
losses 37.7 29.6 (23.2) (21.5)
---------------------------------------------------------------------
Net amount recognized $ 39.5 $ 36.0 $ (85.7) $ (83.4)
=====================================================================
Amounts Recognized
In The Statement Of
Financial Position
Prepaid benefit cost $ 48.3 $ 47.4 $ - $ -
Accrued benefit liability (11.6) (15.4) (85.7) (83.4)
Intangible asset .7 .6
Minimum pension
liability adjustment 2.1 3.4
---------------------------------------------------------------------
Net amount recognized $ 39.5 $ 36.0 $ (85.7) $ (83.4)
=====================================================================
</TABLE>
Other changes in benefit obligation represented 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
$14.0 million and $12.8 million, respectively, at June 30, 2000.
The following actuarial assumptions were used for the pension and postretirement
plans:
<TABLE>
<CAPTION>
1999 2000
=====================================================================
<S> <C> <C>
Domestic Plans
Discount rate 7-1/2% 8%
Compensation increase 5% 6%
Expected rate of return 7-1/2 -- 9-1/4% 8 -- 9-1/4%
=====================================================================
Foreign Plans
Discount rate 5 -- 5-3/4% 3 -- 5-3/4%
Compensation increase 4% 2 -- 4%
Expected rate of return 6-1/2 -- 9% 4 -- 9%
=====================================================================
</TABLE>
The Company recorded expenses for foreign defined benefit plans of $1.4 million,
$1.7 million and $2.2 million in fiscal 1998, 1999, and 2000, respectively.
For measurement purposes, an 8.2% annual rate of increase in the per capita cost
of covered healthcare benefits was assumed for plan year 2001, gradually
reducing to 5.5% in 2004 and thereafter. A one-percentage-point change in
assumed healthcare cost trend rates would have the following effects on
postretirement benefits:
<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 $ .4 $ (.4)
Effect on postretirement
benefit obligation $ 4.8 $ (4.8)
=================================================================
</TABLE>
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.
Employees not eligible for the employee pension plan receive an extra 2%
contribution in addition to the automatic 2% Company contribution through June
30, 2004, while pension plan participants continue to receive the automatic 2%
contribution. The Company contributions allocated to Applied Biosystems for
fiscal 1998, 1999, and 2000 were $5.7 million, $8.0 million, and $10.2 million,
respectively.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 34
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
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
Applied Biosystems operates in one business segment, which is the manufacturing
and marketing of biochemical instrument systems and associated consumable
products for life science research and related applications.
Geographic Areas
Information concerning principal geographical areas for
fiscal 1998, 1999, and 2000 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Net Revenues From
External Customers
United States $ 452.9 $ 596.5 $ 638.3
Europe 291.9 370.1 376.0
Japan 129.5 154.8 213.6
Other Far East countries 42.0 56.1 60.8
Latin America and other 23.8 26.9 39.6
-------------------------------------------------------------
Combined $ 940.1 $ 1,204.4 $ 1,328.3
=============================================================
</TABLE>
Net revenues are attributable to geographic areas based on the region of
destination.
Information concerning long-lived assets at June 30, 1999 and 2000 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Long-Lived Assets
United States $ 172.6 $ 198.3
Europe 15.1 15.3
Japan 14.1 18.1
Other Far East countries .7 2.1
Other countries .3 .8
-------------------------------------------------------------
Combined $ 202.8 $ 234.6
=============================================================
</TABLE>
Long-lived assets exclude goodwill and other intangible assets.
Customer Information
Applied Biosystems has a large and diverse customer base. No single customer
accounted for more than 10% of total net revenues during fiscal 1998, 1999, or
2000.
Related-Party Information
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
transactions 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, net revenues
from leased instruments, shipments of instruments and consumables, and
contracted R&D services to the Celera Genomics group were $17.3 million. For
fiscal 2000, net revenues from leased instruments and shipments of consumables
and project materials to the Celera Genomics group were $59.8 million.
Access to Technology and Know-How
Each group has 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 consult
with each other on a regular basis concerning technology issues that affect both
groups. The costs of developing technology remain in the group responsible for
its development.
Note 7--Group Equity
PE Biosystems 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.
In January 2000, the Board of Directors announced a two-for-one split of PE
Biosystems stock effective February 2000 in the form of a stock dividend. All
Applied Biosystems share data reflect this split and the two-for-one split of PE
Biosystems stock effective July 1999.
Treasury Stock
Common stock repurchases were made in support of Applied Biosystems' various
stock plans. During fiscal 1999, 20,000 shares of PE Biosystems stock, before
giving effect to the February 2000 stock split, were repurchased to support
various stock plans. There were no repurchases of PE Biosystems stock during
fiscal 2000.
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 and subsequent stock splits, each
outstanding warrant for shares of PerSeptive common stock was further converted
into warrants to acquire .7704 share of PE Biosystems stock and .1926 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 or the stock
splits.
================================================================================
35 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
At June 30, 2000, there were 53,799 warrants outstanding at an exercise
price of $65.73. Upon exercise of all of the warrants, the holders would receive
215,196 shares of PE Biosystems stock and 53,799 shares of Celera Genomics
stock. The warrants expire in September 2003.
Stockholders' Rights Plan
In connection with the recapitalization, the Company adopted a new Stockholders'
Rights Plan (the "Rights Agreement") to protect stockholders against abusive
takeover tactics. Under the Rights Agreement, the Company will issue one right
for every four shares of PE Biosystems stock (a "PE Biosystems Right"), which
will allow holders to purchase one-thousandth of a share of Series A
participating junior preferred stock of the Company at a purchase price of $425,
subject to adjustment (the "Series A Purchase Price"), and one right for every
two shares of Celera Genomics stock (a "Celera Genomics Right"), which will
allow holders to purchase one-thousandth of a share of Series B participating
junior preferred stock of the Company at a purchase price of $125, subject to
adjustment (the "Series B Purchase Price").
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
Biosystems stock, 225 million shares of Celera Genomics stock, and 10 million
shares of PE Corporation preferred stock. Of the 10 million authorized shares of
preferred stock, the Company has designated 80,000 shares of two series of
participating junior preferred stock in connection with the Company's
stockholders' rights plan as previously described.
Note 8--Stock Plans
Stock Option Plans
Under the Company's stock option plans, officers, directors, and other key
employees may be 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 follow:
<TABLE>
<CAPTION>
PE Corporation
--------------------------
Weighted
Number of Average
Options Exercise Price
==============================================================
<S> <C> <C>
Fiscal 1998
Outstanding at June 30, 1997 4,155,603 $ 45.03
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 Stock
--------------------------
Weighted
Number of Average
Options Exercise Price
==============================================================
<S> <C> <C>
Fiscal 1999
Outstanding at May 6, 1999 14,382,744 $ 13.67
Granted 5,896,092 $ 27.35
Exercised 1,374,632 $ 13.25
Cancelled 480,958 $ 16.38
--------------------------------------------------------------
Outstanding at June 30, 1999 18,423,246 $ 17.99
Exercisable at June 30, 1999 8,698,906 $ 12.34
==============================================================
Fiscal 2000
Granted 9,000,611 $ 86.06
Exercised 3,146,903 $ 12.37
Cancelled 661,236 $ 26.68
--------------------------------------------------------------
Outstanding at June 30, 2000 23,615,718 $ 44.04
Exercisable at June 30, 2000 9,879,917 $ 15.53
==============================================================
</TABLE>
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 36
<PAGE>
APPLIED BIOSYSTEMS 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 prior to giving effect of PE Biosystems stock splits and the
Celera Genomics stock split. 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, 2000:
<TABLE>
<CAPTION>
Weighted Average
---------------------
Contractual
Life
Number of Exercise Remaining
(Option prices per share) Options Price in Years
=============================================================
<S> <C> <C> <C>
Options Outstanding
At $.47 - $10.00 2,184,420 $ 6.69 4.0
At $10.01 - $20.00 6,892,195 $ 15.84 6.9
At $20.01 - $50.00 6,453,162 $ 28.12 8.8
At $50.01 - $100.50 8,085,941 $ 90.86 9.6
=============================================================
Options Exercisable
At $.47 - $10.00 2,131,665 $ 6.81
At $10.01 - $20.00 6,427,239 $ 15.72
At $20.01 - $50.00 1,286,613 $ 27.05
At $50.01 - $100.50 34,400 $ 89.38
=============================================================
</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,
as amended. 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, certain
officers, and key employees with responsibilities involving both Applied
Biosystems 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 awards tied to the performance of the group in
which the participants work and, in certain cases the other group, is in the
best interests of the Company and its stockholders.
Employee Stock Purchase Plan
The Company's employee stock purchase plans offer U.S. and certain non-U.S.
employees the right to purchase shares of PE Biosystems stock and/or Celera
Genomics stock. The purchase price in the U.S. is equal to the lower of 85% of
the average market price of the applicable class of common stock on the offering
date or 85% of the average market price of such class of common stock on the
last day of the purchase period. Provisions of the plan for employees in
countries outside the U.S. vary according to local practice and regulations.
PE Biosystems stock issued under the employee stock purchase plans during fiscal
1999 and 2000 totaled 98,000 shares and 161,000 shares, respectively. Celera
Genomics stock issued under the employee stock purchase plans during fiscal 1999
and 2000 totaled 24,000 shares and 303,000 shares, respectively. Common stock
issued under the employee stock purchase plans during fiscal 1998 and 1999
totaled 174,000 shares and 168,000 shares, respectively, of PE Corporation
(predecessor) common stock.
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,
2000, the Company had approximately 341,000 shares of PE Biosystems stock and
approximately 85,000 shares of Celera Genomics stock available for issuance
under the plan.
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 prior to giving effect of PE Biosystems stock splits and the
Celera Genomics stock split. Restricted stock granted to key employees and
non-employee directors during fiscal 2000 totaled 3,600 shares of PE Biosystems
stock and 900 shares of Celera Genomics stock. Restricted stock granted prior to
the recapitalization to key employees and non-employee directors during fiscal
1998 and 1999 totaled 4,350 shares and 42,900 shares, respectively, of the PE
Corporation (predecessor) common stock. Compensation expense of continuing
operations recognized by
================================================================================
37 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
Applied Biosystems for these awards was $1.8 million, $2.3 million, and $5.5
million for fiscal 1998, 1999, and 2000, respectively.
Performance Unit Bonus Plan
The Company adopted a Performance Unit Bonus Plan in fiscal 1997. The plan
utilized stock options and a performance unit bonus pool. Performance units
granted under the plan represented the right to receive a cash or stock payment
from the Company at a specified date in the future. The amount of the payment
was determined on the date of the grant. The performance units vested upon
shares of the Company's common stock attaining and maintaining specified price
levels for a specified period. As of June 30, 2000, three series of performance
units were granted under the plan. Compensation expense recognized under the
plan for fiscal 1998, 1999, and 2000 was $5.1 million, $13.5 million, and $53.1
million, respectively. Fiscal 1999 and 2000 compensation expense included $9.1
million and $45.0 million, respectively, related to the acceleration of payments
under the plan's three series as a result of the attainment of the performance
targets. The vesting of the related stock options was not accelerated.
The plan was modified in fiscal 2000 to replace the performance units with
performance stock options. Performance stock options vest in equal portions upon
the earlier of the shares of PE Biosystems stock attaining and maintaining
specified price levels for a specified period of time or after a specified
future date.
Accounting for Stock-Based Compensation
APB 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 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 2000
==============================================================
<S> <C> <C>
Dividend yield .63% .17%
Volatility 34.40% 52.68%
Risk-free interest rates 5.25% 5.88%
Expected option life in years 5.23 4.12
==============================================================
</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 years ended June 30, 1999 and 2000 is presented
below:
<TABLE>
<CAPTION>
(Dollar amounts in millions,
except per share amounts) 1999 2000
=============================================================
<S> <C> <C>
Income from continuing operations
As reported $ 148.4 $ 186.2
Pro forma $ 127.9 $ 140.2
Basic earnings from continuing
operations per share
As reported $ .74 $ .90
Pro forma $ .64 $ .68
Diluted earnings from continuing
operations per share
As reported $ .72 $ .86
Pro forma $ .62 $ .65
=============================================================
</TABLE>
Pro forma information for fiscal 1998 is omitted since PE Biosystems stock was
not part of the capital structure of the Company at that time.
The weighted average fair value of PE Corporation (predecessor) stock options
granted was $24.83 and $33.54 for fiscal 1998 and 1999, respectively. The
weighted average fair value of PE Biosystems stock options granted was $10.12
and $38.00 for fiscal 1999 and 2000, respectively.
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 fiscal 1999 pro forma effect of
PE Biosystems stock options is not representative of what the effect would be in
future years.
Note 9--Additional Information
Selected Accounts
The following table provides the major components of selected accounts of the
Combined Statements of Financial Position at June 30, 1999 and 2000:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Other Long-Term Assets
Minority equity investments $ 46.2 $ 297.7
Goodwill 17.6 15.8
Other 183.3 155.9
-------------------------------------------------------------
Total other long-term assets $ 247.1 $ 469.4
=============================================================
Other Accrued Expenses
Deferred service contract revenues $ 39.7 $ 46.7
Other 116.9 121.0
-------------------------------------------------------------
Total other accrued expenses $ 156.6 $ 167.7
=============================================================
Other Long-Term Liabilities
Accrued postretirement benefits $ 80.2 $ 77.9
Other 58.0 47.1
-------------------------------------------------------------
Total other long-term liabilities $ 138.2 $ 125.0
=============================================================
</TABLE>
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 38
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
Note 10--Commitments and Contingencies
Future minimum payments at June 30, 2000 under non-cancelable operating leases
for real estate and equipment were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
=============================================================
<S> <C>
2001 $ 31.2
2002 26.2
2003 22.1
2004 17.4
2005 13.5
2006 and thereafter 60.0
-------------------------------------------------------------
Total $ 170.4
=============================================================
</TABLE>
Rental expense was $28.7 million for fiscal 1998, $34.6 million for fiscal 1999,
and $35.6 million for fiscal 2000.
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 November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a
patent infringement action against the Company in the United States District
Court for the Northern District of California. The complaint alleges that the
Company is directly, contributorily, or by inducement infringing U.S. Patent No.
5,688,648 ("the '648 patent"), entitled "Probes Labelled with Energy Transfer
Coupled Dyes." Amersham asserts that the Company's sale of DNA analysis reagents
and systems that incorporate "BigDye" fluorescence detection technology would
infringe the '648 patent, and seeks 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. This case is scheduled for trial in
January 2001.
On March 13, 1998, the Company filed a patent infringement action against
Amersham and Molecular Dynamics, Inc. in the United States District Court for
the Northern District of California. The Company asserts that one of its patents
(U.S. 4,811,218) is infringed by reason of Molecular Dynamics' and Amersham's
sale of certain DNA analysis systems (e.g., the MegaBACE 1000 System). In
response, 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(TM) 377 DNA Sequencing Systems.
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 matters described in
this paragraph and the immediately preceding paragraph have been consolidated
into a single case to be heard in the United States District Court for the
Northern District of California. This case has not yet been scheduled for trial.
On May 30, 2000, the Company filed a patent infringement action against Amersham
in the United States District Court for the Northern District of California. The
Company asserts that one of its patents (U.S. 5,945,526) is infringed by reason
of Amersham's sale of DNA analysis reagents and systems that incorporate ET
Terminator fluorescence detection technology. This case is in the early stages
of discovery.
The Company has been named as a defendant in several legal actions, including
patent, commercial, and environmental, arising from 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 Applied Biosystems 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 11--Financial Instruments
Derivatives
Applied Biosystems utilizes foreign exchange forward and option 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. Applied
Biosystems does not use derivative financial instruments for trading purposes,
nor is Applied Biosystems a party to leveraged derivatives.
Foreign Currency Risk Management
Foreign exchange forward and option 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, 2000 were purchased
at a cost of $3.1 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.
================================================================================
39 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
At June 30, 1999 and 2000, the Company had forward and option contracts
outstanding, as well as synthetic forward contracts outstanding in 1999, for the
sale and purchase of foreign currencies at fixed rates as summarized in the
following table:
<TABLE>
<CAPTION>
1999 2000
---------------- ----------------
(Dollar amounts in millions) Sale Purchase Sale Purchase
=================================================================
<S> <C> <C> <C> <C>
Japanese Yen $ 104.2 $ 6.0 $ 92.3 $ -
Euro 28.2 43.8 8.0
British Pounds 18.6 50.6 31.1 26.4
Singapore Dollars 9.3 3.3 10.0 .8
Australian Dollars 12.0 3.1
German Marks 25.4
Italian Lira 10.4 2.6
Swedish Krona 8.9
Danish Krona 8.1
Swiss Francs 7.5 .7
French Francs 4.3
Netherlands Guilder 16.1
Other 17.1 4.7
-----------------------------------------------------------------
Total $ 254.0 $ 79.3 $ 185.0 $ 35.2
=================================================================
</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 will be
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, 2000, 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, and swaps used by the Company in managing its
foreign currency and interest rate exposures contain an element of risk in 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 the interest rate swap, 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 2000:
<TABLE>
<CAPTION>
1999 2000
---------------- ----------------
Notional Fair Notional Fair
(Dollar amounts in millions) Amount Value Amount Value
=================================================================
<S> <C> <C> <C> <C>
Forward contracts $ 187.9 $ 2.6 $ 103.6 $ .6
Purchased options $ 44.0 $ 3.4 $ 116.6 $ 2.6
Synthetic forwards $ 101.4 $ 2.9
Interest rate swap $ 31.5 $ (1.0) $ 36.1 $ (1.0)
=================================================================
</TABLE>
The fair value of other significant financial instruments held or owned by the
Company is estimated using various methods. Cash and cash equivalents
approximate their carrying amount. 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 Applied Biosystems' other financial instruments at
June 30, 1999 and 2000:
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 40
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
<TABLE>
<CAPTION>
1999 2000
----------------- -----------------
Carrying Fair Carrying Fair
(Dollar amounts in millions) Amount Value Amount Value
===================================================================
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 236.5 $ 236.5 $ 394.6 $ 394.6
Minority equity
investments $ 35.7 $ 46.2 $ 42.5 $ 297.7
Note receivable $ 150.0 $ 150.0
Short-term debt $ 3.9 $ 3.9 $ 15.7 $ 15.7
Note payable to the
Celera Genomics
group $ 150.0 $ 150.0
Long-term debt $ 31.5 $ 31.5 $ 36.1 $ 36.1
===================================================================
</TABLE>
Net unrealized gains and losses on minority equity investments are reported as a
separate component of accumulated other comprehensive income (loss).
Note 12--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 2000 1999 2000 1999 2000 1999 2000
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 251.2 $ 292.3 $ 296.2 $ 335.9 $ 329.3 $ 368.1 $ 345.0 $ 391.8
Gross margin 139.0 154.8 163.8 180.7 177.9 202.3 178.1 212.6
Income from continuing operations 21.5 29.7 27.6 43.8 46.3 56.1 53.0 56.6
Income (loss) from discontinued
operations (0.9) (3.2) 5.2 77.9
Net income 20.6 29.7 24.4 43.8 51.5 56.1 130.9 56.6
====================================================================================================================================
Dividends per share $ .0425 $ .0425 $ .085 $ .0425
Income per share from continuing
operations
Basic $ .14 $ .21 $ .27 $ .26 $ .27
Diluted .14 .20 .26 .25 .26
Income per share from discontinued
operations
Basic $ .38
Diluted .37
Net income per share
Basic $ .14 $ .21 $ .27 $ .64 $ .27
Diluted .14 .20 .26 .62 .26
====================================================================================================================================
Price range of common stock
High $ 38-5/16 $ 62-15/16 $ 160 $ 30-5/16 $ 111-7/16
Low $ 26-9/16 $ 30-5/8 $ 50 $ 25 $ 42-13/16
====================================================================================================================================
</TABLE>
Fiscal 1999 price ranges are for the period from May 6, 1999 through June 30,
1999. The recapitalization of the Company on May 6, 1999 resulted in the
issuance of two new classes of common stock called PE Biosystems stock and
Celera Genomics stock.
Per share and price range of common stock reflect the two-for-one stock splits
effective July 1999 and February 2000.
Events Impacting Comparability
Fiscal 1999 First, second, third, and fourth quarter results included net
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 14). Second, third, and
fourth quarter results included before-tax costs of $.5 million, $.8 million,
and $3.3 million, respectively, in connection with the recapitalization of the
Company. Third and fourth quarter results included before-tax gains of $2.6
million and $5.8 million, respectively, in non-recurring gains, primarily
related to the Company's investments. The fourth quarter gain included a $2.3
million before-tax gain on foreign exchange contracts. Fourth quarter results
included before-tax costs of $9.1 million related to the acceleration of certain
long-term compensation programs of the Company. Fourth
================================================================================
41 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
quarter results also included a $3.5 million donation to the Company's
charitable foundation. Third 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 reflected 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 $.7
million and $1.4 million, respectively, and increased third and fourth quarter
income from continuing operations by $4.9 million and $7.8 million,
respectively. The aggregate after-tax effect of the above items increased income
from continuing operations by $.04 per diluted share for the fourth quarter.
Fiscal 2000 Second and fourth quarter results included before-tax gains of $25.8
million and $22.8 million, respectively, in non-recurring gains primarily
related to the sale of a portion of the Company's minority equity investments.
Second and fourth quarter results included before-tax charges of $21.6 million
and $23.4 million, respectively, related to the acceleration of certain
long-term compensation programs. Fourth quarter results included $2.1 million of
acquisition-related before-tax costs and a before-tax gain of $8.2 million from
the sale of real estate. There was no aggregate after-tax effect of the above
items for the second and fourth quarters.
Note 13--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 1998, 1999, and 2000
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, 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)
Activity (25.2) 155.5 (.1)
-----------------------------------------------------------------------
Balance at
June 30, 2000 $ (38.4) $ 166.0 $ (2.2)
=======================================================================
</TABLE>
The change in unrealized gain on investments for fiscal 2000 includes
reclassification adjustments, net of tax, of $31.6 million of gains realized
from the sale of investments. The deferred tax effect on the unrealized gain on
investments and minimum pension liability adjustment was an expense of $89.2
million and a benefit of $1.2 million, respectively, in fiscal 2000. The
currency translation adjustments are not currently adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.
Note 14--Restructuring and Other Merger Costs
During fiscal 1998, Applied Biosystems recorded a $48.1 million before-tax
charge for restructuring and other merger costs to integrate PerSeptive into
Applied Biosystems 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 $1.5 million for fiscal 1998 and $6.1
million for fiscal 1999 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, Applied Biosystems 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, Applied Biosystems recorded a $9.2 million
reduction of charges required to implement the fiscal 1998 plan.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 42
<PAGE>
APPLIED BIOSYSTEMS Notes to Combined Financial Statements continued
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
-------------------------------------------------------------
Fiscal 2000 Activity
Reduction of excess
manufacturing capacity $ .3 $ .5 $ .8
Consolidation of sales and
administrative support 2.3 .3 2.6
Other .1 .1
-------------------------------------------------------------
Total fiscal 2000 activity $ 2.6 $ .9 $ 3.5
-------------------------------------------------------------
Balance At June 30, 2000
Reduction of excess
manufacturing capacity $ - $ .6 $ .6
Consolidation of sales and
administrative support .9 .8 $ 1.7
-------------------------------------------------------------
Balance at June 30, 2000 $ .9 $ 1.4 $ 2.3
=============================================================
</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
Applied Biosystems, developed, manufactured, marketed, sold, and serviced
analytical instruments used in a variety of markets. As part of the sale, the
rights to the "Perkin-Elmer" name were transferred.
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 bearing an interest rate of 5% per annum. The
promissory notes were collected in fiscal 2000. In fiscal 1999, the Company
recognized a net gain on disposal of discontinued operations of $100.2 million,
net of $87.8 million of income taxes.
Amounts previously reported for Analytical Instruments were reclassified and
stated as discontinued operations. There were no remaining assets, liabilities,
or operations within discontinued operations at or for the fiscal year ended
June 30, 2000. Summary results prior to discontinuance were as follows:
<TABLE>
<CAPTION>
For the Year For the Eleven
Ended Months Ended
(Dollar amounts in millions) June 30, 1998 May 28, 1999
=============================================================
<S> <C> <C>
Net revenues $ 586.8 $ 479.4
Total costs and expenses 532.6 509.7
Provision (benefit) for
income taxes 13.5 (9.2)
-------------------------------------------------------------
Income (loss) from
discontinued operations $ 40.7 $ (21.1)
=============================================================
</TABLE>
Income Taxes
Income (loss) before income taxes of discontinued operations for fiscal 1998 and
the eleven months ended May 28, 1999 consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999
=============================================================
<S> <C> <C>
United States $ 34.1 $ (36.2)
Foreign 20.1 5.9
-------------------------------------------------------------
Total $ 54.2 $ (30.3)
=============================================================
</TABLE>
The components of the provision (benefit) for income taxes of discontinued
operations for fiscal 1998 and the eleven months ended May 28, 1999 consisted of
the following:
<TABLE>
<CAPTION>
1998 1999
=============================================================
<S> <C> <C>
Currently Payable
Domestic $ (3.7) $ (13.7)
Foreign 7.8 4.5
-------------------------------------------------------------
Total currently payable 4.1 (9.2)
-------------------------------------------------------------
Deferred
Domestic 4.9
Foreign 4.5
-------------------------------------------------------------
Total deferred 9.4
-------------------------------------------------------------
Provision (benefit) for income taxes
of discontinued operations $ 13.5 $ (9.2)
=============================================================
</TABLE>
For fiscal 1998 and the eleven months ended May 28, 1999, the effective tax
rates for discontinued operations were 25% and 30%, 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, benefits from the use of a foreign sales corporation and federal
research tax credits, and restructuring charges.
================================================================================
43 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
APPLIED BIOSYSTEMS Report of Management and
Report of Independent Accountants
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 under the
circumstances. Financial information presented elsewhere in this annual report
is consistent with that in the financial statements.
In meeting its responsibility for preparing reliable financial statements, the
Company maintains a system of internal accounting controls designed to provide
reasonable assurance that assets are safeguarded and transactions are properly
recorded and executed in accordance with corporate policy and management
authorization. The Company believes its accounting controls provide reasonable
assurance that errors or irregularities which could be material to the financial
statements are prevented or would be detected within a timely period. In
designing such control procedures, management recognizes judgments are required
to assess and balance the costs and expected benefits of a system of internal
accounting controls. Adherence to these policies and procedures is reviewed
through a coordinated audit effort of the Company's internal audit staff and
independent accountants.
The Audit/Finance Committee of the Board of Directors is comprised solely of
outside directors and is responsible for overseeing and monitoring the quality
of the Company's accounting and auditing practices. The independent accountants
and internal auditors have full and free access to the Audit/Finance Committee
and meet periodically with the committee to discuss accounting, auditing, and
financial reporting matters.
/s/ Dennis L. Winger
Dennis L. Winger
Senior Vice President and
Chief Financial Officer
/s/ Tony L. White
Tony L. White
Chairman, President, and
Chief Executive Officer
Report of Independent Accountants
To the Stockholders and Board of Directors of
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, and of cash flows present fairly, in all material respects, the
financial position of the PE Biosystems group ("Applied Biosystems") of PE
Corporation at June 30, 2000 and 1999, and the results of its operations and its
cash flows for each of the three fiscal years in the period ended June 30, 2000,
in conformity with accounting principles generally accepted in the United
States. 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 auditing standards generally accepted in the United States,
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 Applied Biosystems' combined
financial statements, Applied Biosystems is a group of PE Corporation;
accordingly, the combined financial statements of Applied Biosystems should be
read in conjunction with the audited financial statements of PE Corporation.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
July 25, 2000
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 44
<PAGE>
CELERA GENOMICS GROUP Selected Financial Data
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1996 1997 1998 1999 2000
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Financial Operations
Net revenues $ 159 $ 903 $ 4,211 $ 12,541 $ 42,747
Net loss (2,589) (30,247) (8,315) (44,894) (92,737)
Per share of common stock
Basic and diluted (.89) (1.73)
==========================================================================================================================
Other Information
Cash and short-term investments $ - $ - $ - $ 71,491 $ 1,111,034
Note receivable from
Applied Biosystems 150,000
Working capital (deficit) (340) (421) (1,160) 192,803 1,081,039
Capital expenditures 1,073 411 3,648 94,541 30,673
Total assets 977 2,983 6,339 344,720 1,413,257
Total allocated debt 46,000
Group equity (deficit) 611 (3,464) (1,259) 293,867 1,290,816
==========================================================================================================================
</TABLE>
The selected financial data should be read with the combined financial
statements and the consolidated financial statements.
The recapitalization of the Company on May 6, 1999 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. The PE
Biosystems group is currently doing business as Applied Biosystems and will seek
formal approval of a change to this name at the 2000 annual meeting. The PE
Biosystems group is referred to as Applied Biosystems.
Per share data reflects the two-for-one stock split effective February 2000.
Items impacting the comparability of information included acquired research and
development charges of $2.1 million for fiscal 1996 and $26.8 million for fiscal
1997, and $5.6 million of charges for fiscal 1999 relating to the
recapitalization and transformation of the Company.
