polymerase chain reaction, or PCR, patents. In response to our claims, MJ Research filed counterclaims including, among others, allegations that we have licensed and enforced these patents through anticompetitive conduct in violation of federal and state antitrust laws, and MJ Research is seeking injunctive relief, monetary damages, costs and expenses, and other relief. A trial on these matters commenced in March 2004. The court elected to hold the trial in two phases: a patent phase and an antitrust phase. In the patent phase, which has concluded, the jury found that MJ Research infringed U.S. Patent Nos. 4,683,195, 4,683,202 and 4,965,188 (each relates to PCR process technology) and U.S. Patent Nos. 5,656,493, 5,333,675 and 5,475,610 (each relates to thermal cycler instrument technology). The jury found the infringement of the ’195, ’202, ’188 and ’493 patents to be willful. In addition to direct infringement by MJ Research of the ’610 and ’675 patents, the jury found that MJ Research induced its customers to infringe all of the patents and contributed to infringement by its customers of the ’610 and ’675 patents. In April 2004, the jury awarded damages to us and Roche Molecular Systems, also a party to the litigation, in the amount of $19.8 million. We intend to seek, with Roche Molecular Systems, an enhancement of damages, including legal fees, since several infringements were found to be willful. Additionally, we intend to seek an injunction against MJ Research, which filed for bankruptcy court protection on March 29, 2004. The antitrust phase of the trial has not yet commenced.
Subsequent to the filing of our claims against MJ Research which are described in the preceding paragraph, on September 21, 2000, MJ Research filed an action against us in the U.S. District Court for the District of Columbia. This complaint is based on the allegation that the patents underlying our DNA sequencing instruments were improperly obtained because one of the alleged inventors, whose work was funded in part by the U.S. government, was knowingly omitted from the patent applications. Our patents at issue are U.S. Patent Nos. 5,171,534, entitled “Automated DNA Sequencing Technique,” 5,821,058, entitled “Automated DNA Sequencing Technique,” 6,200,748, entitled “Tagged Extendable Primers and Extension Products,” and 4,811,218, entitled “Real Time Scanning Electrophoresis Apparatus for DNA Sequencing.” The complaint asserts violations of the federal False Claims Act and the federal Bayh Dole Act, invalidity and unenforceability of the patents at issue, patent infringement, and various other civil claims against us. MJ Research is seeking monetary damages, costs and expenses, injunctive relief, transfer of ownership of the patents in dispute, and other relief as the court deems proper. MJ Research claims to be suing in the name of the U.S. government although the government has to date declined to participate in the suit. On October 9, 2003, the case against us was dismissed but MJ Research has filed an appeal.
Promega Corporation filed a patent infringement action against Lifecodes Corporation, Cellmark Diagnostics, Genomics International Corporation, and us in the U.S. District Court for the Western District of Wisconsin on April 24, 2001. The complaint alleges that the defendants are infringing Promega’s
U.S. Patent Nos. 6,221,598 and 5,843,660, both entitled “Multiplex Amplification of Short Tandem Repeat Loci,” due to the defendants’ sale of forensic identification and paternity testing kits. Promega is seeking monetary damages, costs and expenses, injunctive relief, and other relief as the court deems proper. The defendants answered the complaint on July 9, 2001, and we asserted counterclaims alleging that Promega is infringing our U.S. Patent No. 6,200,748, entitled “Tagged Extendable Primers and Extension Products,” due to Promega’s sale of forensic identification and paternity testing kits. As a result of settlement negotiations, the case was dismissed without prejudice on October 29, 2002, but could be re-filed against us if settlement negotiations are not successful.
Beckman Coulter, Inc. filed a patent infringement action against us in the U.S. District Court for the Central District of California on July 3, 2002. The complaint alleges that we are infringing Beckman Coulter’s U.S. Patent Nos. RE 37,606 and 5,421,980, both entitled “Capillary Electrophoresis Using Replaceable Gels,” and U.S. Patent No. 5,552,580, entitled “Heated Cover Device.” The allegedly infringing products are the Applied Biosystems group’s capillary electrophoresis sequencing and genetic analysis instruments, and PCR and real-time PCR systems. Since Beckman Coulter filed this claim, U.S. Patent No. 5,421,980 has been reissued as U.S. Patent No. RE 37,941, entitled “Capillary Electrophoresis Using Replaceable Gels.” On January 13, 2003, the court permitted Beckman Coulter to make a corresponding amendment to its complaint. Beckman Coulter is seeking monetary damages, costs and expenses, injunctive relief, and other relief as the court deems proper. On February 10, 2003, we filed our answer to Beckman Coulter’s allegations, and counterclaimed for declaratory relief that the Beckman Coulter patents underlying Beckman Coulter’s claim are invalid, unenforceable, and not infringed. We are seeking dismissal of Beckman Coulter’s complaint, costs and expenses, declaratory and injunctive relief, and other relief as the court deems proper.
Henry Huang (an individual) filed an action against us and the Applied Biosystems group and the other parties described below in the U.S. District Court for the Central District of California on February 19, 2003. Mr. Huang’s complaint seeks to change inventorship of the patents described below, and claims breach of contract, fraud, conversion, and unjust enrichment. The complaint relates to U.S. Patent Nos. 5,171,534, entitled “Automated DNA Sequencing Technique,” 5,821,058, entitled “Automated DNA Sequencing Technique,” 6,200,748, entitled “Tagged Extendable Primers and Extension Products,” and 4,811,218, entitled “Real Time Scanning Electrophoresis Apparatus for DNA Sequencing.” U.S. Patent Nos. 5,171,534, 5,821,058, and 6,200,748 are assigned to the California Institute of Technology and licensed by the Applied Biosystems group. U.S. Patent No. 4,811,218 is assigned to the Applied Biosystems group. Also named in the complaint are the California Institute of Technology, Lloyd Smith, Leroy Hood, Michael Hunkapiller, Timothy Hunkapiller, Charles Connell, John Lytle, William Mordan, and John Bridgham. Lloyd Smith, Leroy Hood, Michael Hunkapiller, Timothy Hunkapiller, and Charles Connell are the inventors named on
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Notes to Consolidated Financial Statements — (Continued)
U.S. Patent Nos. 5,171,534, 5,821,058, and 6,200,748. Michael Hunkapiller, Charles Connell, John Lytle, William Mordan, and John Bridgham are the inventors named on U.S. Patent No. 4,811,218. The issues involved in this litigation are related to the issues in the MJ Research, Inc. litigation that was filed September 21, 2000, which is described above. Mr. Huang is alleging that he is the sole inventor on U.S. Patent Nos. 5,171,534, 5,821,058, 6,200,748, and 4,811,218. He is seeking to substitute himself for the named inventors on the relevant patents, and to have himself named as the sole assignee of the patents, and is also seeking monetary damages, costs, expenses, and other relief as the court deems proper. A trial was completed on December 22, 2003, and on February 18, 2004, the judge issued a decision in our favor finding that Mr. Huang was not an inventor of the patents at issue. Mr. Huang had appealed the decision, but on July 22, 2004, he filed a stipulation with the court withdrawing his appeal, resulting in the termination of this litigation.
Genetic Technologies Limited filed a patent infringement action against us in the U.S. District Court for the Northern District of California on March 26, 2003. They filed an amended complaint against us on August 12, 2003. The amended complaint alleges that we are infringing U.S. Patent No. 5,612,179, entitled “Intron Sequence Analysis Method for Detection of Adjacent and Remote Locus Alleles as Haplotypes,” and U.S. Patent No. 5,851,762, entitled “Genomic Mapping Method by Direct Haplotyping Using Intron Sequence Analysis.” The allegedly infringing products are cystic fibrosis reagent kits, TaqMan® genotyping and gene expression assay products for non-coding regions, TaqMan genotyping and gene expression assay services for non-coding regions, and the CDS. The complaint also alleges that haplotyping analysis performed by our businesses infringes the patents identified above. Genetic Technologies Limited is seeking monetary damages, costs, expenses, injunctive relief, and other relief as the court deems proper.
On-Line Technologies, Inc. (since acquired by MKS Instruments, Inc.) filed claims for patent infringement, trade secret misappropriation, fraud, breach of contract and unfair trade practices against PerkinElmer, Inc., Sick UPA, GmbH, and us in the U.S. District Court for the District of Connecticut on or about November 3, 1999. The complaint alleged that products called the Spectrum One and the MCS100E manufactured by former divisions of the Applied Biosystems group, which divisions were sold to the co-defendants in this case, were based on allegedly proprietary information belonging to On-Line Technologies and that the MCS100E infringed U.S. Patent No. 5,440,143. On-Line Technologies sought monetary damages, costs, expenses, injunctive relief, and other relief. On April 2, 2003, the U.S. District Court for the District of Connecticut granted our summary judgment motion and dismissed all claims brought by On-Line Technologies, Inc., though On-Line Technologies has filed an appeal with the U.S. Court of Appeals for the Federal Circuit seeking reinstatement of its claims.
We filed claims against Roche Molecular Systems, Inc., Hoffmann-La Roche, Inc., Roche Probe, Inc., F. Hoffmann-La
Roche Ltd., and other potential defendants affiliated with the named defendants (“Roche”) in California Superior Court on October 9, 2003. Our complaint asserts, among other things, breach of contract and other contract claims against the defendants arising from agreements relating to polymerase chain reaction, or PCR, technology rights entered into between us and the defendants. Our complaint also asserts various tort claims against the defendants, including breach of trust, breach of fiduciary duty, and unfair competition, relating to our PCR rights. The defendants’ acts and omissions that form the basis of the complaint include, among other things, the: (i) defendants’ failure to abide by contractual provisions intended to allow us to effectively compete with the defendants with respect to (a) sales of diagnostic PCR products and (b) conveyance of diagnostic PCR rights to third parties; (ii) defendants’ failure to pay us requisite royalties for sales by them of thermal cyclers and other products; (iii) defendants’ failure to negotiate in good faith new agreements directed at modifying the relationship between the parties in accordance with principles set forth in an existing letter agreement that states the intended framework for the negotiations (the “Letter Agreement”); (iv) defendants’ failure to provide us with diagnostic PCR rights on a nondiscriminatory basis as required by a European Union commission decree; (v) defendants’ failure to comply with their agreement to assign ownership to us of some PCR instrument patents and patent applications, and (vi) defendants’ mishandling of the prosecution of patent applications that the defendants were obligated to assign to us, in a manner that damaged us and precluded us from obtaining the full potential scope of patent protection for our instrument rights. Contemporaneously with our filing of this complaint, we also commenced arbitration proceedings with the American Arbitration Association against the defendants asserting, among other things, patent infringement claims (both direct infringement, contributory infringement and infringement by inducing third parties to infringe), breach of contract and other contract claims, and tort claims such as breach of fiduciary duty, breach of trust, and unfair competition. The arbitration is based on our allegation that the defendants (i) have infringed our exclusive rights to PCR patents in fields exclusively licensed to us pursuant to agreements with the defendants; and (ii) by their acts and omissions, have undermined the value of our exclusive PCR rights. In both the legal complaint and the arbitration, we are seeking monetary damages, costs, expenses, injunctive relief, and other relief as the court or arbitrator deems proper. On December 15, 2003, Roche filed a motion in California Superior Court to compel arbitration of our state court complaint and to stay the litigation. Concurrently with the motion to compel arbitration, Roche also filed with the American Arbitration Association its response to our notice of arbitration in which Roche denied all of our claims against it. Roche’s response included counterclaims asserting, among other things, that our exclusive patent rights under some PCR patents licensed from Roche under an existing distribution agreement were converted into nonexclusive rights by the Letter Agreement, which was entered into subsequent to the distribution agreement. Roche also alleges that (i) we breached
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Notes to Consolidated Financial Statements — (Continued)
our contractual obligation under the Letter Agreement, including our obligation to source certain enzymes exclusively from Roche; and (ii) we failed to pay Roche the full royalties required pursuant to the distribution agreement. In its counterclaim, Roche is seeking a request for declaratory judgment confirming its assertions, interest, costs, and other relief as the arbitrator deems proper. The claims and counterclaims described in this paragraph involve PCR rights used by the Applied Biosystems group and also rights that the Applied Biosystems group has contributed to Celera Diagnostics. On March 1, 2004 the Superior Court denied Roche’s motion to compel arbitration, but Roche has appealed the decision and both the arbitration and the litigation have been stayed pending the outcome of the appeal.
