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 March 31, 2000
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 May 9, 2000, there were 208,312,583 shares of PE
Corporation - PE Biosystems Group Common Stock and 57,141,333 shares of PE
Corporation - Celera Genomics Group Common Stock outstanding.
<PAGE>
PE CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
<S> <C> <C>
A. PE Biosystems Group
Item 1. Financial Statements
Condensed Combined Statements of Operations for the
Three and Nine Months Ended March 31, 2000 and 1999 1
Condensed Combined Statements of Financial Position at
March 31, 2000 and June 30, 1999 2
Condensed Combined Statements of Cash Flows for the
Nine Months Ended March 31, 2000 and 1999 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 Nine Months Ended March 31, 2000 and 1999 23
Condensed Combined Statements of Financial Position at
March 31, 2000 and June 30, 1999 24
Condensed Combined Statements of Cash Flows for the
Nine Months Ended March 31, 2000 and 1999 25
Notes to Unaudited Condensed Combined Financial Statements 26-29
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 30-44
C. PE Corporation Consolidated
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended March 31, 2000 and 1999 45-46
Condensed Consolidated Statements of Financial Position at
March 31, 2000 and June 30, 1999 47
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2000 and 1999 48
Notes to Unaudited Condensed Consolidated Financial Statements 49-57
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 58-71
Part II. Other Information 72-73
</TABLE>
<PAGE>
PE BIOSYSTEMS GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
2000 1999 2000 1999
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net Revenues $ 368,133 $ 329,269 $ 996,329 $ 876,700
Cost of sales 165,864 151,369 458,565 395,951
----------------- ------------------ ------------------ -----------------
Gross Margin 202,269 177,900 537,764 480,749
Selling, general and administrative 93,776 82,769 277,335 235,380
Research, development and engineering 36,050 33,942 99,454 99,506
Merger costs and other special charges 2,416 4,968
----------------- ------------------ ------------------ -----------------
Operating Income 72,443 58,773 160,975 140,895
Gain on sale of investments 2,597 25,811 2,597
Interest expense 2,218 495 6,547 2,635
Interest income 4,831 358 13,015 1,096
Other income (expense), net 5,040 233 (3,845) (306)
----------------- ------------------ ------------------ -----------------
Income Before Income Taxes 80,096 61,466 189,409 141,647
Provision for income taxes 24,029 13,796 59,801 36,710
Minority interest 1,324 9,536
----------------- ------------------ ------------------ -----------------
Income From Continuing Operations 56,067 46,346 129,608 95,401
Income From Discontinued
Operations, Net of Income Taxes 5,186 1,149
----------------- ------------------ ------------------ -----------------
Net Income $ 56,067 $ 51,532 $ 129,608 $ 96,550
================= ================== ================== =================
Net Income per Share (see Note 6)
Basic $ .27 $ .63
Diluted $ .26 $ .60
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 March 31, At June 30,
2000 1999
------------------- -------------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 295,077 $ 236,530
Note receivable 150,000 150,000
Accounts receivable, net 342,381 306,225
Inventories 162,903 149,670
Prepaid expenses and other current assets 68,751 75,801
------------------- -------------------
Total current assets 1,019,112 918,226
Property, plant and equipment, net 218,048 182,183
Other long-term assets 417,161 247,141
------------------- -------------------
Total Assets $ 1,654,321 $ 1,347,550
=================== ===================
Liabilities and Group Equity
Current liabilities
Loans payable $ 35,415 $ 3,911
Note payable to the Celera Genomics group 150,000 150,000
Tax benefit payable to the Celera Genomics group 12,278 9,935
Accounts payable 150,214 147,704
Accrued salaries and wages 49,610 43,316
Accrued taxes on income 130,444 132,170
Other accrued expenses 165,929 156,552
------------------- -------------------
Total current liabilities 693,890 643,588
Long-term debt 36,039 31,452
Other long-term liabilities 148,271 138,178
------------------- -------------------
Total Liabilities 878,200 813,218
Group Equity 776,121 534,332
------------------- -------------------
Total Liabilities and Group Equity $ 1,654,321 $ 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>
Nine months ended
March 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Operating Activities from Continuing Operations
Income from continuing operations $ 129,608 $ 95,401
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 39,662 32,395
Long-term compensation programs 6,123 4,427
Gain on sale of investments (25,811) (2,597)
Deferred income taxes 1,821 2,107
Changes in operating assets and liabilities:
Increase in accounts receivable (39,266) (58,737)
Increase in inventories (12,468) (32,310)
Increase in prepaid expenses and other assets (11,623) (28,515)
(Decrease) increase in accounts payable and other liabilities (6,191) 49,040
----------------- ------------------
Net Cash Provided by Operating Activities 81,855 61,211
----------------- ------------------
Investing Activities from Continuing Operations
Additions to property, plant and equipment (69,098) (53,049)
(net of disposals of $839 and $780, respectively)
Investments, net (13,998)
Proceeds from the sale of assets, net 31,056 20,898
----------------- ------------------
Net Cash Used by Investing Activities (52,040) (32,151)
----------------- ------------------
Net Cash Provided by Continuing Operations
Before Financing Activities 29,815 29,060
----------------- ------------------
Discontinued Operations
Net cash used by operating activities (8,493) (9,109)
Net cash used by investing activities (24,106)
----------------- ------------------
Net Cash Used by Discontinued Operations
Before Financing Activities (8,493) (33,215)
----------------- ------------------
Financing Activities
Net change in loans payable 30,292 34,726
Principal payments on long-term debt (5,297)
Dividends (17,530) (25,479)
Proceeds from stock issued for stock plans 34,413 54,650
Net cash allocated to the Celera Genomics group (58,897)
----------------- ------------------
Net Cash Provided (Used) by Financing Activities 47,175 (297)
----------------- ------------------
Effect of Exchange Rate Changes on Cash (9,950) (6,038)
----------------- ------------------
Net Change in Cash and Cash Equivalents 58,547 (10,490)
Cash and Cash Equivalents Beginning of Period 236,530 82,865
----------------- ------------------
Cash and Cash Equivalents End of Period $ 295,077 $ 72,375
================= ==================
</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
Aclara Biosciences, Inc. During the third quarter of fiscal 2000, the PE
Biosystems group made an additional minority investment of $5.0 million in
Aclara Biosciences, Inc. Aclara Biosciences is a developer of microfluidics
technology and is believed to have access to the wide range of technology and
intellectual property required to broadly address the markets for genomics, or
RNA and DNA analysis, and pharmaceutical drug screening. The investment is
included in other long-term assets.
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, the PE Biosystems group 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.
4
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
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 investments.
Tecan AG During the fourth quarter of fiscal 1999, the Company divested its
interest in Tecan AG.
Biometric Imaging, Inc. During the third quarter of fiscal 1999, the PE
Biosystems group recorded a before-tax gain of $2.6 million from the sale of the
Company's entire equity interest in Biometric Imaging, Inc. Net cash proceeds
from the sale were $6.6 million.
NOTE 4 - PENDING ACQUISITIONS
Third Wave Technologies, Inc. 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 subject to customary closing conditions and regulatory
approvals. The merger is expected to be accounted for under the pooling method.
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). This
technology will be used with the PE Biosystems group's Sequence Detection
Systems, a proprietary technology for real-time analysis of genetic information.
Paracel, Inc. During the third quarter of fiscal 2000, the Celera Genomics group
and Paracel, Inc. announced the signing of a definitive merger agreement under
which the Celera Genomics group will acquire Paracel in a stock-for-stock
transaction. The PE Biosystems group currently holds a minority equity
investment in Paracel. The transaction is subject to customary closing
conditions and regulatory approvals.
5
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 5 - 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 nine month period ended March 31, 2000 and 1999 is
presented in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) Three months ended Nine months ended
March 31, March 31,
2000 1999 2000 1999
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income $ 56.1 $51.5 $ 129.6 $ 96.6
Other comprehensive income, net of tax:
Foreign currency translation adjustment (13.4) (4.7) (19.1) .3
Unrealized holding gain on investments
arising during period 82.7 2.4 144.6 5.0
Reclassification adjustment for gains
included in net income (16.7)
-------------- ------------ ------------- ------------
Other comprehensive (loss) income 69.3 (2.3) 108.8 5.3
-------------- ------------ ------------- ------------
Comprehensive income $125.4 $49.2 $ 238.4 $101.9
============== ============ ============= ============
</TABLE>
6
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 6 - EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted income per
share:
<TABLE>
<CAPTION>
(Amounts in thousands Three months ended Nine months ended
except per share amounts) March 31, March 31,
2000 2000
-------------- ---------------
<S> <C> <C>
Weighted average number of common
shares used in the calculation of basic
earnings per share 207,516 206,551
Common stock equivalents 11,489 9,201
-------------- --------------
Shares used in the calculation of diluted
earnings per share 219,005 215,752
============== ===============
Net income used in the calculation of
basic and diluted earnings per share $ 56,067 $129,608
============== ===============
Net income per share
Basic $ .27 $ .63
Diluted $ .26 $ .60
</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 nine months ended March 31, 1999
is omitted since PE Biosystems Group Common Stock was not part of the capital
structure of the Company during such period.
Options and warrants to purchase 5.7 million shares of PE Biosystems Group
Common Stock were outstanding at March 31, 2000, but were not included in the
computation of diluted income per share because the effect was antidilutive.
On January 20, 2000, the Board of Directors announced a two-for-one split of PE
Biosystems Group Common Stock, effected in the form of a 100% stock dividend on
February 18, 2000. All PE Biosystems group share and per share data reflect this
split.
7
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 7 - 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) March 31, June 30,
2000 1999
--------------------- ---------------------
<S> <C> <C>
Raw materials and supplies $ 48.3 $ 42.8
Work-in-process 8.2 10.3
Finished products 106.4 96.6
--------------------- ---------------------
Total inventories $162.9 $149.7
===================== =====================
</TABLE>
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes and significant non-cash investing and
financing activities were as follows:
<TABLE>
<CAPTION>
Nine months ended
(Dollar amounts in millions) March 31,
2000 1999
------------- --------------
<S> <C> <C>
Interest $ .6 $ 2.6
Interest paid to the Celera Genomics group $ 5.7 $ .1
Income taxes $ 36.4 $ 32.1
Tax benefits paid to the Celera Genomics group $ 26.8 $ 6.3
Significant non-cash investing
and financing activities
Unrealized gain on investments $ 191.3 $ 3.6
Dividends declared not paid $ 17.7 $ 8.3
Note payable to the Celera Genomics group $ - $280.1
</TABLE>
NOTE 9 - 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 March 31, 2000 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) March 31, 2000 June 30, 1999
Sale Purchase Sale Purchase
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Japanese Yen $ 81.0 $ - $ 104.2 $ 6.0
French Francs 4.3
Australian Dollars 2.9 12.0
German Marks 25.4
Italian Lira 10.4 2.6
British Pounds 53.7 72.9 18.6 50.6
Swiss Francs 4.1 7.5 .7
Swedish Krona 4.6 8.9
Danish Krona 4.0 8.1
Singapore Dollars 10.3 2.6 9.3 3.3
Netherland Guilders 16.1
Euro 97.4 83.0 28.2
Other 9.6 .6 17.1
-------------- -------------- -------------- --------------
Total $ 267.6 $159.1 $ 254.0 $ 79.3
============== ============== ============== ==============
</TABLE>
NOTE 10 - RESTRUCTURING AND OTHER MERGER COSTS
At March 31, 2000, the remaining accrual balance related to the fiscal 1998
restructuring charge for the integration of PerSeptive Biosystems, Inc. was $2.7
million, consisting of $1.3 million relating to personnel costs and $1.4 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 11 - 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).
An additional series of performance units totaling .5 million units has been
granted under the plan and is outstanding as of March 31, 2000. A performance
unit represents the right to receive a cash or stock payment from the Company at
a specified date in the future. The amount of the payment is equal to a
predetermined value on the date of the grant. The performance units vest upon
shares of the PE Biosytems Group Common Stock attaining and maintaining
specified common stock price levels for a
9
<PAGE>
PE BIOSYSTEMS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
specified period, and are payable on or after a specified future date subject to
continued employment through the date of payment.
NOTE 12 - RELATED PARTY TRANSACTIONS
Sales of Products and Services Between Groups. For the three and nine month
periods ended March 31, 2000, net revenues from leased instruments, shipments of
consumables and project materials and contracted R&D services to the Celera
Genomics group totaled $16.0 million and $44.7 million, respectively. For the
three and nine month periods ended March 31, 1999, net revenues from leased
instruments, shipments of instruments, consumables and project materials and
contracted R&D services to the Celera Genomics group totaled $5.2 million and
$15.1 million, respectively.
NOTE 13 - SUBSEQUENT EVENT
The Company's $100 million revolving credit agreement was replaced effective
April 20, 2000 with a new $100 million revolving credit agreement with four
banks that matures on April 20, 2005. Commitment and facility fees are based on
public debt ratings or leverage ratios. Interest rates on amounts borrowed vary
depending on whether borrowings are undertaken in the domestic or Eurodollar
markets. There were no borrowings under the existing facility at March 31, 2000.
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 its Analytical Instruments business to EG&G, Inc. Analytical Instruments,
formerly a unit of the PE Biosystems group, develops, manufactures, markets,
sells, and services analytical instruments used in a variety of markets. As part
of the sale, the rights to the "Perkin-Elmer" name were transferred to EG&G. The
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 investments. 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 Millennium Pharmaceuticals, Inc.
During the third quarter of fiscal 1999, the PE Biosystems group recorded a
before-tax gain of $2.6 million on the sale of the group's entire equity
interest in Biometric Imaging, Inc.
Merger-related costs. The PE Biosystems group incurred merger-related period
before-tax costs of $1.6 million and $3.6 million for the three and nine months
ended March 31, 1999, 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
a long-term compensation program as a result of the attainment of
11
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
performance targets. Refer to Note 11 to the Condensed Combined Financial
Statements for a discussion of this program.
The PE Biosystems group was allocated non-recurring before-tax charges of $.8
million and $1.4 million for the three and nine months ended March 31, 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
total recapitalization costs incurred by the Company.
Results of Continuing Operations for the Three Months Ended March 31, 2000
Compared With the Three Months Ended March 31, 1999
The PE Biosystems group reported income from continuing operations of $56.1
million for the third quarter of fiscal 2000 compared with $46.3 million for the
third quarter of fiscal 1999. On a comparable basis, excluding Tecan and the
special items previously described from the prior year, income from continuing
operations increased 34.9% to $56.1 million for the third quarter of fiscal 2000
compared with $41.6 million for the prior period. This increase is attributable
to the growth in net revenues and higher gross margin as a percent of net
revenues. The net effect of changes in foreign currency had a negligible impact
on this quarter's revenues and operating income. The PE Biosystems group's
foreign currency management program resulted in a gain of $5.1 million,
reflected in other income.
Net revenues were $368.1 million for the third quarter of fiscal 2000 compared
with $329.3 million for the third quarter of fiscal 1999. Excluding the results
of Tecan in the prior year, revenues increased 20.3% compared with the prior
year. The effects of foreign currency translation had minimal overall impact on
net revenues compared with the prior year as weakness in the euro was offset by
strengthening of the Japanese yen. Revenues from leased instruments, shipments
of consumables and project materials and contracted R&D services to the Celera
Genomics group were $16.0 million for the third quarter of fiscal 2000, or 4.3%
of the PE Biosystems group's net revenues. Revenues from leased instruments,
shipments of instruments and consumables and contracted R&D services to the
Celera Genomics group were $5.2 million for the third quarter of fiscal 1999.