================================================================================
45 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Management's Discussion and Analysis
Management's Discussion of Operations
PE Corporation ("PE" or "our 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: PE Corporation-Celera Genomics Group Common Stock
("Celera Genomics stock") and PE Corporation-PE Biosystems Group Common Stock
("PE Biosystems stock"). The Celera Genomics group is engaged principally in the
generation, sale, and support of genomic information and enabling data
management and analysis software. The Celera Genomics group's customers use this
information for commercial applications in the pharmaceutical and life sciences
industries in the specific areas of target identification, drug discovery, and
drug development. The Celera Genomics group also provides gene discovery,
genotyping, and related genomics services. The Celera Genomics group has
recently expanded its business into the emerging fields of functional genomics,
in particular, proteomics and personalized health/medicine. The PE Biosystems
group manufactures and markets biochemical instrument systems and associated
consumable products for life science research and related applications. The PE
Biosystems group is currently doing business as Applied Biosystems and will seek
formal approval of a change to this name at our company's 2000 annual meeting.
We refer to the PE Biosystems group as Applied Biosystems.
Operations prior to September 30, 1998 were principally funded from working
capital, collaborative arrangements, and contract research services. Net losses
for fiscal 2000, 1999, and 1998 were $92.7 million, $44.9 million and $8.3
million, respectively. Fiscal 2000 and 1999 results reflected a significant
increase in R&D expenditures to support the genomic sequencing, bioinformatics,
and software development activities. Fiscal 1999 included a non-recurring
before-tax charge 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 for fiscal 1998
primarily reflected the operations of GenScope and AgGen. In fiscal 1999, these
businesses were integrated into the core business of providing genomic
information, and related gene discovery and genomics 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.
Events Impacting Comparability
Acquisitions and Investments
During the fourth quarter of fiscal 2000, our company acquired Paracel, Inc. in
a stock-for-stock transaction. Paracel produces advanced genomic and text
analysis technologies. Its products include a hardware accelerator for sequence
comparison, a hardware accelerator for text search, and sequence analysis
software tools. Approximately 1.6 million shares of Celera Genomics stock were
issued in exchange for the outstanding shares of Paracel common stock not
previously owned by our company. At the time of the acquisition, our company
owned 14% of Paracel, which was allocated to Applied Biosystems. The transfer of
the Paracel shares to the Celera Genomics group resulted in a $27.3 million cash
payment to Applied Biosystems, which represented the fair market value of those
shares at the transfer date.
During the third quarter of fiscal 1999, our company acquired a 49% interest in
Agrogene S.A. The investment complements the Celera Genomics group's
capabilities in the agricultural genomics field.
See Note 2 of the Celera Genomics group's combined financial statements for a
further description of acquisitions and investments.
Results of Operations--2000 Compared With 1999
The Celera Genomics group reported a net loss of $92.7 million for fiscal 2000
compared with a net loss of $44.9 million for fiscal 1999. The increase in the
net loss reflected the increased sequencing activity; increased investment in
research and development activities relating to expanded scientific and
annotation teams, and bioinformatics staff; and increased operating expenses
required to support the expanded product and business development activities.
Net revenues for the Celera Genomics group were $42.7 million for fiscal 2000
compared with $12.5 million for fiscal 1999. The increased revenues resulted
primarily from database subscription agreements initiated during fiscal 2000 and
the second half of fiscal 1999 and an increase in related genomics services
revenues. Revenues for genotyping services remained essentially unchanged.
R&D expenses increased $119.4 million to $167.8 million for fiscal 2000 from
$48.4 million for fiscal 1999, primarily as a result of a full year of
sequencing operations and significantly expanded bioinformatics and software
development capabilities. The group also continued to expand its scientific and
annotation research teams, and bioinformatics and software engineering staff.
R&D expenses for fiscal 2000 included $4.5 million of amortization of goodwill
and other intangibles primarily associated with the Paracel acquisition.
SG&A expenses were $43.0 million for fiscal 2000 compared with $28.3 million for
fiscal 1999. The increase was related to the planned scale-up in business
development, marketing, and administrative activities in support of the database
business. Corporate expenses and administrative shared services were $7.5
million for fiscal 2000 compared with $5.1 million for fiscal 1999. 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.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 46
<PAGE>
CELERA GENOMICS GROUP Management's Discussion and Analysis continued
The Celera Genomics group was allocated a non-recurring before-tax charge of
$4.6 million in fiscal 1999. These costs were incurred in connection with the
recapitalization of our company. The Celera Genomics group and Applied
Biosystems were each allocated 50% of the total recapitalization costs incurred
in fiscal 1999. These costs included investment banking and professional fees.
See Note 1 to the Celera Genomics group's combined financial statements for a
description of the recapitalization.
Interest expense was $2.1 million for fiscal 2000 as a result of financing the
purchase of the Celera Genomics group's Rockville, Maryland facilities. Interest
income was $27.5 million for fiscal 2000 compared with $1.2 million for fiscal
1999. The increase of $26.3 million was attributable to higher balances of cash
and cash equivalents, and short-term investments balances, which increased
during the third quarter of fiscal 2000 due to a follow-on public offering of
Celera Genomics stock and to interest on the $150 million note receivable from
Applied Biosystems, which was outstanding for most of fiscal 2000.
The effective income tax rate was 35% for fiscal 2000 and 34% for fiscal 1999.
Excluding the recapitalization costs, the effective income tax rate for fiscal
1999 was 35%. See Note 1 to the Celera Genomics group's combined financial
statements for a discussion of allocation of federal and state income taxes.
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.
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 genotyping and gene
discovery services were $8.4 million for fiscal 1999, an increase of $4.5
million over fiscal 1998. 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 genomics information and database
products were $2.8 million for fiscal 1999, mainly from early-access
subscriptions. Revenues for genomics contract services increased $1.0 million
for fiscal 1999 as a result of increased contract research services.
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 the establishment and
operation of the sequencing facility and computing center of the new genomics
information business.
SG&A expenses were $28.3 million for fiscal 1999 compared with $6.7 million for
fiscal 1998. The increase resulted from expenses associated with the start-up
and ongoing operations of the new genomics 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 charge
of $4.6 million for costs incurred in connection with the recapitalization of
our company. The Celera Genomics group and Applied Biosystems were each
allocated 50% of the $9.2 million total recapitalization costs incurred by our
company.
Interest income was $1.2 million for fiscal 1999. Interest income included $.5
million of interest on cash and cash equivalents and $.7 million of interest on
the $150 million note receivable from Applied Biosystems.
The effective income tax rate was 34% for fiscal 1999 and 35% for fiscal 1998.
Excluding the recapitalization costs, the effective income tax rate for fiscal
1999 was 35%. See Note 1 to the Celera Genomics group's combined financial
statements for a discussion of allocation of federal and state income taxes.
Management's Discussion of Financial Resources and Liquidity
At September 30, 1998, our company allocated to the Celera Genomics group a $330
million short-term note receivable from Applied Biosystems. The $330 million
note represented an allocation of the Company's capital to the Celera Genomics
group and did not result in Applied Biosystems 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
Applied Biosystems 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 Applied Biosystems for $150 million. The new note
receivable was for a term of one-year, bearing an interest rate of 5% per annum.
The Celera Genomics group received payment of the note during fiscal 2000.
In addition, our Board of Directors adopted a financing policy, included in Note
1 to the Celera Genomics group's combined financial statements, that permits
Applied Biosystems 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.
================================================================================
47 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Management's Discussion and Analysis continued
Significant Changes in the Combined Statements of Financial Position
Cash and cash equivalents and short-term investments were $1.1 billion at June
30, 2000 compared with $71.5 million at June 30, 1999. In March 2000, our
company completed a follow-on public offering of Celera Genomics stock from
which net proceeds of $943.3 million were realized. During the first quarter of
fiscal 2000, our company obtained financing of $46 million specifically for the
purchase of the Celera Genomics group's Rockville, Maryland facilities.
At June 30, 2000 and 1999, the Celera Genomics group had tax benefit receivables
from Applied Biosystems of $16.7 million and $9.9 million, respectively. The tax
benefit receivable is settled on a quarterly basis. See Note 1 to the Celera
Genomics group's combined financial statements for a discussion of allocation of
federal and state income taxes.
Accounts receivable increased $11.6 million to $14.9 million at June 30, 2000
from $3.3 million at June 30, 1999, primarily as a result of increased genomics
services revenue.
Inventory at June 30, 2000 was $3.3 million pertaining to the operations of
Paracel.
Other long-term assets increased $151.1 million to $153.5 million at June 30,
2000 from $2.4 million at June 30, 1999, primarily as a result of goodwill and
other intangibles, net of accumulated amortization, of $125.3 million associated
with the acquisition of Paracel and the recognition of a $23.0 million deferred
tax asset due primarily to net operating losses and other tax credits.
Accrued salaries and wages increased $6.1 million to $10.3 million at June 30,
2000 from $4.2 million at June 30, 1999. The increase reflected the growth in
the number of employees during fiscal 2000 and the timing of payments.
Deferred revenues increased $12.2 million to $24.2 million at June 30, 2000 from
$12.0 million at June 30, 1999, primarily due to the timing of subscriptions
received for database and gene discovery agreements offset by revenue recognized
under these agreements.
Other long-term liabilities increased $3.7 million to $9.2 million at June 30,
2000 from $5.5 million at June 30, 1999, due to long-term deferred revenues from
subscription payments received for periods beyond fiscal 2001.
Combined Statements of Cash Flows
Net cash used by operating activities was $58.3 million for fiscal 2000 compared
with $22.8 million for the prior fiscal year. The increase in net cash used by
operating activities resulted primarily from net operating losses, an increase
in accounts receivable, and an increase in the tax benefit receivable from
Applied Biosystems. This was partially offset by an increase of $15.9 million in
deferred revenues and an increase of $6.1 million in accrued salaries and wages.
Net cash used by operating activities was $22.8 million for fiscal 1999 compared
with $6.9 million for fiscal 1998, reflecting higher net operating losses for
fiscal 1999.
Net cash used by investing activities was $572.9 million for fiscal 2000
compared with $95.8 million for fiscal 1999. During fiscal 2000, short-term
investments of $541.1 million were purchased with funds received from a
follow-on public offering. Capital expenditures for fiscal 2000 were $30.7
million. The capital expenditures for fiscal 2000 included payments for software
licenses acquired during the fourth quarter of fiscal 1999 and expenditures
associated with the continued development of the laboratories, facilities, and
data center at the Rockville, Maryland headquarters. Fiscal 2000 capital
expenditures also included $.4 million for purchases of instrumentation from
Applied Biosystems. The Celera Genomics group's investments during fiscal 2000
included acquisitions of the Panther(TM) technology from Molecular Applications
Group and a 47.5% equity interest in Shanghai GeneCore BioTechnologies Co., Ltd.
Net cash used by investing activities for fiscal 1999 of $95.8 million was
comprised of capital expenditures of $94.5 million and an equity investment in
Agrogene of $1.2 million. Capital expenditures for fiscal 1999 increased
significantly compared with fiscal 1998 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 the Celera Genomics group's 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 purchase of Applied
Biosystems' ABI PRISM(R) 3700 DNA Analyzers and $1.6 million for other
instrumentation purchased from Applied Biosystems. Net cash used by investing
activities of $3.6 million for fiscal 1998 primarily reflected capital
investment in the genomics services business.
Net cash provided by financing activities was $1.1 billion for fiscal 2000. In
March 2000, our company completed a follow-on public offering of Celera Genomics
stock from which net proceeds of $943.3 million were realized. During fiscal
2000, our company obtained financing of $46 million specifically for the
purchase of the Rockville, Maryland facilities and received payment of the $150
million note receivable from Applied Biosystems. In connection with the
acquisition of Paracel, the transfer of the Paracel shares allocated to Applied
Biosystems resulted in a $27.3 million cash payment to Applied Biosystems, which
represented the fair market value of those shares at the transfer date. See Note
2 to the Celera Genomics group's combined financial statements for a discussion
of the acquisition of Paracel. During fiscal 2000, $17.6 million in proceeds
were recognized from stock issued for the Celera Genomics group's stock plans.
Net cash provided by financing activities was $190.0 million for fiscal 1999,
reflecting the initial capitalization of $330 million partially offset by the
$150 million note receivable from Applied Biosystems. Net cash provided by
financing activities for fiscal 1998 was $10.5 million, attributable entirely to
the funding of that year's operations by Applied Biosystems.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 48
<PAGE>
CELERA GENOMICS GROUP Management's Discussion and Analysis continued
Our company's $100 million revolving credit agreement was replaced, effective
April 20, 2000, with a new $100 million revolving credit agreement with four
banks that matures on April 20, 2005. Terms of this new revolving credit
agreement are substantially similar to those of the previous credit agreement.
At June 30, 2000, our company had unused credit facilities, including the
revolving credit agreement, totaling $341 million, which is available to the
groups.
Recently Issued 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," amended in June 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The provisions of the statements 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 statements in the first quarter of fiscal 2001. The Celera Genomics group
estimates that, upon adoption, there will be no adjustment for a change in
accounting principles in its Combined Statements of Operations or in accumulated
other comprehensive income in the Combined Statements of Financial Position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. The Celera Genomics group does not
expect any impact from the application of SAB No. 101.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation-An
Interpretation of Accounting Principles Board ("APB") Opinion No. 25." FIN No.
44 clarifies the following: the definition of an employee for purposes of
applying APB No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN No. 44 is
effective July 1, 2000, but certain conclusions in FIN No. 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000.
Management does not expect the application of FIN No. 44 to have a material
impact on the Celera Genomics group's combined financial statements.
The Celera Genomics group continues to apply APB No. 25 in accounting for
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for these plans, as all options have been issued with an exercise
price equal to 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 2000 net loss by $13.9 million and diluted net loss per share
by $.25. 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 8
to the Celera Genomics group's combined financial statements for a more detailed
discussion regarding the accounting for stock-based compensation.
Outlook
The Celera Genomics group expects to see a continued expansion in its customer
base for online genomics information products and related genomics services,
with corresponding increases in revenues during fiscal 2001. Revenue growth
should come primarily from increasing the customer base among the major
pharmaceutical and biotech companies and non-profit research organizations and
strengthening our research collaborations and services business.
The expected increase in revenues could be offset as the Celera Genomics group
contemplates investments in the discovery aspects of the business. The Celera
Genomics group expects to continue staffing the organization throughout fiscal
2001. R&D expenses are expected to continue to grow as the research and
bioinformatics areas are expanded. SG&A expenses are also expected to increase
as a sales and marketing function is established to expand potential customer
contact.
Our company believes the Celera Genomics group's existing cash and cash
equivalents and short-term investments are sufficient to fund its operating
expenses and capital requirements related to its original business plan, which
relates to the sequencing and assembly of the human genome and the development
of information products and related genomics services from this data. While our
company intends to use the net proceeds from the Celera Genomics group's
follow-on public offering primarily to fund its new product and technology
development activities in functional genomics, with an emphasis on proteomics
and personalized health/medicine, such funds may not be sufficient to support
these new business activities as they develop. The Celera Genomics group's
actual future capital uses and requirements with respect to its new activities
will depend on many factors, including those discussed under "Forward-Looking
Statements."
================================================================================
49 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Management's Discussion and Analysis continued
Forward-Looking Statements
Certain statements contained in this report, including the Outlook section, are
forward-looking and are subject to a variety of risks and uncertainties. These
statements may be identified by the use of forward-looking words or phrases such
as "believe," "expect," "anticipate," "should," "planned," "estimated," and
"potential," among others. These forward-looking statements are based on our
current expectations. The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for such forward-looking statements. In order to comply
with the terms of the safe harbor, we note that a variety of factors could cause
our actual results and experience to differ materially from the anticipated
results or other expectations expressed in such forward-looking statements. The
risks and uncertainties that may affect the operations, performance,
development, and results of our businesses include, but are not limited to:
The Celera Genomics group has incurred net losses to date and may not achieve
profitability. The Celera Genomics group has accumulated net losses of $178.8
million as of June 30, 2000 and expects that it will continue to incur
additional net losses for the foreseeable future. These losses may increase as
Celera expands its investments in new technology and product development,
including the development of its functional genomics and personalized
health/medicine efforts. As an early-stage business, the Celera Genomics group
faces significant challenges in simultaneously expanding its operations,
pursuing key scientific goals, and attracting customers for its information
products and services. As a result, there is a high degree of uncertainty that
the Celera Genomics group will be able to achieve profitable operations.
Celera Genomics' business plan is unique and expanding. No organization has ever
attempted to combine in one business organization all of the Celera Genomics
group's businesses. In addition, as Celera Genomics moves beyond completion of
the sequencing of the human genome, it is expanding its business plan to provide
new scientific services to customers in areas such as functional genomics,
personalized health/medicine, and proteomics. The offering of genomics
databases, functional genomics, proteomics, and personalized health/medicine
capabilities targeted at a wide variety of customers, from pharmaceutical
companies to university researchers, has a number of risks, including pricing
and volume issues, technology and access concerns, computer security, pursuit of
key scientific goals, and protection of intellectual property. The addition of
the functional genomics, personalized health/medicine, and proteomics efforts
will add further complexity and require additional management attention and
resources as these new markets are addressed.
Celera Genomics' business plan depends heavily on final assembly and annotation
of the human genome. The Celera Genomics group is assembling human genome
sequence data obtained using "whole genome shotgun sequencing." Although we
believe that the Celera Genomics group's sequencing and assembly efforts will be
successfully completed based on Celera Genomics' experience to date, Celera
Genomics is using mehods, together with data from whole genome shotgun
sequencing, which have not previously been applied to complete final assembly of
a genome with the size and complexity of the human genome. The Celera Genomics
group's ability to retain its existing customers and attract new customers is
heavily dependent upon the final assembly and continued annotation of the human
genome. This information is essential to the functional genomics and
personalized health/medicine components of Celera Genomics' business strategy in
which Celera Genomics intends to make substantial investments in the near
future. As a result, failure to complete the assembly and annotation efforts in
a timely manner may have a material adverse effect on the Celera Genomics
group's business.
Celera Genomics' revenue growth depends on retaining existing and adding new
customers. The Celera Genomics group has a small number of customers, the
revenues from which will offset only a small portion of its expenses. In order
to generate significant additional revenues, the Celera Genomics group must
obtain additional customers and retain its existing customers. Celera Genomics'
ability to retain existing and add new customers depends upon customers'
continued belief that Celera Genomics' products can help accelerate their drug
discovery and development efforts and fundamental discoveries in biology.
Although customer agreements typically have multi-year terms, there can be no
assurance that any will be renewed upon expiration. The Celera Genomics group's
future revenues are also affected by the extent to which existing customers
expand their agreements to include new services and database products. In some
cases, the Celera Genomics group may accept milestone payments or future
royalties on products developed by its customers as consideration for access to
Celera Genomics' databases and products in lieu of a portion of subscription
fees. Such arrangements are unlikely to produce revenue for the Celera Genomics
group for a number of years, if ever, and depend heavily on the research and
product development, sales and marketing, and intellectual property protection
abilities of the customer.
Use of genomics information to develop or commercialize products is unproven.
The development of new drugs and the diagnosis of disease based on genomic
information is unproven. Few therapeutic or diagnostic products based on genomic
discoveries have been developed and commercialized, and to date no one has
developed or commercialized any therapeutic, diagnostic, or agricultural
products based on the Celera Genomics group's technologies. If the Celera
Genomics group's customers are unsuccessful in developing and commercializing
products based on the group's databases or other products or services, customers
and the group may be unable to generate sufficient revenues, and its business
may suffer as a result. Development of such products will be subject to risks of
failure, including that such products will be found to be toxic, found to be
ineffective, fail to receive regulatory approvals, fail to be developed prior to
the successful marketing of similar products by competitors, or infringe on
proprietary rights of third parties.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 50
<PAGE>
CELERA GENOMICS GROUP Management's Discussion and Analysis continued
The genomics industry is intensely competitive and evolving. There is intense
competition among entities attempting to sequence segments of the human genome
and identify genes associated with specific diseases and develop products,
services, and intellectual property based on these discoveries. Celera Genomics
faces competition in these areas from genomic, pharmaceutical, biotechnology and
diagnostic companies, academic and research institutions, and government or
other publicly funded agencies, both in the United States and abroad. A number
of companies, other institutions, and government-financed entities are engaged
in gene sequencing, gene discovery, gene expression analysis, positional
cloning, the study of genetic variation, functional genomics, and other genomic
service businesses. Some of these competitors are developing databases
containing gene sequence, gene expression, genetic variation, or other
biological information and are marketing or plan to market their data to
pharmaceutical and biotechnology companies and academic and research
institutions. Additional competitors may attempt to establish databases
containing this information in the future. The Celera Genomics group has
licensed some of its key technology on a non-exclusive basis from third parties,
and therefore such technology may be available for license by PE Corporation's
competitors.
Competitors may also discover, characterize, or develop important genes, drug
targets or leads, drug discovery technologies, or drugs in advance of Celera
Genomics or its customers, or which are more effective than those developed by
Celera Genomics or its customers, or may obtain regulatory approvals of their
drugs more rapidly than Celera Genomics' customers do, any of which could have a
material adverse effect on any of Celera Genomics' similar programs. Moreover,
these competitors may obtain patent protection or other intellectual property
rights that would limit Celera Genomics' rights or its customers' ability to use
Celera Genomics' products to commercialize therapeutic, diagnostic, or
agricultural products. In addition, a customer may use the Celera Genomic
group's services to develop products that compete with products separately
developed by the Group or its other customers.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery, drug
development, and diagnostics based on gene sequencing, target gene
identification, bioinformatics, and related technologies. In addition, certain
pharmaceutical and biotechnology companies have significant needs for genomic
information and may choose to develop or acquire competing technologies to meet
such needs. Celera Genomics also faces competition from providers of software. A
number of companies have announced their intent to develop and market software
to assist pharmaceutical companies and academic researchers in managing and
analyzing their own genomic data and publicly available data.
Celera Genomics' current and potential customers are primarily from, and are
subject to risks faced by, the pharmaceutical and biotechnology industries. The
Celera Genomics group derives a substantial portion of its revenues from fees
paid by pharmaceutical companies and larger biotechnology companies for its
information products and services, including Amgen Inc., Novartis Pharma AG,
Pharmacia & Upjohn, Pfizer Inc., Takeda Chemical Industries, Ltd., American
Home Products Corporation, and Immunex Corporation. The Celera Genomics group
expects that pharmaceutical companies and larger biotechnology companies will
continue to be the Celera Genomics group's primary source of revenues for the
foreseeable future. As a result, the Celera Genomics group is subject to risks
and uncertainties that affect the pharmaceutical and biotechnology industries
and to reduction and delays in research and development expenditures by
companies in these industries.
In addition, the Celera Genomics group's future revenues may be adversely
affected by mergers and consolidation in the pharmaceutical and biotechnology
industries, which will reduce the number of the group's potential customers.
Large pharmaceutical and biotechnology customers could also decide to conduct
their own genomics programs or seek other providers instead of using Celera
Genomics' products and services.
Celera Genomics relies on its strategic relationship with Applied Biosystems.
The Celera Genomics group believes that its strategic relationship with Applied
Biosystems has provided it with a significant competitive advantage in its
efforts to date to sequence the human genome. Celera Genomics' timely completion
of that work and successful extension of its business into the functional
genomics, personalized health/medicine, and proteomics arenas will depend on
Applied Biosystems' ability to continue to provide leading-edge, proprietary
technology and products, including technologies relating to genetic analysis,
protein analysis, and high-throughput screening. If Applied Biosystems is unable
to supply these technologies, Celera will need to obtain access to alternative
technologies, which may not be available, or may only be available on
unfavorable terms. Any change in the relationship with Applied Biosystems that
adversely affects the Celera Genomics group's access to Applied Biosystems'
technology or failure by Applied Biosystems to continue to develop new
technologies or protect its proprietary technology could adversely affect Celera
Genomics' business.
Introduction of new products may expose Celera Genomics to product liability
claims. New products developed by Celera Genomics could expose Celera Genomics
to potential product liability risks which are inherent in the testing,
manufacturing, and marketing of human therapeutic and diagnostic products.
Product liability claims or product recalls, regardless of the ultimate outcome,
could require Celera Genomics to spend significant time and money in litigation
and to pay significant damages.
================================================================================
51 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Management's Discussion and Analysis continued
Celera Genomics could incur liabilities relating to hazardous materials that it
uses in its research and development activities. Celera Genomics' research and
development activities involve the controlled use of hazardous materials and
chemicals, and may in the future involve various radioactive materials. In the
event of an accidental contamination or injury from these materials, Celera
could be held liable for damages in excess of its resources.
Celera Genomics' sales cycle is lengthy and it may spend considerable resources
on unsuccessful sales efforts or may not be able to complete deals on the
schedule anticipated. The Celera Genomics group's ability to obtain new
customers for genomic information products, value-added services and licenses to
intellectual property depends on its customers' belief that the group can help
accelerate their drug discovery efforts. The Celera Genomics group's sales cycle
is typically lengthy because the group needs to educate potential customers and
sell the benefits of its products and services to a variety of constituencies
within such companies. In addition, each agreement involves the negotiation of
unique terms. Celera may expend substantial funds and management effort with no
assurance that an agreement will be reached with a potential customer. Actual
and proposed consolidations of pharmaceutical companies have affected, and may
in the future affect, the timing and progress of the Celera Genomics group's
sales efforts.
Scientific and management staff have unique expertise which is key to Celera
Genomics' commercial viability and which would be difficult to replace. Celera
Genomics is highly dependent on the principal members of its scientific and
management staff, particularly J. Craig Venter, its President. For the
sequencing and assembly of the human genome, the Celera Genomics group believes
the following members of its staff are essential: Dr. Venter; Mark Adams, Vice
President for Genome Programs; and Eugene Myers, Vice President of Informatics
Research, who is responsible for the group assembling the genome. None of these
individuals are party to employment agreements, non-competition agreements, or
non-solicitation agreements with the Celera Genomics group. Additional members
of the Celera Genomics group's medical, scientific, and bioinformatics staff are
important to the development of information, tools, and services required for
implementation of its business plan. Also, in an effort to meet the demands of
its growing business, the group recently hired other key management personnel in
the areas of operations, sales, marketing, and business development, and the
group believes that these persons will be important to the successful growth of
the group's business. The loss of any of these persons' expertise would be
difficult to replace and could have a material adverse effect on the Celera
Genomics group's ability to achieve its goals.
Celera Genomics' competitive position may depend on patent and copyright
protection, which may not be sufficiently available. The Celera Genomics group's
ability to compete and to achieve profitability may be affected by its ability
to protect its proprietary technology and other intellectual property. While
Celera Genomics' business is currently primarily dependent on revenues from
access fees to its discovery and information system, obtaining patent protection
may also be important to its business, in that Celera Genomics would be able to
prevent competitors from making, using, or selling any of its technology for
which it obtains a patent. Patent law affecting Celera Genomics' business,
particularly gene sequences, gene function, and polymorphisms, is uncertain, and
as a result, the Celera Genomics group is uncertain as to its ability to obtain
intellectual property protection covering its information discoveries sufficient
to prevent competitors from developing similar subject matter. Patents may not
issue from patent applications that the Celera Genomics group may own or
license. In addition, because patent applications in the United States are
maintained in secrecy until patents issue, third parties may have filed patent
applications for technology used by Celera Genomics or covered by Celera
Genomics' pending patent applications without Celera Genomics being aware of
such applications.
Moreover, the Celera Genomics group may be dependent on protecting, through
copyright law or otherwise, its databases to prevent other organizations from
taking information from such databases and copying and reselling it. Copyright
law currently provides uncertain protection regarding the copying and resale of
factual data. As such, Celera Genomics is uncertain whether it could prevent
such copying or resale. Changes in copyright and patent law could either expand
or reduce the extent to which the Celera Genomics group and its customers are
able to protect their intellectual property.
Celera Genomics' position may depend on its ability to protect trade secrets.
The Celera Genomics group relies on trade secret protection for its confidential
and proprietary information and procedures, including procedures related to
sequencing genes and to searching and identifying important regions of genetic
information. The Celera Genomics group currently protects such information and
procedures as trade secrets. The Celera Genomics group protects its trade
secrets through recognized practices, including access control, confidentiality,
and non-use agreements with employees, consultants, collaborators and customers,
and other security measures. These confidentiality and non-use agreements may be
breached, however, and the group may not have adequate remedies for any such
breach. In addition, the group's trade secrets may otherwise become known or be
independently developed by competitors.
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PE CORPORATION 2000 ANNUAL REPORT 52
<PAGE>
CELERA GENOMICS GROUP Management's Discussion and Analysis continued
Public disclosure of genomics sequence data could jeopardize Celera Genomics'
intellectual property protection and have an adverse effect on the value of our
products and services. The Celera Genomics group, the federally funded Human
Genome Project, and others engaged in similar research have committed to make
available to the public basic human sequence data. Such disclosures might limit
the scope of the Celera Genomics group's claims or make subsequent discoveries
related to full-length genes unpatentable. While the Celera Genomics group
believes that the publication of sequence data will not preclude it or others
from being granted patent protection on genes, there can be no assurance that
such publication has not affected, and will not affect, the ability to obtain
patent protection. Customers may conclude that uncertainties of such protection
decrease the value of the Celera Genomics group's information products and
services and, as a result, it may be required to reduce the fees it charges for
such products and services.
Celera Genomics may infringe the intellectual property rights of third parties
and may become involved in expensive intellectual property litigation. The
intellectual property rights of biotechnology companies, including Celera
Genomics, are generally uncertain and involve complex legal, scientific, and
factual questions. Celera Genomics' success in the functional genomics field may
depend, in part, on its ability to operate without infringing on the
intellectual property rights of others and to prevent others from infringing on
its intellectual property rights.
