Free Declaration in Support - District Court of California - California

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EXHIBIT 1

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APPLIED BIOSYSTEMS. INC.

1992 Annual Report

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1

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APPLIED
~IOSYSTEMS' PRODUCTS

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AND MARKETS

Products

I

Instruments

DNA/RNA synthesizers DNA sequencer DNA fragment analyzer

Molecular biology lab station DNA/RNA extractor Peptide synthesizers Protein sequencers

Amino acid analyzer Data analysis systems Electrophoretic systems HPLC systems

I

Consumables

Buffers Reagents Solvents Enzymes

HPLC columns Capillary tubes Dye labels Amino acids

Nucleic acids Synthesis columns Polystyrene filters Collection vials

I

Services

Training Educational Seminars

Technical Support

Maintenance

Markets/Applications

More than 95% ofApplied Biosystems' product sales occur in the life science research market. The additional markets listed below are emerging markets for the Company's products.

I Life Science Research
Life science researchers identify the structure of DNA, RNA, or proteins, enabling their understanding of the function and inter-relationships of these molecules.

I Diagnostics
As researchers identify gene sequences associated with certain disorders, DNA testing can be performed to

provide early information about diseases such as colon cancer, breast cancer, Alzheimer's, and Duchenne muscular dystrophy.

I

Therapeutics

Synthetic DNA can be modified to make antisense DNA - a very specific treatment for certain diseases such as cancer, inflammatory disorders, and AIDS.

I

Forensics

DNA-based human identification testing is a rapidly growing market. It includes areas such as criminal forensics, paternity testing, and military identification.

I

Agriculture/Animal Husbandry

DNA analysis offers a very accurate and relatively rapid method for improved plant and animal breeding.

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APPLIED BIOSYSTEMS' CUSTOMER PROFILE

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Fiscal 1992 Sales by Customer Type

Pharmaceutical 18%

Government 20%

Biotech/Industrial 25%

-----~

Universities 37%

Fiscal 1992 Sales by Geographic Region

Americas 49%

Europe 25%

Asia/Pacific 26%

Tl~~~," ------~~ ,.

------~

..

Sales by Product Type (in millionsof dollars)
FiscalYear
88

89 90
91

92
50 - - - - Consumables/Services
_ _ _1liiI

100 Instruments

150

200

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APPLIED BIOSYSTEMS' FINANCIAL HIGHLIGHTS

YearendedJune 30 (In thousands, except pershareamounts and employees)
1992 1991

1990

1989

1988

Net Sales Research & Development Expenses Income (loss) from Operations Net Income (loss) Net Income (loss) per Share Working Capital Total Assets Long-Term Obligations Shareholders' Equity Shares Outstanding (at year end) Employees

$182,803 26,231 (16,228) * (15,859) (1.10) $ 81,397 200,874 14,635
139,!J28

$163,886 21,727 (3,901) ** (2,841) (.20) $ 75,966 194,064 12,642 152,478 14,264 1,244

$158,890 21,815 5,744 6,088 .43 $ 75,426 188,393 5,603 152,996 14,044 1,334

$158,055 18,568 29,420 19,262 1.38 $ 78,283 174,536 4,219 142,330 13,838 1,286

$132,131 15,680 27,513 17,028 1.25 $ 77,752 150,924 0 115,643 13,468 959

14,484 1,259

*Fisca11992income(loss) from operations includes a $22 million product line discontinuance/facility relocation charge. **FiscaI1991 income(loss) from operations includes a $5 millionfacility relocation charge.

R&D Expenditures
(in millions of dollars) Fiscal Year 88
89 90 91

92
5

10

15

20

25

30

Sales by Product Line
(in millions of dollars) Fiscal Year
88 89 90 91

92
50
---DNA
IIIIIIIIIIIIIIIIIIIII

100
Protein

150

200

Applied Biosystems, Inc.

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Michael W. Hunkapiller, Ph.D., Executive Vice President Andre F. Marion, Chairman, President, and Chief Executive Officer Robert W. Carroll, Executive Vice President

We are pleased with the progress that we have made in fiscal 1992 and expect to build on this momentum for the future. We will continue to provide superior support for our customers and invest aggressively in new product development.

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TO OUR SHAREHOLDERS:

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Fiscal 1992 was a year of significant achievements for Applied Biosystems. Sales grew more than 11%; gross margin increased; and selling, general and administrative expenses declined as a percent of sales. We continued to fund research and development at a level that enables Applied Biosystems both to improve product offerings in the research market and to develop products for new markets. During the year, we introduced three new instruments and a variety of new consumables that expand the utility of our existing systems (these new products are highlighted on the last page of the feature section). Our steady progress in the area of antisense DNA research led to the formation of a new subsidiary, Lynx Therapeutics, Inc. Product development for the diagnostic market also accelerated. Our financial position remains solid due to excellent asset management. Our cash position is strong, inventory levels are down reflecting improved efficiencies, and we have little debt.
Positive Trends Underlie Top Line Sales Growth

For the year, we reported total sales of$183 million compared to $164 million in fiscal 1991. This growth was achieved by gains in market share, modest increases in instrument sales, and our continued introduction of new consumable products that increase the versatility of Applied Biosystems' instruments. The most significant sales growth occurred in products related to DNA research. DNA instrument, consumable, and service products grew an outstanding 31 %, compared to last year's level, and now account for over 60% of total sales. While sales of protein products declined slightly in fiscal 1992 mirroring an industry-wide slowdown of purchases

in this market segment - capillary electrophoresis and peptide synthesis sales increased at a healthy rate. Market share remained strong in all key protein products. Overall, Applied Biosystems' instrument sales grew more than 5% in fiscal 1992, bringing our total installed instrument base to over 8500 systems worldwide. This expanding base, combined with the introduction of new consumable products, fueled an 18% increase in the Company's consumable and service product sales.

Applied Biosystems, Inc.

