SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-4389
PE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1534213
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
761 Main Avenue,
Norwalk, Connecticut 06859-0001
(Address of Principal Executive Offices, Including Zip Code)
(203) 762-1000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
As of the close of business on February 7, 2000, there were 103,692,648 shares
of PE Corporation - PE Biosystems Group Common Stock and 26,153,586 shares of PE
Corporation - Celera Genomics Group Common Stock outstanding.
<PAGE>
PE CORPORATION
INDEX
<TABLE>
<S> <C>
Part I. Financial Information Page
A. PE Biosystems Group
Item 1. Financial Statements
Condensed Combined Statements of Operations for the
Three and Six Months Ended December 31, 1999 and 1998 1
Condensed Combined Statements of Financial Position at
December 31, 1999 and June 30, 1999 2
Condensed Combined Statements of Cash Flows for the
Six Months Ended December 31, 1999 and 1998 3
Notes to Unaudited Condensed Combined Financial Statements 4-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-22
B. Celera Genomics Group
Item 1. Financial Statements
Condensed Combined Statements of Operations for the
Three and Six Months Ended December 31, 1999 and 1998 23
Condensed Combined Statements of Financial Position at
December 31, 1999 and June 30, 1999 24
Condensed Combined Statements of Cash Flows for the
Six Months Ended September 30, 1999 and 1998 25
Notes to Unaudited Condensed Combined Financial Statements 26-29
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 30-42
C. PE Corporation Consolidated
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended December 31, 1999 and 1998 43-44
Condensed Consolidated Statements of Financial Position at
December 31, 1999 and June 30, 1999 45
<PAGE>
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1999 and 1998 46
Notes to Unaudited Condensed Consolidated Financial Statements 47-58
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 59-72
Part II. Other Information 73
</TABLE>
<PAGE>
PE BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net Revenues $ 335,941 $ 296,227 $ 628,196 $ 547,431
Cost of sales 155,202 132,353 292,701 244,582
----------------- ------------------ ------------------ -----------------
Gross Margin 180,739 163,874 335,495 302,849
Selling, general and administrative 105,822 79,924 183,559 152,611
Research, development and engineering 31,372 33,267 63,404 65,564
Merger costs and other special charges 1,614 2,552
----------------- ------------------ ------------------ -----------------
Operating Income 43,545 49,069 88,532 82,122
Gain on sale of investment 25,811 25,811
Interest expense 2,116 1,338 4,329 2,140
Interest income 3,939 248 8,184 738
Other expense, net (4,305) (2,245) (8,885) (539)
----------------- ------------------ ------------------ -----------------
Income Before Income Taxes 66,874 45,734 109,313 80,181
Provision for income taxes 23,040 13,072 35,772 22,914
Minority interest 5,104 8,212
----------------- ------------------ ------------------ -----------------
Income From Continuing Operations 43,834 27,558 73,541 49,055
Loss From Discontinued
Operations, Net of Income Taxes (3,158) (4,037)
----------------- ------------------ ------------------ -----------------
Net Income $ 43,834 $ 24,400 $ 73,541 $ 45,018
================= ================== ================== =================
Net Income per Share (see Note 5)
Basic $ .42 $ .71
Diluted $ .41 $ .69
Dividends per Share $ .085 $ .17
</TABLE>
See accompanying notes to the PE Biosystems group unaudited
condensed combined financial statements.
1
<PAGE>
PE BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
At December 31, At June 30,
1999 1999
------------------- -------------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 295,526 $ 236,530
Note receivable 150,000 150,000
Accounts receivable, net 319,223 306,225
Inventories 168,716 149,670
Prepaid expenses and other current assets 84,103 75,801
------------------- -------------------
Total current assets 1,017,568 918,226
Property, plant and equipment, net 194,520 182,183
Other long-term assets 296,573 247,141
------------------- -------------------
Total Assets $ 1,508,661 $ 1,347,550
=================== ===================
Liabilities and Group Equity
Current liabilities
Loans payable $ 35,249 $ 3,911
Note payable to the Celera Genomics group 150,000 150,000
Tax benefit payable to the Celera Genomics group 9,413 9,935
Accounts payable 137,988 147,704
Accrued salaries and wages 57,569 43,316
Accrued taxes on income 143,974 132,170
Other accrued expenses 169,792 156,552
------------------- -------------------
Total current liabilities 703,985 643,588
Long-term debt 37,102 31,452
Other long-term liabilities 114,322 138,178
------------------- -------------------
Total Liabilities 855,409 813,218
Group Equity 653,252 534,332
------------------- -------------------
Total Liabilities and Group Equity $ 1,508,661 $ 1,347,550
=================== ===================
</TABLE>
See accompanying notes to the PE Biosystems group unaudited
condensed combined financial statements.
2
<PAGE>
PE BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six months ended
December 31,
1999 1998
----------------- ------------------
<S> <C> <C>
Operating Activities from Continuing Operations
Income from continuing operations $ 73,541 $ 49,055
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 25,922 22,064
Long-term compensation programs 27,660 2,411
Gain on sale of investment (25,811)
Deferred income taxes 1,678 1,600
Changes in operating assets and liabilities:
Increase in accounts receivable (13,683) (26,956)
Increase in inventories (17,572) (17,854)
Increase in prepaid expenses and other assets (17,008) (13,425)
(Decrease) increase in accounts payable and other liabilities (23,844) 16,156
----------------- ------------------
Net Cash Provided by Operating Activities 30,883 33,051
----------------- ------------------
Investing Activities from Continuing Operations
Additions to property, plant and equipment
(net of disposals of $594 and $581, respectively) (30,646) (38,831)
Investments, net (9,000)
Proceeds from the sale of assets, net 31,056 14,301
----------------- ------------------
Net Cash Used by Investing Activities (8,590) (24,530)
----------------- ------------------
Net Cash Provided by Continuing Operations
Before Financing Activities 22,293 8,521
----------------- ------------------
Discontinued Operations
Net cash used by operating activities (7,435) (4,778)
Net cash used by investing activities (21,595)
----------------- ------------------
Net Cash Used by Discontinued Operations
Before Financing Activities (7,435) (26,373)
----------------- ------------------
Financing Activities
Net change in loans payable 28,999 15,579
Proceeds from long-term debt 803
Principal payments on long-term debt (5,297)
Dividends (8,748) (8,396)
Proceeds from stock issued for stock plans 21,474 37,890
Net cash allocated to the Celera Genomics group (27,683)
----------------- ------------------
Net Cash Provided by Financing Activities 41,725 12,896
----------------- ------------------
Effect of Exchange Rate Changes on Cash 2,413 (2,430)
----------------- ------------------
Net Change in Cash and Cash Equivalents 58,996 (7,386)
Cash and Cash Equivalents Beginning of Period 236,530 82,865
----------------- ------------------
Cash and Cash Equivalents End of Period $ 295,526 $ 75,479
================= ==================
</TABLE>
See accompanying notes to the PE Biosystems group unaudited
condensed combined financial statements.
3
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED COMBINED FINANCIAL STATEMENTS
The interim condensed combined financial statements should be read in
conjunction with the financial statements presented in PE Corporation's ("PE's"
or the "Company's") 1999 Annual Report to Stockholders. Significant accounting
policies disclosed therein have not changed.
The unaudited condensed combined financial statements reflect, in the opinion of
the Company's management, all adjustments which are necessary for a fair
statement of the results for the interim periods. All such adjustments are of a
normal recurring nature. These results are, however, not necessarily indicative
of the results to be expected for a full year. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. Certain amounts in the combined financial statements have been
reclassified for comparative purposes.
The PE Biosystems group's and the Celera Genomics group's condensed combined
financial statements should be read in conjunction with the Company's
consolidated financial statements.
NOTE 2 - DISCONTINUED OPERATIONS
Effective May 28, 1999, the Company completed the sale of its Analytical
Instruments business to EG&G, Inc. Analytical Instruments, formerly a unit of
the Company's PE Biosystems group, develops, manufactures, markets, sells, and
services analytical instruments used in a variety of markets. As part of the
sale, the rights to the "Perkin-Elmer" name were transferred to EG&G. The
transaction is subject to post-closing adjustments pursuant to the terms of the
agreement with EG&G.
The PE Biosystems group's combined financial statements were restated to reflect
the operating results of the Analytical Instruments business as discontinued
operations for fiscal 1999.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
Illumina, Inc. During the second quarter of fiscal 2000, the PE Biosystems group
entered into a strategic collaboration with Illumina, Inc. for the purpose of
developing, manufacturing and marketing array-based systems for high-throughput
DNA analysis. Under the agreement, the companies will jointly develop systems
based on Illumina's BeadArray technology and PE Biosystems' proprietary DNA
chemistry. As part of the agreement, PE Biosystems made a minority investment of
$5.0 million in Illumina and will provide a portion of the research and
development funding for the collaboration. The investment is included in other
long-term assets.
Epoch Pharmaceuticals, Inc. During the second quarter of fiscal 2000, the PE
Biosystems group made a minority investment in Epoch Pharmaceuticals, Inc. of
$1.0 million and converted into equity
4
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
$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 investment is
included in other long-term assets.
Millennium Pharmaceuticals, Inc. During the second quarter of fiscal 2000, the
PE Biosystems group recognized a before-tax gain of $25.8 million from the sale
of a portion of the Company's equity interest in Millennium Pharmaceuticals,
Inc. Net cash proceeds from the sale were $31.1 million. The specific
identification method is used to compute realized gains and losses on the
disposition of investments.
NOTE 4 - COMPREHENSIVE INCOME
Accumulated other comprehensive income included in Group Equity on the Condensed
Combined Statements of Financial Position consists of foreign currency
translation adjustments, unrealized gains and losses on available-for-sale
investments, and minimum pension liability adjustments. Total comprehensive
income for the three and six month period ended December 31, 1999 and 1998 is
presented in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net income $ 43.8 $ 24.4 $ 73.5 $ 45.0
Other comprehensive income, net of tax:
Foreign currency translation adjustment (18.6) (1.2) (5.7) 5.0
Unrealized holding gain on investments
arising during period 29.3 6.7 61.9 2.6
Reclassification adjustment for gains
included in net income (16.7) - (16.7) -
------------ ----------- ----------- -------------
Other comprehensive (loss) income (6.0) 5.5 39.5 7.6
------------ ----------- ----------- -------------
Comprehensive income $ 37.8 $ 29.9 $ 113.0 $ 52.6
============ =========== =========== =============
</TABLE>
5
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 5 - EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted income per
share:
<TABLE>
<CAPTION>
(Amounts in thousands Three months ended Six months ended
except per share amounts) December 31, December 31,
1999 1999
-------------- ---------------
<S> <C> <C>
Weighted average number of common
shares used in the calculation of basic
earnings per share 103,208 103,032
Common stock equivalents 4,329 3,977
-------------- ---------------
Shares used in the calculation of diluted
earnings per share 107,537 107,009
============== ===============
Net income used in the calculation of
Basic and diluted earnings per share $ 43,834 $ 73,541
============== ===============
Net income per share
Basic $ .42 $ .71
Diluted $ .41 $ .69
</TABLE>
On May 6, 1999, The Perkin-Elmer Corporation was merged with a subsidiary of PE
Corporation, a new Delaware corporation. The recapitalization 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.
Therefore, the reconciliation for the three and six months ended December 31,
1998 is omitted since PE Biosystems Group Common Stock was not part of the
capital structure of the Company during such period.
6
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
On January 20, 2000, the Board of Directors announced a two-for-one split of PE
Biosystems Group Common Stock. The two-for-one stock split will be effected in
the form of a 100% stock dividend payable on February 18, 2000 to stockholders
of record as of the close of business on February 4, 2000. The following table
presents share and per share data on a pro forma basis to reflect this split:
<TABLE>
<CAPTION>
(Amounts in thousands Three months ended Six months ended
except per share amounts) December 31, December 31,
1999 1999
-------------- ---------------
<S> <C> <C>
Weighted average number of common
shares used in the calculation of basic
earnings per share 206,417 206,064
Common stock equivalents 8,657 7,955
-------------- ---------------
Shares used in the calculation of diluted
earnings per share 215,074 214,019
============== ===============
Net income used in the calculation of
basic and diluted earnings per share $ 43,834 $ 73,541
============== ===============
Net income per share
Basic $ .21 $ .36
Diluted $ .20 $ .34
</TABLE>
NOTE 6 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories included the following components:
<TABLE>
<CAPTION>
(Dollar amounts in millions) December 31, June 30,
1999 1999
-------------- --------------
<S> <C> <C>
Raw materials and supplies $ 49.7 $ 42.8
Work-in-process 7.6 10.3
Finished products 111.4 96.6
-------------- --------------
Total inventories $ 168.7 $ 149.7
============== ==============
</TABLE>
7
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes and significant non-cash investing and
financing activities were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) Six months ended
December 31,
1999 1998
------------- --------------
<S> <C> <C>
Interest $ 1.1 $ 1.4
Interest paid to the Celera Genomics group $ 3.8 $ -
Income taxes $ 20.9 $ 12.2
Tax benefits paid to the Celera Genomics group $ 17.4 $ -
Significant non-cash investing
and financing activities
Unrealized gain on investments $ 45.2 $ 2.6
Dividends declared not paid $ 8.8 $ 8.5
Note payable to the Celera Genomics group $ - $ 310.9
</TABLE>
NOTE 8 - FINANCIAL INSTRUMENTS
The PE Biosystems group utilizes foreign exchange forward, option, and synthetic
forward contracts and an interest rate swap agreement to manage foreign currency
and interest rate exposures. The principal objective of these contracts is to
minimize the risks and/or costs associated with global financial and operating
activities. The PE Biosystems group does not use derivative financial
instruments for trading or other speculative purposes, nor is the PE Biosystems
group a party to leveraged derivatives.
8
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
At December 31, 1999 and June 30, 1999, the Company had forward, option, and
synthetic forward contracts outstanding for the sale and purchase of foreign
currencies at fixed rates as summarized in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) December 31, 1999 June 30, 1999
Sale Purchase Sale Purchase
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Japanese Yen $ 78.8 $ - $ 104.2 $ 6.0
French Francs 4.3
Australian Dollars 6.4 12.0
German Marks 25.4
Italian Lira 10.4 2.6
British Pounds 69.6 94.1 18.6 50.6
Swiss Francs 7.2 7.5 .7
Swedish Krona 8.3 8.9
Danish Krona 7.6 8.1
Singapore Dollars 9.0 3.1 9.3 3.3
Netherland Guilders 16.1
Euro 34.5 128.0 28.2
Other 11.1 .5 17.1
-------------- -------------- -------------- --------------
Total $ 232.5 $ 225.7 $ 254.0 $ 79.3
============== ============== ============== ==============
</TABLE>
NOTE 9 - RESTRUCTURING AND OTHER MERGER COSTS
At December 31, 1999, the remaining accrual balance related to the fiscal 1998
restructuring charge for the integration of PerSeptive Biosystems, Inc. was $3.6
million, consisting of $1.8 million relating to personnel costs and $1.8 million
relating to facility consolidation and asset related write-off costs (see Note
10 to the PE Biosystems group's combined financial statements in the Company's
1999 Annual Report to Stockholders).
NOTE 10 - PERFORMANCE UNIT BONUS PLAN
During the second quarter of fiscal 2000, a before-tax charge of $21.6 million
was recognized for the accelerated vesting of certain performance units as a
result of the attainment of performance targets of the second series. The
vesting of the related stock options was not accelerated (see Note 8 to the PE
Biosystems group's combined financial statements in the Company's 1999 Annual
Report to Stockholders.)
A third series of performance units totaling .5 million units had been granted
under the plan as of December 31, 1999.
NOTE 11 - RELATED PARTY TRANSACTIONS
Sales of Products and Services Between Groups. For the three and six month
periods ended December 31, 1999, net revenues from leased instruments and
shipments of consumables and project materials to Celera Genomics group totaled
$16.9 million and $28.6 million, respectively.
9
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 12 - SUBSEQUENT EVENT
Third Wave Technologies, Inc. Acquisition. On January 24, 2000, PE Corporation
announced the signing of a definitive merger agreement under which the PE
Biosystems group has agreed to acquire Third Wave Technologies, Inc. in a
stock-for-stock transaction. The transaction, which has been approved by the
Boards of Directors of both companies, is structured as a tax-free pooling of
interests. All of the equity of Third Wave will be exchanged for an aggregate of
approximately 1,972,000 shares of PE Corporation-PE Biosystems Group Common
Stock, before giving effect to the 2-for-1 stock dividend declared January 20,
2000 for distribution on February 18, 2000. The transaction is subject to
customary closing conditions and regulatory approvals.
Third Wave has developed the Invader(R) nucleic acid (DNA and RNA) detection
technology. The Invader assays detect differences among genetic sequences
important for the analysis of single nucleotide polymorphisms (SNPs). SNPs are
single genetic code changes thought to account for individual differences
ranging from predispositions for certain diseases to particular responses to
drug treatment.
10
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion of Operations
The following discussion should be read in conjunction with the PE Biosystems
group's condensed combined financial statements and related notes and PE
Corporation's ("PE's" or the "Company's") condensed consolidated financial
statements and related notes included in this report; the PE Biosystems group's
"Management's Discussion and Analysis" appearing on pages 38 - 47 of the
Company's Annual Report to Stockholders; and PE Corporation's "Management's
Discussion and Analysis" appearing on pages 97 - 109 of the Company's 1999
Annual Report to Stockholders. Historical results and percentage relationships
are not necessarily indicative of operating results for any future periods.
Throughout the following discussion of operations the impact on the Company's
reported results of the movement in foreign currency exchange rates from one
reporting period to another is referred to as "foreign currency translation."