There has been substantial litigation regarding patents and other intellectual
property rights in the genomics industry. The Celera Genomics group may become a
party to patent litigation or proceedings in the federal courts or at the U.S.
Patent and Trademark Office to determine its patent rights with respect to third
parties which may include subscribers to Celera Genomics' database information
services. Interference proceedings may be necessary to establish which party was
the first to discover such intellectual property. Celera Genomics may become
involved in patent litigation against third parties to enforce the Celera
Genomics group's patent rights, to invalidate patents held by such third
parties, or to defend against such claims. The cost to Celera Genomics of any
patent litigation or similar proceeding could be substantial, and it may absorb
significant management time. If an infringement litigation against Celera
Genomics is resolved unfavorably to Celera Genomics, Celera Genomics may be
enjoined from manufacturing or selling certain of its products or services
without a license from a third party. Celera Genomics may not be able to obtain
such a license on commercially acceptable terms, or at all.
The U.S. Patent and Trademark Office has issued several patents to third parties
relating to single nucleotide polymorphisms ("SNPs"). If other important SNPs
receive patents, Celera Genomics will need to obtain rights to those important
SNPs in order to develop, use, and sell related assays. Such licenses may not be
available to Celera Genomics on commercially acceptable terms, or at all.
Celera Genomics' business is dependent on the continuous, effective, reliable,
and secure operation of its computer hardware, software, and internet
applications and related tools and functions. Because the Celera Genomics
group's business requires manipulating and analyzing large amounts of data, and
communicating the results of such analysis to customers via the internet, the
Celera Genomics group depends on the continuous, effective, reliable, and secure
operation of its computer hardware, software, networks, internet servers, and
related infrastructure. To the extent that the Celera Genomics group's hardware
or software malfunctions or the Celera Genomics group's customers' access to
products through the Internet is interrupted, its business could suffer. The
Celera Genomics group's computer and communications hardware is protected
through physical and software safeguards. However, it is still vulnerable to
fire, storm, flood, power loss, earthquakes, telecommunications failures,
physical or software break-ins, and similar events. In addition, Celera
Genomics' database products are complex and sophisticated, and as such, could
contain data, design, or software errors that could be difficult to detect and
correct. Software defects could be found in current or future products. If the
Celera Genomics group fails to maintain and further develop the necessary
computer capacity and data to support computational needs and its customers'
drug efforts, it could result in loss of or delay in revenues and market
acceptance. In addition, any sustained disruption in Internet access provided by
third parties could adversely impact the Celera Genomics group's business.
Celera Genomics' research and product development depends on access to tissue
samples and other biological materials. To continue to build its product base,
Celera Genomics will need access to normal and diseased human and other tissue
samples, other biological materials, and related clinical and other information,
which may be in limited supply. Celera Genomics may not be able to obtain or
maintain access to these materials and information on acceptable terms. In
addition, government regulation in the United States and foreign countries could
result in restricted access to, or use of, human and other tissue samples. If
Celera Genomics loses access to sufficient numbers or sources of tissue samples,
or if tighter restrictions are imposed on its use of the information generated
from tissue samples, its business may be harmed.
Ethical, legal, and social issues related to the use of genetic information and
genetic testing may cause less demand for our products. Genetic testing has
raised issues regarding confidentiality and the appropriate uses of the
resulting information. For example, concerns have been expressed toward
insurance carriers and employers using such tests to discriminate on the basis
of such information, resulting in barriers to the acceptance of such tests by
consumers. This could lead to governmental authorities calling for limits on, or
regulation of, the use of genetic testing, or prohibit testing for genetic
predisposition to certain diseases, particularly those that have no known cure.
Any of these scenarios could reduce the potential markets for PE Corporation's
products.
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53 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Management's Discussion and Analysis continued
Expected rapid growth in the number of its employees could absorb valuable
management resources and be disruptive to the development of Celera Genomics'
business. The Celera Genomics group expects to grow significantly. This growth
will require substantial effort to hire new employees and train and integrate
them into the Celera Genomics group's business and to develop and implement
management information systems, financial controls, and facility plans. In
addition, the Celera Genomics group will be required to create a sales and
marketing organization and expand customer support resources as sales of its
information products increase. The Celera Genomics group's inability to manage
growth effectively would have a material adverse effect on its future operating
results.
The use of Celera Genomics' products and services by its customers may be
subject to government regulation. Within the field of genomics, the use of the
Celera Genomics group's products by pharmaceutical and biotechnology customers
may be subject to certain U.S. Food and Drug Administration or other regulatory
approvals. For example, any new drug developed by the efforts of the Celera
Genomics group's customers as a result of their use of the Celera Genomics
group's databases must undergo an extensive regulatory review process. This
process can take many years and require substantial expense.
Within the field of personalized health/medicine, current and future patient
privacy and healthcare laws and regulations issued by the FDA may limit the use
of polymorphism data. To the extent that use of the Celera Genomics group's
databases is limited, or additional costs are imposed on the Celera Genomics
group's customers due to regulation, the Celera Genomics group's business may be
adversely affected.
Furthermore, the Celera Genomics group may be directly subject to the
regulations as a provider of diagnostic information. To the extent that such
regulations restrict the sale of the Celera Genomics group's products or impose
other costs, the Celera Genomics group's business may be materially adversely
affected.
Future acquisitions may absorb significant resources and may be unsuccessful. As
part of the Celera Genomics group's strategy, it expects to pursue acquisitions,
investments, and other relationships and alliances. Acquisitions may involve
significant cash expenditures, debt incurrence, additional operating losses,
dilutive issuances of equity securities, and expenses that could have a material
effect on the Celera Genomics group's financial condition and results of
operations. For example, to the extent that it elects to pay the purchase price
for such acquisitions in shares of Celera Genomics stock, such issuance of
additional shares of Celera Genomics stock will be dilutive to holders of Celera
Genomics stock. Acquisitions involve numerous other risks, including:
o difficulties integrating acquired technologies and personnel into the business
of the Celera Genomics group;
o diversion of management from daily operations;
o inability to obtain required financing on favorable terms;
o entry into new markets in which the Celera Genomics group has little previous
experience;
o potential loss of key employees or customers of acquired companies;
o assumption of the liabilities and exposure to unforeseen liabilities of
acquired companies; and
o amortization of the intangible assets of acquired companies.
It may be difficult for the Celera Genomics group to complete such transactions
quickly and to integrate such business efficiently into its current business.
Any such acquisitions or investments by the Celera Genomics group may ultimately
have a negative impact on its business and financial condition.
PE Corporation is subject to a purported class action lawsuit relating to its
recent offering of shares of Celera Genomics stock which may be expensive and
time consuming. As of August 25, 2000, PE Corporation and certain of its
officers had been served in five lawsuits purportedly on behalf of purchasers of
Celera Genomics stock in PE Corporation's offering of Celera Genomics stock
completed on March 6, 2000. In the offering, PE Corporation sold an aggregate of
approximately 4.4 million shares of Celera Genomics common stock at a public
offering price of $225 per share. The complaints in these lawsuits generally
allege that the prospectus used in connection with the offering contained
inaccurate and misleading statements in violation of federal securities laws.
The complaints seek unspecified damages, rescission, costs and expenses, and
such other relief as the court deems proper. All of these lawsuits have been
consolidated into a single case. Although PE Corporation believes the asserted
claims are without merit and intends to defend the case vigorously, the outcome
of this or any other litigation is inherently uncertain. The defense of this
case will require management attention and resources.
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PE CORPORATION 2000 ANNUAL REPORT 54
<PAGE>
CELERA GENOMICS GROUP Combined Statements of Operations
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1998 1999 2000
=========================================================================
<S> <C> <C> <C>
Net Revenues $ 4,211 $ 12,541 $ 42,747
-------------------------------------------------------------------------
Costs And Expenses
Research and development 10,279 48,448 167,831
Selling, general and administrative 6,725 28,255 43,022
Special charges 4,616
-------------------------------------------------------------------------
Operating Loss (12,793) (68,778) (168,106)
Interest expense 2,115
Interest income 1,245 27,548
-------------------------------------------------------------------------
Loss Before Income Taxes (12,793) (67,533) (142,673)
Benefit for income taxes 4,478 22,639 49,936
-------------------------------------------------------------------------
Net Loss $ (8,315) $ (44,894) $ (92,737)
=========================================================================
Net Loss Per Share (see Note 1)
Basic and diluted $ (.89) $ (1.73)
=========================================================================
</TABLE>
See accompanying notes to the Celera Genomics group's combined financial
statements.
================================================================================
55 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Combined Statements of Financial Position
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
At June 30, 1999 2000
========================================================================================
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 71,491 $ 569,894
Short-term investments 541,140
Note receivable from Applied Biosystems (see Note 7) 150,000
Tax benefit receivable from Applied Biosystems (see Note 1) 9,935 16,702
Accounts receivable 3,276 14,936
Inventories 3,336
Prepaid expenses and other current assets 3,454 2,283
----------------------------------------------------------------------------------------
Total current assets 238,156 1,148,291
Property, plant and equipment, net 104,192 111,442
Other long-term assets 2,372 153,524
----------------------------------------------------------------------------------------
Total Assets $ 344,720 $ 1,413,257
========================================================================================
Liabilities And Group Equity
Current liabilities
Accounts payable $ 19,861 $ 21,566
Accrued salaries and wages 4,179 10,251
Deferred revenues 12,032 24,169
Other accrued expenses 9,281 11,266
----------------------------------------------------------------------------------------
Total current liabilities 45,353 67,252
Long-term debt 46,000
Other long-term liabilities 5,500 9,189
----------------------------------------------------------------------------------------
Total Liabilities 50,853 122,441
----------------------------------------------------------------------------------------
Commitments and contingencies (see Note 10)
Group Equity 293,867 1,290,816
----------------------------------------------------------------------------------------
Total Liabilities And Group Equity $ 344,720 $ 1,413,257
========================================================================================
</TABLE>
See accompanying notes to the Celera Genomics group's combined financial
statements.
The PE Biosystems group is currently doing business as Applied Biosystems and
will seek formal approval of a change to this name at the 2000 annual meeting.
The PE Biosystems group is referred to as Applied Biosystems.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 56
<PAGE>
CELERA GENOMICS GROUP Combined Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 1998 1999 2000
============================================================================================================
<S> <C> <C> <C>
Operating Activities
Net loss $ (8,315) $ (44,894) $ (92,737)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization 650 3,757 29,575
Long-term compensation programs 2,802 883
Deferred income taxes (6,971)
Changes in operating assets and liabilities
Increase in tax benefit receivable from
Applied Biosystems (9,935) (6,767)
Increase in accounts receivable (354) (2,520) (11,620)
Decrease in inventories 615
Increase in prepaid expenses and other assets (4) (3,458) (446)
Increase in accounts payable and other liabilities 1,151 31,496 29,138
------------------------------------------------------------------------------------------------------------
Net Cash Used By Operating Activities (6,872) (22,752) (58,330)
------------------------------------------------------------------------------------------------------------
Investing Activities
Additions to property, plant and equipment
(net of disposals of $1,175 for fiscal 2000) (3,648) (94,541) (29,498)
Purchases of short-term investments (541,127)
Acquisitions and investments, net (1,236) (2,275)
------------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (3,648) (95,777) (572,900)
------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in debt 46,000
Net proceeds from follow-on stock offering 943,303
Proceeds from stock issued for Celera Genomics
group stock plans 1,485 17,613
Proceeds from the collection of note receivable
from Applied Biosystems 150,000
Net cash allocated (to) from Applied Biosystems 10,520 188,535 (27,283)
------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 10,520 190,020 1,129,633
------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents 71,491 498,403
Cash And Cash Equivalents Beginning Of Year 71,491
------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ - $ 71,491 $ 569,894
============================================================================================================
</TABLE>
See accompanying notes to the Celera Genomics group's combined financial
statements.
The PE Biosystems group is currently doing business as Applied Biosystems and
will seek formal approval of a change to this name at the 2000 annual meeting.
The PE Biosystems group is referred to as Applied Biosystems.
================================================================================
57 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Combined Statements of Group Equity
and Comprehensive Loss
<TABLE>
<CAPTION>
Accumulated
Other Group
Accumulated Comprehensive Equity
(Dollar amounts in thousands) Other Deficit Income (Deficit)
===========================================================================================================
<S> <C> <C> <C> <C>
Balance At June 30, 1997 $ 29,372 $ (32,836) $ - $ (3,464)
Net loss (8,315) (8,315)
Net cash allocated from Applied Biosystems 10,520 10,520
-----------------------------------------------------------------------------------------------------------
Balance At June 30, 1998 39,892 (41,151) (1,259)
Net loss (44,894) (44,894)
Issuances under stock plans 1,485 1,485
Net cash allocated from Applied Biosystems 8,535 8,535
Allocated capital from Applied Biosystems 330,000 330,000
-----------------------------------------------------------------------------------------------------------
Balance At June 30, 1999 379,912 (86,045) 293,867
Comprehensive loss
Net loss (92,737) (92,737)
Other comprehensive income, net of tax
Unrealized gain on investments, net 8
---
Other comprehensive gain 8 8
-----------
Comprehensive loss (92,729)
-----------
Issuances under stock plans 17,613 17,613
Tax benefit related to employee stock options 21,090 21,090
Stock compensation 8,076 8,076
Issuances under follow-on stock offering 943,303 943,303
Purchase business combination 125,093 125,093
Net cash allocated to Applied Biosystems (27,283) (27,283)
Allocation of investment from Applied Biosystems 1,786 1,786
-----------------------------------------------------------------------------------------------------------
Balance At June 30, 2000 $ 1,469,590 $ (178,782) $ 8 $ 1,290,816
===========================================================================================================
</TABLE>
See accompanying notes to the Celera Genomics group's combined financial
statements.
The PE Biosystems group is currently doing business as Applied Biosystems and
will seek formal approval of a change to this name at the 2000 annual meeting.
The PE Biosystems group is referred to as Applied Biosystems.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 58
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements
Note 1--Accounting Policies and Practices
Basis of Presentation
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 and enabling data
management and analysis software. The Celera Genomics group's customers use this
information for commercial applications in the pharmaceutical and life sciences
industries in the specific areas of target identification, drug discovery, and
drug development. The Celera Genomics group also provides gene discovery,
genotyping, and related genomics services. The Celera Genomics group has
recently expanded its business into the emerging fields of functional genomics,
in particular, proteomics and personalized health/medicine. The PE Biosystems
group manufactures and markets biochemical instrument systems and associated
consumable products for life science research and related applications. The PE
Biosystems group is currently doing business as Applied Biosystems and will seek
formal approval of a change to this name at the Company's 2000 annual meeting.
The PE Biosystems group is referred to as Applied Biosystems.
Recapitalization
The recapitalization of the Company on May 6, 1999 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 Applied Biosystems' life sciences business ("Applied
Biosystems"). As part of the recapitalization, 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 Applied
Biosystems (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 Applied Biosystems
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 Applied Biosystems 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 the Celera Genomics group
and Applied Biosystems, with all significant intragroup transactions and
balances eliminated, (2) in the case of the Celera Genomics group's 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 Applied Biosystems' 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 Applied Biosystems are not separate legal
entities. As a result, stockholders are subject to all 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
Applied Biosystems 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 Applied Biosystems 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 Applied Biosystems 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
of Directors 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 Applied Biosystems 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 Applied
Biosystems.
================================================================================
59 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements continued
The Board of Directors has adopted the following financing policy which will
affect the combined statements of the Celera Genomics group and Applied
Biosystems.
The Company will allocate the Company's debt between the Celera Genomics group
and Applied Biosystems ("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 of Directors,
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 of Directors. If the Company allocates
preferred stock in its entirety to one group, the Company will charge the
dividend cost to that group in a similar manner. If the interest or dividend
cost is higher than the Company's actual cost, the other group will receive a
credit for an amount equal to the difference as compensation for the use of the
Company's credit capacity. Any expense related to debt or preferred stock of the
Company that is allocated in its entirety to a group will be allocated in whole
to that group.
Cash or other property that the Company allocates to one group that is
transferred to the other group, could, if so determined by the Board of
Directors, 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 of Directors will determine the rate of interest for such
loan. The Board of Directors 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 Applied Biosystems 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 totals for these allocations were $1.7 million, $5.1
million, and $7.5 million for fiscal 1998, 1999, and 2000, 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 can then be utilized on a consolidated basis,
will be credited to the Celera Genomics group up to a limit of $75 million. As
of June 30, 2000, the Celera Genomics group generated $68.5 million of tax
benefits utilized by Applied Biosystems since July 1, 1998.
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, 1998, 1999, and 2000. However, the amount of current and deferred
taxes and taxes payable or refundable allocated to each group in these
historical
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 60
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements continued
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 Celera Genomics 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 Celera Genomics group and Applied Biosystems, all
dividends declared and paid by the Company were allocated to Applied Biosystems.
Principles of Combination
The Celera Genomics group's combined financial statements have been prepared in
accordance with generally accepted accounting principles and, taken together
with Applied Biosystems' 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 Applied
Biosystems 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.
Recently Issued 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," amended in June 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The provisions of the statements 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 statements in the first quarter of fiscal 2001. The Celera Genomics group
estimates that, upon adoption, there will be no adjustment for a change in
accounting principles in the Combined Statements of Operations or in accumulated
other comprehensive income in the Combined Statements of Financial Position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. SAB No. 101 is required to be
implemented in the fourth quarter of fiscal 2001. The Celera Genomics group does
not expect any impact from the application of SAB No. 101.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation-An
Interpretation of Accounting Principles Board ("APB") Opinion No. 25." FIN No.
44 clarifies the following: the definition of an employee for purposes of
applying APB No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN No. 44 is
effective July 1, 2000, but certain conclusions in FIN No. 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000.
Management does not expect the application of FIN No. 44 to have a material
impact on the Celera Genomics group's combined financial statements.
Loss Per Share
Loss 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
================================================================================
61 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements continued
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 following table presents a reconciliation of basic and diluted loss per
share for the years ended June 30, 1999 and 2000:
<TABLE>
<CAPTION>
(Amounts in thousands except per share amounts) 1999 2000
==========================================================================
<S> <C> <C>
Weighted average number of
common shares used in the
calculation of basic loss
per share 50,200 53,725
Common stock equivalents
--------------------------------------------------------------------------
Shares used in the calculation of
diluted loss per share 50,200 53,725
==========================================================================
Net loss used in the calculation
of basic and diluted
loss per share $ (44,894) $ (92,737)
Net loss per share
Basic and diluted $ (.89) $ (1.73)
==========================================================================
</TABLE>
The reconciliation for fiscal 1998 is omitted since Celera Genomics stock was
not part of the capital structure of the Company.
Options and warrants to purchase 11.2 million and 12.3 million shares of Celera
Genomics stock were outstanding at June 30, 1999 and 2000, respectively, but
were not included in the computation of diluted loss per share because the
effect was antidilutive.
The Celera Genomics group's share and per share data reflect the two-for-one
stock split effective February 2000.
Cash and Cash Equivalents and Short-Term Investments
Cash equivalents consist of highly liquid debt instruments, time deposits, and
certificates of deposit with original maturities of three months or less.
Short-term investments have maturities of less than one year, are carried at
fair value, and are classified as available for sale with unrealized gains and
losses included as a separate component of equity, net of any related tax
effect. The specific identification method is used to determine the cost of
securities disposed of, with realized gains and losses recorded to other income,
net. These short-term investments include certificates of deposit, commercial
paper, U.S. government securities, and corporate bonds. These investments are
held with two major financial institutions in the Company's name.
The fair value of short-term investments at June 30, 2000 was as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000
=============================================================
<S> <C>
Certificates of deposit $ 107.3
Commercial paper 364.5
U.S. government notes and bonds 49.2
Corporate bonds 20.1
-------------------------------------------------------------
Total short-term investments $ 541.1
=============================================================
</TABLE>
There were no short-term investments at June 30, 1999. Gross unrealized gains
and losses on short-term investments were each $.1 million at June 30, 2000.
There were no realized gains or losses for fiscal 2000.
Investments
The Company's investments in Shanghai GeneCore BioTechnologies Co., Ltd. and
Agrogene S.A. are accounted for under the equity method of accounting.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories at June 30, 2000 included the following components:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000
=============================================================
<S> <C>
Raw materials and supplies $ 1.9
Finished products 1.4
-------------------------------------------------------------
Total inventories $ 3.3
=============================================================
</TABLE>
There were no inventories at June 30, 1999.
Property, Plant and Equipment, and Depreciation
Property, plant and equipment are recorded at cost and consisted of the
following at June 30, 1999 and 2000:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Land $ 10.0 $ 10.0
Buildings and leasehold
improvements 66.4 69.8
Machinery and equipment 33.3 54.6
-------------------------------------------------------------
Property, plant and equipment,
at cost 109.7 134.4
Accumulated depreciation and
amortization 5.5 23.0
-------------------------------------------------------------
Property, plant and equipment, net $ 104.2 $ 111.4
=============================================================
</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 7 years.
Machinery and equipment included $11.6 million and $13.4 million of software
licenses at June 30, 1999 and 2000, respectively.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 62
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements continued
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 3 years.
Purchased technology rights are amortized using the straight-line method over
their expected useful lives.
At June 30, 1999 and 2000, other long-term assets included goodwill, net of
accumulated amortization, of $.9 million and $113.4 million, respectively.
Accumulated amortization of goodwill was $.1 million and $3.7 million at June
30, 1999 and 2000, respectively.
At June 30, 1999 and 2000, other long-term assets included other intangible
assets, net of accumulated amortization, of $1.1 million and $14.1 million,
respectively. Accumulated amortization of purchased technology rights was $.3
million and $.9 million at June 30, 1999 and 2000, respectively.
Revenues
Subscription fees for access to the Company's genomic databases are recognized
ratably over the contracted period in accordance with the provisions of the
contract. Contract research service revenues are earned and recognized in
accordance with the contract provisions. Revenue may be recognized on a
percentage of completion, as contract research costs are incurred, or may be
contingent upon the achievement of certain milestones. 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.
Supplemental Cash Flow Information
Cash paid for interest and income taxes and significant non-cash investing and
financing activities for the following periods was as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Interest $ 2.1
Income taxes $ 1.1
Capital expenditures liability $ 8.9
Note receivable from Applied
Biosystems $ 150.0
Equity instruments issued in
Paracel acquisition $ 125.1
=============================================================
</TABLE>
Note 2--Acquisitions and Investments
Paracel, Inc.
During the fourth quarter of fiscal 2000, the Company acquired Paracel, Inc. in
a stock-for-stock transaction. Paracel produces advanced genomic and text
analysis technologies. Its products include a hardware accelerator for sequence
comparison, a hardware accelerator for text search, and sequence analysis
software tools.
The Company issued approximately 1.6 million shares of Celera Genomics stock in
exchange for all the outstanding shares of Paracel common stock not previously
owned by the Company. At the time of the acquisition, the Company owned 14% of
Paracel, which was allocated to Applied Biosystems. The transfer of the Paracel
shares to the Celera Genomics group resulted in a $27.3 million cash payment to
Applied Biosystems, which represented the fair market value of those shares at
the transfer date. The Celera Genomics group recorded the previously owned
investment at the Company's original cost value. The transfer of the original
cost value and the $27.3 million cash payment were recorded as an adjustment to
group equity in the Celera Genomics group's Combined Statements of Financial
Position and Applied Biosystems' Combined Statements of Financial Position.
The acquisition of the shares of Paracel not previously owned by the Company was
valued at $125.6 million and was accounted for under the purchase method of
accounting. In connection with the acquisition, $115.2 million was allocated to
goodwill, including $5.3 million of deferred tax, and $13.6 million was
allocated to other intangible assets. The goodwill and the other intangible
assets are being amortized on a straight-line method over 3 years.
The net assets and results of operations of Paracel were included in the Celera
Genomics group's combined financial statements from the date of acquisition. The
following selected unaudited pro forma information for the Celera Genomics group
assumes the acquisition had occurred at the beginning of fiscal 1999 and fiscal
2000, and gives effect to purchase accounting adjustments:
<TABLE>
<CAPTION>
(Dollar amounts in millions except per share amounts) 1999 2000
==============================================================================
<S> <C> <C>
Net revenues $ 22.7 $ 51.1
Net loss $ (90.4) $ (140.5)
Net loss per share
Basic and diluted $ (1.75) $ (2.54)
==============================================================================
</TABLE>
The unaudited pro forma data is for informational purposes only and may not be
indicative of the actual results that would have occurred had the acquisition
been consummated at the beginning of fiscal 1999 or at the beginning of fiscal
2000 or of the future operations of the combined companies.
Panther(TM) Technology
During the second quarter of fiscal 2000, the Company acquired the Panther(TM)
technology from Molecular Applications Group. Panther(TM) is a software tool
designed for rapid and accurate determination of gene and protein function. As
part of the agreement, members of the Molecular Applications Group research team
who developed the Panther(TM) technology became employees of the Celera Genomics
group. The cost of the acquisition was $2.5 million and was accounted for under
the purchase method of accounting.
================================================================================
63 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements continued
Shanghai GeneCore BioTechnologies Co., Ltd.
During the second quarter of fiscal 2000, the Company acquired an additional
47.5% equity interest in Shanghai GeneCore BioTechnologies Co., Ltd., allocated
to the Celera Genomics group, from Axys Pharmaceuticals, Inc. for $.5 million.
The Company previously owned a 47.5% equity interest in Shanghai GeneCore, which
was allocated to Applied Biosystems. Shanghai GeneCore is a genomics service
company with expertise in nucleotide synthesis, DNA sequencing, bioinformatics
analysis, and mutation detection. The Celera Genomics group's combined financial
statements reflect the investment under the equity method of accounting.
Agrogene S.A.
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 excess of cost over net assets acquired of $1.0 million is being
amortized on a straight-line basis over 3 years. This investment has been
accounted for under the equity method of accounting.
Note 3--Debt and Lines of Credit
Allocated Debt Activity
Long-term debt consisted of $46.0 million of commercial paper with an average
interest rate of 6.84% at June 30, 2000. The Company established the necessary
credit facilities, through its revolving credit agreement, to refinance the
commercial paper borrowings on a long-term basis. These borrowings were
classified as noncurrent because it is the Company's intent to refinance these
obligations on a long-term basis.
The Company's $100 million revolving credit agreement was replaced effective
April 20, 2000 with a new $100 million revolving credit agreement with four
banks that matures on April 20, 2005. Commitment and facility fees are based on
public debt ratings, or net worth and leverage ratios. Interest rates on amounts
borrowed vary depending on whether borrowings are undertaken in the domestic or
eurodollar markets. There were no borrowings outstanding under the facility at
June 30, 2000.
At June 30, 2000, in addition to the $100 million revolving credit facility, the
Company had $241 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 various local banks. A PE Corporation guarantee is usually
required if a local unit borrows any funds.
Under various debt and credit agreements, the Company is required to maintain
certain minimum net worth and leverage ratios.
Note 4--Income Taxes
Loss before income taxes for fiscal 1998, 1999, and 2000 related to operations
in the United States.
The benefit for income taxes includes the Celera Genomics 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 Celera Genomics group's benefit for income taxes for fiscal
1998, 1999, and 2000 consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Currently payable $ (4.5) $ (22.6) $ (42.9)
Deferred (7.0)
-------------------------------------------------------------
Total benefit for income
taxes $ (4.5) $ (22.6) $ (49.9)
=============================================================
</TABLE>
Significant components of deferred tax assets and liabilities at June 30, 2000
are summarized below:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000
=============================================================
<S> <C>
Deferred Tax Assets
Reserves and accruals $ 2.2
Tax credit and loss carryforwards 26.5
-------------------------------------------------------------
Total deferred tax assets 28.7
-------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 1.3
Intangibles 4.6
-------------------------------------------------------------
Total deferred tax liabilities 5.9
-------------------------------------------------------------
Total deferred tax assets, net $ 22.8
=============================================================
</TABLE>
There were no deferred tax assets or liabilities at June 30, 1999.
A reconciliation of the federal statutory tax to the Celera Genomics group's
benefit for income taxes for fiscal 1998, 1999, and 2000 is set forth in the
following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
=============================================================
Tax at federal statutory
rate $ (4.5) $ (23.6) $ (49.9)
State income taxes (net
of federal benefit) .2
Reorganization,
restructuring, and
other costs 1.4
Effect of goodwill
amortization .2
R&D tax credit (5.4)
Recapitalization costs 1.6
Other (.6) 3.6
-------------------------------------------------------------
Total benefit for income
taxes $ (4.5) $ (22.6) $ (49.9)
=============================================================
</TABLE>
The Celera Genomics group was allocated a consolidated domestic loss
carryforward of $57.0 million and domestic credit carryforward of $6.5 million,
which will expire between the fiscal years 2005 and 2020.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 64
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements continued
Note 5--Retirement and Other Benefits
Pension Plan
The Company maintains or sponsors a pension plan that covers 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 plan covers a substantial portion of 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 $.1 million for fiscal 1998, less than $.1 million for
fiscal 1999, and $.3 million for fiscal 2000.
Retiree Healthcare and Life Insurance Benefits
The postretirement benefit plan provides certain healthcare and life insurance
benefits to domestic employees hired prior to January 1, 1993, who retire and
satisfy certain service and age requirements. Generally, medical coverage pays a
stated percentage of most medical expenses, reduced for any deductible and for
payments made by Medicare or other group coverage. The cost of providing these
benefits is shared with retirees. The plan is unfunded. The postretirement
benefit expense allocated to the Celera Genomics group was not material for
fiscal 1998, 1999, and 2000. Amounts allocated to the Celera Genomics group were
less than $.1 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.