Promega Corporation filed an action against us and some of our affiliates and Roche Molecular Systems, Inc. and Hoffmann-La Roche, Inc. in the U.S. District Court for the Eastern District of Virginia on April 10, 2000. The complaint asserts violations of the federal False Claims Act. On November 12, 2003, the court issued an order to have the complaint, which had previously been sealed, served on us and the other defendants. On February 9, 2004, we waived service of the complaint, which initiated our direct involvement in the case. The complaint alleges that we and Hoffmann-La Roche overcharged the U.S. government for thermal cyclers and PCR reagents. The overcharges are alleged to be the result of a licensing program based in part on U.S. Patent No. 4,889,818. Promega is asserting that U.S. Patent No. 4,889,818 was obtained fraudulently and that the licensing program run by us and Hoffmann-La Roche is the cause of the alleged overcharging. Promega is seeking monetary damages. Promega claims to be suing in the name of the U.S. government although the government has to date declined to participate in the suit. On June 29, 2004, the court granted our motion to dismiss for failure to state a claim upon which relief could be granted, but gave Promega the right to file an amended complaint. Promega filed an amended complaint on July 13, 2004, and we filed another motion to dismiss on August 6, 2004. The court granted our second motion to dismiss on August 20, 2004, but we have not yet received the written court opinion and therefore do not know the full scope of that decision.
Bio-Rad Laboratories, Inc. filed a patent infringement, trademark infringement, and unfair competition action against us in the U.S. District Court for the Northern District of California on December 26, 2002. The complaint alleges that we are infringing Bio-Rad’s U.S. Pat. No. 5,089,011, entitled “Electrophoretic Sieving in Gel-Free Media with Dissolved Polymers,” and infringing Bio-Rad’s “Bio-Rad” trademark. They filed a third amended complaint against us on May 30, 2003. The allegedly infringing products according to the third amended complaint are instruments using, and reagents used for, capillary electrophoresis, and products using the BioCAD name. Bio-Rad submitted its final infringement contentions under the local court rules on April 22, 2004, and the parties held a court-ordered mediation conference on July 19, 2004. Bio-Rad is seeking monetary damages, costs, expenses, injunctive relief, and other relief as the court deems proper.
Enzo Biochem, Inc., Enzo Life Sciences, Inc., and Yale University filed a patent infringement action against us in the U.S. District Court for the District of Connecticut on June 8, 2004. The complaint alleges that we are infringing six patents. Four of these patents are assigned to Yale University and licensed exclusively to Enzo Biochem, i.e., U.S. Patent No. 4,476,928, entitled “Modified Nucleotides and Polynucleotides and Complexes Formed Therefrom,” U.S. Patent No. 5,449,767, entitled “Modified Nucleotides and Polynucleotides and Methods of Preparing Same,” U.S. Patent No. 5,328,824 entitled “Methods of Using Labeled Nucleotides,” and U.S. Patent No. 4,711,955, entitled “Modified Nucleotides and Polynucleotides and Methods of Preparing and Using Same.” The other two patents are assigned to Enzo Life Sciences, i.e., U.S. Patent No. 5,082,830 entitled “End Labeled Nucleotide Probe” and U.S. Patent No. 4,994,373 entitled “Methods and Structures Employing Compoundly – Labeled Polynucleotide Probes.” The allegedly infringing products include the Applied Biosystems group’s sequencing reagent kits, its TaqMan® genotyping and gene expression assays, and the gene expression microarrays used with its Expression Array System. Enzo Biochem, Enzo Life Sciences, and Yale University are seeking monitory damages, costs, expenses, injunctive relief, and other relief as the court deems proper.
We have not accrued for any potential losses in the cases described above because we believe that an adverse determination is not probable, and potential losses cannot be reasonably estimated, in any of these cases. However, the outcome of litigation is inherently uncertain, and we cannot be sure that we will prevail in any of the cases described above or in our other current litigation. An adverse determination in some of our current litigation, particularly the cases described above, could have a material adverse effect on our consolidated financial statements.
Note 11—Financial Instruments |
Our foreign currency risk management strategy uses derivative instruments to hedge certain foreign currency forecasted revenues and intercompany transactions, and to offset the impact of changes in foreign currency exchange rates on certain foreign currency-denominated assets and liabilities. The principal objective of this strategy is to minimize the risks and/or costs associated with our global financing and operating activities. We use foreign exchange forward, option, and range forward contracts to manage our foreign currency exposures. We do not use derivative financial instruments for trading or speculative purposes or for activities other than risk management, nor are we a party to leveraged derivatives.
We record the fair value of foreign currency derivative contracts in either prepaid expenses and other current assets, other long-term assets, or other accrued expenses in the Consolidated Statements of Financial Position.
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Notes to Consolidated Financial Statements — (Continued)
Our international sales are typically denominated in the local currency of the customer, whether third party or intercompany. We use foreign exchange forward, option, and range forward contracts to hedge a portion of forecasted international sales not denominated in U.S. dollars. We use hedge accounting on the derivative contracts that are considered highly effective in offsetting the changes in fair value of the forecasted sales transactions caused by the movements in foreign currency exchange rates. We designate these contracts as cash flow hedges and we record the effective portion of the change in the fair value of these contracts in other comprehensive income (loss) in the Consolidated Statements of Financial Position until the underlying external forecasted transaction affects earnings. At that time, we reclassify to net revenues in the Consolidated Statements of Operations the gain or loss on the derivative instrument, which had been deferred in accumulated other comprehensive income (loss). We recognized net gains of $17.4 million in fiscal 2002, and net losses of $39.8 million in fiscal 2003 and $40.7 million in fiscal 2004 in net revenues from derivative instruments designated as cash flow hedges of anticipated sales. At June 30, 2004, we recorded $4.5 million of net derivative losses in accumulated other comprehensive income (loss). This amount, which is net of tax, is expected to be reclassified to revenues within the next twelve months.
Other Foreign Currency Derivatives |
We also use derivative financial instruments to manage exposures resulting from changes in foreign currency exchange rates on our foreign currency-denominated net asset positions. The gains and losses on these derivatives are expected to largely offset transaction losses and gains, respectively, on the underlying foreign currency-denominated assets and liabilities, both of which are recorded in other income (expense), net in the Consolidated Statements of Operations.
Concentration of Credit Risk |
The forward contracts and options used in managing our foreign currency exposures have an element of risk in that the counterparties may be unable to meet the terms of the agreements. However, we minimize this risk by limiting the counterparties to a diverse group of highly-rated major domestic and international financial institutions. We are exposed to potential losses in the event of non-performance by these counterparties. However, we do not expect to record any losses as a result of counterparty default. We do not require and are not required to pledge collateral for these financial instruments. Other financial instruments that potentially subject us to concentrations of credit risk are cash and cash equivalents, short and long-term investments, and accounts receivable. We minimize the risks related to cash and cash equivalents and short and long-term investments by using highly-rated financial institutions that invest in a broad and diverse range of financial instruments. We have established
guidelines relative to credit ratings and maturities that seek to maintain safety and liquidity.
Concentration of credit risk with respect to accounts receivable is limited due to our large and diverse customer base, which is dispersed over differing geographic areas. Allowances are maintained for potential credit losses and such losses have historically been within our expectations.
We use various methods to estimate the fair value of financial instruments we hold or own. The carrying amount of cash and cash equivalents approximates fair value. We use quoted market prices, if available, or quoted market prices of financial instruments with similar characteristics in valuing our short and long-term investments and minority equity investments. We base the fair value of our debt on the current rates of debt with similar maturities offered to us. The following table presents the carrying amounts and fair values of our significant financial instruments at June 30:
| | | 2003
| | 2004
| |
| (Dollar amounts in millions) | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value | |
| |
| Cash and cash equivalents | | $ | 654.3 | | $ | 654.3 | | $ | 561.9 | | $ | 561.9 | |
| Short-term investments | | $ | 748.0 | | $ | 749.8 | | $ | 690.1 | | $ | 688.8 | |
| Long-term investments | | $ | 16.3 | | $ | 16.4 | | $ | — | | $ | — | |
Currency forwards
and options | | $ | 11.6 | | $ | (2.3 | ) | $ | 8.8 | | $ | 5.1 | |
| Other investments | | $ | 19.3 | | $ | 19.3 | | $ | 24.7 | | $ | 24.7 | |
| Minority equity investments | | $ | 20.2 | | $ | 44.4 | | $ | 4.5 | | $ | 16.2 | |
| Short-term debt | | $ | — | | $ | — | | $ | (6.1 | ) | $ | (6.1 | ) |
| Long-term debt | | $ | (17.1 | ) | $ | (17.1 | ) | $ | — | | $ | — | |
| |
We report net unrealized gains and losses on short and long-term investments and minority equity investments as a separate component of accumulated other comprehensive income (loss) in the Consolidated Statements of Financial Position.
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Notes to Consolidated Financial Statements — (Continued)
Note 12—Quarterly Financial Information (Unaudited) |
The following is a summary of quarterly financial results:
| | | First Quarter
| | Second Quarter
| | Third Quarter
| | Fourth Quarter
| |
(Dollar amounts in millions
except per share amounts) | | 2003(a) | | 2004 | | 2003(b) | | 2004(c) | | 2003(d) | | 2004(e) | | 2003(f) | | 2004(g) | |
| |
Consolidated | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 417.3 | | $ | 405.0 | | $ | 473.0 | | $ | 485.3 | | $ | 431.0 | | $ | 455.2 | | $ | 455.9 | | $ | 479.7 | |
| Gross margin | | | 222.4 | | | 214.6 | | | 242.7 | | | 254.6 | | | 224.9 | | | 239.0 | | | 237.6 | | | 258.8 | |
| Income from continuing operations | | | 12.1 | | | 16.0 | | | 13.4 | | | 42.6 | | | 13.6 | | | 22.1 | | | 79.4 | | | 34.3 | |
| Net income (loss) | | | (4.3 | ) | | 16.0 | | | 13.4 | | | 42.6 | | | 13.6 | | | 22.1 | | | 79.4 | | | 44.9 | |
| |
Applied Biosystems Group | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 395.9 | | $ | 382.7 | | $ | 444.7 | | $ | 458.4 | | $ | 409.4 | | $ | 439.6 | | $ | 432.9 | | $ | 460.4 | |
| Gross margin | | | 202.6 | | | 196.4 | | | 218.9 | | | 236.0 | | | 207.1 | | | 228.9 | | | 220.8 | | | 244.4 | |
| Income from continuing operations | | | 34.2 | | | 33.4 | | | 29.2 | | | 52.4 | | | 40.1 | | | 46.0 | | | 96.1 | | | 40.5 | |
| Net income | | | 17.8 | | | 33.4 | | | 29.2 | | | 52.4 | | | 40.1 | | | 46.0 | | | 96.1 | | | 51.1 | |
| Dividends declared per share | | $ | .0425 | | $ | .0425 | | $ | .0425 | | $ | .0425 | | $ | .085 | | $ | .0425 | | $ | — | | $ | .0425 | |
| Income per share from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.16 | | $ | 0.16 | | $ | 0.14 | | $ | 0.25 | | $ | 0.19 | | $ | 0.23 | | $ | 0.46 | | $ | 0.20 | |
| Diluted | | $ | 0.16 | | $ | 0.16 | | $ | 0.14 | | $ | 0.25 | | $ | 0.19 | | $ | 0.22 | | $ | 0.46 | | $ | 0.20 | |
| Net income per share | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.08 | | $ | 0.16 | | $ | 0.14 | | $ | 0.25 | | $ | 0.19 | | $ | 0.23 | | $ | 0.46 | | $ | 0.26 | |
| Diluted | | $ | 0.08 | | $ | 0.16 | | $ | 0.14 | | $ | 0.25 | | $ | 0.19 | | $ | 0.22 | | $ | 0.46 | | $ | 0.25 | |
| |
Celera Genomics Group | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 23.6 | | $ | 17.3 | | $ | 22.9 | | $ | 19.2 | | $ | 20.3 | | $ | 11.2 | | $ | 21.5 | | $ | 12.4 | |
| Net loss | | | (19.7 | ) | | (16.3 | ) | | (16.1 | ) | | (13.6 | ) | | (26.7 | ) | | (21.9 | ) | | (19.4 | ) | | (5.7 | ) |
Net loss per share
Basic and diluted | | $ | (0.28 | ) | $ | (0.23 | ) | $ | (0.23 | ) | $ | (0.19 | ) | $ | (0.37 | ) | $ | (0.30 | ) | $ | (0.27 | ) | $ | (0.08 | ) |
| |
Celera Diagnostics | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenues | | $ | 3.0 | | $ | 8.5 | | $ | 7.8 | | $ | 11.0 | | $ | 4.3 | | $ | 7.5 | | $ | 5.7 | | $ | 10.1 | |
| Net loss | | $ | (13.3 | ) | $ | (12.0 | ) | $ | (9.9 | ) | $ | (9.3 | ) | $ | (12.6 | ) | $ | (11.9 | ) | $ | (15.4 | ) | $ | (8.4 | ) |
| |
| Price range of common stock | | | | | | | | | | | | | | | | | | | | | | | | | |
Applied Biosystems Group
High | | $ | 21.42 | | $ | 22.55 | | $ | 24.49 | | $ | 24.00 | | $ | 19.17 | | $ | 24.44 | | $ | 21.38 | | $ | 21.96 | |
| Low | | $ | 13.00 | | $ | 18.47 | | $ | 17.29 | | $ | 19.95 | | $ | 14.90 | | $ | 19.10 | | $ | 15.30 | | $ | 18.04 | |
Celera Genomics Group | | | | | | | | | | | | | | | | | | | | | | | | | |
| High | | $ | 11.93 | | $ | 12.65 | | $ | 11.67 | | $ | 15.49 | | $ | 10.95 | | $ | 17.99 | | $ | 14.42 | | $ | 15.36 | |
| Low | | $ | 7.16 | | $ | 8.84 | | $ | 6.94 | | $ | 10.08 | | $ | 7.95 | | $ | 13.35 | | $ | 8.05 | | $ | 10.63 | |
| |
There were no dividends paid on Applera-Celera stock during the periods presented.