Events Impacting Comparability
Discontinued Operations. Effective May 28, 1999, the Company completed the sale
of our Analytical Instruments business to EG&G, Inc. Analytical Instruments,
formerly a unit of the PE Biosystems group, develops, manufactures, markets,
sells, and services analytical instruments used in a variety of markets. As part
of the sale, the rights to the "Perkin-Elmer" name were transferred to EG&G. The
transaction is subject to post-closing adjustments pursuant to the terms of the
agreement with EG&G.
Amounts previously reported for Analytical Instruments have been reclassified
and stated as discontinued operations. See Note 15 to the PE Biosystems group's
combined financial statements included in the Company's 1999 Annual Report to
Stockholders.
Disposition. During the fourth quarter of fiscal 1999, the Company divested its
interest in Tecan AG.
Gain on sale of investment. The PE Biosystems group recognized a before-tax gain
of $25.8 million in the second quarter of fiscal 2000 related to the sale of a
portion of the Company's interest in a minority equity investment.
Merger-related costs. The Company incurred merger-related period costs of $1.0
million and $2.0 million for the three and six months ended December 31, 1998,
respectively, in connection with the integration of PerSeptive into the Company.
See Note 10 to the PE Biosystems group's combined financial statements included
in the Company's 1999 Annual Report to Stockholders.
Other special charges. During the second quarter of fiscal 2000, the PE
Biosystems group recorded a before-tax charge of $21.6 million in selling,
general and administrative expenses, for costs related to the acceleration of
certain long-term compensation programs as a result of the attainment of
performance targets.
11
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The PE Biosystems group was allocated a non-recurring before-tax charge of $.6
million in the second quarter of fiscal 1999 for costs incurred in connection
with the recapitalization of the Company. The PE Biosystems group and the Celera
Genomics group were each allocated 50% of the $1.2 million total
recapitalization costs incurred during the second quarter of fiscal 1999.
Results of Continuing Operations for the Three Months Ended December 31, 1999
Compared With the Three Months Ended December 31, 1998
The PE Biosystems group reported income from continuing operations of $43.8
million for the second quarter of fiscal 2000 compared with $27.6 million for
the second quarter of fiscal 1999. On a comparable basis, excluding Tecan and
the special items previously described, income from continuing operations
increased 53.1% to $43.8 million for the second quarter of fiscal 2000 compared
with $28.6 million for the prior period. This increase is attributable to the
growth in net revenues and lower operating expenses as a percent of net
revenues. The net effect of changes in foreign currency had a negligible impact
on this quarter's earnings.
Net revenues were $335.9 million for the second quarter of fiscal 2000 compared
with $296.2 million for the second quarter of fiscal 1999. Excluding the results
of Tecan in the prior year, revenues increased 26% compared with the prior year.
The effects of foreign currency translation decreased net revenues by
approximately $2.5 million compared with the prior year. Revenues from leased
instruments and shipments of consumables and project materials to the Celera
Genomics group were $16.9 million for the second quarter of fiscal 2000, or 5%
of the PE Biosystems group's net revenues. Revenues from shipments of
instruments and consumables to the Celera Genomics group were $9.4 million for
the second quarter of fiscal 1999.
Geographically, excluding the net revenues of Tecan for the second quarter of
fiscal 1999, the PE Biosystems group reported revenue growth in all regions for
the second quarter of fiscal 2000 compared with the second quarter of fiscal
1999. Revenues increased 35.1% in the United States, 19.6% in Europe, 8.2% in
the Far East and 68.1% in Latin America and other markets, compared with the
second quarter of the prior fiscal year. Increased demand for genetic analysis
instruments, sequence detection systems, and genetic analysis reagents, sold
into both the research and applied markets, contributed to the growth. During
the quarter, the PE Biosystems group shipped its one thousandth ABI Prism(R)
3700 DNA Analyzer. The 3700 began shipping in the second quarter of fiscal 1999.
Gross margin as a percentage of net revenues was 53.8% for the second quarter of
fiscal 2000 compared with 55.3% for the second quarter of fiscal 1999. Excluding
Tecan for the prior year, the gross margin as a percentage of net revenues was
53.5%.
SG&A expenses were $105.8 million for the second quarter of fiscal 2000 compared
with $79.9 million for the second quarter of fiscal 1999, an increase of 32.4%.
12
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
On a comparable basis, excluding the long-term compensation charge for the
current year and Tecan from the prior year, SG&A expenses increased 19.7%. This
increase was due to higher planned expenses, reflecting the growth in sales. As
a percentage of net revenues, excluding the long-term compensation charge and
Tecan, SG&A expenses were 25.1% for the second quarter of fiscal 2000 compared
with 26.4% for the prior year.
R&D expenses were $31.4 million for the second quarter of fiscal 2000 compared
with $33.3 million for the prior year. Excluding Tecan for the prior year, R&D
expenses increased 12.2% compared with the prior year period. As a percentage of
net revenues, excluding Tecan, R&D expenses were 9.3% for the second quarter of
fiscal 2000 compared with 10.5% for the second quarter of the prior year. The
prior year's R&D expense level was higher as a percentage of sales due to the
release of new products introduced later in fiscal 1999.
The Company incurred merger-related period costs of $1.0 million for the second
quarter of fiscal 1999 for training, relocation, and communication in connection
with the integration of PerSeptive into the Company. See Note 10 to the PE
Biosystems group's combined financial statements included in the Company's 1999
Annual Report to Stockholders. During the second quarter of fiscal 1999, the PE
Biosystems group was allocated a non-recurring charge of $.6 million. These
costs were incurred in connection with the recapitalization of the Company.
Operating income decreased to $43.5 million for the second quarter of fiscal
2000 compared with $49.1 million for the prior year. On a comparable basis,
excluding the special items previously described and Tecan, operating income
increased 47% for the second quarter of fiscal 2000 compared with the prior
year. The PE Biosystems group benefited from increased revenues primarily as a
result of strong demand for several new products introduced over the past year.
The PE Biosystems group also benefited from lower operating expenses as a
percentage of net revenues, partially as a result of slower than planned ramp-up
in staffing. Operating income as a percentage of net revenues, excluding the
special items and Tecan, increased to 19.4% for the second quarter of fiscal
2000 compared with 16.6% for the prior year.
The PE Biosystems group recognized a before-tax gain of $25.8 million for the
second quarter of fiscal 2000 related to the sale of a portion of the Company's
interest in a minority equity investment.
Interest expense was $2.1 million for the second quarter of fiscal 2000 compared
with $1.3 million for the prior year. This increase was primarily due to the
interest on the note payable to the Celera Genomics group, as well as slightly
higher average interest rates. Interest income was $3.9 million for the second
quarter of fiscal 2000 compared with $.2 million for the prior year. Fiscal 2000
interest income included interest on the note receivable from EG&G relating to
the sale of the Analytical Instruments business. The increase was also due to
higher cash balances and higher interest rates.
13
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Other expense, net was $4.3 million for the second quarter of fiscal 2000
compared with $2.2 million for the prior year. For both periods, other expense,
net primarily related to costs associated with a portion of the Company's
traditional foreign currency management program that provides hedge coverage for
projected cash flows.
The effective income tax rate was 34% for the second quarter of fiscal 2000
compared with 29% for the prior year. Excluding special items in fiscal 2000 and
fiscal 1999 and Tecan in fiscal 1999, the effective income tax rate was 30% for
the second quarter of fiscal 2000 and for the prior year. See Note 1 to the PE
Biosystems group combined financial statements in the Company's 1999 Annual
Report to Stockholders for a discussion of allocations of federal and state
income taxes.
For the second quarter of fiscal 1999, the PE Biosystems group incurred minority
interest expense of $5.1 million relating to Tecan.
Results of Continuing Operations for the Six Months Ended December 31, 1999
Compared With the Six Months Ended December 31, 1998
The PE Biosystems group reported income from continuing operations of $73.5
million for the first six months of fiscal 2000 compared with $49.1 million for
the first six months of fiscal 1999. On a comparable basis, excluding the
special items previously described and Tecan, income from continuing operations
increased 44.4% to $73.5 million for the first six months of fiscal 2000
compared with $50.9 million for the prior period. This increase is attributable
to the growth in net revenues and lower operating expenses as a percent of net
revenues. Partially offsetting the lower operating expenses were increased
non-operating costs related to the PE Biosystems group's foreign currency
management program.
Net revenues were $628.2 million for the first six months of fiscal 2000
compared with $547.4 million for the first six months of fiscal 1999. Excluding
the results of Tecan for the prior year, revenues increased 28.2% compared with
the prior year. The effects of foreign currency translation increased net
revenues by approximately $2.4 million compared with the prior year. Revenues
from leased instruments and shipments of consumables and project materials to
the Celera Genomics group were $28.6 million for the first six months of fiscal
2000, or 4.6% of the PE Biosystems group's net revenues. For the first six
months of fiscal 1999, revenues from shipments of instruments and consumables to
the Celera Genomics group were $9.8 million.
Geographically, excluding the net revenues of Tecan for the first six months of
fiscal 1999, the PE Biosystems group reported revenue growth in all regions for
the first six months of fiscal 2000 compared with the first six months of fiscal
1999. Revenues increased 29.9% in the United States, 21.2% in Europe, 31% in the
Far East and 60.3% in Latin America and other markets, compared with the first
six months of the prior fiscal year. Increased demand for genetic analysis
products, sequence detection systems, and polymerase chain reaction product
lines was the primary contributor.
Gross margin as a percentage of net revenues was 53.4% for the first six months
of fiscal 2000 compared with 55.3% for the first six months of fiscal 1999.
Excluding Tecan for the prior year, gross
14
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
margin as a percentage of net revenues was 54.2% for the first six months of
fiscal 1999. The decrease in the gross margin percentage was primarily the
result of a change in product mix. Higher unit sales of reagents to support
genetic analysis systems and increased royalty and contract licensing revenues
were the primary contributors for the higher gross margin percentage for the
first six months of fiscal 1999.
SG&A expenses were $183.6 million for the first six months of fiscal 2000
compared with $152.6 million for the first six months of fiscal 1999, an
increase of 20.3%. On a comparable basis, excluding the long-term compensation
charge for the current year and Tecan for the prior year, SG&A expenses for the
PE Biosystems group increased 20.2% for the first six months of fiscal 2000
compared with the first six months of the prior year. This increase was due to
higher planned expenses, reflecting the growth in sales. As a percentage of net
revenues, excluding the long-term compensation charge and Tecan, SG&A expenses
were 25.8% for the first six months of fiscal 2000 compared with 27.5% for the
prior year.
R&D expenses were $63.4 million for the first six months of fiscal 2000 compared
with $65.6 million for the prior year. Excluding Tecan, R&D expenses increased
11% compared with second quarter of the prior year. As a percentage of net
revenues, excluding Tecan, R&D expenses were 10.1% for the first six months of
fiscal 2000 compared with 11.6% for the first six months of the prior year. The
prior year's R&D expense level was higher as a percentage of sales due to the
release of new products introduced later in fiscal 1999.
The Company incurred merger-related period costs of $2.0 million for the first
six months of fiscal 1999 for training, relocation, and communication in
connection with the integration of PerSeptive into the Company. See Note 10 to
the PE Biosystems group's combined financial statements included in the
Company's 1999 Annual Report to Stockholders. During the first six months of
fiscal 1999, the PE Biosystems group was allocated a non-recurring charge of $.6
million. These costs were incurred in connection with the recapitalization of
the Company.
Operating income increased to $88.5 million for the first six months of fiscal
2000 compared with $82.1 million for the first six months of the prior year. On
a comparable basis, excluding the special items previously described and Tecan,
operating income increased 49.2% for the first six months of fiscal 2000
compared with the first six months of the prior year. The PE Biosystems group
benefited from increased revenues primarily as a result of strong demand for
several new products introduced over the past year. The PE Biosystems group also
benefited from lower operating expenses as a percentage of net revenues,
partially as a result of slower than planned ramp-up in staffing. Operating
income as a percentage of net revenues, excluding the special items and Tecan,
increased to 17.5% for the first six months of fiscal 2000 compared with 15.1%
for the first six months of the prior year.
15
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The PE Biosystems group recognized a before-tax gain of $25.8 million in the
second quarter of fiscal 2000 related to the sale of a portion of the Company's
interest in a minority equity investment.
Interest expense was $4.3 million for the first six months of fiscal 2000
compared with $2.1 million for the prior year. This increase was primarily due
to the interest on the note payable to the Celera Genomics group, as well as
slightly higher average interest rates. Interest income was $8.2 million for the
first six months of fiscal 2000 compared with $.7 million for the prior year,
which included interest on the note receivable from EG&G relating to the sale of
the Analytical Instruments business. The increase was also due to higher cash
balances and higher interest rates.
Other expense, net for the first six months of fiscal 2000 was $8.9 million,
primarily related to costs associated with a portion of the Company's
traditional foreign currency management program that provides hedge coverage for
projected cash flows. Other expense, net was $.5 million for the first six
months of fiscal 1999, which related to costs associated with the Company's
traditional foreign currency hedging program offset by income from a legal
settlement.
The effective income tax rate was 33% for the first six months of fiscal 2000
compared with 29% for the prior year. Excluding special items in fiscal 2000 and
fiscal 1999 and Tecan in fiscal 1999, the effective income tax rate was 30% for
the first six months of fiscal 2000 compared with 29% for the prior year. See
Note 1 to the PE Biosystems group combined financial statements in the Company's
1999 Annual Report to Stockholders for a discussion of allocations of federal
and state income taxes.
For the first six months of fiscal 1999, the PE Biosystems group incurred
minority interest expense of $8.2 million relating to Tecan.
Market Risk
The PE Biosystems group operates internationally, with manufacturing and
distribution facilities in various countries throughout the world. For the first
six months of fiscal 2000 and fiscal 1999, the PE Biosystems group derived
approximately 49% of its revenues from countries outside of the United States.
Results continue to be affected by market risk, including fluctuations in
foreign currency exchange rates and changes in economic conditions in foreign
markets.
The risk management strategy for the PE Biosystems group utilizes derivative
financial instruments, including forwards, swaps, purchased options, and
synthetic forward contracts to hedge certain foreign currency and interest rate
exposures, with the intent of offsetting losses and gains that occur on the
underlying exposures with gains and losses, respectively, on the derivatives.
The PE Biosystems group does not use derivative financial instruments for
trading or other speculative purposes, nor is the PE Biosystems group a party to
leveraged derivatives. At December 31, 1999, outstanding hedge contracts covered
approximately 75% of the estimated exposures related to foreign currency cash
flows to be realized over the next nine months. The outstanding hedges were a
combination of forward, option, and synthetic forward contracts maturing over
the next nine months.
16
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Company performed sensitivity analyses as of December 31, 1999 and June 30,
1999. Assuming a hypothetical adverse change of 10% in foreign exchange rates in
relation to the U.S. Dollar at December 31, 1999, the Company calculated a
hypothetical loss of $9.0 million when comparing the change in fair value of
both the foreign currency contracts outstanding and the underlying exposures
being hedged at December 31, 1999. Performing the same hypothetical calculation
at June 30, 1999, the Company calculated a hypothetical loss of $6.1 million.
These hypothetical analyses exclude the impact of foreign currency translation
on PE Biosystems group's 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 the PE Biosystems group,
in conjunction with PE entering into a five-year Japanese Yen debt obligation.
Under the terms of the swap agreement, PE pays a fixed rate of interest at 2.1%
and receives a floating LIBOR interest rate. At December 31, 1999, the notional
amount of indebtedness covered by the interest rate swap was Yen 3.8 billion or
$37.1 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.
Financial Resources and Liquidity
Significant Changes in the Condensed Combined Statements of Financial Position.
Cash and cash equivalents were $295.5 million at December 31, 1999 compared with
$236.5 million at June 30, 1999, with total debt of $222.4 million at December
31, 1999 compared with $185.4 million at June 30, 1999. Working capital was
$313.6 million at December 31, 1999 compared with $274.6 million at June 30,
1999. Debt to total capitalization decreased slightly to 25% at December 31,
1999 from 26% at June 30, 1999. The increase in loans payable is primarily a
result of the Company's decision to discontinue its receivables factoring
program in a foreign subsidiary.
Other long-term assets increased $49.4 million to $296.6 million at December 31,
1999 from $247.1 million at June 30, 1999, primarily as a result of a net
increase in value of the Company's minority equity investments.
Accounts payable decreased $9.7 million to $138.0 million at December 31, 1999
from $147.7 million at June 30, 1999. Payments for higher purchases made in the
fourth quarter of fiscal 1999, which were made to support increased production
and operating requirements, contributed to the decrease.
Accrued salaries and wages increased $14.3 million to $57.6 million at December
31, 1999 from $43.3 million at June 30, 1999. The increase reflects the accrual
of the charge for the acceleration of certain
17
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
long-term compensation programs, as a result of the attainment of performance
targets, partially offset by the timing of recurring payments.
Condensed Combined Statements of Cash Flows. Net cash provided by operating
activities from continuing operations was $30.9 million for the first six months
of fiscal 2000 compared with $33.1 million for the same period in fiscal 1999.
For the first six months of fiscal 2000, higher income-related cash flow was
more than offset by higher payments to suppliers and payments of certain
compensation accruals, as well as higher prepaid expenses and other assets.
Net cash used by investing activities from continuing operations was $8.6
million for the first six months of fiscal 2000 compared with $24.5 million for
the first six months of fiscal 1999. In the first six months of fiscal 2000, the
PE Biosystems group's capital expenditures were $31.2 million, which included
$4.3 million related to improvement of its information technology
infrastructure. The PE Biosystems group realized approximately $31.1 million
from the sale of a portion of a minority investment during the first six months
of fiscal 2000 and invested $9.0 million in equity investments. For the first
six months of fiscal 1999, the PE Biosystems group generated $14.3 million in
net cash proceeds from the sale of certain non-operating assets. The fiscal 1999
cash proceeds were more than offset by capital expenditures of $39.4 million,
which included $4.7 million related to improvement of the information technology
infrastructure, and $17.5 million for the acquisition of a corporate airplane.