Employees not eligible for the employee pension plan receive an extra 2% Company
contribution in addition to the automatic 2% Company contribution through June
30, 2004, while pension plan participants continue to receive the automatic 2%
contribution. The Company contributions allocated to the Celera Genomics group
for fiscal 1998, 1999, and 2000 were $.2 million, $.5 million, and $1.9 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 6--Segment, Geographic, and Customer Information
Business Segments and Geographic
The Celera Genomics group operates in one business segment, which is the
generation, sale, and support of genomic information and enabling data
management and analysis software. The Celera Genomics group's customers use this
information for commercial applications in the pharmaceutical and life sciences
industries in the specific areas of target identification, drug discovery, and
drug development. The Celera Genomics group also provides gene discovery,
genotyping, and related genomics services. The Celera Genomics group has
recently expanded its business in the emerging fields of functional genomics, in
particular, proteomics and personalized health/medicine. The Celera Genomics
group has a small number of customers and derives a substantial portion of its
revenues from fees paid by multinational pharmaceutical companies and larger
biotechnology companies. The Celera Genomics group operates in the United
States.
Note 7--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
and 2000.
In January 2000, the Board of Directors announced a two-for-one split of Celera
Genomics stock effective February 2000 in the form of a stock dividend. All
Celera Genomics group share data reflect this split.
Note Receivable from Applied Biosystems
The initial capitalization of the Celera Genomics group included a $330 million
short-term note receivable from Applied Biosystems 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 Applied Biosystems 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 Applied Biosystems 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 Applied
Biosystems for $150 million. The new note receivable was for a term of one-year,
bearing an interest rate of 5% per annum, and was payable on demand without
penalty. The Celera Genomics group received payment of the new note during
fiscal 2000.
================================================================================
65 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements continued
Tax Benefit Receivable from Applied Biosystems
Applied Biosystems reimburses the Celera Genomics group for tax benefits
generated, which then can be utilized on a consolidated basis. These
reimbursements are intended to provide additional cash resources to the Celera
Genomics group up to a maximum of $75 million. As of June 30, 2000, the Celera
Genomics group had generated $68.5 million of tax benefits utilized by Applied
Biosystems. At June 30, 1999 and 2000, the tax benefit receivable was $9.9
million and $16.7 million, respectively.
Third-Party Equity Transaction
In June 1999, the Company granted an option to purchase 2.6 million shares of
Celera Genomics 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 was 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 Applied Biosystems'
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 and subsequent stock splits, each
outstanding warrant for shares of PerSeptive common stock was further converted
into warrants to acquire .1926 share of Celera Genomics stock and .7704 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 or the stock
splits.
At June 30, 2000, there were 53,799 warrants outstanding at an exercise price of
$65.73. Upon exercise of all of the warrants, the holders would receive 53,799
shares of Celera Genomics stock and 215,196 shares of PE Biosystems stock. The
warrants expire in September 2003.
Stockholders' Rights Plan
In connection with the recapitalization, the Company adopted a new Stockholders'
Rights Plan (the "Rights Agreement") to protect stockholders against abusive
takeover tactics. Under the Rights Agreement, the Company will issue one right
for every two shares of Celera Genomics stock (a "Celera Genomics Right"), which
will allow holders to purchase one-thousandth of a share of Series B
participating junior preferred stock of the Company at a purchase price of $125,
subject to adjustment (the "Series B Purchase Price"), and one right for every
four shares of PE Biosystems stock (a "PE Biosystems Right"), which will allow
holders to purchase one-thousandth of a share of Series A participating junior
preferred stock of the Company at a purchase price of $425, subject to
adjustment (the "Series A Purchase Price").
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.
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 Celera
Genomics stock, 500 million shares of PE Biosystems stock, and 10 million shares
of PE Corporation preferred stock. Of the 10 million authorized shares of
preferred stock, the Company has designated 80,000 shares of two series of
participating junior preferred stock in connection with the Company's
stockholders' rights plan as previously described.
In March 2000, the Company completed a follow-on public offering of Celera
Genomics stock. In this offering, 4.4 million shares of Celera Genomics stock
were sold, resulting in net proceeds of $943.3 million.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 66
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements continued
Note 8--Stock Plans
Stock Option Plans
Under the Company's stock option plans, officers, directors, and other key
employees may be 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 1998
Outstanding at June 30, 1997 4,155,603 $ 45.03
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 Stock
--------------------------
Weighted
Number of Average
Options Exercise Price
==============================================================
<S> <C> <C>
Fiscal 1999
Outstanding at May 6, 1999 3,595,686 $ 5.52
Granted 7,952,036 $ 8.72
Exercised 281,788 $ 5.25
Cancelled 132,606 $ 6.67
--------------------------------------------------------------
Outstanding at June 30, 1999 11,133,328 $ 7.81
Exercisable at June 30, 1999 3,636,232 $ 6.39
==============================================================
Fiscal 2000
Granted 2,838,848 $ 77.55
Exercised 1,392,069 $ 6.44
Cancelled 311,266 $ 11.04
--------------------------------------------------------------
Outstanding at June 30, 2000 12,268,841 $ 20.49
Exercisable at June 30, 2000 3,945,450 $ 7.47
==============================================================
</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 prior to giving effect of the Celera Genomics stock split and PE
Biosystems stock splits. 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 has remained the same on conversion.
In connection with the acquisition of Paracel, the Company assumed Paracel's
stock option plans. Options granted to Paracel employees and directors in
exchange for their Paracel options at the acquisition date have been included in
Celera Genomics stock options granted amount for fiscal 2000.
The following table summarizes information regarding options outstanding and
exercisable for the Celera Genomics group at June 30, 2000:
<TABLE>
<CAPTION>
Weighted Average
------------------------
Contractual
Life
Number of Exercise Remaining
(Option prices per share) Options Price in Years
===================================================================
<S> <C> <C> <C>
Options Outstanding
At $.19 - $6.00 812,644 $ 3.49 4.6
At $6.01 - $8.50 1,446,691 $ 6.77 7.2
At $8.51 - $10.00 6,706,186 $ 8.56 8.5
At $10.01 - $135.00 3,303,320 $ 54.91 8.8
===================================================================
Options Exercisable
At $.19 - $6.00 797,252 $ 3.52
At $6.01 - $8.50 1,290,681 $ 6.69
At $8.51 - $10.00 1,482,797 $ 8.56
At $10.01 - $135.00 374,720 $ 14.30
===================================================================
</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, as
amended. The Celera Genomics Plan authorizes grants of stock options, stock
awards, and performance shares with respect to Celera Genomics stock. The PE
Biosystems Group Plan authorizes grants of stock options, stock awards, and
performance shares with respect to PE Biosystems stock. Directors, certain
officers, and key employees with responsibilities involving both Applied
Biosystems 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 awards tied to the performance of the group in
which the participants work and, in certain cases the other group, is in the
best interests of the Company and its stockholders.
================================================================================
67 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements continued
Employee Stock Purchase Plans
The Company's employee stock purchase plan offers domestic and certain non-U.S.
employees the right to purchase shares of Celera Genomics stock and/or PE
Biosystems stock. The purchase price in the U.S. is equal to the lower of 85% of
the average market price of the applicable class of common stock on the offering
date or 85% of the average market price of such class of common stock on the
last day of the purchase period. Provisions of the plan for employees in
countries outside the U.S. vary according to local practice and regulations.
Celera Genomics stock issued under the employee stock purchase plans during
fiscal 1999 and 2000 totaled 24,000 shares and 303,000 shares, respectively. PE
Biosystems stock issued under the employee stock purchase plans during fiscal
1999 and 2000 totaled 98,000 shares and 161,000 shares, respectively. Common
stock issued under the employee stock purchase plans during fiscal 1998 and 1999
totaled 174,000 shares and 168,000 shares, respectively, of PE Corporation
(predecessor) common stock.
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 and PE Biosystems stock outstanding. The
purchase price is the fair market value on the date of purchase. At June 30,
2000, the Company had approximately 85,000 shares of Celera Genomics stock and
341,000 shares of PE Biosystems stock available for issuance under this plan.
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 prior to giving effect of the Celera Genomics stock split and
PE Biosystems stock splits. Restricted stock granted to key employees and
non-employee directors during fiscal 2000 totaled 900 shares of Celera Genomics
stock and 3,600 shares of PE Biosystems stock. Restricted stock granted prior to
recapitalization to key employees and non-employee directors during fiscal 1998
and 1999 totaled 4,350 shares and 42,900 shares, respectively, of the PE
Corporation (predecessor) common stock. Compensation expense recognized by the
Celera Genomics group for these awards was $1.0 million for fiscal 2000.
Performance Unit Bonus Plan
The Company adopted a Performance Unit Bonus Plan in fiscal 1997. The plan
utilized stock options and a performance unit bonus pool. Performance units
granted under the plan represented the right to receive a cash or stock payment
from the Company at a specified date in the future. The amount of the payment
was determined on the date of the grant. The performance units vested upon
shares of the Company's common stock attaining and maintaining specified price
levels for a specified period. As of June 30, 2000, three series of performance
units were granted under the plan. Certain members of the Celera Genomics group
senior management participated in the first series of the plan, which was prior
to the recapitalization. Compensation expense, pertaining to the first of the
series, for the Celera Genomics group was $1.3 million for fiscal 1999. Fiscal
1999 compensation expense included $1.0 million related to the acceleration of
payments under the plan as a result of the attainment of the performance
targets. The vesting of the related stock options was not accelerated. No
compensation expense pertaining to the plan was recognized in fiscal 1998 or
2000.
The plan was modified in fiscal 2000 to replace the performance units with
performance stock options. Performance stock options vest in equal portions upon
the earlier of the shares of PE Biosystems stock attaining and maintaining
specified price levels for a specified period of time or after a specified
future date. Members of the Celera Genomics group are not participants in this
modified plan.
Accounting for Stock-Based Compensation
APB 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 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 2000
==============================================================
<S> <C> <C>
Dividend yield -% -%
Volatility 34.40% 99.30%
Risk-free interest rates 5.0% 6.21%
Expected option life in years 5.23 3.5
==============================================================
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 68
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements continued
Pro forma information for fiscal years 1999 and 2000 is presented below:
<TABLE>
<CAPTION>
(Dollar amounts in millions, except per share amounts) 1999 2000
=================================================================================
<S> <C> <C>
Net loss
As reported $ (44.9) $ (92.7)
Pro forma $ (47.5) $ (106.6)
Basic and diluted loss per share
As reported $ (.89) $ (1.73)
Pro forma $ (.95) $ (1.98)
=================================================================================
</TABLE>
Pro forma information for fiscal 1998 is omitted since Celera Genomics stock was
not part of the capital structure of the Company at that time.
The weighted average fair value of PE Corporation (predecessor) stock options
granted was $24.83 and $33.54 for fiscal 1998 and 1999, respectively. The
weighted average fair value of Celera Genomics stock options granted was $4.13
and $46.41 for fiscal 1999 and 2000, respectively.
Since Celera Genomics stock and Applied 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 fiscal 1999 pro forma effect of
Celera Genomics stock options is not representative of what the effect would be
in future years.
Note 9--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
transactions 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 and fiscal 2000,
R&D expenses included $15.2 million and $53.9 million, respectively, for
purchases of instruments, lease payments on instruments, and the purchase of
consumables, and $2.1 million and $.5 million, respectively, of contracted R&D
services from Applied Biosystems.
Access to Technology and Know-How
Each group has 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 consult
with each other on a regular basis concerning technology issues that affect both
groups. The costs of developing technology remain in the group responsible for
its development.
Note 10--Commitments and Contingencies
Future minimum payments at June 30, 2000 under non-cancelable operating leases
for real estate and equipment were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
=============================================================
<S> <C>
2001 $ 35.6
2002 14.5
2003 5.1
2004 1.4
2005 1.4
2006 and thereafter 1.1
-------------------------------------------------------------
Total $ 59.1
=============================================================
</TABLE>
Rental expense was $.3 million for fiscal 1998, $8.5 million for fiscal 1999,
and $30.5 million for fiscal 2000.
On November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a
patent infringement action against the Company in the United States District
Court for the Northern District of California. The complaint alleges that the
Company is directly, contributorily, or by inducement infringing U.S. Patent No.
5,688,648 ("the '648 patent"), entitled "Probes Labelled with Energy Transfer
Coupled Dyes." Amersham asserts that the Company's sale of DNA analysis reagents
and systems that incorporate "BigDye" fluorescence detection technology would
infringe the '648 patent, and seeks 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. This case is scheduled for trial in
January 2001.
On March 13, 1998, the Company filed a patent infringement action against
Amersham and Molecular Dynamics, Inc. in the United States District Court for
the Northern District of California. The Company asserts that one of its patents
(U.S. 4,811,218) is infringed by reason of Molecular Dynamics' and Amersham's
sale of certain DNA analysis systems (e.g., the MegaBACE 1000 System). In
response, 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(TM) 377 DNA Sequencing Systems.
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 matters described in
this paragraph and the immediately preceding paragraph have been consolidated
into a single case to be heard in the United States District Court for the
Northern District of California. This case has not yet been scheduled for trial.
================================================================================
69 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
CELERA GENOMICS GROUP Notes to Combined Financial Statements continued
On May 30, 2000, the Company filed a patent infringement action against Amersham
in the United States District Court for the Northern District of California. The
Company asserts that one of its patents (U.S. 5,945,526) is infringed by reason
of Amersham's sale of DNA analysis reagents and systems that incorporate ET
Terminator fluorescence detection technology. This case is in the early stages
of discovery.
The Company has been named as a defendant in several legal actions, including
patent, commercial, and environmental, arising from 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 risks associated with an investment in the
Company, including any legal proceedings and claims affecting Applied
Biosystems.
Note 11--Financial Instruments
The fair value of significant financial instruments held or owned by the Company
is estimated using various methods. Cash and cash equivalents approximate their
carrying amount. Fair values of short-term 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
significant financial instruments at June 30, 1999 and 2000:
<TABLE>
<CAPTION>
1999 2000
------------------- ------------------
Carrying Fair Carrying Fair
(Dollar amounts in millions) Amount Value Amount Value
============================================================================
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 71.5 $ 71.5 $ 569.9 $ 569.9
Short-term
investments $ 541.1 $ 541.1
Note receivable from
Applied Biosystems $ 150.0 $ 150.0
Long-term debt $ 46.0 $ 46.0
============================================================================
</TABLE>
Net unrealized gains and losses on short-term investments are reported as a
separate component of accumulated other comprehensive income.
Note 12--Quarterly Financial Information (Unaudited)
The following is a summary of quarterly financial results:
<TABLE>
<CAPTION>
First Quarter Second Quarter
------------------- ---------------------
(Dollar amounts in millions
except per share amounts) 1999 2000 1999 2000
=======================================================================
<S> <C> <C> <C> <C>
Net revenues $ 3.9 $ 8.3 $ 1.7 $ 8.3
Operating loss (5.6) (32.3) (12.9) (39.3)
Net loss (3.6) (19.4) (8.6) (24.3)
=======================================================================
Net loss per share
Basic and diluted $ (.38) $ (.47)
=======================================================================
Price range of
common stock
High $ 26-29/32 $ 96-13/32
Low $ 7-7/8 $ 15-3/16
=======================================================================
<CAPTION>
Third Quarter Fourth Quarter
------------------- ---------------------
(Dollar amounts in millions
except per share amounts) 1999 2000 1999 2000
=======================================================================
<S> <C> <C> <C> <C>
Net revenues $ 1.8 $ 11.1 $ 5.1 $ 15.0
Operating loss (19.3) (42.9) (31.0) (53.6)
Net loss (12.8) (24.1) (19.9) (24.9)
=======================================================================
Net loss per share
Basic and diluted $ (.45) $ (.39) $ (.43)
=======================================================================
Price range of
common stock
High $ 276 $ 11-1/4 $ 151
Low $ 73 $ 7-3/32 $ 50-3/16
=======================================================================
</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. The recapitalization of the Company on May 6, 1999 resulted in the
issuance of two new classes of common stock called Celera Genomics stock and PE
Biosystems stock.
Per share and price range of common stock reflect the two-for-one stock split
effective February 2000.
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 related to the acceleration of certain
long-term compensation programs of the Company. 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 $.08 per diluted share.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 70
<PAGE>
CELERA GENOMICS GROUP Report of Management and
Report of Independent Accountants
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 under the
circumstances. Financial information presented elsewhere in this annual report
is consistent with that in the financial statements.
In meeting its responsibility for preparing reliable financial statements, the
Company maintains a system of internal accounting controls designed to provide
reasonable assurance that assets are safeguarded and transactions are properly
recorded and executed in accordance with corporate policy and management
authorization. The Company believes its accounting controls provide reasonable
assurance that errors or irregularities which could be material to the financial
statements are prevented or would be detected within a timely period. In
designing such control procedures, management recognizes judgments are required
to assess and balance the costs and expected benefits of a system of internal
accounting controls. Adherence to these policies and procedures is reviewed
through a coordinated audit effort of the Company's internal audit staff and
independent accountants.
The Audit/Finance Committee of the Board of Directors is comprised solely of
outside directors and is responsible for overseeing and monitoring the quality
of the Company's accounting and auditing practices. The independent accountants
and internal auditors have full and free access to the Audit/Finance Committee
and meet periodically with the committee to discuss accounting, auditing, and
financial reporting matters.
/s/ Dennis L. Winger
Dennis L. Winger
Senior Vice President and
Chief Financial Officer
/s/ Tony L. White
Tony L. White
Chairman, President, and
Chief Executive Officer
Report of Independent Accountants
To the Stockholders and Board of Directors of
PE Corporation
In our opinion, the accompanying combined statements of financial position and
the related combined statements of operations, of group equity and comprehensive
loss, and of cash flows present fairly, in all material respects, the financial
position of the Celera Genomics group of PE Corporation at June 30, 2000 and
1999, and the results of its operations and its cash flows for each of the three
fiscal years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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 25, 2000
================================================================================
71 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Selected Financial Data
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1996 1997 1998 1999 2000
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Financial Operations
Net revenues $ 642,218 $ 768,368 $ 944,306 $ 1,216,897 $ 1,371,035
Income from continuing operations 1,310 102,492 15,694 96,797 95,496
Per share of common stock
Basic .03 2.16 .32
Diluted .03 2.07 .31
Income (loss) from discontinued
operations (net of income taxes) (37,833) 27,906 40,694 79,058
Net income (loss) (36,523) 130,398 56,388 175,855 95,496
Per share of common stock
Basic (.80) 2.74 1.16
Diluted (.77) 2.63 1.12
Dividends per share .68 .68 .68 .51
=============================================================================================================
Applied Biosystems
Income from continuing operations $ 3,899 $ 132,739 $ 24,009 $ 148,365 $ 186,247
Per share of common stock
Basic .74 .90
Diluted .72 .86
Income (loss) from discontinued
operations (net of income taxes) (37,833) 27,906 40,694 79,058
Net income (loss) (33,934) 160,645 64,703 227,423 186,247
Per share of common stock
Basic 1.13 .90
Diluted 1.10 .86
Dividends per share .0425 .17
=============================================================================================================
Celera Genomics Group
Net loss $ (2,589) $ (30,247) $ (8,315) $ (44,894) $ (92,737)
Per share of common stock
Basic and diluted (.89) (1.73)
=============================================================================================================
Other Information
Cash and short-term investments $ 121,145 $ 217,222 $ 84,091 $ 308,021 $ 1,505,642
Working capital 229,639 354,742 287,991 471,350 1,479,027
Capital expenditures 28,198 58,057 71,820 176,035 125,815
Total assets 809,856 1,006,793 1,135,276 1,519,307 3,083,315
Long-term debt 33,694 59,152 33,726 31,452 82,115
Total debt 89,801 89,068 45,825 35,363 97,808
Stockholders' equity 373,727 504,270 564,248 821,525 2,220,492
=============================================================================================================
</TABLE>
The selected financial data should be read with the consolidated financial
statements.
The recapitalization of the Company on May 6,1999 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. The PE Biosystems
group is currently doing business as Applied Biosystems and will seek formal
approval of a change to this name at the 2000 annual meeting. The PE Biosystems
group is referred to as Applied Biosystems.
Applied Biosystems per share data reflects the two-for-one stock splits
effective July 1999 and February 2000. Celera Genomics group per share data
reflects the two-for-one stock split effective February 2000.
A number of items impact the comparability of the data from continuing
operations. Before-tax amounts include:
o Restructuring, other merger costs, and acquisition-related costs of $17.5
million for fiscal 1996, $48.1 million for fiscal 1998, $6.1 million for
fiscal 1999, and $2.1 million for fiscal 2000;
o A restructuring reserve adjustment of $9.2 million for fiscal 1999 relating to
excess fiscal 1998 restructuring liabilities;
o Gain on investments of $11.7 million for fiscal 1996, $64.9 million for fiscal
1997, $1.6 million for fiscal 1998, $6.1 million for fiscal 1999, and $48.6
million for fiscal 2000;
o Acquired research and development charges of $33.9 million for fiscal 1996,
$26.8 million for fiscal 1997, and $28.9 million for fiscal 1998;
o Charges for the impairment of assets of $9.9 million for fiscal 1996, $.7
million for fiscal 1997, and $14.5 million for fiscal 1999;
o Tax benefit and valuation allowance reductions of $22.2 million for fiscal
1999;
o A charge of $3.5 million for a donation to the Company's charitable foundation
for fiscal 1999;
o Foreign currency hedge contract-related gain of $2.3 million for fiscal 1999;
o Charges of $9.2 million for fiscal 1999 relating to the recapitalization of
the Company;
o Charges relating to the acceleration of certain long-term compensation
programs as a result of the attainment of performance targets of $10.1 million
for fiscal 1999 and $45.0 million for fiscal 2000; and
o A gain of $8.2 million on the sale of real estate for fiscal 2000.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 72
<PAGE>
PE CORPORATION Management's Discussion and Analysis
Management's Discussion of
Continuing Operations
PE Corporation ("PE" or "our 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 Corporation-PE Biosystems Group Common Stock
("PE Biosystems stock") and PE Corporation-Celera Genomics Group Common Stock
("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 PE Biosystems group is currently
doing business as Applied Biosystems and will seek formal approval of a change
to this name at our company's 2000 annual meeting. We refer to the PE Biosystems
group as Applied Biosystems. The Celera Genomics group is engaged principally in
the generation, sale, and support of genomic information and enabling data
management and analysis software. The Celera Genomics group's customers use this
information for commercial applications in the pharmaceutical and life sciences
industries in the specific areas of target identification, drug discovery, and
drug development. The Celera Genomics group also provides gene discovery,
genotyping, and related genomics services. The Celera Genomics group has
recently expanded its business into the emerging fields of functional genomics,
in particular, proteomics and personalized health/medicine.
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. Analytical Instruments, formerly a unit of Applied
Biosystems, developed, manufactured, marketed, sold, and serviced analytical
instruments used in a variety of markets. The aggregate consideration received
from the sale was $425 million, consisting of $275 million in cash and one-year
secured promissory notes in the aggregate principal amount of $150 million
bearing interest at a rate of 5% per annum. The promissory notes were collected
in fiscal 2000. In fiscal 1999, we recognized a net gain on disposal of
discontinued operations of $100.2 million, net of $87.8 million of income taxes.
Amounts previously reported for Analytical Instruments were reclassified and
stated as discontinued operations. See Note 15 to our consolidated financial
statements.
Events Impacting Comparability
Acquisitions, Investments, and Dispositions
During the fourth quarter of fiscal 2000, we acquired Paracel, Inc. in a
stock-for-stock transaction. Paracel produces advanced genomic and text analysis
technologies. Its products include a hardware accelerator for sequence
comparison, a hardware accelerator for text search, and sequence analysis
software tools. Approximately 1.6 million shares of Celera Genomics stock were
issued in exchange for the outstanding shares of Paracel common stock not
previously owned by our company. At the time of the acquisition, our company
owned 14% of Paracel.
On January 22, 1998, we acquired PerSeptive Biosystems, Inc. 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. and a 14.5% interest, and approximately
52% of the voting rights, in Tecan AG during the second quarter of fiscal 1998.
The results of operations for these acquisitions, each of which was accounted
for as a purchase, were included in our consolidated financial statements since
the date of 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 our consolidated financial statements.
Restructuring and Other Special Charges
During fiscal 2000, we incurred $2.1 million of before-tax costs associated with
acquisitions for Applied Biosystems which were not consummated.
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 our
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 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 in
connection with the integration.
================================================================================
73 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Management's Discussion and Analysis continued
During the fourth quarter of fiscal 1999, we 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, Applied Biosystems recorded a $9.2 million reduction of charges
required to implement the fiscal 1998 plan. A discussion of the restructuring
program is provided in Note 14 to our consolidated financial statements.
Acquired Research and Development
During 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 to 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. This product was released in
September 1998. As of the acquisition date, BioMERGE 3.0's functional scope was
defined and the requirements assessment had been completed. The product was
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 rate 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, 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.
Gain on Investments
Fiscal 2000 included a before-tax gain of $48.6 million related to the sale of
minority equity investments. Fiscal 1999 and 1998 included before-tax gains of
$4.5 million and $1.6 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 our consolidated financial statements.
Other Events Impacting Comparability
Fiscal 2000 and 1999 included charges of $45.0 million and $10.1 million,
respectively, to selling, general and administrative expenses, for costs related
to the acceleration of certain long-term compensation programs as a result of
the attainment of performance targets.
During the fourth quarter of fiscal 2000, we recorded a gain of $8.2 million to
other income, net from the sale of real estate. 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.
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.
The effective income tax rate for fiscal 1999 included certain tax benefit and
valuation allowance reductions of $22.2 million. See Note 4 to our consolidated
financial statements for a discussion of income taxes.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 74
<PAGE>
PE CORPORATION Management's Discussion and Analysis continued
Results of Continuing Operations--2000 Compared With 1999
We reported income from continuing operations of $95.5 million for fiscal 2000
compared with $96.8 million for fiscal 1999. On a segment basis, Applied
Biosystems reported income from continuing operations of $186.2 million for
fiscal 2000 compared with $148.4 million for fiscal 1999 and the Celera Genomics
group reported a net loss of $92.7 million for fiscal 2000 compared with a net
loss of $44.9 million for fiscal 1999.
Income from continuing operations for our company, on a comparable basis
excluding the special items previously described from both fiscal years and
Tecan from the prior fiscal year, increased 4.5%, to $95.5 million for fiscal
2000 compared with $91.4 million for fiscal 1999. On a segment basis, Applied
Biosystems, excluding the special items from both fiscal years and Tecan from
the prior fiscal year, income from continuing operations increased 35.4% to
$186.2 million for fiscal 2000 compared with $137.5 million for fiscal 1999. The
Celera Genomics group reported a net loss of $92.7 million for fiscal 2000
compared with a net loss of $39.6 million for fiscal 1999, excluding the special
items allocated to the group. The special items consisted of a before-tax charge
of $4.6 million for costs incurred in connection with the recapitalization of
our company and $1.0 million of before-tax costs related to the acceleration of
certain long-term compensation programs as a result of the recapitalization and
the attainment of performance targets.
Net revenues were $1.4 billion for fiscal 2000 compared with $1.2 billion for
fiscal 1999, an increase of 12.7%. On a segment basis, net revenues for Applied
Biosystems were $1.4 billion for fiscal 2000 compared with $1.2 billion for
fiscal 1999. The Celera Genomics group reported net revenues of $42.7 million
for fiscal 2000 compared with $12.5 million for fiscal 1999.
Net revenues for Applied Biosystems, excluding the results of Tecan for the
prior fiscal year, increased 24.0% compared with fiscal 1999. Increased net
revenues for sequence detection systems, including reagents and instrument
systems for gene expression analysis and single nucleotide polymorphism ("SNP")
detection, mass spectrometry products, and DNA sequencing consumables were
contributors. The effects of foreign currency translation decreased net revenues
by approximately $1.8 million compared with the prior fiscal year as weakness in
the euro was essentially offset by strengthening of the Japanese yen. Net
revenues from leased instruments and shipments of consumables and project
materials to the Celera Genomics group were $59.8 million for fiscal 2000, or
4.3% of Applied Biosystems' net revenues. For fiscal 1999, net revenues from
leased instruments, shipments of instruments and consumables, and contracted R&D
services to the Celera Genomics group were $17.3 million and represented less
than 2% of Applied Biosystems' net revenues. Geographically, excluding the net
revenues of Tecan for fiscal 1999, Applied Biosystems reported revenue growth in
all regions for fiscal 2000 compared with the prior fiscal year. Net revenues
increased 21.6% in the United States, 18.5% in Europe, 35.8% in the Far East,
and 50.7% in Latin America and other markets. Excluding the favorable effects of
foreign currency translation in Japan, net revenues increased approximately 23%
in the Far East, partly reflecting increased government funding for
genomics-related research. Excluding the negative effects of foreign currency
translation in Europe, net revenues increased by approximately 27%.
Net revenues for the Celera Genomics group increased $30.2 million for fiscal
2000 compared with fiscal 1999. The increased revenues resulted primarily from
database subscription agreements initiated during fiscal 2000 and the second
half of fiscal 1999 and an increase in related genomics services revenues.
Revenues for genotyping services remained essentially unchanged.