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European sales were sluggish in fiscal 1992 due primarily to economic and political turmoil which negatively affected research funding. In the Asia/Pacific region, however, the actions we have taken over the last several years contributed to a strong 24%

,
sales increase in fiscal 1992. Sales in the Americas grew 14%, strengthened by improved marketing and sales efforts.
Key Operating Results I

Gross margin improved to 48% from 47% last year, largely due to growing sales of our highmargin consumable products and increased instrument volume which reduced per unit costs. Our cost control efforts paid off as selling, general and administrative expenses fell from 32% of sales in fiscal 1991 to 30% this year. We also took steps in fiscal 1992 to strengthen Applied Biosystems for future growth. We increased our investment in research and development from 13% of sales last year to 14% in fiscal 1992. Additionally, our ongoing assessment of profitable markets led to important decisions regarding certain Applied Biosystems technologies and businesses. Accordingly, in our fourth quarter we incurred a $22 million charge to write down goodwill and other intangibles with little or no continuing value and to reserve for the closing of a small, mass analysis operation in Uppsala, Sweden. While this charge negatively impacted our 1992 operating results, it will reduce expenses by approximately $5 million per year for the next two years, with continued but lesser benefits beyond. Excluding the fiscal 1992 charge of $22 million, operating income in fiscal 1992 was $5.8 million. Reflecting the impact of this charge, we recorded a net loss of$15.9 million, or $1.10 loss per share, for fiscal 1992.
Exciting New Markets For Our Technology
I

Our antisense DNA research efforts, which have been ongoing since 1987, were strengthened this year by a number of collaborations and exclusive licenses. In order to focus the efforts of this group further, we formed a new subsidiary, Lynx Therapeutics, Inc. We are actively seeking financial and other partners to solidify Lynx's position in this exciting new market.

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Lynx's current and planned projects include development of antisense therapeutics for acute and chronic myelogenous leukemias, melanoma, colorectal cancer, and human immunodeficiency virus (HIV). Lynx expects to file at least one investigational new drug (IND) application by late 1992. We also made good progress this year applying our DNA analysis expertise to product development for the diagnostic market. During the year, we increased research staffing and built labs specifically tailored for diagnostic product research and development.
Outlook For 1993 and Beyond
I

In fiscal 1993 we expect to continue the momentum of this past year. Our goal is to grow sales, improve gross margin, and reduce operating expenses as a percent of sales, increasing our profits. We will continue to invest aggressively in new product development, expanding our position in both life science research and related markets such as forensics, therapeutics, and diagnostics. We will also fuel growth of our consumable and service revenues by introducing new instruments that broaden our installed base and new consumable products that enhance our existing systems. We are pleased with the progress that we made in fiscal 1992. We are clearly moving forward. This could not have been achieved without the involvement of our employees, the loyalty of our customers, and the support of our shareholders. Many thanks to all for helping us continue our growth.

AndreE Marion Chairman, President, and ChiefExecutiveOfficer September 8, 1992

RobertW Carroll Executive Vice President

MichaelW Hunkapiller; Ph.D. ExecutiveVice President

Applied Biosystems, Inc.

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NEW RESEARCH PRODUCTS/LICENSES FOR CONTINUED GROWTH

Applied Biosystems' strong commitment to developing new technologies has led to a wide variety of product enhancements and new product introductions. The six new instruments and wide variety of consumable products introduced in fiscal 1991 have met fiscal 1992 sales expectations. In particular, the CATALYST Molecular Biology LabStation, INHERIT Data Analysis System, and a host of DNA sequencing kits have been very well received by researchers. In fiscal 1992 the Company introduced three new instruments. The Model 390Z Large Scale DNA Synthesizer accommodates large scale production of synthetic DNA, while the Model 172 Biopolymer Micropurification and Analysis System is designed for specific separation requirements in life science research applications. The Model 476 Microsequence Analysis System replaces the Model 473 and enhances the Company's family of protein sequencer products. It provides high throughput, chemistry versatility, and also accommodates a variety of sample preparation strategies. We also introduced a number of new consumable products in fiscal 1992 - for example, TAQ and PCR DNA sequencing kits, FAMAmidites, and ProSpin Cartridges - that expand the utility of our existing instruments. Applied Biosystems also enhanced its position in the DNA analysis and human identification markets in fiscal 1992 by entering into license agreements with Dynal A.S.; Dupont; Hoffman-La Roche/Perkin-Elmer Corporation; Genmark, Inc; Baylor College of Medicine; and Cornell University.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Applied Biosystems (ABI) is a leading supplier of automated systems for life science research and related applications. ABI develops, manufactures, and markets instruments and associated consumables for the purification, analysis, interpretation of results, and synthesis of biological molecules such as DNA, RNA, and proteins. ABI also provides technical support, training, maintenance, and repair services for its systems.

[

Results of Operations

Fiscal Year 1992 us. Fiscal Year 1991

Net sales in fiscal 1992 were $182.8 million comparedto $163.9 million in fiscal 1991. Instrument sales were approximately $91.0 million, an increase of 5%, compared to fiscal 1991 sales of $86.4 million. This was attributable to unit instrument shipment increases which were partially offset by lower average unit prices in certain product lines; the lower prices were principally attributable to selective price decreases made early in fiscal 1991 in response to competition. Fiscal 1992 sales of consumable products and services were approximately $91.8 million, an increase ofl8% compared to fiscal 1991 sales of approximately $77.5 million. Sales of consumable products and services increased due to an increase in the size of the installed instrument base, higher utilization rates within portions of the installed base, introduction of new products, and an increased emphasis on service products. ABI's ability to achieve its fiscal 1993 operating plan is uncertain due to a number of factors including government funding levels, commercial capital spending levels, and competitive price pressures. ABI's fiscal 1993 operating plan anticipates continued sales growth of consumable and service products at a rate similar to that seen in fiscal 1992. Instrument sales are also planned to increase.
~