Geographically, excluding the net revenues of Tecan for the third quarter of
fiscal 1999, the PE Biosystems group reported revenue growth in all regions for
the third quarter of fiscal 2000 compared with the third quarter of fiscal 1999.
Revenues increased 15.4% in the United States, 9.8% in Europe, 38.5% in the Far
East, and 61.7% in Latin America and other markets, compared with the third
quarter of the prior fiscal year. Excluding the effects of currency translation,
revenues grew in the Far East approximately 28%, reflecting increased government
funding for genomics related research, and approximately 18% in Europe. Revenues
grew substantially in genetic analysis reagents used in a variety of whole
genome DNA sequencing projects and in applied genetic analysis markets, such as
forensics and human diagnostics. Genetic analysis revenues also reflected
continued demand for the ABI Prism 3700 DNA Analyzer and other DNA sequencing
systems. Demand also was strong for sequence detection systems and mass
spectrometry instruments.
12
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Gross margin as a percentage of net revenues was 54.9% for the third quarter of
fiscal 2000 compared with 54.0% for the third quarter of fiscal 1999. Excluding
Tecan, the prior year gross margin as a percentage of net revenues was 52.9%.
The increase 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 were a primary contributor for the higher gross margin percentage for
the third quarter of fiscal 2000.
SG&A expenses were $93.8 million for the third quarter of fiscal 2000 compared
with $82.8 million for the third quarter of fiscal 1999, an increase of 13.3%.
On a comparable basis, excluding Tecan from the prior year, SG&A expenses
increased 28.7%. This increase was due to higher planned expenses. As a
percentage of net revenues, excluding Tecan from the prior year, SG&A expenses
were 25.5% for the third quarter of fiscal 2000 compared with 23.8% for the
third quarter of fiscal 1999.
R&D expenses were $36.1 million for the third quarter of fiscal 2000 compared
with $33.9 million for the prior year. Excluding Tecan from the prior year, R&D
expenses increased 18.8% compared with the prior year period. As a percentage of
net revenues, R&D expenses were 9.8% for the third quarter of fiscal 2000,
essentially unchanged when compared with the prior year excluding Tecan.
The PE Biosystems group incurred merger-related period costs of $1.6 million for
the third quarter of fiscal 1999 for training, relocation, and communication in
connection with the integration of PerSeptive into the PE Biosystems group. See
Note 10 to the PE Biosystems group's combined financial statements included in
the Company's 1999 Annual Report to Stockholders. During the third quarter of
fiscal 1999, the PE Biosystems group was allocated a non-recurring charge of $.8
million. These costs were incurred in connection with the recapitalization of
the Company.
Operating income increased to $72.4 million for the third quarter of fiscal 2000
compared with $58.8 million for the prior year. On a comparable basis, excluding
the special items and Tecan from the prior year, operating income increased
23.2% for the third quarter of fiscal 2000 compared with the prior year. The PE
Biosystems group benefited from increased revenues and improvements in gross
margin. Operating income as a percentage of net revenues, excluding the special
items and Tecan, increased to 19.7% for the third quarter of fiscal 2000
compared with 19.2% for the prior year.
During the third quarter of fiscal 1999, the PE Biosystems group recorded a
before-tax gain of $2.6 million on the sale of the group's entire equity
interest in Biometric Imaging, Inc.
Interest expense was $2.2 million for the third quarter of fiscal 2000 compared
with $.5 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 $4.8 million for the third
quarter of fiscal 2000 compared with $.4 million for the prior year. Fiscal 2000
interest income included interest on the note receivable 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 income, net was $5.0 million for the third quarter of fiscal 2000 compared
with $.2 million for the prior year. For both periods, other income, net
primarily related to gains from the Company's foreign currency management
program that provides hedge coverage for projected cash flows.
The effective income tax rate was 30% for the third quarter of fiscal 2000
compared with 22% for the prior year. Excluding special items and Tecan in
fiscal 1999, the effective income tax rate was 29% for the third quarter of 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 third quarter of fiscal 1999, the PE Biosystems group incurred minority
interest expense of $1.3 million relating to Tecan.
Results of Continuing Operations for the Nine Months Ended March 31, 2000
Compared With the Nine Months Ended March 31, 1999
The PE Biosystems group reported income from continuing operations of $129.6
million for the first nine months of fiscal 2000 compared with $95.4 million for
the first nine months of fiscal 1999. On a comparable basis, excluding the
special items previously described from both fiscal years and Tecan from the
prior year, income from continuing operations increased 40.1% to $129.6 million
for the first nine months of fiscal 2000 compared with $92.5 million for the
prior period. This increase is attributable primarily 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 $996.3 million for the first nine months of fiscal 2000
compared with $876.7 million for the first nine months of fiscal 1999. Excluding
the results of Tecan for the prior year, revenues increased 25.1% compared with
the prior year. The effects of foreign currency translation increased net
revenues by approximately $2.8 million compared with the prior year. Revenues
from leased instruments and shipments of consumables and project materials to
the Celera Genomics group were $44.7 million for the first nine months of fiscal
2000, or 4.5% of the PE Biosystems group's net revenues. For the first nine
months of fiscal 1999, revenues from leased instruments, shipments of
instruments and consumables, and contracted R&D services to the Celera Genomics
group were $15.1 million.
Geographically, excluding the net revenues of Tecan for the first nine months of
fiscal 1999, the PE Biosystems group reported revenue growth in all regions for
the first nine months of fiscal 2000 compared with the first nine months of
fiscal 1999. Revenues increased 24.6% in the United States, 17.0% in Europe,
34.4% in the Far East, and 60.9% in Latin America and other markets, compared
with the first nine months of the prior fiscal year. Excluding the favorable
effects of currency translation in Japan, revenues grew approximately 21% in the
Far East, partly reflecting increased government funding for genomics related
research. Excluding the effects of currency translation in Europe, revenues
increased by approximately 25%. Increased demand for genetic analysis reagents
14
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
and instruments, sequence detection systems, and mass spectrometry instruments
was the primary contributor.
Gross margin as a percentage of net revenues was 54.0% for the first nine months
of fiscal 2000 compared with 54.8% for the first nine months of fiscal 1999.
Excluding Tecan for the prior year, gross margin as a percentage of net revenues
was 53.7% for the first nine months of fiscal 1999.
SG&A expenses were $277.3 million for the first nine months of fiscal 2000
compared with $235.4 million for the first nine months of fiscal 1999, an
increase of 17.8%. On a comparable basis, excluding the long-term compensation
charge incurred in the second quarter of the current year and Tecan from the
prior year, SG&A expenses for the PE Biosystems group increased 23.2% for the
first nine months of fiscal 2000 compared with the prior year. This increase was
due to higher planned expenses. As a percentage of net revenues, excluding the
long-term compensation charge and Tecan, SG&A expenses were 25.7% for the first
nine months of fiscal 2000 compared with 26.1% for the prior year.
R&D expenses were $99.5 million for the first nine months of fiscal 2000,
unchanged compared with the first nine months of the prior year. Excluding Tecan
from the prior year, R&D expenses increased 13.7% compared with the first nine
months of fiscal 1999. As a percentage of net revenues, excluding Tecan, R&D
expenses were 10.0% for the first nine months of fiscal 2000 compared with 11.0%
for the first nine months of the prior year. The prior year's R&D expense level
was higher as a percentage of net revenues due to the development of new
products released in the second half of fiscal 1999.
The PE Biosystems group incurred merger-related period costs of $3.6 million for
the first nine months of fiscal 1999 for training, relocation, and communication
in connection with the integration of PerSeptive into the PE Biosystems group.
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 nine
months of fiscal 1999, the PE Biosystems group was allocated a non-recurring
charge of $1.4 million for costs incurred in connection with the
recapitalization of the Company.
Operating income increased to $161.0 million for the first nine months of fiscal
2000 compared with $140.9 million for the first nine months of the prior year.
On a comparable basis, excluding the special items previously described from
both fiscal years and Tecan from the prior year, operating income increased
37.7% for the first nine months of fiscal 2000 compared with the first nine
months of the prior year. The PE Biosystems group benefited from increased
revenues primarily as a result of strong demand for several new products. 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 18.3% for the first nine months of fiscal 2000 compared
with 16.7% for the first nine months of the prior year.
The PE Biosystems group recognized a before-tax gain of $25.8 million in the
first nine months of fiscal 2000 related to the sale of a portion of the
Company's equity interest in Millennium Pharmaceuticals, Inc. During the first
nine months of fiscal 1999, the PE Biosystems group recorded
15
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
a before-tax gain of $2.6 million from the sale of the group's entire equity
interest in Biometric Imaging, Inc.
Interest expense was $6.5 million for the first nine months of fiscal 2000
compared with $2.6 million for the prior year. This increase was primarily due
to the interest on the note payable to the Celera Genomics group. Interest
income was $13.0 million for the first nine months of fiscal 2000, which
included interest on the note receivable relating to the sale of the Analytical
Instruments business, compared with $1.1 million for the prior year. The
increase in interest income was also due to higher cash balances and higher
interest rates.
Other expense, net for the first nine months of fiscal 2000 was $3.8 million,
primarily related to costs associated with a portion of the Company's foreign
currency management program that provides hedge coverage for projected cash
flows. Other expense, net was $.3 million for the first nine months of fiscal
1999, which related to costs associated with the Company's foreign currency
management program offset by income from a legal settlement.
The effective income tax rate was 32% for the first nine months of fiscal 2000
compared with 26% for the prior year. Excluding special items in both fiscal
years and Tecan in fiscal 1999, the effective income tax rate was 30% for the
first nine 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 nine months of fiscal 1999, the PE Biosystems group incurred
minority interest expense of $9.5 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
nine months of fiscal 2000 and fiscal 1999, the PE Biosystems group derived
approximately 51% 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 March 31, 2000, outstanding hedge contracts covered
approximately 64% 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 March 31, 2000 and June 30,
1999. Assuming a hypothetical adverse change of 10% in foreign exchange rates in
relation to the U.S. Dollar at
16
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
March 31, 2000, the Company calculated a hypothetical loss of $4.5 million when
comparing the change in fair value of both the foreign currency contracts
outstanding and the underlying exposures being hedged at March 31, 2000.
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 March 31, 2000, the notional
amount of indebtedness covered by the interest rate swap was Yen 3.8 billion or
$36.0 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 $295.1 million at March 31, 2000 compared with
$236.5 million at June 30, 1999, with total debt of $221.5 million at March 31,
2000 compared with $185.4 million at June 30, 1999. Working capital was $325.2
million at March 31, 2000 compared with $274.6 million at June 30, 1999. Debt to
total capitalization decreased to 22% at March 31, 2000 from 26% at June 30,
1999. The increase in loans payable was primarily a result of the Company's
decision to discontinue its receivables factoring program in a foreign
subsidiary.
Accounts receivable increased $36.2 million to $342.4 million at March 31, 2000
from $306.2 million at June 30, 1999, reflecting the growth in PE Biosystems
group's revenue.
Other long-term assets increased $170.1 million to $417.2 million at March 31,
2000 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.
Condensed Combined Statements of Cash Flows. Net cash provided by operating
activities from continuing operations was $81.9 million for the first nine
months of fiscal 2000 compared with $61.2 million for the same period in fiscal
1999. For the first nine months of fiscal 2000 compared with the same period in
the prior year, higher income-related cash flows and lower increases in
receivables and inventory were partially offset by higher payments to suppliers
and payments of certain compensation accruals. Inventory levels were higher in
the third quarter of fiscal 1999 due to the introduction of new product lines in
late fiscal 1999.
Net cash used by investing activities from continuing operations was $52.0
million for the first nine months of fiscal 2000 compared with $32.2 million for
the first nine months of fiscal 1999. In the first
17
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
nine months of fiscal 2000, the PE Biosystems group's capital expenditures were
$69.9 million, which included $5.7 million related to improvement of its
information technology infrastructure and $20.3 million for the acquisition of a
new corporate airplane. The PE Biosystems group realized $31.1 million from the
sale of a portion of a minority investment during the first nine months of
fiscal 2000 and invested $14.0 million in additional minority investments. For
the first nine months of fiscal 1999, the PE Biosystems group generated $20.9
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 $53.8
million, which included $9.2 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 $8.5 million for the first nine
months of fiscal 2000 compared with $33.2 million for the first nine 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 $47.2 million for the first nine
months of fiscal 2000 compared with net cash used by financing activities of $.3
million for the prior period. For the first nine months of fiscal 2000, the PE
Biosystems group received $34.4 million in proceeds from employee stock option
exercises compared with $54.7 million for the prior period. Loans payable
increased $30.3 million for the first nine months of fiscal 2000 compared with
an increase of $34.7 million for the prior year. The first nine months of fiscal
1999 included a payment of $5.3 million for the retirement of foreign debt and
$58.9 million of cash allocated to the Celera Genomics group.
The Company's $100 million revolving credit agreement was replaced effective
April 20, 2000 with a new $100 million revolving credit agreement with four
banks that matures on April 20, 2005. Terms of this new revolving credit
agreement are substantially similar to those of the previous credit agreement.
At March 31, 2000, PE had unused credit facilities, including the existing
revolving credit agreement, totaling $275.4 million.
Year 2000
In fiscal 1997, the Company initiated a worldwide program to assess the expected
impact of the Year 2000 date recognition problem on the Company's existing
internal computer systems; its non-information technology systems, including
embedded and process control systems; The Company's product offerings; and its
significant suppliers. The operations of the PE Biosystems 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 the Company's 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 its
exposure in areas where appropriate. Based on currently available information,
management
18
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. The Company does not expect any impact
from the application of SAB 101.
Outlook
The PE Biosystems group expects to continue to grow and maintain profitability
for the balance of fiscal 2000 on the strength of robust demand and several new
products. PE Biosystems should continue to benefit from its customers in basic
medical research, pharmaceutical development, and applied markets for
sophisticated, automated, and cost effective life science tools.
19
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
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 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. The group recently announced new products and initiatives in
proteomics and a new genetic analyzer system, the ABI Prism 3100 that are
expected to be important contributors during fiscal 2001.
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 subject to
customary closing conditions and regulatory approvals. The process of obtaining
such approvals is taking longer than originally expected and, as a result, the
parties have extended the termination date under the merger agreement. While
this process is inherently uncertain, both parties are continuing to cooperate,
and the Company currently contemplates that the transaction will close in the
first quarter of fiscal 2001.
We remain concerned about adverse currency effects because approximately 50% of
the PE Biosystems group's revenues were derived from regions outside the United
States for fiscal 1999.
20
<PAGE>
PE BIOSYSTEMS 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 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
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
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.
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.
21
<PAGE>
PE BIOSYSTEMS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
Due to rapidly-developing technology and lack of legal precedents, PE
Biosystems' products could be subject to claims for patent infringement. PE
Biosystems' products are based on complex, rapidly-developing technologies.
These products could be developed without knowledge of previously filed but
unpublished patent applications that cover some aspect of these technologies. In
addition, there are relatively few decided court cases interpreting the scope of
patent claims in these technologies. PE Biosystems could be made a party to
litigation regarding intellectual property matters in the future. PE Biosystems
has from time to time been notified that it may be infringing certain patents
and other intellectual property rights of others. It may be necessary or
desirable in the future to obtain licenses relating to one or more products or
relating to current or future technologies, and we cannot assure you that PE
Biosystems will be able to obtain these licenses or other rights on commercially
reasonable terms.
Since PE Biosystems' business is dependent on foreign sales, fluctuating
currencies will make our revenues and operating results more volatile.