Gross margin as a percentage of net revenues for our company was 55.6% for
fiscal 2000 compared with 54.1% for fiscal 1999. Gross margin for Applied
Biosystems as a percentage of net revenues was 54.1% for fiscal 2000 compared
with 53.9% for fiscal 1999. Excluding Tecan and the asset impairment charge from
the prior fiscal year, gross margin as a percentage of net revenues for Applied
Biosystems was 54.1% for fiscal 1999.
SG&A expenses for our company were $436.9 million for fiscal 2000 compared with
$364.1 million for fiscal 1999. On a segment basis, SG&A expenses were $393.9
million and $335.9 million for fiscal 2000 and 1999, respectively, for Applied
Biosystems, and $43.0 million and $28.3 million for fiscal 2000 and 1999,
respectively, for the Celera Genomics group.
SG&A expenses for Applied Biosystems, excluding the long-term compensation
charges for fiscal 2000 and 1999, Tecan, and the $3.5 million charge for a
contribution to our company's charitable foundation for fiscal 1999, increased
20.5%. This increase was due to higher planned worldwide selling and marketing
expenses commensurate with the higher revenue growth. As a percentage of net
revenues, excluding the special charges from both fiscal years and Tecan from
the prior fiscal year, SG&A expenses were 25.1% for fiscal 2000 compared with
25.9% for fiscal 1999.
The Celera Genomics group's SG&A expenses increased to $43.0 million for fiscal
2000 compared with $28.3 million for fiscal 1999. The increase was related to
the planned scale-up in business development, marketing, and administrative
activities in support of the database business. 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.
R&D expenses for our company increased to $274.8 million for fiscal 2000
compared with $179.3 million for the prior fiscal year. R&D expenses for Applied
Biosystems were $141.2 million for fiscal 2000 compared with $133.5 million for
fiscal 1999, an increase of 5.7%. Excluding Tecan from the prior fiscal year,
R&D expenses for fiscal 2000 increased 18.4% compared with fiscal 1999. As a
percentage of net revenues, excluding Tecan from fiscal 1999, R&D expenses
================================================================================
75 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Management's Discussion and Analysis continued
were 10.2% for fiscal 2000 compared with 10.7% for fiscal 1999. The prior fiscal
year's R&D expense level was higher as a percentage of net revenues due to the
development of new products released in the second half of fiscal 1999.
The Celera Genomics group's R&D expenses increased $119.4 million to $167.8
million for fiscal 2000 from $48.4 million for fiscal 1999, primarily as a
result of a full year of sequencing operations and significantly expanded
bioinformatics and software development capabilities. The group also continued
to expand its scientific and annotation research teams, and bioinformatics and
software engineering staff. R&D expenses for fiscal 2000 included $4.5 million
of amortization of goodwill and other intangibles primarily associated with the
Paracel acquisition.
During fiscal 2000, our company incurred $2.1 million of costs associated with
acquisitions for Applied Biosystems which were not consummated. During fiscal
1999, we incurred merger-related period costs of $6.1 million for training,
relocation, and communication in connection with the integration of PerSeptive
into Applied Biosystems. During the fourth quarter of fiscal 1999, our company
completed the restructuring actions associated with integration of PerSeptive
following the acquisition. 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, Applied Biosystems recorded a $9.2 million
reduction of charges required to implement the fiscal 1998 plan. See Note 14 to
our consolidated financial statements for a discussion of the restructuring.
Also during fiscal 1999, our company recorded a non-recurring 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, Applied Biosystems and the Celera Genomics group were each
allocated 50% of the charge. These costs included investment banking and
professional fees.
<TABLE>
<CAPTION>
Operating Income
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Operating income before
special items $ 142.8 $ 95.2
Asset impairment (14.5)
Long-term compensation
programs (10.1) (45.0)
Charitable foundation
contribution (3.5)
Restructuring and other
merger costs, net 3.1
Recapitalization costs (9.2)
Acquisition-related costs (2.1)
-------------------------------------------------------------
Operating income $ 108.6 $ 48.1
=============================================================
</TABLE>
Operating income for our company decreased to $48.1 million for fiscal 2000
compared with $108.6 million for fiscal 1999. On a comparable basis, excluding
the special items previously described, operating income decreased 33.3% to
$95.2 million for fiscal 2000 compared with $142.8 million for fiscal 1999.
On a segment basis, operating income for Applied Biosystems increased to $213.2
million for fiscal 2000 compared with $187.9 million for the prior fiscal year.
On a comparable basis, excluding the special items previously described from
both fiscal years and Tecan from the prior fiscal year, operating income
increased 32.0% for fiscal 2000 compared with fiscal 1999. Applied Biosystems
benefited from increased revenues as a result of strong worldwide demand and
lower operating expenses as a percentage of net revenues, partially as a result
of a slower than planned increase in staffing during the fiscal year. Operating
income as a percentage of net revenues, excluding the special items from both
fiscal years and Tecan from the prior fiscal year, increased to 18.8% for fiscal
2000 compared with 17.6% for fiscal 1999.
The operating loss for the Celera Genomics group was $168.1 million for fiscal
2000 compared with $68.8 million for fiscal 1999. The increase in the Celera
Genomics group's operating loss reflected: the increased sequencing activity;
increased investment in research and development activities related to expanded
scientific and annotation teams, and bioinformatics staff; and increased
operating expenses required to support the expanded product and business
development activities.
For fiscal 2000 and 1999, Applied Biosystems recorded before-tax gains of $48.6
million and $4.5 million, respectively, related to the sale of 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 $3.5 million for fiscal 2000 compared with $3.8 million for
fiscal 1999. This decrease was primarily due to lower average interest rates.
Interest income was $39.4 million for fiscal 2000 compared with $2.9 million for
fiscal 1999. This increase was primarily a result of higher balances of cash and
cash equivalents and short-term investments, which increased during the third
quarter of fiscal 2000 due to a follow-on public offering of Celera Genomics
stock, as well as interest on the note receivable related to the sale of the
Analytical Instruments business.
Other income, net for fiscal 2000 was $3.4 million, primarily related to a gain
on the sale of real estate, and was partially offset by costs associated with a
portion of our company's foreign currency management program. Other income, net
was $.5 million for fiscal 1999, which related primarily 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.
Our company's effective income tax rate was 30% for fiscal 2000 compared with 4%
for the prior fiscal year. Excluding special items in both fiscal years and
Tecan in fiscal 1999, the effective income tax rate was 24% for fiscal 2000
compared with 25% for the prior fiscal year. The effective income tax rate for
fiscal 1999 included the release of valuation allowances of $17.4 million.
Because the sale of the Analytical Instruments business had been completed, the
valuation allowance was reduced as management believed that it was more likely
than not that the deferred tax assets to which the valuation allowance related
would be realized.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 76
<PAGE>
PE CORPORATION Management's Discussion and Analysis continued
An analysis of the differences between the federal statutory income tax rate and
the effective income tax rate is provided in Note 4 to our consolidated
financial statements.
For fiscal 1999, we incurred minority interest expense of $13.4 million relating
to our company's 14.5% financial interest in Tecan.
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, Applied
Biosystems 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, Applied Biosystems, excluding the special items, reported an
increase of 44.8% in income from continuing operations for fiscal 1999 compared
with fiscal 1998. 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 long-term compensation programs, the group reported a net loss of $39.6
million for fiscal 1999 compared with a net loss of $8.3 million for fiscal
1998.
Net revenues were $1.2 billion for fiscal 1999 compared with $944.3 million for
fiscal 1998, an increase of 28.9%. On a segment basis, net revenues for Applied
Biosystems increased 30.0% to $1.2 billion for fiscal 1999 compared with $940.1
million for fiscal 1998. 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 Applied Biosystems, excluding the results of Tecan, increased
25.9% compared with fiscal 1998. The effects of foreign currency translation
increased net revenues by less than 1% compared with fiscal 1998. Net revenues
from shipments to the Celera Genomics group were $17.3 million for fiscal 1999
and represented less than 2% of Applied Biosystems' net revenues. There were no
revenues recorded by Applied Biosystems from shipments to the Celera Genomics
group for fiscal 1998. Geographically, excluding the net revenues of Tecan,
Applied Biosystems reported revenue growth in all regions for fiscal 1999
compared with fiscal 1998. 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 fiscal 1998. Demand for Applied Biosystems' 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 fiscal 1998. Net revenues for contract research services
increased $4.5 million, related primarily to expression-based gene discovery
services in the agricultural market, and $2.8 million from the group's new
genomics 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 fiscal 1998. Applied Biosystems' 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 from both fiscal
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 Applied Biosystems, and $28.3 million compared with $6.7
million for fiscal 1999 and 1998, respectively, for the Celera Genomics group.
SG&A expenses for Applied Biosystems, excluding Tecan, increased 15.6% for
fiscal 1999 compared with fiscal 1998. 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. 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 fiscal
1998.
The Celera Genomics group's SG&A expenses increased $21.5 million for fiscal
1999 compared with fiscal 1998. The increase was primarily related to the
start-up and ongoing operations of the new genomics 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 Applied
Biosystems increased 26.6% to $133.5 million for fiscal 1999 compared
================================================================================
77 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Management's Discussion and Analysis continued
with $105.5 million for fiscal 1998. Excluding Tecan, expenses increased 19.5%
compared with fiscal 1998 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 fiscal
1998.
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 the
establishment and operation of the sequencing facility and computing center of
the new genomics information business.
During fiscal 1998, $48.1 million of before-tax charges were recorded for
restructuring and other merger costs to integrate PerSeptive into Applied
Biosystems 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, we recorded a $9.2 million reduction of charges
required to implement the fiscal 1998 plan. See Note 14 to our consolidated
financial statements for a discussion of the restructuring.
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. On a segment basis, Applied Biosystems and the Celera Genomics group
were each allocated 50% of the charge.
Fiscal 1998 included $28.9 million of purchased in-process research and
development associated with our company's acquisition of Molecular Informatics
for Applied Biosystems.
<TABLE>
<CAPTION>
Operating Income
(Dollar amounts in millions) 1998 1999
=============================================================
<S> <C> <C>
Operating income before
special items $ 117.6 $ 142.8
Asset impairment (14.5)
Long-term compensation
programs (10.1)
Charitable foundation
contribution (3.5)
Restructuring and other
merger costs, net (48.1) 3.1
Recapitalization costs (9.2)
Acquired research and
development (28.9)
-------------------------------------------------------------
Operating income $ 40.6 $ 108.6
=============================================================
</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 fiscal 1998.
On a segment basis, operating income for Applied Biosystems increased to $187.9
million for fiscal 1999 compared with $53.4 million for fiscal 1998. 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 fiscal 1998. Applied Biosystems 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 foreign currency translation for
Applied Biosystems increased operating income by less than 1% for fiscal 1999
compared with fiscal 1998. 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 fiscal 1998.
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.
For fiscal 1999 and 1998, Applied Biosystems 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
fiscal 1998. 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 fiscal 1998, primarily because of lower average cash balances
during the fiscal year.
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PE CORPORATION 2000 ANNUAL REPORT 78
<PAGE>
PE CORPORATION Management's Discussion and Analysis continued
Other income, net for fiscal 1999 was $.5 million compared with $3.1 million for
fiscal 1998. Fiscal 1999 other income, net related primarily 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. Because the
sale of the Analytical Instruments business had been completed, the valuation
allowance was reduced as management believed that it was more likely than not
that the deferred tax assets to which the valuation allowance related would be
realized. An analysis of the differences between the federal statutory income
tax rate and the effective income tax rate is provided in Note 4 to our
consolidated financial statements.
Applied Biosystems 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.
Market Risk
Applied Biosystems operates internationally, with manufacturing and distribution
facilities in various countries throughout the world. For fiscal 2000 and 1999,
Applied Biosystems derived approximately 50% of its revenues from countries
outside of the United States. Results continue to be affected by market risk,
including fluctuations in foreign currency exchange rates and changes in
economic conditions in foreign markets.
Our risk management strategy utilizes derivative financial instruments,
including forward, swap, and purchased option 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,
respectively, on the derivatives. We do not use derivative financial instruments
for trading purposes, nor are we a party to leveraged derivatives. At June 30,
2000, outstanding hedge contracts covered approximately 50% of the estimated
foreign currency exposures to be realized over the next twelve months. The
outstanding hedges were a combination of forward and option contracts maturing
over this period.
We performed sensitivity analyses as of June 30, 2000 and June 30, 1999.
Assuming a hypothetical adverse change of 10% in foreign exchange rates in
relation to the U.S. dollar at June 30, 2000, we calculated a hypothetical loss
of $1.9 million when comparing the change in fair value of both the foreign
currency contracts outstanding and the underlying exposures being hedged.
Performing a similar hypothetical calculation at June 30, 1999, we calculated a
hypothetical loss of $6.1 million. These hypothetical analyses exclude the
impact of foreign currency translation on our operations. 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 in conjunction with our company 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, 2000, the notional amount of indebtedness covered by
the interest rate swap was yen 3.8 billion or $36.1 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 our
Consolidated Statements of Financial Position and our Consolidated Statements of
Cash Flows.
Cash and cash equivalents and short-term investments were $1.5 billion at June
30, 2000 and $308.0 million at June 30, 1999, with total debt of $97.8 million
at June 30, 2000 and $35.4 million at June 30, 1999. In March 2000, we completed
a follow-on public offering of Celera Genomics stock from which net proceeds of
$943.3 million were realized. During the first quarter of fiscal 2000, we
obtained financing of $46 million specifically for the purchase of the Celera
Genomics group's Rockville, Maryland facilities. We received payment of $150
million for the promissory notes associated with the sale of the Analytical
Instruments business during the fourth quarter of fiscal 2000.
Working capital was $1.5 billion at June 30, 2000 and $471.4 million at June 30,
1999. Debt to total capitalization was 4% at June 30, 2000 and June 30, 1999.
Significant Changes in the Consolidated Statements of Financial Position
Accounts receivable increased by $71.5 million to $378.6 million at June 30,
2000 from $307.1 million at June 30, 1999, reflecting the growth in net
revenues.
Other long-term assets increased to $622.9 million at June 30, 2000 from $249.5
million at June 30, 1999. The change was primarily a result of a net $251.5
million increase in minority equity investments and $125.3 million of goodwill
and other intangibles, net of accumulated amortization, associated with the
acquisition of Paracel.
================================================================================
79 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Management's Discussion and Analysis continued
Accounts payable increased to $191.5 million at June 30, 2000 from $165.1
million at June 30, 1999. The increase was primarily related to higher purchases
to support production and operating requirements as a result of revenue growth
in fiscal 2000.
Accrued salaries and wages increased $42.2 million to $89.7 million at June 30,
2000 from $47.5 million at June 30, 1999, primarily reflecting the timing of
payments for both groups and increased headcount of the Celera Genomics group.
Accrued taxes on income increased $21.3 million to $149.6 million at June 30,
2000 from $128.3 million at June 30, 1999 as a result of Applied Biosystems'
increased income before taxes in foreign tax jurisdictions.
Other accrued expenses increased by $22.2 million to $200.1 million at June 30,
2000 from $177.9 million at June 30, 1999, primarily due to an increase in
deferred revenues.
Consolidated Statements of Cash Flows
Operating activities from continuing operations generated $108.2 million of cash
for fiscal 2000 compared with $69.1 million for fiscal 1999 and $68.1 million
for fiscal 1998. For fiscal 2000, higher operating losses of the Celera Genomics
group were more than offset by effective working capital management of Applied
Biosystems.
For fiscal 2000, net cash used by investing activities from continuing
operations was $455.0 million compared with net cash provided of $154.1 million
for fiscal 1999. During fiscal 2000, we realized $82.8 million in net cash
proceeds from the sale of minority equity investments and real estate, and we
received payment of the $150.0 million promissory notes associated with the sale
of the Analytical Instruments business. During fiscal 2000, short-term
investments of $541.1 million were purchased, with funds received from a
follow-on public offering of Celera Genomics stock. For fiscal 2000, capital
expenditures were $125.8 million. The capital expenditures included $8.6 million
related to improvement of our information technology infrastructure and $21.6
million for the acquisition of a new corporate airplane. Fiscal 2000 capital
expenditures also included payments for software licenses acquired during the
fourth quarter of fiscal 1999 and expenditures associated with the continued
development of the laboratories, facilities, and data center at the Celera
Genomics group's Rockville, Maryland headquarters. For fiscal 2000, $23.0
million was used for various investments and acquisitions. See Note 2 to the
consolidated financial statements for a description of these investments and
acquisitions.
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 Applied Biosystems, 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
our consolidated financial statements for a description of these acquisitions
and investments.
For fiscal 1998, we 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.
Net cash provided by financing activities was $1.0 billion for fiscal 2000
compared with $43.6 million for fiscal 1999. For fiscal 2000, we completed a
follow-on public offering of Celera Genomics stock from which net proceeds of
$943.3 million were realized, and we obtained financing of $46 million
specifically for the purchase of the Rockville, Maryland facilities. Reduction
in loans payable and principal payments on long-term debt were $16.4 million for
fiscal 1999. For fiscal 2000, we received $61.0 million of proceeds from stock
issued for stock plans compared with $96.4 million for fiscal 1999. Dividends
paid were $26.4 million for fiscal 2000 and $34.2 million for fiscal 1999.
Fiscal 1999 included $2.2 million for the purchase of shares of common stock for
treasury. No shares were repurchased during fiscal 2000 or 1998.
During fiscal 1998, we received $33.6 million of proceeds from stock issued for
stock plans. These proceeds were offset by stockholder dividend payments of
$39.1 million and reduction in loans payable and principal payments on long-term
debt of $32.2 million. The fiscal 1998 principal payment on long-term debt
included $24.7 million for the redemption of the PerSeptive Notes.
During fiscal 2000, we made cash payments of $3.5 million for obligations
related to restructuring plans. Restructuring liabilities remaining at June 30,
2000 were $2.3 million. See Note 14 to our consolidated financial statements.
The funding for the remaining restructuring liabilities will be from current
cash balances and funds generated from operating activities.
Our company's $100 million revolving credit agreement was replaced effective
April 20, 2000 with a new $100 million revolving credit agreement with four
banks that matures on April 20, 2005. Terms of this new revolving credit
agreement are substantially similar to those of the previous credit agreement.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 80
<PAGE>
PE CORPORATION Management's Discussion and Analysis continued
We believe our cash and cash equivalents, short-term investments, funds
generated from operating activities, and available borrowing facilities are
sufficient to provide for our anticipated financing needs for at least the next
two years. At June 30, 2000, we had unused credit facilities totaling $341
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.
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
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," amended in June 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The provisions of the statements 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 statements in the
first quarter of fiscal 2001. We estimate that, upon adoption, we will record an
immaterial adjustment for a change in accounting principles in our Consolidated
Statements of Operations and in accumulated other comprehensive income in our
Consolidated Statements of Financial Position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. We do not expect any impact from the
application of SAB No. 101.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation-An
Interpretation of Accounting Principles Board ("APB") Opinion No. 25." FIN No.
44 clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of the previously fixed stock options or awards; and
the accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 is effective July 1, 2000, but certain conclusions in
FIN No. 44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. We do not expect the application of FIN No. 44 to have a
material impact on our consolidated financial statements.
We continue to apply APB No. 25 in accounting for stock-based compensation
plans. Accordingly, no compensation expense has been recognized for these plans,
as all options have been issued with an exercise price equal to 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 2000
income from continuing operations by $59.9 million. The effect of accounting for
such plans at fair value would be to decrease Applied Biosystems' fiscal 2000
diluted earnings per share from continuing operations by $.21, and to increase
the Celera Genomics group's diluted net loss per share by $.25. 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 8 to the
consolidated financial statements for a more detailed discussion regarding the
accounting for stock-based compensation.
Outlook
Applied Biosystems expects to continue to grow and maintain profitability in
fiscal 2001. Applied Biosystems should continue to benefit from its customers in
basic medical research, pharmaceutical development, and applied markets for
sophisticated, automated, and cost-effective life science tools.
Sales of Applied Biosystems' genetic analysis systems are increasingly moving
beyond the basic research markets to a wider group of commercial customers and
public agencies. Applied Biosystems should also benefit from shipments of new
high-throughput screening products such as the FMAT(TM) 8100 HTS System, the
NorthStar(TM) HTS
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Workstation, and the ABI PRISM(TM) 6700 Automated Nucleic Acid Workstation.
Applied Biosystems recently announced new products and initiatives in proteomics
and a new genetic analyzer system. Applied Biosystems expects that the ABI
PRISM(R) 3100 Genetic Analyzer and the forthcoming MALDI-Q-STAR(TM) for
proteomics will be important new products during fiscal 2001. During the next
year, Applied Biosystems expects to introduce other new products to serve unmet
customer needs in the areas of gene expression, SNP analysis, and proteomics.
We remain concerned about adverse currency effects because approximately 50% of
Applied Biosystems' revenues were derived from regions outside the United States
for fiscal 2000.
The Celera Genomics group expects to see a continued expansion in its customer
base for online genomics information products and related genomics services,
with corresponding increases in revenues during fiscal 2001. Revenue growth
should come primarily from increasing the customer base among the major
pharmaceutical and biotech companies and non-profit research organizations and
strengthening its research collaborations and services business.
The expected increase in revenues could be offset as the Celera Genomics group
contemplates investments in the discovery aspects of the business. The Celera
Genomics group expects to continue staffing the organization throughout fiscal
2001. R&D expenses are expected to continue to grow as the research and
bioinformatics areas are expanded. SG&A expenses are also expected to increase
as a sales and marketing function is established to expand potential customer
contact.
We believe the Celera Genomics group's existing cash and cash equivalents and
short-term investments are sufficient to fund its operating expenses and capital
requirements related to its original business plan, which relates to the
sequencing and assembly of the human genome and the development of information
products and related genomics services from this data. While we intend to use
the net proceeds from the Celera Genomics group's follow-on public offering
primarily to fund its new product and technology development activities in
functional genomics, with an emphasis on proteomics and personalized
health/medicine, such funds may not be sufficient to support these new business
activities as they develop. The Celera Genomics group's actual future capital
uses and requirements with respect to its new activities will depend on many
factors, including those discussed under "Forward-Looking Statements."
Forward-Looking Statements
Certain statements contained in this report, including the Outlook section, are
forward-looking and are subject to a variety of risks and uncertainties. These
statements may be identified by the use of forward-looking words or phrases such
as "believe," "expect," "anticipate," "should," "planned," "estimated," and
"potential," among others. These forward-looking statements are based on our
current expectations. The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for such forward-looking statements. In order to comply
with the terms of the safe harbor, we note that a variety of factors could cause
our actual results and experience to differ materially from the anticipated
results or other expectations expressed in such forward-looking statements. The
risks and uncertainties that may affect the operations, performance,
development, and results of our businesses include, but are not limited to:
Factors Relating to Applied Biosystems
Rapidly changing technology in life sciences could make Applied Biosystems'
product line obsolete unless it continues to improve existing products and
develop new products. A significant portion of the net revenues for Applied
Biosystems each year is derived from products that did not exist in the prior
year. Applied Biosystems' future success 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. Applied Biosystems' products are based on complex technology
which is subject to rapid change as new technologies are developed and
introduced in the marketplace. Unanticipated difficulties or delays in replacing
existing products with new products could adversely affect Applied Biosystems'
future operating results.
A significant portion of sales depends on customers' capital spending policies
which may be subject to significant and unexpected decreases. A significant
portion of Applied Biosystems' instrument product sales are capital purchases by
its customers. Applied Biosystems' customers include pharmaceutical,
environmental, research, and chemical companies, and the capital spending
policies of these companies can have a significant effect on the demand for
Applied Biosystems' products. These policies are based on a wide variety of
factors, including the resources available to make purchases, the spending
priorities among various types of research equipment, and policies regarding
capital expenditures during recessionary periods. Any decrease in capital
spending or change in the spending policies of these companies could
significantly reduce the demand for Applied Biosystems' products.
A substantial portion of Applied Biosystems' sales is to customers at
universities or research laboratories whose funding is dependent on both the
level and timing of funding from government sources. As a result, the timing and
amount of revenues from these sources may vary significantly due to factors that
can be difficult to forecast. Although research funding has increased during the
past several years, grants have, in the past, been frozen for extended periods
or otherwise become unavailable to various institutions, sometimes without
advance notice. Budgetary pressures, 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
Applied Biosystems' products were to become unavailable to researchers for any
extended period of time, or if overall research funding were to decrease, the
business of Applied Biosystems could be adversely affected.
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Due to rapidly developing technology and lack of legal precedents, Applied
Biosystems' products could be subject to claims for patent infringement and
trade secret theft. Applied 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, and Applied
Biosystems' belief that its products do not infringe the technology covered by
patents and patent applications could be successfully challenged by third
parties. Also, in the course of its business, Applied Biosystems may from time
to time have access to confidential or proprietary information of third parties,
and such parties could bring a theft of trade secret claim against Applied
Biosystems asserting that Applied Biosystems' products improperly utilize
technologies which are not patented but which are protected as trade secrets.
Applied Biosystems has been and could in the future be made a party to
litigation regarding intellectual property matters. Applied 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 Applied Biosystems
will be able to obtain these licenses or other rights on commercially reasonable
terms.
Since Applied Biosystems' business is dependent on foreign sales, fluctuating
currencies will make our revenues and operating results more volatile.
Approximately 50% of Applied Biosystems' net revenues during fiscal 2000 were
derived from sales to customers outside of the United States. The majority of
these sales were based on the relevant customer's local currency. As a result,
Applied Biosystems' reported and anticipated operating results and cash flows
are subject to fluctuations due to material changes in foreign currency exchange
rates that are beyond Applied Biosystems' control.
Integrating acquired technologies may be costly and may not result in
technological advances. The future growth of Applied Biosystems depends in part
on its ability to acquire complementary technologies through acquisitions and
investments. Since January 1, 1996, Applied 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, Applied Biosystems may encounter
operational difficulties in the integration of manufacturing or other
facilities. In addition, technological advances resulting from the integration
of technologies may not be achieved as successfully or rapidly as anticipated,
if at all.
Earthquakes could disrupt operations in California. A significant portion of
Applied Biosystems' operations is located near major California earthquake
faults. The ultimate impact of earthquakes on Applied 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 the Celera Genomics Group
The Celera Genomics group has incurred net losses to date and may not achieve
profitability. The Celera Genomics group has accumulated net losses of $178.8
million as of June 30, 2000 and expects that it will continue to incur
additional net losses for the foreseeable future. These losses may increase as
Celera expands its investments in new technology and product development,
including the development of its functional genomics and personalized
health/medicine efforts. As an early-stage business, the Celera Genomics group
faces significant challenges in simultaneously expanding its operations,
pursuing key scientific goals, and attracting customers for its information
products and services. As a result, there is a high degree of uncertainty that
the Celera Genomics group will be able to achieve profitable operations.
Celera Genomics' business plan is unique and expanding. No organization has ever
attempted to combine in one business organization all of the Celera Genomics
group's businesses. In addition, as Celera Genomics moves beyond completion of
the sequencing of the human genome, it is expanding its business plan to provide
new scientific services to customers in areas such as functional genomics,
personalized health/medicine, and proteomics. The offering of genomics
databases, functional genomics, proteomics, and personalized health/medicine
capabilities targeted at a wide variety of customers, from pharmaceutical
companies to university researchers, has a number of risks, including pricing
and volume issues, technology and access concerns, computer security, pursuit of
key scientific goals, and protection of intellectual property. The addition of
the functional genomics, personalized health/medicine, and proteomics efforts
will add further complexity and require additional management attention and
resources as these new markets are addressed.
Celera Genomics' business plan depends heavily on final assembly and annotation
of the human genome. The Celera Genomics group is assembling human genome
sequence data obtained using "whole genome shotgun sequencing." Although we
believe that the Celera Genomics group's sequencing and assembly efforts will be
successfully completed based on Celera Genomics' experience to date, Celera
Genomics is using methods, together with data from whole genome shotgun
sequencing, which have not previously been applied to complete final assembly of
a genome with the size and complexity of the human genome. The Celera Genomics
group's ability to retain its existing customers and attract new customers is
heavily dependent upon the final assembly and continued annotation of the human
genome. This information is essential to the functional genomics and
personalized health/medicine components of Celera Genomics' business strategy,
in which Celera Genomics intends to make substantial investments in the near
future. As a result, failure to complete the assembly and annotation efforts in
a timely manner may have a material adverse effect on the Celera Genomics
group's business.
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Celera Genomics' revenue growth depends on retaining existing and adding new
customers. The Celera Genomics group has a small number of customers, the
revenues from which will offset only a small portion of its expenses. In order
to generate significant additional revenues, the Celera Genomics group must
obtain additional customers and retain its existing customers. Celera Genomics'
ability to retain existing and add new customers depends upon customers'
continued belief that Celera Genomics' products can help accelerate their drug
discovery and development efforts and fundamental discoveries in biology.
Although customer agreements typically have multi-year terms, there can be no
assurance that any will be renewed upon expiration. The Celera Genomics group's
future revenues are also affected by the extent to which existing customers
expand their agreements to include new services and database products. In some
cases, the Celera Genomics group may accept milestone payments or future
royalties on products developed by its customers as consideration for access to
Celera Genomics' databases and products in lieu of a portion of subscription
fees. Such arrangements are unlikely to produce revenue for the Celera Genomics
group for a number of years, if ever, and depend heavily on the research and
product development, sales and marketing, and intellectual property protection
abilities of the customer.
Use of genomics information to develop or commercialize products is unproven.