Sales denominated in foreign currencies are expected to continue to account for a substantial portion of future sales. Due to the variability of exchange rates, the future impacts that foreign exchange rates may have upon sales and income cannot be accurately predicted. At the end of fiscal 1991, ABI purchased foreign currency option contracts in an effort to lessen unfavorable impacts if the dollar were to strengthen during fiscal 1992. The costs of these unexercised contracts reduced fiscal 1992 sales by approximately $0.9 million. ABI expects to continue utilizing foreign currency option contracts, when appropriate, in its foreign currency hedging program. ABI has purchased foreign currency option contracts at a cost of $0.6 million to reduce potential exposure during fiscal 1993. Gross margin was 48.4% in fiscal 1992 compared to 47.2% in fiscal 1991. The increase was primarily due to increased volume of consumable products and instruments, sale of instruments with higher margins, and changes in geographic sales mix. The increase was partially offset by lower average unit prices in certain product lines as discussed above, and increased amortization of capitalized software development costs. Research and development expenses, net of capitalized software development costs, were $26.2 million, or 14.3% of sales, in fiscal 1992 compared to $21.7 million, or 13.3% of sales in fiscal 1991. The amount of software . development costs capitalized in fiscal 1992 was $1.6 million less than in fiscal 1991 due to differing stages of product development cycles. The balance of the increase in total spending was a result of continued investment in life science research products, therapeutics, and diagnostics, primarily due to increased headcount and higher project materials and supplies expenses. ABI intends to continue to invest heavily in research and development; the amount devoted to new business areas, primarily diagnostics and therapeutics, is planned to increase in fiscal 1993.

i

I

I

International sales in fiscal 1992 were approximately 54% of total sales compared to approximately 55% in fiscal 1991. Substantially all international sales were denominated in foreign currencies and the U.S. dollar equivalent fluctuated with the movement of foreign currency exchange rates. Fiscal 1992 sales would have been approximately $0.4 million, or .2%, higher if foreign currency rates had been the same as those in each comparable period of fiscal 1991.

Applied Biosystems. Inc.

1

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As previously announced, ABI has formed a separate

subsidiary, Lynx Therapeutics, to develop, make, and sell therapeutic products based on its synthetic DNA technologies and expertise. For each of the three fiscal years beginning in fiscal 1990, ABI has spent $1.1 million, $1.4 million, and $2.1 million, respectively, on therapeutic research and development activities. Therapeutic revenues were $1.0 million in fiscal 1992 and $0.6 million in fiscal 1991. By creating this separate entity and seeking equity financing for it, ABI expects to exclude similar or greater research and development expenses from future years' operating results while still maintaining an ownership position in an entity with substantial potential value for future product development. Selling, general and administrative expenses increased in absolute terms but decreased as a percentage of sales to 29.9% in fiscal 1992 from 32.2% in fiscal 1991. Increased spending occurred in selling and marketing expenses in the United States andJapan. These increases were partially offset by reduced general and administrative costs in the United States as a result of the liquid chromatography operations relocation discussed below. A significant portion of selling, general and administrative expenses were denominated in foreign currencies and the U.S. dollar equivalent fluctuated with the movements in foreign currency exchange rates. Fiscal 1992 expenses would have been higher by approximately $0.5 million, or .9%, if the foreign currency rates in fiscal 1992 had been the same as those in the comparable accounting periods of fiscal 1991. Based upon a strategic assessment of its profitable markets, ABI recorded a $22 million charge to write down goodwill and other intangibles from acquisitions and to provide for costs of closing a small operation in Uppsala, Sweden and a manufacturing facility in San Jose, California. Approximately $15 million of the charge is associated with prior business and technology acquisitions. ABI expects that lower amortization and improved

efficiencies related to the closures should result in annual savings of approximately $5 million in fiscal years 1993 and 1994 and lesser amounts in each of the next several fiscal years. In the first quarter of fiscal 1991, a $5.0 million charge was recorded in connection with the relocation of the liquid chromatography components operation. Net interest income in fiscal 1992 declined to $0.7 million from $1.2 million in fiscal 1991. The decrease was primarily due to completion of the Japanese manufacturing facility in the fourth quarter of fiscal 1991; upon completion, interest costs were charged to expense instead of being capitalized as a part of construction costs. The income tax provision in fiscal 1992 was zero, primarily as a result of the $22 million charge which resulted in a limited tax benefit, compared to a 12% rate in fiscal 1991. During fiscal 1992, ABI adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", effective at the start of fiscal 1990. The cumulative effect of this accounting change at July 1, 1989, and the impact of the change on the fiscal 1991 and 1990 tax provisions were not material. The impact of inflation on ABI's financial position and the results of operation has not been material during the three-year period endingJune 30, 1992. Fiscal Year 1991 vs. Fiscal Year 1990 Net sales in fiscal 1991 were $163.9 million compared to $158.9 million in fiscal 1990. Sales of consumable products and services increased 24% to approximately $77.5 million in fiscal 1991 from approximately $62.7 million in fiscal 1990. Instrument sales were approximately $86.4 million in fiscal 1991, a decrease of 10% compared to the prior fiscal year. Fiscal 1991 sales were lower due to selective price decreases, changes in geographic sales mix, and shifts from higher to lower priced products within some product lines. Consumable product sales and service revenue increased due to the increase in the total installed instrument base, higher utilization rates within the installed base, and introduction of new products. Fiscal 1991 international sales were approximately 55% of total sales, a decrease of three percentage points from fiscal 1990. The effect of differing foreign currency exchange rates between periods increased sales by $6.9 million, or 4%.

2

Applied Btosystems. Inc.