Approximately 50% of PE Biosystems' net revenues during fiscal 1999 were derived
from sales to customers outside of the United States. The majority of these
sales were 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 Nine months ended
March 31, March 31,
2000 1999 2000 1999
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net Revenues $ 11,041 $ 1,798 $ 27,666 $ 7,429
Costs and Expenses
Research and development 43,447 13,300 113,780 26,237
Selling, general and administrative 10,451 6,988 28,383 17,594
Special charges 793 1,366
----------------- ------------------ ------------------ -----------------
Operating Loss (42,857) (19,283) (114,497) (37,768)
Interest expense 699 1,360
Interest income 6,469 107 11,576 107
----------------- ------------------ ------------------ -----------------
Loss Before Income Taxes (37,087) (19,176) (104,281) (37,661)
Benefit for income taxes 12,980 6,435 36,498 12,704
----------------- ------------------ ------------------ -----------------
Net Loss $ (24,107) $ (12,741) $ (67,783) $ (24,957)
================= ================== ================== =================
Net Loss per Share (see Note 4)
Basic and diluted $ (.45) $ (1.29)
</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 March 31, At June 30,
2000 1999
------------------- -------------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 991,107 $ 71,491
Note receivable from the PE Biosystems group 150,000 150,000
Tax benefit receivable from the PE Biosystems group 12,278 9,935
Accounts receivable 6,834 3,276
Prepaid expenses and other current assets 3,308 3,454
------------------- -------------------
Total current assets 1,163,527 238,156
Property, plant and equipment, net 108,576 104,192
Other long-term assets 11,290 2,372
------------------- -------------------
Total Assets $ 1,283,393 $ 344,720
=================== ===================
Liabilities and Group Equity
Current liabilities
Accounts payable $ 11,305 $ 19,861
Accrued salaries and wages 7,150 4,179
Deferred revenues 20,080 12,032
Other accrued expenses 6,969 9,281
------------------- -------------------
Total current liabilities 45,504 45,353
Long-term debt 46,000
Other long-term liabilities 5,500 5,500
------------------- -------------------
Total Liabilities 97,004 50,853
Group Equity 1,186,389 293,867
------------------- -------------------
Total Liabilities and Group Equity $ 1,283,393 $ 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>
Nine months ended
March 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Operating Activities
Net loss $ (67,783) $ (24,957)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 17,270 3,081
Deferred income taxes (7,317)
Changes in operating assets and liabilities:
Increase in tax benefit receivable
from the PE Biosystems group (2,343) (6,435)
Increase in accounts receivable (3,558) (140)
Decrease (increase) in prepaid expenses and other assets 1,117 (690)
Increase in accounts payable and other liabilities 8,252 15,580
----------------- ------------------
Net Cash Used by Operating Activities (54,362) (13,561)
----------------- ------------------
Investing Activities
Additions to property, plant and equipment (23,267) (35,100)
(net of disposals of $1,175 for fiscal 2000)
Investments (3,000) (1,236)
----------------- ------------------
Net Cash Used by Investing Activities (26,267) (36,336)
----------------- ------------------
Financing Activities
Net change in long-term debt 46,000
Net cash allocated from the PE Biosystems group 58,897
Net proceeds from stock offering 943,303
Proceeds from stock issued for stock plans 10,942
----------------- ------------------
Net Cash Provided by Financing Activities 1,000,245 58,897
----------------- ------------------
Net Change in Cash and Cash Equivalents 919,616 9,000
Cash and Cash Equivalents Beginning of Period 71,491
----------------- ------------------
Cash and Cash Equivalents End of Period $ 991,107 $ 9,000
================= ==================
</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 has been accounted
for under the equity method of accounting.
NOTE 3 - PENDING ACQUISITION
Paracel, Inc. During the third quarter of fiscal 2000, the Celera Genomics group
signed a definitive agreement to acquire Paracel, Inc. in a stock-for-stock
transaction. All of the equity of Paracel will be exchanged for shares of Celera
Genomics Group Common Stock having a market value at the effective time of the
merger equal to $283 million, except that the number of shares issued at closing
will not be more than 2.26 million or less than 1.55 million. The acquisition is
subject to customary closing conditions and regulatory approvals. Paracel
produces advanced genomic and text analysis
26
<PAGE>
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
technologies. Its products include a hardware accelerator for sequence
comparison, a hardware accelerator for text search, and sequence analysis
software tools. This merger will be accounted for under the purchase method.
NOTE 4 - LOSS PER SHARE
The following table presents a reconciliation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
(Amounts in thousands Three months ended Nine months ended
except per share amounts) March 31, March 31,
2000 2000
---------------- ---------------
<S> <C> <C>
Weighted average number of common
shares used in the calculation of basic
loss per share 53,884 52,430
Common stock equivalents - -
---------------- ---------------
Shares used in the calculation of
diluted loss per share 53,884 52,430
================ ===============
Net loss used in the calculation of
basic and diluted loss per share $ (24,107) $ (67,783)
================ ===============
Net loss per share
Basic and diluted $ (.45) $ (1.29)
</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 nine months ended March 31, 1999
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 14.3 million shares of Celera Genomics Group
Common Stock were outstanding at March 31, 2000, but were not included in the
computation of diluted loss per share because the effect was antidilutive.
On January 20, 2000, the Board of Directors announced a two-for-one split of
Celera Genomics Group Common Stock, effected in the form of a 100% stock
dividend on February 18, 2000. All Celera Genomics group share and per share
data reflect this split.
27
<PAGE>
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 5 - COMMON STOCK
On March 6, 2000, PE Corporation completed a follow-on public offering of Celera
Genomics Group Common Stock. In this offering, 4,370,000 shares were sold,
netting proceeds of $943.3 million.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and significant non-cash financing activity were as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in millions) Nine months ended
March 31,
2000 1999
---------------- -----------------
<S> <C> <C>
Interest $ 1.4 $ -
Significant non-cash investing
and financing activities:
Note receivable from the
PE Biosystems group $ - $ 280.1
</TABLE>
NOTE 7 - DEBT
Long-term debt consisted of $46.0 million of commercial paper with an average
interest rate of 6.23% at March 31, 2000. The Company has established the
necessary credit facilities, through its revolving credit agreement discussed
below, to refinance the commercial paper borrowings on a long-term basis. These
borrowings have been classified as noncurrent because it is the Company's intent
to refinance these obligations on a long-term basis.
The Company's $100 million revolving credit agreement was replaced effective
April 20, 2000 with a new $100 million revolving credit agreement with four
banks that matures on April 20, 2005. Commitment and facility fees are based on
public debt ratings or leverage ratios. Interest rates on amounts borrowed vary
depending on whether borrowings are undertaken in the domestic or Eurodollar
markets. There were no borrowings under the existing facility at March 31, 2000.
28
<PAGE>
CELERA GENOMICS GROUP
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
continued
NOTE 8 - RELATED PARTY TRANSACTIONS
Sales of Products and Services Between Groups. For the three month period ended
March 31, 2000, R&D expenses included $14.4 million for lease payments on
instruments and the purchase of consumables and project materials from the PE
Biosystems group. For the nine month period ended March 31, 2000, R&D expenses
included $39.9 million for lease payments on instruments and the purchase of
consumables and project materials and $.5 million for R&D services contracted
from the PE Biosystems group.
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 March 31, 2000 Compared With
the Three Months Ended March 31, 1999
The Celera Genomics group reported a net loss of $24.1 million for the third
quarter of fiscal 2000, compared with a net loss of $12.7 million for the third
quarter of fiscal 1999. The increase in the net loss reflected the increased
sequencing activity and increased investment in research and development
activities, as the group continued to expand its scientific and annotation
research teams and its bioinformatics staff.
Net revenues for the Celera Genomics group were $11.0 million for the third
quarter of fiscal 2000 compared with $1.8 million for the third quarter of
fiscal 1999. The increased revenues resulted primarily from recent subscription
and related service agreements. Revenues for plant and animal genotyping
services remained essentially unchanged.
R&D expenses increased $30.1 million to $43.4 million for the third quarter of
fiscal 2000 from $13.3 million for the third quarter of fiscal 1999 primarily as
a result of increased sequencing operations and expanded scientific and
annotation research teams and bioinformatics and software engineering staffing.
SG&A expenses were $10.5 million for the third quarter of fiscal 2000 compared
with $7.0 million for the third 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 third quarter of fiscal
2000 compared with $1.6 million for the third quarter of fiscal 1999. 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 $.8
million in the third 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 total
recapitalization costs incurred during the third 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 $.7 million for the third quarter of fiscal 2000 as a
result of the Company's financing of the purchase of the Rockville, Maryland
facilities. Interest income was $6.5 million for the third quarter of fiscal
2000, which was attributable to interest received on cash and cash equivalents
balances, which increased during the third quarter due to the follow-on public
offering described in Note 5 to the Celera Genomics group's condensed combined
financial statements, as well as interest on the $150 million note receivable
from the PE Biosystems group.
The effective income tax rate was 35% for the third quarter of fiscal 2000 and
34% for the third quarter of fiscal 1999. Excluding the recapitalization costs
for the third 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 Nine Months Ended March 31, 2000 Compared With the
Nine Months Ended March 31, 1999
The Celera Genomics group reported a net loss of $67.8 million for the first
nine months of fiscal 2000, compared with a net loss of $25.0 million for the
first nine months of fiscal 1999. The increase in the net loss reflected the
increased sequencing activity; increased investment in research and development
activities relating to expanded scientific and annotation teams, and
bioinformatics staff; and increased operating expenses required to support the
expanded data management and software and business development activities.
Net revenues for the Celera Genomics group were $27.7 million for the first nine
months of fiscal 2000 compared with $7.4 million for the first nine months of
fiscal 1999. The increased revenues were primarily a result of database
subscription agreements initiated during the current fiscal year and the second
half of fiscal 1999 and an increase in related genomics services revenues.
Revenues for plant and animal genotyping services remained essentially
unchanged.
R&D expenses increased $87.6 million to $113.8 million for the first nine months
of fiscal 2000 from $26.2 million for the first nine months of fiscal 1999
primarily as a result of a full nine months of sequencing operations and
significantly expanded bioinformatics and software development capabilities. The
group also continued to expand its scientific and annotation research teams and
bioinformatics and software engineering staff.
SG&A expenses were $28.4 million for the first nine months of fiscal 2000
compared with $17.6 million for the first nine 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 $6.3 million for the first nine
months of fiscal 2000 compared with $3.9 million for the first nine months of
fiscal 1999. 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.
31
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
The Celera Genomics group was allocated a non-recurring before-tax charge of
$1.4 million in the first nine months 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 total
recapitalization costs incurred during the first nine months of fiscal 1999.
Interest expense was $1.4 million for the first nine months of fiscal 2000 as a
result of the Company's financing of the purchase of the Rockville, Maryland
facilities. Interest income was $11.6 million for the first nine months of
fiscal 2000, which was attributable to interest on the $150 million note
receivable from the PE Biosystems group, as well as interest on cash and cash
equivalents balances, which increased during the third quarter due to the
follow-on public offering described in Note 5 to the Celera Genomics group's
condensed combined financial statements.
The effective income tax rate was 35% for the first nine months of fiscal 2000
and 34% for the first nine months of fiscal 1999. Excluding the recapitalization
costs from the first nine 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 $991.1 million at March 31, 2000 compared with
$71.5 million at June 30, 1999. In March 2000, the Company completed a follow-on
public offering of Celera Genomics Group Common Stock from which the Company
realized net proceeds of $943.3 million. During the first quarter of fiscal
2000, the Company secured financing of $46 million specifically for the purchase
of the Rockville, Maryland facilities.
At March 31, 2000 and June 30, 1999, the Celera Genomics group had a $12.3
million and $9.9 million tax benefit receivable from the PE Biosystems group.
These amounts represent the tax benefits for the third 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 $3.5 million to $6.8 million at March 31, 2000
from $3.3 million at June 30, 1999, primarily as a result of increased genomics
service revenue.
Other long-term assets increased $8.9 million to $11.3 million at March 31, 2000
from $2.4 million at June 30, 1999 primarily as a result of recognition of a
deferred tax asset due to operating losses incurred by the group.
32
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
Accounts payable decreased $8.6 million to $11.3 million at March 31, 2000 from
$19.9 million at June 30, 1999 primarily as a result of payment for software
license fees incurred during the fourth quarter of fiscal 1999.
Deferred revenues increased $8.1 million to $20.1 million at March 31, 2000 from
$12.0 million at June 30, 1999 due to timing of subscriptions received for
database and gene discovery agreements offset by revenue recognized under these
agreements.
Other accrued expenses decreased $2.3 million to $7.0 million at March 31, 2000
from $9.3 million at June 30, 1999 as a result of payments pertaining to fiscal
year-end accruals.
Condensed Combined Statements of Cash Flows. Cash used by operating activities
was $54.4 million for the first nine months of fiscal 2000 compared with $13.6
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 $24.4 million
for the first nine months of fiscal 2000 compared with $35.1 million for the
first nine 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. Fiscal 2000
capital spending also included $.3 million for purchases of instrumentation from
the PE Biosystems group. The capital spending for the first nine months of
fiscal 1999 included $8.4 million of purchases for the PE Biosystems group's ABI
Prism(R) 3700 DNA Analyzers and $1.6 million for other instrumentation purchased
from the PE Biosystems group. The Celera Genomics group's investments during the
first nine 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 $1,000.2 million for the first
nine months of fiscal 2000 compared with $58.9 million for same period in the
prior year. In March 2000, the Company completed a follow-on public offering of
Celera Genomics Group Common Stock from which the company realized net proceeds
of $943.3 million. 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 nine months of fiscal 2000, the Celera
Genomics group received $10.9 million in proceeds from employee stock option
exercises. Net cash provided by financing activities for the first nine months
of fiscal 1999 was $58.9 million, attributable entirely to the funding of that
year's operations by the Company.
The Company's $100 million revolving credit agreement was replaced effective
April 20, 2000 with a new $100 million revolving credit agreement with four
banks that matures on April 20, 2005. Terms of this new revolving credit
agreement are substantially similar to those of the previous credit agreement.
33
<PAGE>
CELERA GENOMICS GROUP
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 its existing internal
computer systems; its non-information technology systems, including embedded and
process control systems; its product offerings; and its 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 the Company's 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.
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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. The Company does not expect any impact
from the application of SAB 101.
Outlook
On March 20, 2000, the Celera Genomics group announced the signing of a
definitive merger agreement under which Celera Genomics will acquire Paracel,
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
reorganization and will be accounted for under the purchase method. All of the
equity of Paracel will be exchanged for shares of Celera Genomics Group Common
Stock having a market
34
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
value at the effective time of the merger equal to $283 million, except that the
number of shares issued at closing will not be more than 2.26 million or less
than 1.55 million. If the closing of the merger were to have occurred on May 8,
2000, each issued and outstanding share of Paracel common stock would have been
exchanged for .2146 shares of Celera Genomics common stock, and the aggregate
consideration paid to Paracel stockholders would have been less than $283
million. The transaction is subject to customary closing conditions and
regulatory approvals. Paracel, Inc. is a leading producer of advanced genomic
and text analysis technologies. Its products include a sequence comparison
supercomputer (GeneMatcher(TM)), high-throughput sequence analysis and
annotation software tools, and a text search supercomputer (TextFinder(TM)). Its
customers include major pharmaceutical, biotechnology and genomic companies;
research centers; and government institutions worldwide. Celera intends to
utilize Paracel's technology and bioinformatic expertise to provide value added
analytical and data mining tools needed by its customers as well as for Celera's
internal gene discovery and annotation work.