The development of new drugs and the diagnosis of disease based on genomic
information is unproven. Few therapeutic or diagnostic products based on genomic
discoveries have been developed and commercialized, and to date no one has
developed or commercialized any therapeutic, diagnostic, or agricultural
products based on the Celera Genomics group's technologies. If the Celera
Genomics group's customers are unsuccessful in developing and commercializing
products based on the group's databases or other products or services, customers
and the group may be unable to generate sufficient revenues, and its business
may suffer as a result. Development of such products will be subject to risks of
failure, including that such products will be found to be toxic, found to be
ineffective, fail to receive regulatory approvals, fail to be developed prior to
the successful marketing of similar products by competitors, or infringe on
proprietary rights of third parties.
The genomics industry is intensely competitive and evolving. There is intense
competition among entities attempting to sequence segments of the human genome
and identify genes associated with specific diseases and develop products,
services, and intellectual property based on these discoveries. Celera Genomics
faces competition in these areas from genomic, pharmaceutical, biotechnology and
diagnostic companies, academic and research institutions, and government or
other publicly funded agencies, both in the United States and abroad. A number
of companies, other institutions, and government-financed entities are engaged
in gene sequencing, gene discovery, gene expression analysis, positional
cloning, the study of genetic variation, functional genomics, and other genomic
service businesses. Some of these competitors are developing databases
containing gene sequence, gene expression, genetic variation, or other
biological information and are marketing or plan to market their data to
pharmaceutical and biotechnology companies and academic and research
institutions. Additional competitors may attempt to establish databases
containing this information in the future. The Celera Genomics group has
licensed some of its key technology on a non-exclusive basis from third parties,
and therefore such technology may be available for license by PE Corporation's
competitors.
Competitors may also discover, characterize, or develop important genes, drug
targets or leads, drug discovery technologies, or drugs in advance of Celera
Genomics or its customers, or which are more effective than those developed by
Celera Genomics or its customers, or may obtain regulatory approvals of their
drugs more rapidly than Celera Genomics' customers do, any of which could have a
material adverse effect on any of Celera Genomics' similar programs. Moreover,
these competitors may obtain patent protection or other intellectual property
rights that would limit Celera Genomics' rights or its customers' ability to use
Celera Genomics' products to commercialize therapeutic, diagnostic, or
agricultural products. In addition, a customer may use the Celera Genomic
group's services to develop products that compete with products separately
developed by the Group or its other customers.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery, drug
development, and diagnostics based on gene sequencing, target gene
identification, bioinformatics, and related technologies. In addition, certain
pharmaceutical and biotechnology companies have significant needs for genomic
information and may choose to develop or acquire competing technologies to meet
such needs. Celera Genomics also faces competition from providers of software. A
number of companies have announced their intent to develop and market software
to assist pharmaceutical companies and academic researchers in managing and
analyzing their own genomic data and publicly available data.
Celera Genomics' current and potential customers are primarily from, and are
subject to risks faced by, the pharmaceutical and biotechnology industries. The
Celera Genomics group derives a substantial portion of its revenues from fees
paid by pharmaceutical companies and larger biotechnology companies for its
information products and services, including Amgen Inc., Novartis Pharma AG,
Pharmacia & Upjohn, Pfizer Inc., Takeda Chemical Industries, Ltd., American
Home Products Corporation, and Immunex Corporation. The Celera Genomics group
expects that pharmaceutical companies and larger biotechnology companies will
continue to be the Celera Genomics group's primary source of revenues for the
foreseeable future. As a result, the Celera Genomics group is subject to risks
and uncertainties that affect the pharmaceutical and biotechnology industries
and to reduction and delays in research and development expenditures by
companies in these industries.
In addition, the Celera Genomics group's future revenues may be adversely
affected by mergers and consolidation in the pharmaceutical and biotechnology
industries, which will
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reduce the number of the group's potential customers. Large pharmaceutical and
biotechnology customers could also decide to conduct their own genomics programs
or seek other providers instead of using Celera Genomics' products and services.
Celera Genomics relies on its strategic relationship with Applied Biosystems.
The Celera Genomics group believes that its strategic relationship with Applied
Biosystems has provided it with a significant competitive advantage in its
efforts to date to sequence the human genome. Celera Genomics' timely completion
of that work and successful extension of its business into the functional
genomics, personalized health/medicine, and proteomics arenas will depend on
Applied Biosystems' ability to continue to provide leading-edge, proprietary
technology and products, including technologies relating to genetic analysis,
protein analysis, and high-throughput screening. If Applied Biosystems is unable
to supply these technologies, Celera will need to obtain access to alternative
technologies, which may not be available, or may only be available on
unfavorable terms. Any change in the relationship with Applied Biosystems that
adversely affects the Celera Genomics group's access to Applied Biosystems'
technology or failure by Applied Biosystems to continue to develop new
technologies or protect its proprietary technology could adversely affect Celera
Genomics' business.
Introduction of new products may expose Celera Genomics to product liability
claims. New products developed by Celera Genomics could expose Celera Genomics
to potential product liability risks which are inherent in the testing,
manufacturing, and marketing of human therapeutic and diagnostic products.
Product liability claims or product recalls, regardless of the ultimate outcome,
could require Celera Genomics to spend significant time and money in litigation
and to pay significant damages.
Celera Genomics could incur liabilities relating to hazardous materials that it
uses in its research and development activities. Celera Genomics' research and
development activities involve the controlled use of hazardous materials and
chemicals, and may in the future involve various radioactive materials. In the
event of an accidental contamination or injury from these materials, Celera
could be held liable for damages in excess of its resources.
Celera Genomics' sales cycle is lengthy and it may spend considerable resources
on unsuccessful sales efforts or may not be able to complete deals on the
schedule anticipated. The Celera Genomics group's ability to obtain new
customers for genomic information products, value-added services and licenses to
intellectual property depends on its customers' belief that the group can help
accelerate their drug discovery efforts. The Celera Genomics group's sales cycle
is typically lengthy because the group needs to educate potential customers and
sell the benefits of its products and services to a variety of constituencies
within such companies. In addition, each agreement involves the negotiation of
unique terms. Celera may expend substantial funds and management effort with no
assurance that an agreement will be reached with a potential customer. Actual
and proposed consolidations of pharmaceutical companies have affected, and may
in the future affect, the timing and progress of the Celera Genomics group's
sales efforts.
Scientific and management staff have unique expertise which is key to Celera
Genomics' commercial viability and which would be difficult to replace. Celera
Genomics is highly dependent on the principal members of its scientific and
management staff, particularly J. Craig Venter, its President. For the
sequencing and assembly of the human genome, the Celera Genomics group believes
the following members of its staff are essential: Dr. Venter; Mark Adams, Vice
President for Genome Programs; and Eugene Myers, Vice President of Informatics
Research, who is responsible for the group assembling the genome. None of these
individuals are party to employment agreements, non-competition agreements, or
non-solicitation agreements with the Celera Genomics group. Additional members
of the Celera Genomics group's medical, scientific, and bioinformatics staff are
important to the development of information, tools, and services required for
implementation of its business plan. Also, in an effort to meet the demands of
its growing business, the group recently hired other key management personnel in
the areas of operations, sales, marketing, and business development, and the
group believes that these persons will be important to the successful growth of
the group's business. The loss of any of these persons' expertise would be
difficult to replace and could have a material adverse effect on the Celera
Genomics group's ability to achieve its goals.
Celera Genomics' competitive position may depend on patent and copyright
protection, which may not be sufficiently available. The Celera Genomics group's
ability to compete and to achieve profitability may be affected by its ability
to protect its proprietary technology and other intellectual property. While
Celera Genomics' business is currently primarily dependent on revenues from
access fees to its discovery and information systems, obtaining patent
protection may also be important to its business, in that Celera Genomics would
be able to prevent competitors from making, using, or selling any of its
technology for which it obtains a patent. Patent law affecting Celera Genomics'
business, particularly gene sequences, gene function, and polymorphisms, is
uncertain, and as a result, the Celera Genomics group is uncertain as to its
ability to obtain intellectual property protection covering its information
discoveries sufficient to prevent competitors from developing similar subject
matter. Patents may not issue from patent applications that the Celera Genomics
group may own or license. In addition, because patent applications in the United
States are maintained in secrecy until patents issue, third parties may have
filed patent applications for technology used by Celera Genomics or covered by
Celera Genomics' pending patent applications without Celera Genomics being aware
of such applications.
Moreover, the Celera Genomics group may be dependent on protecting, through
copyright law or otherwise, its databases to prevent other organizations from
taking information
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from such databases and copying and reselling it. Copyright law currently
provides uncertain protection regarding the copying and resale of factual data.
As such, Celera Genomics is uncertain whether it could prevent such copying or
resale. Changes in copyright and patent law could either expand or reduce the
extent to which the Celera Genomics group and its customers are able to protect
their intellectual property.
Celera Genomics' position may depend on its ability to protect trade secrets.
The Celera Genomics group relies on trade secret protection for its confidential
and proprietary information and procedures, including procedures related to
sequencing genes and to searching and identifying important regions of genetic
information. The Celera Genomics group currently protects such information and
procedures as trade secrets. The Celera Genomics group protects its trade
secrets through recognized practices, including access control, confidentiality,
and non-use agreements with employees, consultants, collaborators and customers,
and other security measures. These confidentiality and non-use agreements may be
breached, however, and the group may not have adequate remedies for any such
breach. In addition, the group's trade secrets may otherwise become known or be
independently developed by competitors.
Public disclosure of genomics sequence data could jeopardize Celera Genomics'
intellectual property protection and have an adverse effect on the value of our
products and services. The Celera Genomics group, the federally funded Human
Genome Project, and others engaged in similar research have committed to make
available to the public basic human sequence data. Such disclosures might limit
the scope of the Celera Genomics group's claims or make subsequent discoveries
related to full-length genes unpatentable. While the Celera Genomics group
believes that the publication of sequence data will not preclude it or others
from being granted patent protection on genes, there can be no assurance that
such publication has not affected, and will not affect, the ability to obtain
patent protection. Customers may conclude that uncertainties of such protection
decrease the value of the Celera Genomics group's information products and
services and, as a result, it may be required to reduce the fees it charges for
such products and services.
Celera Genomics may infringe the intellectual property rights of third parties
and may become involved in expensive intellectual property litigation. The
intellectual property rights of biotechnology companies, including Celera
Genomics, are generally uncertain and involve complex legal, scientific, and
factual questions. Celera Genomics' success in the functional genomics field may
depend, in part, on its ability to operate without infringing on the
intellectual property rights of others and to prevent others from infringing on
its intellectual property rights.
There has been substantial litigation regarding patents and other intellectual
property rights in the genomics industry. The Celera Genomics group may become a
party to patent litigation or proceedings in the federal courts or at the U.S.
Patent and Trademark Office to determine its patent rights with respect to third
parties which may include subscribers to Celera Genomics' database information
services. Interference proceedings may be necessary to establish which party was
the first to discover such intellectual property. Celera Genomics may become
involved in patent litigation against third parties to enforce the Celera
Genomics group's patent rights, to invalidate patents held by such third
parties, or to defend against such claims. The cost to Celera Genomics of any
patent litigation or similar proceeding could be substantial, and it may absorb
significant management time. If an infringement litigation against Celera
Genomics is resolved unfavorably to Celera Genomics, Celera Genomics may be
enjoined from manufacturing or selling certain of its products or services
without a license from a third party. Celera Genomics may not be able to obtain
such a license on commercially acceptable terms, or at all.
The U.S. Patent and Trademark Office has issued several patents to third parties
relating to single nucleotide polymorphisms ("SNPs"). If other important SNPs
receive patents, Celera Genomics will need to obtain rights to those important
SNPs in order to develop, use, and sell related assays. Such licenses may not be
available to Celera Genomics on commercially acceptable terms, or at all.
Celera Genomics' business is dependent on the continuous, effective, reliable,
and secure operation of its computer hardware, software, and internet
applications and related tools and functions. Because the Celera Genomics
group's business requires manipulating and analyzing large amounts of data, and
communicating the results of such analysis to customers via the internet, the
Celera Genomics group depends on the continuous, effective, reliable, and secure
operation of its computer hardware, software, networks, internet servers, and
related infrastructure. To the extent that the Celera Genomics group's hardware
or software malfunctions or the Celera Genomics group's customers' access to
products through the internet is interrupted, its business could suffer. The
Celera Genomics group's computer and communications hardware is protected
through physical and software safeguards. However, it is still vulnerable to
fire, storm, flood, power loss, earthquakes, telecommunications failures,
physical or software break-ins, and similar events. In addition, Celera
Genomics' database products are complex and sophisticated, and as such, could
contain data, design, or software errors that could be difficult to detect and
correct. Software defects could be found in current or future products. If the
Celera Genomics group fails to maintain and further develop the necessary
computer capacity and data to support computational needs and its customers'
drug efforts, it could result in loss of or delay in revenues and market
acceptance. In addition, any sustained disruption in Internet access provided by
third parties could adversely impact the Celera Genomics group's business.
Celera Genomics' research and product development depends on access to tissue
samples and other biological materials. To continue to build its product base,
Celera Genomics will need access to normal and diseased human and other tissue
samples, other biological materials, and related clinical and other information,
which may be in limited supply. Celera Genomics may not be able to obtain or
maintain access to these materials and information on acceptable terms. In
addition, government regulation in the United States and foreign countries could
result in restricted
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access to, or use of, human and other tissue samples. If Celera Genomics loses
access to sufficient numbers or sources of tissue samples, or if tighter
restrictions are imposed on its use of the information generated from tissue
samples, its business may be harmed.
Ethical, legal, and social issues related to the use of genetic information and
genetic testing may cause less demand for our products. Genetic testing has
raised issues regarding confidentiality and the appropriate uses of the
resulting information. For example, concerns have been expressed toward
insurance carriers and employers using such tests to discriminate on the basis
of such information, resulting in barriers to the acceptance of such tests by
consumers. This could lead to governmental authorities calling for limits on or
regulation of the use of genetic testing or prohibit testing for genetic
predisposition to certain diseases, particularly those that have no known cure.
Any of these scenarios could reduce the potential markets for PE Corporation's
products.
Expected rapid growth in the number of its employees could absorb valuable
management resources and be disruptive to the development of Celera Genomics'
business. The Celera Genomics group expects to grow significantly. This growth
will require substantial effort to hire new employees and train and integrate
them into the Celera Genomics group's business and to develop and implement
management information systems, financial controls, and facility plans. In
addition, the Celera Genomics group will be required to create a sales and
marketing organization and expand customer support resources as sales of its
information products increase. The Celera Genomics group's inability to manage
growth effectively would have a material adverse effect on its future operating
results.
The use of Celera Genomics' products and services by its customers may be
subject to government regulation. Within the field of genomics, the use of the
Celera Genomics group's products by pharmaceutical and biotechnology customers
may be subject to certain U.S. Food and Drug Administration or other regulatory
approvals. For example, any new drug developed by the efforts of the Celera
Genomics group's customers as a result of their use of the Celera Genomics
group's databases must undergo an extensive regulatory review process. This
process can take many years and require substantial expense.
Within the field of personalized health/medicine, current and future patient
privacy and healthcare laws and regulations issued by the FDA may limit the use
of polymorphism data. To the extent that use of the Celera Genomics group's
databases is limited, or additional costs are imposed on the Celera Genomics
group's customers due to regulation, the Celera Genomics group's business may be
adversely affected.
Furthermore, the Celera Genomics group may be directly subject to the
regulations as a provider of diagnostic information. To the extent that such
regulations restrict the sale of the Celera Genomics group's products or impose
other costs, the Celera Genomics group's business may be materially adversely
affected.
Future acquisitions may absorb significant resources and may be unsuccessful. As
part of the Celera Genomics group's strategy, it expects to pursue acquisitions,
investments, and other relationships and alliances. Acquisitions may involve
significant cash expenditures, debt incurrence, additional operating losses,
dilutive issuances of equity securities, and expenses that could have a material
effect on the Celera Genomics group's financial condition and results of
operations. For example, to the extent that it elects to pay the purchase price
for such acquisitions in shares of Celera Genomics stock, such issuance of
additional shares of Celera Genomics stock will be dilutive to holders of Celera
Genomics stock. Acquisitions involve numerous other risks, including:
o difficulties integrating acquired technologies and personnel into the business
of the Celera Genomics group;
o diversion of management from daily operations;
o inability to obtain required financing on favorable terms;
o entry into new markets in which the Celera Genomics group has little previous
experience;
o potential loss of key employees or customers of acquired companies;
o assumption of the liabilities and exposure to unforeseen liabilities of
acquired companies; and
o amortization of the intangible assets of acquired companies.
It may be difficult for the Celera Genomics group to complete such transactions
quickly and to integrate such business efficiently into its current business.
Any such acquisitions or investments by the Celera Genomics group may ultimately
have a negative impact on its business and financial condition.
PE Corporation is subject to a purported class action lawsuit relating to its
recent offering of shares of Celera Genomics stock which may be expensive and
time consuming. As of August 25, 2000, PE Corporation and certain of its
officers had been served in five lawsuits purportedly on behalf of purchasers of
Celera Genomics stock in PE Corporation's offering of Celera Genomics stock
completed on March 6, 2000. In the offering, PE Corporation sold an aggregate of
approximately 4.4 million shares of Celera Genomics stock at a public offering
price of $225 per share. The complaints in these lawsuits generally allege that
the prospectus used in connection with the offering contained inaccurate and
misleading statements in violation of federal securities laws. The complaints
seek unspecified damages, rescission, costs and expenses, and such other relief
as the court deems proper. All of these lawsuits have been consolidated into a
single case. Although PE Corporation believes the asserted claims are without
merit and intends to defend the case vigorously, the outcome of this or any
other litigation is inherently uncertain. The defense of this case will require
management attention and resources.
================================================================================
87 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share amounts)
For the years ended June 30, 1998 1999 2000
==========================================================================================================================
<S> <C> <C> <C>
Net Revenues $ 944,306 $ 1,216,897 $ 1,371,035
Cost of sales 431,738 558,813 609,054
--------------------------------------------------------------------------------------------------------------------------
Gross Margin 512,568 658,084 761,981
--------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 283,399 364,128 436,911
Research, development and engineering 115,764 179,275 274,796
Restructuring and other special charges 43,980 6,116 2,142
Acquired research and development 28,850
--------------------------------------------------------------------------------------------------------------------------
Operating Income 40,575 108,565 48,132
Gain on investments 1,605 6,126 48,603
Interest expense 4,905 3,783 3,501
Interest income 5,938 2,869 39,428
Other income, net 3,147 522 3,446
--------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 46,360 114,299 136,108
Provision for income taxes 25,069 4,140 40,612
Minority interest 5,597 13,362
--------------------------------------------------------------------------------------------------------------------------
Income From Continuing Operations 15,694 96,797 95,496
--------------------------------------------------------------------------------------------------------------------------
Discontinued Operations, Net Of Income Taxes
Income (loss) from discontinued operations 40,694 (21,109)
Gain on disposal of discontinued operations 100,167
--------------------------------------------------------------------------------------------------------------------------
Net Income $ 56,388 $ 175,855 $ 95,496
==========================================================================================================================
Applied Biosystems (see Note 1)
Income From Continuing Operations $ 24,009 $ 148,365 $ 186,247
Basic per share $ .74 $ .90
Diluted per share $ .72 $ .86
Income From Discontinued Operations $ 40,694 $ 79,058
Basic per share $ .39
Diluted per share $ .38
Net Income $ 64,703 $ 227,423 $ 186,247
Basic per share $ 1.13 $ .90
Diluted per share $ 1.10 $ .86
==========================================================================================================================
Celera Genomics Group (see Note 1)
Net Loss $ (8,315) $ (44,894) $ (92,737)
Basic and diluted per share $ (.89) $ (1.73)
==========================================================================================================================
PE Corporation (see Note 1)
Income Per Share From Continuing Operations
Basic $ .32
Diluted $ .31
Income Per Share From Discontinued Operations
Basic $ .84
Diluted $ .81
Net Income Per Share
Basic $ 1.16
Diluted $ 1.12
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
The PE Biosystems group is currently doing business as Applied Biosystems and
will seek formal approval of a change to this name at the 2000 annual meeting.
The PE Biosystems group is referred to as Applied Biosystems.
================================================================================
88 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
(Dollar amounts in thousands except share data)
At June 30, 1999 2000
==========================================================================================================================
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 308,021 $ 964,502
Short-term investments 541,140
Note receivable 150,000
Accounts receivable (less allowances for doubtful
accounts of $3,834 and $3,965) 307,056 378,593
Inventories 149,670 157,827
Prepaid expenses and other current assets 79,255 83,465
--------------------------------------------------------------------------------------------------------------------------
Total current assets 994,002 2,125,527
Property, plant and equipment, net 275,792 334,855
Other long-term assets 249,513 622,933
--------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,519,307 $ 3,083,315
==========================================================================================================================
Liabilities And Stockholders' Equity
Current liabilities
Loans payable $ 3,911 $ 15,693
Accounts payable 165,120 191,484
Accrued salaries and wages 47,495 89,660
Accrued taxes on income 128,261 149,584
Other accrued expenses 177,865 200,079
--------------------------------------------------------------------------------------------------------------------------
Total current liabilities 522,652 646,500
Long-term debt 31,452 82,115
Other long-term liabilities 143,678 134,208
--------------------------------------------------------------------------------------------------------------------------
Total Liabilities 697,782 862,823
--------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (see Note 10)
Stockholders' Equity
Capital stock
Preferred stock
PE Corporation: $.01 par value; 10,000,000 shares authorized at
June 30, 1999 and 2000, respectively; no shares issued at
June 30, 1999 and 2000
Common stock
PE Corporation - PE Biosystems stock: $.01 par value;
500,000,000 shares authorized at June 30, 1999 and 2000,
respectively; 102,707,006 shares and 208,651,594 shares issued
and outstanding at June 30, 1999 and 2000, respectively 1,027 2,087
PE Corporation - Celera Genomics stock: $.01 par value;
225,000,000 shares authorized at June 30, 1999 and 2000,
respectively; 25,658,020 shares and 59,335,885 shares issued
and outstanding at June 30, 1999 and 2000, respectively 257 593
Capital in excess of par value 507,341 1,714,362
Retained earnings 317,720 377,996
Accumulated other comprehensive income (loss) (4,820) 125,454
--------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 821,525 2,220,492
--------------------------------------------------------------------------------------------------------------------------
Total Liabilities And Stockholders' Equity $ 1,519,307 $ 3,083,315
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 89
<PAGE>
PE CORPORATION Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
For the years ended June 30, 1998 1999 2000
==========================================================================================================================
<S> <C> <C> <C>
Operating Activities From Continuing Operations
Income from continuing operations $ 15,694 $ 96,797 $ 95,496
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities
Depreciation and amortization 35,928 48,066 80,699
Long-term compensation programs 6,853 17,482 10,535
Deferred income taxes 10,234 (25,533) (26,399)
Gains from sales of assets (3,052) (6,126) (56,801)
Provision for restructured operations and other
merger costs 48,080 (9,200)
Acquired research and development 28,850
Asset impairment 14,464
Changes in operating assets and liabilities
Increase in accounts receivable (23,507) (105,093) (72,538)
Increase in inventories (21,362) (22,387) (2,180)
Increase in prepaid expenses and other assets (30,862) (46,665) (22,842)
Increase in accounts payable and other liabilities 1,219 107,259 102,234
--------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 68,075 69,064 108,204
--------------------------------------------------------------------------------------------------------------------------
Investing Activities From Continuing Operations
Additions to property, plant and equipment (net of disposals
of $11,339, $9,614, and $2,201, respectively) (60,481) (166,421) (123,614)
Purchases of short-term investments (541,127)
Acquisitions and investments, net (97,998) (5,261) (23,023)
Proceeds from the sale of assets, net 19,496 325,766 82,763
Proceeds from the collection of notes receivable 9,673 150,000
--------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Investing Activities (129,310) 154,084 (455,001)
--------------------------------------------------------------------------------------------------------------------------
Net Cash From Continuing Operations Before
Financing Activities (61,235) 223,148 (346,797)
--------------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Net cash provided (used) by operating activities 10,084 (16,297) (15,081)
Net cash used by investing activities (40,639) (26,970)
--------------------------------------------------------------------------------------------------------------------------
Net Cash From Discontinued Operations Before
Financing Activities (30,555) (43,267) (15,081)
--------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net change in loans payable (6,797) (9,572) 52,701
Principal payments on long-term debt (25,449) (6,843)
Dividends (39,072) (34,156) (26,358)
Purchases of common stock for treasury (2,187)
Net proceeds from follow-on stock offering 943,303
Proceeds from stock issued for stock plans 33,629 96,379 61,047
--------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Financing Activities (37,689) 43,621 1,030,693
--------------------------------------------------------------------------------------------------------------------------
Elimination of PerSeptive results from
July 1, 1997 to September 30, 1997 (see Note 1) 2,590
Effect Of Exchange Rate Changes On Cash (3,274) 1,654 (12,334)
--------------------------------------------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents (130,163) 225,156 656,481
Cash And Cash Equivalents Beginning Of Year 213,028 82,865 308,021
--------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents End Of Year $ 82,865 $ 308,021 $ 964,502
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
================================================================================
90 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Consolidated Statements of Stockholders' Equity
and Comprehensive Income
<TABLE>
<CAPTION>
PE PE Celera Capital in
Corporation Biosystems Genomics 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, 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
Stock compensation 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
stock (25,479)
Cash dividends declared on PE Biosystems
stock (8,677)
Issuances under PE Corporation
stock plans 873 43,323 (14,862)
Recapitalization (May 6, 1999) (51,021) 510 255 50,256
Repurchases of PE Biosystems stock
Issuances under PE Biosystems stock
plans 3 17,967 (1,290)
Issuances under Celera Genomics
stock plans 2 1,483
Tax benefit related to employee stock options 15,735
Stock compensation (883) 1,207
Two-for-one stock split 514 (514)
-----------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 1,027 257 507,341 317,720
Comprehensive income
Net income 95,496
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 Biosystems
stock (35,220)
Issuances under PE Biosystems stock plans 23 43,411
Issuances under Celera Genomics stock plans 15 17,598
Issuances under Celera Genomics follow-on
stock offering 44 943,259
Tax benefit related to employee stock options 65,708
Stock compensation 13,266
Celera Genomics group purchase business
combination 16 125,077
Two-for-one stock split 1,037 261 (1,298)
-----------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ - $ 2,087 $ 593 $ 1,714,362 $ 377,996
=================================================================================================================
<CAPTION>
Accumulated
Other Total
Comprehensive Treasury Treasury Stock-
Income Stock Stock holders'
(Dollar amounts and shares in thousands) (Loss) At Cost Shares Equity
====================================================================================================
<S> <C> <C> <C> <C>
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
Stock compensation 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
stock (25,479)
Cash dividends declared on PE Biosystems
stock (8,677)
Issuances under PE Corporation
stock plans 45,354 789 74,688
Recapitalization (May 6, 1999)
Repurchases of PE Biosystems stock (2,187) (20) (2,187)
Issuances under PE Biosystems stock
plans 2,187 20 18,867
Issuances under Celera Genomics
stock plans 1,485
Tax benefit related to employee stock options 15,735
Stock compensation 1,973 42 2,297
Two-for-one stock split
----------------------------------------------------------------------------------------------------
Balance at June 30, 1999 (4,820) 821,525
Comprehensive income
Net income 95,496
Other comprehensive income, net of tax
Foreign currency translation adjustments (25,196)
Minimum pension liability adjustment (60)
Unrealized gain on investments, net 155,530
---------
Other comprehensive income 130,274 130,274
-----------
Comprehensive income 225,770
-----------
Cash dividends declared on PE Biosystems
stock (35,220)
Issuances under PE Biosystems stock plans 43,434
Issuances under Celera Genomics stock plans 17,613
Issuances under Celera Genomics follow-on
stock offering 943,303
Tax benefit related to employee stock options 65,708
Stock compensation 13,266
Celera Genomics group purchase business
combination 125,093
Two-for-one stock split
----------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 125,454 $ - - $ 2,220,492
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 91
<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 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).
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 year ended June 30, 1998.
Recapitalization
The recapitalization of the Company on May 6, 1999 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 PE Biosystems life sciences business ("PE
Biosystems group"), and Celera Genomics stock is intended to reflect separately
the performance of the Celera Genomics business ("Celera Genomics group"). As
part of the recapitalization, 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 PE Biosystems group is currently doing business as Applied Biosystems and
will seek formal approval of a change to this name at the Company's 2000 annual
meeting. The PE Biosystems group is referred to as Applied Biosystems.
Holders of PE Biosystems stock and Celera Genomics stock are stockholders of the
Company. Applied Biosystems and the Celera Genomics group (individually referred
to as a "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 Applied
Biosystems 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 statements.
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 (see Note 15). The operating results are reflected in
the Consolidated Statements of Operations as income (loss) from discontinued
operations for fiscal 1998 and fiscal 1999. The accompanying notes, except Note
15, relate only to continuing operations.
Recently Issued 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," amended in June 2000 by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
The provisions of the statements 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 statements
in the first quarter of fiscal 2001. The Company estimates that, upon adoption,
it will record an immaterial adjustment for a change in accounting principles in
the Consolidated Statements of Operations and in accumulated other comprehensive
income in the Consolidated Statements of Financial Position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. SAB No. 101 is required to be
implemented in the fourth quarter of fiscal 2001. The Company does not expect
any impact from the application of SAB No. 101.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation-An
Interpretation
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 92
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
of Accounting Principles Board ("APB") Opinion No. 25." FIN No. 44 clarifies the
following: the definition of an employee for purposes of applying APB No. 25;
the criteria for determining whether a plan qualifies as a noncompensatory plan;
the accounting consequence of various modifications to the terms of the
previously fixed stock options or awards; and the accounting for an exchange of
stock compensation awards in a business combination. FIN No. 44 is effective
July 1, 2000, but certain conclusions in FIN No. 44 cover specific events that
occurred after either December 15, 1998 or January 12, 2000. Management does not
expect the application of FIN No. 44 to have a material impact on the Company's
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.