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Gross margin was 47.2% in fiscal 1991 compared to 49.9% in fiscal 1990. The decrease was primarily due to lower instrument prices, unfavorable instrument manufacturing capacity variances, and increased service function spending, partially offset by foreign currency impacts. Research and development expenses, net of capitalized software development costs, were 13.3% of sales in fiscal 1991 compared to 13.7% in fiscal 1990. Capitalized software development costs were $1.4 million and $2.0 million in fiscal 1991 and fiscal 1990, respectively. Total spending was reduced as a result of the consolidation of the liquid chromatography operations discussed below. Selling, general and administrative expenses, as a percentage of sales, were 32.2% in fiscal 1991 and 31.4% in fiscal 1990. The increase was due to the impact offoreign currency exchange rates and legal costs. In fiscal 1991, a $5.0 million charge was recorded in connection with the relocation of the liquid chromatography components operation. The charge was primarily due to employee severance costs, moving expenses, and lease termination costs. Net interest income was $1.2 million and $1.1 million in fiscal 1991 and fiscal 1990, respectively. The effective tax rates were 12% in fiscal 1991 and 10% in fiscal 1990. Both reflect benefits available from tax credits.
Liquidity and Capital Resources

ABI has sufficient instrument manufacturing capacity to meet market opportunities that may arise over the next two years and could increase shipments without substantial capital investment. Due to operational efficiency gains during fiscal 1992, certain expansions of consumable products capacity which were planned during fiscal 1992 have been delayed until fiscal 1993. Real property with an estimated value of approximately $20 million is held for sale, and if sold would result in additional liquidity.
Company Stock Information

The common stock of ABI is traded under NASDAQ symbol ABIO. There were approximately 2,084 shareholders of record onJune 30,1992. No dividends have been paid on the common stock.
1992
High
Low

1991
High
Low

First Quarter Second Quarter Third Quarter Fourth Quarter

$14.25 $17.00 $18.00 $16.00

$11.00 $12.25 $13.25 $12.00

$14.25 $12.25 $18.00 $17.75

$ 7.00 $ 6.50 $10.75 $10.38

Cash and equivalents increased by $14.5 million, or 58% during fiscal 1992. Cash was provided by operations, $22.4 million, and issuance of common stock, $2.9 million. Investing activities used $10.1 million, primarily for purchases of equipment and technology. ABI expects current cash balances and cash generated from operations to satisfy planned financing needs during fiscal 1993. ABI has used debt to fund capital acquisitions and may again use debt or other means of financing capital acquisitions and operations as considered appropriate.

Applied Biosystems, Inc.

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For Fiscal Years EndedJune 30, 1992, 1991, and 1990

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CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

1992

1991

1990

Net sales Cost of sales Gross profit Operating expenses: Research and development Selling, general and administrative Product line discontinuance/facility relocation Amortization of goodwill Income (loss) from operations Currency exchange loss Interest income - net Income (lOSS) before income taxes Income taxes (benefit) Net income (loss) Net income (loss) per share Shares used in the computation
See notes to consolidated financial statements.

$182,803 94,332 88,471 26,231 54,718 22,000 1,750 (16,228) (294) 663 (15,859) $ (15,859) $ (1.10) 14,392

$163,886 86,498 77,388 21,727 52,701 5,000 1,861 (3,901) (519) 1,187 (3,233) (392) $ (2,841) $ (.20) 14,175

$158,890 79,618 79,272 21,815 49,902 1,811 5,744 (122) 1,142 6,764 676 $ $ 6,088 .43 14,110

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For Fiscal YearsEndedJune 30, 1992, 1991, and 1990

(In thousands)

Shares

Common Stock Amount

Retained Earnings

Shareholders' Equity

Balance, June 30,1989 Common stock issued Common stock issued for acquisition Net income Balance,June 30,1990 Common stock issued Net loss Balance, June 30,1991 Common stock issued Net loss Balance,June 30,1992
See notes to consolidated financial statements.

13,838 161 45 14,044 220 14,264 220 14,484

$76,179 3,368 1,210 80,757 2,323 83,080 2,909 $85,989

$66,151

6,088 72,239 (2,841) 69,398 (15,859) $53,539

$142,330 3,368 1,210 6,088 152,996 2,323 (2,841) 152,478 2,909 (15,859) $139,528

4

Applied Biosyslems, Inc.

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CONSOLIDATED BALANCE SHEETS
June 30, 1992 and 1991

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(In thousands)

1992

1991

Assets Current assets: Cash and equivalents Accounts receivable (less allowances of$1,136 in 1992 and $1,069 in 1991) Inventories: Finished goods Work in process Materials Prepaid and deferred income taxes Deposits and other

$ 39,246 40,590 14,190 4,000 10,919 14,866 4,297 128,108 32,931 15,860 21,058 69,849 (34,082) 35,767 36,508 491 $200,874

$ 24,768 36,643 14,274 3,882 13,747 7,253 4,255 104,822 31,133 36,057 19,157 86,347 (28,741) 57,606 31,636 $194,064

Total current assets Property, plant and equipment (at cost): Machinery and equipment Land and buildings Leasehold improvements Total Accumulated depreciation and amortization Property - net Intangibles and other assets - net Deferred income taxes Total
Liabilities and Shareholders' Equity Current liabilities: Accounts payable Accrued liabilities: Compensation Warranty Facility closure/relocation Other Income taxes payable Deferred revenues Current portion -long-term obligations

$

6,204 7,290 3,282 3,837 6,960 9,756 5,843 3,539 46,711 14,635

$

6,428 6,347 3,097 4,968 2,352 4,220 1,444 28,856 88 12,642

Total current liabilities Deferred income taxes Long-term obligations Commitments and contingencies Shareholders' equity: Common stock- issued and outstanding: 1992, 14,484 shares; 1991, 14,264 shares Retained earnings Shareholders' equity Total
See notes to consolidatedfinancial statements.

85,989 53,539 139,528 $200,874

83,080 69,398 152,478 $194,064

Applied Biosystems. Inc.