Net cash used by discontinued operations was $7.4 million for the first six
months of fiscal 2000 compared with $26.4 million for the first six months of
fiscal 1999. The fiscal 2000 use was for transaction-related payments and other
cash outlays associated with the divestiture of the analytical instruments
business. The Company expects additional cash outlays over the balance of the
fiscal year.
Net cash provided by financing activities was $41.7 million for the first six
months of fiscal 2000 compared with $12.9 million for the prior period. For the
first six months of fiscal 2000, the PE Biosystems group received $21.5 million
in proceeds from employee stock option exercises compared with $37.9 million for
the prior period. Loans payable increased $29 million for the first six months
of fiscal 2000 compared with an increase of $15.6 million for the prior year.
The first six months of fiscal 1999 included a payment of $5.3 million for the
retirement of foreign debt and $27.7 million of cash allocated to the Celera
Genomics group.
At December 31, 1999, PE had unused credit facilities totaling $354 million.
Year 2000
In fiscal 1997, PE Corporation initiated a worldwide program to assess the
expected impact of the Year 2000 date recognition problem on the Company's
existing internal computer systems; our non-information technology systems,
including embedded and process control systems; The Company's product offerings;
and our significant suppliers. The purpose of this program has been to ensure
the event does not have a material adverse effect on our business operations.
18
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
While not all possible Year 2000 date related disruption scenarios have been
experienced, and there is a possibility of disruptions in the future, through
the date of this report, the Company has experienced no material disruption or
other significant problems. The Company continues to evaluate and mitigate its
exposure in areas where appropriate. Based on currently available information,
management continues to believe that Year 2000 related disruptions or other
problems, if any, will not have a material adverse effect on the Company's
operations or financial condition. However, the Company cannot be certain that
Year 2000 issues will not have a material adverse effect on the Company, since
the evaluation process is not yet complete and it is early in the Year 2000.
Euro Conversion
A single currency called the euro was introduced in Europe on January 1, 1999.
Eleven of the fifteen member countries of the European Union agreed to adopt the
euro as their common legal currency on that date. Fixed conversion rates between
these participating countries' existing currencies (the "legacy currencies") and
the euro were established as of that date. The legacy currencies are scheduled
to remain legal tender as denominations of the euro until at least January 1,
2002, but not later than July 1, 2002. During this transition period, parties
may settle transactions using either the euro or a participating country's legal
currency.
The PE Biosystems group is currently evaluating the impact the euro conversion
may have on its computer and financial systems, business processes, market risk,
and price competition. The PE Biosystems group does not expect this conversion
to have a material impact on its results of operations, financial position, or
cash flows.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The provisions of the statement require the
recognition of all derivatives as either assets or liabilities in the statement
of financial position and the measurement of those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. The PE Biosystems
group is required to implement the statement in the first quarter of fiscal
2001. Management is currently analyzing the statement to determine the impact,
if any, on the combined financial statements.
Outlook
The PE Biosystems group expects to continue to grow and maintain profitability
for fiscal 2000 on the strength of robust demand and several new products.
Fiscal 2000 will focus on growing product lines across a broad array of base
technologies and exploring the needs of evolving markets. As public funding for
basic life science research continues to expand, and more progress is made in
uncovering
19
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
structured genomic information, pharmaceutical companies, recognizing the
opportunity that this information may provide, are placing greater emphasis on
research and development in these areas. PE Biosystems should continue to
benefit from its customers' needs for more efficient and cost effective systems
that can analyze and commercialize the volume of genomic information being
created.
Sales of PE Biosystems' genetic analysis systems are increasingly moving beyond
the basic research markets to a wider group of commercial customers and public
agencies. The PE Biosystems group also should benefit this spring 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, now that the final versions have been shipped to test site
customers. Additionally, the PE Biosystems group should also benefit from new
products expected to be introduced during this period for drug characterization,
as well as instruments and software for drug screening.
On January 24, 2000, PE Corporation announced the signing of a definitive merger
agreement under which the PE Biosystems group has agreed to acquire Third Wave
Technologies, Inc. in a stock-for-stock transaction. The transaction, which has
been approved by the Boards of Directors of both companies, is structured as a
tax-free pooling of interests. All of the equity of Third Wave will be exchanged
for an aggregate of approximately 1,972,000 shares of PE Corporation-PE
Biosystems Group Common Stock, before giving effect to the two-for-one stock
dividend declared January 20, 2000 for distribution on February 18, 2000. The
transaction is subject to customary closing conditions and regulatory approvals.
Third Wave has developed the Invader(R) nucleic acid (DNA and RNA) detection
technology. The Invader(R) assays detect differences among genetic sequences
important for the analysis of single nucleotide polymorphisms (SNPs). SNPs are
single genetic code changes thought to account for individual differences
ranging from predispositions for certain diseases to particular responses to
drug treatment. This technology will be used with the PE Biosystems group's
Sequence Detection Systems, a proprietary technology for real-time analysis of
genetic information.
We remain concerned about adverse currency effects because approximately 49% of
the PE Biosystems group's revenues were derived from regions outside the United
States for fiscal 1999.
Forward-Looking Statements
Certain statements contained in this report, including the Outlook section, are
forward-looking and are subject to a variety of risks and uncertainties. These
statements may be identified by the use of forward-looking words or phrases such
as "believe," "expect," "anticipate," "should," "planned," "estimated," and
"potential," among others. These forward-looking statements are based on the
Company's current expectations. The Private Securities Litigation Reform Act of
1995 provides a "safe harbor" for such forward-looking statements. In order to
comply with the terms of the safe harbor, 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
20
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
statements. The risks and uncertainties that may affect the operations,
performance, development, and results of our businesses include, but are not
limited to:
Rapidly changing technology in life sciences could make PE Biosystems' product
line obsolete unless it continues to improve existing products and develop new
products. A significant portion of the net revenues for PE Biosystems each year
is derived from products that did not exist in the prior year. PE Biosystems'
future success will depend on its ability to continually improve its current
products and to develop and introduce, on a timely and cost-effective basis, new
products that address the evolving needs of its customers. PE Biosystems'
products are based on complex technology which is subject to rapid change as new
technologies are developed and introduced in the marketplace. Unanticipated
difficulties or delays in replacing existing products with new products could
adversely affect PE Biosystems' future operating results.
A significant portion of sales depends on customers' capital spending policies
and government funding which may be subject to significant and unexpected
decreases. A significant portion of PE Biosystems' instrument product sales are
capital purchases by its customers. PE Biosystems' customers include
pharmaceutical, environmental, research and chemical companies, and the capital
spending policies of these companies can have a significant effect on the demand
for PE Biosystems' products. These policies are based on a wide variety of
factors, including the resources available to make purchases, the spending
priorities among various types of research equipment and policies regarding
capital expenditures during recessionary periods. Any decrease in capital
spending or change in spending policies of these companies could significantly
reduce the demand for PE Biosystems' products.
In addition, a substantial portion of PE Biosystems' sales is to customers at
universities or research laboratories whose funding is dependent on both the
level and timing of funding from government sources. As a result, the timing and
amount of revenues from these sources may vary significantly due to factors that
can be difficult to forecast. Although research funding has increased during the
past several years, grants have, in the past, been frozen for extended periods
or otherwise become unavailable to various institutions, sometimes without
advance notice. Budgetary pressures, particularly in the United States and
Japan, may result in reduced allocations to government agencies that fund
research and development activities. If government funding necessary to purchase
PE Biosystems' products were to become unavailable to researchers for any
extended period of time or if overall research funding were to decrease, the
business of PE Biosystems could be adversely affected.
Due to rapidly-developing technology and lack of legal precedents, PE
Biosystems' products could be subject to claims for patent infringement. PE
Biosystems' products are based on complex, rapidly-developing technologies.
These products could be developed without knowledge of previously filed but
unpublished patent applications that cover some aspect of these technologies. In
addition, there are relatively few decided court cases interpreting the scope of
patent claims in these technologies. PE Biosystems could be made a party to
litigation regarding intellectual property matters in the future. PE Biosystems
has from time to time been notified that it may be infringing certain
21
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
patents and other intellectual property rights of others. It may be necessary or
desirable in the future to obtain licenses relating to one or more products or
relating to current or future technologies, and we cannot assure you that PE
Biosystems will be able to obtain these licenses or other rights on commercially
reasonable terms.
Since PE Biosystems' business is dependent on foreign sales, fluctuating
currencies will make our revenues and operating results more volatile.
Approximately 50% of PE Biosystems' net revenues during fiscal 1999 were derived
from sales to customers outside of the United States. The majority of these
sales was based on the relevant customer's local currency. As a result, PE
Biosystems' reported and anticipated operating results and cash flows are
subject to fluctuations due to material changes in foreign currency exchange
rates that are beyond PE Biosystems' control.
Integrating acquired technologies may be costly and may not result in
technological advances. The future growth of PE Biosystems depends in part on
its ability to acquire complementary technologies through acquisitions and
investments. Since January 1, 1996, PE Biosystems has acquired a number of
companies, including PerSeptive Biosystems, Inc., Molecular Informatics, Inc.,
and Tropix, Inc., and made investments in others. The consolidation of
employees, operations, and marketing and distribution methods could present
significant managerial challenges. For example, PE Biosystems may encounter
operational difficulties in the integration of manufacturing or other
facilities. In addition, technological advances resulting from the integration
of technologies may not be achieved as successfully or rapidly as anticipated,
if at all.
Earthquakes could disrupt operations in California. A significant portion of PE
Biosystems' operations is located near major California earthquake faults. The
ultimate impact of earthquakes on PE Biosystems, significant suppliers and the
general infrastructure is unknown, but operating results could be materially
affected in the event of a major earthquake.
22
<PAGE>
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net Revenues $ 8,346 $ 1,715 $ 16,625 $ 5,631
Costs and Expenses
Research and development 38,169 8,260 70,333 12,937
Selling, general and administrative 9,525 5,814 17,932 10,606
Special charges 573 573
----------------- ------------------ ------------------ -----------------
Operating Loss (39,348) (12,932) (71,640) (18,485)
Interest expense 610 661
Interest income 3,074 5,107
----------------- ------------------ ------------------ -----------------
Loss Before Income Taxes (36,884) (12,932) (67,194) (18,485)
Benefit for income taxes 12,606 4,325 23,518 6,269
----------------- ------------------ ------------------ -----------------
Net Loss $ (24,278) $ (8,607) $ (43,676) $ (12,216)
================= ================== ================== =================
Net Loss per Share (see Note 3)
Basic and diluted $ (.94) $ (1.69)
</TABLE>
See accompanying notes to the Celera Genomics group unaudited
condensed combined financial statements.
23
<PAGE>
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
At December 31, At June 30,
1999 1999
------------------- -------------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 53,955 $ 71,491
Note receivable from the PE Biosystems group 150,000 150,000
Tax benefit receivable from the PE Biosystems group 9,413 9,935
Accounts receivable 9,788 3,276
Prepaid expenses and other current assets 13,017 3,454
------------------- -------------------
Total current assets 236,173 238,156
Property, plant and equipment, net 109,043 104,192
Other long-term assets 4,313 2,372
------------------- -------------------
Total Assets $ 349,529 $ 344,720
=================== ===================
Liabilities and Group Equity
Current liabilities
Loans payable $ 46,000 $ -
Accounts payable 14,711 19,861
Accrued salaries and wages 4,542 4,179
Deferred revenues 11,826 12,032
Other accrued expenses 6,646 9,281
------------------- -------------------
Total current liabilities 83,725 45,353
Other long-term liabilities 5,507 5,500
------------------- -------------------
Total Liabilities 89,232 50,853
Group Equity 260,297 293,867
------------------- -------------------
Total Liabilities and Group Equity $ 349,529 $ 344,720
=================== ===================
</TABLE>
See accompanying notes to the Celera Genomics group unaudited
condensed combined financial statements.
24
<PAGE>
CELERA GENOMICS GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six months ended
December 31,
1999 1998
----------------- ------------------
<S> <C> <C>
Operating Activities
Net loss $ (43,676) $ (12,216)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 10,966 659
Deferred income taxes (6,615)
Changes in operating assets and liabilities:
Decrease (increase) in tax benefit receivable
from the PE Biosystems group 522 (4,325)
Increase in accounts receivable (6,512) (182)
Increase in prepaid expenses and other assets (2,051) (112)
Increase in accounts payable and other liabilities 479 5,873
----------------- ------------------
Net Cash Used by Operating Activities (46,887) (10,303)
----------------- ------------------
Investing Activities
Additions to property, plant and equipment (19,867) (17,380)
Investments (3,000)
----------------- ------------------
Net Cash Used by Investing Activities (22,867) (17,380)
----------------- ------------------
Financing Activities
Net change in loans payable 46,000
Net cash allocated from the PE Biosystems group 27,683
Proceeds from stock issued for stock plans 6,218
----------------- ------------------
Net Cash Provided by Financing Activities 52,218 27,683
----------------- ------------------
Net Change in Cash and Cash Equivalents (17,536)
Cash and Cash Equivalents Beginning of Period 71,491
----------------- ------------------
Cash and Cash Equivalents End of Period $ 53,955 $ -
================= ==================
</TABLE>
See accompanying notes to the Celera Genomics group unaudited
condensed combined financial statements.
25
<PAGE>
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED COMBINED FINANCIAL STATEMENTS
The interim condensed combined financial statements should be read in
conjunction with the financial statements presented in PE Corporation's ("PE's"
or the "Company's") 1999 Annual Report to Stockholders. Significant accounting
policies disclosed therein have not changed.
The unaudited condensed combined financial statements reflect, in the opinion of
the Company's management, all adjustments which are necessary for a fair
statement of the results for the interim periods. All such adjustments are of a
normal recurring nature. These results are, however, not necessarily indicative
of the results to be expected for a full year. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. Certain amounts in the combined financial statements have been
reclassified for comparative purposes.
The Celera Genomics group's and the PE Biosystems group's combined financial
statements should be read in conjunction with the Company's consolidated
financial statements.
NOTE 2 - ACQUISITIONS
Panther(TM) Technology. During the second quarter of fiscal 2000, the Celera
Genomics group 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 this
acquisition was $2.5 million and has been accounted for under the purchase
accounting method.
Shanghai GeneCore BioTechnologies Co., Ltd. During the second quarter of fiscal
2000, the Celera Genomics group acquired a 47.5% equity interest in Shanghai
GeneCore BioTechnologies Co., Ltd. from Axys Pharmaceuticals, Inc. The PE
Biosystems group also owns 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.
Shanghai GeneCore has ongoing research collaborations with several Chinese
government agencies and research institutes. This investment will be accounted
for under the equity method of accounting.
26
<PAGE>
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 3 - LOSS PER SHARE
The following table presents a reconciliation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
(Amounts in thousands Three months ended Six months ended
except per share amounts) December 31, December 31,
1999 1999
---------------- ---------------
<S> <C> <C>
Weighted average number of common
shares used in the calculation of basic
loss per share 25,959 25,848
Common stock equivalents - -
---------------- ---------------
Shares used in the calculation of
diluted loss per share 25,959 25,848
================ ===============
Net loss used in the calculation of
basic and diluted loss per share $(24,278) $(43,676)
================ ===============
Net loss per share
Basic and diluted $ (.94) $ (1.69)
</TABLE>
On May 6, 1999, The Perkin-Elmer Corporation was merged with a subsidiary of PE
Corporation, a new Delaware corporation. The recapitalization 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.
Therefore, the reconciliation for the three and six months ended December 31,
1998 is omitted since Celera Genomics Group Common Stock was not part of the
capital structure of the Company during such period.
Options and warrants to purchase 7.0 million shares of Celera Genomics Group
Common Stock were outstanding at December 31, 1999, but were not included in the
computation of diluted loss per share because the effect was antidilutive.
27
<PAGE>
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
On January 20, 2000, the Board of Directors announced a two-for-one split of
Celera Genomics Group Common Stock. The two-for-one stock split will be effected
in the form of a 100% stock dividend payable on February 18, 2000 to
stockholders of record as of the close of business on February 4, 2000. The
following table presents share and per share data on a pro forma basis to
reflect this split:
<TABLE>
<CAPTION>
(Amounts in thousands Three months ended Six months ended
except per share amounts) December 31, December 31,
1999 1999
---------------- ---------------
<S> <C> <C>
Weighted average number of common
shares used in the calculation of basic
loss per share 51,918 51,695
Common stock equivalents - -
---------------- ---------------
Shares used in the calculation of
diluted loss per share 51,918 51,695
================ ===============
Net loss used in the calculation of
basic and diluted loss per share $(24,278) $(43,676)
================ ===============
Net loss per share
Basic and diluted $ (.47) $ (.84)
</TABLE>
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and significant non-cash financing activity were as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) Six months ended
December 31,
1999 1998
------------- --------------
<S> <C> <C>
Interest $ .7 $ -
Significant non-cash investing
and financing activities
Note receivable from the
PE Biosystems group $ - $ 310.9
</TABLE>
NOTE 5 - LOANS PAYABLE
Loans payable consisted of $46 million of commercial paper with an average
interest rate of 5.65% at December 31, 1999.
28
<PAGE>
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 6 - RELATED PARTY TRANSACTIONS
Sales of Products and Services Between Groups. For the three and six month
periods ended December 31, 1999, R&D expenses included $14.0 and $25.5 million,
respectively, for lease payments on instruments and the purchase of consumables
and project materials and $.3 million and $.5 million, respectively, for R&D
services contracted from the PE Biosystems group.