The following transactions impacted the comparability between fiscal 2003 and 2004.
| (a) | The Applied Biosystems group recorded a charge of $16.4 million, net of tax, as part of discontinued operations as a result of an adverse jury verdict in connection with a patent lawsuit between TA Instruments, Inc., a subsidiary of Waters Corporation, and The Perkin-Elmer Corporation relating to thermal analysis products (see Note 14). |
| (b) | The Applied Biosystems group recorded before-tax charges of $22.9 million for severance and benefit costs, $9.5 million for asset impairments, and $1.4 million for office closures related to a workforce reduction (see Note 2). |
| (c) | The Applied Biosystems group recorded before tax gains of $6.4 million related to the sales of minority equity investments. The Applied Biosystems also recorded a before tax benefit of $0.6 million for a reduction of severance costs previously recorded during the second quarter of fiscal 2003. |
| (d) | The Celera Genomics group recorded a before-tax loss of $15.1 million in other income (expense), net for the loss from its equity interest in DPI. |
| (e) | The Applied Biosystems group recorded before-tax charges of $6.3 million for severance and related costs (see Note 2). The Applied Biosystems group also recorded a before-tax net gain of $6.7 million from legal settlements (see Note 2) and $3.6 million relating to the sales of minority equity investments. |
| (f) | The Applied Biosystems group recorded a before-tax gain of $25.8 million related to the successful completion of a patent infringement lawsuit against Micromass U.K. Ltd. and its U.S. subsidiary, Micromass, Inc., both divisions of Waters Corporation (see Note 2). The Applied Biosystems group also recorded a before-tax benefit of $4.3 million for a reduction in anticipated employee-related costs associated with the workforce reduction implemented during the second quarter of fiscal 2003 and a benefit of $27.8 million for a reduction of valuation allowances on deferred tax assets resulting from the expected utilization of foreign tax credits and a reduction of the income tax liability due to the settlement of overseas tax audits. |
| (g) | The Applied Biosystems group recorded a charge of $14.9 million for the impairment of patents and acquired technology and $4.4 million for write-downs of fixed assets and other costs (see Note 2). The Applied Biosystems group also recorded an after-tax benefit of $10.6 million as part of discontinued operations that included a reversal of a portion of a patent liability lawsuit accrued in fiscal 2003 and an expected German tax benefit (see Note 14). The Celera Genomics group recorded a gain of $24.8 million associated with the sale of its equity investment in DPI and a charge of $18.1 million for the estimated loss of the planned sale of its Rockville, MD facility (see Note 2). |
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Notes to Consolidated Financial Statements — (Continued)
Note 13—Accumulated Other Comprehensive Income (Loss) |
Accumulated other comprehensive income (loss), net of tax, for fiscal 2002, 2003, and 2004 was as follows:
| (Dollar amounts in millions) | | Unrealized
Gain
(Loss) on
Investments | | Unrealized
Gain (Loss) on
Hedge
Contracts | | Foreign
Currency
Translation
Adjustments | | Minimum
Pension
Liability | | Accumulated
Other
Comprehensive
Income (Loss) | |
| |
| Balance at June 30, 2001 | | | $ 42.9 | | | $ 11.2 | | | $(72.6 | ) | | $(37.4 | ) | | $(55.9 | ) |
Change in net unrealized losses on investments,
net of tax benefit of $21.7 | | | (40.3 | ) | | | | | | | | | | | (40.3 | ) |
Net unrealized losses reclassified into earnings,
net of tax benefit of $4.8 | | | 8.9 | | | | | | | | | | | | 8.9 | |
Change in net unrealized losses on hedge contracts,
net of tax benefit of $5.8 | | | | | | (23.9 | ) | | | | | | | | (23.9 | ) |
Net unrealized gains reclassified into earnings,
net of tax expense of $5.6 | | | | | | (11.8 | ) | | | | | | | | (11.8 | ) |
| Foreign currency translation adjustments | | | | | | | | | 48.4 | | | | | | 48.4 | |
Minimum pension liability adjustment,
net of tax benefit of $9.2 | | | | | | | | | | | | (17.0 | ) | | (17.0 | ) |
| |
| Balance at June 30, 2002 | | | 11.5 | | | (24.5 | ) | | (24.2 | ) | | (54.4 | ) | | (91.6 | ) |
| |
Change in net unrealized gains on investments,
net of tax expense of $2.4 | | | 4.6 | | | | | | | | | | | | 4.6 | |
Net unrealized losses reclassified into earnings,
net of tax benefit of $0.5 | | | 0.9 | | | | | | | | | | | | 0.9 | |
Change in net unrealized losses on hedge contracts,
net of tax benefit of $9.6 | | | | | | (12.6 | ) | | | | | | | | (12.6 | ) |
Net unrealized losses reclassified into earnings,
net of tax benefit of $13.4 | | | | | | 26.4 | | | | | | | | | 26.4 | |
| Foreign currency translation adjustments | | | | | | | | | 45.7 | | | | | | 45.7 | |
Minimum pension liability adjustment,
net of tax benefit of $15.1 | | | �� | | | | | | | | | (27.9 | ) | | (27.9 | ) |
| |
| Balance at June 30, 2003 | | | 17.0 | | | (10.7 | ) | | 21.5 | | | (82.3 | ) | | (54.5 | ) |
| |
Change in net unrealized losses on investments,
net of tax benefit of $1.1 | | | (2.1 | ) | | | | | | | | | | | (2.1 | ) |
Net unrealized gains reclassified into earnings,
net of tax expense of $4.4 | | | (8.1 | ) | | | | | | | | | | | (8.1 | ) |
Change in net unrealized losses on hedge contracts,
net of tax expense of $9.9 | | | | | | (20.9 | ) | | | | | | | | (20.9 | ) |
Net unrealized losses reclassified into earnings,
net of tax expense of $13.6 | | | | | | 27.1 | | | | | | | | | 27.1 | |
| Foreign currency translation adjustments | | | | | | | | | 34.0 | | | | | | 34.0 | |
Minimum pension liability adjustment,
net of tax expense of $4.7 | | | | | | | | | | | | 8.8 | | | 8.8 | |
| |
Balance at June 30, 2004 | | | $ 6.8 | | | $ (4.5 | ) | | $ 55.5 | | | $(73.5 | ) | | $(15.7 | ) |
| |
| | |
The unrealized gains and losses on investments consist of investments in debt securities and minority equity investments in public companies that are classified as available for sale. The gains and losses recorded above resulted from temporary declines in the market value of the investments based on the most recent public information available. Please see Note 1 to our consolidated financial statements for the accounting policies related to our investments. The currency translation adjustments are not currently adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
Note 14—Discontinued Operations |
In October 2002, we received an adverse jury verdict in Federal District Court for the District of Delaware in connection with a patent lawsuit between TA Instruments, Inc., a subsidiary of Waters Corporation, and The Perkin-Elmer Corporation relating to thermal analysis products. The Applied Biosystems group is involved as the successor to The Perkin-Elmer Corporation, having sold the thermal instruments product line as part of the sale of its Analytical Instruments business to EG&G, Inc. (now named PerkinElmer, Inc.) in 1999. In fiscal 2003, the jury
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Notes to Consolidated Financial Statements — (Continued)
awarded TA Instruments $13.3 million based on lost sales, price erosion, and reasonable royalties, and also rejected claims we had made against TA Instruments alleging that their conduct infringed one of our patents. Subsequently, the District Court entered final judgment on a modified award of $17.3 million, after ruling on motions filed by us and TA Instruments which resulted in the Court’s striking the price erosion element of the jury’s damage award, but granting TA Instruments enhanced damages and attorneys fees on certain aspects of the verdict, and prejudgment interest. We recorded a charge of $16.4 million, net of income taxes, as part of discontinued operations in the first quarter of fiscal 2003. In June 2003, we appealed the judgment rejecting our infringement claims to the U.S. Court of Appeals for the Federal Circuit. On May 5, 2004, the U.S. Court of Appeals for the Federal Circuit affirmed the District Court’s judgment denying our infringement claim, and we have elected not to pursue further appeals. As a result, we paid TA Instruments $17.4 million during the fourth quarter of fiscal 2004. Also, during the fourth quarter of fiscal 2004, as a result of the final judgment and subsequent payment to TA Instruments, we recorded an after-tax benefit of $3.0 million related to the reversal of a portion of the patent lawsuit liability accrued in fiscal 2003.
During the fourth quarter of fiscal 2004, we also recorded a $7.6 million German tax benefit from tax refunds and other tax attributes (benefits) resulting from the tax write-off of our investment in one of our former German affiliates. Based on our discussions with the German tax authorities, we concluded that the write-off of our investment was appropriate and that refunds would be due to the Applied Biosystems group. The write-off also created loss carryforwards; however, since it is possible that the tax benefit attributable to the loss carryforwards may not be realized, a full valuation allowance of $6.2 million has been established against the asset.
Note 15—Segment, Geographic, Customer and Consolidating Information |
We are organized based on the products and services that we offer. We operate in the life science industry through three reportable segments: the Applied Biosystems group, the Celera Genomics group, and Celera Diagnostics. We collectively refer to the Applied Biosystems group and the Celera Genomics group as the groups. The Applied Biosystems group serves the life science industry and research community by developing and marketing instrument-based systems, consumables, software, and services. Customers use these tools to analyze nucleic acids (DNA and RNA), small molecules, and proteins to make scientific discoveries, develop new pharmaceuticals, and conduct standardized testing. The Celera Genomics group is engaged principally in the discovery and development of targeted therapeutics for cancer, autoimmune and inflammatory diseases. The Celera Genomics group is leveraging its proteomic, bioinformatic, and genomic capabilities to identify and validate drug targets, and to
discover and develop small molecule therapeutics. It is also seeking to advance therapeutic antibody and selected small molecule drug programs in collaboration with global technology and market leaders. Celera Diagnostics is a 50/50 joint venture between the Applied Biosystems group and the Celera Genomics group. This venture is focused on the discovery, development, and commercialization of diagnostic products.