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For Fiscal Years EndedJune 30, 1992, 1991, and 1990

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

1992

1991

1990

Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Write-down of goodwill and other intangibles Changes in: Accounts receivable Inventories Accounts payable Accrued liabilities Deferred income taxes and income taxes payable Other liabilities Other-net Net cash provided by operating activities Cash flows from financing activities: Net proceeds from issuance of common stock Proceeds from bank borrowings Repayments on bank borrowings Net cash provided by financing activities Cash flows from investing activities: Acquisition of business Property and other assets purchased Technology purchased Software development costs Net cash used in investing activities Effect of exchange rate changes on cash Cash and equivalents: Increase (decrease) for the year Beginning of year End of year Other cash flow information: Interest paid (net of interest expense capitalized) Income taxes paid (net of income tax refunds received)

$(15,859)

$(2,841)

$ 6,088

15,670 15,335 (3,103) 2,071 (425) 6,431 (768) 1,559 1,506 22,417 2,909 (1,282) 1,627

14,656

12,793

(1,954) 4,180 1,866 (749) (3,453) 1,755 1,628 15,088 2,323 4,788 (823) 6,288

550 (7,475) (1,967) 2,085 729 633 (1,500) 11,936 3,368 2,354 (1,084) 4,638 (1,290) (23,264) (848) (2,003) (27,405) (444) (11,275) 30,747 $19,472 $ 221 1,579

(6,915) (3,001) (218) (10,134) 568 14,478 24,768 $ 39,246 $ 879 522

(12,534) (1,449) (1,373) (15,356) (724) 5,296 19,472 $24,768

$

269 1,582

Noncash investing and financing activities (in thousands): As described in Notes 3 and 4, in fiscal 1991 ABI borrowed $3,500 under an industrial development revenue bond issuance. Proceeds were used for the purchase ofland ($1,488) with the remaining proceeds deposited into a restricted cash account ($2,012). In fiscal 1992, ABI purchased technology in the amount of$6,181 of which $3,180 is due in future periods.

See notes to consolidated financial statements.

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Applied Blosystems. Inc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[!J

Significant Accounting Policies

Consolidation - The consolidated financial statements include Applied Biosystems, Inc. and its subsidiaries (ABI). Intercompany balances and transactions are eliminated in consolidation. Fiscal Year- ABI uses a 52-53 week fiscal year. The fiscal year ended July 3,1992 (fiscal 1992) includes 53 weeks. The fiscal years endedJune 28,1991 (fiscal 1991) and June 29,1990 (fiscal 1990) include 52 weeks. June 30 is used throughout these financial statements to designate the fiscal year-end. Revenues- Product sales are recognized upon shipment. Service contract revenues are recognized ratably over the terms of the related contracts. Foreign Currency- Monetary assets and liabilities denominated in a foreign currency are restated into United States dollars at exchange rates prevailing at fiscal year end, and the resulting gains and losses are included in determining net income (loss) for the period in which exchange rates change. Cash Equivalents - Cash equivalents are highly liquid debt instruments purchased with a remaining maturity of three months or less and are stated at cost which approximates market. Inventories-Inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or market. Depreciation and Amortization - Equipment is depreciated over its estimated useful life from three to five years using the straight-line method. Buildings and leasehold improvements are amortized over their estimated useful life or the term of the applicable lease, whichever is less, using the straight-line method. Intangibles, including excess of cost over net assets acquired, are amortized over the estimated periods of related benefit, ranging from five to twenty years, using the straight-line method. Amortization ofSoftwareDevelopment Costs- Capitalized software development costs are amortized based upon the greater of the straight-line method over the estimated economic life of three years or the ratio of current gross revenues to total expected gross revenues for the product. Warranty - Estimated future warranty obligations are accrued by charges to operations in the period related sales are recognized; revenues related to extended warranty contracts are deferred and recognized ratably over the terms of the contract.

Income Taxes- Deferred taxes are determined on the liability method in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Under SFAS 109, deferred taxes arise from the effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, and from the effect of operating loss carryforwards on taxes payable in future years based on currently enacted tax law. The measurement of deferred tax assets is reduced by a valuation allowance if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Net Income (Loss) per Share- Net income (loss) per share is calculated using the weighted average common shares outstanding during the period plus the dilutive effect of common stock equivalents resulting from common stock warrants and options. The difference between primary and fully diluted net income per share is not significant. Reclassifications- Certain prior year amounts have been reclassified to conform to the fiscal 1992 presentation.

[!]

Product Line Discontinuance/Facility Relocation

Based upon a strategic assessment of its profitable markets, ABI recorded a $22,000,000 charge in the fourth quarter of 1992 to write down goodwill and other intangibles with limited or no continuing value ($15,335,000); to reserve for the closing of its Swedish operation ($4,065,000); and to accrue for expenses related to the closure and relocation of its San Jose manufacturing facility to ABI's headquarters ($2,600,000). The Swedish operation was acquired in October 1989 for approximately $2.5 million: $1.3 million in cash and $1.2 million in common stock. The acquisition was accounted for as a purchase; the unamortized excess of cost over net assets acquired was included in the write-down of goodwill described above. In the first quarter of fiscal 1991, ABI recorded a $5,000,000 charge in connection with the relocation of its liquid chromatography components operation from New Jersey to existing California facilities.

Applied Biosystems. Inc.

7

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[!J

Intangibles and Other Assets

Intangibles and other assets consist of:
(In thousands)

1992

1991

Excess of cost over net assets acquired (goodwill) Other intangibles from acquisitions Purchased technologies Real property held for sale Restricted cash Real property Software development and other Total Accumulated amortization of: Excess of cost and other intangibles from acquisitions Purchased technologies Software development and other Intangibles and other assets - net

$ 2,622 1,800 10,143 19,026 2,012 1,773 4,431 41,807

$23,042 5,730 14,150 2,012 1,645 5,211 51,790

In fiscal 1991, ABI borrowed $3.5 million from the California Statewide Communities Development Authority which issued tax-exempt industrial development revenue bonds on behalf ofABI. Proceeds will be used to finance the construction of manufacturing facilities. Interest varies weekly based on tax-exempt market rates of similar issues (2.6% at June 30,1992). ABI is obligated to maintain certain working capital and tangible net worth ratios. There are limits on the total cost for the manufacturing facility and on the time within which the project must be completed. Yen denominated bank notes include fixed rate notes (5.4% and 6.2%) and notes bearing interest at the banks' long-term prime rates (6.4% and 6.1% atJune 30, 1992). Principal payments on long-term obligations are $3,539,000 in fiscal 1993, $2,439,000 in fiscal 1994, $2,339,000 in fiscal 1995, $1,722,000 in fiscal 1996, $822,000 in fiscal 1997, and $5,047,000 thereafter. Longterm debt is collateralized by certain real property with a net book value of approximately $14,658,000. ABI has available and unused lines of credit totaling approximately $12,167,000 atJune 30,1992, of which $5,000,000 was irrevocably committed. In fiscal 1991, interest costs in the amount of $529,000 were capitalized to various construction projects.