NOTE 7 - SUBSEQUENT EVENT
On January 31, 2000, the Company filed a registration statement with the
Securities and Exchange Commission for a follow-on public offering of 1.6
million shares of its PE Corporation-Celera Genomics Group Common Stock. The
Company will also grant the underwriters a 15% over-allotment option. The number
of shares to be sold does not reflect the two-for-one stock split of PE
Corporation-Celera Genomics Group Common Stock, discussed in Note 3.
29
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion of Operations
The following discussion should be read in conjunction with the Celera Genomics
group's condensed combined financial statements and related notes and PE
Corporation's ("PE's" or the "Company's") condensed consolidated financial
statements and related notes included in this report; the Celera Genomics
group's "Management's Discussion and Analysis" appearing on pages 74 - 79 of the
Company's 1999 Annual Report to Stockholders; and PE Corporation's "Management's
Discussion and Analysis" appearing on pages 97 - 109 of the Company's 1999
Annual Report to Stockholders. Historical results and percentage relationships
are not necessarily indicative of operating results for any future periods.
Results of Operations for the Three Months Ended December 31, 1999 Compared With
the Three Months Ended December 31, 1998
The Celera Genomics group reported a net loss of $24.3 million for the second
quarter of fiscal 2000, compared with a net loss of $8.6 million for the second
quarter of fiscal 1999. The increase in the net loss reflected the increased
sequencing activity and increased operating expenses required to support the
expanded data management and software and business development activities.
Net revenues for the Celera Genomics group were $8.3 million for the second
quarter of fiscal 2000 compared with $1.7 million for the second quarter of
fiscal 1999. The increased revenues were primarily a result of database
subscription agreements initiated during the second half of fiscal 1999 and an
increase in genomics services revenues. Revenues for plant and animal genotyping
services remained essentially unchanged.
R&D expenses increased $29.9 million to $38.2 million for the second quarter of
fiscal 2000 from $8.3 million for the second quarter of fiscal 1999 primarily as
a result of a full quarter of sequencing operations and significantly expanded
bioinformatics and software development capabilities.
SG&A expenses were $9.5 million for the second quarter of fiscal 2000 compared
with $5.8 million for the second quarter of fiscal 1999. The increase 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 $2.3 million for the second quarter of
fiscal 2000 compared with $1.4 million for the second quarter of fiscal 1999.
The increase is a result of corporate expenses attributable to the Celera
Genomics group. See Note 1 to the Celera Genomics group's combined financial
statements in the Company's 1999 Annual Report to Stockholders for a discussion
of allocations of corporate overhead and administrative shared services.
The Celera Genomics group was allocated a non-recurring before-tax charge of $.6
million in the second quarter of fiscal 1999. These costs were incurred in
connection with the recapitalization of the Company. The Celera Genomics group
and the PE Biosystems group were each allocated 50% of the $1.2 million total
recapitalization costs incurred during the second quarter of fiscal 1999.
30
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Interest expense was $.6 million for the second quarter of fiscal 2000 as a
result of the Company's financing of the purchase of the Rockville, Maryland
facilities. Interest income was $3.1 million for the second quarter of fiscal
2000, which was primarily attributable to interest on the $150 million note
receivable from the PE Biosystems group, as well as interest received on cash
balances.
The effective income tax rate was 34% for the second quarter of fiscal 2000 and
33% for the second quarter of fiscal 1999. Excluding special items for the
second quarter of fiscal 1999, the effective income tax rate was 35%. See Note 1
to the Celera Genomics group's combined financial statements in the Company's
1999 Annual Report to Stockholders for a discussion of allocations of federal
and state income taxes.
Results of Operations for the Six Months Ended December 31, 1999 Compared With
the Six Months Ended December 31, 1998
The Celera Genomics group reported a net loss of $43.7 million for the first six
months of fiscal 2000, compared with a net loss of $12.2 million for the first
six months of fiscal 1999. The increase in the net loss reflected the increased
sequencing activity and increased operating expenses required to support the
expanded data management and software and business development activities.
Net revenues for the Celera Genomics group were $16.6 million for the first six
months of fiscal 2000 compared with $5.6 million for the first six months of
fiscal 1999. The increased revenues were primarily a result of database
subscription agreements initiated during the second half of fiscal 1999 and an
increase in genomics services revenues. Revenues for plant and animal genotyping
services remained essentially unchanged.
R&D expenses increased $57.4 million to $70.3 million for the first six months
of fiscal 2000 from $12.9 million for the first six months of fiscal 1999
primarily as a result of a full six months of sequencing operations and
significantly expanded bioinformatics and software development capabilities.
SG&A expenses were $17.9 million for the first six months of fiscal 2000
compared with $10.6 million for the first six months of 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 $4.1 million for the first six
months of fiscal 2000 compared with $2.4 million for the first six months of
fiscal 1999. The increase is a result of corporate expenses attributable to the
Celera Genomics group. See Note 1 to the Celera Genomics group's combined
financial statements in the Company's 1999 Annual Report to Stockholders for a
discussion of corporate overhead and administrative shared services.
The Celera Genomics group was allocated a non-recurring before-tax charge of $.6
million in the first six months of fiscal 1999. These costs were incurred in
connection with the recapitalization of the
31
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Company. The Celera Genomics group and the PE Biosystems group were each
allocated 50% of the $1.2 million total recapitalization costs incurred during
the first six months of fiscal 1999.
Interest expense was $.7 million for the first six months of fiscal 2000 as a
result of the Company's financing of the purchase of the Rockville, Maryland
facilities. Interest income was $5.1 million for the first six months of fiscal
2000, which was primarily attributable to interest on the $150 million note
receivable from the PE Biosystems group, as well as interest received on cash
balances.
The effective income tax rate was 35% for the first six months of fiscal 2000
and 34% for the first six months of fiscal 1999. Excluding special items for the
first six months of fiscal 1999, the effective income tax rate was 35%. See Note
1 to the Celera Genomics group's combined financial statements in the Company's
1999 Annual Report to Stockholders for a discussion of allocations of federal
and state income taxes.
Financial Resources and Liquidity
Significant Changes in the Condensed Combined Statements of Financial Position.
Cash and cash equivalents were $54.0 million at December 31, 1999 compared with
$71.5 million at June 30, 1999. During the first quarter of fiscal 2000, the
Company secured financing of $46 million specifically for the purchase of the
Rockville, Maryland facilities. The Company anticipates that the $46 million
financing will remain outstanding beyond the current fiscal year.
At December 31 and June 30, 1999, the Celera Genomics group had a $9.4 million
and $9.9 million tax benefit receivable from the PE Biosystems group. These
amounts represent the tax benefits for the second quarter of fiscal 2000 and the
fourth quarter of fiscal 1999, respectively. The tax benefit receivable is
settled on a quarterly basis. See Note 1 to the Celera Genomics group combined
financial statements in the Company's 1999 Annual Report to Stockholders for a
discussion of allocations of federal and state income taxes.
Accounts receivable increased $6.5 million to $9.8 million at December 31, 1999
from $3.3 million at June 30, 1999, primarily as a result of increased database
subscriptions and genomics service revenue.
Prepaid expenses and other current assets increased $9.5 million to $13.0
million at December 31, 1999 from $3.5 million at June 30, 1999. The increase
included a deferred tax asset of $6.6 million resulting from the Celera Genomics
group's operating losses.
Accounts payable decreased $5.2 million to $14.7 million at December 31, 1999
from $19.9 million at June 30, 1999 primarily as a result of software license
fees incurred during the fourth quarter of fiscal 1999.
32
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Deferred revenues decreased $.2 million to $11.8 million at December 31, 1999
compared with $12.0 million at June 30, 1999 due to revenue recognized under
database subscription contracts offset by timing of payments received for
subscription and gene discovery agreements.
Other accrued expenses decreased $2.6 million to $6.6 million at December 31,
1999 compared with $9.3 million at June 30, 1999 as a result of payments for
fiscal year-end accruals.
Condensed Combined Statements of Cash Flows. Cash used by operating activities
was $46.9 million for the first six months of fiscal 2000 compared with $10.3
million for the same period in the prior year. The increase in cash used by
operating activities resulted primarily from higher net operating losses.
Net cash used by investing activities for capital expenditures was $19.9 million
for the first six months of fiscal 2000 compared with $17.4 million for the
first six months of fiscal 1999. Fiscal 2000 capital expenditures 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 facilities. The capital
spending for the first six months of fiscal 1999 included $7.8 million of
purchases for the PE Biosystems group's ABI Prism(R) 3700 DNA Analyzers and $.5
million for other instrumentation purchased from the PE Biosystems group. The
Celera Genomics group's investments during the first six months of 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 provided by financing activities was $52.2 million for the first six
months of fiscal 2000 compared with $27.7 million for same period in the prior
year. During the first quarter of fiscal 2000, the Company secured financing of
$46 million specifically for the purchase of the Rockville, Maryland facilities.
In the first six months of fiscal 2000, the Celera Genomics group received $6.2
million in proceeds from employee stock option exercises. Net cash provided by
financing activities for the first six months of fiscal 1999 was $27.7 million,
attributable entirely to the funding of that year's operations by PE
Corporation.
Year 2000
In fiscal 1997, PE Corporation initiated a worldwide program to assess the
expected impact of the Year 2000 date recognition problem on our existing
internal computer systems; our non-information technology systems, including
embedded and process control systems; our product offerings; and our significant
suppliers. The operations of the Celera Genomics group are included within this
program. The purpose of this program has been to ensure the event does not have
a material adverse effect on our business operations.
While not all possible Year 2000 date related disruption scenarios have been
experienced, and there is a possibility of disruptions in the future, through
the date of this report, the Company has experienced
33
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
no material disruption or other significant problems. The Company continues to
evaluate and mitigate our exposure in areas where appropriate. Based on
currently available information, management continues to believe that Year 2000
related disruptions or other problems, if any, will not have a material adverse
effect on the Company's operations or financial condition. However, the Company
cannot be certain that Year 2000 issues will not have a material adverse effect
on the Company, since the evaluation process is not yet complete and it is early
in the Year 2000.
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." The provisions of the statement require the
recognition of all derivatives as either assets or liabilities in the statement
of financial position and the measurement of those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. The Celera
Genomics group is required to implement the statement in the first quarter of
fiscal 2001. The Celera Genomics group currently believes the statement will not
have a material impact on its combined financial statements.
Outlook
The Celera Genomics group expects to see an expansion in the customer base for
the new genomic information and database products, with corresponding increases
in revenues throughout fiscal 2000. During the second quarter of fiscal 2000,
the Celera Genomics group entered into a five-year comprehensive genomics
agreement with Pfizer Inc. which includes a subscription to all of Celera
Genomics group's current database products and a collaborative gene discovery
agreement. Pfizer's database subscription gives it access to five databases
developed by the Celera Genomics group until 2005. All of these databases
integrate the Celera Genomics group's proprietary information with publicly
available sources. Despite the potential for increased revenues in fiscal 2000,
the Celera Genomics group expects that it will continue to incur significant
operating losses for such year.
Operating expenses will increase over the balance of the fiscal year as the
Celera Genomics group continues to improve its sequencing throughput and
installs additional hardware and software designed to accelerate product
development and support for its information delivery systems.
The Celera Genomics group recently completed the sequencing phase in deciphering
the genome of Drosophila, the fruit fly. In January, 2000, the Celera Genomics
group announced it had compiled DNA sequence in its database that covers 90% of
the human genome. As a result of the extensive sequence coverage of the 23 pairs
of human chromosomes and based on statistical analysis, the Celera Genomics
group believes that greater than 97% of all human genes are now represented in
the Celera Genomics group's database. As a result of Celera's successful
sequencing and assembly of Drosophila and the accelerated availability of data
from public human genome sequencing efforts,
34
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Celera believes that it can sequence and assemble the human genome on an
accelerated basis. Celera Genomics expects to complete the sequencing phase of
the human genome by mid-2000 and the assembly phase by the end of 2000, or one
year ahead of its original schedule.
Celera Genomics' progress to date has placed it well ahead of its original
schedule. Consequently, Celera Genomics intends to make significant new
investments to expand beyond the genome and to take advantage of what it
believes will be new market opportunities in the emerging fields of functional
genomics, in particular proteomics, and personalized health/medicine. New
revenue opportunities in these fields range from expansion of Celera's
information and service businesses to the licensing of proprietary discoveries
resulting from the new information.
On January 31, 2000, the Company filed a registration statement with the
Securities and Exchange Commission for a follow-on public offering of 1.6
million shares of its Celera Genomics Group Common Stock. Celera intends to use
the net proceeds from this offering primarily to fund its new product and
technology development activities in functional genomics, with an emphasis on
proteomics, and personalized health/medicine. These activities will require
increased investment in Celera's laboratory, computational resources, software
systems and business and product development operations. Celera also intends to
use the net proceeds of this offering for general corporate purposes, including
possible acquisitions, alliances or collaborations. Pending such uses, Celera
intends to invest the net proceeds of this offering in interest-bearing,
investment-grade securities.
We believe that Celera Genomics' existing cash and cash equivalents and the note
receivable and tax benefit receivable from the PE Biosystems group 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 informational products and services based on
the resultant data. While we intend to use the net proceeds of the Celera
Genomics Group Common Stock offering to fund Celera's expansion into functional
genomics and personalized health/medicine, such funds may not be sufficient to
support these new business activities as they develop. Celera'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."
35
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 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:
Celera Genomics group has incurred net losses to date and may not achieve
profitability. The Celera Genomics group has accumulated net losses of $129.7
million as of December 31, 1999 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 our 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 nears completion of the
sequencing of the human genome, it is expanding its business plan to enter into
new markets: functional genomics and personalized health/medicine. The creation
of a genomics database, and the offering of functional genomics 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 and personalized
health/medicine 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 timely completion of the
sequencing
36
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
and assembly of the human genome. The Celera Genomics group's efforts to
complete the sequencing and assembly of the human genome are not yet complete.
Some genomic scientists have criticized the Celera Genomics group's sequencing
strategy, known as "whole genome shotgun sequencing," as having limitations when
applied on a large scale in sequencing the human genome. Others have stated that
the human genome cannot be sequenced using whole genome shotgun sequencing.
Although scientists at The Institute for Genomic Research have used the whole
genome shotgun strategy to sequence the genomes of other organisms, the strategy
has not been used to sequence a genome with the size and complexity of the human
genome. Although the Celera Genomics group has been successful in sequencing and
assembling the Drosophila genome, once the human genome has been fully
sequenced, there can be no assurance that the Celera Genomics group will be
successful in its assembly of the human genome. Celera Genomics group's ability
to retain its existing customers and attract new customers is heavily dependent
upon the completion of the sequencing and assembly of the human genome within
the expected time frames. In addition, completion of the sequencing and assembly
of the human genome is essential to the functional genomics and personalized
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 sequencing and assembly effort 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 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 Genomic group's technologies. If the 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, be 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.
37
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 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 and
services 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, and other genomic service businesses. Some of these
competitors are developing databases containing gene sequence, gene expression,
genetic variation or other genomic information and are marketing or plan to
market their data to pharmaceutical companies. 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, including the Human Genome Index licensed from the Institute for Genomics
Research, and therefore such technology may be available for license by our
competitors.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery 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 and Pfizer Inc. The Group expects that
pharmaceutical companies and larger biotechnology companies will continue to be
the Group's primary source of revenues for the foreseeable future. As a result,
the 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's
products and services.
38
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Celera Genomics relies heavily on its strategic relationship with PE Biosystems
group. The Celera Genomics group believes that its strategic relationship with
the PE Biosystems group 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 and personalized health/medicine arenas will depend heavily
on the PE Biosystems group's ability to continue to provide leading edge,
proprietary technology and products, including technologies relating to genetic
analysis, protein analysis and high-throughput screening. If PE 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 the PE Biosystems
group that adversely affects the Celera Genomic group's access to PE Biosystems'
technology or failure by PE 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 could incur liabilities relating to hazardous materials that
it uses in its research and development activities. Celera Genomics' research
and development activities involve the controlled use of hazardous materials,
chemicals and various radioactive materials. In the event of an accidental
contamination or injury from these materials, Celera 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 and value-added programs 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 result. Actual and proposed consolidations of pharmaceutical
companies have affected and may in the future affect the timing and progress of
the Group's sales efforts.
Scientific and management staff have unique expertise which is key to the Celera
Genomics' commercial viability and which would be difficult to replace. Celera
Genomics is highly dependent on the principal members of its scientific and
management staff, particularly Dr. Venter, its President. For the sequencing and
assembly of the human genome, the Celera Genomics group believes the following
members of its staff are essential: Dr. Venter; Dr. Mark Adams, Vice President
for Genome Programs; and Dr. Eugene Myers, 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. 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.
39
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 will be primarily dependent on revenues from access fees to its
discovery and information system, obtaining patent protection may also be
important to its business, 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 and polymorphisms, is uncertain, and as a result, the Group is
uncertain as to its ability to prevent competitors from developing similar
subject matter. Patents may not issue from patent applications that the 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 confidentiality agreements with employees, consultants,
collaborators, and customers as well as through other security measures. These
confidentiality 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's
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.
40
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Celera Genomics may infringe the intellectual property rights of third parties
and may become involved in expensive intellectual property litigation. The
intellectual property rights of biotechnology companies, including Celera
Genomics, are generally uncertain and involve complex legal, scientific and
factual questions. Celera Genomics' success in the functional genomics field may
depend, in part, on its ability to operate without infringing on the
intellectual property rights of others and to prevent others from infringing on
its intellectual property rights.