Refer to the consolidating information section of this note for additional information regarding our segments.
Information concerning principal geographical areas for fiscal years ended June 30 follows:
| (Dollar amounts in millions) | | | 2002 | | | 2003 | | | 2004 | |
| |
Net Revenues From
External Customers
United States | | | $ 822.6 | | | $ 885.9 | | | $ 868.5 | |
| Europe | | | 452.5 | | | 487.5 | | | 546.8 | |
| Japan | | | 287.9 | | | 250.4 | | | 237.8 | |
| Other Asia Pacific countries | | | 90.1 | | | 102.0 | | | 110.8 | |
| Latin America and other | | | 48.1 | | | 51.4 | | | 61.3 | |
| |
| Consolidated | | | $1,701.2 | | | $1,777.2 | | | $1,825.2 | |
| |
Net revenues are attributable to geographic areas based on the region of destination.
Information concerning long-lived assets at June 30 follows:
| (Dollar amounts in millions) | | | 2002 | | | 2003 | | | 2004 | |
| |
Long-Lived Assets | | | | | | | | | | |
| United States | | | $ 439.8 | | | $ 475.8 | | | $ 391.5 | |
| Europe | | | 34.2 | | | 37.0 | | | 41.0 | |
| Japan | | | 14.8 | | | 14.0 | | | 14.0 | |
| Other Asia Pacific countries | | | 3.0 | | | 3.0 | | | 2.7 | |
| Latin America and other | | | 0.5 | | | 0.4 | | | 0.4 | |
| |
| Consolidated | | | $ 492.3 | | | $ 530.2 | | | $ 449.6 | |
| |
Long-lived assets exclude goodwill and other intangible assets.
We have a large and diverse customer base. No single customer accounted for more than 10% of total net revenues during fiscal 2002, 2003, and 2004.
Consolidating Information |
Presented below is our consolidating financial information, including the allocation of expenses between our segments in accordance with our allocation policies, as well as other related party transactions, such as sales of products between segments and interest income and expense on intercompany borrowings. Our board of directors approves the method of allocating earnings to each class of common stock for purposes of calculating earnings per share. This determination is generally based on net income or loss amounts of the
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Notes to Consolidated Financial Statements — (Continued)
corresponding group calculated in accordance with GAAP, consistently applied.
The management and allocation policies applicable to the attribution of assets, liabilities, revenues and expenses to our segments may be modified or rescinded, or additional policies may be adopted, at the sole discretion of our board of directors at any time without stockholder approval. Our board of directors would make any decision in accordance with its good faith business judgment that its decision is in the best interests of Applera and all of its stockholders as a whole.
We primarily base the attribution of the assets, liabilities, revenues and expenses to each segment on specific identification of the businesses included in each segment. Where specific identification is not practical, we use other methods and criteria that we believe are equitable and provide a reasonable estimate of the assets, liabilities, revenues and expenses attributable to each segment.
We record the sales of products and services between the segments as intersegment revenues, which are eliminated in determining our consolidated net revenues. These sales are generally made on terms that would be available from third parties in commercial transactions. If similar transactions with third parties are not available for purposes of determining fair value, the purchasing business will pay fair value as determined by our board of directors for such products and services or at the cost (including overhead) of the selling business. The selling business records revenues on these transactions when the product is shipped, as the service is performed, or over the term of the lease, as applicable.
Access to Technology and Know-How |
Each segment has free access to all of our technology and know-how (excluding products and services of the other segment) that may be useful in that segment’s business, subject to obligations and limitations applicable to us and to such exceptions that our board of directors may determine. The segments consult with each other on a regular basis concerning technology issues that affect each segment. The costs of developing technology remain in the segment responsible for its development.
Allocation of Corporate Overhead and Administrative Shared Services |
Our shared corporate services (such as executive management, human resources, legal, accounting, auditing, tax, treasury, strategic planning and environmental services) and related balance sheet amounts have been allocated to the segments based upon identification of such services specifically benefiting each segment. A portion of our costs of administrative shared services (such as information technology services) has been allocated in a similar manner. Where determination based on specific usage alone is not practical, we use other methods and criteria that we believe are
equitable and provide a reasonable estimate of the cost attributable to each segment. It is not practical to specifically identify a portion of corporate overhead expenses attributable to each of the segments. As a result, we allocate these corporate overhead expenses primarily based on headcount, total expenses, and revenues attributable to each segment. We believe that the allocation methods developed are reasonable and have been consistently applied.
Joint Transactions Between Segments |
The segments may from time to time engage in transactions jointly, including with third parties. Research and development and other services performed by one segment for a joint venture or other collaborative arrangement will be charged at fair value, as determined by our board of directors. The segments also may jointly undertake a project, such as the Applera Genomics Initiative, where the total costs and benefits of the project are shared. Shipments of products or performance of services related to such joint projects are not recorded as revenues by any of the businesses, but instead are included, at cost, in the total project costs that are shared based on each business’ expected benefit.
Our businesses may perform services for one another, which are not directly atttributable to either businesses’ revenue generating activities. In these cases the business performing the services charges the benefiting business the cost of performing the services, including overhead.
Allocation of Federal and State Income Taxes |
The federal income taxes of the Company and its subsidiaries that own assets allocated between the groups are determined on a consolidated basis using the asset and liability approach prescribed by SFAS No. 109, “Accounting for Income Taxes.” If we had used the separate return basis of accounting for taxes, the tax provision for the Applied Biosystems group would not have changed, but more likely than not, a significant valuation allowance would have been recorded by the Celera Genomics group. We allocate the federal income tax provisions and related tax payments or refunds between the groups based on a consolidated return approach taking into account each group’s relative contribution (positive or negative) to our consolidated federal taxable income, tax liability and tax credit position. We taxed intersegment transactions as if each segment were a stand-alone company. We transferred tax benefits that cannot be used by the group generating those benefits, but can be used on a consolidated basis, to the group that can use such benefits. We will reimburse existing tax benefits acquired by either group in a business combination that are used by the other group, to the group that acquired such benefits. Tax benefits generated by the Celera Genomics group commencing July 1, 1998, which could be used on a consolidated basis, were reimbursed by the Applied Biosystems group to the Celera Genomics group up to a limit of $75 million.
Pursuant to the terms of the Celera Diagnostics joint venture agreement, the Applied Biosystems group reimburses the
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Notes to Consolidated Financial Statements — (Continued)
Celera Genomics group for tax benefits generated by Celera Diagnostics to the extent such tax benefits are used by the Applied Biosystems group. These tax benefits are not subject to the $75 million limit described above. The amounts used by the Applied Biosystems group that were not reimbursed to the Celera Genomics group were recorded to allocated net worth of each group in the following Consolidating Statements of Financial Position.
We calculate, depending on the tax laws of the respective jurisdictions, state and local income taxes on either a separate, consolidated, or combined basis. We allocate state and local income tax provisions and related tax payments or refunds between the groups based on the respective contributions of the groups to our state or local tax liabilities.
As a matter of policy, we manage most financing activities of the Applied Biosystems group and the Celera Genomics group on a centralized basis. These activities include the investment of surplus cash, the issuance and repayment of short-term and long-term debt, treasury stock repurchases, and the issuance and repayment of any preferred stock.
Our board of directors has adopted the following financing policy that affects the financial results of the Applied Biosystems group and the Celera Genomics group.
We allocate our debt between the groups (“pooled debt”) or, if we so determine, in its entirety to a particular group. We will allocate preferred stock, if issued, in a similar manner.
Cash allocated to one group that is used to repay pooled debt or redeem pooled preferred stock decreases such group’s allocated portion of the pooled debt or preferred stock. Cash or other property allocated to one group that is transferred to the other group, if so determined by our board of directors, decreases the transferring group’s allocated portion of the pooled debt or preferred stock and, correspondingly, increases the recipient group’s allocated portion of the pooled debt or preferred stock.
Pooled debt bears interest for the groups at a rate equal to the weighted average interest rate of the debt calculated on a quarterly basis and applied to the average pooled debt balance during the period. Preferred stock, if issued and if pooled in a manner similar to the pooled debt, will bear dividends for the groups at a rate based on the weighted average dividend rate of the preferred stock similarly calculated and applied. Any expense related to increases in pooled debt or preferred stock will be reflected in the weighted average interest or dividend rate of such pooled debt or preferred stock as a whole. During fiscal 2003 and 2004, there was no pooled debt.
If we allocate debt for a particular financing in its entirety to one group, that debt will bear interest for that group at a rate determined by our board of directors. If we allocate preferred stock in its entirety to one group, we will charge the dividend cost to that group in a similar manner. If the interest or dividend cost is higher than our actual cost, the other group
will receive a credit for an amount equal to the difference as compensation for the use of our credit capacity. Any expense related to our debt or preferred stock that is allocated in its entirety to a group will be allocated in whole to that group.
Cash or other property that we allocate to one group that is transferred to the other group could, if so determined by our board of directors, be accounted for either as a short-term loan or as a long-term loan. Short-term loans bear interest at a rate equal to the weighted average interest rate of our pooled debt. If we do not have any pooled debt, our board of directors will determine the rate of interest for such loan. Our board of directors establishes the terms on which long-term loans between the groups will be made, including interest rate, amortization schedule, maturity, and redemption terms.
In addition, cash allocated to the Applied Biosystems group may be reallocated to the Celera Genomics group in exchange for Celera Genomics Designated Shares as provided under our Certificate of Incorporation. The number of Celera Genomics Designated Shares issued would be determined by dividing the amount of cash reallocated by the average market value of Applera-Celera stock over the 20-trading day period immediately prior to the date of the reallocation. As a result of such a reallocation, a relative percentage of future earnings or losses of the Celera Genomics group would be attributed to the Applied Biosystems group. There were no Celera Genomics Designated Shares issued during fiscal 2003 and 2004.
Although we may allocate our debt and preferred stock between the groups, the debt and preferred stock remain obligations of the Company and all stockholders of the Company are subject to the risks associated with those obligations.
Transfers of Assets Between Groups |
Transfers of assets can be made between groups without stockholder approval. Such transfers will be made at fair value, as determined by our board of directors. The consideration for such transfers may be paid by one group to the other in cash or other consideration, as determined by our board of directors.
The Applied Biosystems group contributed, among other things, its existing molecular diagnostics business to Celera Diagnostics as part of its initial contribution to the joint venture. The Celera Genomics group contributed, among other things, access to its genome databases and agreed to fund all of the cash operating losses of Celera Diagnostics up to a maximum of $300 million (“initial losses”), after which, operating losses, if any, would be shared equally by the groups. Celera Diagnostics has accumulated cash operating losses of approximately $125 million through June 30, 2004. Celera Diagnostics’ profits, if any, will be shared in the ratio of 65 percent to the Celera Genomics group and 35 percent to the Applied Biosystems group until the cumulative profits of Celera Diagnostics equal the initial losses. Subsequently, profits
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Notes to Consolidated Financial Statements — (Continued)
and losses and cash flows would be shared equally. Capital expenditures and working capital requirements of the joint venture are funded equally by the groups. The Applied Biosystems group will reimburse the Celera Genomics group for all tax benefits generated by Celera Diagnostics to the extent such tax benefits are used by the Applied Biosystems group.
The groups account for their investments in Celera Diagnostics under the equity method of accounting, with the Celera Genomics group recording 100 percent of the initial losses in its statement of operations as loss from joint venture. The Celera Genomics group recorded 100% of the losses of Celera Diagnostics from fiscal 2001 through fiscal 2004. Additionally, the Celera Genomics group recorded the tax benefit associated with the loss generated by Celera Diagnostics.
In the event of liquidation of the assets attributable to Celera Diagnostics, including sale of such assets, the proceeds upon liquidation would be distributed to the groups based on a proportion similar to their relative investment accounts. If the proceeds upon liquidation are in excess of the groups’ combined investment accounts, the excess liquidation proceeds would be shared in the ratio of 65 percent to the Celera Genomics group and 35 percent to the Applied Biosystems group until the cumulative amount of the distributed excess proceeds equals the initial losses funded by the Celera Genomics group. Any additional liquidation proceeds would be allocated equally to the Celera Genomics group and the Applied Biosystems group.