(2,164) (2,063) (1,072) $36,508

(10,179) (9,395) (580) $31,636

Fiscal 1992, 1991, and 1990 cost of sales include $1,083,000, $382,000, and $229,000, respectively, of amortized software development costs. Real property held for sale, stated at the lower of cost or estimated fair value, consists of former manufacturing facilities in San Jose, California. AtJune 30, 1991 this property was classified as property, plant and equipment. Real property consists ofland and related acquisition costs for property purchased in connection with the future construction of manufacturing facilities, while restricted cash consists of amounts on deposit to be used for the construction of such facilities (see Note 4).

[!]

Capital Stock

AtJune 30,1992, authorized capital consists of 50,000,000 shares of no par common stock and 2,000,000 shares of preferred stock; no preferred shares are outstanding.

[!]

Long-Term Obligations

Long-term obligations consist of:
(In thousands)

1992

1991

Ownership Rights- Becton Dickinson and Company, a shareholder owning approximately 20% ofABI's outstanding common stock, has the right to purchase additional shares necessary to maintain its 20% ownership interest.
Warrants - Warrants to purchase 65,000 common shares at $18.00 per share were issued previously in connection with a research and development contract with Genetic Systems Diagnostic Partners. Remaining unexercised warrants expired on December 31,1991. Warrants to purchase 1,900 common shares were exercised in 1990.

Industrial development bonds, due through 2010 Yen denominated bank notes with maturities through 2005 Purchased technology obligations Subtotal Non-current accrued liabilities Less current portion

$ 3,325 8,688 3,895 15,908 2,266 (3,539) $14,635

$ 3,500 9,107 935 13,542 544 (1,444) $12,642

Warrants to purchase 30,000 common shares which were issued previously in connection with research and development contracts expired unexercised on December 17,1991.

8

Applied Biosystems, Inc.

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Page 23 of 28

Stock Option and Purchase Plans - Stock options under ABI's 1992 Stock Option Plan (the "Plan") may be granted to employees, directors, and consultants to purchase an aggregate of 2,000,000 common shares. Incentive stock options may be granted at prices not less than the fair market value of common stock on the date of grant; nonstatutory stock options may be granted at prices ranging from 85% to 100% of the fair market value on the date of grant. Options issued under the Plan become exercisable at rates determined by the Board of Directors and expire ten years from the date of grant. The Plan was adopted by the Board of Directors in January 1992, subject to shareholder approval in October 1992. The total number of shares authorized under earlier plans was 4,037,500; granted options will expire at various dates through the year 2001 and have terms similar to those issued under the Plan.
In August 1990, options to purchase approximately 1,500,000 common shares at $11.25 per share (which approximated market value) were granted to 902 employees and outstanding options to purchase a like number of shares with similar vesting schedules and other terms were cancelled. Common stock option activity is summarized as follows:
Weighted Average Price Per Share

AtJune 30,1992, options to purchase 970,000 common shares were exercisable and 1,836,000 common shares were available for grant. Under ABI's employee stock purchase plan, 1,200,000 common shares have been reserved for issuance, of which 696,000 shares had been issued through June 30, 1992. Common shares issued under the plan in 1992, 1991, and 1990 were approximately 149,000,193,000, and 102,000, respectively. ABI contributes 25% of the purchase price of eligible stock purchases. Compensation expense for such contribution was $503,000, $388,000, and $568,000 in fiscal 1992, 1991, and 1990, respectively.

[!]

Significant Related Party Transactions

During fiscal 1992, 1991, and 1990, ABI incurred legal fees of $759,000, $1,008,000, and $395,000, respectively, with a law firm of which a partner is a member of ABI's Board of Directors.

[1J

Income Taxes

In fiscal 1992, ABI adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" effective July 1,1989. The cumulative effect of this accounting change at July 1,1989, and the impact of the change on the fiscal 1991 and 1990 tax provisions were not material. Income (loss) before income taxes for domestic and foreign operations were as follows:
(In thousands)

Shares

Outstanding, june 30,1989 Granted Exercised Cancelled Outstanding,june 30, 1990 Granted Exercised Cancelled Outstanding, june 30,1991 Granted Exercised Cancelled Outstanding,june 30,1992

1,516,000 597,000 (57,000) (236,000) 1,820,000 2,378,000 (27,000) (1,755,000) 2,416,000 607,000 (71,000) (138,000) 2,814,000

$19.72 18.56 16.21 20.46 19.36 11.49 12.19 19.15 11.84 16.67 12.92 13.03 $12.80

1992

1991

1990

Domestic Foreign Total

$(23,069) 7,210 $(15,859)

$(2,421) (812) $(3,233)

$3,273 3,491 $6,764

Income taxes (benefit) were as follows:
(In thousands)

1992

1991

1990

Current: Federal Foreign State Deferred: Federal Foreign State Total

$

2,940 4,016

$ (562) 587 75 (986) 494 $ (392)

$ (702) 1,142 (1,530) 1,045 (875) 1,596 $ 676

(4,631) (2,325) $

Applied Biosyslems, Inc.