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. Recently, the Celera Genomics group entered
into a five-year comprehensive genomics agreement with Takeda Chemical
Industries, Ltd., the largest pharmaceutical company in Japan, which includes a
subscription to five of Celera Genomics group's current databases. The agreement
also includes access to the group's advanced bioinformatics tools and browsers.
Celera also signed a research services agreement that allows ViaLactia, a
subsidiary of the New Zealand Dairy Board, to search for genetic traits that
could improve the quality of dairy products. 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 during the fourth quarter of the fiscal year as
the Celera Genomics group continues to increase its sequencing throughput and
installs additional hardware and software designed to accelerate product
development and support for its information delivery systems. However, due to
increased interest income related to the cash received in the secondary
offering, the Celera Genomics group expects its fourth quarter pre-tax loss to
be smaller than pre-tax losses recorded in the third quarter of fiscal 2000.
The Celera Genomics group recently completed the sequencing phase of one
person's genome and has now begun to assemble the sequenced fragments of the
genome into their proper order. In addition to assembly, the group is now
focusing on annotating the sequence information and collecting additional data
on genetic variations. The group has also begun the next phase of its
information business, sequencing the mouse genome. The mouse is considered to be
important to biomedical research as a model for studies of human biology and
medicines.
The Company believes that the Celera Genomics group's existing cash and cash
equivalents and the note and tax benefit receivables 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
35
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
and assembly of the human genome and the development of informational products
and services based on the resultant data. While the Company intends to use the
net proceeds of the Celera Genomics Group Common Stock follow-on public offering
primarily to fund the Celera Genomics group's new product and technology
development activities in functional genomics, with an emphasis on proteomics,
and personalized health/medicine, such funds may not be sufficient to support
these new business activities as they develop. 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 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
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 $153.8
million as of March 31, 2000 and expects that it will continue to incur
additional net losses for the foreseeable future. These losses may increase as
Celera expands its investments in new technology and product development,
including the development of its functional genomics and personalized
health/medicine efforts. As an early stage business, the Celera Genomics group
faces significant challenges in simultaneously expanding its operations,
pursuing key scientific goals and attracting customers for its information
products and services. As a result, there is a high degree of uncertainty that
the Celera Genomics group will be able to achieve profitable operations.
Celera Genomics' business plan is unique and expanding. No organization has ever
attempted to combine in one business organization all of the Celera Genomics
group's businesses. In addition, as Celera Genomics 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 offering
of a genomics database, 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.
36
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
Celera Genomics' business plan depends heavily on timely completion of the
sequencing 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 health/medicine components of Celera Genomics' business strategy in
which Celera Genomics intends to make substantial investments in the near
future. As a result, failure to complete the 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 the Celera Genomics
group for a number of years, if ever, and depend heavily on the research and
product development, sales and marketing and intellectual property protection
abilities of the customer.
Use of genomics information to develop or commercialize products is unproven.
The development of new drugs and the diagnosis of disease based on genomic
information is unproven. Few therapeutic or diagnostic products based on genomic
discoveries have been developed and commercialized and to date no one has
developed or commercialized any therapeutic, diagnostic or agricultural products
based on the Celera Genomics group's technologies. If the Celera Genomics
group's customers are unsuccessful in developing and commercializing products
based on the Group's databases or other products or services, customers and the
Group may be unable to generate sufficient revenues and its
37
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
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.
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 PE
Corporation's competitors.
Competitors may also discover, characterize or develop important genes, drug
targets or leads, drug discovery technologies or drugs in advance of Celera
Genomics or its customers or which are more effective than those developed by
Celera Genomics or its customers, or may obtain regulatory approvals of their
drugs more rapidly than Celera Genomics' customers do, any of which could have a
material adverse effect on any of Celera Genomics' similar programs. Moreover,
these competitors may obtain patent protection or other intellectual property
rights that would limit Celera Genomics' rights or its customers' ability to use
Celera Genomics' products to commercialize therapeutic, diagnostic or
agricultural products. In addition, a customer may use the Celera Genomic
group's services to develop products that compete with products separately
developed by the Group or its other customers.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery 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
38
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
biotechnology companies for its information products and services, including
Amgen Inc., Novartis Pharma AG, Pharmacia & Upjohn and Pfizer Inc. The Celera
Genomics group expects that pharmaceutical companies and larger biotechnology
companies will continue to be the Celera Genomics group's primary source of
revenues for the foreseeable future. As a result, the Celera Genomics group is
subject to risks and uncertainties that affect the pharmaceutical and
biotechnology industries and to reduction and delays in research and development
expenditures by companies in these industries.
In addition, the Celera Genomics group's future revenues may be adversely
affected by mergers and consolidation in the pharmaceutical and biotechnology
industries, which will reduce the number of the Group's potential customers.
Large pharmaceutical and biotechnology customers could also decide to conduct
their own genomics programs or seek other providers instead of using Celera
Genomics' products and services.
Celera Genomics relies heavily on its strategic relationship with the 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 may in the future involve various radioactive materials. In the
event of an accidental contamination or injury from these materials, Celera
could be held liable for damages in excess of its resources.
Celera Genomics' sales cycle is lengthy and it may spend considerable resources
on unsuccessful sales efforts or may not be able to complete deals on the
schedule anticipated. The Celera Genomics group's ability to obtain new
customers for genomic information products and value-added programs depends on
its customers' belief that the Group can help accelerate their drug discovery
efforts. The
39
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
Celera Genomics group's sales cycle is typically lengthy because the Group needs
to educate potential customers and sell the benefits of its products and
services to a variety of constituencies within such companies. In addition, each
agreement involves the negotiation of unique terms. Celera may expend
substantial funds and management effort with no assurance that an agreement will
be reached with a potential customer. Actual and proposed consolidations of
pharmaceutical companies have affected and may in the future affect the timing
and progress of the Celera Genomics group's sales efforts.
Scientific and management staff have unique expertise which is key to 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 J. Craig Venter, its President. For the
sequencing and assembly of the human genome, the Celera Genomics group believes
the following members of its staff are essential: Dr. Venter; Mark Adams, Vice
President for Genome Programs; and Eugene Myers, 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.
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 Celera
Genomics group is uncertain as to its ability to prevent competitors from
developing similar subject matter. Patents may not issue from patent
applications that the Celera Genomics group may own or license. In addition,
because patent applications in the United States are maintained in secrecy until
patents issue, third parties may have filed patent applications for technology
used by Celera Genomics or covered by Celera Genomics' pending patent
applications without Celera Genomics being aware of such applications.
Moreover, the Celera Genomics group may be dependent on protecting, through
copyright law or otherwise, its databases to prevent other organizations from
taking information from such databases and copying and reselling it. Copyright
law currently provides uncertain protection regarding the copying and resale of
factual data. As such, Celera Genomics is uncertain whether it could prevent
such copying or resale. Changes in copyright and patent law could either expand
or reduce the extent to which the Celera Genomics group and its customers are
able to protect their intellectual property.
40
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
Celera Genomics' position may depend on its ability to protect trade secrets.
The Celera Genomics group relies on trade secret protection for its confidential
and proprietary information and procedures, including procedures related to
sequencing genes and to searching and identifying important regions of genetic
information. The Celera Genomics group currently protects such information and
procedures as trade secrets. The Celera Genomics group protects its trade
secrets through recognized practices, including access control, confidentiality
agreements with employees, consultants, collaborators and customers, and 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 Genomics'
intellectual property protection and have an adverse effect on the value of our
products and services. The Celera Genomics group, the federally funded Human
Genome Project and others engaged in similar research have committed to make
available to the public basic human sequence data. Such disclosures might limit
the scope of the Celera Genomics group's claims or make subsequent discoveries
related to full-length genes unpatentable. While the Celera Genomics group
believes that the publication of sequence data will not preclude it or others
from being granted patent protection on genes, there can be no assurance that
such publication has not affected and will not affect the ability to obtain
patent protection. Customers may conclude that uncertainties of such protection
decrease the value of the Celera Genomics group's information products and
services and as a result, it may be required to reduce the fees it charges for
such products and services.
Celera Genomics may infringe the intellectual property rights of third parties
and may become involved in expensive intellectual property litigation. The
intellectual property rights of biotechnology companies, including Celera
Genomics, are generally uncertain and involve complex legal, scientific and
factual questions. Celera Genomics' success in the functional genomics field may
depend, in part, on its ability to operate without infringing on the
intellectual property rights of others and to prevent others from infringing on
its intellectual property rights.
There has been substantial litigation regarding patents and other intellectual
property rights in Celera Genomics' industry. The Celera Genomics 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
which may include subscribers to Celera Genomics' database information services.
Interference proceedings may be necessary to establish which party was the first
to discover such intellectual property. Celera Genomics may become involved in
patent litigation against third parties to enforce the Celera Genomics group's
patent rights, to invalidate patents held by such third parties, or to defend
against such claims. The cost to Celera Genomics of any patent litigation or
similar proceeding could be substantial, and it may absorb significant
management time. If an infringement litigation against Celera Genomics is
resolved unfavorably to Celera Genomics, Celera Genomics may be enjoined from
manufacturing or selling certain of its products or services without a license
from a third party. Celera Genomics may not be able to obtain such a license on
commercially acceptable terms, or at all.
41
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
The U.S. Patent and Trademark Office has issued at least one patent to a third
party relating to a single nucleotide polymorphism (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 group's
business requires manipulating and analyzing large amounts of data, and
communicating the results of such analysis to customers via the Internet, the
Celera Genomics group depends on the continuous, effective, reliable and secure
operation of its computer hardware, software, networks, Internet servers and
related infrastructure. To the extent that the Celera Genomics group's hardware
or software malfunctions or the Celera Genomics group's customers' access to
products through the Internet is interrupted, its business could suffer. The
Celera Genomics group's computer and communications hardware is protected
through physical and software safeguards. However, it is still vulnerable to
fire, storm flood, power loss, earthquakes, telecommunications failures,
physical or software break-ins and similar events. In addition, Celera Genomics'
database products are complex and sophisticated, and as such, could contain
data, design, or software errors that could be difficult to detect and correct.
Software defects could be found in current or future products. If the Celera
Genomics group fails to maintain and further develop the necessary computer
capacity and data to support computational needs and its customers' drug
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 Celera Genomics group's business.
Celera Genomics' research and product development depends on access to tissue
samples and other biological materials. To continue to build its 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.
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 PE Corporation's
products.
42
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
Expected rapid growth in the number of its employees could absorb valuable
management resources and be disruptive to the development of the Celera
Genomics' business. The Celera Genomics group expects to grow significantly,
from approximately 450 employees at December 31, 1999 to approximately 700 by
June 30, 2000 (including Paracel, Inc.'s employees). 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 the Celera Genomics group'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 the Celera Genomics group's customers as a result of
their use of the Celera Genomics group's databases must undergo an extensive
regulatory review process. This process can take many years and require
substantial expense.
Within the field of personalized health/medicine, current and future patient
privacy and health care laws and regulations issued by the FDA may limit the use
of polymorphism data. To the extent that use of the Celera Genomics group's
databases is limited or additional costs are imposed on the Celera Genomics
group's customers due to regulation, the Celera Genomics group's business may be
adversely affected.
Furthermore, the Celera Genomics group may be directly subject to the
regulations as a provider of diagnostic information. To the extent that such
regulations restrict the sale of the Celera Genomics group's products or impose
other costs, the Celera Genomics group's business may be materially adversely
affected.
Future acquisitions may absorb significant resources and may be unsuccessful. As
part of the Celera Genomics group's strategy, it expects to pursue acquisitions
(in addition to the Paracel, Inc. acquisition), investments and other
relationships and alliances. Acquisitions may involve significant cash
expenditures, debt incurrence, additional operating losses, dilutive issuances
of equity securities, and expenses that could have a material effect on the
Celera Genomics group's financial condition and results of operations. For
example, to the extent that it elects to pay the purchase price for such
acquisitions in shares of Celera Genomics Group Common Stock, such issuance of
additional shares of Celera Genomics Group Common Stock will be dilutive to
holders of Celera Genomics Group Common Stock. Acquisitions involve numerous
other risks, including:
o difficulties integrating acquired technologies and personnel into the
business of the Celera Genomics group;
o diversion of management from daily operations;
o inability to obtain required financing on favorable terms;
43
<PAGE>
CELERA GENOMICS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
continued
o entry into new markets in which the Celera Genomics group has little previous
experience;
o potential loss of key employees or customers of acquired companies;
o assumption of the liabilities and exposure to unforseen liabilities of
acquired companies; and
o amortization of the intangible assets of acquired companies.
It may be difficult for the Celera Genomics group to complete such transactions
quickly and to integrate such business efficiently into its current business.
Any such acquisitions or investments by the Celera Genomics group may ultimately
have a negative impact on its business and financial condition.