Online Marketing and Distribution Agreement |
Beginning July 1, 2002, the Applied Biosystems group became the exclusive distributor of the CDS online platform operated by the Celera Genomics group and related human genetic and other biological and medical information. As a result of this arrangement, the Applied Biosystems group integrated CDS and other genomic and biological information into its product offerings. In exchange for the rights it acquired under the marketing and distribution agreement, the Applied Biosystems group agreed to pay royalties to the Celera Genomics group based on revenues generated by sales of some products of the Applied Biosystems group from July 1, 2002 through the end of fiscal 2012. The royalty rate is progressive, up to a maximum of 5%, with the level of sales through fiscal 2008. The royalty rate becomes a fixed percentage of sales starting in fiscal 2009, and the rate declines each succeeding fiscal year through fiscal 2012. TaqMan® Gene Expression and SNP Genotyping Assays, Taqman® Pre-Designed Gene Expression
and SNP Genotyping Assays, Custom Tagman® Gene Expression and SNP Genotyping Assays, some reagents for arrays, and new database subscriptions sold by the Applied Biosystems group are the products subject to royalties. During fiscal 2004, the Applied Biosystems group reorganized its internal operations and, among other things, integrated the operations of the former Knowledge Business into other business units of the Applied Biosystems group. However, the Applied Biosystems group and the Celera Genomics group continue to operate under the marketing and distribution agreement on the same terms and conditions as in effect prior to the reorganization.
The Celera Genomics group will continue to be responsible for the performance of its obligations under all contracts relating to its information products and services either existing on June 30, 2002 (including certain renewals, if any, of these contracts) and will receive all revenues and other benefits under, and be responsible for all costs and expenses associated with, such contracts. Assuming the Celera Genomics group continues to perform under its existing contracts, the Applied Biosystems group has agreed to reimburse the Celera Genomics group for any shortfall in earnings before interest, taxes, depreciation, and amortization from these contracts during the four fiscal years ending with fiscal year 2006 below $62.5 million, if the shortfall is due to the actions of the Applied Biosystems group including changes in marketing strategy for CDS. However, this commitment is also subject to the Celera Genomics group otherwise continuing to perform under these contracts, and does not protect the Celera Genomics group from lost revenue due to other circumstances such as customer bankruptcy or default.
Transfer of Business Unit from the Celera Genomics Group to the Applied Biosystems Group |
Effective July 1, 2001, we transferred the assets, liabilities and personnel of a business unit from the Celera Genomics group to the Applied Biosystems group. Our board of directors determined that the assets of the business transferred and the liabilities of the business assumed by the Applied Biosystems group constituted fair value for the transfer. The net assets were transferred at recorded book value as an increase to the Applied Biosystems group’s allocated net worth and a decrease to the Celera Genomics group’s allocated net worth. The Applied Biosystems group is using the resources of this business unit for initiatives, including validation of single nucleotide polymorphisms, among others.
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Notes to Consolidated Financial Statements — (Continued)
The following table summarizes the related party transactions between our segments:
| (Dollar amounts in millions) | | 2002 | | 2003 | | 2004 | |
| |
Applied Biosystems Group | | | | | | | | | | |
| Sales to the Celera Genomics group (a) | | | $22.4 | | | $ 4.4 | | | $ 2.8 | |
| Sales to Celera Diagnostics (a) | | | 1.7 | | | 5.1 | | | 7.2 | |
| Nonreimbursable utilization of tax benefits (b) | | | 19.0 | | | 28.1 | | | 12.3 | |
| Payments for reimbursable utilization of tax benefits (c) | | | 19.4 | | | 20.5 | | | 16.4 | |
| Funding of Celera Diagnostics (d) | | | 2.3 | | | 7.1 | | | 4.6 | |
| |
Celera Genomics Group | | | | | | | | | | |
| Royalties from the Applied Biosystems group (e) | | | $ — | | | $ 1.9 | | | $ 2.7 | |
| Funding of Celera Diagnostics (f) | | | 43.6 | | | 52.3 | | | 38.7 | |
| |
Celera Diagnostics | | | | | | | | | | |
| Sales to the Applied Biosystems group (g) | | | $ 8.7 | | | $ 3.3 | | | $ — | |
| |
| (a) | The Applied Biosystems group recorded net revenues from leased instruments, consumables, and project materials to the Celera Genomics group and Celera Diagnostics. |
| (b) | The Applied Biosystems group used, without reimbursement, some of the tax benefits generated by the Celera Genomics group in accordance with the tax allocation policy described above. |
| (c) | The Applied Biosystems group paid the Celera Genomics group for the use of existing tax benefits acquired by the Celera Genomics group in business combinations and other tax benefits, including those associated with Celera Diagnostics, in accordance with the tax allocation policy described above. |
| (d) | The Applied Biosystems group recorded its share of capital expenditures and working capital funding for Celera Diagnostics. |
| (e) | The Celera Genomics group recorded net revenues primarily for royalties generated from sales by the Applied Biosystems group of products integrating CDS and some other genomic and biological information under a marketing and distribution agreement. |
| (f) | The Celera Genomics group recorded operating losses and its share of capital expenditures and working capital funding for Celera Diagnostics. |
| (g) | Celera Diagnostics recorded net revenues from the sale of diagnostics products to the Applied Biosystems group under a distribution agreement. On October 1, 2002, sales responsibilities for products manufactured by Celera Diagnostics were largely transferred to the diagnostic division of Abbott Laboratories, pursuant to a profit-sharing alliance announced in June 2002. |
In the following tables, the “Eliminations” column represents the elimination of intersegment activity and the loss on Celera Diagnostics, which is included once, in the “Celera Diagnostics” column, and again net within the “Celera Genomics group” column as “Loss from joint venture.”
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Notes to Consolidated Financial Statements — (Continued)
Consolidating Statement of Operations for the Year Ended June 30, 2004 |
| |
| (Dollar amounts in thousands) | | Applied
Biosystems
Group | | Celera
Genomics
Group | | Celera
Diagnostics | | Eliminations | | Consolidated | |
| |
| Products | | $ | 1,441,759 | | $ | 5,011 | | $ | 9,189 | | $ | — | | $ | 1,455,959 | |
| Services | | | 178,239 | | | 4,201 | | | | | | | | | 182,440 | |
| Other sources | | | 111,105 | | | 48,204 | | | 27,485 | | | | | | 186,794 | |
| |
| Total net revenues from external customers | | | 1,731,103 | | | 57,416 | | | 36,674 | | | — | | | 1,825,193 | |
| Intersegment revenues | | | 9,995 | | | 2,710 | | | 28 | | | (12,733 | ) | | | |
| |
Total Net Revenues | | | 1,741,098 | | | 60,126 | | | 36,702 | | | (12,733 | ) | | 1,825,193 | |
| |
| Products | | | 724,410 | | | 3,228 | | | 7,079 | | | (4,023 | ) | | 730,694 | |
| Services | | | 95,205 | | | 800 | | | | | | (770 | ) | | 95,235 | |
| Other sources | | | 15,753 | | | 6,804 | | | 13,041 | | | (3,017 | ) | | 32,581 | |
| |
Total Cost of Sales | | | 835,368 | | | 10,832 | | | 20,120 | | | (7,810 | ) | | 858,510 | |
| |
Gross Margin | | | 905,730 | | | 49,294 | | | 16,582 | | | (4,923 | ) | | 966,683 | |
| |
| Selling, general and administrative | | | 392,627 | | | 22,087 | | | 11,630 | | | 56,541 | | | 482,885 | |
| Corporate allocated expenses | | | 46,339 | | | 7,100 | | | 3,102 | | | (56,541 | ) | | | |
| Research, development and engineering | | | 233,834 | | | 104,603 | | | 43,818 | | | (5,194 | ) | | 377,061 | |
| Amortization of intangible assets | | | | | | 2,900 | | | | | | | | | 2,900 | |
| Employee-related charges, asset impairments and other | | | 23,741 | | | 18,083 | | | | | | | | | 41,824 | |
| Litigation settlements | | | (6,660 | ) | | | | | | | | | | | (6,660 | ) |
| |
Operating Income (Loss) | | | 215,849 | | | (105,479 | ) | | (41,968 | ) | | 271 | | | 68,673 | |
| Gain on investments, net | | | 11,235 | | | 24,294 | | | | | | | | | 35,529 | |
| Interest income, net | | | 12,068 | | | 10,769 | | | | | | | | | 22,837 | |
| Other income (expense), net | | | 592 | | | 1,856 | | | | | | | | | 2,448 | |
| Loss from joint venture | | | | | | (41,968 | ) | | | | | 41,968 | | | | |
| |
Income (Loss) before Income Taxes | | | 239,744 | | | (110,528 | ) | | (41,968 | ) | | 42,239 | | | 129,487 | |
| Provision (benefit) for income taxes | | | 67,491 | | | (53,052 | ) | | | | | 95 | | | 14,534 | |
| |
Income (Loss) from Continuing Operations | | | 172,253 | | | (57,476 | ) | | (41,968 | ) | | 42,144 | | | 114,953 | |
Income from discontinued operations,
net of income taxes | | | 10,628 | | | | | | | | | | | | 10,628 | |
| |
Net Income (Loss) | | $ | 182,881 | | $ | (57,476 | ) | $ | (41,968 | ) | $ | 42,144 | | $ | 125,581 | |
| |
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Notes to Consolidated Financial Statements — (Continued)
Consolidating Statement of Financial Position at June 30, 2004 |
| |
| (Dollar amounts in thousands) | | Applied
Biosystems
Group | | Celera
Genomics
Group | | Celera
Diagnostics | | Eliminations | | Consolidated | |
| |
Assets | | | | | | | | | | | | | | | | |
| Current assets | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 504,947 | | $ | 56,988 | | $ | — | | $ | — | | $ | 561,935 | |
| Short-term investments | | | | | | 688,806 | | | | | | | | | 688,806 | |
| Accounts receivable, net | | | 382,977 | | | 4,082 | | | 6,704 | | | (1,593 | ) | | 392,170 | |
| Inventories, net | | | 129,342 | | | 1,924 | | | 9,530 | | | | | | 140,796 | |
| Prepaid expenses and other current assets | | | 92,440 | | | 47,346 | | | 4,590 | | | (4,675 | ) | | 139,701 | |
| |
| Total current assets | | | 1,109,706 | | | 799,146 | | | 20,824 | | | (6,268 | ) | | 1,923,408 | |
| Property, plant and equipment, net | | | 402,908 | | | 34,093 | | | 9,245 | | | (219 | ) | | 446,027 | |
| Other long-term assets | | | 435,146 | | | 184,475 | | | 6,834 | | | (23,039 | ) | | 603,416 | |
| |
Total Assets | | $ | 1,947,760 | | $ | 1,017,714 | | $ | 36,903 | | $ | (29,526 | ) | $ | 2,972,851 | |
| |
| | | | | | | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | |
| Current liabilities | | | | | | | | | | | | | | | | |
| Current portion of long-term debt | | $ | — | | $ | 6,081 | | $ | — | | $ | — | | $ | 6,081 | |
| Accounts payable | | | 139,866 | | | 9,223 | | | 4,767 | | | (5,861 | ) | | 147,995 | |
| Accrued salaries and wages | | | 72,513 | | | 12,733 | | | 4,458 | | | | | | 89,704 | |
| Accrued taxes on income | | | 66,967 | | | 13,632 | | | | | | | | | 80,599 | |
| Other accrued expenses | | | 238,340 | | | 30,715 | | | 3,741 | | | (407 | ) | | 272,389 | |
| |
| Total current liabilities | | | 517,686 | | | 72,384 | | | 12,966 | | | (6,268 | ) | | 596,768 | |
| Other long-term liabilities | | | 186,516 | | | 7,901 | | | 617 | | | | | | 195,034 | |
| |
Total Liabilities | | | 704,202 | | | 80,285 | | | 13,583 | | | (6,268 | ) | | 791,802 | |
| |
Total Stockholders’ Equity | | | 1,243,558 | | | 937,429 | | | 23,320 | | | (23,258 | ) | | 2,181,049 | |
| |
Total Liabilities and Stockholders’ Equity | | $ | 1,947,760 | | $ | 1,017,714 | | $ | 36,903 | | $ | (29,526 | ) | $ | 2,972,851 | |
| |
Back to Contents
Notes to Consolidated Financial Statements — (Continued)
Consolidating Statement of Cash Flows for the Year Ended June 30, 2004 |
| |
| (Dollar amounts in thousands) | | Applied
Biosystems
Group | | Celera
Genomics
Group | | Celera
Diagnostics | | Eliminations | | Consolidated | |
| |
Operating Activities of Continuing Operations | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | $ | 172,253 | | $ | (57,476 | ) | $ | (41,968 | ) | $ | 42,144 | | $ | 114,953 | |
| Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 96,776 | | | 20,834 | | | 7,789 | | | (132 | ) | | 125,267 | |
| Asset impairments | | | 19,205 | | | 18,083 | | | | | | | | | 37,288 | |
| Provisions for office closures and severance costs | | | 5,456 | | | | | | | | | | | | 5,456 | |
| Long-term compensation programs | | | 2,410 | | | 899 | | | | | | | | | 3,309 | |
| Deferred income taxes | | | (21,395 | ) | | (27,270 | ) | | | | | (571 | ) | | (49,236 | ) |
| Gains from investments and sales of assets | | | (11,411 | ) | | (24,052 | ) | | | | | | | | (35,463 | ) |
| Loss from joint venture and equity method investees | | | | | | 42,456 | | | | | | (41,968 | ) | | 488 | |
| Nonreimbursable utilization of intergroup tax benefits | | | 12,334 | | | (12,334 | ) | | | | | | | | | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | |
| Accounts receivable | | | 39,910 | | | 12,626 | | | (1,601 | ) | | (1,597 | ) | | 49,338 | |
| Inventories | | | 11,966 | | | 650 | | | (690 | ) | | (139 | ) | | 11,787 | |
| Prepaid expenses and other assets | | | (12,329 | ) | | 493 | | | (4,179 | ) | | 2,792 | | | (13,223 | ) |
| Accounts payable and other liabilities | | | (25,917 | ) | | (28,768 | ) | | (315 | ) | | (529 | ) | | (55,529 | ) |
| |
Net Cash Provided (Used) by Operating Activities
of Continuing Operations | | | 289,258 | | | (53,859 | ) | | (40,964 | ) | | — | | | 194,435 | |
| |
Investing Activities of Continuing Operations | | | | | | | | | | | | | | | | |
| Additions to property, plant and equipment, net | | | (60,410 | ) | | (5,977 | ) | | (2,320 | ) | | 316 | | | (68,391 | ) |
| Proceeds from maturities of available-for-sale investments | | | | | | 2,230,846 | | | | | | | | | 2,230,846 | |
| Proceeds from sales of available-for-sale investments | | | 26,364 | | | 667,932 | | | | | | | | | 694,296 | |
| Purchases of available-for-sale investments | | | | | | (2,823,874 | ) | | | | | | | | (2,823,874 | ) |
| Acquisitions and investments in joint venture and other, net | | | (4,840 | ) | | (38,732 | ) | | | | | 43,284 | | | (288 | ) |
| Proceeds from the sale of assets, net | | | 3,241 | | | 32,296 | | | | | | (316 | ) | | 35,221 | |
| |
Net Cash Provided (Used) by Investing Activities
of Continuing Operations | | | (35,645 | ) | | 62,491 | | | (2,320 | ) | | 43,284 | | | 67,810 | |
| |
Net Cash Used by Operating Activities
of Discontinued Operations | | | (17,738 | ) | | | | | | | | | | | (17,738 | ) |
| |
Financing Activities | | | | | | | | | | | | | | | | |
| Principal payments on debt | | | | | | (10,000 | ) | | | | | | | | (10,000 | ) |
| Dividends | | | (43,528 | ) | | | | | | | | | | | (43,528 | ) |
| Net cash funding from groups | | | | | | | | | 43,284 | | | (43,284 | ) | | | |
| Purchases of common stock for treasury | | | (324,999 | ) | | | | | | | | | | | (324,999 | ) |
| Proceeds from stock issued for stock plans | | | 23,062 | | | 5,739 | | | | | | | | | 28,801 | |
| |
Net Cash Provided (Used) by Financing Activities | | | (345,465 | ) | | (4,261 | ) | | 43,284 | | | (43,284 | ) | | (349,726 | ) |
| |
Effect of Exchange Rate Changes on Cash | | | 12,871 | | | | | | | | | | | | 12,871 | |
| |
Net Change in Cash and Cash Equivalents | | | (96,719 | ) | | 4,371 | | | | | | | | | (92,348 | ) |
| |
Cash and Cash Equivalents Beginning of Year | | | 601,666 | | | 52,617 | | | | | | | | | 654,283 | |
| |
Cash and Cash Equivalents End of Year | | $ | 504,947 | | $ | 56,988 | | $ | — | | $ | — | | $ | 561,935 | |
| |
Back to Contents
Notes to Consolidated Financial Statements — (Continued)
Consolidating Statement of Operations for the Year Ended June 30, 2003 |
| |
| (Dollar amounts in thousands) | | Applied
Biosystems
Group | | Celera
Genomics
Group | | Celera
Diagnostics | | Eliminations | | Consolidated | |
| |
| Products | | $ | 1,392,841 | | $ | 5,563 | | $ | 6,659 | | $ | — | | $ | 1,405,063 | |
| Services | | | 159,260 | | | 7,386 | | | | | | | | | 166,646 | |
| Other sources | | | 121,281 | | | 73,405 | | | 10,837 | | | | | | 205,523 | |
| |
| Total net revenues from external customers | | | 1,673,382 | | | 86,354 | | | 17,496 | | | | | | 1,777,232 | |
| Intersegment revenues | | | 9,561 | | | 1,910 | | | 3,267 | | | (14,738 | ) | | | |
| |
Total Net Revenues | | | 1,682,943 | | | 88,264 | | | 20,763 | | | (14,738 | ) | | 1,777,232 | |
| |
| Products | | | 722,351 | | | 1,767 | | | 3,192 | | | (6,922 | ) | | 720,388 | |
| Services | | | 91,104 | | | 3,064 | | | | | | (626 | ) | | 93,542 | |
| Other sources | | | 20,067 | | | 9,245 | | | 8,108 | | | (1,694 | ) | | 35,726 | |
| |
Total Cost of Sales | | | 833,522 | | | 14,076 | | | 11,300 | | | (9,242 | ) | | 849,656 | |
| |
Gross Margin | | | 849,421 | | | 74,188 | | | 9,463 | | | (5,496 | ) | | 927,576 | |
| |
| Selling, general and administrative | | | 352,091 | | | 23,593 | | | 9,229 | | | 50,113 | | | 435,026 | |
| Corporate allocated expenses | | | 41,016 | | | 6,634 | | | 2,463 | | | (50,113 | ) | | | |
| Research, development and engineering | | | 238,389 | | | 120,849 | | | 49,008 | | | (6,715 | ) | | 401,531 | |
| Amortization of intangible assets | | | | | | 5,873 | | | | | | | | | 5,873 | |
| Employee-related charges, asset impairments and other | | | 20,041 | | | | | | | | | | | | 20,041 | |
| Litigation settlements | | | (25,776 | ) | | | | | | | | | | | (25,776 | ) |
| |
Operating Income (Loss) | | | 223,660 | | | (82,761 | ) | | (51,237 | ) | | 1,219 | | | 90,881 | |
| Loss on investments, net | | | (2,281 | ) | | (334 | ) | | | | | | | | (2,615 | ) |
| Interest income, net | | | 12,684 | | | 16,933 | | | | | | | | | 29,617 | |
| Other income (expense), net | | | 4,604 | | | (16,910 | ) | | | | | | | | (12,306 | ) |
| Loss from joint venture | | | | | | (51,237 | ) | | | | | 51,237 | | | | |
| |
Income (Loss) before Income Taxes | | | 238,667 | | | (134,309 | ) | | (51,237 | ) | | 52,456 | | | 105,577 | |
| Provision (benefit) for income taxes | | | 39,050 | | | (52,380 | ) | | | | | 427 | | | (12,903 | ) |
| |
Income (Loss) from Continuing Operations | | | 199,617 | | | (81,929 | ) | | (51,237 | ) | | 52,029 | | | 118,480 | |
Loss from discontinued operations,
net of income taxes | | | (16,400 | ) | | | | | | | | | | | (16,400 | ) |
| |
Net Income (Loss) | | $ | 183,217 | | $ | (81,929 | ) | $ | (51,237 | ) | $ | 52,029 | | $ | 102,080 | |
| |
Back to Contents
Notes to Consolidated Financial Statements — (Continued)
Consolidating Statement of Financial Position at June 30, 2003 |
| |
| (Dollar amounts in thousands) | | Applied
Biosystems
Group | | Celera
Genomics
Group | | Celera
Diagnostics | | Eliminations | | Consolidated | |
| |
Assets | | | | | | | | | | | | | | | | |
| Current assets | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 601,666 | | $ | 52,617 | | | $ — | | | $ — | | | $ 654,283 | |
| Short-term investments | | | | | | 749,785 | | | | | | | | | 749,785 | |
| Accounts receivable, net | | | 404,928 | | | 16,708 | | | 5,103 | | | (3,190 | ) | | 423,549 | |
| Inventories, net | | | 140,833 | | | 2,526 | | | 8,840 | | | (139 | ) | | 152,060 | |
| Prepaid expenses and other current assets | | | 84,393 | | | 10,510 | | | 686 | | | (1,883 | ) | | 93,706 | |
| |
| Total current assets | | | 1,231,820 | | | 832,146 | | | 14,629 | | | (5,212 | ) | | 2,073,383 | |
| Property, plant and equipment, net | | | 409,626 | | | 104,742 | | | 12,574 | | | (351 | ) | | 526,591 | |
| Other long-term assets | | | 485,269 | | | 185,178 | | | 8,699 | | | (21,628 | ) | | 657,518 | |
| |
Total Assets | | $ | 2,126,715 | | $ | 1,122,066 | | | $35,902 | | | $(27,191 | ) | | $3,257,492 | |
| |
| | | | | | | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | |
| Current liabilities | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 153,124 | | $ | 10,241 | | | $ 7,651 | | | $ (4,697 | ) | | $ 166,319 | |
| Accrued salaries and wages | | | 63,859 | | | 11,886 | | | 3,878 | | | | | | 79,623 | |
| Accrued taxes on income | | | 73,611 | | | 12,332 | | | | | | | | | 85,943 | |
| Other accrued expenses | | | 232,674 | | | 46,907 | | | 2,230 | | | (376 | ) | | 281,435 | |
| |
| Total current liabilities | | | 523,268 | | | 81,366 | | | 13,759 | | | (5,073 | ) | | 613,320 | |
| Long-term debt | | | | | | 17,101 | | | | | | | | | 17,101 | |
| Other long-term liabilities | | | 265,274 | | | 21,373 | | | 139 | | | | | | 286,786 | |
| |
Total Liabilities | | | 788,542 | | | 119,840 | | | 13,898 | | | (5,073 | ) | | 917,207 | |
| |
Total Stockholders’ Equity | | | 1,338,173 | | | 1,002,226 | | | 22,004 | | | (22,118 | ) | | 2,340,285 | |
| |
Total Liabilities and Stockholders’ Equity | | $ | 2,126,715 | | $ | 1,122,066 | | | $35,902 | | | $(27,191 | ) | | $3,257,492 | |
| |
Back to Contents
Notes to Consolidated Financial Statements — (Continued)
Consolidating Statement of Cash Flows for the Year Ended June 30, 2003 |
| |
| (Dollar amounts in thousands) | | Applied
Biosystems
Group | | Celera
Genomics
Group | | Celera
Diagnostics | | Eliminations | | Consolidated | |
| |
Operating Activities of Continuing Operations | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | $ | 199,617 | | $ | (81,929) | | $ | (51,237) | | $ | 52,029 | | $ | 118,480 | |
| Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 106,392 | | | 35,504 | | | 5,970 | | | (1,211 | ) | | 146,655 | |