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Page 24 of 28

The major differences between ABI's effective tax rate and the United States statutory rate were as follows:
(In thousands)

As ofJune 30,1991, the deferred tax balances consist of the following:
(In thousands) Assets Liabilities Total

1992

1991

1990

Income tax provision at statutory rate (34%) $(5,392) Nondeductible foreign losses 48 Utilization of foreign loss carryforwards and credits (396) Research and development (164) credits Nontaxable export income (209) Goodwill and other intangibles 5,710 Foreign taxes at higher rates 320 Foreign currency translation (gains) losses (263) Alternative minimum tax liability not creditable in future State taxes - net of Federal benefit Other-net 346 Total
$

$(1,099) 1,042 (476) (584) (346) 388 115 200

$2,300 58 (925) (842) (488) 369 169 40

Intercompany profit in inventory Inventory reserves Warranty reserves Depreciation Capitalized software Other Current Noncurrent Total

$3,062 1,533 702 426 1,738 7,461 0 $7,461 $(1,186) (523) (1,709) (88) $(1,797)

$3,062 1,533 702 426 (1,186) 1,215 5,752 (88) $5,664

[!]

Segment Reporting

135 50 183 $ (392) 44 (49) $ 676

ABI is engaged in the development, manufacture, and marketing of instruments and related consumables. ABI sells its products primarily to research laboratories and industrial companies engaged in life science and related applications. ABI has manufacturing, sales, and service operations in the United States, the United Kingdom, Japan, and Sweden. It also has sales and service subsidiaries in Australia, Canada, France, Germany, Italy, and the Netherlands. ABI, in fiscal year 1992, decided to close its operations in Sweden (see Note 2). Net sales by geographic area are shown in the following table:
(In thousands)

As ofJune 30,1992, the deferred tax balances consist of the following:
(In thousands) Assets Liabilities Total

Intercompany profit in inventory Inventory reserves Facilityreserves Warranty reserves Depreciation Capitalized software Other Current Depreciation Other Noncurrent Total

$ 2,702 2,541 2,802 1,046 781 3,872 13,744 720 398 1,118 $14,862 $ (628) (984) (1,612) (627) (627) $(2,239)

$ 2,702 2,541 2,802 1,046 781 (628) 2,888 12,132 720 (229) 491 $12,623

1992

1991

1990

United States: Domestic customers Foreign customers Intercompany Europe: Customers Intercompany Japan Other Eliminations and adjustments Net sales

$ 84,713 4,382 46,276 46,045 12,972 39,271 8,392 (59,248) $182,803

$ 73,506 6,013 46,157 47,005 10,683 30,845 6,517 (56,840) $163,886

$ 66,676 4,697 56,939 45,628 9,597 34,904 6,985 (66,536) $158,890

Net sales by geographic area include shipments to unaffiliated customers and intercompany transfers. Such intercompany transfers are made at discounts from selling prices. Customer sales by geographic location bear little relation to the manufacturing location; therefore, it is not practicable to present meaningful operating income by geographic area.

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Applied Biosystems, Inc.

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Identifiable assets are those assets of ABI that are used in each geographic area. Corporate assets are principally cash and equivalents, prepaid and deferred taxes, intangibles and other assets. United States assets decreased and corporate assets increased due to the reclassification of real property held for sale (see Note 3).
(In thousands)

1992

1991

Identifiable assets: United States Europe Japan Other Eliminations and adjustments Corporate assets Total assets

$ 67,253 24,135 37,115 4,081 (17,528) 85,818 $200,874

$ 96,522 25,358 34,403 3,285 (23,440) 57,936 $194,064

rates. The forward contracts are contracts requiring ABI to deliver foreign currencies at specified future dates and prices; and the option contracts are contracts whereby ABI has the option to deliver foreign currencies within a specified period of time at a specified price. At June 30,1992, ABI had foreign exchange forward contracts and foreign currency option contracts with major financial institutions in the amounts of $10,802,000 and $27,664,000, respectively. ABI is exposed to foreign exchange loss in the event of nonperformance by financial institutions who are party to these contracts; however, ABI does not anticipate nonperformance by such financial institutions.
~ Contingencies

[!]

Commitments

operating Leases- ABI leases facilities and equipment under operating leases with aggregate minimum annual lease payments, subject to escalation, as follows at June 30,1992:
(In thousands)

Two purported class action suits have been filed against ABI alleging that misleading statements and mismanagement led to declines in ABI's stock price during fiscal years 1987 and 1990. The complaints do not specify the amount of damages sought, although it is anticipated that plaintiffs will eventually seek damages in the millions of dollars. Other claims have been filed or are pending against ABI concerning intellectual property and other matters. In management's opinion - based on its knowledge, discussion with legal counsel, and other considerations the ultimate resolution of the above-mentioned proceedings will not have a material adverse effect on ABI's consolidated financial position.

1993 1994 1995 1996 1997 Thereafter
Total

$ 5,582 4,435 3,530 3,596 3,711 11,711 $32,565

[!!]

Employee Benefit Plan

Rent expense was $5,629,000, $4,816,000, and $3,833,000 in fiscal 1992, 1991, and 1990, respectively. ABI has an agreement with a supplier to secure the availability of certain raw materials through fiscal 1999. Under the agreement, ABI must purchase minimum amounts of such raw materials as follows: $1,000,000 in fiscal years 1993 through 1996, $1,500,000 in fiscal year 1997, and $3,000,000 thereafter.
Financial Instruments with OffBalance SheetRisk - ABI enters into foreign currency forward contracts and foreign currency option contracts as a means of reducing its exposure to fluctuations in foreign currency exchange

ABI has a 401 (k) employee benefit plan whereby substantially all U.S. employees may elect to contribute up to 15% of their compensation. ABI matches employee contributions for 100% of the first $750 of each participating employee's contributions. ABI's contributions to the plan were $496,000, $446,000, and $411,000 in fiscal 1992,1991, and 1990, respectively.

Applied Biosystems, Inc.

11

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INDEPENDENT AUDITORS' REPORT

[!!]

Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly results of operations for the years ended June 30, 1992 and 1991:
(In thousands, except per share amounts) 1st

The Shareholders and Board of Directors of Applied Biosystems, Inc.: We have audited the accompanying consolidated balance sheets of Applied Biosystems, Inc. as ofJune 30, 1992 and 1991, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period endedJune 30, 1992. 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 in accordance with generally accepted auditing standards. 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Applied Biosystems, Inc. at June 30, 1992 and 1991, and the results of its operations and its cash flows for each of the three fiscal years in the period ended June 30, 1992 in conformity with generally accepted accounting principles.

2nd

3rd

4th

1992 Quarters Net sales Gross profit Income (loss) from operations Net income (loss) Net income (loss) per share

$40,602 18,738 14 42 $

$45,529 22,100 1,098 823 $ .06

$49,081 24,276 3,288 2,155 $ .15

$47,591 23,357 (20,628) (18,879) $ (1.30)

Net loss in the fourth quarter of fiscal 1992 includes the $22.0 million pre-tax charge discussed in Note 2. The effect of reducing the annual tax rate to 0% from the estimated rate of 35% used through the first three quarters also affected fourth quarter results.
(In thousands, except per share amounts) 1st

2nd

3rd

4th

1991 QJtarters Net sales Gross profit Income (loss) from operations Net income (loss) Net income (loss) per share

$36,812 16,958 (7,037) (5,895) $ (.42)

$42,152 19,583 (18) 480 $ .03

$44,200 21,316 2,123 1,893 $ .13

$40,722 19,531 1,031 681 $ .05

Net loss in the first quarter of fiscal 1991 includes a pre-tax charge of approximately $5.0 million for the cost of relocating ABI's liquid chromatography components operation from New Jersey to California. Deloitte & Touche San Francisco, California July 29, 1992

12

Applied Biosyslems. Inc.

Case 3:07-cv-02845-WHA
CORPORATE DIRECTORY

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Board of Directors

Independent Public Accountants

International Operations

Andre F. Marion
Chairman of the Board Applied Biosystems, Inc.

Dcloitte & Touche
San Francisco. CA
Registrar and Transfer Agent

Applied Biosystems (Anstralia) Pty. Lid.
2(; Ilarkcr Str('el Burwood, Victoria :112;' Australia Phone (il-:I-808-7777 Fax (;1-:l-HH7-1469

Moshe Alafi
General Partner Alafi Capital Company

William K. Bowes,Jr.
General Partner U.S. Venture Partners

Questions ITg-arding- accounts, address changes, stock transfers, and IOSI certificates should be directed to Shareholder Services Division at:
The Firsl National Bank O/"lIoston Cnstomer Service P.O. Box (;44 Bost.on, MA 02102-0(;44 Phone (i l7-575-2900
Annual Meeting

Applied Biosystcms Canada, Inc.
(;5:15 Millcreek Drive. lInil 7'1 Mississauga. Ontario I.!'iN 2M2 Canada Phone 416-H21-8I 8,1 Fax 416-821-8246

Donald S. Hetzel, Ph.D.
Vice President Research and Development Bect.on Dickinson and Company

Applied Biosysterns S.A.R.L.
B.P.5008(; 9594H Roissy Charles de Gaulle, Codex France Phone :1:1-1-48-6:1-2444 Fax ,tl-I-48-(;3-22H2

.lames C. Kitch
Partner Cooley Godward Castro Huddleson & Tatum

Craig C. Taylor
General Partner Asset. Management Company
Corporate Officers

The Annual Meeting of Shareholders will be held on October 28, 1992, at the corporate offices.
SEC Form IO·K

Applied Biosysterns GmbH
Brunnenweg 13 6108 Weilerstadt Germany Phone 49-6150-1010 Fax 49-6150-101101

Andre F. Marion
Chairman of the Board President. and Chief Executive Officer

Robert W. Carroll
Executive Vice President.

A copy of the Company's annual report to the Securit.ies and Exchange Commission on Form IO-Kis available without charge upon written request to: Vice President-Finance, Applied Biosystems, Inc., 850 Lincoln Centre Drive, Foster Cit.y, CA 94404
Common Stock

Applied Biosystcms S.r.1.
Via Walter Tobagi, 6 20143 Milan Italy Phone 39-2-8912-60 I I Fax 39-2-8912-6023

Michael W. Hunkapiller, Ph.D.
Execut.ive Vice President

G. Bradley Cole
Vice President. Secretary

List.ed NASDAQ National Market Syst.em and trades under t.he symbol ABIO.
Corporate Office

Applied BiosystemsJapan, Inc.
3-3-6, Minamisuna, Koto-ku Tokyo, ]36 Japan Phone 81-3-3699-0700 Fax 81-3-3699-0733

Robert H. Ellis
Vice President

Applied Biosystems, Inc.
850 Lincoln Centre Drive Foster City, C.A94404 Phone 4]5-570-6667 Fax 415-572-2743
U.S. Operations

Applied Biosystems BV
Industrieweg 66-68 3606 AS Maarssen The Netherlands Phone 31-3465-74868 Fax 31-3465-74904

Bernard]. Herd
Vice President

Richard B. Hetke
Vice President.

Eric D. Shulse
Vice President.

Applied Biosystems, Inc.
777 Lincoln Centre Drive Fost.er City, CA 94404 Phone 4]5-570-6667 Fax 415-572-2743

Applied Biosystems Sweden AB
Box ]5045 75015 Uppsala Sweden Phone 46-18-552315 Fax 46-18-5511]4

Joseph H. Smith
Vice President

Kenneth]. Wilson, Ph.D.
Vice President
General Counsel

Lynx Therapeutics, Inc.
465 Lincoln Centre Drive, Fost.er City, CA 94404 Phone 415-570-6667 Fax 415-572-2743

Applied Biosystems Ltd.
Kelvin Close Birchwood Science Park Warringt.on, Cheshire WA3 7PB United Kingdom Phone 44--925-825650 Fax 44--925-828196

Cooley Godward Castro Huddleson & Tatum
Palo Alto, CA

CATALYST. INHERIT.and ProSpin Cartridges are registered trademarks of Applied Biosystems, Inc.

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Printed in V.SA. © 1992 Applied Biosystems, Inc.