44
<PAGE>
PE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
2000 1999 2000 1999
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net Revenues $ 363,130 $ 325,825 $ 979,337 $ 869,063
Cost of Sales 158,590 149,686 438,402 392,652
----------------- ------------------ ------------------ -----------------
Gross Margin 204,540 176,139 540,935 476,411
Selling, general and administrative 104,227 89,757 305,718 252,974
Research, development and engineering 69,421 46,467 186,806 123,568
Merger costs and other special charges 3,209 6,334
----------------- ------------------ ------------------ -----------------
Operating Income 30,892 36,706 48,411 93,535
Gain on sale of investment 2,597 25,811 2,597
Interest expense 1,047 495 2,297 2,635
Interest income 9,430 465 18,981 1,203
Other income (expense), net 5,040 233 (3,845) (306)
----------------- ------------------ ------------------ -----------------
Income Before Income Taxes 44,315 39,506 87,061 94,394
Provision for income taxes 11,464 6,894 24,956 17,475
Minority interest 1,324 9,536
----------------- ------------------ ------------------ -----------------
Income From Continuing Operations 32,851 31,288 62,105 67,383
Income From Discontinued
Operations, Net of Income Taxes 5,186 1,149
----------------- ------------------ ------------------ -----------------
Net Income $ 32,851 $ 36,474 $ 62,105 $ 68,532
================= ================== ================== =================
PE Biosystems Group (see Note 6)
Income from Continuing Operations $ 56,067 $ 46,346 $ 129,608 $ 95,401
Basic per share $ .27 $ .63
Diluted per share $ .26 $ .60
Income from Discontinued Operations $ 5,186 $ 1,149
Basic per share
Diluted per share
Net Income $ 56,067 $ 51,532 $ 129,608 $ 96,550
Basic per share $ .27 $ .63
Diluted per share $ .26 $ .60
Dividends per share $ .085 $ .17
Celera Genomics Group (see Note 6)
Net Loss $ (24,107) $ (12,741) $ (67,783) $ (24,957)
Basic and diluted per share $ (.45) $ (1.29)
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
45
<PAGE>
PE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS continued
(unaudited)
(Dollar amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
2000 1999 2000 1999
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
PE Corporation (see Note 6)
Income from Continuing Operations
Basic per share $ .62 $ 1.35
Diluted per share $ .60 $ 1.32
Income from Discontinued Operations
Basic per share $ .10 $ .02
Diluted per share $ .10 $ .02
Net Income
Basic per share $ .72 $ 1.37
Diluted per share $ .70 $ 1.34
Dividends per share $ .17 $ .51
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
46
<PAGE>
PE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
At March 31, At June 30,
2000 1999
------------------- -------------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 1,286,184 $ 308,021
Note receivable 150,000 150,000
Accounts receivable, net 344,784 307,056
Inventories 162,903 149,670
Prepaid expenses and other current assets 71,422 79,255
------------------- -------------------
Total current assets 2,015,293 994,002
Property, plant and equipment, net 317,974 275,792
Other long-term assets 421,134 249,513
------------------- -------------------
Total Assets $ 2,754,401 $ 1,519,307
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities
Loans payable $ 35,415 $ 3,911
Accounts payable 156,451 165,120
Accrued salaries and wages 56,760 47,495
Accrued taxes on income 128,188 128,261
Other accrued expenses 192,978 177,865
------------------- -------------------
Total current liabilities 569,792 522,652
Long-term debt 82,039 31,452
Other long-term liabilities 146,454 143,678
------------------- -------------------
Total Liabilities 798,285 697,782
Stockholders' Equity
Capital stock
PE Corporation - PE Biosystems group 2,081 1,027
PE Corporation - Celera Genomics group 571 257
Capital in excess of par value 1,504,858 507,341
Retained earnings 344,619 317,720
Accumulated other comprehensive income 103,987 (4,820)
------------------- -------------------
Total stockholders' equity 1,956,116 821,525
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 2,754,401 $ 1,519,307
=================== ===================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
47
<PAGE>
PE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended
March 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Operating Activities from Continuing Operations
Income from continuing operations $ 62,105 $ 67,383
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 54,301 34,332
Long-term compensation programs 6,822 5,571
Gain on sale of investments (25,811) (2,597)
Deferred income taxes (5,496) 2,107
Changes in operating assets and liabilities:
Increase in accounts receivable (40,838) (58,477)
Increase in inventories (12,468) (32,310)
Increase in prepaid expenses and other assets (9,869) (28,430)
(Decrease) increase in accounts payable and other
liabilities (1,253) 50,479
----------------- ------------------
Net Cash Provided by Operating Activities 27,493 38,058
----------------- ------------------
Investing Activities from Continuing Operations
Additions to property, plant and equipment
(net of disposals of $2,014 and $780, respectively) (92,365) (78,557)
Investments, net (16,998) (1,236)
Proceeds from the sale of assets, net 31,056 20,898
----------------- ------------------
Net Cash Used by Investing Activities (78,307) (58,895)
----------------- ------------------
Net Cash Used by Continuing Operations
Before Financing Activities (50,814) (20,837)
----------------- ------------------
Discontinued Operations
Net cash used by operating activities (8,493) (9,109)
Net cash used by investing activities (24,106)
----------------- ------------------
Net Cash Used by Discontinued Operations
Before Financing Activities (8,493) (33,215)
----------------- ------------------
Financing Activities
Net change in loans payable 76,292 34,726
Principal payments on long-term debt (5,297)
Dividends (17,530) (25,479)
Net proceeds from stock offering 943,303
Proceeds from stock issued for stock plans 45,355 54,650
----------------- ------------------
Net Cash Provided by Financing Activities 1,047,420 58,600
----------------- ------------------
Effect of Exchange Rate Changes on Cash (9,950) (6,038)
----------------- ------------------
Net Change in Cash and Cash Equivalents 978,163 (1,490)
Cash and Cash Equivalents Beginning of Period 308,021 82,865
----------------- ------------------
Cash and Cash Equivalents End of Period $ 1,286,184 $ 81,375
================= ==================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
48
<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
Aclara Biosciences, Inc. During the third quarter of fiscal 2000, the PE
Biosystems group made an additional minority investment of $5.0 million in
Aclara Biosciences, Inc. Aclara Biosciences is a developer of microfluidics
technology and is believed to have access to the wide range of technology and
intellectual property required to broadly address the markets for genomics, or
RNA and DNA analysis, and pharmaceutical drug screening. The investment is
included in other long-term assets.
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
49
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PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
DNA chemistry. As part of the agreement, the PE Biosystems group 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 $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.
Tecan AG During the fourth quarter of fiscal 1999, the Company divested its
interest in Tecan AG.
Biometric Imaging, Inc. During the third quarter of fiscal 1999, the PE
Biosystems group recorded a before-tax gain of $2.6 million from the sale of the
Company's entire equity interest in Biometric Imaging, Inc. Net cash proceeds
from the sale were $6.6 million.
NOTE 4 - PENDING ACQUISITIONS
Paracel, Inc. During the third quarter of fiscal 2000, the Celera Genomics group
signed a definitive agreement to acquire Paracel, Inc. in a stock-for-stock
transaction. All of the equity of Paracel will be exchanged for shares of Celera
Genomics Group Common Stock having a market value at the effective time of the
merger equal to $283 million, except that the number of shares issued at closing
will not be more than 2.26 million or less than 1.55 million. The acquisition is
subject to customary closing conditions and regulatory approvals. Paracel
produces advanced genomic and text analysis
50
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PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
technologies. Its products include a hardware accelerator for sequence
comparison, a hardware accelerator for text search, and sequence analysis
software tools. This merger will be accounted for under the purchase method. The
PE Biosystems group currently holds a minority equity investment in Paracel.
Third Wave Technologies, Inc. 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 subject to customary closing conditions and regulatory
approvals. The merger is expected to be accounted for under the pooling method.
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). This
technology will be used with the PE Biosystems group's Sequence Detection
Systems, a proprietary technology for real-time analysis of genetic information.
NOTE 5 - 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 nine
month period ended March 31, 2000 and 1999 is presented in the following table:
<TABLE>
<CAPTION>
(Dollar amounts in millions) Three months ended Nine months ended
March 31, March 31,
2000 1999 2000 1999
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income $32.9 $36.5 $62.1 $68.5
Other comprehensive income, net of tax:
Foreign currency translation adjustment (13.4) (4.7) (19.1) .3
Unrealized holding gain on investments
arising during period 82.7 2.4 144.6 5.0
Reclassification adjustment for gains
included in net income (16.7)
-------------- ------------ ------------- ------------
Other comprehensive (loss) income 69.3 (2.3) 108.8 5.3
-------------- ------------ ------------- ------------
Comprehensive income $ 102.2 $34.2 $ 170.9 $ 73.8
============== ============ ============= ============
</TABLE>
51
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PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
NOTE 6 - 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>
March 31, 2000 March 31, 1999
------------------------------------ ------------------
(Amounts in thousands PE Biosystems Celera
except per share amounts) Group Genomics Group PE Corporation
--------------- --------------- ------------------
<S> <C> <C> <C>
Weighted average number of common shares
Used in the calculation of basic earnings (loss)
Per share from continuing operations 207,516 53,884 50,508
Common stock equivalents 11,489 - 1,538
--------------- --------------- ------------------
Shares used in the calculation of diluted
earnings (loss) per share from
continuing operations 219,005 53,884 52,046
=============== =============== ==================
Income (loss) from continuing operations used
in the calculation of basic and diluted earnings
(loss) per share from continuing operations $56,067 $(24,107) $31,288
=============== =============== ==================
Income (loss) per share from
continuing operations
Basic $ .27 $ (.45) $ .62
Diluted $ .26 $ (.45) $ .60
</TABLE>
52
<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 nine month period ended:
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
------------------------------------ ------------------
(Amounts in thousands PE Biosystems Celera
except per share amounts) Group Genomics Group PE Corporation
--------------- --------------- ------------------
<S> <C> <C> <C>
Weighted average number of common shares
used in the calculation of basic earnings (loss)
per share from continuing operations 206,551 52,430 49,927
Common stock equivalents 9,201 - 1,245
--------------- --------------- ------------------
Shares used in the calculation of diluted
earnings (loss) per share from
continuing operations 215,752 52,430 51,172
=============== =============== ==================
Income (loss) from continuing operations used
in the calculation of basic and diluted earnings
(loss) per share from continuing operations $129,608 $ (67,783) $67,383
=============== =============== ==================
Income (loss) per share from
continuing operations
Basic $ .63 $ (1.29) $ 1.35
Diluted $ .60 $ (1.29) $ 1.32
</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 5.7 million shares of PE Biosystems Group
Common Stock and 14.3 million shares of Celera Genomics Group Common Stock were
outstanding at March 31, 2000, but were not included in the computation of
diluted income/loss per share because the effect was antidilutive. Antidilutive
options and warrants outstanding at March 31, 1999 were not material.
On January 20, 2000, the Board of Directors announced two-for-one splits of PE
Corporation-PE Biosystems Group Common Stock and PE Corporation-Celera Genomics
Group Common Stock, effected in the form of 100% stock dividends on February 18,
2000. All PE Biosystems group and Celera Genomics group share and per share data
reflect these splits.
53
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
NOTE 7 - COMMON STOCK
On March 6, 2000, PE Corporation completed a follow-on public offering of Celera
Genomics Group Common Stock. In this offering, 4,370,000 shares were sold,
netting proceeds of $943.3 million.
NOTE 8 - 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) March 31, June 30,
2000 1999
--------------------- ---------------------
<S> <C> <C>
Raw materials and supplies $ 48.3 $ 42.8
Work-in-process 8.2 10.3
Finished products 106.4 96.6
--------------------- ---------------------
Total inventories $162.9 $ 149.7
===================== =====================
</TABLE>
NOTE 9 - 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) Nine months ended
March 31,
2000 1999
------------ -------------
<S> <C> <C>
Interest $ 1.9 $ 2.6
Income taxes $ 36.4 $ 32.1
Significant non-cash investing
and financing activities
Unrealized gain on investments $ 191.3 $ 3.6
Dividends declared not paid $ 17.7 $ 8.3
</TABLE>
NOTE 10 - 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
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PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
At March 31, 2000 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) March 31, 2000 June 30, 1999
Sale Purchase Sale Purchase
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Japanese Yen $ 81.0 $ - $ 104.2 $ 6.0
French Francs 4.3
Australian Dollars 2.9 12.0
German Marks 25.4
Italian Lira 10.4 2.6
British Pounds 53.7 72.9 18.6 50.6
Swiss Francs 4.1 7.5 .7
Swedish Krona 4.6 8.9
Danish Krona 4.0 8.1
Singapore Dollars 10.3 2.6 9.3 3.3
Netherland Guilders 16.1
Euro 97.4 83.0 28.2
Other 9.6 .6 17.1
-------------- -------------- -------------- --------------
Total $267.6 $159.1 $ 254.0 $ 79.3
============== ============== ============== ==============
</TABLE>
NOTE 11 - RESTRUCTURING AND OTHER MERGER COSTS
At March 31, 2000, the remaining accrual balance related to the fiscal 1998
restructuring charge for the integration of Perseptive Biosystems, Inc. was $2.7
million, consisting of $1.3 million relating to personnel costs and $1.4 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 12 - 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).
An additional series of performance units totaling .5 million units has been
granted under the plan and is outstanding as of March 31, 2000. A performance
unit represents the right to receive a cash or stock payment from the Company at
a specified date in the future. The amount of the payment is equal to a
predetermined value on the date of the grant. The performance units vest upon
shares of the PE Biosystems Group Common Stock attaining and maintaining
specified common stock price levels for a specified period, and are payable on
or after a
55
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
specified future date subject to continued employment through the date of
payment.
NOTE 13 - SEGMENT INFORMATION
The following table presents summarized segment financial information for the
three months ended March 31:
<TABLE>
<CAPTION>
(Dollar amounts PE Biosystems Celera Genomics
in millions) Group Group Other Consolidated
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
2000
Net revenues from
external customers $ 352.1 $ 11.0 $ - $363.1
Intersegment revenues 16.0 - (16.0) -
----------------- ----------------- --------------- -----------------
Total revenues $ 368.1 $ 11.0 $(16.0) $363.1
================= ================= =============== =================
Operating income (loss) $ 72.4 $(42.9) $ 1.4 $ 30.9
1999
Net revenues from
external customers $ 324.0 $ 1.8 $ - $325.8
Intersegment revenues 5.3 - (5.3) -
----------------- ----------------- --------------- -----------------
Total revenues $ 329.3 $ 1.8 $ (5.3) $325.8
================= ================= =============== =================
Operating income (loss) $ 58.8 $(19.3) $ (2.8) $ 36.7
</TABLE>
56
<PAGE>
PE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS continued
The following table presents summarized segment financial information for the
nine months ended March 31:
<TABLE>
<CAPTION>
(Dollar amounts PE Biosystems Celera Genomics
in millions) Group Group Other Consolidated
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
2000
Net revenues from
external customers $951.6 $ 27.7 $ - $979.3
Intersegment revenues 44.7 - (44.7) -
----------------- ----------------- ----------------- -----------------
Total revenues $996.3 $ 27.7 $(44.7) $979.3
================= ================= ================= =================
Operating income (loss) $161.0 $(114.5) $ 1.9 $ 48.4
1999
Net revenues from
external customers $861.7 $ 7.4 $ - $869.1
Intersegment revenues 15.0 - (15.0) -
----------------- ----------------- ----------------- -----------------
Total revenues $876.7 $ 7.4 $(15.0) $869.1
================= ================= ================= =================
Operating income (loss) $140.9 $ (37.8) $ (9.6) $ 93.5
</TABLE>
See Note 6 to PE Corporation's consolidated financial statements included in the
Company's 1999 Annual Report to Stockholders.
NOTE 14 - DEBT
Long-term debt includes $46.0 million of commercial paper allocated to the
Celera Genomics group with an average interest rate of 6.23% at March 31, 2000.
The Company has established the necessary credit facilities, through its
revolving credit agreement discussed below, to refinance the commercial paper
borrowings on a long-term basis. These borrowings have been classified as
noncurrent because it is the Company's intent to refinance these obligations on
a long-term basis.
The Company's $100 million revolving credit agreement was replaced effective
April 20, 2000 with a new $100 million revolving credit agreement with four
banks that matures on April 20, 2005. Commitment and facility fees are based on
public debt ratings or leverage ratios. Interest rates on amounts borrowed vary
depending on whether borrowings are undertaken in the domestic or Eurodollar
markets. There were no borrowings under the existing facility at March 31, 2000.
There were no borrowings under the existing facility at March 31, 2000.
57
<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 investments. 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 equity interest in Millennium Pharmaceuticals, Inc. During the
third quarter of fiscal 1999, the Company recorded a before-tax gain of $2.6
million on the sale of the its entire equity interest in Biometric Imaging,
Inc.
Merger-related costs. The Company incurred merger-related period before-tax
costs of $1.6 million and $3.6 million for the three and nine months ended March
31, 1999, 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 a long-term
compensation program as a result of the attainment of performance targets. Refer
to Note 12 to the Condensed Consolidated Financial Statements for a discussion
of this program.
58
<PAGE>
PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
The Company recognized non-recurring before-tax costs of $1.5 million and $2.7
million for the three and nine months ended March 31, 1999, respectively, in
connection with the recapitalization of the Company.
Results of Continuing Operations for the Three Months Ended March 31, 2000
Compared With the Three Months Ended March 31, 1999
PE Corporation reported income from continuing operations of $32.9 million for
the third quarter of fiscal 2000 compared with $31.3 million for the third
quarter of fiscal 1999. On a segment basis, the PE Biosystems group reported
income from continuing operations of $56.1 million for the third quarter of
fiscal 2000 compared with $46.3 million for the third quarter of fiscal 1999. On
a comparable basis, excluding Tecan and the special items previously described
from the prior year, income from continuing operations increased 34.9% to $56.1
million for the third quarter of fiscal 2000 compared with $41.6 million for the
prior period. This increase is attributable to the growth in net revenues and
higher gross margin as a percent of net revenues. The net effect of changes in
foreign currency had a negligible impact on this quarter's revenues and
operating income. The PE Biosystems group's foreign currency management program
resulted in a gain of $5.1 million, reflected in other income. The Celera
Genomics group reported a net loss of $24.1 million for the third quarter of
fiscal 2000, compared with a net loss of $12.7 million for the third quarter of
fiscal 1999. The increase in the net loss reflected the increased sequencing
activity and increased investment in research and development activities, as the
group continued to expand its scientific and annotation research teams and its
bioinformatics staff.