The following tables present a reconciliation of basic and diluted earnings per
share from continuing operations:
<TABLE>
<CAPTION>
PE Corporation
--------------
(Amounts in thousands except per share amounts)
For the year ended June 30, 1998
===============================================================
<S> <C>
Weighted average number
of common shares used in
the calculation of basic earnings
per share from continuing
operations 48,560
Common stock equivalents 1,592
---------------------------------------------------------------
Shares used in the calculation of
diluted earnings per share
from continuing operations 50,152
===============================================================
Income from continuing operations
used in the calculation of basic
and diluted earnings per share
from continuing operations $ 15,694
Income per share from
continuing operations
Basic $ .32
Diluted $ .31
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Applied Biosystems
--------------------
(Amounts in thousands except per share amounts)
For the years ended June 30, 1999 2000
=====================================================================
<S> <C> <C>
Weighted average number
of common shares used in
the calculation of basic earnings
per share from continuing
operations 200,811 207,010
Common stock equivalents 5,398 10,006
---------------------------------------------------------------------
Shares used in the calculation of
diluted earnings per share
from continuing operations 206,209 217,016
=====================================================================
Income from continuing operations
used in the calculation of basic
and diluted earnings per share
from continuing operations $ 148,365 $ 186,247
Income per share from
continuing operations
Basic $ .74 $ .90
Diluted $ .72 $ .86
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
Celera Genomics Group
---------------------
(Amounts in thousands except per share amounts)
For the years ended June 30, 1999 2000
======================================================================
<S> <C> <C>
Weighted average number
of common shares used in
the calculation of basic loss
per share 50,200 53,725
Common stock equivalents
----------------------------------------------------------------------
Shares used in the calculation of
diluted loss per share 50,200 53,725
======================================================================
Net loss used in the calculation of
basic and diluted loss per share $ (44,894) $ (92,737)
Net loss per share
Basic and diluted $ (.89) $ (1.73)
======================================================================
</TABLE>
Options to purchase 40,000 and 5.9 million shares of PE Biosystems stock were
outstanding at June 30, 1999 and 2000, respectively, but were not included in
the computation of diluted earnings per share because the effect was
antidilutive. Options and warrants to purchase 11.2 million and 12.3 million
shares of Celera Genomics stock were outstanding at June 30, 1999 and 2000,
respectively, but were not included in the computation of diluted earnings per
share because the effect was antidilutive. Options and warrants to purchase 1.4
million shares of the Company's common stock were outstanding at June 30, 1998
but were not included in the computation of diluted earnings per share because
the effect was antidilutive.
Applied Biosystems' share and per share data reflect the two-for-one stock
splits effective July 1999 and February 2000. Celera Genomics group's share and
per share data reflect the two-for-one stock split effective February 2000.
================================================================================
93 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
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 losses for the fiscal years
ended June 30, 1998, 1999, and 2000 were $2.5 million, $5.6 million, and $.1
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, foreign currency options, and an
interest rate swap (see Note 11).
Cash and Cash Equivalents and Short-Term Investments
Cash equivalents consist of highly liquid debt instruments, time deposits, and
certificates of deposit with original maturities of three months or less.
Short-term investments have maturities of less than one year, are carried at
fair value and are classified as available for sale with unrealized gains and
losses included as a separate component of equity, net of any related tax
effect. The specific identification method is used to determine the cost of
securities disposed of, with realized gains and losses recorded to other income,
net. These short-term investments include certificates of deposit, commercial
paper, U.S. government securities, and corporate bonds. These investments are
held with two major financial institutions in the Company's name.
The fair value of short-term investments at June 30, 2000 was as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 2000
=============================================================
<S> <C>
Certificates of deposit $ 107.3
Commercial paper 364.5
U.S. government notes and bonds 49.2
Corporate bonds 20.1
-------------------------------------------------------------
Total short-term investments $ 541.1
=============================================================
</TABLE>
There were no short-term investments at June 30, 1999. Gross unrealized gains
and losses on short-term investments were each $.1 million at June 30, 2000.
There were no realized gains or losses for fiscal 2000.
Accounts Receivable
The Company periodically sold accounts receivable arising from business
conducted in Japan. During fiscal 1998, 1999, and 2000, the Company received
cash proceeds of $98.8 million, $40.5 million, and $7.8 million, respectively,
from the sale of such receivables. There were no sales of accounts receivable
after July 28, 1999. The Company accounted for such sales in accordance with
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities."
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." The specific
identification method is used to determine the cost of securities disposed of.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories at June 30, 1999 and 2000 included the following components:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Raw materials and supplies $ 42.8 $ 53.1
Work-in-process 10.3 6.3
Finished products 96.6 98.4
-------------------------------------------------------------
Total inventories $ 149.7 $ 157.8
=============================================================
</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 2000:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Land $ 21.2 $ 23.5
Buildings and leasehold improvements 154.9 185.1
Machinery and equipment 231.4 311.6
-------------------------------------------------------------
Property, plant and equipment, at cost 407.5 520.2
Accumulated depreciation
and amortization 131.7 185.3
-------------------------------------------------------------
Property, plant and equipment, net $ 275.8 $ 334.9
=============================================================
</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 7 years.
Machinery and equipment, which included capitalized internal-use software
primarily related to the Company's worldwide strategic program to improve its
information technology infrastructure, was $53.2 million and $61.8 million at
June 30, 1999 and 2000, respectively. Net of accumulated amortization, the
capitalized internal-use software was $43.4 million and $43.5 million at June
30, 1999 and 2000, respectively.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 94
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
Capitalized Software
Internal software development costs, for software in the Company's products,
which are incurred from the time technological feasibility of the software is
established until the software is ready for its intended use, are capitalized
and included in other long-term assets. The costs are amortized using the
straight-line method over a maximum of 3 years or the expected life of the
product, whichever is less. At June 30, 1999 and 2000, capitalized software
costs, net of accumulated amortization, were $12.5 million and $21.3 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 20 years. Patents
and trademarks are amortized using the straight-line method over their expected
useful lives. At June 30, 1999 and 2000, other long-term assets included
goodwill, net of accumulated amortization, of $18.5 million and $129.2 million,
respectively. Accumulated amortization of goodwill was $6.7 million and $12.1
million at June 30, 1999 and 2000, 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,
Applied Biosystems recorded a $14.5 million charge to cost of sales for the
impairment of assets associated with the Molecular Informatics business (see
Note 2). The impairment loss was 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 genomic
databases are recognized ratably over the contracted period in accordance with
the provisions of the contract. Contract research service revenues are earned
and recognized in accordance with contract provisions. Revenues may be
recognized on a percentage of completion, as contract research costs are
incurred, or may be contingent upon the achievement of certain milestones.
Amounts received in advance of performance are recorded as deferred revenue.
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 was as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Interest $ 5.7 $ 3.4 $ 3.0
Income taxes $ 60.5 $ 30.3 $ 49.3
Significant non-cash investing
and financing activities
Capital expenditures
liability $ 8.9
Unrealized gain (loss) on
investments $ (4.4) $ 11.9 $ 155.5
Dividends declared
not paid $ 8.9
Common shares issued
in PerSeptive pooling $ 4.6
Equity instruments issued
in Paracel acquisition $ 125.1
Minority interest assumed $ 41.3
=============================================================
</TABLE>
Note 2--Acquisitions, Investments, and Dispositions
PerSeptive Biosystems, Inc.
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 (predecessor) common stock at an exchange
ratio equal to 0.1926. Accordingly, the Company issued 4.6 million shares of its
(predecessor) 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 (predecessor) 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 (predecessor)
common stock. As a result of the merger, PerSeptive's 8-1/4% Convertible
Subordinated Notes Due 2001 became convertible into shares of the Company's
(predecessor) 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
================================================================================
95 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
converted by the holders thereof into 35,557 shares of the Company's
(predecessor) common stock. The merger qualified as a tax-free reorganization
and was accounted for as a pooling of interests.
Tecan AG
The Company acquired a 14.5% interest and approximately 52% of the voting rights
in Tecan AG during the second quarter of fiscal 1998. Tecan is a leader in the
development and manufacturing of automated sample processors, liquid handling
systems, and microplate photometry. 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 15 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. Net cash proceeds from the divestiture were $53.8 million. The
Company recognized a before-tax gain of $1.6 million on the divestiture.
Molecular Informatics, Inc.
In fiscal 1998, the Company acquired Molecular Informatics, Inc., 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 10 years for the goodwill and 4
to 7 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 to 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. The product was released in
September 1998. As of the acquisition date, BioMerge 3.0's functional scope was
defined and the requirements assessment had been completed. The product 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, 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.
In 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.
Paracel, Inc.
During the fourth quarter of fiscal 2000, the Company acquired Paracel, Inc. in
a stock-for-stock transaction. Paracel produces advanced genomic and text
analysis technologies. Its products include a hardware accelerator for sequence
comparison, a hardware accelerator for text search, and sequence analysis
software tools.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 96
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
The Company issued approximately 1.6 million shares of Celera Genomics stock in
exchange for all the outstanding shares of Paracel common stock not previously
owned by the Company. At the time of the acquisition, the Company owned 14% of
Paracel. The acquisition of the shares of Paracel not previously owned by the
Company was valued at $125.6 million and was accounted for under the purchase
method of accounting. In connection with the acquisition, $115.2 million was
allocated to goodwill, including $5.3 million of deferred tax, and $13.6 million
was allocated to other intangible assets. The goodwill and the other intangible
assets are being amortized on a straight-line method over 3 years.
The net assets and results of operations of Paracel were included in the
Company's consolidated financial statements from the date of acquisition. The
following selected unaudited pro forma information assumes the acquisition had
occurred at the beginning of fiscal 1999 and fiscal 2000, and gives effect to
purchase accounting adjustments:
<TABLE>
<CAPTION>
(Dollar amounts in millions except per share amounts) 1999 2000
==============================================================================
<S> <C> <C>
Net revenues $ 1,226.8 $ 1,379.4
Net income $ 130.3 $ 47.7
==============================================================================
Applied Biosystems
Net income per share
Basic $ 1.13 $ .90
Diluted $ 1.10 $ .86
==============================================================================
Celera Genomics Group
Net loss per share
Basic and diluted $ (1.75) $ (2.54)
==============================================================================
</TABLE>
The unaudited pro forma data is for informational purposes only and may not be
indicative of the actual results that would have occurred had the acquisition
been consummated at the beginning of fiscal 1999 or at the beginning of fiscal
2000 or of the future operations of the combined companies.
Millennium Pharmaceuticals, Inc.
In fiscal 2000, Applied Biosystems recognized a before-tax gain of $41.0 million
from the sale of a portion of the Company's equity interest in Millennium
Pharmaceuticals, Inc. Net cash proceeds from the sale were $48.0 million. 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 common stock.
Boston Probes, Inc.
In fiscal 2000, the Company made a minority equity investment of $6.0 million in
Boston Probes, Inc. Additionally, the Company committed to make term loans in
the aggregate of up to $2.0 million, subject to market terms and conditions. The
loan commitment and the loan maturity may not extend beyond May 1, 2003. Applied
Biosystems and Boston Probes are collaborating on the development and
commercialization of products employing peptide nucleic acid technology. The
acquisition was accounted for under the cost method and was included in the
Company's Consolidated Statements of Financial Position.
Epoch Biosciences, Inc.
The Company made a minority equity investment in Epoch Biosciences, Inc. of $1.0
million in fiscal 2000. The Company also converted into equity $1.0 million of
funds advanced to Epoch as part of a licensing transaction in fiscal 1999. Epoch
is a biomedical company utilizing nucleoside and nucleotide chemistry to develop
molecular tools for genetic analysis. The acquisition was accounted for under
the cost method and was included in the Company's Consolidated Statements of
Financial Position.
Illumina, Inc.
In fiscal 2000, the Company made a minority equity investment of $5.0 million in
Illumina, Inc. and will provide a portion of the research and development
funding for a strategic collaboration. The strategic collaboration is for the
purpose of developing, manufacturing, and marketing array-based systems for
high-throughput DNA analysis. Under the agreement, Applied Biosystems and
Illumina will jointly develop systems based on Illumina's BeadArray technology
and Applied Biosystems' proprietary DNA chemistry. The acquisition was accounted
for under the cost method and was included in the Company's Consolidated
Statements of Financial Position.
ACLARA BioSciences, Inc.
The Company made a minority equity investment of $2.5 million in ACLARA
BioSciences, Inc. in fiscal 1998. Applied Biosystems and ACLARA are
collaborating on the development of advanced genetic analysis systems. In fiscal
1999 and fiscal 2000, the Company increased its investment by $3.0 million and
$5.0 million, respectively. The acquisition was accounted for under the cost
method and was included in the Company's Consolidated Statements of Financial
Position.
Biometric Imaging, Inc.
In fiscal 1998, the Company acquired a minority equity investment in Biometric
Imaging, Inc. for $4.0 million. Applied Biosystems and Biometric Imaging were
collaborating on 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. In fiscal 1999, the Company
recorded a before-tax gain of $2.6 million on the sale of the Company's entire
equity interest in Biometric Imaging. Net cash proceeds from the sale were $6.6
million.
Hyseq, Inc.
In fiscal 1997, the Company entered into a strategic relationship with Hyseq,
Inc., acquiring a minority equity interest for a cash investment of $5.0
million. Hyseq applies proprietary DNA array technology to develop gene-based
therapeutic product candidates and diagnostic products and tests. In fiscal
1998, the Company increased its investment by $5.0 million. During the fourth
quarter of fiscal 2000, the Company recognized a before-tax gain of $4.4 million
from the sale of a portion of its equity interest in Hyseq. Net cash proceeds
from the sale were $6.4 million.
================================================================================
97 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
Panther(TM) Technology
During the second quarter of fiscal 2000, the Company acquired the Panther(TM)
technology from Molecular Applications Group. Panther(TM) is a software tool
designed for rapid and accurate determination of gene and protein function. As
part of the agreement, members of the Molecular Applications Group research team
who developed the Panther(TM) technology became employees of the Celera Genomics
group. The cost of the acquisition was $2.5 million and was accounted for under
the purchase method of accounting.
Shanghai GeneCore BioTechnologies Co., Ltd.
During the second quarter of fiscal 2000, the Company acquired an additional
47.5% equity interest in Shanghai GeneCore BioTechnologies Co., Ltd. from Axys
Pharmaceuticals, Inc. for $.5 million. The Company previously owned a 47.5%
equity interest in Shanghai GeneCore. Shanghai GeneCore is a genomics service
company with expertise in nucleotide synthesis, DNA sequencing, bioinformatics
analysis, and mutation detection. The 95% equity interest in Shanghai GeneCore
was accounted for under the purchase method of accounting in the consolidated
financial statements of the Company.
Agrogene S.A.
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 excess of cost over net assets acquired of $1.0 million is being
amortized on a straight-line basis over 3 years. This investment has been
accounted for under the equity method of accounting.
Other Dispositions
In fiscal 2000, the Company recognized a before-tax gain of $3.3 million from
the sale of its equity interest in various other companies. Net cash proceeds
from the sales were $4.3 million.
Note 3--Debt and Lines of Credit
Loans payable and long-term debt at June 30, 1999 and 2000 are summarized as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Loans Payable
Short-term loans $ 3.9 $ 15.7
=============================================================
Long-Term Debt
Commercial paper $ - $ 46.0
Yen loan 31.5 36.1
-------------------------------------------------------------
Total long-term debt $ 31.5 $ 82.1
=============================================================
</TABLE>
The weighted average interest rates at June 30, 1999 and 2000 for loans payable
were 4.5% and .6%, respectively.
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 11),
the effective interest rate for the loan is fixed at 2.1%.
Long-term debt includes $46.0 million of commercial paper with an average
interest rate of 6.84% at June 30, 2000. The Company established the necessary
credit facilities, through its revolving credit agreement, to refinance the
commercial paper borrowings on a long-term basis. These borrowings were
classified as noncurrent because it is the Company's intent to refinance these
obligations on a long-term basis.
The Company's $100 million revolving credit agreement was replaced effective
April 20, 2000 with a new $100 million revolving credit agreement with four
banks that matures on April 20, 2005. Commitment and facility fees are based on
public debt ratings, or net worth and leverage ratios. Interest rates on amounts
borrowed vary depending on whether borrowings are undertaken in the domestic or
eurodollar markets. There were no borrowings outstanding under the facility at
June 30, 2000.
At June 30, 2000, in addition to the $100 million revolving credit facility, the
Company had $241 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 various local banks. A PE Corporation guarantee is usually
required if a local unit borrows any funds.
Under various debt and credit agreements, the Company is required to maintain
certain minimum net worth and leverage ratios.
There are no maturities of long-term debt scheduled for fiscal 2001, 2003, 2004,
or 2005. The yen 3.8 billion loan matures in fiscal 2002.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 98
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
Note 4--Income Taxes
Income (loss) before income taxes from continuing operations for fiscal 1998,
1999, and 2000 is summarized in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
United States $ (38.0) $ (41.6) $ (46.5)
Foreign 84.4 155.9 182.6
-------------------------------------------------------------
Total $ 46.4 $ 114.3 $ 136.1
=============================================================
</TABLE>
The Company's provision for income taxes from continuing operations for fiscal
1998, 1999, and 2000 consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Currently Payable
Domestic $ 3.8 $ 6.1 $ 18.4
Foreign 17.8 23.5 48.6
-------------------------------------------------------------
Total currently payable 21.6 29.6 67.0
-------------------------------------------------------------
Deferred
Domestic 6.1 (29.1) (14.0)
Foreign (2.6) 3.6 (12.4)
-------------------------------------------------------------
Total deferred 3.5 (25.5) (26.4)
-------------------------------------------------------------
Total provision for income
taxes from continuing
operations $ 25.1 $ 4.1 $ 40.6
=============================================================
</TABLE>
Significant components of deferred tax assets and liabilities from continuing
operations at June 30, 1999 and 2000 are summarized in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Deferred Tax Assets
Inventories $ 2.3 $ 4.0
Postretirement and
postemployment benefits 32.2 31.4
Other reserves and accruals 8.8 11.9
Tax credit and loss carryforwards 68.8 162.6
-------------------------------------------------------------
Subtotal 112.1 209.9
Valuation allowance (37.5) (37.2)
-------------------------------------------------------------
Total deferred tax assets 74.6 172.7
-------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 3.1 15.8
Other reserves and accruals 12.3 4.9
Intangibles 4.6
Unrealized gains on investments 89.2
-------------------------------------------------------------
Total deferred tax liabilities 15.4 114.5
-------------------------------------------------------------
Total deferred tax assets, net $ 59.2 $ 58.2
=============================================================
</TABLE>
A reconciliation of the federal statutory tax to the Company's continuing tax
provision for fiscal 1998, 1999, and 2000 is set forth in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
=============================================================
Tax at federal statutory rate $ 16.2 $ 40.0 $ 47.6
State income taxes (net of
federal benefit) .1 .4 .4
Effect on income taxes from
foreign operations 1.2 (21.4) (6.2)
Effect on income taxes from
foreign sales corporation (2.5) (4.9) (7.1)
Acquired research and
development 10.1
Reorganization, restructuring,
and other costs 5.2 7.9
Domestic temporary
differences for which
benefit is recognized (4.8) (17.4)
Effect of goodwill
amortization and write-off .4 1.2 .5
R&D tax credit (11.4)
Long-term compensation 8.7
Recapitalization costs 3.3
Other (.8) 2.9 .2
-------------------------------------------------------------
Total provision for income
taxes from continuing
operations $ 25.1 $ 4.1 $ 40.6
=============================================================
</TABLE>
The category "domestic temporary differences for which benefit is recognized"
reported in the preceding table reflects the fiscal 1998 and 1999 benefit
attributable to a reduction in the valuation allowance. The benefit is primarily
due to release of the valuation allowance in fiscal 1999 in the amount of $17.4
million. The valuation allowance was reduced in fiscal 1999 because management
believed, once the sale of the Analytical Instruments business was completed,
that it was more likely than not that the deferred tax assets to which the
valuation allowance related would be realized. The fiscal 1998 benefit resulted
from the utilization of domestic tax credit carryforwards and reversing
temporary differences and the recognition of various other deferred tax assets
that were previously subject to a valuation allowance.
At June 30, 2000, the Company's worldwide valuation allowance of $37.2 million
related to foreign tax loss carryforwards, as well as domestic tax loss
carryforwards, temporary differences, and tax credit carryforwards.
PerSeptive has domestic loss carryforwards of approximately $68 million that
will expire between the fiscal 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 consolidated domestic
loss carryforward of approximately $230 million and consolidated domestic credit
carryforwards of $43.2 million that will expire between the fiscal years
================================================================================
99 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
2005 and 2020, and loss carryforwards of approximately $49 million in various
foreign countries with varying expiration dates.
U.S. income taxes were not provided on approximately $352 million of net
unremitted earnings from foreign subsidiaries since the Company intends to
permanently reinvest substantially all of such earnings outside the U.S. These
earnings include income from manufacturing operations in Singapore, which is
tax-exempt through fiscal 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, is not significant.
The Company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. On December 17, 1998, the Company filed a petition in
the U.S. Tax Court which contested a deficiency asserted by the IRS for fiscal
1992. The Company has entered into settlement discussions with the IRS Appeals
Office in order to determine whether this dispute can be resolved on a favorable
basis to the Corporation without the necessity of a trial. 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 Healthcare, 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 plan covers a substantial portion of U.S.
employees. During fiscal 1999, the plan was amended to terminate the accrual of
benefits 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 benefit plan provides certain healthcare and life insurance
benefits to domestic employees hired prior to January 1, 1993, who retire and
satisfy certain service and age requirements. Generally, medical coverage pays a
stated percentage of most medical expenses, reduced for any deductible and for
payments made by Medicare or other group coverage. The cost of providing these
benefits is shared with retirees. The plan is unfunded.
The components of net pension and postretirement benefit expenses for fiscal
1998, 1999, and 2000 are set forth in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Pension
Service cost $ 4.9 $ 5.2 $ 7.7
Interest cost 36.4 38.7 44.1
Expected return on
plan assets (35.6) (38.6) (45.7)
Amortization of
transition asset (1.9) (1.9) (2.4)
Amortization of prior
service cost (.4) (.4)
Amortization of losses .5 .5 .2
Curtailments and
settlements .1
-------------------------------------------------------------
Net periodic expense $ 4.3 $ 3.6 $ 3.5
=============================================================
Postretirement Benefit
Service cost $ .1 $ .2 $ .3
Interest cost 4.7 4.8 4.6
Amortization of gains (1.2) (1.5) (1.8)
-------------------------------------------------------------
Net periodic expense $ 3.6 $ 3.5 $ 3.1
=============================================================
</TABLE>
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 100
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
The following tables set forth the changes in the benefit obligations and the
plan assets, the funded status of the plans, and the amounts recognized in the
Company's Consolidated Statements of Financial Position at June 30, 1999 and
2000:
<TABLE>
<CAPTION>
Pension Postretirement
------------------ ------------------
(Dollar amounts in millions) 1999 2000 1999 2000
=========================================================================
<S> <C> <C> <C> <C>
Change In Benefit
Obligation
Benefit obligation,
beginning of year $ 560.5 $ 594.1 $ 72.4 $ 62.5
Service cost 5.2 7.7 .2 .3
Interest cost 38.7 44.1 4.8 4.6
Participants' contributions .1
Benefits paid (30.8) (36.7) (5.3) (5.4)
Actuarial (gain) loss 17.7 7.9 (3.3) (.1)
Variable annuity
unit value change 2.8 (12.9)
Addition of plan 3.9
Amendments (2.0)
Currency translation (.1) (.2)
Other 2.0 (6.3)
-------------------------------------------------------------------------
Benefit obligation $ 594.1 $ 607.9 $ 62.5 $ 61.9
=========================================================================
Change In Plan Assets
Fair value of plan assets,
beginning of year $ 561.8 $ 600.6 $ - $ -
Actual return on
plan assets 56.8 47.9
Participants' contributions .1
Company contribution 11.4 5.3 5.4
Benefits paid (29.5) (34.3) (5.3) (5.4)
Addition of plan 1.0
Currency translation (.2)
-------------------------------------------------------------------------
Fair value of plan assets $ 600.6 $ 615.0 $ - $ -
=========================================================================
Funded Status
Reconciliation
Funded status $ 6.5 $ 7.1 $ (62.5) $ (61.9)
Unrecognized prior
service gain (2.5) (2.0)
Unrecognized transition
asset (obligation) (2.2) .9
Unrecognized (gains)
losses 37.7 29.6 (23.2) (21.5)
-------------------------------------------------------------------------
Net amount recognized $ 39.5 $ 35.6 $ (85.7) $ (83.4)
=========================================================================
Amounts Recognized
In The Statement Of
Financial Position
Prepaid benefit cost $ 48.3 $ 47.4 $ - $ -
Accrued benefit liability (11.6) (15.8) (85.7) (83.4)
Intangible asset .7 .6
Minimum pension
liability adjustment 2.1 3.4
-------------------------------------------------------------------------
Net amount recognized $ 39.5 $ 35.6 $ (85.7) $ (83.4)
=========================================================================
</TABLE>
Other changes in benefit obligation represented 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
$14.0 million and $12.8 million, respectively, at June 30, 2000.
The following actuarial assumptions were used for the Company's pension and
postretirement plans:
<TABLE>
<CAPTION>
1999 2000
=============================================================
<S> <C> <C>
Domestic Plans
Discount rate 7-1/2% 8%
Compensation increase 5% 6%
Expected rate of return 7-1/2 -- 9-1/4% 8 -- 9-1/4%
=============================================================
Foreign Plans
Discount rate 5 -- 5-3/4% 3 -- 5-3/4%
Compensation increase 4% 2 -- 4%
Expected rate of return 6-1/2 -- 9% 4 -- 9%
=============================================================
</TABLE>
The Company recorded expenses for foreign defined benefit plans of $1.4 million,
$1.7 million, and $2.2 million in fiscal 1998, 1999, and 2000, respectively.
For measurement purposes, an 8.2% annual rate of increase in the per capita cost
of covered healthcare benefits was assumed for plan year 2001, gradually
reducing to 5.5% in 2004 and thereafter. A one-percentage-point change in
assumed healthcare cost trend rates would have the following effects on
postretirement benefits:
<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 $ .4 $ (.4)
Effect on postretirement
benefit obligation $ 4.8 $ (4.8)
=================================================================
</TABLE>
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.
Employees not eligible for the employee pension plan receive an extra 2% Company
contribution in addition to the automatic 2% Company contribution through June
30, 2004, while pension plan participants continue to receive the automatic 2%
contribution. The Company's contributions to this plan were $5.9 million, $8.5
million, and $12.1 million for fiscal 1998, 1999, and 2000, respectively.
================================================================================
101 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
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
The Company operates in the life science industry through two reportable
segments, Applied Biosystems and the Celera Genomics group. Applied Biosystems
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 and enabling data management and analysis
software. The Celera Genomics group's customers use this information for
commercial applications in the pharmaceutical and life sciences industries in
the specific areas of target identification, drug discovery, and drug
development. The Celera Genomics group also provides gene discovery, genotyping,
and related genomics services. The Celera Genomics group has recently expanded
its business in the emerging fields of functional genomics, in particular,
proteomics and personalized health/medicine.
As a result of the recapitalization, the Company established two separate stocks
to track the individual performance of the reportable segments. Segment
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 for fiscal 1999 included the $150 million
Celera Genomics group note receivable from Applied Biosystems.
Segment information follows:
<TABLE>
<CAPTION>
Celera
Applied Genomics Consol-
(Dollar amounts in millions) Biosystems Group Other idated
=======================================================================================
<S> <C> <C> <C> <C>
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
=======================================================================================
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
=======================================================================================
2000
Net revenues from
external customers $ 1,328.3 $ 42.7 $ - $ 1,371.0
Intersegment
revenues $ 59.8 $ (59.8)
---------------------------------------------------------------------------------------
Total revenues $ 1,388.1 $ 42.7 $ (59.8) $ 1,371.0
=======================================================================================
Operating income
(loss) $ 213.2 $ (168.1) $ 3.0 $ 48.1
Depreciation and
amortization
expense $ 54.5 $ 29.6 $ (3.4) $ 80.7
Capital expenditures $ 95.5 $ 30.7 $ (.4) $ 125.8
Total assets $ 1,698.2 $ 1,413.3 $ (28.2) $ 3,083.3
=======================================================================================
</TABLE>
Events Impacting Comparability
Applied Biosystems
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 1999 operating income included: $9.1 million for costs related to the
acceleration of certain long-term compensation programs as a result of the
attainment of performance targets; charges of $4.6 million related to the
recapitalization of the Company; other merger costs of $6.1 million; a $14.5
million charge for the impairment of assets; a $3.5 million donation to the
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 102
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
Company's charitable foundation; and a $9.2 million reduction of charges
required to implement the fiscal 1998 restructuring plan. Fiscal 2000 operating
income included a charge of $45.0 million related to the acceleration of certain
long-term compensation programs as a result of the attainment of performance
targets and $2.1 million of acquisition-related costs.