There has been substantial litigation regarding patents and other intellectual
property rights in Celera Genomics' industry. The Group may become a party to
patent litigation or proceedings at the U.S. Patent and Trademark Office to
determine its patent rights with respect to third parties. Interference
proceedings may be necessary to establish which party was the first to discover
such intellectual property. Celera Genomics may become involved in patent
litigation against third parties to enforce the 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 at least one patent to a third
party relating to a SNP. 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 Celera Genomics' business
requires manipulating and analyzing large amounts of data, and communicating the
results of such analysis to customers via the Internet, the 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 Group's hardware or software malfunctions or the Group's customers'
access to products through the Internet is interrupted, its business could
suffer. The 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 Group fails to
maintain and further develop the necessary computer capacity and data to support
its customers' drug discovery 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 Group's
business.
Celera Genomics' research and product development depends on access to tissue
samples and other biological materials. To continue to build its database
products, 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.
41
<PAGE>
If 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 towards
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 its products.
Expected rapid growth in the number of our employees could absorb
valuable management resources and be disruptive to the development of Celera
Genomics' business. The Celera Genomics group expects to grow significantly,
from approximately 450 employees at December 31, 1999 to over 600 by June 30,
2000. This growth will require substantial effort to hire new employees and
train and integrate them in 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 functional genomics, the
use of Celera's database 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 Celera's
customers as a result of their use of Celera'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 health care laws and regulations issued by the FDA may limit the use
of polymorphism data. To the extent that use of Celera's databases is limited or
additional costs are imposed on Celera's customers due to regulation, our
business may be adversely affected.
Furthermore, Celera Genomics may be directly subject to regulation as a provider
of diagnostic information. To the extent that such regulations restrict the sale
of Celera's products or impose other costs, Celera'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 adverse effect on Celera Genomics' financial condition and results of
operations. For example, to the extent that we elect 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 Celera's
shareholders. Acquisitions involve numerous other risks, including:
o difficulties integrating acquired technologies and personnel into
Celera's business;
o diversion of management from daily operations;
o inability to obtain required financing on favorable terms;
o entering new markets in which Celera has little previous experience;
o potential loss of key employees or customers of acquired companies;
o assumption of the liabilities and exposure to unforseen liabilities of
acquired companies; and
o amortization of the intangible assets of acquired companies.
It may be difficult for Celera to complete such transactions quickly and to
integrate such business efficiently into its current business. Any such
acquisitions or investments by Celera may ultimately have a negative impact on
its business and financial condition.
42
<PAGE>
PE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net Revenues $ 327,364 $ 288,518 $ 616,207 $ 543,238
Cost of Sales 147,261 130,737 279,812 242,966
----------------- ------------------ ------------------ -----------------
Gross Margin 180,103 157,781 336,395 300,272
Selling, general and administrative 115,347 85,738 201,491 163,217
Research, development and engineering 60,725 40,527 117,385 77,101
Merger costs and other special charges 2,187 3,125
----------------- ------------------ ------------------ -----------------
Operating Income 4,031 29,329 17,519 56,829
Gain on sale of investment 25,811 25,811
Interest expense 856 1,338 1,250 2,140
Interest income 5,143 248 9,551 738
Other expense, net (4,305) (2,245) (8,885) (539)
----------------- ------------------ ------------------ -----------------
Income Before Income Taxes 29,824 25,994 42,746 54,888
Provision for income taxes 10,649 2,683 13,492 10,581
Minority interest 5,104 8,212
----------------- ------------------ ------------------ -----------------
Income From Continuing Operations 19,175 18,207 29,254 36,095
Loss From Discontinued
Operations, Net of Income Taxes (3,158) (4,037)
----------------- ------------------ ------------------ -----------------
Net Income $ 19,175 $ 15,049 $ 29,254 $ 32,058
================= ================== ================== =================
PE Biosystems Group (see Note 5)
Income from Continuing Operations $ 43,834 $ 27,558 $ 73,541 $ 49,055
Basic per share $ .42 $ .71
Diluted per share $ .41 $ .69
Loss from Discontinued Operations $ (3,158) $ (4,037)
Basic per share
Diluted per share
Net Income $ 43,834 $ 24,400 $ 73,541 $ 45,018
Basic per share $ .42 $ .71
Diluted per share $ .41 $ .69
Dividends per share $ .085 $ .17
Celera Genomics Group (see Note 5)
Net Loss $ (24,278) $ (8,607) $ (43,676) $ (12,216)
Basic and diluted per share $ (.94) $ (1.69)
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
43
<PAGE>
PE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS continued
(unaudited)
(Dollar amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
----------------- ------------------ ------------------ -----------------
<S> <C> <C>
PE Corporation (see Note 5)
Income from Continuing Operations
Basic per share $ .36 $ .73
Diluted per share $ .36 $ .71
Loss from Discontinued Operations
Basic per share $ (.06) $ (.08)
Diluted per share $ (.06) $ (.08)
Net Income
Basic per share $ .30 $ .65
Diluted per share $ .30 $ .63
Dividends per Share $ .17 $ .34
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
44
<PAGE>
PE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
At December 31, At June 30,
1999 1999
------------------- -------------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 349,481 $ 308,021
Note receivable 150,000 150,000
Accounts receivable, net 321,434 307,056
Inventories 168,716 149,670
Prepaid expenses and other current assets 96,384 79,255
------------------- -------------------
Total current assets 1,086,015 994,002
Property, plant and equipment, net 294,343 275,792
Other long-term assets 300,886 249,513
------------------- -------------------
Total Assets $ 1,681,244 $ 1,519,307
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities
Loans payable $ 81,249 $ 3,911
Accounts payable 145,122 165,120
Accrued salaries and wages 62,111 47,495
Accrued taxes on income 141,303 128,261
Other accrued expenses 188,264 177,865
------------------- -------------------
Total current liabilities 618,049 522,652
Long-term debt 37,102 31,452
Other long-term liabilities 119,829 143,678
------------------- -------------------
Total Liabilities 774,980 697,782
Stockholders' Equity
Capital stock
PE Corporation - PE Biosystems group 1,035 1,027
PE Corporation - Celera Genomics group 260 257
Capital in excess of par value 540,863 507,341
Retained Earnings 329,443 317,720
Accumulated other comprehensive income 34,663 (4,820)
------------------- -------------------
Total Stockholders' Equity 906,264 821,525
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 1,681,244 $ 1,519,307
=================== ===================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
45
<PAGE>
PE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six months ended
December 31,
1999 1998
----------------- ------------------
<S> <C> <C>
Operating Activities from Continuing Operations
Income from continuing operations $ 29,254 $ 36,095
Adjustments to reconcile income from continuing
operations to net cash (used) provided by operating activities:
Depreciation and amortization 35,211 22,723
Long-term compensation programs 27,974 2,411
Gain on sale of investment (25,811)
Deferred income taxes (4,937) 1,600
Changes in operating assets and liabilities:
Increase in accounts receivable (15,063) (27,138)
Increase in inventories (17,572) (17,854)
Increase in prepaid expenses and other assets (18,323) (13,537)
(Decrease) increase in accounts payable and other liabilities (26,737) 11,640
----------------- ------------------
Net Cash (Used) Provided by Operating Activities (16,004) 15,940
----------------- ------------------
Investing Activities from Continuing Operations
Additions to property, plant and equipment
(net of disposals of $594 and $581, respectively) (50,513) (49,403)
Investments, net (12,000)
Proceeds from the sale of assets, net 31,056 14,301
----------------- ------------------
Net Cash Used by Investing Activities (31,457) (35,102)
----------------- ------------------
Net Cash Used by Continuing Operations
Before Financing Activities (47,461) (19,162)
----------------- ------------------
Discontinued Operations
Net cash used by operating activities (7,435) (4,778)
Net cash used by investing activities (21,595)
----------------- ------------------
Net Cash Used by Discontinued Operations
Before Financing Activities (7,435) (26,373)
----------------- ------------------
Financing Activities
Net change in loans payable 74,999 15,579
Proceeds from long-term debt 803
Principal payments on long-term debt (5,297)
Dividends (8,748) (8,396)
Proceeds from stock issued for stock plans 27,692 37,890
----------------- ------------------
Net Cash Provided by Financing Activities 93,943 40,579
----------------- ------------------
Effect of Exchange Rate Changes on Cash 2,413 (2,430)
----------------- ------------------
Net Change in Cash and Cash Equivalents 41,460 (7,386)
Cash and Cash Equivalents Beginning of Period 308,021 82,865
----------------- ------------------
Cash and Cash Equivalents End of Period $ 349,481 $ 75,479
================= ==================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
46
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The interim condensed consolidated financial statements should be read in
conjunction with the financial statements presented in PE Corporation's ("PE's"
or the "Company's") 1999 Annual Report to Stockholders. Significant accounting
policies disclosed therein have not changed.
The unaudited condensed consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments which are necessary for a
fair statement of the results for the interim periods. All such adjustments are
of a normal recurring nature. These results are, however, not necessarily
indicative of the results to be expected for a full year. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Certain amounts in the consolidated financial statements
have been reclassified for comparative purposes.
The PE Biosystems group's and Celera Genomics group's condensed combined
financial statements should be read in conjunction with the Company's condensed
consolidated financial statements.
NOTE 2 - DISCONTINUED OPERATIONS
Effective May 28, 1999, the Company completed the sale of its Analytical
Instruments business to EG&G, Inc. Analytical Instruments, formerly a unit of
the Company's PE Biosystems group, develops, manufactures, markets, sells, and
services analytical instruments used in a variety of markets. As part of the
sale, the rights to the "Perkin-Elmer" name were transferred to EG&G. The
transaction is subject to post-closing adjustments pursuant to the terms of the
agreement with EG&G.
The Company's consolidated financial statements were restated to reflect the
operating results of the Analytical Instruments business as discontinued
operations for fiscal 1999.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
Illumina, Inc. During the second quarter of fiscal 2000, the PE Biosystems group
entered into a strategic collaboration with Illumina, Inc. for the purpose of
developing, manufacturing and marketing array-based systems for high-throughput
DNA analysis. Under the agreement, the companies will jointly develop systems
based on Illumina's BeadArray technology and PE Biosystems' proprietary DNA
chemistry. As part of the agreement, PE Biosystems made a minority investment of
$5.0 million
47
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
in Illumina and will provide a portion of the research and development funding
for the collaboration. The investment is included in other long-term assets.
Epoch Pharmaceuticals, Inc. During the second quarter of fiscal 2000, the PE
Biosystems group made a minority investment in Epoch Pharmaceuticals, Inc. of
$1.0 million and 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 investment is included in other long-term assets.
Millennium Pharmaceuticals, Inc. During the second quarter of fiscal 2000, the
PE Biosystems group recognized a before-tax gain of $25.8 million from the sale
of a portion of the Company's equity interest in Millennium Pharmaceuticals,
Inc. Net cash proceeds from the sale were $31.1 million. The specific
identification method is used to compute realized gains and losses on the
disposition of equity investments.
Panther(TM) Technology. During the second quarter of fiscal 2000, the Celera
Genomics group 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 this
acquisition was $2.5 million and has been accounted for under the purchase
accounting method.
Shanghai GeneCore BioTechnologies Co., Ltd. During the second quarter of fiscal
2000, the Celera Genomics group acquired a 47.5% equity interest in Shanghai
GeneCore BioTechnologies Co., Ltd. from Axys Pharmaceuticals, Inc. The PE
Biosystems group also owns 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.
Shanghai GeneCore has ongoing research collaborations with several Chinese
government agencies and research institutes.
48
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
NOTE 4 - COMPREHENSIVE INCOME
Accumulated other comprehensive income on the Condensed Consolidated Statements
of Financial Position consists of foreign currency translation adjustments,
unrealized gains and losses on available-for-sale investments, and minimum
pension liability adjustments. Total comprehensive income for the three and six
month period ended December 31, 1999 and 1998 is presented in the following
table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net income $ 19.2 $ 15.0 $ 29.3 $ 32.1
Other comprehensive income, net of tax:
Foreign currency translation adjustment (18.6) (1.2) (5.7) 5.0
Unrealized holding gain on investments
arising during period 29.3 6.7 61.9 2.6
Reclassification adjustment for gains
included in net income (16.7) - (16.7) -
------------ ----------- ----------- -------------
Other comprehensive (loss) income (6.0) 5.5 39.5 7.6
------------ ----------- ----------- -------------
Comprehensive income $ 13.2 $ 20.5 $ 68.8 $ 39.7
============ =========== =========== =============
</TABLE>
49
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
NOTE 5 - EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted income per
share from continuing operations for the three month period ended:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------------------- ------------------
(Amounts in thousands PE Celera
except per share amounts) Biosystems Genomics PE
Group Group Corporation
--------------- -------------- ------------------
<S> <C> <C> <C>
Weighted average number of common shares
used in the calculation of basic earnings (loss)
per share from continuing operations 103,208 25,959 49,884
Common stock equivalents 4,329 - 1,126
--------------- -------------- ------------------
Shares used in the calculation of diluted
earnings (loss) per share from
continuing operations 107,537 25,959 51,010
=============== ============== ==================
Income (loss) from continuing operations used
in the calculation of basic and diluted earnings
(loss) per share from continuing operations $ 43,834 $ (24,278) $ 18,207
=============== ============== ==================
Income (loss) per share from
continuing operations
Basic $ .42 $ (.94) $ .36
Diluted $ .41 $ (.94) $ .36
</TABLE>
50
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
The following table presents a reconciliation of basic and diluted income per
share from continuing operations for the six month period ended:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------------------- ------------------
(Amounts in thousands PE Celera
except per share amounts) Biosystems Genomics PE
Group Group Corporation
--------------- -------------- ------------------
<S> <C> <C> <C>
Weighted average number of common shares
used in the calculation of basic earnings (loss)
per share from continuing operations 103,032 25,848 49,631
Common stock equivalents 3,977 - 1,107
--------------- -------------- ------------------
Shares used in the calculation of diluted
earnings (loss) per share from
continuing operations 107,009 25,848 50,738
=============== ============== ==================
Income (loss) from continuing operations used
in the calculation of basic and diluted earnings
(loss) per share from continuing operations $ 73,541 $ (43,676) $ 36,095
=============== ============== ==================
Income (loss) per share from
continuing operations
Basic $ .71 $ (1.69) $ .73
Diluted $ .69 $ (1.69) $ .71
</TABLE>
On May 6, 1999, The Perkin-Elmer Corporation was merged with a subsidiary of PE
Corporation, a new Delaware corporation. The recapitalization 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.
Options and warrants to purchase 7.0 million shares of Celera Genomics Group
Common Stock were outstanding at December 31, 1999, but were not included in the
computation of diluted loss per share because the effect was antidilutive.
Antidilutive options and warrants outstanding at December 31, 1998 were not
material.
51
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
On January 20, 2000, the Board of Directors announced a two-for-one split of PE
Corporation-PE Biosystems Group Common Stock and PE Corporation-Celera Genomics
Group Common Stock. The two-for-one stock splits will be effected in the form of
a 100% stock dividend payable on February 18, 2000 to stockholders of record as
of the close of business on February 4, 2000, for distribution on February 18,
2000. The following table presents PE Biosystems group and Celera Genomics group
share and per share data on a pro forma basis to reflect this split for the
three month period ended December 31, 1999:
<TABLE>
<CAPTION>
(Amounts in thousands PE Biosystems Celera Genomics
except per share amounts) Group Group
------------------- -----------------
<S> <C> <C>
Weighted average number of common shares
used in the calculation of basic earnings (loss)
per share from continuing operations 206,417 51,918
Common stock equivalents 8,657 -
------------------- -----------------
Shares used in the calculation of diluted
earnings (loss) per share from
continuing operations 215,074 51,918
=================== =================
Income (loss) from continuing operations used
in the calculation of basic and diluted earnings
(loss) per share from continuing operations $ 43,834 $ (24,278)
=================== =================
Income (loss) per share from
continuing operations
Basic $ .21 $ (.47)
Diluted $ .20 $ (.47)
</TABLE>
52
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
The following table presents PE Biosystems group and Celera Genomics group share
and per share data on a pro forma basis to reflect this split for the six month
period ended December 31, 1999:
<TABLE>
<CAPTION>
(Amounts in thousands PE Biosystems Celera Genomics
except per share amounts) Group Group
------------------- -----------------
<S> <C> <C>
Weighted average number of common shares
used in the calculation of basic earnings (loss)
per share from continuing operations 206,064 51,695
Common stock equivalents 7,955 -
------------------- -----------------
Shares used in the calculation of diluted
earnings (loss) per share from
continuing operations 214,019 51,695
=================== =================
Income (loss) from continuing operations used
in the calculation of basic and diluted earnings
(loss) per share from continuing operations $ 73,541 $ (43,676)
=================== =================
Income (loss) per share from
continuing operations
Basic $ .36 $ (.84)
Diluted $ .34 $ (.84)
</TABLE>
NOTE 6 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market. Inventories included the following components:
<TABLE>
<CAPTION>
(Dollar amounts in millions) December 31, 1999 June 30, 1999
--------------------- ---------------------
<S> <C> <C>
Raw materials and supplies $ 49.7 $ 42.8
Work-in-process 7.6 10.3
Finished products 111.4 96.6
--------------------- ---------------------
Total inventories $ 168.7 $ 149.7
===================== =====================
</TABLE>
53
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes and significant non-cash investing and
financing activities were as follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) Six months ended
December 31,
1999 1998
------------ -------------
<S> <C> <C>
Interest $ 1.1 $ 1.4
Income taxes $ 20.9 $ 12.2
Significant non-cash investing
and financing activities
Unrealized gain on investments $ 45.2 $ 2.6
Dividends declared not paid $ 8.8 $ 8.5
</TABLE>
NOTE 8 - FINANCIAL INSTRUMENTS
The Company utilizes foreign exchange forward, option, and synthetic forward
contracts and an interest rate swap agreement to manage foreign currency and
interest rate exposures. The principal objective of these contracts is to
minimize the risks and/or costs associated with global financial and operating
activities. The Company does not use derivative financial instruments for
trading or other speculative purposes, nor is the Company a party to leveraged
derivatives.