Net revenues for the Company were $363.1 million for the third quarter of fiscal
2000 compared with $325.8 million for the third quarter of fiscal 1999, an
increase of 11.4%. On a segment basis, net revenues for the PE Biosystems group
increased 11.8% to $368.1 million for the third quarter of fiscal 2000, compared
with $329.3 million for the prior year. The Celera Genomics group reported net
revenues of $11.0 million for the third quarter of fiscal 2000, compared with
$1.8 million for the third quarter of fiscal 1999.
Net revenues for the PE Biosystems group, excluding the results of Tecan in the
prior year, increased 20.3% compared with the prior year. The effects of foreign
currency translation had minimal overall impact on net revenues compared with
the prior year as weakness in the euro was offset by strengthening of the
Japanese yen. Revenues from leased instruments and shipments of consumables and
project materials to the Celera Genomics group were $16.0 million for the third
quarter of fiscal 2000, or 4.3% of the PE Biosystems group's net revenues.
Revenues from leased instruments and shipments of instruments and consumables to
the Celera Genomics group were $5.2 million for the third quarter of fiscal
1999. Geographically, excluding the net revenues of Tecan for the third quarter
of fiscal 1999, the PE Biosystems group reported revenue growth in all regions
for the third quarter of fiscal 2000 compared with the third quarter of fiscal
1999. Revenues increased 15.4% in the United States, 9.8% in Europe, 38.5% in
the Far East, and 61.7% in Latin America and other markets, compared with the
third quarter of the prior fiscal year. Excluding the effects of currency
translation, revenues grew in the Far East approximately 28%, reflecting
increased government funding for genomics related research, and approximately
18% in Europe. Revenues grew substantially in genetic
59
<PAGE>
PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
analysis reagents used in a variety of whole genome DNA sequencing projects and
in applied genetic analysis markets, such as forensics and human diagnostics.
Genetic analysis revenues also reflected continued demand for the ABI Prism 3700
DNA Analyzer and other DNA sequencing systems. Demand also was to be strong for
sequence detection systems and mass spectrometry instruments.
Net revenues for the Celera Genomics group were $11.0 million for the third
quarter of fiscal 2000 compared with $1.8 million for the third quarter of
fiscal 1999. The increased revenues resulted primarily from recent subscription
and related service agreements. Revenues for plant and animal genotyping
services remained essentially unchanged.
Gross margin as a percentage of net revenues for the Company was 56.3% for the
third quarter of fiscal 2000 compared with 54.1% for the third quarter of fiscal
1999. Gross margin for the PE Biosystems group as a percentage of net revenues
was 54.9% for the third quarter of fiscal 2000 compared with 54.0% for the third
quarter of fiscal 1999. Excluding Tecan for the prior year, the gross margin as
a percentage of net revenues was 52.9% for the PE Biosystems group. The increase
in the PE Biosystems group's gross margin percentage was primarily the result of
a change in product mix. Higher unit sales of reagents to support genetic
analysis systems were a primary contributor for the higher gross margin
percentage for the third quarter of fiscal 2000.
SG&A expenses for the Company were $104.2 million for the third quarter of
fiscal 2000 compared with $89.8 million for the third quarter of fiscal 1999. On
a segment basis, SG&A expenses were $93.8 million and $82.8 million for the
third quarter of fiscal 2000 and 1999, respectively, for the PE Biosystems
group. SG&A expenses for the Celera Genomics group were $10.5 million and $7.0
million for the third quarter of fiscal 2000 and 1999, respectively.
SG&A expenses for the PE Biosystems group, excluding Tecan from the prior year,
increased 28.7% for the third quarter of fiscal 2000 compared with the third
quarter of the prior year. This increase was due to higher planned expenses. As
a percentage of net revenues, excluding the long-term compensation charge and
Tecan, SG&A expenses were 25.5% for the third quarter of fiscal 2000 compared
with 23.8% for the third quarter of fiscal 1999.
The Celera Genomics group's SG&A expenses increased $3.5 million for the third
quarter of fiscal 2000 compared with the third 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 $69.4 million for the third quarter of
fiscal 2000 compared with $46.5 million for the prior year. R&D expenses for the
PE Biosystems group were $36.1 million for the third quarter of fiscal 2000
compared with $33.9 million for the prior year. Excluding Tecan for the prior
year, R&D expenses increased 18.8% compared with the prior year period. As a
percentage of net revenues, R&D expenses were 9.8% for the third quarter of
fiscal 2000, essentially unchanged when compared with the prior year excluding
Tecan.
The Celera Genomics group's R&D expenses increased $30.1 million to $43.4
million for the third quarter of fiscal 2000 from $13.3 million for the third
quarter of fiscal 1999 primarily as a result of
60
<PAGE>
PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
increased sequencing operations and expanded scientific and annotation research
teams and bioinformatics and software engineering staffing.
The Company incurred merger-related period costs of $1.6 million for the third
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 third quarter of fiscal 1999, the
Company recorded a non-recurring charge of $1.5 million for costs incurred in
connection with the recapitalization of the Company.
Operating income was $30.9 million for the third quarter of fiscal 2000 compared
with $36.7 million for the third quarter of the prior year. On a segment basis,
operating income for the PE Biosystems group increased to $72.4 million for the
third quarter of fiscal 2000 compared with $58.8 million for the prior year. On
a comparable basis, excluding the special items and Tecan from the prior year,
operating income increased 23.2% for the third quarter of fiscal 2000 compared
with the prior year. The PE Biosystems group benefited from increased revenues
and improvements in gross margin. Operating income as a percentage of net
revenues for the PE Biosystems group, excluding the special items and Tecan,
increased to 19.7% for the third quarter of fiscal 2000 compared with 19.2% for
the prior year.
Operating loss for the Celera Genomics group was $42.9 million for the third
quarter of fiscal 2000 compared with $19.3 million for the third quarter of
fiscal 1999. The increase in the operating loss reflected the increased
sequencing activity and increased investment in research and development
activities, as the group continued to expand its scientific and annotation
research teams and its bioinformatics staff.
During the third quarter of fiscal 1999, the Company recorded a before-tax gain
of $2.6 million on the sale of its entire equity interest in Biometric Imaging,
Inc.
Interest expense was $1.0 million for the third quarter of fiscal 2000 compared
with $.5 million for the prior year. This increase was primarily due to higher
average debt balances. Interest income was $9.4 million for the third quarter of
fiscal 2000 compared with $.5 million for the prior year. This increase was a
result of the higher cash and cash equivalents balances, primarily caused by the
follow-on public offering of Celera Genomics Group Common Stock, as well as
interest on the note receivable relating to the sale of the Analytical
Instruments business.
Other income, net for the Company for the third quarter of fiscal 2000 was $5.0
million compared with $.2 million for the prior year. For both periods, other
income, net primarily related to gains associated with the Company's foreign
currency management program that provides hedge coverage for projected cash
flows.
The Company's effective income tax rate was 26% for the third quarter of fiscal
2000 compared with 17% for the prior year. Excluding special items and Tecan in
fiscal 1999, the effective income tax rate for the third quarter of fiscal 1999
was 27%.
61
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PE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS continued
In the third quarter of fiscal 1999, minority interest expense of $1.3. million
was recognized relating to the Company's 14.5% financial interest in Tecan.
Results of Continuing Operations for the Nine Months Ended March 31, 2000
Compared With the Nine Months Ended March 31, 1999
PE Corporation reported income from continuing operations of $62.1 million for
the first nine months of fiscal 2000 compared with $67.4 million for the first
nine months of fiscal 1999. On a segment basis, the PE Biosystems group reported
income from continuing operations of $129.6 million for the first nine months of
fiscal 2000 compared with $95.4 million for the first nine months of fiscal
1999. On a comparable basis, excluding the special items previously described
from both fiscal years and Tecan from the prior year, income from continuing
operations increased 40.1% to $129.6 million for the first nine months of fiscal
2000 compared with $92.5 million for the prior period. This increase is
attributable primarily 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 $67.8 million for the first nine months of fiscal 2000, compared with a
net loss of $25.0 million for the first nine months of fiscal 1999. The increase
in the net loss reflected the increased sequencing activity; increased
investment in research and development activities relating to expanded
scientific and annotation teams, and bioinformatics staff; and increased
operating expenses required to support the expanded data management and software
and business development activities.
Net revenues for the Company were $979.3 million for the first nine months of
fiscal 2000 compared with $869.1 million for first nine months of fiscal 1999,
an increase of 12.7%. On a segment basis, net revenues for the PE Biosystems
group increased 13.6% to $996.3 million for the first nine months of fiscal
2000, compared with $876.7 million for the prior year. The Celera Genomics group
reported net revenues of $27.7 million for the first nine months of fiscal 2000,
compared with $7.4 million for the first nine months of fiscal 1999.
Net revenues for the PE Biosystems group, excluding the results of Tecan for the
prior year, increased 25.1% compared with the prior year. The effects of foreign
currency translation increased net revenues by approximately $2.8 million
compared with the prior year. Revenues from leased instruments and shipments of
consumables and project materials to the Celera Genomics group were $44.7
million for the first nine months of fiscal 2000, or 4.5% of the PE Biosystems
group's net revenues. For the first nine months of fiscal 1999, revenues from
leased instruments, shipments of instruments and consumables, and contracted R&D
services to the Celera Genomics group were $15.1 million. Geographically,
excluding the net revenues of Tecan for the first nine months of fiscal 1999,
the PE Biosystems group reported revenue growth in all regions for the first
nine months of fiscal 2000 compared with the first nine months of fiscal 1999.
Revenues increased 24.6% in the United States, 17.0% in Europe, 34.4% in the Far
East, and 60.9% in Latin America and other markets, compared with the first nine
months of the prior fiscal year. Excluding the favorable effects of currency
translation in Japan, revenues grew approximately 21% in the Far East partly
reflecting increased government funding for genomics related research. Excluding
the effects of currency translation in
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Europe, revenues increased by approximately 25%. Increased demand for genetic
analysis reagents and instruments, sequence detection systems, and mass
spectrometry instruments was the primary contributor.
Net revenues for the Celera Genomics group were $27.7 million for the first nine
months of fiscal 2000 compared with $7.4 million for the first nine months of
fiscal 1999. The increased revenues were primarily a result of database
subscription agreements initiated during the current fiscal year and the second
half of fiscal 1999 and an increase in related genomics services revenues.
Revenues for plant and animal genotyping services remained essentially
unchanged.
Gross margin as a percentage of net revenues for the Company was 55.2% for the
first nine months of fiscal 2000 compared with 54.8% for the first nine months
of fiscal 1999. Gross margin for the PE Biosystems group as a percentage of net
revenues was 54.0% for the first nine months of fiscal 2000 compared with 53.7%
for the first nine months of fiscal 1999, excluding Tecan.
SG&A expenses for the Company were $305.7 million for the first nine months of
fiscal 2000 compared with $253.0 million for the first nine months of fiscal
1999. On a segment basis, SG&A expenses were $277.3 million, including the
long-term compensation charge, and $235.4 million for the first nine months of
fiscal 2000 and 1999, respectively, for the PE Biosystems group, and $28.4
million and $17.6 million for the first nine 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 incurred in the second quarter of the current year and Tecan from the
prior year, increased 23.2% for the first nine months of fiscal 2000 compared
with the first nine months of the prior year. This increase was due to higher
planned expenses. As a percentage of net revenues, excluding the long-term
compensation charge and Tecan, SG&A expenses were 25.7% for the first nine
months of fiscal 2000 compared with 26.1% for the prior year.
The Celera Genomics group's SG&A expenses increased to $28.4 million for the
first nine months of fiscal 2000 compared with $17.6 million for the first nine
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.
R&D expenses for the Company increased to $186.8 million for the first nine
months of fiscal 2000 compared with $123.6 million for the prior year. R&D
expenses for the PE Biosystems group were $99.5 million for the first nine
months of fiscal 2000, unchanged compared with the first nine months of the
prior year. Excluding Tecan from the prior year, R&D expenses increased 13.7%
compared with the first nine months of fiscal 1999. As a percentage of net
revenues, excluding Tecan, R&D expenses were 10.0% for the first nine months of
fiscal 2000 compared with 11.0% for the first nine months of the prior year. The
prior year's R&D expense level was higher as a percentage of net revenues due to
the development of new products released in the second half of fiscal 1999.
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The Celera Genomics group's R&D expenses increased $87.6 million to $113.8
million for the first nine months of fiscal 2000 from $26.2 million for the
first nine months of fiscal 1999 primarily as a result of a full nine months of
sequencing operations and significantly expanded bioinformatics and software
development capabilities. The group also continued to expand its scientific and
annotation research teams and bioinformatics and software engineering staff.
The Company incurred merger-related period costs of $3.6 million for the first
nine 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 nine months of fiscal 1999,
the Company recorded a non-recurring charge of $2.7 million for costs incurred
in connection with the recapitalization of the Company.
Operating income was $48.4 million for the first nine months of fiscal 2000
compared with $93.5 million for the first nine months of the prior year. On a
segment basis, operating income for the PE Biosystems group increased to $161.0
million for the first nine months of fiscal 2000 compared with $140.9 million
for the first nine months of the prior year. On a comparable basis, excluding
the special items previously described from both fiscal years and Tecan from the
prior year, operating income increased 37.7% for the first nine months of fiscal
2000 compared with the first nine months of the prior year. The PE Biosystems
group benefited from increased revenues primarily as a result of strong demand
for several new products. 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 18.3% for the
first nine months of fiscal 2000 compared with 16.7% for the first nine months
of the prior year.
Operating loss for the Celera Genomics group was $114.5 million for the first
nine months of fiscal 2000 compared with $37.8 million for the first nine months
of fiscal 1999. The increase in the operating loss reflected the increase in
sequencing activity; increased investment in research and development activities
relating to expanded scientific and annotation teams, and bioinformatics staff;
and increased operating expenses required to support the expanded data
management and software and business development activities.
The Company recognized a before-tax gain of $25.8 million in the first nine
months of fiscal 2000 related to the sale of a portion of its equity interest in
Millennium Pharmaceuticals, Inc. During the first nine months of fiscal 1999,
the Company recorded a before-tax gain of $2.6 million from the sale of its
entire equity interest in Biometric Imaging, Inc.
Interest expense was $2.3 million for the first nine months of fiscal 2000
compared with $2.6 million for the prior year. This decrease was primarily due
to lower average interest rates. Interest income was $19.0 million for the first
nine months of fiscal 2000 compared with $1.2 million for the prior year. This
increase was primarily a result of interest on higher cash and cash equivalents
balances, resulting from the follow-on public offering of Celera Genomics Group
Common Stock, as well as interest on the note receivable relating to the sale of
the Analytical Instruments business.
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Other expense, net for the Company for the first nine months of fiscal 2000 was
$3.8 million, primarily related to costs associated with a portion of the
Company's foreign currency management program that provides hedge coverage for
projected cash flows. Other expense, net was $.3 million for the first nine
months of fiscal 1999, which related to costs associated with a portion of the
Company's foreign currency management program offset by income from a legal
settlement.