Celera Genomics Group
Fiscal 1999 operating loss included costs of $5.6 million related to the
recapitalization and transformation of the Company.
Geographic Areas
Information concerning principal geographical areas for fiscal 1998, 1999, and
2000 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Net Revenues From
External Customers
United States $ 457.1 $ 609.0 $ 681.0
Europe 291.9 370.1 376.0
Japan 129.5 154.8 213.6
Other Far East countries 42.0 56.1 60.8
Latin America and other 23.8 26.9 39.6
-------------------------------------------------------------
Consolidated $ 944.3 $ 1,216.9 $ 1,371.0
=============================================================
</TABLE>
Net revenues are attributable to geographic areas based on the region of
destination.
Information concerning long-lived assets at June 30, 1999 and 2000 follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Long-Lived Assets
United States $ 266.2 $ 302.2
Europe 15.1 15.3
Japan 14.1 18.1
Other Far East countries .7 2.1
Latin America and other .3 .8
-------------------------------------------------------------
Consolidated $ 296.4 $ 338.5
=============================================================
</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 1998, 1999, or 2000.
Note 7--Stockholders' Equity
In January 2000, the Board of Directors announced two-for-one splits of PE
Biosystems stock and Celera Genomics stock, effective February 2000 in the form
of stock dividends. All Applied Biosystems and Celera Genomics group share data
reflect these splits. Applied Biosystems share data also reflect the two-for-one
split of PE Biosystems stock effective July 1999.
Treasury Stock
Common stock repurchases were 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 stock, before giving effect to the February
2000 stock split, were repurchased to support various stock plans. There were no
repurchases of common stock during fiscal 1998 or fiscal 2000.
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 and stock splits, each outstanding warrant
for shares of PerSeptive common stock was further converted into warrants to
acquire .7704 share of PE Biosystems stock and .1926 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 or the stock splits.
At June 30, 2000, there were 53,799 warrants outstanding at an exercise price of
$65.73. Upon exercise of the warrants, the holders would receive 215,196 shares
of PE Biosystems stock and 53,799 shares of Celera Genomics stock. The warrants
expire in September 2003.
Stockholders' Rights Plan
In connection with the recapitalization, the Company adopted a new Stockholders'
Rights Plan (the "Rights Agreement") to protect stockholders against abusive
takeover tactics. Under the Rights Agreement, the Company will issue one right
for every four shares of PE Biosystems stock (a "PE Biosystems Right"), which
will allow holders to purchase one-thousandth of a share of Series A
participating junior preferred stock of the Company at a purchase price of $425,
subject to adjustment (the "Series A Purchase Price"), and one right for every
two shares of Celera Genomics stock (a "Celera Genomics Right"), which will
allow holders to purchase one-thousandth of a share of Series B participating
junior preferred stock of the Company at a purchase price of $125, subject to
adjustment (the "Series B Purchase Price").
================================================================================
103 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
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
Biosystems stock, 225 million shares of Celera Genomics stock, and 10 million
shares of PE Corporation preferred stock. Of the 10 million authorized shares of
preferred stock, the Company had designated 80,000 shares of two series of
participating junior preferred stock in connection with the Company's
stockholders' rights plan as previously described.
In March 2000, PE Corporation completed a follow-on public offering of Celera
Genomics stock. In this offering, 4.4 million shares of Celera Genomics stock
were sold, resulting in net proceeds of $943.3 million.
Note 8--Stock Plans
Stock Option Plans
Under the Company's stock option plans, officers, directors, and other key
employees may be 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 follow:
<TABLE>
<CAPTION>
PE Corporation
------------------------
Weighted
Average
Number of Exercise
Options Price
==============================================================
<S> <C> <C>
Fiscal 1998
Outstanding at June 30, 1997 4,155,603 $ 45.03
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 Stock
-------------------------
Weighted
Average
Number of Exercise
Options Price
==============================================================
<S> <C> <C>
Fiscal 1999
Outstanding at May 6, 1999 14,382,744 $ 13.67
Granted 5,896,092 $ 27.35
Exercised 1,374,632 $ 13.25
Cancelled 480,958 $ 16.38
--------------------------------------------------------------
Outstanding at June 30, 1999 18,423,246 $ 17.99
Exercisable at June 30, 1999 8,698,906 $ 12.34
==============================================================
Fiscal 2000
Granted 9,000,611 $ 86.06
Exercised 3,146,903 $ 12.37
Cancelled 661,236 $ 26.68
--------------------------------------------------------------
Outstanding at June 30, 2000 23,615,718 $ 44.04
Exercisable at June 30, 2000 9,879,917 $ 15.53
==============================================================
</TABLE>
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 104
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
<TABLE>
<CAPTION>
Celera Genomics Stock
-------------------------
Weighted
Average
Number of Exercise
Options Price
==============================================================
<S> <C> <C>
Fiscal 1999
Outstanding at May 6, 1999 3,595,686 $ 5.52
Granted 7,952,036 $ 8.72
Exercised 281,788 $ 5.25
Cancelled 132,606 $ 6.67
--------------------------------------------------------------
Outstanding at June 30, 1999 11,133,328 $ 7.81
Exercisable at June 30, 1999 3,636,232 $ 6.39
==============================================================
Fiscal 2000
Granted 2,838,848 $ 77.55
Exercised 1,392,069 $ 6.44
Cancelled 311,266 $ 11.04
--------------------------------------------------------------
Outstanding at June 30, 2000 12,268,841 $ 20.49
Exercisable at June 30, 2000 3,945,450 $ 7.47
==============================================================
</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 prior to giving effect of PE Biosystems stock splits and the
Celera Genomics stock split. 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.
In connection with the acquisition of Paracel, the Company has assumed Paracel's
stock option plans. Options granted to Paracel employees and directors in
exchange for their Paracel options at the acquisition date have been included in
Celera Genomics stock options granted amount for fiscal 2000.
The following tables summarize information regarding options outstanding and
exercisable at June 30, 2000:
<TABLE>
<CAPTION>
Weighted Average
---------------------
Contractual
Life
Number of Exercise Remaining
(Option prices per share) Options Price in Years
===========================================================
<S> <C> <C> <C>
PE Biosystems Stock
Options Outstanding
At $.47 - $10.00 2,184,420 $ 6.69 4.0
At $10.01 - $20.00 6,892,195 $ 15.84 6.9
At $20.01 - $50.00 6,453,162 $ 28.12 8.8
At $50.01 - $100.50 8,085,941 $ 90.86 9.6
===========================================================
Options Exercisable
At $.47 - $10.00 2,131,665 $ 6.81
At $10.01 - $20.00 6,427,239 $ 15.72
At $20.01 - $50.00 1,286,613 $ 27.05
At $50.01 - $100.50 34,400 $ 89.38
===========================================================
===========================================================
Celera Genomics Stock
Options Outstanding
At $.19 - $6.00 812,644 $ 3.49 4.6
At $6.01 - $8.50 1,446,691 $ 6.77 7.2
At $8.51 - $10.00 6,706,186 $ 8.56 8.5
At $10.01 - $135.00 3,303,320 $ 54.91 8.8
===========================================================
Options Exercisable
At $.19 - $6.00 797,252 $ 3.52
At $6.01 - $8.50 1,290,681 $ 6.69
At $8.51 - $10.00 1,482,797 $ 8.56
At $10.01 - $135.00 374,720 $ 14.30
===========================================================
</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,
as amended. 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, certain
officers, and key employees with responsibilities involving both Applied
Biosystems 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 awards tied to the performance of the group in
which the participants work and, in certain cases the other group, is in the
best interests of the Company and its stockholders.
================================================================================
105 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
Employee Stock Purchase Plans
The Company's employee stock purchase plans offer U.S. and certain non-U.S.
employees the right to purchase shares of PE Biosystems stock and/or Celera
Genomics stock. The purchase price in the U.S. is equal to the lower of 85% of
the average market price of the applicable class of common stock on the offering
date or 85% of the average market price of such class of common stock on the
last day of the purchase period. Provisions of the plan for employees in
countries outside the U.S. vary according to local practice and regulations.
PE Biosystems stock issued under the employee stock purchase plans during fiscal
1999 and 2000 totaled 98,000 shares and 161,000 shares, respectively. Celera
Genomics stock issued under the employee stock purchase plans during fiscal 1999
and 2000 totaled 24,000 shares and 303,000 shares, respectively. Common stock
issued under the employee stock purchase plans during fiscal 1998 and 1999
totaled 174,000 shares and 168,000 shares, respectively, of PE Corporation
(predecessor) common stock.
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,
2000, the Company had approximately 341,000 shares of PE Biosystems stock and
approximately 85,000 shares of Celera Genomics stock available for issuance
under this plan.
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 prior to giving effect of PE Biosystems stock splits and the
Celera Genomics stock split. Restricted stock granted to key employees and
non-employee directors during fiscal 2000 totaled 3,600 shares of PE Biosystems
stock and 900 shares of Celera Genomics stock. Restricted stock granted prior to
the recapitalization to key employees and non-employee directors during fiscal
1998 and 1999 totaled 4,350 shares and 42,900 shares, respectively, of the PE
Corporation (predecessor) common stock. Compensation expense of continuing
operations recognized by the Company for these awards was $1.8 million, $2.3
million, and $6.5 million for fiscal 1998, 1999, and 2000, respectively.
Performance Unit Bonus Plan
The Company adopted a Performance Unit Bonus Plan in fiscal 1997. The plan
utilized stock options and a performance unit bonus pool. Performance units
granted under the plan represented the right to receive a cash or stock payment
from the Company at a specified date in the future. The amount of the payment
was determined on the date of the grant. The performance units vested upon
shares of the Company's common stock attaining and maintaining specified price
levels for a specified period. As of June 30, 2000, three series of performance
units were granted under the plan. Compensation expense recognized under the
plan for fiscal 1998, 1999, and 2000 was $5.1 million, $14.8 million, and $53.1
million, respectively. Fiscal 1999 and 2000 compensation expense included $10.1
million and $45.0 million, respectively, related to the acceleration of payments
under the plan's three series as a result of the attainment of the performance
targets. The vesting of the related stock options was not accelerated.
The plan was modified in fiscal 2000 to replace the performance units with
performance stock options. Performance stock options vest in equal portions upon
the earlier of the shares of PE Biosystems stock attaining and maintaining
specified price levels for a specified period of time or after a specified
future date.
Accounting for Stock-Based Compensation
APB 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 stock option and employee stock purchase plans, as all
options have been issued at fair market value.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 106
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
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, 1998 1999 2000
===============================================================
<S> <C> <C> <C>
Applied Biosystems
Dividend yield .63% .17%
Volatility 34.40% 52.68%
Risk-free interest rates 5.25% 5.88%
Expected option life in years 5.23 4.12
===============================================================
Celera Genomics Group
Dividend yield -% -%
Volatility 34.40% 99.30%
Risk-free interest rates 5.00% 6.21%
Expected option life in years 5.23 3.5
===============================================================
PE Corporation
Dividend yield .94% .62%
Volatility 27.00% 34.40%
Risk-free interest rates 5.64% 4.71%
Expected option life in years 5.70 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.
The Company's pro forma information for the years ended June 30, 1998, 1999, and
2000 is presented below:
<TABLE>
<CAPTION>
Applied Celera Genomics
Biosystems Group
---------------- -----------------
(Dollar amounts in millions,
except per share amounts) 1999 2000 1999 2000
===================================================================
<S> <C> <C> <C> <C>
Income (loss) from
continuing
operations
As reported $ 148.4 $ 186.2 $ (44.9) $ (92.7)
Pro forma $ 127.9 $ 140.2 $ (47.5) $ (106.6)
Basic earnings (loss)
from continuing
operations per share
As reported $ .74 $ .90 $ (.89) $ (1.73)
Pro forma $ .64 $ .68 $ (.95) $ (1.98)
Diluted earnings (loss)
from continuing
operations per share
As reported $ .72 $ .86 $ (.89) $ (1.73)
Pro forma $ .62 $ .65 $ (.95) $ (1.98)
====================================================================
</TABLE>
<TABLE>
<CAPTION>
PE Corporation
--------------------------
(Dollar amounts in millions,
except per share amounts) 1998 1999 2000
=============================================================
<S> <C> <C> <C>
Income (loss) from
continuing operations
As reported $ 15.7 $ 96.8 $ 95.5
Pro forma $ (15.0) $ 73.7 $ 35.6
Basic earnings (loss) from
continuing operations
per share
As reported $ .32
Pro forma $ (.31)
Diluted earnings (loss) from
continuing operations
per share
As reported $ .31
Pro forma $ (.31)
=============================================================
</TABLE>
Pro forma information for Applied Biosystems and Celera Genomics group for
fiscal 1998 is omitted since PE Biosystems stock and Celera Genomics stock were
not part of the capital structure of the Company at that time.
The weighted average fair value of PE Corporation (predecessor) stock options
granted was $24.83 and $33.54 per share for fiscal 1998 and 1999, respectively.
The weighted average fair value of PE Biosystems stock options granted was
$10.12 and $38.00 for fiscal 1999 and 2000, respectively. The weighted average
fair value of Celera Genomics stock options granted was $4.13 and $46.41 for
fiscal 1999 and 2000, respectively.
Note 9--Additional Information
Selected Accounts
The following table provides the major components of selected accounts of the
Consolidated Statements of Financial Position at June 30, 1999 and 2000:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1999 2000
=============================================================
<S> <C> <C>
Other Long-Term Assets
Minority equity investments $ 46.2 $ 297.7
Goodwill 18.5 129.2
Other 184.8 196.0
-------------------------------------------------------------
Total other long-term assets $ 249.5 $ 622.9
=============================================================
Other Accrued Expenses
Deferred revenues $ 51.7 $ 70.9
Other 126.2 129.2
-------------------------------------------------------------
Total other accrued expenses $ 177.9 $ 200.1
=============================================================
Other Long-Term Liabilities
Accrued postretirement benefits $ 80.2 $ 77.9
Other 63.5 56.3
-------------------------------------------------------------
Total other long-term liabilities $ 143.7 $ 134.2
=============================================================
</TABLE>
================================================================================
107 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
Third-Party Equity Transactions
In June 1999, the Company granted an option to purchase 2.6 million shares of
Celera Genomics 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 was amortized over the life of the non-compete agreement.
Note 10--Commitments and Contingencies
Future minimum payments at June 30, 2000 under non-cancelable operating leases
for real estate and equipment were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions)
=============================================================
<S> <C>
2001 $ 41.6
2002 35.5
2003 26.5
2004 18.1
2005 14.2
2006 and thereafter 60.0
-------------------------------------------------------------
Total $ 195.9
=============================================================
</TABLE>
Rental expense was $29.0 million for fiscal 1998, $43.1 million for fiscal 1999,
and $45.2 million for fiscal 2000.
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 November 18, 1997, Amersham Pharmacia Biotech, Inc. ("Amersham") filed a
patent infringement action against the Company in the United States District
Court for the Northern District of California. The complaint alleges that the
Company is directly, contributorily, or by inducement infringing U.S. Patent No.
5,688,648 ("the '648 patent"), entitled "Probes Labelled with Energy Transfer
Coupled Dyes." Amersham asserts that the Company's sale of DNA analysis reagents
and systems that incorporate "BigDye" fluorescence detection technology would
infringe the '648 patent, and seeks 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. This case is scheduled for trial in
January 2001.
On March 13, 1998, the Company filed a patent infringement action against
Amersham and Molecular Dynamics, Inc. in the United States District Court for
the Northern District of California. The Company asserts that one of its patents
(U.S. 4,811,218) is infringed by reason of Molecular Dynamics' and Amersham's
sale of certain DNA analysis systems (e.g., the MegaBACE 1000 System). In
response, 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(TM) 377 DNA Sequencing Systems.
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 matters described in
this paragraph and the immediately preceding paragraph have been consolidated
into a single case to be heard in the United States District Court for the
Northern District of California. This case has not yet been scheduled for trial.
On May 30, 2000, the Company filed a patent infringement action against Amersham
in the United States District Court for the Northern District of California. The
Company asserts that one of its patents (U.S. 5,945,526) is infringed by reason
of Amersham's sale of DNA analysis reagents and systems that incorporate ET
Terminator fluorescence detection technology. This case is in the early stages
of discovery.
The Company has been named as a defendant in several legal actions, including
patent, commercial, and environmental, arising from conduct of normal business
activities. Although the amount of any liability that might arise with respect
to any of these matters cannot be accurately predicted, the resulting liability,
if any, will not in the opinion of management have a material adverse effect on
the financial statements of the Company.
Note 11--Financial Instruments
Derivatives
The Company utilizes foreign exchange forward and option 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 purposes, nor
is the Company a party to leveraged derivatives.
Foreign Currency Risk Management
Foreign exchange forward and option 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, 2000 were purchased
at a cost of $3.1 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.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 108
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
At June 30, 1999 and 2000, the Company had forward and option contracts
outstanding, as well as synthetic forward contracts outstanding in 1999, for the
sale and purchase of foreign currencies at fixed rates as summarized in the
following table:
<TABLE>
<CAPTION>
1999 2000
---------------- ----------------
(Dollar amounts in millions) Sale Purchase Sale Purchase
===================================================================
<S> <C> <C> <C> <C>
Japanese Yen $ 104.2 $ 6.0 $ 92.3 $ -
Euro 28.2 43.8 8.0
British Pounds 18.6 50.6 31.1 26.4
Singapore Dollars 9.3 3.3 10.0 .8
Australian Dollars 12.0 3.1
German Marks 25.4
Italian Lira 10.4 2.6
Swedish Krona 8.9
Danish Krona 8.1
Swiss Francs 7.5 .7
French Francs 4.3
Netherlands Guilder 16.1
Other 17.1 4.7
-------------------------------------------------------------------
Total $ 254.0 $ 79.3 $ 185.0 $ 35.2
===================================================================
</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, 2000, 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, and swaps used by the Company in managing its
foreign currency and interest rate exposures contain an element of risk in 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 for the interest rate swap, 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 2000:
<TABLE>
<CAPTION>
1999 2000
---------------------- ----------------------
Notional Fair Notional Fair
(Dollar amounts in millions) Amount Value Amount Value
=================================================================================
<S> <C> <C> <C> <C>
Forward contracts $ 187.9 $ 2.6 $ 103.6 $ .6
Purchased options $ 44.0 $ 3.4 $ 116.6 $ 2.6
Synthetic forwards $ 101.4 $ 2.9
Interest rate swap $ 31.5 $ (1.0) $ 36.1 $ (1.0)
=================================================================================
</TABLE>
The fair value of other significant financial instruments held or owned by the
Company is estimated using various methods. Cash and cash equivalents
approximate their carrying amount. Fair values of short-term investments,
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 2000:
<TABLE>
<CAPTION>
1999 2000
---------------------- ----------------------
Carrying Fair Carrying Fair
(Dollar amounts in millions) Amount Value Amount Value
=================================================================================
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 308.0 $ 308.0 $ 964.5 $ 964.5
Short-term
investments $ 541.1 $ 541.1
Minority equity
investments $ 35.7 $ 46.2 $ 42.5 $ 297.7
Note receivable $ 150.0 $ 150.0
Short-term debt $ 3.9 $ 3.9 $ 15.7 $ 15.7
Long-term debt $ 31.5 $ 31.5 $ 82.1 $ 82.1
=================================================================================
</TABLE>
Net unrealized gains and losses on short-term investments and minority equity
investments are reported as a separate component of accumulated other
comprehensive income.
================================================================================
109 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
Note 12--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 2000 1999 2000 1999 2000 1999 2000
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 254.7 $ 288.8 $ 288.5 $ 327.4 $ 325.8 $ 363.1 $ 347.8 $ 391.7
Gross margin 142.5 156.3 157.8 180.1 176.2 204.5 181.7 221.1
Income from continuing operations 17.9 10.1 18.2 19.2 31.3 32.8 29.4 33.4
Income (loss) from discontinued
operations (0.9) (3.2) 5.2 77.9
Net income 17.0 10.1 15.0 19.2 36.5 32.8 107.3 33.4
===========================================================================================================================
PE Corporation
Dividends per share $ .17 $ .17 $ .17
Income per share from
continuing operations
Basic $ .36 $ .36 $ .62
Diluted .36 .36 .60
Income (loss) per share from
discontinued operations
Basic $ (.02) $ (.06) $ .10
Diluted (.02) (.06) .10
Net income per share
Basic $ .34 $ .30 $ .72
Diluted .34 .30 .70
===========================================================================================================================
Applied Biosystems
Dividends per share $ .0425 $ .0425 $ .085 $ .0425
Income per share from
continuing operations
Basic $ .14 $ .21 $ .27 $ .26 $ .27
Diluted .14 .20 .26 .25 .26
Income per share from
discontinued operations
Basic $ .38
Diluted .37
Net income per share
Basic $ .14 $ .21 $ .27 $ .64 $ .27
Diluted .14 .20 .26 .62 .26
===========================================================================================================================
Celera Genomics Group
Net loss per share
Basic and diluted (.38) (.47) (.45) (.39) (.43)
===========================================================================================================================
Price range of common stock
PE Corporation
(through May 5, 1999)
High $ 70-15/16 $ 100-11/16 $ 110-1/2 $ 117-1/2
Low $ 54-1/2 $ 65 $ 87-7/8 $ 96-1/2
Applied Biosystems
High $ 38-5/16 $ 62-15/16 $ 160 $ 30-5/16 $ 111-7/16
Low $ 26-9/16 $ 30-5/8 $ 50 $ 25 $ 42-13/16
Celera Genomics Group
High $ 26-29/32 $ 96-13/32 $ 276 $ 11-1/4 $ 151
Low $ 7-7/8 $ 15-3/16 $ 73 $ 7-3/32 $ 50-3/16
===========================================================================================================================
</TABLE>
There were no dividends on Celera Genomics stock for the periods presented.
Fiscal 1999 price ranges for PE Biosystems stock and Celera Genomics stock are
for the period from May 6, 1999 through June 30, 1999. The recapitalization of
the Company on May 6, 1999 resulted in the issuance of two new classes of common
stock called PE Biosystems stock and Celera Genomics stock. Therefore, neither
group had common stock issued or outstanding for periods prior to May 6, 1999.
Applied Biosystems' per share and price range of common stock reflect the
two-for-one stock splits effective July 1999 and February 2000. Celera Genomics
group per share and price range of common stock reflect the two-for-one stock
split effective February 2000.
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 110
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
Events Impacting Comparability
Fiscal 1999 First, second, third, and fourth quarter results included net
before-tax costs of $.9 million, $1.1 million, $1.6 million, and $7.8 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 14). Second, third, and
fourth quarter results included before-tax costs of $1.1 million, $1.6 million,
and $6.5 million, respectively, in connection with the recapitalization of the
Company. Third and fourth quarter results included before-tax gains of $2.6
million, and $5.8 million, respectively, in non-recurring gains, primarily
related to the Company's investments. The fourth quarter gain included a $2.3
million before-tax gain on foreign exchange contracts. Fourth quarter results
included before-tax costs of $10.1 million related to the acceleration of
certain long-term compensation programs of the Company. Fourth quarter results
also included a $3.5 million donation to the Company's charitable foundation.
Third 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
reflected 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 $.7 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 after-tax 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
after-tax effect of the above items for the fourth quarter increased income from
continuing operations for Applied Biosystems by $.04 per diluted share, and
increased Celera Genomics group's net loss by $.08 per diluted share.
Fiscal 2000 Second and fourth quarter results included before-tax gains of $25.8
million and $22.8 million, respectively, in non-recurring gains primarily
related to the sale of a portion of the Company's minority equity investments.
Second and fourth quarter results included before-tax charges of $21.6 million
and $23.4 million, respectively, related to the acceleration of certain
long-term compensation programs. Fourth quarter results included $2.1 million of
acquisition-related before-tax costs and a before-tax gain of $8.2 million from
the sale of real estate. There was no aggregate after-tax effect of the above
items for the second and fourth quarters.
Note 13--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 1998, 1999, and 2000
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, 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)
Activity (25.2) 155.6 (.1)
-------------------------------------------------------------------------------------
Balance at June 30, 2000 $ (38.4) $ 166.1 $ (2.2)
=====================================================================================
</TABLE>
The change in unrealized gain on investments for fiscal 2000 includes
reclassification adjustments, net of tax, of $31.6 million of gains realized
from the sale of investments. The deferred tax effect on the unrealized gain on
investments and minimum pension liability adjustment was an expense of $89.3
million and a benefit of $1.2 million, respectively, in fiscal 2000. The
currency translation adjustments are not currently adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.
Note 14--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 $1.5 million for fiscal 1998 and $6.1 million for
fiscal 1999 were incurred for training, relocation, and communication in
connection with the integration.
================================================================================
111 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
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>
<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
----------------------------------------------------------------------------
Fiscal 2000 Activity
Reduction of excess
manufacturing capacity $ .3 $ .5 $ .8
Consolidation of sales and
administrative support 2.3 .3 2.6
Other .1 .1
----------------------------------------------------------------------------
Total fiscal 2000 activity $ 2.6 $ .9 $ 3.5
----------------------------------------------------------------------------
Balance At June 30, 2000
Reduction of excess
manufacturing capacity $ - $ .6 $ .6
Consolidation of sales and
administrative support .9 .8 1.7
----------------------------------------------------------------------------
Balance at June 30, 2000 $ .9 $ 1.4 $ 2.3
============================================================================
</TABLE>
================================================================================
PE CORPORATION 2000 ANNUAL REPORT 112
<PAGE>
PE CORPORATION Notes to Consolidated Financial Statements continued
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
Applied Biosystems, developed, manufactured, marketed, sold, and serviced
analytical instruments used in a variety of markets. As part of the sale, the
rights to the "Perkin-Elmer" name were transferred.
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 bearing an interest rate of 5% per annum. The
promissory notes were collected in fiscal 2000. In fiscal 1999, the Company
recognized a net gain on disposal of discontinued operations of $100.2 million,
net of $87.8 million of income taxes.
Amounts previously reported for Analytical Instruments were reclassified and
stated as discontinued operations. There were no remaining assets, liabilities,
or operations within discontinued operations at or for the fiscal year ended
June 30, 2000. Summary results prior to discontinuance were as follows:
<TABLE>
<CAPTION>
For the Year For the Eleven
Ended Months Ended
(Dollar amounts in millions) June 30, 1998 May 28, 1999
================================================================
<S> <C> <C>
Net revenues $ 586.8 $ 479.4
Total costs and expenses 532.6 509.7
Provision (benefit) for
income taxes 13.5 (9.2)
----------------------------------------------------------------
Income (loss) from
discontinued operations $ 40.7 $ (21.1)
================================================================
</TABLE>
Income Taxes
Income (loss) before income taxes of discontinued operations for fiscal 1998 and
the eleven months ended May 28, 1999 consisted of the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999
=============================================================
<S> <C> <C>
United States $ 34.1 $ (36.2)
Foreign 20.1 5.9
-------------------------------------------------------------
Total $ 54.2 $ (30.3)
=============================================================
</TABLE>
The components of the provision (benefit) for income taxes of discontinued
operations for fiscal 1998 and the eleven months ended May 28, 1999 consisted of
the following:
<TABLE>
<CAPTION>
(Dollar amounts in millions) 1998 1999
=============================================================
<S> <C> <C>
Currently Payable
Domestic $ (3.7) $ (13.7)
Foreign 7.8 4.5
-------------------------------------------------------------
Total currently payable 4.1 (9.2)
-------------------------------------------------------------
Deferred
Domestic 4.9
Foreign 4.5
-------------------------------------------------------------
Total deferred 9.4
-------------------------------------------------------------
Provision (benefit) for income taxes
of discontinued operations $ 13.5 $ (9.2)
=============================================================
</TABLE>
For fiscal 1998 and the eleven months ended May 28, 1999, the effective tax
rates for discontinued operations were 25% and 30%, 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.
================================================================================
113 PE CORPORATION 2000 ANNUAL REPORT
<PAGE>
PE CORPORATION Report of Management and
Report of Independent Accountants
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 under the
circumstances. Financial information presented elsewhere in this annual report
is consistent with that in the financial statements.
In meeting its responsibility for preparing reliable financial statements, the
Company maintains a system of internal accounting controls designed to provide
reasonable assurance that assets are safeguarded and transactions are properly
recorded and executed in accordance with corporate policy and management
authorization. The Company believes its accounting controls provide reasonable
assurance that errors or irregularities which could be material to the financial
statements are prevented or would be detected within a timely period. In
designing such control procedures, management recognizes judgments are required
to assess and balance the costs and expected benefits of a system of internal
accounting controls. Adherence to these policies and procedures is reviewed
through a coordinated audit effort of the Company's internal audit staff and
independent accountants.
The Audit/Finance Committee of the Board of Directors is comprised solely of
outside directors and is responsible for overseeing and monitoring the quality
of the Company's accounting and auditing practices. The independent accountants
and internal auditors have full and free access to the Audit/Finance Committee
and meet periodically with the committee to discuss accounting, auditing, and
financial reporting matters.
/s/ Dennis L. Winger
Dennis L. Winger
Senior Vice President and
Chief Financial Officer
/s/ Tony L. White
Tony L. White
Chairman, President, and
Chief Executive Officer
Report of Independent Accountants
To the Stockholders and Board of Directors of
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, and of cash flows present fairly, in all material
respects, the financial position of PE Corporation and its subsidiaries at June
30, 2000 and 1999, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended June 30, 2000, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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 25, 2000
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PE CORPORATION 2000 ANNUAL REPORT 114