54
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
At December 31, 1999 and June 30, 1999, the Company had forward, option, and
synthetic forward contracts outstanding for the sale and purchase of foreign
currencies at fixed rates as summarized in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) December 31, 1999 June 30, 1999
Sale Purchase Sale Purchase
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Japanese Yen $ 78.8 $ - $ 104.2 $ 6.0
French Francs 4.3
Australian Dollars 6.4 12.0
German Marks 25.4
Italian Lira 10.4 2.6
British Pounds 69.6 94.1 18.6 50.6
Swiss Francs 7.2 7.5 .7
Swedish Krona 8.3 8.9
Danish Krona 7.6 8.1
Singapore Dollars 9.0 3.1 9.3 3.3
Netherland Guilders 16.1
Euro 34.5 128.0 28.2
Other 11.1 .5 17.1
-------------- -------------- -------------- --------------
Total $ 232.5 $ 225.7 $ 254.0 $ 79.3
============== ============== ============== ==============
</TABLE>
NOTE 9 - RESTRUCTURING AND OTHER MERGER COSTS
At December 31, 1999, the remaining accrual balance related to the fiscal 1998
restructuring charge for the integration of Perseptive Biosystems, Inc. was $3.6
million, consisting of $1.8 million relating to personnel costs and $1.8 million
relating to facility consolidation and asset related write-off costs (see Note
10 to PE Corporation's consolidated financial statements included in the
Company's 1999 Annual Report to Stockholders).
NOTE 10 - PERFORMANCE UNIT BONUS PLAN
During the second quarter of fiscal 2000, a before-tax charge of $21.6 million
was recognized for the accelerated vesting of certain performance units as a
result of the attainment of performance targets of the second series. The
related vesting of the stock options was not accelerated (see Note 8 to PE
Corporation's consolidated financial statements included in the Company's 1999
Annual Report to Stockholders).
A third series of performance units totaling .5 million units had been granted
under the plan as of December 31, 1999.
55
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
NOTE 11 - SEGMENT INFORMATION
The following table presents summarized segment financial information for the
three months ended December 31:
<TABLE>
<CAPTION>
(Dollar amounts PE Biosystems Celera Genomics
in millions) Group Group Other Consolidated
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1999
Net revenues from
external customers $ 319.1 $ 8.3 $ - $ 327.4
Intersegment revenues 16.8 - (16.8) -
----------------- ----------------- ----------------- -----------------
Total revenues $ 335.9 $ 8.3 $ (16.8) $ 327.4
================= ================= ================= =================
Operating income (loss) $ 43.5 $ (39.3) $ (.2) $ 4.0
1998
Net revenues from
external customers $ 286.8 $ 1.7 $ - $ 288.5
Intersegment revenues 9.4 - (9.4) -
----------------- ----------------- ----------------- -----------------
Total revenues $ 296.2 $ 1.7 $ (9.4) $ 288.5
================= ================= ================= =================
Operating income (loss) $ 49.1 $ (12.9) $ (6.9) $ 29.3
</TABLE>
56
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
The following table presents summarized segment financial information for the
six months ended December 31:
<TABLE>
<CAPTION>
(Dollar amounts PE Biosystems Celera Genomics
in millions) Group Group Other Consolidated
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1999
Net revenues from
external customers $ 599.6 $ 16.6 $ - $ 616.2
Intersegment revenues 28.5 - (28.5) -
----------------- ----------------- ----------------- -----------------
Total revenues $ 628.1 $ 16.6 $ (28.5) $ 616.2
================= ================= ================= =================
Operating income (loss) $ 88.5 $ (71.6) $ .6 $ 17.5
1998
Net revenues from
external customers $ 537.6 $ 5.6 $ - $ 543.2
Intersegment revenues 9.8 - (9.8) -
----------------- ----------------- ----------------- -----------------
Total revenues $ 547.4 $ 5.6 $ (9.8) $ 543.2
================= ================= ================= =================
Operating income (loss) $ 82.1 $ (18.5) $ (6.8) $ 56.8
</TABLE>
See Note 6 to PE Corporation's consolidated financial statements included in the
Company's 1999 Annual Report to Stockholders.
NOTE 12 - LOANS PAYABLE
Loans payable included $46 million of commercial paper allocated to the Celera
Genomics group with an average interest rate of 5.65% at December 31, 1999.
NOTE 13 - SUBSEQUENT EVENTS
Third Wave Technologies, Inc. Acquisition. On January 24, 2000, PE Corporation
announced the signing of a definitive merger agreement under which the PE
Biosystems group has agreed to acquire Third Wave Technologies, Inc. in a
stock-for-stock transaction. The transaction, which has been approved by the
Boards of Directors of both companies, is structured as a tax-free pooling of
interests. All of the equity of Third Wave will be exchanged for an aggregate of
approximately 1,972,000 shares of PE Corporation-PE Biosystems Group Common
Stock, before giving effect to the 2-for-1 stock dividend declared January 20,
2000 for distribution on February 18, 2000. The transaction is subject to
customary closing conditions and regulatory approvals.
57
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
Third Wave has developed the Invader(R) nucleic acid (DNA and RNA) detection
technology. The Invader assays detect differences among genetic sequences
important for the analysis of single nucleotide polymorphisms (SNPs). SNPs are
single genetic code changes thought to account for individual differences
ranging from predispositions for certain diseases to particular responses to
drug treatment.
Celera Genomics Group Common Stock Follow-On Public Offering. On January 31,
2000, the Company filed a registration statement with the Securities and
Exchange Commission for a follow-on public offering of 1.6 million shares of its
PE Corporation-Celera Genomics Group Common Stock. The Company will also grant
the underwriters a 15% over-allotment option. The number of shares to be sold
does not reflect the two-for-one stock split of PE Corporation-Celera Genomics
Group Common Stock, discussed in Note 5.
58
<PAGE>
PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion of Operations
The following discussion should be read in conjunction with the PE Corporation's
("PE's" or the "Company's") condensed consolidated financial statements and
related notes included in this report and "Management's Discussion and Analysis"
appearing on pages 97 - 109 of the Company's 1999 Annual Report to Stockholders.
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."
Events Impacting Comparability
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 our PE Biosystems group, develops, manufactures, markets, sells, and
services analytical instruments used in a variety of markets. As part of the
sale, the rights to the "Perkin-Elmer" name were transferred to EG&G. The
transaction is subject to post-closing adjustments pursuant to the terms of the
agreement with EG&G.
Amounts previously reported for Analytical Instruments have been reclassified
and stated as discontinued operations. See Note 15 to PE Corporation's
consolidated financial statements included in the Company's 1999 Annual Report
to Stockholders.
Disposition. During the fourth quarter of fiscal 1999, we divested our interest
in Tecan AG.
Gain on sale of investment. The Company recognized a before-tax gain of $25.8
million in the second quarter of fiscal 2000 related to the sale of a portion of
the Company's interest in a minority equity investment.
Merger-related costs. The Company incurred merger-related period costs of $1.0
million and $2.0 million for the three and six months ended December 31, 1998,
respectively, in connection with the integration of PerSeptive into the Company.
See Note 10 to PE Corporation's consolidated financial statements included in
the Company's 1999 Annual Report to Stockholders.
Other special charges. During the second quarter of fiscal 2000, the Company
recorded a before-tax charge of $21.6 million in selling, general and
administrative expenses, for costs related to the acceleration of certain
long-term compensation programs as a result of the attainment of performance
targets.
During the second quarter of fiscal 1999, non-recurring before-tax costs of $1.2
million were incurred in connection with the recapitalization of the Company.
59
<PAGE>
PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Results of Continuing Operations for the Three Months Ended December 31, 1999
Compared With the Three Months Ended December 31, 1998
PE Corporation reported income from continuing operations of $19.2 million for
the second quarter of fiscal 2000 compared with $18.2 million for the second
quarter of fiscal 1999. On a segment basis, the PE Biosystems group reported
income from continuing operations of $43.8 million for the second quarter of
fiscal 2000 compared with $27.6 million for the second quarter of fiscal 1999.
On a comparable basis, excluding Tecan and the special items previously
described, income from continuing operations increased 53.1% to $43.8 million
for the second quarter of fiscal 2000 compared with $28.6 million for the prior
period. This increase is attributable to the growth in net revenues and lower
operating expenses as a percent of net revenues. The net effect of changes in
foreign currency had a negligible impact on this quarter's earnings. The Celera
Genomics group reported a net loss of $24.3 million for the second quarter of
fiscal 2000, compared with a net loss of $8.6 million for the second quarter of
fiscal 1999. The increase in the net loss resulted from an increase in
sequencing throughput and continued scale-up of the Celera Genomics group's R&D
and business operations infrastructure.
Net revenues for the Company were $327.4 million for the second quarter of
fiscal 2000 compared with $288.5 million for the second quarter of fiscal 1999,
an increase of 13.5%. On a segment basis, net revenues for the PE Biosystems
group increased 13.4% to $335.9 million for the second quarter of fiscal 2000,
compared with $296.2 million for the prior year. The Celera Genomics group
reported net revenues of $8.3 million for the second quarter of fiscal 2000,
compared with $1.7 million for the second quarter of fiscal 1999.
Net revenues for the PE Biosystems group, excluding the results of Tecan in the
prior year, increased 26% compared with the prior year. The effects of foreign
currency translation decreased net revenues by approximately $2.5 million
compared with the prior year. Revenues from leased instruments and shipments of
consumables and project materials to the Celera Genomics group were $16.9
million for the second quarter of fiscal 2000, or 5% of the PE Biosystems
group's net revenues. Revenues from shipments of instruments and consumables to
the Celera Genomics group were $9.4 million for the second quarter of fiscal
1999. Geographically, excluding the net revenues of Tecan for the second quarter
of fiscal 1999, the PE Biosystems group reported revenue growth in all regions
for the second quarter of fiscal 2000 compared with the second quarter of fiscal
1999. Revenues increased 35.1% in the United States, 19.6% in Europe, 8.2% in
the Far East and 68.1% in Latin America and other markets, compared with the
second quarter of the prior fiscal year. Increased demand for genetic analysis
instruments, sequence detection systems, and genetic analysis reagents, sold
into both the research and applied markets, contributed to the growth. During
the quarter, the PE Biosystems group shipped its one thousandth ABI Prism(R)
3700 DNA Analyzer. The 3700 began shipping in the second quarter of fiscal 1999.
Net revenues for the Celera Genomics group were $8.3 million for the second
quarter of fiscal 2000 compared with $1.7 million for the second quarter of
fiscal 1999. The increased revenues were
60
<PAGE>
PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
primarily a result of database subscription agreements initiated during the
second half of fiscal 1999 and an increase in genomics services revenues.
Revenues for plant and animal genotyping services remained essentially unchanged
with the prior year.
Gross margin as a percentage of net revenues for the Company was 55% for the
second quarter of fiscal 2000 compared with 54.7% for the second quarter of
fiscal 1999. Gross margin for the PE Biosystems group as a percentage of net
revenues was 53.8% for the second quarter of fiscal 2000 compared with 55.3% for
the second quarter of fiscal 1999. Excluding Tecan for the prior year, the gross
margin as a percentage of net revenues was 53.5% for the PE Biosystems group.
SG&A expenses for the Company were $115.3 million for the second quarter of
fiscal 2000 compared with $85.7 million for the second quarter of fiscal 1999.
On a segment basis, SG&A expenses were $105.8 million, including the long-term
compensation charge, and $79.9 million for the second quarter of fiscal 2000 and
1999, respectively, for the PE Biosystems group. SG&A expenses for the Celera
Genomics group were $9.5 million and $5.8 million for the second quarter of
fiscal 2000 and 1999, respectively.
SG&A expenses for the PE Biosystems group, excluding the long-term compensation
charge for the current year and Tecan from the prior year, increased 19.7% for
the second quarter of fiscal 2000 compared with the second quarter of the prior
year. This increase was due to higher planned expenses, reflecting the growth in
sales. As a percentage of net revenues, excluding the long-term compensation
charge and Tecan, SG&A expenses were 25.1% for the second quarter of fiscal 2000
compared with 26.4% for the prior year.
The Celera Genomics group's SG&A expenses increased $3.7 million for the second
quarter of fiscal 2000 compared with the second quarter of the prior year. The
increase related to the planned scale-up in business development, marketing and
administrative activities in support of the database business.
R&D expenses for the Company increased to $60.7 million for the second quarter
of fiscal 2000 compared with $40.5 million for the prior year. R&D expenses for
the PE Biosystems group were $31.4 million for the second quarter of fiscal 2000
compared with $33.3 million for the prior year. Excluding Tecan for the prior
year, R&D expenses increased 12.2% compared with the prior year period. As a
percentage of net revenues, excluding Tecan, R&D expenses were 9.3% for the
second quarter of fiscal 2000 compared with 10.5% for the second quarter of the
prior year. The prior year's R&D expense level was higher as a percentage of
sales due to the release of new products introduced later in fiscal 1999. The
Celera Genomics group's R&D expenses increased $29.9 million to $38.2 million
for the second quarter of fiscal 2000 from $8.3 million for the second quarter
of fiscal 1999 primarily as a result of a full quarter of sequencing operations
and significantly expanded bioinformatics and software development capabilities.
61
<PAGE>
PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Company incurred merger-related period costs of $1.0 million for the second
quarter of fiscal 1999 for training, relocation, and communication in connection
with the integration of PerSeptive into the Company. See note 10 to PE
Corporation's consolidated financial statements included in the Company's 1999
Annual Report to Stockholders. During the second quarter of fiscal 1999, the
Company recorded a non-recurring charge of $1.2 million for costs incurred in
connection with the recapitalization of the Company.
Operating income was $4.0 million for the second quarter of fiscal 2000 compared
with $29.3 million for the second quarter of the prior year. On a segment basis,
operating income for the PE Biosystems group decreased to $43.5 million for the
second quarter of fiscal 2000 compared with $49.1 million for the prior year. On
a comparable basis, excluding the special items previously described and Tecan,
operating income increased 47% for the second quarter of fiscal 2000 compared
with the prior year. The PE Biosystems group benefited from increased revenues
primarily as a result of strong demand for several new products introduced over
the past year. The PE Biosystems group also benefited from lower operating
expenses as a percentage of net revenues, partially as a result of slower than
planned ramp-up in staffing. Operating income as a percentage of net revenues,
excluding the special items and Tecan, increased to 19.4% for the second quarter
of fiscal 2000 compared with 16.6% for the prior year.
Operating loss for the Celera Genomics group was $39.3 million for the second
quarter of fiscal 2000 compared with $12.9 million for the second quarter of
fiscal 1999. The increase in the operating loss reflected the increased
sequencing activity and increased operating expenses required to support the
expanded data management and software and business development activities.
The Company recognized a before-tax gain of $25.8 million for the second quarter
of fiscal 2000 related to the sale of a portion of the Company's interest in a
minority equity investment.
Interest expense was $.9 million for the second quarter of fiscal 2000 compared
with $1.3 million for the prior year. This decrease was primarily due to lower
average interest rates. Interest income was $5.1 million for the second quarter
of fiscal 2000 compared with $.2 million for the prior year, which included
interest on the note receivable from EG&G relating to the sale of the Analytical
Instruments business. The increase was also due to higher cash balances and
higher interest rates.
Other expense, net for the Company for the second quarter of fiscal 2000 was
$4.3 million compared with $2.2 million for the prior year. For both periods,
other expense, net primarily related to costs associated with a portion of the
Company's traditional foreign currency management program that provides hedge
coverage for projected cash flows.
The Company's effective income tax rate was 36% for the second quarter of fiscal
2000 compared with 10% for the prior year. Excluding special items in fiscal
2000 and fiscal 1999, and Tecan in fiscal 1999, the effective income tax rate
was 25% for the second quarter of 2000 compared with 8% for the prior year.
62
<PAGE>
PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
In the second quarter of fiscal 1999, minority interest expense of $5.1 million
was recognized relating to the Company's 14.5% financial interest in Tecan.
Results of Continuing Operations for the Six Months Ended December 31, 1999
Compared With the Six Months Ended December 31, 1998
PE Corporation reported income from continuing operations of $29.3 million for
the first six months of fiscal 2000 compared with $36.1 million for the first
six months of fiscal 1999. On a segment basis, the PE Biosystems group reported
income from continuing operations of $73.5 million for the first six months of
fiscal 2000 compared with $49.1 million for the first six months of fiscal 1999.
On a comparable basis, excluding the special items previously described and
Tecan, income from continuing operations increased 44.4% to $73.5 million for
the first six months of fiscal 2000 compared with $50.9 million for the prior
period. This increase is attributable to the growth in net revenues and lower
operating expenses as a percent of net revenues. Partially offsetting the lower
operating expenses were increased non-operating costs related to the PE
Biosystems group's foreign currency management program. The Celera Genomics
group reported a net loss of $43.7 million for the first six months of fiscal
2000, compared with a net loss of $12.2 million for the first six months of
fiscal 1999. The increase in the net loss reflected the increased sequencing
activity and increased operating expenses required to support the expanded data
management and software and business development activities.
Net revenues for the Company were $616.2 million for the first six months of
fiscal 2000 compared with $543.2 million for first six months of fiscal 1999, an
increase of 13.4%. On a segment basis, net revenues for the PE Biosystems group
increased 14.8% to $628.2 million for the first six months of fiscal 2000,
compared with $547.4 million for the prior year. The Celera Genomics group
reported net revenues of $16.6 million for the first six months of fiscal 2000,
compared with $5.6 million for the first six months of fiscal 1999.