The Company's effective income tax rate was 29% for the first nine 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 25% for the first nine months of 2000 compared with 22% for the prior
year.
In the first nine months of fiscal 1999, minority interest expense of $9.5
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 nine months of fiscal 2000 and fiscal 1999, the PE
Biosystems group derived approximately 51% 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 March 31, 2000, outstanding
hedge contracts covered approximately 64% 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 March 31, 2000 and June 30,
1999. Assuming a hypothetical adverse change of 10% in foreign exchange rates in
relation to the U.S. Dollar at March 31, 2000, the Company calculated a
hypothetical loss of $4.5 million when comparing the change in fair value of
both the foreign currency contracts outstanding and the underlying exposures
being hedged at March 31, 2000. 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.
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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 the Company 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 March 31, 2000,
the notional amount of indebtedness covered by the interest rate swap was Yen
3.8 billion or $36.0 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 $1,286.2 million at March 31, 2000
compared with $308.0 million at June 30, 1999, with total debt of $117.5 million
at March 31, 2000 compared with $35.4 million at June 30, 1999. Working capital
was $1,445.5 million at March 31, 2000 compared with $471.4 million at June 30,
1999. In March 2000, the Company completed a follow-on public offering of Celera
Genomics Group Common Stock from which the Company realized net proceeds of
$943.3 million. Debt to total capitalization increased to 6% at March 31, 2000
from 4% at June 30, 1999 as a result of an increase in loans payable and
long-term debt. 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 increase in loans payable for the PE
Biosystems group was primarily a result of the Company's decision to discontinue
its receivables factoring program in a foreign subsidiary.
Other long-term assets increased $171.6 million to $421.1 million at March 31,
2000 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.
Condensed Consolidated Statements of Cash Flows. Net cash provided by operating
activities from continuing operations was $27.5 million for the first nine
months of fiscal 2000 compared with net cash provided by operating activities of
$38.1 million for the same period in fiscal 1999. For the first nine months of
fiscal 2000 compared with the same period in the prior year, higher
income-related cash flows and lower increases in receivables and inventory were
offset by higher payments to suppliers and payments of certain compensation
accruals.
Net cash used by investing activities from continuing operations was $78.3
million for the first nine months of fiscal 2000 compared with $58.9 million for
the first nine months of fiscal 1999. In the first nine months of fiscal 2000,
the Company had capital expenditures of $94.4 million. Capital expenditures were
$69.9 million for the PE Biosystems group, which included $5.7 million related
to improvement of its information technology infrastructure and $20.3 million
for the acquisition of a new corporate airplane, and $24.4 million for the
Celera Genomics group. Investments during the first nine months of fiscal 2000
included minority investments in Aclara Biosciences, Inc., Illumina, Inc. and
Epoch Pharmaceuticals, Inc. for the PE Biosystems group. The Celera Genomics
group's investments during the first nine months of fiscal 2000 included
acquisitions of the Panther(TM)
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technology from Molecular Applications Group and a 47.5% equity interest in
Shanghai GeneCore BioTechnologies Co., Ltd. In the first nine months of fiscal
2000, the Company realized approximately $31.1 million from the sale of a
portion of a minority investment. In the first nine months of fiscal 1999, the
Company generated $20.9 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 $78.6 million, which included $9.2 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 $8.5 million for the first nine
months of fiscal 2000 compared with $33.2 million for the first nine months of
fiscal 1999. The fiscal 2000 use of $8.5 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 $1,047.4 million for the first
nine months of fiscal 2000 compared with $58.6 million for the prior period. In
March 2000, the Company completed a follow-on public offering of Celera Genomics
Group Common Stock from which the Company realized net proceeds of $943.3
million. For the first nine months of fiscal 2000, the Company received $45.4
million in proceeds from employee stock option exercises compared with $54.7
million for fiscal 1999. Loans payable increased $76.3 million for the first
nine months of fiscal 2000 compared with an increase of $34.7 million for the
prior year. The first nine months of fiscal 1999 included a payment of $5.3
million for the retirement of foreign debt.
The Company's $100 million revolving credit agreement was replaced effective
April 20, 2000 with a new $100 million revolving credit agreement with four
banks that matures on April 20, 2005. Terms of this new revolving credit
agreement are substantially similar to those of the previous credit agreement.
At March 31, 2000, PE had unused credit facilities, including the existing
revolving credit agreement, totaling $275.4 million.
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
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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.
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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.
Outlook
PE Biosystems Group
The PE Biosystems group expects to continue to grow and maintain profitability
for the balance of fiscal 2000 on the strength of robust demand and several new
products. PE Biosystems should continue to benefit from its customers in basic
medical research, pharmaceutical development, and applied markets for
sophisticated, automated, and cost effective life science tools.
Sales of 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 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. The group recently announced new products and initiatives in
proteomics and a new genetic analyzer system, the ABI Prism 3100 that are
expected to be important contributors during fiscal 2001.
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 subject to
customary closing conditions and regulatory approvals. The process of obtaining
such approvals is taking longer than originally expected and, as a result, the
parties have extended the termination date under the merger agreement. While
this process is inherently uncertain, both parties are continuing to cooperate,
and the Company currently contemplates that the transaction will close in the
first quarter of fiscal 2001.
We remain concerned about adverse currency effects because approximately 50% of
the PE Biosystems group's revenues were derived from regions outside the United
States for fiscal 1999.
Celera Genomics Group
On March 20, 2000, the Celera Genomics group announced the signing of a
definitive merger agreement under which Celera Genomics will acquire Paracel,
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
reorganization and will be accounted for under the purchase method. All of the
equity of Paracel will be exchanged for shares of Celera Genomics Group Common
Stock having a market value at the effective time of the merger equal to $283
million, except that the number of shares issued
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at closing will not be more than 2.26 million or less than 1.55 million. If the
closing of the merger were to have occurred on May 8, 2000, each issued and
outstanding share of Paracel common stock would have been exchanged for .2146
shares of Celera Genomics common stock, and the aggregate consideration paid to
Paracel stockholders would have been less than $283 million. The transaction is
subject to customary closing conditions and regulatory approvals. Paracel, Inc.
is a leading producer of advanced genomic and text analysis technologies. Its
products include a sequence comparison supercomputer (GeneMatcher(TM)),
high-throughput sequence analysis and annotation software tools, and a text
search supercomputer (TextFinder(TM)). Its customers include major
pharmaceutical, biotechnology and genomic companies; research centers; and
government institutions worldwide. Celera intends to utilize Paracel's
technology and bioinformatic expertise to provide value added analytical and
data mining tools needed by its customers as well as for Celera's internal gene
discovery and annotation work.
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. Recently, the Celera Genomics group entered
into a five-year comprehensive genomics agreement with Takeda Chemical
Industries, Ltd., the largest pharmaceutical company in Japan, which includes a
subscription to five of Celera Genomics group's current databases. The agreement
also includes access to the group's advanced bioinformatics tools and browsers.
Celera also signed a research services agreement that allows ViaLactia, a
subsidiary of the New Zealand Dairy Board, to search for genetic traits that
could improve the quality of dairy products. 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 during the fourth quarter of the fiscal year as
the Celera Genomics group continues to increase its sequencing throughput and
installs additional hardware and software designed to accelerate product
development and support for its information delivery systems. However, due to
increased interest income related to the cash received in the secondary
offering, the Celera Genomics group expects its fourth quarter pre-tax loss to
be smaller than pre-tax losses recorded in the third quarter of fiscal 2000.
The Celera Genomics group recently completed the sequencing phase of one
person's genome and has now begun to assemble the sequenced fragments of the
genome into their proper order. In addition to assembly, the group is now
focusing on annotating the sequence information and collecting additional data
on genetic variations. The group has also begun the next phase of its
information business, sequencing the mouse genome. The mouse is considered to be
important to biomedical research as a model for studies of human biology and
medicines.
The Company believes that the Celera Genomics group's existing cash and cash
equivalents and the note and tax benefit receivables 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 the Company intends to use the net
proceeds of the Celera Genomics
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Group Common Stock follow-on public offering primarily to fund the Celera
Genomics group's new product and technology development activities in functional
genomics, with an emphasis on proteomics, and personalized health/medicine, such
funds may not be sufficient to support these new business activities as they
develop. 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 44 of this report.
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PART II - OTHER INFORMATION
Item 5. Other Information.
Purported Class Action Litigation. As of May 12, 2000, PE Corporation
and certain of its officers had been served in three virtually identical
lawsuits purportedly on behalf of purchasers of Celera Genomics Group Common
Stock in PE Corporation's offering of Celera Genomics Group Common Stock
completed on March 6, 2000. These complaints generally allege that the
prospectus used in connection with the offering contained inaccurate and
misleading statements in violation of federal securities laws. The complaints
seek unspecified damages, rescission, costs and expenses, and such other relief
as the court deems proper. Although the Company is unable to predict the outcome
of this or any litigation, the Company believes the asserted claims are without
merit and intends to defend the actions vigorously.
Insider Diversification Program. The Company intends to create an
Insider Diversification Program to facilitate limited and orderly dispositions
of Company stock by the Company's officers and directors. The Company believes
such a program will provide several benefits, including the following:
facilitating reasonable asset diversification for members of management, most of
whom have accumulated stock over the years without significant sales, such that
a substantial percentage of their net worth is currently tied up in Company
stock and options; facilitating dispositions in a controlled and periodic manner
through a trust mechanism which should not be disruptive to the market; placing
the timing of sales with an independent trustee who would not have access to any
non-public information concerning the Company; assuring that insiders have ample
opportunity to exercise stock options prior to their expiration; and reducing
the likelihood that valued members of management might otherwise be motivated to
leave the Company in order to monetize their holdings and diversify their
assets. The Insider Diversification Program will permit directors and officers
to sell a specified portion of their stock and option holdings over a period of
time (up to 5% per quarter or 20% per year) through a trust arrangement. The
program does not change the Company's existing requirements that members of
senior management maintain specified minimum holdings of Company stock. Under
the terms of the Insider Diversification Program, sales will be made through an
independent third party in accordance with the terms of the trust instrument. As
of this date, the Company does not know how many of its directors and officers
will elect to participate in this program.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 PE Corporation 1993 Director Stock Purchase and Deferred
Compensation Plan, as amended through March 17, 2000.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter ended March 31, 2000, the Company filed
a Current Report on Form 8-K dated February 18, 2000 and filed
March 15, 2000 to report under Item 5 thereof the adjustment of
the number of shares of PE Biosystems Group Common Stock and
Celera Genomics Group Common Stock, together with associated
preferred stock purchase rights, registered with the Securities
and Exchange Commission pursuant to its outstanding registration
statements to reflect the recent two-for-one stock splits.
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The Company also filed a Current Report on Form 8-K dated
and filed March 20, 2000 to report under Item 5 thereof that the
Company had entered into a definitive agreement to acquire
Paracel, Inc.
.
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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: May 15, 2000
74
<PAGE>
Exhibit No. Exhibit
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10.1 PE Corporation 1993 Director Stock
Purchase and Deferred Compensation
Plan, as amended through March 17,
2000.
27. Financial Data Schedule.
PE CORPORATION
1993 DIRECTOR STOCK PURCHASE AND DEFERRED
COMPENSATION PLAN
(as amended through March 17, 2000)
1. OBJECTIVE OF THE PLAN.
The PE Corporation 1993 Director Stock Purchase and Deferred
Compensation Plan (the "Plan") is established effective October 21, 1993 for the
benefit of directors of PE Corporation (the "Corporation") who are not employees
of the Corporation or any of its subsidiaries. The Corporation has adopted the
Plan in recognition that its long-term success and achievements are enhanced and
the interests of its shareholders are best served when its outside directors
have a direct and personal stake in the performance of the Corporation's stock.
2. DEFINITIONS.
As used herein, the following terms have the meanings hereinafter set
forth unless the context clearly indicates to the contrary:
2.1 "Account" shall mean the deferred Fees account established
for a Participant pursuant to Section 5.3.
2.2 "Board of Directors" shall mean the board of directors of
the Corporation.
2.3 "Celera Stock" shall mean shares of PE Corporation -
Celera Genomics Group Common Stock, par value $.01 per share, of the
Corporation.
2.4 "Celera Stock Unit" shall mean the bookkeeping entry
representing the equivalent of one share of Celera Stock.
2.5 "Corporate Secretary" shall mean the person holding the
position of Secretary of the Corporation.
2.6 "Effective Date" shall mean October 21, 1993.
2.7 "Fees" shall mean all retainer, meeting and committee fees
payable to a non-employee director for service on the Board of
Directors for any calendar year from and after the Effective Date,
before any reduction pursuant to this Plan.
<PAGE>
2.8 "Fees Payment Date" shall mean the first calendar day of
the third month of each fiscal quarter or, if such date is not a
business day for the Corporation, the next succeeding business day.
2.9 "Participant" shall mean any member of the Board of
Directors who is not also a regular, salaried employee of the
Corporation or any of its subsidiaries.
2.10 "PE Biosystems Stock" shall mean shares of PE Corporation
- PE Biosystems Group Common Stock, par value $.01 per share, of the
Corporation.
2.11 "PE Biosystems Stock Unit" shall mean the bookkeeping
entry representing the equivalent of one share of PE Biosystems Stock.
2.12 "Stock" shall mean Celera Stock and/or PE Biosystems
Stock.
2.13 "Stock Price" shall mean the simple average of the high
and low sales prices of a share of Celera Stock or PE Biosystems Stock,
as the case may be, as reported in the report of composite transactions
(or other independent published source designated by the Board of
Directors) on the Fees Payment Date (or if there shall be no trading on
such date, then on the first previous date on which sales were made on
a national securities exchange). Notwithstanding the foregoing, if
Celera Stock or PE Biosystems Stock is purchased in the market for
purposes of the Plan on a Fees Payment Date, "Stock Price" shall mean
the actual average cost per share of the aggregate purchases of Celera
Stock or PE Biosystems Stock for the Plan on such date.
2.14 "Stock Unit" shall mean a Celera Stock Unit and/or a PE
Biosystems Stock Unit.
3. PARTICIPATION.
All members of the Board of Directors who are not also regular salaried
employees of the Corporation or any of its subsidiaries shall participate in the
Plan.
4. PAYMENT OF FEES.
4.1 Automatic Payment of Fees in Stock. Fifty percent (50%) of the Fees
of each Participant payable on and after the Effective Date, shall be applied to
the purchase of Celera Stock and/or PE Biosystems Stock or, if deferred pursuant
to Section 5.1, credited as Celera Stock Units or PE Biosystems Stock Units, at
the applicable Stock Price on the Fees Payment Date, in each case in the ratio
specified in or established by the Board of Directors pursuant to Section 4.3.
To the extent not deferred pursuant to Section 5.1, whole shares of Stock
purchased in respect of such Fees shall be issued to the Participant
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as soon as practicable thereafter. Cash shall be paid to a Participant in lieu
of a fractional share of Stock.
4.2 Election to Receive Fees in Stock. A Participant may elect, by
filing the appropriate election form with the Corporate Secretary before the
Fees Payment Date to which the election applies, to have up to that portion of
his or her Fees payable on and after such Fees Payment Date which are not
automatically paid in Stock pursuant to Section 4.1 or which are not deferred
pursuant to Section 5.1, applied to the purchase of Celera Stock and/or PE
Biosystems Stock at the applicable Stock Price on the Fees Payment Date;
provided, however, that such purchase of Stock of each class shall be in the
ratio specified in or established by the Board of Directors pursuant to Section
4.3. Whole shares of Stock purchased in respect of such Fees shall be issued to
the Participant as soon as practicable thereafter. Cash shall be paid to a
Participant in lieu of a fractional share of Stock.