| Asset impairments | | | 9,991 | | | | | | | | | | | | 9,991 | |
| Provisions for office closures and severance costs | | | 19,498 | | | | | | | | | | | | 19,498 | |
| Long-term compensation programs | | | 3,943 | | | 1,171 | | | | | | | | | 5,114 | |
| Deferred income taxes | | | (49,617 | ) | | (8,241 | ) | | | | | (156 | ) | | (58,014 | ) |
| Losses from investments and sales of assets | | | 1,191 | | | 309 | | | | | | | | | 1,500 | |
| Loss from joint venture and equity method investees | | | | | | 70,131 | | | | | | (51,237 | ) | | 18,894 | |
| Nonreimbursable utilization of intergroup tax benefits | | | 28,129 | | | (28,129 | ) | | | | | | | | | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | |
| Accounts receivable | | | (8,299 | ) | | 13,242 | | | (4,926 | ) | | 2,932 | | | 2,949 | |
| Inventories | | | 452 | | | (666 | ) | | (6,625 | ) | | (8 | ) | | (6,847 | ) |
| Prepaid expenses and other assets | | | (22,896 | ) | | (1,058 | ) | | (752 | ) | | 1,825 | | | (22,881 | ) |
| Accounts payable and other liabilities | | | (8,960 | ) | | (32,250 | ) | | 5,903 | | | (4,174 | ) | | (39,481 | ) |
| |
Net Cash Provided (Used) by Operating Activities
of Continuing Operations | | | 279,441 | | | (31,916 | ) | | (51,667 | ) | | — | | | 195,858 | |
| |
Investing Activities of Continuing Operations | | | | | | | | | | | | | | | | |
| Additions to property, plant and equipment, net | | | (131,940 | ) | | (5,991 | ) | | (7,743 | ) | | 1,279 | | | (144,395 | ) |
| Proceeds from maturities of available-for-sale investments | | | 29,646 | | | 3,861,558 | | | | | | | | | 3,891,204 | |
| Proceeds from sales of available-for-sale investments | | | | | | 520,349 | | | | | | | | | 520,349 | |
| Purchases of available-for-sale investments | | | | | | (4,271,258 | ) | | | | | | | | (4,271,258 | ) |
| Purchases of long-term investments | | | | | | (16,834 | ) | | | | | | | | (16,834 | ) |
| Acquisitions and investments in joint venture and other, net | | | (7,396 | ) | | (52,339 | ) | | | | | 59,411 | | | (324 | ) |
| Proceeds from the sale of assets, net | | | 5,463 | | | 2,425 | | | | | | (1,280 | ) | | 6,608 | |
| |
Net Cash Provided (Used) by Investing Activities
of Continuing Operations | | | (104,227 | ) | | 37,910 | | | (7,743 | ) | | 59,410 | | | (14,650 | ) |
| |
Net Cash Used by Operating Activities
of Discontinued Operations | | | (3,677 | ) | | | | | | | | | | | (3,677 | ) |
| |
Financing Activities | | | | | | | | | | | | | | | | |
| Net change in loans payable | | | (290 | ) | | | | | | | | | | | (290 | ) |
| Dividends | | | (35,567 | ) | | | | | | | | | | | (35,567 | ) |
| Net cash funding from groups | | | | | | | | | 59,410 | | | (59,410 | ) | | | |
| Purchases of common stock for treasury | | | (19,779 | ) | | | | | | | | | | | (19,779 | ) |
| Proceeds from stock issued for stock plans | | | 15,314 | | | 17,733 | | | | | | | | | 33,047 | |
| |
Net Cash Provided (Used) by Financing Activities | | | (40,322 | ) | | 17,733 | | | 59,410 | | | (59,410 | ) | | (22,589 | ) |
| |
Effect of Exchange Rate Changes on Cash | | | 29,123 | | | | | | | | | | | | 29,123 | |
| |
Net Change in Cash and Cash Equivalents | | | 160,338 | | | 23,727 | | | | | | | | | 184,065 | |
| |
Cash and Cash Equivalents Beginning of Year | | | 441,328 | | | 28,890 | | | | | | | | | 470,218 | |
| |
Cash and Cash Equivalents End of Year | | $ | 601,666 | | $ | 52,617 | | $ | — | | $ | — | | $ | 654,283 | |
| |
Back to Contents
Notes to Consolidated Financial Statements — (Continued)
Consolidating Statement of Operations for the Year Ended June 30, 2002 |
| |
| (Dollar amounts in thousands) | | Applied
Biosystems
Group | | Celera
Genomics
Group | | Celera
Diagnostics | | Eliminations | | Consolidated | |
| |
| Products | | $ | 1,344,386 | | $ | 6,027 | | $ | — | | $ | — | | $ | 1,350,413 | |
| Services | | | 135,192 | | | 41,025 | | | | | | | | | 176,217 | |
| Other sources | | | 100,329 | | | 73,785 | | | 474 | | | | | | 174,588 | |
| |
| Total net revenues from external customers | | | 1,579,907 | | | 120,837 | | | 474 | | | | | | 1,701,218 | |
| Intersegment revenues | | | 24,112 | | | 49 | | | 8,732 | | | (32,893 | ) | | | |
| |
Total Net Revenues | | | 1,604,019 | | | 120,886 | | | 9,206 | | | (32,893 | ) | | 1,701,218 | |
| |
| Products | | | 662,738 | | | 6,367 | | | 1,602 | | | (10,472 | ) | | 660,235 | |
| Services | | | 85,922 | | | 35,845 | | | | | | (17,149 | ) | | 104,618 | |
| Other sources | | | 19,856 | | | 9,686 | | | 4,628 | | | (36 | ) | | 34,134 | |
| |
Total Cost of Sales | | | 768,516 | | | 51,898 | | | 6,230 | | | (27,657 | ) | | 798,987 | |
| |
Gross Margin | | | 835,503 | | | 68,988 | | | 2,976 | | | (5,236 | ) | | 902,231 | |
| |
| Selling, general and administrative | | | 340,561 | | | 42,768 | | | 6,644 | | | 48,396 | | | 438,369 | |
| Corporate allocated expenses | | | 38,648 | | | 7,675 | | | 2,073 | | | (48,396 | ) | | | |
| Research, development and engineering | | | 219,630 | | | 132,655 | | | 39,022 | | | (9,405 | ) | | 381,902 | |
| Amortization of intangible assets | | | | | | 7,443 | | | | | | | | | 7,443 | |
| Goodwill impairment | | | | | | 12,043 | | | | | | | | | 12,043 | |
| Employee-related charges, asset impairments and other | | | | | | 13,711 | | | | | | | | | 13,711 | |
| Acquired research and development | | | 2,200 | | | 98,981 | | | | | | | | | 101,181 | |
| |
Operating Income (Loss) | | | 234,464 | | | (246,288 | ) | | (44,763 | ) | | 4,169 | | | (52,418 | ) |
| Loss on investments, net | | | (8,536 | ) | | (5,960 | ) | | | | | | | | (14,496 | ) |
| Interest income, net | | | 12,177 | | | 31,330 | | | | | | | | | 43,507 | |
| Other income (expense), net | | | (601 | ) | | (4,542 | ) | | | | | | | | (5,143 | ) |
| Loss from joint venture | | | | | | (44,763 | ) | | | | | 44,763 | | | | |
| |
Income (Loss) before Income Taxes | | | 237,504 | | | (270,223 | ) | | (44,763 | ) | | 48,932 | | | (28,550 | ) |
| Provision (benefit) for income taxes | | | 69,023 | | | (58,451 | ) | | | | | 1,459 | | | 12,031 | |
| |
Net Income (Loss) | | $ | 168,481 | | $ | (211,772 | ) | $ | (44,763 | ) | $ | 47,473 | | $ | (40,581 | ) |
| |
Back to Contents
Notes to Consolidated Financial Statements — (Continued)
Consolidating Statement of Cash Flows for the Year Ended June 30, 2002 |
| |
| (Dollar amounts in thousands) | | Applied
Biosystems
Group | | Celera
Genomics
Group | | Celera
Diagnostics | | Eliminations | | Consolidated | |
| |
Operating Activities of Continuing Operations | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 168,481 | | $ | (211,772 | ) | $ | (44,763 | ) | $ | 47,473 | | $ | (40,581 | ) |
| Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 81,184 | | | 36,499 | | | 3,259 | | | (4,148 | ) | | 116,794 | |
| Asset impairments | | | | | | 15,563 | | | | | | | | | 15,563 | |
| Provisions for excess lease space and severance costs | | | | | | 13,106 | | | | | | | | | 13,106 | |
| Long-term compensation programs | | | 3,799 | | | 1,441 | | | | | | | | | 5,240 | |
| Deferred income taxes | | | (12,431 | ) | | (26,700 | ) | | | | | (8,404 | ) | | (47,535 | ) |
| Losses from investments and sales of assets | | | 8,536 | | | 5,559 | | | | | | | | | 14,095 | |
| Loss from joint venture and equity method investees | | | | | | 49,552 | | | | | | (44,763 | ) | | 4,789 | |
| Nonreimbursable utilization of intergroup tax benefits | | | 18,994 | | | (18,994 | ) | | | | | | | | | |
| Acquired research and development | | | 2,200 | | | 98,981 | | | | | | | | | 101,181 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | |
| Accounts receivable | | | 27,258 | | | (5,739 | ) | | (177 | ) | | (5,518 | ) | | 15,824 | |
| Inventories | | | (455 | ) | | 1,174 | | | 559 | | | (21 | ) | | 1,257 | |
| Prepaid expenses and other assets | | | (27,460 | ) | | 1,962 | | | (3,279 | ) | | 58 | | | (28,719 | ) |
| Accounts payable and other liabilities | | | 30,515 | | | (10,501 | ) | | 6,506 | | | 15,323 | | | 41,843 | |
| |
Net Cash Provided (Used) by Operating Activities | | | 300,621 | | | (49,869 | ) | | (37,895 | ) | | — | | | 212,857 | |
| |
Investing Activities of Continuing Operations | | | | | | | | | | | | | | | | |
| Additions to property, plant and equipment, net | | | (88,274 | ) | | (17,809 | ) | | (8,024 | ) | | | | | (114,107 | ) |
| Proceeds from maturities of available-for-sale investments | | | | | | 3,732,525 | | | | | | | | | 3,732,525 | |
| Proceeds from sales of available-for-sale investments | | | 5,228 | | | 839,287 | | | | | | | | | 844,515 | |
| Purchases of available-for-sale investments | | | (29,653 | ) | | (4,650,787 | ) | | | | | | | | (4,680,440 | ) |
| Acquisitions and investments in joint venture and other, net | | | (39,473 | ) | | (48,347 | ) | | | | | 45,919 | | | (41,901 | ) |
| |
Net Cash Used by Investing Activities | | | (152,172 | ) | | (145,131 | ) | | (8,024 | ) | | 45,919 | | | (259,408 | ) |
| |
Net Cash Used by Operating Activities
of Discontinued Operations | | | (2,843 | ) | | | | | | | | | | | (2,843 | ) |
| |
Financing Activities | | | | | | | | | | | | | | | | |
| Net change in loans payable | | | (15,278 | ) | | (8,443 | ) | | | | | | | | (23,721 | ) |
| Principal payments on debt | | | (28,973 | ) | | (10,000 | ) | | | | | | | | (38,973 | ) |
| Dividends | | | (36,020 | ) | | | | | | | | | | | (36,020 | ) |
| Net cash funding from groups | | | | | | | | | 45,919 | | | (45,919 | ) | | | |
| Purchases of common stock for treasury | | | (68,950 | ) | | (941 | ) | | | | | | | | (69,891 | ) |
| Proceeds from stock issued for stock plans | | | 21,017 | | | 27,198 | | | | | | | | | 48,215 | |
| |
Net Cash Provided (Used) by Financing Activities | | | (128,204 | ) | | 7,814 | | | 45,919 | | | (45,919 | ) | | (120,390 | ) |
| |
Effect of Exchange Rate Changes on Cash | | | 31,467 | | | | | | | | | | | | 31,467 | |
| |
Net Change in Cash and Cash Equivalents | | | 48,869 | | | (187,186 | ) | | | | | | | | (138,317 | ) |
Cash and Cash Equivalents Beginning of Year | | | 392,459 | | | 216,076 | | | | | | | | | 608,535 | |
| |
Cash and Cash Equivalents End of Year | | $ | 441,328 | | $ | 28,890 | | $ | — | | $ | — | | $ | 470,218 | |
| |
Back to Contents
Report of Management and Report of Independent
Registered Public Accounting Firm
| |
To the Stockholders of
Applera Corporation |
We are responsible for the accompanying consolidated financial statements. We prepared the financial statements in conformity with accounting principles generally accepted in the United States of America, which requires us to make informed judgments and estimates that we believe are appropriate under the circumstances. Financial information presented elsewhere in this annual report is consistent with that in the financial statements.