Net revenues for the PE Biosystems group, excluding the results of Tecan for the
prior year, increased 28.2% compared with the prior year. The effects of foreign
currency translation increased net revenues by approximately $2.4 million
compared with the prior year. Revenues from leased instruments and shipments of
consumables and project materials to the Celera Genomics group were $28.6
million for the first six months of fiscal 2000, or 4.6% of the PE Biosystems
group's net revenues. For the first six months of fiscal 1999, revenues from
shipments of instruments and consumables to the Celera Genomics group were $9.8
million. Geographically, excluding the net revenues of Tecan for the first six
months of fiscal 1999, the PE Biosystems group reported revenue growth in all
regions for the first six months of fiscal 2000 compared with the first six
months of fiscal 1999. Revenues increased 29.9% in the United States, 21.2% in
Europe, 31% in the Far East and 60.3% in Latin America and other markets,
compared with the first six months of the prior fiscal year. Increased demand
for genetic analysis products, sequence detection systems, and polymerase chain
reaction product lines was the primary contributor.
63
<PAGE>
PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Net revenues for the Celera Genomics group were $16.6 million for the first six
months of fiscal 2000 compared with $5.6 million for the first six months of
fiscal 1999. The increased revenues were primarily a result of database
subscription agreements initiated during the second half of fiscal 1999 and an
increase in genomics services revenues. Revenues for plant and animal genotyping
services remained essentially unchanged with the prior year.
Gross margin as a percentage of net revenues for the Company was 54.6% for the
first six months of fiscal 2000 compared with 55.3% for the first six months of
fiscal 1999. Excluding Tecan for the prior year, the gross margin as a
percentage of net revenues was 53.7%. Gross margin for the PE Biosystems group
as a percentage of net revenues was 53.4% for the first six months of fiscal
2000 compared with 55.3% for the first six months of fiscal 1999.
SG&A expenses for the Company were $201.5 million for the first six months of
fiscal 2000 compared with $163.2 million for the first six months of fiscal
1999. On a segment basis, SG&A expenses were $183.6 million, including the
long-term compensation charge, and $152.6 million for the first six months of
fiscal 2000 and 1999, respectively, for the PE Biosystems group, and $17.9
million and $10.6 million for the first six months of fiscal 2000 and 1999,
respectively, for the Celera Genomics group.
SG&A expenses for the PE Biosystems group, excluding the long-term compensation
charge for the current year and Tecan from the prior year, increased 20.2% for
the first six months of fiscal 2000 compared with the first six months of the
prior year. This increase was due to higher planned expenses, reflecting the
growth in sales. As a percentage of net revenues, excluding the long-term
compensation charge and Tecan, SG&A expenses were 25.8% for the first six months
of fiscal 2000 compared with 27.5% for the prior year.
The Celera Genomics group's SG&A expenses increased $7.3 million for the first
six months of fiscal 2000 compared with the first six months of the prior year.
The increase related to the planned scale-up in business development, marketing
and administrative activities in support of the database business.
R&D expenses for the Company increased to $117.4 million for the first six
months of fiscal 2000 compared with $77.1 million for the prior year. R&D
expenses for the PE Biosystems group were $63.4 million for the first six months
of fiscal 2000 compared with $65.6 million for the prior year. Excluding Tecan,
R&D expenses increased 11% compared with second quarter of the prior year. As a
percentage of net revenues, excluding Tecan, R&D expenses were 10.1% for the
first six months of fiscal 2000 compared with 11.6% for the first six months of
the prior year. The prior year's R&D expense level was higher as a percentage of
sales due to the release of new products introduced later in fiscal 1999. The
Celera Genomics group's R&D expenses increased $57.4 million to $70.3 million
for the first six months of fiscal 2000 from $12.9 million for the first six
months of fiscal 1999
64
<PAGE>
PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
primarily as a result of a full six months of sequencing operations and
significantly expanded bioinformatics and software development capabilities.
The Company incurred merger-related period costs of $2.0 million for the first
six months of fiscal 1999 for training, relocation, and communication in
connection with the integration of PerSeptive into the Company. See note 10 to
PE Corporation's consolidated financial statements included in the Company's
1999 Annual Report to Stockholders. During the first six months of fiscal 1999,
the Company recorded a non-recurring charge of $1.2 million for costs incurred
in connection with the recapitalization of the Company.
Operating income was $17.5 million for the first six months of fiscal 2000
compared with $56.8 million for the first six months of the prior year. On a
segment basis, operating income for the PE Biosystems group increased to $88.5
million for the first six months of fiscal 2000 compared with $82.1 million for
the first six months of the prior year. On a comparable basis, excluding the
special items previously described and Tecan, operating income increased 49.2%
for the first six months of fiscal 2000 compared with the first six months of
the prior year. The PE Biosystems group benefited from increased revenues
primarily as a result of strong demand for several new products introduced over
the past year. The PE Biosystems group also benefited from lower operating
expenses as a percentage of net revenues, partially as a result of slower than
planned ramp-up in staffing. Operating income as a percentage of net revenues,
excluding the special items and Tecan, increased to 17.5% for the first six
months of fiscal 2000 compared with 15.1% for the first six months of the prior
year.
Operating loss for the Celera Genomics group was $71.6 million for the first six
months of fiscal 2000 compared with $18.5 million for the first six months of
fiscal 1999. The increase in the operating loss reflected the increase in
sequencing activity and increased operating expenses required to support the
expanded data management and software and business development activities.
The Company recognized a before-tax gain of $25.8 million in the second quarter
of fiscal 2000 related to the sale of a portion of the Company's interest in a
minority equity investment.
Interest expense was $1.3 million for the first six months of fiscal 2000
compared with $2.1 million for the prior year. This decrease was primarily due
to lower average interest rates. Interest income was $9.6 million for the first
six months of fiscal 2000 compared with $.7 million for the prior year, which
included interest on the note receivable from EG&G relating to the sale of the
Analytical Instruments business. The increase was also due to higher cash
balances and higher interest rates.
Other expense, net for the Company for the first six months of fiscal 2000 was
$8.9 million, primarily related to costs associated with a portion of the
Company's traditional foreign currency management program that provides hedge
coverage for projected cash flows. Other expense, net was $.5 million for the
first six months of fiscal 1999, which related to costs associated with a
portion of the Company's traditional foreign currency hedging program offset by
income from a legal settlement.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Company's effective income tax rate was 32% for the first six months of
fiscal 2000 compared with 19% for the prior year. Excluding special items in
fiscal 2000 and fiscal 1999, and Tecan in fiscal 1999, the effective income tax
rate was 24% for the first six months of 2000 compared with 18% for the prior
year.
In the first six months of fiscal 1999, minority interest expense of $8.2
million was recognized relating to the Company's 14.5% financial interest in
Tecan.
Market Risk
The PE Biosystems group of our company operates internationally, with
manufacturing and distribution facilities in various countries throughout the
world. For the first six months of fiscal 2000 and fiscal 1999, the PE
Biosystems group derived approximately 49% of its revenues from countries
outside of the United States. Results continue to be affected by market risk,
including fluctuations in foreign currency exchange rates and changes in
economic conditions in foreign markets.
The Company's risk management strategy utilizes derivative financial
instruments, including forwards, swaps, purchased options, and synthetic forward
contracts to hedge certain foreign currency and interest rate exposures, with
the intent of offsetting losses and gains that occur on the underlying exposures
with gains and losses, respectively, on the derivatives. We do not use
derivative financial instruments for trading or other speculative purposes, nor
is our company a party to leveraged derivatives. At December 31, 1999,
outstanding hedge contracts covered approximately 75% of the estimated exposures
related to foreign currency cash flows to be realized over the next nine months.
The outstanding hedges were a combination of forward, option, and synthetic
forward contracts maturing over the next nine months.
The Company performed sensitivity analyses as of December 31, 1999 and June 30,
1999. Assuming a hypothetical adverse change of 10% in foreign exchange rates in
relation to the U.S. Dollar at December 31, 1999, the Company calculated a
hypothetical loss of $9.0 million when comparing the change in fair value of
both the foreign currency contracts outstanding and the underlying exposures
being hedged at December 31, 1999. Performing the same hypothetical calculation
at June 30, 1999, the Company calculated a hypothetical loss of $6.1 million.
These hypothetical analyses exclude the impact of foreign currency translation
on the Company's 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, the Company executed an interest rate swap, allocated to the PE Biosystems
group, in conjunction with the Company entering into a five-year Japanese Yen
debt obligation. Under the terms of the swap agreement, the Company pays a fixed
rate of interest at 2.1% and receive a floating LIBOR interest rate. At December
31, 1999, the notional amount of indebtedness covered by the interest rate swap
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
was Yen 3.8 billion or $37.1 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.
Financial Resources and Liquidity
Significant Changes in the Condensed Consolidated Statements of Financial
Position. Cash and cash equivalents were $349.5 million at December 31, 1999
compared with $308.0 million at June 30, 1999, with total debt of $118.4 million
at December 31, 1999 compared with $35.4 million at June 30, 1999. Working
capital was $468.0 million at December 31, 1999 compared with $471.4 million at
June 30, 1999. Debt to total capitalization increased to 12% at December 31,
1999 from 4% at June 30, 1999 as a result of an increase in loans payable.
During the first quarter of fiscal 2000, the Company secured financing of $46
million specifically for the purchase of the Celera Genomics group's Rockville,
Maryland facilities. The Company anticipates that the $46 million financing will
remain outstanding beyond the current fiscal year. The increase in loans payable
for the PE Biosystems group is primarily a result of the Company's decision to
discontinue its receivables factoring program in a foreign subsidiary.
Other long-term assets increased $51.4 million to $300.9 million at December 31,
1999 from $249.5 million at June 30, 1999, primarily as a result of a net
increase in value of the Company's minority equity investments.
Accounts payable decreased $20.0 million to $145.1 million at December 31, 1999
from $165.1 million at June 30, 1999. Payments for higher purchases made in the
fourth quarter of fiscal 1999, which were made to support increased production
and operating requirements, contributed to the decrease.
Accrued salaries and wages increased $14.6 million to $62.1 million at December
31, 1999 from $47.5 million at June 30, 1999. The increase reflects the accrual
of the charge for the acceleration of certain long-term compensation programs,
as a result of the attainment of performance targets, partially offset by the
timing of recurring payments.
Condensed Consolidated Statements of Cash Flows. Net cash used by operating
activities from continuing operations was $16.0 million for the first six months
of fiscal 2000 compared with net cash provided by operating activities of $15.9
million for the same period in fiscal 1999. For the first six months of fiscal
2000, income related cash flow was more than offset by higher payments to
suppliers and payments of certain compensation accruals, as well as higher
prepaid expenses and other current assets.
Net cash used by investing activities from continuing operations was $31.5
million for the first six months of fiscal 2000 compared with $35.1 million for
the first six months of fiscal 1999. In the first
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PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
six months of fiscal 2000, the Company had capital expenditures of $51.1
million. Capital expenditures were $31.2 million for the PE Biosystems group,
which included $4.3 million related to improvement of its information technology
infrastructure, and $19.9 million for the Celera Genomics group. Investments
during the first six months of fiscal 2000 included minority investments in
Illumina, Inc. and Epoch Pharmaceuticals, Inc. for the PE Biosystems group. The
Celera Genomics groups' investments during the first six months of 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.
In the first six months of fiscal 2000, the Company realized approximately $31.1
million from the sale of a portion of a minority investment. In the first six
months of fiscal 1999, the Company generated $14.3 million in net cash proceeds
from the sale of certain non-operating assets. The fiscal 1999 cash proceeds
were more than offset by capital expenditures of $50.0 million, which included
$4.7 million related to improvement of the Company's information technology
infrastructure, and $17.5 million for the acquisition of a corporate airplane.
Net cash used by discontinued operations was $7.4 million for the first six
months of fiscal 2000 compared with $26.4 million for the first six months of
fiscal 1999. The fiscal 2000 use of $7.4 million was for transaction-related
payments and other cash outlays associated with the divestiture of the
Analytical Instruments business. The Company expects additional cash outlays
over the balance of the fiscal year.
Net cash provided by financing activities was $93.9 million for the first six
months of fiscal 2000 compared with $40.6 million for the prior period. For the
first six months of fiscal 2000, the Company received $27.7 million in proceeds
from employee stock option exercises compared with $37.9 million for fiscal
1999. Loans payable increased $75.0 million for the first six months of fiscal
2000 compared with an increase of $15.6 million for the prior year. The first
six months of fiscal 1999 included a payment of $5.3 million for the retirement
of foreign debt.
At December 31, 1999 PE had unused credit facilities totaling $354 million.
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PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Year 2000
In fiscal 1997, the Company initiated a worldwide program to assess the expected
impact of the Year 2000 date recognition problem on our existing internal
computer systems; our non-information technology systems, including embedded and
process control systems; our product offerings; and our significant suppliers.
The purpose of this program has been to ensure the event does not have a
material adverse effect on our business operations.
While not all possible Year 2000 date related disruption scenarios have been
experienced, and there is a possibility of disruptions in the future, through
the date of this report, the Company has experienced no material disruption or
other significant problems. The Company continues to evaluate and mitigate our
exposure in areas where appropriate. Based on currently available information,
management continues to believe that Year 2000 related disruptions or other
problems, if any, will not have a material adverse effect on the Company's
operations or financial condition. However, the Company cannot be certain that
Year 2000 issues will not have a material adverse effect on the Company, since
the evaluation process is not yet complete and it is early in the Year 2000.
Euro Conversion
A single currency called the euro was introduced in Europe on January 1, 1999.
Eleven of the fifteen member countries of the European Union agreed to adopt the
euro as their common legal currency on that date. Fixed conversion rates between
these participating countries' existing currencies (the "legacy currencies") and
the euro were established as of that date. The legacy currencies are scheduled
to remain legal tender as denominations of the euro until at least January 1,
2002, but not later than July 1, 2002. During this transition period, parties
may settle transactions using either the euro or a participating country's legal
currency.
The Company is currently evaluating the impact the euro conversion may have on
its computer and financial systems, business processes, market risk, and price
competition. The Company 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." The provisions of the statement require the
recognition of all derivatives as either assets or liabilities in the statement
of financial position and the measurement of those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. The Company is
required to implement the statement in the first quarter of fiscal 2001. The
Company is currently analyzing the statement to determine the impact, if any, on
the consolidated financial statements.
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PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Outlook
The PE Biosystems group expects to continue to grow and maintain profitability
for fiscal 2000 on the strength of robust demand and several new products.
Fiscal 2000 will focus on growing product lines across a broad array of base
technologies and exploring the needs of evolving markets. As public funding for
basic life science research continues to expand, and more progress is made in
uncovering structured genomic information, pharmaceutical companies, recognizing
the opportunity that this information may provide, are placing greater emphasis
on research and development in these areas. PE Biosystems should continue to
benefit from its customers' needs for more efficient and cost effective systems
that can analyze and commercialize the volume of genomic information being
created.
Sales of PE Biosystems' genetic analysis systems are increasingly moving beyond
the basic research markets to a wider group of commercial customers and public
agencies. The PE Biosystems group also should benefit this spring 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, now that the final versions have been shipped to test site
customers. Additionally, the PE Biosystems group should also benefit from new
products expected to be introduced during this period for drug characterization,
as well as instruments and software for drug screening.
On January 24, 2000, PE Corporation announced the signing of a definitive merger
agreement under which the PE Biosystems group has agreed to acquire Third Wave
Technologies, Inc. in a stock-for-stock transaction. The transaction, which has
been approved by the Boards of Directors of both companies, is structured as a
tax-free pooling of interests. All of the equity of Third Wave will be exchanged
for an aggregate of approximately 1,972,000 shares of PE Corporation-PE
Biosystems Group Common Stock, before giving effect to the two-for-one stock
dividend declared January 20, 2000 for distribution on February 18, 2000. The
transaction is subject to customary closing conditions and regulatory approvals.
Third Wave has developed the Invader(R) nucleic acid (DNA and RNA) detection
technology. The Invader(R) assays detect differences among genetic sequences
important for the analysis of single nucleotide polymorphisms (SNPs). SNPs are
single genetic code changes thought to account for individual differences
ranging from predispositions for certain diseases to particular responses to
drug treatment. This technology will be used with the PE Biosystems group's
Sequence Detection Systems, a proprietary technology for real-time analysis of
genetic information.
We remain concerned about adverse currency effects because approximately 49% of
the PE Biosystems group's revenues were derived from regions outside the United
States for fiscal 1999.
The Celera Genomics group expects to see an expansion in the customer base for
the new genomic information and database products, with corresponding increases
in revenues throughout fiscal 2000. During the second quarter of fiscal 2000,
the Celera Genomics group entered into a five-year comprehensive genomics
agreement with Pfizer Inc. which includes a subscription to all of Celera
Genomics group's current database products and a collaborative gene discovery
agreement. Pfizer's
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PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
database subscription gives it access to five databases developed by the Celera
Genomics group until 2005. All of these databases integrate the Celera Genomics
group's proprietary information with publicly available sources. Despite the
potential for increased revenues in fiscal 2000, the Celera Genomics group
expects that it will continue to incur significant operating losses for such
year.
Operating expenses will increase over the balance of the fiscal year as the
Celera Genomics group continues to improve its sequencing throughput and
installs additional hardware and software designed to accelerate product
development and support for its information delivery systems.