A Participant may amend or terminate an election under this Section 4.2
by written notice to the Corporate Secretary. Such amendment or termination
shall be effective as of the next Fees Payment Date following the date of
delivery of such notice to the Corporate Secretary.
4.3 Allocation Between Stock. Purchases of Stock of each class under
Section 4.1 and Section 4.2 shall be made, as nearly as practicable, in the
ratio of the number of shares of such class then outstanding to the number of
shares of the other class then outstanding, or in such other ratio as shall be
determined by the Board of Directors from time to time. The Board of Directors
shall allocate each Participant's purchases of Stock of each class under the
Plan in order to maintain such Participants' holdings in accordance with this
ratio. The Board of Directors may, if it deems necessary, adopt specific rules
consistent with this Section 4.3.
5. DEFERRAL OF FEES.
5.1 Deferral Election. A Participant may elect to defer receipt of his
or her Fees, including all or any portion of his or her Fees which are subject
to Section 4.1 hereof, by filing the appropriate deferral form with the
Corporate Secretary on or before December 15th of the calendar year prior to the
calendar year in which such deferral is to be effective or, in the case of any
person elected to the Board of Directors after the Effective Date, within thirty
(30) days after such person first becomes eligible to participate in the Plan.
Any Participant who has made an effective election to defer the receipt
of Fees which election was in effect on October 21, 1993 may continue to defer
receipt of such Fees pursuant to such election; provided, however, that such
election and any such deferral which occurs on or after the Effective Date shall
be governed by the terms of this Plan.
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Notwithstanding the foregoing, no deferral shall be permitted to the
extent prohibited by applicable law.
5.2 Period of Deferral. Subject to Section 5.9, a Participant may elect
to defer receipt of Fees until (a) a specified date in the future, (b) cessation
of the Participant's service as a member of the Board of Directors or (c) the
end of the calendar year in which cessation of the Participant's service as a
member of the Board of Directors occurs.
5.3 Deferred Fees Account. There shall be established an Account in the
Participant's name on the books of the Corporation for each Participant electing
to defer Fees pursuant to this Section 5.
5.4 Investment of Deferrals. Except as provided in the next sentence,
deferrals shall be credited to a Participant's Account in Celera Stock Units
and/or PE Biosystems Stock Units. With respect to that portion of his or her
deferrals under the Plan which are not subject to Section 4.1, the Participant
may elect under the procedures set forth in Section 4.2 that such deferrals be
credited to his or her Account in cash or Stock Units.
5.5 Amounts Credited to Accounts.
(a) Investment in Stock Units. To the extent the deferral of a
Participant's Fees is deemed invested in Stock Units, such amounts
shall be credited to his or her Account in the following manner: on the
Fees Payment Date to which the deferral election applies, the amount
deferred shall be converted into a number of Stock Units by dividing
the amount of Fees payable by the sum of the Stock Prices as of such
date in the ratio specified in or established by the Board of Directors
pursuant to Section 4.3. The quotient, which shall be expressed in
whole or fractional Stock Units to the nearest one/one hundredth
(1/100th), shall be credited to the Participant's Account as of such
date in Celera Stock Units and PE Biosystems Stock Units; provided,
however, that if the ratio established by the Board of Directors
pursuant to Section 4.3 is other than 1:1, the number of Stock Units so
credited shall be appropriately adjusted to reflect such ratio.
Whenever cash dividends are paid with respect to shares of
Stock, each Participant's Account shall be credited on the payment date
of such dividend with additional Stock Units of the same class
(including fractional units to the nearest one/one hundredth (1/100th))
equal in value to the amount of the cash dividend paid on a single
share of such Stock multiplied by the number of Stock Units of the same
class (including fractional units) credited to a Participant's Account
as of the date of record for dividend purposes. For purposes of
crediting dividends, the value of a Stock Unit shall be the applicable
Stock Price as of the payment date of the dividend.
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The number of Stock Units credited to each Participant's
Account shall be appropriately adjusted and modified upon the
occurrence of any stock split, stock dividend or stock consolidation
affecting the Celera Stock or PE Biosystems Stock. In the event of a
merger, consolidation or an acquisition involving more than 50% of the
issued and outstanding shares of Celera Stock or PE Biosystems Stock,
the Board of Directors shall have the authority to amend the Plan to
provide for the conversion of Celera Stock Units or PE Biosystems Stock
Units credited to Participants' Accounts into units equal to shares of
stock of the resulting or acquiring company (or a related company), as
appropriate, if such stock is publicly traded or, if not, into cash of
equal value on the date of merger, consolidation or acquisition. If
pursuant to the preceding sentence cash is credited to Participants'
Accounts, income shall be credited thereon from the date such cash is
received to the date of distribution at the rate determined pursuant to
Section 5.5(b). If units representing publicly traded stock of the
resulting or acquired company (or a related company) are credited to
Participants' Accounts, dividends shall be credited thereto in the same
manner as dividends are credited on Stock Units credited to such
Accounts.
(b) Deferrals in Cash. To the extent not deemed invested in
Stock Units pursuant to Section 5.5(a), the Account of a Participant
will be credited with the dollar amount of the Participant's deferrals
as of the Fees Payment Date. Subject to Section 5.9, interest shall be
credited thereon from the date such cash is received to the date of
distribution quarterly, at the end of each calendar quarter, at a rate
per annum (computed on the basis of a 360 day year and a 91 day
quarter) equal to the prime rate announced publicly by Citibank, N.A.
at the end of such calendar quarter.
5.6 Distribution of Deferral Account. Subject to Section 5.9,
distributions of a Participant's Account under the Plan shall be made as
follows:
(a) if a Participant has elected to defer his or her Fees to a
specified date in the future, payment shall be as of such date and
shall be made or shall commence, as the case may be, within thirty (30)
days after the date specified;
(b) if a Participant has elected to defer his or her Fees
until cessation of his or her service as a member of the Board of
Directors, payment shall be as of the date of such cessation of service
and shall be made or shall commence, as the case may be, within thirty
(30) days after the cessation of the Participant's service as a
director; and
(c) if a Participant has elected to defer his or her Fees
until the end of the calendar year in which the cessation of his or her
service as a member of the Board of Directors occurs, payment shall be
made or commence, as the case may be, on or before December 31st of
such year.
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5.7 Payment Upon Death. Notwithstanding any elections pursuant to
Sections 5.2 and/or 5.8 hereof, but subject to Section 5.9 hereof, in the event
of the death of a Participant prior to the distribution of his or her Account
hereunder, the balance credited to such Participant's Account as of the date of
his or her death shall be paid, as soon as reasonably possible thereafter, in a
single distribution to the Participant's beneficiary or beneficiaries designated
on such Participant's deferral election form. If no such election or designation
has been made, such amounts shall be payable to the Participant's estate.
5.8 Form of Payment. Subject to Section 5.9, a Participant may elect to
have his or her Account under the Plan paid in a single distribution or in equal
annual, semi-annual or quarterly installments over a period not to exceed 10
years. To the extent a Participant's Account is deemed invested in Stock Units,
such Stock Units shall be converted to the applicable Stock on the distribution
date as provided in the next paragraph. To the extent deemed invested in units
of any other stock, such units shall similarly be converted and distributed in
the form of stock. To the extent invested in a medium other than Stock Units or
other units, each such distribution hereunder shall be in the medium credited to
the Participant's Account.
To the extent a Participant's Account is deemed invested in Stock
Units, a single distribution shall consist of the number of whole shares of the
applicable Stock equal to the number of Stock Units credited to the
Participant's Account on the date as of which the distribution occurs. Cash
shall be paid to a Participant in lieu of a fractional share, determined by
reference to the applicable Stock Price on the date as of which the distribution
occurs.
In the event a Participant has elected to receive installment payments,
each such payment shall be determined as follows:
(i) To the extent his or her Account is deemed to be invested
in Stock Units, each such payment shall consist of the number of whole
shares of Stock equal to the number of Celera Stock Units and PE
Biosystems Stock Units, as the case may be, (in each case including
fractional units) credited to the Participant's Account on the date as
of which the distribution occurs, divided by the number of installments
remaining as of such distribution date. Distributions in the form of
stock shall be rounded to the nearest 100 shares. Cash shall be paid to
Participants in lieu of fractional shares, determined by reference to
the applicable Stock Price on the date as of which the distribution
occurs.
(ii) To the extent his or her Account has been credited in
cash, each such payment shall be calculated by dividing the value on
the date the distribution occurs of that portion of the Participant's
Account which is in cash by the number of installments remaining as of
such distribution date.
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Each Participant or beneficiary agrees that prior to any distribution
under the Plan, he or she will make such representations and execute such
documents as are deemed by the Board of Directors to be necessary to comply with
applicable laws.
5.9 Split-Dollar Arrangements. Notwithstanding anything to the contrary
contained herein, in the event that the Company has paid any premiums under any
life insurance policies purchased in accordance with the terms of any
split-dollar insurance agreement between a Participant and the Company, the
Company shall have no obligation hereunder to make any distribution to such
Participant of that portion of the balance of such Participant's Account
credited in cash pursuant to Section 5.6 or 5.7 equal to the amount of such
premiums, or to credit any interest on such portion of such Account pursuant to
Section 5.5(b), unless and until such time as the Company shall be reimbursed in
full for the amount of such premium payments. At such time as the Company shall
have been reimbursed in full for the amount of such premium payments, the
balance of such Participant's Account so credited in cash shall be distributed
as follows: (i) if such Participant is on the date of such reimbursement in full
a Participant in the Plan, then in accordance with his or her election pursuant
to Sections 5.2 and 5.8, and (ii) if such Participant is not a Participant in
the Plan on the date of such reimbursement, then in a single distribution as
soon as reasonably possible after such date.
6. ADMINISTRATION OF THE PLAN.
The Board of Directors shall administer the Plan. The Board of
Directors shall have plenary authority in its discretion to interpret the Plan;
to prescribe, amend and rescind rules and regulations relating to it; to
determine the terms of Fees deferral agreements executed and delivered under the
Plan, including such terms and provisions as shall be requisite in the judgment
of the Board of Directors to conform to any change in any law or regulation
applicable thereto; and to make all other determinations deemed necessary or
advisable for the administration of the Plan. The Board of Directors'
determination on the foregoing matters shall be conclusive.
7. TERMINATION AND AMENDMENT OF THE PLAN.
The Board of Directors may at any time terminate the Plan or make such
modification or amendment of the Plan as it shall deem advisable; provided,
however, that no amendment may be made, without the approval by the holders of
the Stock, which would (i) materially increase the benefits accruing to
Participants under the Plan, (ii) increase the maximum number of shares reserved
for issuance under the Plan, or (iii) amend the requirements as to the class of
persons eligible to participate in the Plan and, provided further, that no
modification or amendment of the Plan shall reduce any amount already credited
to a Participant's Account as of the effective date of such modification or
amendment. This Plan may be amended without shareholder approval in order to
ensure
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that this Plan, in form and operation, complies with regulations issued under
Section 16 of the Securities Exchange Act of 1934.
8. STOCK RESERVED FOR THE PLAN.
Four hundred thousand (400,000) shares of authorized but unissued PE
Biosystems Stock are reserved for issuance and may be issued pursuant to the
terms of the Plan. One hundred thousand (100,000) shares of authorized but
unissued Celera Stock are reserved for issuance and may be issued pursuant to
the terms of the Plan.
In lieu of such unissued shares, the Corporation may, in its
discretion, transfer to Participants under the terms of the Plan treasury
shares, reacquired shares or shares bought in the market for the purposes of the
Plan, provided that (subject to the provisions of the next paragraph) the total
number of shares which may be issued under the Plan shall not exceed 400,000
shares of PE Biosystems Stock and 100,000 shares of Celera Stock.
In the event of any changes in the outstanding Celera Stock or PE
Biosystems Stock by reason of stock dividends, split-ups, spin-offs,
recapitalizations, mergers, consolidations, combinations or exchanges of shares
and the like, the aggregate number and class of shares available under the Plan
shall be appropriately adjusted.
9. NO INTEREST IN ASSETS.
No Participant or any other person shall have any interest in any
specific asset of the Corporation by reason of any amount credited to him or her
hereunder, nor any right to receive any distribution under the Plan except as
and to the extent expressly provided in the Plan. There shall be no funding of
any benefits which may become payable hereunder. No trust shall be created by
the execution or adoption of this Plan or be required to be created in
connection herewith. Any amounts which become payable hereunder shall be paid
from the general assets of the Corporation. Nothing in the Plan shall be deemed
to give any member of the Board of Directors any right to participate in the
Plan, except in accordance with the provisions of the Plan.
10. RESTRICTION AGAINST ASSIGNMENT.
The Corporation shall pay all amounts payable hereunder only to the
person or persons designated by the Plan as Participant or beneficiary, as
appropriate, and not to any other person or corporation. No part of a
Participant's Account shall be liable for the debts, contracts or engagements of
any Participant, his or her beneficiaries or successors in interest, nor shall
it be subject to execution by levy, attachment or garnishment or by any other
legal or equitable proceeding, nor shall any such person have any right to
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alienate, anticipate, commute, pledge, encumber or assign any benefits or
payments hereunder in any manner whatsoever.
11. GOVERNMENT REGULATIONS.
The Plan, and the deferral of Fees and purchase of Stock thereunder,
and the obligation of the Corporation to issue, sell and deliver shares, as
applicable, under the Plan, shall be subject to all applicable laws, rules and
regulations.
12. GOVERNING LAW.
This Plan shall be construed, regulated and administered under the
internal laws of the State of Delaware.
13. SHAREHOLDER APPROVAL.
This Plan shall be without force and effect unless approved by the
Corporation's shareholders.
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Operations for the Nine Months Ended
March 31, 2000 and the Condensed Consolidated Statement of Financial
Position at March 31, 2000 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,286,184
<SECURITIES> 0
<RECEIVABLES> 349,258
<ALLOWANCES> (4,474)
<INVENTORY> 162,903
<CURRENT-ASSETS> 2,015,293
<PP&E> 488,832
<DEPRECIATION> (170,858)
<TOTAL-ASSETS> 2,754,401
<CURRENT-LIABILITIES> 569,792
<BONDS> 0
0
0
<COMMON> 2,652
<OTHER-SE> 1,953,464
<TOTAL-LIABILITY-AND-EQUITY> 2,754,401
<SALES> 0
<TOTAL-REVENUES> 979,337
<CGS> 0
<TOTAL-COSTS> 438,402
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,343
<INTEREST-EXPENSE> 2,297
<INCOME-PRETAX> 87,061
<INCOME-TAX> 24,956
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,105
<EPS-BASIC> 0 <F1> <F3>
<EPS-DILUTED> 0 <F2> <F3>
<FN>
<F1>
Basic earnings per share - PE Biosystems Group 0.63
Basic loss per share - Celera Genomics Group (1.29)
<F2>
Diluted earnings per share - PE Biosystems Group 0.60
Diluted loss per share - Celera Genomics Group (1.29)
<F3>
On January 20, 2000, the Board of Directors announced two-for-one splits of
PE Corporation-PE Biosystems Group Common Stock and PE Corporation-Celera
Genomics Group Common Stock, effected in the form of 100% stock dividends
on February 18, 2000. All PE Biosystems group and Celera Genomics group
per share data included in this financial data schedule reflect these
splits. Prior financial data schedules have not been restated to reflect
these splits.
</FN>
</TABLE>