In meeting our responsibility for preparing reliable financial statements, we maintain a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with corporate policy and management authorization. We believe our accounting controls provide reasonable assurance that errors or irregularities which could be material to the financial statements are prevented or would be detected within a timely period. In designing such control procedures, we recognize judgments are required to assess and balance the costs and expected benefits of a system of internal accounting controls. Adherence to these policies and procedures is reviewed through a coordinated audit effort of our internal audit staff and independent auditors.
The Audit/Finance Committee of our board of directors is comprised solely of outside directors and is responsible for overseeing and monitoring the quality of our accounting and auditing practices. The independent auditors and internal auditors have full and free access to the Audit/Finance Committee and meet periodically with the committee to discuss accounting, auditing, and financial reporting matters.
Dennis L. Winger
Senior Vice President and
Chief Financial Officer
Tony L. White
Chairman, President, and
Chief Executive Officer
Report of Independent Registered Public Accounting Firm |
| |
To the Stockholders and Board of Directors of
Applera Corporation |
In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of operations, of stockholders’ equity, and of cash flows present fairly, in all material respects, the financial position of Applera Corporation and its subsidiaries at June 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Stamford, Connecticut
July 28, 2004
Back to Contents
Board of Directors
Tony L. White
Chairman, President, and
Chief Executive Officer,
Director Since 1995(1)
Richard H. Ayers
Retired Chairman and
Chief Executive Officer
The Stanley Works
Director since 1988(1,2)
Jean-Luc Bélingard
President and Chief Executive Officer
Ipsen Group
Director since 1993(3,4,5)
Robert H. Hayes, Ph.D.
Phillip Caldwell Professor, Emeritus
Harvard Business School
Director Since 1985 (1,2,5)
Arnold J. Levine, Ph.D.
Professor, Institute for
Advanced Study
Director since 1999(3,4,5)
William H. Longfield
Retired Chairman and
Chief Executive Officer
C.R. Bard
Director since 2003(3,4)
Theodore E. Martin
Retired President and
Chief Executive Officer
Barnes Group Inc.
Director since 1999(2)
Carolyn W. Slayman, Ph.D.
Sterling Professor and
Deputy Dean
Yale University School
of Medicine
Director since 1994 (1,3,4,5)
Orin R. Smith
Retired Chairman and
Chief Executive Officer
Engelhard Corporation
Director since 1995 (3,4)
James R. Tobin
President and Chief
Executive Officer
Boston Scientific
Corporation
Director since 1999 (2)
Committee Memberships:
1 Executive Committee
2 Audit/Finance Committee
3 Management Resources Committee
4 Nominating/Corporate
Governance Committee
5 Technology Advisory Committee
Corporate Officers
Tony L. White*
Chairman, President, and
Chief Executive Officer
Robert F. G. Booth, Ph.D.
Vice President
Celera Genomics
Samuel E. Broder, M.D.
Vice President
Celera Genomics
Catherine M. Burzik*
Senior Vice President and President
Applied Biosystems
Ugo D. DeBlasi
Vice President and Controller
Paul D. Grossman, Ph.D.
Intellectual Property
Applied Biosystems
Vikram Jog
Vice President
Celera Genomics and
Celera Diagnostics
Barbara J. Kerr*
Vice President
Human Resources
Laura C. Lauman
Vice President
Applied Biosystems
Victor K. Lee, Ph.D.
Intellectual Property
Celera Diagnostics
Thomas P. Livingston
Vice President and Secretary
Wayne W. Montgomery
Intellectual Property
Celera Genomics
Sandeep Nayyar
Finance
Applied Biosystems
Tama Olver
Vice President and Chief
Information Officer
Kathy Ordoñez*
Senior Vice President and President
Celera Genomics and Celera Diagnostics
John S. Ostaszewski
Vice President and Treasurer
Robert P. Ragusa
Vice President
Applied Biosystems
William B. Sawch*
Senior Vice President and
General Counsel
Michael G. Schneider
Vice President
Applied Biosystems
Mark N. Stevenson
Vice President
Applied Biosystems
Thomas J. White, Ph.D.
Vice President
Celera Diagnostics
Dennis L. Winger*
Senior Vice President and
Chief Financial Officer
* Member, Management
Executive Committee
Back to Contents
Principal Offices
Applera Corporation
301 Merritt 7
Norwalk, CT 06851-1070
Tel 203.840.2000
Toll Free 800.761.5381
www.applera.com
Mailing address:
Applera Corporation
301 Merritt 7
P.O. Box 5435
Norwalk, CT 06856-5435
Applied Biosystems
850 Lincoln Centre Drive
Foster City, CA 94404
Tel 650.570.6667
Toll Free 800.874.9868
www.appliedbiosystems.com
Celera Genomics
45 West Gude Drive
Rockville, MD 20850
Tel 240.453.3000
Toll Free 877.235.3721
www.celera.com
Celera Diagnostics
1401 Harbor Bay Parkway
Alameda, CA 94502
Tel 510.749.4200
Toll Free 866.235.3723
www.celeradiagnostics.com
Stockholder Response Center
Equiserve Trust Company, N.A.,
the stockholder services and transfer agent, will answer questions about accounts, certificates, and dividends. Please call toll-free 800.730.4001 or write to:
Equiserve Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
www.equiserve.com
Dividend Reinvestment
The Applied Biosystems Dividend Reinvestment Plan provides owners of Applera-Applied Biosystems stock with a convenient, automatic, and inexpensive way to purchase additional shares. For information and an enrollment form, contact EquiServe Trust Company at the address above.
Stockholder Publications
Applera Corporation information, including quarterly earnings releases, is available by calling 800.762.6923. This menu-driven system allows callers to receive specific news releases by fax within minutes of a request. Corporate publications, including the annual report, proxy statement, and Securities and Exchange Commission filings (Forms 10-K, 10-Q, etc.), may also be requested and will be sent by mail.
Stock Exchange Listings
The Applera-Applied Biosystems and Applera-Celera Genomics stock are listed on the New York and Pacific exchanges under the symbols ABI and CRA, respectively.
Form 10-K
A copy of the annual report to the Securities and Exchange Commission on Form 10-K may be obtained without charge by writing to the Secretary at the 301 Merritt 7 corporate address.
Information Via Internet
Internet users can access information on Applera Corporation, its public announcements, including press releases, quarterly conference calls, products, and services, and other items of interest, at the following addresses:
www.applera.com
www.appliedbiosystems.com
www.celera.com
www.celeradiagnostics.com
Alternatively, you may request this information by writing to:
Applera Corporation
Corporate Communications
850 Lincoln Centre Drive
Foster City, CA 94404
Annual Meeting
The Annual Meeting of Stockholders will be held on Thursday, October 21, 2004, at 9:30 a.m. at 301 Merritt 7, Norwalk, CT 06851.
Investor Relations & Corporate Communications
Peter Dworkin, Vice President
Investment professionals should call 650.554.2449.
News media representatives and others seeking general information should call 650.638.6227.
Equal Employment Opportunity and Affirmative Action
Applera Corporation has long been committed to Equal Employment Opportunity and Affirmative Action. A policy of positive action is the foundation of this commitment and is typified at Applera Corporation by programs directed toward responsible community involvement.
ABI PRISM, Applied Biosystems, SQL*LIMS, and MicroSeq are registered trademarks and AB (Design), Applera, Celera, Celera Diagnostics, Celera Genomics, iTRAQ, iScience, iScience (Wordmark/Design), Science for Life, SNPlex, VariantSEQr, and ViroSeq are trademarks of Applera Corporation or its subsidiaries in the US and/or certain other countries.
Q TRAP is a registered trademark of Applied Biosystems/MDS SCIEX Instruments MDS Inc., a joint venture between Applera Corporation and MDS Inc. ICAT is a registered trademark of University of Washington, exclusively licensed to Applied Biosystems Group of Applera Corporation. TaqMan is a registered trademark of Roche Molecular Systems, Inc. IRESSA is a registered trademark of the AstraZeneca group of companies.
®2004 Applera Corporation. All rights reserved.
| | | | | |
| | | | Glossary | |
| | | | | |
| | | Analyte specific reagents
(ASRs) | The active ingredient used by appropriately licensed clinical laboratories for developing in-house, or “home brew” diagnostic tests. The clinical laboratory must independently establish and maintain the performance of the test. ASRs have not been evaluated by the U.S. Food and Drug Administration (FDA). | |
| | | Bioinformatics | The use of advanced computing techniques to manage and analyze large amounts of biological data. | |
| | | Biomarkers | A distinctive segment of DNA (e.g., a gene, a SNP, or several SNPs) or a protein that has been determined to be an indicator of a relevant biological condition, such as disease, predisposition to a disease, disease progression, disease regression, drug response, etc. | |
| | | Disease association studies | Large-scale studies seeking to link genetic markers to disease or to therapeutic response. The studies compare genotype and/or gene expression profiles in various sample populations to identify and validate novel genetic markers. Findings may be relevant for diagnostic and/or therapeutic applications. | |
| | | Genome | The total hereditary material, or DNA, of a cell, contained in the chromosomes located in the cell nucleus. | |
| | | Genomics | The scientific study of genes and their role in an organism’s structure, growth, health, disease, resistance to disease, etc. | |
| | | Genotyping | Studies to determine variations in DNA sequence among individuals, groups, or populations. Single Nucleotide Polymorphisms (SNPs), one type of genetic variations, may serve as genetic markers for disease or drug response. | |
| | | Gene expression analysis | Studies to identify patterns in gene activity, determining if a gene is “switched on” or “switched off.” Differences in gene expression patterns can serve as genetic markers for disease progression or response to therapy. | |
| | | Mass spectrometer | An instrument that determines the exact mass of charged particles or ions, used to find the mass of proteins and nucleic acids, sequence proteins and peptides, and analyze biological samples in complex mixtures. | |
| | | Microarray | Artificially constructed grids of DNA such that each element of the grid probes for a specific RNA sequence and allows researchers to determine the expression of genes from different tissue samples. | |
| | | Polymerase chain reaction (PCR) | A method for creating millions of copies of a particular segment of DNA so that a scientist may be better able to study its composition or characteristics. | |
| | | Pharmacogenomics | The science of understanding the correlation between an individual patient’s genetic make-up (genotype), and his or her response to drug treatment. | |
| | | Proteomics | The scientific study of proteins and their role in an organism’s structure, growth, health, disease, resistance to disease, etc. | |
| | | Real-time PCR | PCR that during the amplification cycle measures with high precision the level of gene expression. | |
| | | Sequencing / Resequencing | Sequencing is the process of determining the order of nucleotides in a DNA or RNA molecule. Resequencing is the comparative sequencing of candidate genes or other genomic regions of interest in patients and control populations to find the inherited basis of disease and individual drug response. | |
| | | SNP | See “Genotyping.” | |
| | | Systems biology /
Integrated science | Rather than focusing on individual genes, proteins or other component parts, systems biology is an integrative approach that unites technology, informatics and traditional laboratory research to study networks of these components in the context of the whole organism. | |
| | | Targeted medicine | Prevention and earlier detection of disease and the tailoring of treatments to patients based on genetic factors and understanding the molecular basis of disease. Encompasses new diagnostic tests to help physicians predict, characterize, monitor, and select therapies. This new paradigm is sometimes referred to as “personalized medicine”. | |
| | | Therapeutic antibodies | Laboratory-engineered chemicals that recognize and bind with a specific protein target to disrupt a disease process or to carry a drug to the target. | |
| | | | For a broader reference of biotechnology terms, see www.geneticmedicine.org | |
| | | | | |
Applera Corporation tel 203.840.2000
301 Merritt 7 www.applera.com
Norwalk, CT 06851 |