The Celera Genomics group recently completed the sequencing phase in deciphering
the genome of Drosophila melanogaster, the fruit fly. In January, 2000, the
Celera Genomics group announced it had compiled DNA sequence in their database
that covers 90% of the human genome. As a result of the extensive sequence
coverage of the 23 pairs of human chromosomes and based on statistical analysis,
the Celera Genomics group believes that greater than 97% of all human genes are
now represented in the Celera Genomics group's database. As a result of Celera's
successful sequencing and assembly of Drosophila and the accelerated
availability of data from public human genome sequencing efforts, Celera
believes that it can sequence and assemble the human genome on an accelerated
basis. Celera Genomics expects to complete the sequencing phase of the human
genome by mid-2000 and the assembly phase by the end of 2000, or one year ahead
of its original schedule.
Celera Genomics' progress to date has placed it well ahead of its original
schedule. Consequently, Celera Genomics intends to make significant new
investments to expand beyond the genome and to take advantage of what it
believes will be new market opportunities in the emerging fields of functional
genomics, in particular proteomics, and personalized health/medicine. New
revenue opportunities in these fields range from expansion of Celera's
information and service businesses to the licensing of proprietary discoveries
resulting from the new information.
On January 31, 2000, the Company filed a registration statement with the
Securities and Exchange Commission for a follow-on public offering of 1.6
million shares of its Celera Genomics Group Common Stock. Celera intends to use
the net proceeds from this offering primarily to fund its new product and
technology development activities in functional genomics, with an emphasis on
proteomics, and personalized health/medicine. These activities will require
increased investment in Celera's laboratory, computational resources, software
systems and business and product development operations. Celera also intends to
use the net proceeds of this offering for general corporate purposes, including
possible acquisitions, alliances or collaborations. Pending such uses, Celera
intends to invest the net proceeds of this offering in interest-bearing,
investment-grade securities.
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PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
We believe that Celera Genomics' existing cash and cash equivalents and the note
receivable and tax benefit receivable from the PE Biosystems group 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 informational products and services based on
the resultant data. While we intend to use the net proceeds of the Celera
Genomics Group Common Stock offering to fund Celera's expansion into functional
genomics and personalized health/medicine, such funds may not be sufficient to
support these new business activities as they develop. Celera'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. For
information concerning the risks and uncertainties that may affect the
operations, performance, development and results of the PE Biosystems Group see
"PE Biosystems Group - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward-Looking Statements" on pages 21 to
22 of this report. For information concerning the risks and uncertainties that
may affect the operations, performance, development and results of the Celera
Genomics Group see "Celera Genomics Group - Management's Discussion and Analysis
of Financial Condition and Results of Operations - Forward-Looking Statements"
on pages 36 to 42 of this report.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 PE Corporation Performance Unit Bonus Plan, as amended
through November 18, 1999.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report is being filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PE CORPORATION
By: /s/ Dennis L. Winger
-------------------------------
Dennis L. Winger
Senior Vice President and Chief
Financial Officer
By: /s/ Vikram Jog
-------------------------------
Vikram Jog
Corporate Controller (Chief
Accounting Officer)
Dated: February 11, 2000
74
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
10.1 PE Corporation Performance Unit Bonus Plan, as amended through
November 18, 1999.
27. Financial Data Schedule.
</TABLE>
PE CORPORATION
PERFORMANCE UNIT BONUS PLAN
(as amended through November 18, 1999)
1. Purpose of the Plan.
The purpose of the PE Corporation Performance Unit Bonus Plan (the
"Plan") is to increase stockholder value and to advance the interests of PE
Corporation and its subsidiaries (collectively, the "Corporation") by providing
financial incentives designed to attract, retain, and motivate key employees of
the Corporation.
2. Definitions.
As used herein, the following terms have the meanings hereinafter set
forth unless the context clearly indicates to the contrary:
2.1 "Cause" means (a) willful malfeasance or willful misconduct by the
employee in connection with his or her employment, (b) continuing refusal by the
employee to perform his or her duties at the Corporation or any lawful direction
by either the Board of Directors or the Chief Executive Officer of the
Corporation (other than due to the employee's physical or mental incapacity),
after a demand for substantial performance is delivered to the employee which
identifies the manner in which the employee has not performed his or her duties,
(c) the willful engaging by the employee in conduct which is materially
injurious to the Corporation, or (d) the indictment of the employee for any
felony or misdemeanor involving moral turpitude.
2.2 "Celera Stock" means the PE Corporation - Celera Genomics Group
Common Stock, par value $.01 per share.
2.3 "Committee" means the Management Resources Committee of the Board
of Directors of the Corporation, or any successor thereto or committee
designated thereby.
2.4 "Common Stock" means Celera Stock and PE Biosystems Stock and
either of them as the context requires.
2.5 "Good Reason" means the occurrence of any of the following, other
than with the employee's consent: (a) a reduction of 10% or more by the
Corporation in the employee's base salary without a substantially similar
reduction to all other executives of comparable level to the employee, (b) any
material breach by the Corporation of its contractual obligations to the
employee, and (c) the Corporation's requiring the employee to be based more than
50 miles from his or her then principal place of employment with the Corporation
without the employee's consent, except for required travel on the Corporation's
business to an extent substantially consistent with the business travel
obligations of the employee.
1
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2.6 "Participant" means an employee to whom an award of Performance
Units has been granted under the Plan.
2.7 "PE Biosystems Stock" means the PE Corporation - PE Biosystems
Group Common Stock, par value $.01 per share.
2.8 "Stock Incentive Plan" means any of the Corporation's stock
incentive plans under which options for shares of Common Stock may be granted.
2.9 "Stock Price Targets" means the stock price targets applicable to a
series of Performance Units established by the Committee at the time of such
award. For purposes hereof, a stock price target shall be deemed attained at
such time as the fair market value (as defined in the applicable Stock Incentive
Plan) of a share of Celera Stock or PE Biosystems Stock, as the case may be,
averages such stock price target over a period of 90 consecutive calendar days.
2.10 "Unit Value" means the value of a Performance Unit as determined
pursuant to Section 4.
2.11 "Vesting Period" means the vesting period applicable to a series
of Performance Units established by the Committee at the time of such award.
3. Administration of the Plan.
The Committee shall have plenary authority in its discretion, but
subject to the express provisions of the Plan, to administer the Plan. The
Committee shall also have plenary authority in its discretion to interpret the
Plan, to prescribe, amend, and rescind rules and regulations relating to it, and
to make any and all other determinations and take any and all actions deemed
necessary or advisable for the administration of the Plan. The Committee's
determination on the foregoing matters shall be conclusive and binding.
4. Awards of Performance Units.
At the time of grant of stock options under a Stock Incentive Plan, the
Committee may grant to any employee to whom options have been so granted such
number of Performance Units up to the number of stock options so granted.
Performance Units may be granted in one or more series, each series containing
such terms and conditions consistent with the Plan as the Committee shall
determine. The term of each Performance Unit shall be the term of the related
stock option, subject to earlier termination as hereinafter provided, and the
Unit Value of each Performance Unit shall be determined by the Committee but
shall be not more than the purchase price of the related option. Each
Performance Unit granted hereunder shall be evidenced by an agreement containing
such terms and conditions consistent with the Plan as the Committee shall
determine.
5. Conditions to Payment of Performance Units.
A Participant's right to receive payment of the Unit Value of
Performance Units awarded to him or her shall, except as provided below, be
subject to the attainment of the Stock Price Targets and satisfaction of the
Vesting Period applicable to such Performance Units. Performance Units shall not
2
<PAGE>
be affected by any change of duties or position so long as the holder thereof
continues to be an employee of the Corporation.
6. Payment of Performance Units.
6.1 Terms of Payment. Payment of the aggregate Unit Value of
Performance Units shall be made to Participants as soon as practicable following
the satisfaction of the applicable Stock Price Targets and Vesting Period and
shall, in the discretion of the Committee, be made in cash, Common Stock, or a
combination thereof. Notwithstanding the foregoing, if payment is to be made in
shares of Common Stock, or a combination of such shares and cash, any such
issuance of shares of Common Stock may be made subject to all applicable laws
and regulations and to the approval of all governmental authorities required in
connection with the authorization, issuance, sale, or transfer of shares of
Common Stock.
6.2 Deferrals. Notwithstanding the provisions of Section 6.1 above, to
the extent otherwise permissible under the terms of any deferred compensation
plan then offered by the Corporation, and subject to the terms thereof, a
Participant may elect to defer payment of the dollar value of the Unit Value
payable with respect to any Performance Units.
7. Payment Upon Termination of Employment.
7.1 Termination of Employment Prior to Attainment of Stock Price
Targets. In the event that the employment of a Participant shall terminate for
any reason prior to any Stock Price Targets having been attained, all
Performance Units granted to such Participant shall immediately terminate
without the payment of any consideration therefor.
7.2 Termination of Employment Following Attainment of Stock Price
Targets. In the event that the employment of a Participant shall terminate
following the attainment of one or more applicable Stock Price Targets but prior
to satisfaction of the applicable Vesting Period, the Performance Units
corresponding to such Stock Price Targets shall be payable as follows:
7.2.1 Termination by Participant Other than for Good Reason or
by the Corporation For Cause. In the event of termination of employment
by Participant due to Participant's choice, such choice not being
supported by Good Reason, or due to the Corporation's terminating said
employment for Cause, then all Performance Units granted to such
Participant shall immediately terminate without the payment of any
consideration therefor.
7.2.2 Termination by Participant for Good Reason or by the
Corporation Other than For Cause. In the event of termination of
employment by Participant for Good Reason or by the Corporation other
than for Cause, then the Performance Units as to which the Stock Price
Targets have been attained as of the date of such termination shall be
paid to the Participant at such time as payment of the Unit Value of
the Performance Units would otherwise be made pursuant to Section 6.1
hereof.
7.2.3 Termination Upon Retirement, Death, or Disability. In
the event of termination of employment due to retirement from the
Corporation in accordance with the terms of any pension plan provided
by the Corporation, or if a Participant shall die while
3
<PAGE>
employed by the Corporation or become totally and permanently disabled,
then the Performance Units as to which the Stock Price Targets have
been attained as of the date of such termination shall be paid to the
Participant at such time as payment of the Unit Value of the
Performance Units would otherwise be made pursuant to Section 6.1
hereof.
8. Rights as a Stockholder.
A Participant shall not be entitled to any rights or privileges of a
stockholder of the Corporation, except that such Participant shall be entitled
to receive dividend equivalents on the Performance Units if, as, and when paid
on shares of Celera Stock or PE Biosystems Stock, as applicable; provided,
however, that, except as otherwise provided by the Committee, Participants shall
not be entitled to receive dividend equivalents on more than one series of
Performance Units at any one time. For purposes of the payment of such dividend
equivalent, each Performance Unit shall be deemed equivalent to one share of
Celera Stock or PE Biosystems Stock, as the case may be (subject to adjustment
as provided below).
9. Acceleration Upon a Change of Control.
Notwithstanding any other provision of the Plan or any Performance Unit
granted hereunder, all Stock Price Targets shall be deemed attained and all
Vesting Periods satisfied (i) in the event that a tender offer or exchange offer
(other than an offer by the Corporation) for the Common Stock representing more
than 25% of the combined voting power of the then outstanding voting securities
of the Corporation entitled to vote generally in the election of directors
("Voting Securities") is made by any "person" within the meaning of Section
14(d) of the Securities Exchange Act of 1934, as amended from time to time (the
"Act"), and not withdrawn within ten (10) days after the commencement thereof;
provided, however, that the Committee may by action taken prior to the end of
such ten (10) day period extend such ten (10) day period; and, provided further,
that the Committee may by further action taken prior to the end of such extended
period declare all Stock Price Targets to have been attained and all Vesting
Periods to have been satisfied, or (ii) in the event of a Change in Control (as
hereinafter defined).
For purposes of this Section 9, a "Change in Control" means an event
that would be required to be reported (assuming such event has not been
"previously reported") in response to Item 1(a) of the Current Report on Form
8-K, as in effect on the effective date of the Plan, pursuant to Section 13 or
15(d) of the Act; provided, however, that, without limitation, such a Change in
Control shall be deemed to have occurred at such time as (a) any "person" within
the meaning of Section 14(d) of the Act becomes the "beneficial owner" as
defined in Rule 13d-3 thereunder, directly or indirectly, of more than 25% of
the combined voting power of the then outstanding Voting Securities, (b) during
any two-year period, individuals who constitute the Board of Directors (the
"Incumbent Board") as of the beginning of the period cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director during such period whose election or nomination for election by the
Corporation's stockholders was approved by a vote of at least three-quarters of
the Incumbent Board (either by a specific vote or by approval of the proxy
statement of the Corporation in which such person is named as a nominee for
director without objection to such nomination, other than in response to an
actual or threatened Change in Control or proxy contest) shall be, for purposes
of this clause (b), considered as though such person were a member of the
Incumbent Board, or (c) the approval by the Corporation's stockholders of the
sale of all or substantially all of the stock or assets
4
<PAGE>
of the Corporation. The Committee may adopt such procedures as to notice and
exercise as may be necessary to effectuate the acceleration of the payment of
the Unit Value of Performance Units as described above.
10. Performance Units Not Transferable.
Performance Units may not be sold, assigned, bequeathed, transferred,
pledged, hypothecated, or otherwise disposed of in any way by the recipient
thereof. Any attempt to sell, pledge, assign, or transfer such rights shall be
void and unenforceable against the Corporation or any affiliate.
11. Time of Granting Performance Units.
Nothing contained in the Plan or in any resolution adopted by the Board
of Directors or the holders of Common Stock shall constitute the grant of any
Performance Units hereunder. A Performance Unit shall be deemed to have been
granted on the date on which the name of the recipient and the terms of the
Performance Unit are set forth in an Agreement and delivered to the recipient,
unless otherwise provided in the Agreement.
12. No Right to Continued Employment.
Nothing contained in the Plan shall confer upon any employee the right
to continue in the employ of the Corporation or any subsidiary or interfere with
the right of the Corporation or such subsidiary to terminate such employee's
employment at any time.
13. Adjustment Upon Changes in Capitalization.
Notwithstanding any other provision of the Plan, in the event of
changes in the outstanding Celera Stock or PE Biosystems Stock, as the case may
be, by reason of stock dividends, stock splits, recapitalizations, combinations
or exchanges of shares, corporate separations or divisions (including, but not
limited to, split-ups, split-offs, or spin-offs), reorganizations (including,
but not limited to, mergers or consolidations), liquidations, or other similar
events, the aggregate number of Performance Units granted under the Plan, the
dividend equivalent payments payable thereon, and the applicable Stock Price
Targets shall be adjusted in such manner as the Committee in its discretion
deems appropriate.
14. Termination and Amendment of the Plan; Amendment of Awards.
The Board of Directors may terminate the Plan at any time or make such
modification or amendment to the Plan as it shall deem advisable. The Committee
may amend the terms of any award of Performance Shares granted hereunder,
including, without limitation, to permit the payment of the Unit Value of any
Performance Units to Participants under circumstances other than those set forth
in Section 7 above; provided, however, that no such amendment shall adversely
affect in any material manner any right of any Participant without his or her
consent.
5
<PAGE>
15. Miscellaneous.
15.1 Withholding for Taxes. The Corporation shall have the right to
deduct from all payments under the Plan, or withhold from any distribution of
shares of Common Stock under the Plan, any taxes required by law to be withheld
with respect to such payments.
15.2 Unfunded Status. The Plan is intended and at all times shall be an
unfunded and unsecured deferred compensation plan that is limited to key
management and other highly-compensated employees of the Corporation. Any
payments made under the Plan shall be paid from the general funds of the
Corporation, and no provision shall at any time be made with respect to
segregating assets of the Corporation for such payment hereunder. No Participant
or other person shall have any interest in any particular assets of the
Corporation by reason of a right to receive any payment or benefit under the
Plan, and any such Participant or other person shall have only the rights of a
general unsecured creditor of the Corporation with respect to any rights under
the Plan.
15.3 Compliance with Laws. Notwithstanding anything to the contrary
contained in the Plan or otherwise, the Corporation shall not be obligated to
pay the Unit Amount of any Performance Unit to the extent that the aggregate
amount payable would cause the Company to violate any law or violate or breach
any term of any loan, credit, or any other material agreement of the Corporation
or to which it or any of its assets are bound or subject. If any payments are
precluded from being made by reason of the first sentence of this Section 15.3,
such payments otherwise due shall be made on a pro rata basis as and to the
extent such applicable laws or agreements shall permit.
15.4 Governing Law. The Plan shall be construed, regulated, and
administered under the internal laws of the State of Delaware.
6
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
PE CORPORATION
FINANCIAL DATA SCHEDULE
(unaudited)
(Dollar amounts in thousands except per share amounts)
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Operations for the Six Months Ended December
31, 1999 and the Condensed Consolidated Statement of Financial Position at
December 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 349,481
<SECURITIES> 0
<RECEIVABLES> 324,920
<ALLOWANCES> (3,486)
<INVENTORY> 168,716
<CURRENT-ASSETS> 1,086,015
<PP&E> 454,492
<DEPRECIATION> (160,149)
<TOTAL-ASSETS> 1,681,244
<CURRENT-LIABILITIES> 618,049
<BONDS> 0
0
0
<COMMON> 1,295
<OTHER-SE> 904,969
<TOTAL-LIABILITY-AND-EQUITY> 1,681,244
<SALES> 616,207
<TOTAL-REVENUES> 616,207
<CGS> 279,812
<TOTAL-COSTS> 279,812
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 506
<INTEREST-EXPENSE> 1,250
<INCOME-PRETAX> 42,746
<INCOME-TAX> 13,492
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,254
<EPS-BASIC> 0 <F1>
<EPS-DILUTED> 0 <F2>
<FN>
<F1>
Basic earnings per share - PE Biosystems Group 0.71
Basic loss per share - Celera Genomics Group (1.69)
<F2>
Diluted earnings per share - PE Biosystems Group 0.69
Diluted loss per share - Celera Genomics Group (1.69)
</FN>
</TABLE>
